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Nick French: Department of Land Management and Development, The University of Reading, Reading, UK
Richard Cooper: LaSalle Investment Management, London, UK
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 property, then its use to calculate the years' purchase multiplier to apply to the annual rental figure will produce a good estimate of market value. The traditional investment method of valuation is one of simple comparison, and once again, preciseness in terms of technical analysis of the benchmark is less important than the consistency of the measure. In fact, no yield analysis of any type is required to carry out the valuation. It would be possible to carry out a comparison valuation by reference to the multiplier alone (YP) without translating this into a yield reference. It is simple convention in the UK property market that has led to the reliance on the yield as the benchmark for comparison.
However, problems arise where the subject valuation is more complicated that a simple rack rented investment thereby requiring subjective inputs from the valuer and where comparisons are made with other asset classes that benchmark on a different basis.
The aim of this paper is not to be a critique of traditional or contemporary valuation methodologies but to provide the appropriate formula to allow annually in arrears based data to be used correctly in a quarterly in advance valuation framework. The use of quarterly in advance formula may provide a marginally different bottom line...