Table Of ContentIntroducing Property Valuation
This comprehensive introduction to the concepts and methods of valuing real estate helps students
to progress successfully from basic principles to a more sophisticated understanding.
Taking a practically oriented rather than purely theoretical approach, this textbook enables you
to undertake valuation calculations yourself. Experienced tutor and valuer Michael Blackledge
demonstrates how the principles can be applied in professional practice in line with the
requirements and guidance provided by the Royal Institution of Chartered Surveyors.
The five traditional methods of valuation are outlined and the practical applications of the
two main approaches, the comparison and investment methods, are fully explored. The use
of discounted cash flow and quarterly in advance calculations, topics which have often been
neglected elsewhere, are also explained. Complete with extensive further reading suggestions, a
full range of worked examples, clear chapter summaries and additional online exercises (accessible
at www.routledge.com/9780415434775), this book is essential for any student of real estate and
its valuation.
Michael Blackledge is currently Senior Lecturer in the School of Environmental Design &
Management, University of Portsmouth, UK. He has worked extensively in practice as a surveyor
and valuer and is also a tutor and examiner for the College of Estates Management.
Introducing
Property
Valuation
Michael Blackledge
First published 2009
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
270 Madison Ave, New York, NY 10016
Routledge is an imprint of the Taylor & Francis Group, an informa business
This edition published in the Taylor & Francis e-Library, 2009.
To purchase your own copy of this or any of Taylor & Francis or Routledge’s
collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.
© 2009 Michael Blackledge
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
The publisher makes no representation, express or implied, with regard to
the accuracy of the information contained in this book and cannot accept
any legal responsibility or liability for any efforts or omissions that may be
made.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Blackledge, Michael.
Introducing property valuation / Michael Blackledge.
p. cm.
1. Valuation. I. Title.
HF5681.V3B53 2009
333.33´2–dc22 2008050957d
ISBN 0-203-87617-2 Master e-book ISBN
ISBN10: 0–415–43476–9 (hbk)
ISBN10: 0–415–43477–7 (pbk)
ISBN10: 0–203–87617–2 (ebk)
ISBN13: 978–0–415–43476–8 (hbk)
ISBN13: 978–0–415–43477–5 (pbk)
ISBN13: 978–0–203–87617–6 (ebk)
Contents
Illustrations x
Cases xii
Acknowledgements xiv
Disclaimers xv
Part 1: Background 1
1 Economic context 3
1.1 Why is a valuation needed? 3
1.2 What types of property value are there? 4
1.3 Important terms and concepts: value, price, worth, cost and market value 5
1.4 Supply and demand as determinants of price and value 8
1.5 Land use principles 11
1.6 The investment and property markets 14
1.7 Taxation and its effects 15
1.8 Influence of town and country planning legislation and policies on property
values 16
2 The property valuation profession 20
2.1 Skills required by and role of the property valuer 20
2.2 Who may require the services of a valuer? 23
2.3 Difference between a valuation and a building survey 24
2.4 The level of accuracy expected of the valuer 26
2.5 Independence of the valuer 28
2.6 The role of the Royal Institution of Chartered Surveyors (RICS) as a
regulatory and unifying body for the profession 28
vi Contents
2.7 The RICS professional groups 29
2.8 RICS information resources 29
2.9 International dimensions of the profession 30
2.10 Likely future developments including Automated Valuation Models (AVMs) 31
3 Investment 34
3.1 Types of investment 34
3.2 Types of investor 46
3.3 Nominal and real returns on investments 46
3.4 The ‘ideal’ investment 48
3.5 Risk and yields 49
3.6 The reverse yield gap 51
3.7 Real property as an investment 52
3.8 Investment evaluation and selection 53
3.9 Methods of purchase and sale 57
Part 2: Valuation mathematics 63
4 Compounding and discounting 65
4.1 Simple interest 65
4.2 Compound interest 66
4.3 ‘Traditional’ annually in arrear tables and formulae 68
4.4 Use of calculators and computers 69
4.5 The concepts of compounding and discounting 70
4.6 All risks yields (ARYs) and implied risk/growth allowances 71
4.7 Amount of £1 calculations 73
4.8 Present Value of £1 calculations 73
4.9 Amount of £1 per annum calculations 74
5 Sinking funds and mortgages 78
5.1 Role and relevance of sinking funds 78
5.2 Calculation of sinking funds 79
5.3 Effects of tax and adjustments made 80
5.4 Sinking funds and leaseholds 82
5.5 Mortgages and their repayment calculations 82
6 Capitalisation 88
6.1 Income flows and capital sums 88
6.2 Years purchase in perpetuity 91
6.3 Single rate years purchase for a number of years 92
6.4 Years purchase of a reversion to perpetuity 93
6.5 Years purchase (single rate) deferred 94
6.6 Remunerative and accumulative rates of interest in leasehold valuations 95
6.7 Years purchase dual rate for a number of years 96
6.8 Dual rate years purchase (tax adjusted) 97
Contents vii
6.9 Deferment of dual rate years purchase 99
6.10 Life tables and years purchases based on them 100
7 Alternative valuation tables and formulae 103
7.1 Background and historical development 103
7.2 Annually in advance calculations 106
7.3 Income in advance or in arrear and not receivable annually 106
7.4 Quarterly in advance dual rate tax adjusted years purchases 108
7.5 Rose’s Tables 109
7.6 Bowcock’s Tables 109
7.7 Donaldsons’ Investment Tables 110
7.8 Practical effects of using alternative tables and formulae 110
Part 3: Valuation methods 115
8 Methods of measurement 117
8.1 Overview of RICS Code of Measuring Practice 117
8.2 Gross external area (GEA) 121
8.3 Gross internal area (GIA) 122
8.4 Net internal area (NIA) 122
9 RICS valuation standards: The Red Book 124
9.1 Valuation Standards and Guidance Notes 124
9.2 Valuation Information Papers 128
9.3 Form and content of valuation reports 129
9.4 Loan valuations 131
10 Comparison method 133
10.1 Basis of method 133
10.2 Units of comparison and application of the method to the various property
types 137
10.3 Property market evidence and information sources 176
10.4 Making qualitative and quantitative adjustments to comparable evidence 180
10.5 Methods of assessing market rent 184
10.6 Assessing ground rents 186
10.7 Indexed rents 187
10.8 Annual equ ivalents 188
11 Investment method: traditional 192
11.1 Basis of method 192
11.2 Valuation layout 197
11.3 Choice of all risks yield 198
11.4 Differences between freehold and leasehold all risks yields 199
11.5 Initial yields 199
11.6 Reversionary yields 201
viii Contents
11.7 Equivalent yields 201
11.8 Equated yields 201
11.9 Analysis of a property yield 202
11.10 Term and reversion valuations using the ‘block income’ approach 204
11.11 From term and reversion with differential yields to equivalent yield
approach 209
11.12 ‘Hardcore’ or ‘layer’ approach 215
11.13 Gross versus net of tax calculations and effects of tax on leasehold
valuations 222
11.14 Different types of lease repairing and insuring terms and effects of
property outgoings on net rental income 225
12 Investment method: discounted cash flow 240
12.1 Discounted cash flow methods 240
12.2 Use of computer spreadsheets and other software 244
12.3 Future property rental and capital growth 245
12.4 Equated yield and implied rental growth formulae 250
12.5 Application of the method to property investments, including holding
period and exit yield 251
12.6 DCF method compared with ‘traditional’ property valuation methods 257
12.7 ‘Short-cut’ freehold DCF valuations 259
12.8 Leasehold DCF valuations 260
12.9 Combining the methods in a single valuation appraisal: block income,
layer, equivalent yield and equated yield/DCF approaches 263
13 Residual method 269
13.1 Basis of method and when used 269
13.2 Simple and more complex methods 280
13.3 Reliability and limitations of method 286
14 Profits method 289
14.1 Basis and variations of method and when used 289
14.2 Reliability and limitations of method 297
14.3 Turnover rents and leases 303
15 Cost methods 308
15.1 Basis of cost methods and when used 308
15.2 Age, obsolescence and depreciation 310
15.3 Format and content of calculations 313
15.4 Costs in use 317
Part 4 Applied valuations 319
16 Landlord and tenant valuations 321
16.1 Calculation of a premium on the grant of a lease at a reduced rent 322
Contents ix
16.2 Capital payment on assignment of a lease 324
16.3 Lease surrender and renewals 324
16.4 Premium on variation of a condition of a lease 332
16.5 Sale and leaseback 333
16.6 Marriage valuations 335
16.7 Divorce valuations 342
16.8 Effect of improvements and restrictive user clauses on valuations 343
16.9 Constant rent 348
16.10 Rental equivalent on an annual tenancy 352
16.11 Problems with leasehold valuations, including double sinking fund error
theory and relevance of ‘dual rate’ calculations 353
16.12 ‘Reverse premiums’ 357
16.13 Lease inducements 358
16.14 Virtual or equivalent rent and valuation analysis of lease inducements 359
16.15 The problem of overrented property and its valuation 362
Bibliography 372
Index 383
