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Article

STEPHEN SYKES

The market value of any property investment will tend to deteriorate over time when compared to similar modern properties if monies are not periodically expended to…

Abstract

The market value of any property investment will tend to deteriorate over time when compared to similar modern properties if monies are not periodically expended to mitigate the effects of obsolescence. This paper examines the relationship between the initial yield of a property at purchase and the rate of future rental value growth necessary to achieve a criterion rate of return on the investment. Traditionally in calculations of the future rental growth rate required to justify an initial investment yield (when compared, say, to the rental shown by gilt‐edged stocks) the simplistic view is taken that following purchase no further expenditure is anticipated. However, if a property is to maintain its original market appeal (or adapt to evolving circumstances), capital must from time‐to‐time be injected for the purposes of refurbishment. Thus, any analytical model which ignores this inevitable expenditure, but nevertheless assumes a constant rate of long‐term future rental growth, is quite unrealistic. A Refurbishment‐Rental Growth Model is derived which allows the introduction of regular future capital expenditure both in terms of magnitude and frequency. Various examples are illustrated of the effect which such expenditure may have in necessarily increasing the required future rental growth for a property investment in order to achieve an anticipated level of return.

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Journal of Valuation, vol. 3 no. 1
Type: Research Article
ISSN: 0263-7480

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Article

WILL FRASER

In the 1970s, yields on UK commercial investment property appear to have been influenced principally by the cost of long term capital and the rate of rental growth

Abstract

In the 1970s, yields on UK commercial investment property appear to have been influenced principally by the cost of long term capital and the rate of rental growth. Consequently, yields tended to respond to the economic cycle, falling in times of economic recovery and rising when the economy moved into recession. However, in the 1980s so far, yield trends appear anomalous by comparison. Yields failed to rise on the advent of the recession in 1980–81, despite a sharp rise in the cost of capital, yet rose in 1982 just when the economy began to emerge from recession, and have since continued to rise as economic recovery and rental growth have gathered pace. This paper seeks to explain recent movements in investment property yields and to reconcile these with trends in the 1970s. It concludes that the behaviour of yields in the 1980s can be explained by the dominance of institutional investors in the property market, and by their perception of the changing risk attributes of property (compared with alternative investments) which have resulted from changes taking place in the investment markets and the UK economy.

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Journal of Valuation, vol. 4 no. 3
Type: Research Article
ISSN: 0263-7480

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Article

Andrew Baum and Neil Turner

The retention rate of a company has an impact on its earnings and dividend growth. Corporate management has control over this. However, lease structures in some real…

Abstract

The retention rate of a company has an impact on its earnings and dividend growth. Corporate management has control over this. However, lease structures in some real estate markets reduce the control of investment managers and force them to adopt full distribution policies and a passive management style. This is likely to impact the rental performance of the real estate by permitting depreciation to go uncorrected. This paper examines several European office markets across which lease structures and retention rates vary. It then compares depreciation rates across these markets. It is concluded that there is evidence of a relationship between retention and depreciation. Markets with particularly inflexible lease structures clearly exhibit low retention rates, and we can tentatively suggest higher levels of rental value depreciation. This poses interesting questions concerning the relationships between lease structures in different markets and their impact on expenditure by owners, and also concerning the impact on building depreciation and property performance. While longer and deeper datasets are necessary to establish direct linkages between lease structures and performance, this paper raises important issues for global investors.

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Journal of Property Investment & Finance, vol. 22 no. 3
Type: Research Article
ISSN: 1463-578X

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Article

Neil Crosby, Steven Devaney and Vicki Law

The paper addresses the practical problems which emerge when attempting to apply longitudinal approaches to the assessment of property depreciation using valuation‐based…

Abstract

Purpose

The paper addresses the practical problems which emerge when attempting to apply longitudinal approaches to the assessment of property depreciation using valuation‐based data. These problems relate to inconsistent valuation regimes and the difficulties in finding appropriate benchmarks.

Design/methodology/approach

The paper adopts a case study of seven major office locations around Europe and attempts to determine ten‐year rental value depreciation rates based on a longitudinal approach using IPD, CBRE and BNP Paribas datasets.

Findings

The depreciation rates range from a 5 per cent PA depreciation rate in Frankfurt to a 2 per cent appreciation rate in Stockholm. The results are discussed in the context of the difficulties in applying this method with inconsistent data.

Research limitations/implications

The paper has methodological implications for measuring property investment depreciation and provides an example of the problems in adopting theoretically sound approaches with inconsistent information.

Practical implications

Valuations play an important role in performance measurement and cross border investment decision making and, therefore, knowledge of inconsistency of valuation practice aids decision making and informs any application of valuation‐based data in the attainment of depreciation rates.

Originality/value

The paper provides new insights into the use of property market valuation data in a cross‐border context, insights that previously had been anecdotal and unproven in nature.

Details

Journal of European Real Estate Research, vol. 4 no. 1
Type: Research Article
ISSN: 1753-9269

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Article

Robert Peto, Nick French and Gillian Bowman

Looks at the philosophy of valuation, explaining the distinction between “worth” and “price”. Attempts to explain traditional techniques of assessing price. Looks at the…

Abstract

Looks at the philosophy of valuation, explaining the distinction between “worth” and “price”. Attempts to explain traditional techniques of assessing price. Looks at the development of discounted cash flow and its applications in valuations and calculations of worth. Concludes that there must be more openness with clients about valuation risks and issues so that they can make informed judgements.

Details

Journal of Property Valuation and Investment, vol. 14 no. 4
Type: Research Article
ISSN: 0960-2712

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Article

Neil Crosby

Examines the valuation difficulties that have arisen as a result ofthe falls in rental value in the UK property market during the earlypart of the 1990s. Considers overage…

Abstract

Examines the valuation difficulties that have arisen as a result of the falls in rental value in the UK property market during the early part of the 1990s. Considers overage cases being caused by the rent passing being above rental value on a normal rent review pattern because of a letting on an abnormal review pattern. Comments on the straightforward case of a fall in rental value since the last rent revision. Concludes that the growth explicit model is a better and more consistent methodology for the market valuation of investment property.

Details

Journal of Property Valuation and Investment, vol. 10 no. 2
Type: Research Article
ISSN: 0960-2712

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Article

STEPHEN SYKES

The mathematics of property valuations commonly used in practice exist in several formulations which have been adopted over the years. All are similar in that they…

Abstract

The mathematics of property valuations commonly used in practice exist in several formulations which have been adopted over the years. All are similar in that they represent simple discounted cash flow models equating the estimated future earnings capacity of a property to a net present (capital) value. The process, whilst appearing somewhat daunting, is in fact accomplished in a manner such that, under normal circumstances, the estimated future cash flow beyond the next rent review is not explicitly expressed. Instead of generating a future income flow (assuming some rate of rental growth) and discounting at a money rate of interest (suitably adjusted for risk), the estimated rental income at the next review is capitalised at a relatively low investment yield rate which merely implies a future rental growth rate.

Details

Journal of Valuation, vol. 2 no. 3
Type: Research Article
ISSN: 0263-7480

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Article

Mark Teale

Rising occupational costs, unit shop oversupply and falling retailsector profits have generated demands for changes to the currentvaluation and leasing procedures. Tests…

Abstract

Rising occupational costs, unit shop oversupply and falling retail sector profits have generated demands for changes to the current valuation and leasing procedures. Tests the accuracy of rental value estimation at review by identifying the actual residual value of occupation to existing tenants, and quantifies demand volume requirements at different levels of rental increase so that the interpretation of transactional evidence can be set in an actual demand volume context by selecting two shopping centres – Brent Cross and MetroCentre – for audit. Concludes that the long‐running dispute between landlords and tenants over rent review valuations is a market information problem that can be resolved only by the release of local sales data.

Details

Journal of Property Valuation and Investment, vol. 13 no. 1
Type: Research Article
ISSN: 0960-2712

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Article

Song Shi and Iona McCarthy

The purpose of this paper is to investigate the relationship between dairy farmland prices and farmland rental incomes in New Zealand from 1982 to 2009.

Abstract

Purpose

The purpose of this paper is to investigate the relationship between dairy farmland prices and farmland rental incomes in New Zealand from 1982 to 2009.

Design/methodology/approach

Using the net cash income received under a 50/50 share‐milking agreement to proxy the net cash rent, the paper attempts to explore the prices and rental incomes relationship using the present value model and then apply them in a pool regression model to show how farmers formulate their price bids.

Findings

Results show that over the long‐term dairy farmland price growth tends to be in line with rental growth. However, there is substantially higher growth in land prices in relation to the rental growth since 2002. Moreover, the risk premium placed by farmland owners on future rental cash flows since 2002 appears substantially below the historical average. The research further shows that farmers nowadays place more emphasis on the current season's payout than historical incomes in their price bids.

Practical implications

As a consequence the recent high land prices will be extremely sensitive to a permanent change to the low interest rate environment and future growth of dairy income. A policy recommendation is also highlighted.

Originality/value

The results of this paper indicates that the rapid price appreciation for New Zealand dairy farmland since 2000s might give rise to bubbles.

Details

Journal of Property Investment & Finance, vol. 31 no. 2
Type: Research Article
ISSN: 1463-578X

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Article

Bruno Giussani, Marshall Hsia and Sotiris Tsolacos

Presents an empirical investigation of office rental trends forsome of the largest cities in Europe. Uses annual data for the period1983‐91 to test the changes in rental

Abstract

Presents an empirical investigation of office rental trends for some of the largest cities in Europe. Uses annual data for the period 1983‐91 to test the changes in rental values and fluctuations in economic activity. Includes a review of previous office market studies and an assessment of the research direction and information requirements of current European property research. Suggests that European rental values are determined by similar demand‐side variables and, in particular, real gross domestic product (GDP).

Details

Journal of Property Valuation and Investment, vol. 11 no. 2
Type: Research Article
ISSN: 0960-2712

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