The new edition remains a major critical work, outlining the limitations of property investment appraisal and valuation whilst still providing readers with enough practical application to help them undertake appraisals. The authors explain the process of property investment appraisal – estimating both the most likely selling price (market value) and the worth of property investments to individual or groups of investors (investment value). 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.

With many cases, problems and solutions presented throughout the book, and a companion website used for deeper analysis and slides presentations (see below), this is a key text for higher-level real estate students on BSc, MSc, MPhil and MBA courses worldwide as well as for practising property professionals worldwide in fund management, investment and asset management, banking and real estate advisory firms.

ANDREW E. BAUM is Professor of Practice at the Saïd Business School, University of Oxford, where he leads the Future of Real Estate Initiative. He is also Senior Research Fellow at Green Templeton College and Emeritus Professor at the University of Reading. He is Chairman of Newcore Capital Management and advisor to several property organisations. He has held senior positions with Nuveen, CBRE Global Investors, Grosvenor and other investors and fund managers.

NEIL CROSBY is Professor of Real Estate in the Department of Real Estate and Planning at the University of Reading. He is a Fellow of the Academy of Social Sciences, has been awarded life membership of the Investment Property Forum and a fellowship of the Society of Property Researchers, and is a member of the RICS Valuation Standards Board. He originally qualified and practised as a Chartered Valuation Surveyor in the UK before holding academic positions at Nottingham Trent and Oxford Brookes Universities.

STEVEN DEVANEY is an Associate Professor at the Henley Business School, University of Reading, where he teaches both investment appraisal and market valuation methods. He was previously a Lecturer in Real Estate at the University of Aberdeen and worked as an analyst at Investment Property Databank.

1. Property Investment Appraisal in its Context

1.1         What is appraisal?

1.2         The appraisal process

1.3         What makes a good appraisal?

1.3.1      Accuracy, bias, smoothing and lagging of valuations

1.3.2      Client Influence on valuations

1.4         Conventional and discounted-cash-flow approaches to appraisal

2. Principles of Investment Analysis

2.1         Introduction

2.2         Types of investments

2.2.1      Cash deposits

2.2.2      Fixed-interest securities

2.2.3      Index-linked securities

2.2.4      Ordinary shares (equities)

2.2.5      Property

2.2.6      Summary of investment types

2.3         Qualities of investments

2.3.1      Income and capital growth

2.3.2      Operating expenses

2.3.3      Liquidity, marketability and transfer costs

2.3.4      Real options

2.3.5      Leverage

2.3.6      Tax efficiency

2.4         Sources of risk

2.5         Comparing investments: NPV and IRR

2.6         Initial yield analysis and construction

2.7         Summary

3. The DCF Appraisal Model

3.1         The cash flow model

3.2         The inputs

3.2.1      The holding period

3.2.2      The lease and lease events

3.2.3      Depreciation, refurbishment and redevelopment

3.2.4      Forecasting rental growth

3.2.5      The resale price

3.2.6      Exit Capitalisation rate

3.2.7      Expenses

3.2.8      Void allowances

3.2.9      Transaction costs

3.2.10Taxes

3.2.11Debt finance

3.3         The discount rate

3.3.1      The risk free rate

3.3.2      The risk premium

3.4         Examples

3.5         Summary

Part Two Market Valuation Models

4. The Evolution of Freehold Market Valuation Models

4.1         Introduction

4.2         The evolution of conventional techniques

4.2.1      The changing perception of investors

4.2.2      Historical application of the basic valuation model

4.3         Rationale of the pre-1960 appraisal approach

4.4         The post-1960 conventional market valuation model

4.4.1      The fully let freehold

4.4.2      The reversionary freehold

4.4.3      Over-rented properties

4.5         Conclusion

5. Contemporary Freehold Market Valuations

5.1         Introduction

5.2         Analysing transactions

5.2.1      Implied rental growth rate analysis

5.2.2      Calculation of the implied rental growth rate

5.2.3      Implied Target Rate Analysis

5.3         Full Explicit and Short-cut DCF valuation models

5.3.1      Introduction

5.3.2      An explicit cash-flow model including short cut DCF

5.3.3      DCF by Formula

5. 4        Alternatives to DCF

5.4.1      Introduction

5.4.2      Real value

5.4.3      Arbitrage model

5.5         Reversionary Freehold Valuations

5.5.1      Analysis of transactions

5.5.2      Short Cut DCF

5.5.3      Real Value

5.5.4      Arbitrage.

5.6         Over-rented contemporary model valuations

5.6.1      Analysis of transactions

5.6.2      Short Cut DCF

5.6.3      Real Value

5.6.4      Arbitrage

5.7         Summary

6. Freehold Market Valuations - Applications

6.1         Introduction

6.2         Analysis of Transactions

6.3         Rack Rented or Vacant Property Investments.

6.4         Two-stage reversionary freeholds

6.4.1      Basic two stage reversionary freeholds

6.4.2      Long reversions

6.4.3      Over-rented properties

6. 5        More complex reversionary freeholds

6.5.1      Lease events

6.4.2      Alternative review forms: indexation and fixed increases

6.4.3      Summary

6.5         Comparing conventional and contemporary techniques

6.5.1      Defending conventional techniques

6.5.2      Target-Rate Choice

6.5.3      Fully let freeholds: contemporary versus conventional valuations

6.5.4      Reversionary freeholds contemporary versus conventional valuations

6.6         Taxation and market valuation

6.7         Conclusions

7. Leasehold Valuations

7.1         Introduction

7.2         The evolution of conventional leasehold valuations.

7.3         Contemporary Leasehold Valuations

7.3.1      Fixed leasehold profit rents

7.3.2      Geared leasehold profit rents Reviewable rent received, fixed rent paid

7.4         Conventional versus contemporary techniques

7.7         Conclusions

8. Measurement and Pricing of Risk in Appraisals

8.1         Introduction

8.2         Nature and sources of risk

8.3         Measuring risk

8.3.1      Risk-adjusted discount rate

8.3.2      Sensitivity analysis

8.3.2      Scenarios

8.3.3      Simulations

8.4         Risk Pricing

8.4.1      Assessing the risk premium

8.4.2      Certainty-equivalent cash flows

8.5         Summary

9. Development Appraisal

9.1         Introduction

9.2         Valuation Methods

9.2.1      Basic Residual Method

9.2.2      Discounted Cash Flow Residual Method

9.3         Developers profit

9.4         Changes in costs and values and phasing of developments

9.5         Finance

9.6         Conclusion

10. Bank Lending Appraisals

10.1       Introduction

10.2       Market Value

10.3       Mortgage Lending Value

10.4       Investment value.

10.5       Illustration of the three approaches

10.6       Performance of the three valuation bases over the last two property market downturns in the UK

11. Conclusions

Bibliography

Index