Property Investment Appraisal

Andrew E. Baum, Neil Crosby, Steven Devaney

• Publisher: Wiley-Blackwell
• Year: 2021
• ISBN:
  9781118399538
• Edition: 4
• Topic: Business
• Subtopic: Real Estate
• Index: Business

Discover an insightful examination of the property investment appraisal process from leaders in the industry

This book explains the process of property investment appraisal: the process ofestimating both the most likely selling price (market value) and the worth of property investments to individuals or groups of investors (investment value).

Valuations are important.They are used as a surrogate for transactions in the measurement of investment performance and they influence investors and other market operators when transacting property. Valuations need to be trusted by their clients and valuers need to produce rational and objective solutions. Appraisals of worth are even more important, as they help to determine the prices that should be paid for assets, even in times of crisis, and they can indicate market under- or over-pricing.

In a style that makes the theory as well as the practice of valuation accessible to students and practitioners, the authors provide a valuable critique of conventional valuation methods and argue for the adoption of more contemporary cash-flow methods. They explain how such valuation models are constructed and give useful examples throughout. They also show how these contemporary cash-flow methods connect market valuations with rational appraisals.

The UK property investment market has been through periods of both boom and bust since the first edition of this text was produced in 1988. As a result, the book includes examples generated byvastly differentmarket states.Complex reversions, over-rented properties and leaseholds areall fullyexamined by the authors.

This Fourth Edition includes new material throughout, including brand new chapters on development appraisals and bank lending valuations, heavily revised sections on discountedcash flow modelswith extended examples, and on the measurement and analysis of risk at an individual property asset level. The heart of the book remains the critical examination of market valuation models, whichno other book addressesin such detail.

1
Property Investment Appraisal in its Context

1.1 What is Appraisal?

The subject of this book is the appraisal of property, or real estate, investments. In choosing the term ‘appraisal’, we have two distinct applications in mind.

The first of these is market valuation; this means to fix a price for an asset, or to predict the most likely selling price of an asset.

The second is investment appraisal. This means to estimate the worth or value of an asset.

The book is concerned with the difference between these two terms. While a market valuation will tell us what a property asset is likely to sell for, an investment appraisal will tell us what the asset is worth to us. In a scenario where we wish to acquire a property, comparison of these appraisals can help us answer the following question: should we pay the market price – or not?

There is now widespread acceptance of the international definition of Market Value set out in the valuation standards of the International Valuation Standards Council (IVSC), which is commonly known as ‘the White Book’. This definition is

the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction after proper marketing and where the parties had each acted knowledgeably, prudently, and without compulsion.

(IVSC 2019)

Many nations feel the need to have their own valuation standards, not least the UK, whose standards (maintained by the Royal Institution of Chartered Surveyors [RICS]) have been through a number of editions of what is commonly referred to as ‘the Red Book’. The latest edition (RICS 2020a) adopts the aforementioned international definition of Market Value. There are also some regional standards such as the European ‘Blue Book’ published by TEGOVA, The European Group of Valuers Associations. This has in the past created some tension and rivalry between international, regional, and national bodies, particularly in Europe. Yet there is now very little disagreement, if any, on the general wording of the Market Value definition, even if there are some differences in interpretation. Hopefully, these differences will continue to diminish as the property investment market becomes more and more international.

Investment appraisal, or the estimation of worth or value, is not necessarily market-based. Between the second and third editions of this book, this concept was both developed and institutionalised, having entered UK valuation standards in the 1990s as the ‘calculation of worth’. It was subsequently defined in International Valuation Standards under the term ‘Investment Value’. Up until 2013, this was defined as:

the value of property to a particular investor or class of investors, for identified investment objectives. This subjective concept relates specific property to a specific investor, group of investors, or entity with identifiable investment objectives and/or criteria.

(IVSC 2007)

This definition blurred a major issue, specifically whether worth or value is to an individual investor or to a group of investors. This question has significant implications about how value might be assessed in practice, as the value to an individual and the value to a group may not be the same. However, in the 2013 edition, the IVSC changed the definition and ...