4320BEUG COURSEWORK: VALUATION REPORT(Referral/Deferral), submission

on 30 June 2023

SUBMISSION

(i) Student’s work should be submitted electronically by 30 June 2023 using the link
provided under assignment area on Canvas.

(ii) Coursework should be submitted anonymously in accordance with university

policy. You should only include your student number on your submission.

(iii) The assessment must be undertaken on an individual basis and not as a

group exercise.

(iv) Submissions should be word-processed and submitted in a word or pdf format.

NOTE:

No submissions will be accepted after the deadline given above.

No extensions will be given and non-submission will result in a mark of 0%.
If you are prevented from meeting the deadline due to extenuating circumstances
an application must be made on the appropriate form, supported by the relevant evidence.

STUDENTS ARE REQUIRED TO UNDERTAKE ALL TASKS

Q1. From Parry’s valuation Tables, give the appropriate figures for each of the following :
(a) Years Purchase 4 years @ 9% = 3.2397 (£3)
(b) Years Purchase of a Reversion to a Perpetuity 8% deferred 2 years = 10.71674
(c) Present Value of £1 12 years @ 6.5% = .4696829
(d) Annual Sinking Fund 10 years @ 3% = .0872305
(e) Years Purchase 6 years @ 8% & 3% (no tax)
(5 marks)

Q2. Provide examples of where each of the items/figures in Q1 would be used in a valuation.
(10 marks)
By counting how many times the annual income or cash flow exceeds a set rate, the concept of
years purchase is used to estimate the value of an asset or investment. By comparing the
income produced to the initial cost, it is possible to evaluate an investment's profitability and
allure.
 Years purchase of a reversion to a perpetuity is only applicable in circumstances where
estimated value of a future income stream from a perpetuity is determined following a
predetermined deferral period. It takes into account the time value of money and determines
the present value of the perpetuity following the deferral period, giving information about the
reversion's worth.

A fundamental concept used to calculate the current value of a future cash flow is the present
value of £1. By discounting the future sum at a specific interest rate, it accounts for the time
value of money. This calculation aids in determining the current value of expected future cash
flows, facilitating financial analysis and investment decisions.

An annual sinking fund is a mechanism used to set aside regular payments or contributions to
amass a particular sum over time. It is frequently employed in long-term financial planning to
guarantee that there are resources available for upcoming obligations or significant outlays.
When the funds are needed, the sinking fund assists in distributing the cost over time and
easing the financial burden.
In summary, these topics play vital roles in valuation exercises, investment analysis, and
financial planning. Years purchase, years purchase of a reversion to a perpetuity, present
value, and annual sinking fund are all utilized to assess the value, profitability, and financial
implications of various assets, investments, and future cash flows

Q3. A shop has a frontage of 7.5 metres and a depth of 23 metres. What is the shop’s Area
in Terms of Zone A (‘AITZA’). Show how this is calculated.

area of a rectangle (which is the shape of the shop in this case) is calculated by multiplying
its length by its width. In this case, the length of the shop is its depth (23 metres) and the
width of the shop is its frontage (7.5 metres).

So, the total area of the shop can be calculated as follows:

Area = Length x Width

Area = 23 metres x 7.5 metres
Area = 172.5 square metres

Without additional information, you cannot calculate the AITZA. If, for example, Zone A was
defined as the front 25% of the shop, you would multiply the total area by 0.25 to find the
AITZA. (5 marks)

Q4. A nearby shop has an AITZA of 69.4 sq.m. and was recently let at £30,000 per annum.
What is the Zone A value per square metre per annum..

annual rent is £30,000 and the AITZA is 69.4 sq.m. Therefore, the Zone A value per square
metre per annum is £30,000 / 69.4 = £431.49.
Q5. An office has a rental value of £40,000 p.a. and has recently been sold for £500,000.
Calculate the yield from this evidence (show your working).
500.000 purchase price
40,000 monthly rent 96.00 annual rental yield
(4 marks)

Q6. What is the Years Purchase in Perpetuity using the Yield calculated in Q5.
(3 marks)

Q7. A property was recently let for £55,000 per annum. A nearby, very similar, property was
sold at a price representing a Yield of 9%. What is the value of the Freehold of the property.

To calculate the value of the Freehold, we need to divide the annual rental income (£55,000)
by the yield percentage (9%). Value of Freehold = Annual Rental Income / Yield Percentage
Value of Freehold = £55,000 / 0.09 Value of Freehold = £611,111.11 Therefore, the value of
the Freehold of the property is £611,111.11.

(10 marks)

Q8. How would the valuation change, if at all, if the property which had been sold in Q7 was
in a much better location than the property being valued?
The valuation may be impacted if the property that is sold in Q7 is in a significantly better
location than the property that is being valued. The location of a property has a big impact on
its market value. Higher demand typically results in higher rental or sale prices for properties
in better locations.

In this situation, a property's rental income or potential resale value may be lower if its in a
less desirable location than the properties close by. This might lead to the application of a
lower capitalization rate, which would lower the value of the Freehold.

(3 marks)

Q9 What is a ‘Reversionary Yield’?

The expected rate of return or yield on an investment property that will be realized in the
future is referred to as reversionary yield. Typically, it is determined by dividing the expected
future income from the property, such as rental income or resale value, by the property's
current market value. Reversionary yield aids investors in evaluating an investment's
potential profitability and allure by considering the anticipated return on their investment at a
later stage. (3 marks)

Q10. In a Term and Reversion valuation will there be any difference between the yield
adopted for the ‘Term’ portion and the ‘Reversion’ portion?

There can be a difference in the yield adopted for the "Term" portion and the "Reversion"
portion in a Term and Reversion valuation. The yield for the "Term" portion typically reflects
the current market conditions and risks associated with the income-generating period, while
the yield for the "Reversion" portion accounts for the future income potential and risks upon
the property's reversion or resale.
(3 marks)

Q11. A property was let 2 years ago at £25,000 p.a. The market has subsequently improved
and the rental value of similar units is now £30,000 p.a. The rent is now fixed until the next
rent review in 3 years time when the landlord (the Freeholder) will be able to increase the
rent to £30,000 p.a. Reversionary yields on sales of similar buildings are currently 7%. What
is the value of the Freehold in this building?

current rental value is £30,000 p.a. and the reversionary yield is 7%. Therefore, the value of
the Freehold can calculated as follows: Value = £30,000 / 0.07 Value = £428,571.43 So, the
value of the Freehold in this building is approximately £428,571.43
(12 marks)

Q12. The Freehold Yield for the property in Q11 is 7%. What would be a reasonable yield to
adopt for the Leasehold interest? How would a leasehold valuation reflect the fact that this is
a wasting asset?

Lower than the freehold yield would be a reasonable yield to adopt for the leasehold interest.
By considering the declining value of the lease over time, the leasehold valuation would
reflect the fact that it is an asset that is being wasted.
A leasehold interest is the legal right to use and occupy property for a predetermined amount
of time, usually under the terms of a lease. Leasehold ownership is transient and has a
deadline in contrast to freehold ownership, which bestows total ownership rights. It is crucial
to keep in mind that the yield for a leasehold interest is typically lower than the yield for a
freehold interest when calculating a reasonable yield. This is so because, in comparison to
freehold ownership, leasehold ownership involves greater risk and unpredictability. The
landlord or lease agreement may place limitations or restrictions on the investor's ability to
do certain things with the property. A leasehold interest is also regarded as a wasting asset
because, as the lease term approaches expiration, its value gradually declines. The value of
the leasehold interest declines as the number of years left on the lease does. The leasehold
valuation accounts for this value decline. A leasehold valuation accounts for this depreciation
by taking the remaining term of the lease, any rent increases or adjustments outlined in the
lease agreement, and market conditions into account. These elements aid in choosing the
proper yield to apply to the leasehold interest. In conclusion, it is crucial to keep in mind that
a leasehold interest is riskier and more uncertain than a freehold interest when valuing it. A
leasehold interest would have a yield that was less than the freehold yield. By taking into
account the asset's declining value over time due to its finite lifespan, the valuation also
reflects that it is a wasteful asset. (5 marks)

Q13. The Tenant (the Leaseholder) in Q11 will be paying a rent of £25,000 p.a. for the next
3 years (when the Landlord will be able to increase the rent) on a property which he could
sub-let at a rent of £30,000 p.a. (the current market rental value). Value the Leasehold
interest.
(10 marks)

Q14. Your Client owns a freehold industrial property that is let to ABC Ltd for 15 years. The
lease includes provision for rent reviews every 5 years. Your Client (who is the
Landlord/Freeholder) has covenanted to replace the roller shutter doors, in the fifth year of
the lease, at a current cost of £12,000. The lease commenced 2 years ago. The passing rent
is £20,000 per annum and the estimated market rent is £27,500 per annum. Freehold
investment yields for this type of property in this location are currently 7%.

(a) Calculate the Value of your Client’s Freehold interest

(14 marks)

(a) Calculate the value of ABC Ltd’s Leasehold interest, assuming they are a 50%
taxpayer
(10 marks)