Investment valuation models. Annually in arrears data in quarterly in advance cash flows
| Date | 01 April 2000 |
| DOI | https://doi.org/10.1108/14635780010324493 |
| Published date | 01 April 2000 |
| Pages | 225-238 |
| Author | Nick French,Richard Cooper |
| Subject Matter | Property management & built environment |
Academic papers:
Investment
valuation models
225
Journal of Property Investment &
Finance, Vol. 18 No. 2, 2000,
pp. 225-238. #MCB University
Press, 1463-578X
Received 20 Ocrober
1998
Revised 1 September
1999
ACADEMIC PAPERS
Investment valuation models
Annually in arrears data in quarterly in
advance cash flows
Nick French
Department of Land Management and Development,
The University of Reading, Reading, UK
Richard Cooper
LaSalle Investment Management, London, UK
Keywords Yield, Rent, Valuation
Abstract It is well recognised that the UK commercial property market has traditionally used
nominal market benchmarks such as the all-risk yield based on the assumption that rents are
received annually in arrears. Obviously, the reality of the market is that rents are invariably
received quarterly in advance and it has been suggested that valuers should move towards
valuation techniques that reflect the actual timing of the cash flow. The Investment Property
Forum issued a paper in September 1999 promulgating the use of quarterly in advance
valuations. Parry's Tables provides quarterly in advance formulae that reflect the reality of rental
income and indicates that an annual effective yield should be used instead of a nominal yield to
compensate for the subsequent compounding resulting from an income received quarterly.
However, as will be shown, the effective yield formula provided by Parry's does not reflect
quarterly payments that are received in advance so compromising the accurate transition from
annually in arrears to quarterly in advance formulae based valuations. Tables produced by the
IPF have rectified this problem in part as they correctly work on the premise that capital values
will not change as the profession changes to a quarterly approach. It is the yield which will be
expressed differently. The use of an all risk yield technique for valuation is actually a comparative
method. The way in which the yield is expressed is not the critical issue, it is the multiplier against
the rent which will determine value. This paper provides the formula required to accurately
transfer annually in arrears data into quarterly in advance data together with the formulae
required for contemporary growth explicit discounted cash flows (DCF).
Introduction
Nominal benchmarks such as the all-risk yield and equivalent yield are used in
a valuation framework assuming that rents are received annually in arrears.
Basically, the market uses measures such as the all-risk yield as a convenient
comparative measure. If the all-risk yield on a particular property is calculated
on an annually in arrears assumption, then that figure will be directly
comparable to a similar property with an all-risk yield calculated in the same
way. For comparison purposes within a single asset class, the preciseness of
the benchmark measure is less important than the consistency of that measure.
The use of the all risk yield in a subsequent valuation should also be quite
straightforward. In the case of a fully let freehold, if the valuer is satisfied that
the all-risk yield chosen is implying the correct assumptions for the subject
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