PRMD 40046 The Real Estate Assignment: Valuation and Appraisal
Added on 2020-05-28
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REAL ESTATE VALUATIONAND APPRAISALTABLE OF CONTENT
SCase Background.........................................................................................................1Market Valuation...........................................................................................................1Term and reversion...................................................................................................2Layer/hardcore..........................................................................................................3Investment Appraisal....................................................................................................4Calculate NPV and IRR for the investment and also calculate Expected net of tax and gross of tax returns on equity.............................................................................6Risk analysis.................................................................................................................8Recommendations........................................................................................................9REFERENCES...........................................................................................................10
CASE BACKGROUND The aim of the current assignment is to evaluate the nature of the propertyinvestment made by the client. This investment is about the ownership of officeslocated in the business district of the large provincial city in the United Kingdom.Current property is fully under the control of an insurance company in the form ofcorporate offices. The total area of the property comprises of 4500M2. Property is onlease basis for a total period of 10 years along with some conditions such as fullrepairing and insuring terms as any damage to the property will bear by the lesseewho taken the property on lease. Rent of the property is exclusively£1125000without the inclusion of business rates. Current business rates payable amountsto£700,000 per annum. Market rent of this property is higher than the actual ratepayable by a lessee is£1485000 per annum which is£360000 higher than the actualrent payable by a lessee to the owner. According to the commercial property survey,it has observed that yield generated from this property would get an increase to 5.1in the future will increase the quality and demand of this property. The minimumtarget rate of return for the whole region in which the property is located will achieve6% that grabs the attention of all the investment bankers who intends to invest in asuccessful project. In the past two years, the rate of market rental growth was 1%which remains the same in the future.MARKET VALUATIONEvery investment seekers pay more attention to the valuation of the marketbefore entering in the segment to invest their precious stuff at risk. Knowledge aboutvarious approaches for valuing commercial property available on rent is called as aninvestment property (Limaei, Safari and Merceh, 2017). The aim of every investmentis to earn money in return as every individual wants to double their investment bytrusting right people. Generating information regarding the nature of all theinvestments is essential to get the desired return over the property in a given span oftime (Agnihotri and Bhattacharya, 2017). The property market is a fully uncertainarea where the price of the property is changing in few seconds due to the increasein the market competition. The aim of a person in valuing the investment property is to know about allthe risks incurred in the future investment along with additional or uncertain costs to1
be borne by the investor. Financial advisors or investment bankers provide legal,financial and economic suggestion to an investor to invest their money in rightproducts (Mervelskemper and Streit, 2017). Return on every property depends onthe growth of the product with the passage of time. Time value of money concept isused to know about the future by applying present resources available to anindividual. According to this concept, the initial investment is multiplied by thediscounting rate to know about the present value of the investments in the future.Term and reversionTermRent passing- £1125000YP 7years@3%- 33.95Term value= Rent passing*Years purchase=£1125000*33.95=£38193750ReversionMarket Rent-£1485000YP Perpetuity@3%- 33.33 PV 7 years @3%- 0.81Reversion value= Market Rent*YP Perp*PV= £38193750Valuation- £38193750+ £40090990.5= £78284740.5Market Value = £78284740.5/6.0= £13047456It is one of the methods of valuing the investment property by knowing aboutthe risks and returns associated with the same. The focus of the investors is more on2
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