Modelling UK, Real Estate Valuations in Excel An Introduction

Transcription

1 Modelling UK, Real Estate Valuations in Excel An Introduction Contents Compound Growth Summary Providing insight into valuing changing income Present Value profiles to determine Net and Gross Values. Capitalisation in Perpetuity Capitalisation of a Changing Rental Profile Single yield rates per tenant assuming capitalisation annually in arrears. Calculate the Net Value A specialist consultancy offering flexible, financial appraisal and analysis services. A unique blend of practical, Real Estate experience and Excel and Argus Software modelling experience. Regulated by the RICS. Business Analysis and Specification Writing Working with clients to define and fulfil their financial appraisal & analysis requirements. Meeting with clients to determine their precise needs. Compiling specifications for REF Models or a third party to create financial models. Real Estate Appraisals & Analysis Investment, development, debt and risk appraisals. Models to include Returns, Scenarios, Sensitivity Analysis and Profit Distribution. Excel or Argus Software tools. Project Management and Quality Assurance Manage development of a financial appraisal or appraisal tool by a third party. Manage Quality Assurance / testing by a third party. Provide QA / testing of a third party s appraisal or appraisal tool. Provide high level, PM & QA oversight. Additional Services Excel and Argus Software training. Independent Support of Argus products. Caveat Copyright and the author are not responsible for any losses, direct or indirect, resulting from anyone s use or reliance on this document, the appraisals / models built or the values derived from the models. This document is the copyright of. 5 th September

2 Compound Growth Calculation of future values, applying the principle that your interest earns interest. Summary Sum Invested 200 Interest Rate 10% pa Years Investment Value at Start Interest in Year of Year Investment Value at End of Year Interest in Year = Investment Value at Start x 10% Investment Value at End is the opening balance for the next year Interest earned in each year increases as a result of compounding. Compounding causes increases in Investment Value to accelerate over time

3 Compound Growth cont d Future Value of a current sum. Standard Excel format p x (1 + i) n p * (1 + i) ^n p = amount originally invested i = interest rate pa n = number of years invested Example Sum Invested 200 Interest Rate 10% pa 200 x (1 + 10%) 3 = Investment period 3yrs =B1*(1+B2)^B

4 Present Value The discounted or day-one value of a future sum, assuming a certain interest rate. The sum I would need to invest to provide a required future value. Interest is Compounded. PV Rate PV of a Future Sum Standard (1 + i) -n f x (1 + i) -n Excel format (1 + i) ^-n f * (1 + i) ^-n f = future sum i = interest rate pa n = number of years invested Example Future Amount 266 Interest Rate 10% pa x (1 + 10%) -3 = 200 Investment period 3yrs PV Rate (1 + 10%) -3 = PV of Future Sum x (1 + 10%) -3 = 200 =(1+B1)^-B2 =B1*(1+B2)^-B

5 Capitalisation In Perpetuity The cumulative Present Value (PV) of successive, regular payments, typically rents. PV of year 1 rent + PV of year 2 rent + PV of year 3 rent +...etc into perpetuity. Capital valuation calculation assuming regular rents. This formula capitalises rents annually in arrears. Standard Excel format r i r / i r = rent pa i = yield Example Rent pa % = 6,000 Yield 5% pa Annual rent is multiplied by a factor of 20 which is 100% 5% Why does this simple formula work? Answer: Because the PV of future rents are progressively less valuable. The PV of rents in 50 years are relatively small. True values depend on the scale of the rent and the yield used. PV s diminish more slowly if low yields are used. The 5,846 value in the table is 2.5% short of the full, calculated, 6,000 value after 75 yrs. Year End PV Rate PV Year End PV Rate PV Year End PV Rate PV ,

6 Capitalisation of a Changing Rental Profile Steps 1) Capitalise each rent change in perpetuity. 2) PV each of the capital sums to the valuation date. 3) Sum the PV s to provide a Gross Value. Change in Rent Example Valuation Date 01/01/2015 Yield (Capitalisation Rate) 10% Date First date entered is the Valuation Date. Initial Change in Rent is the rent passing at the valuation date. Subsequent entries use formula to calculate the changes in rent between rows. Example: The formula in C5 is =B5-B4 Date 01/01/2015 Rent 20,000 01/07/ ,000 01/01/ /01/ ,000 Capital Value in Perpetuity Change in Rent Capitalisation Rate Example: The formula in D6 is =C6/B$1 The $ symbol between the B and the 1 was used to preserve the 1 (row) value when the formula was copied down the column. Number Yrs Following Valuation Date The $ symbol in A$4 of the formula preserved the Valuation Date cell reference when it was copied down the column. Example: The formula for E7 is =(A7-A$4)/365 PV of Capital Value Example: The formula for G4 is =D4*F4 Gross Capital Value =sum(g4:g7) PV Rate Example: The formula for F6 is =(1+B$1)^-E

7 Calculate the Net Value The Net Value is the Price the purchaser pays to the vendor. The purchaser will typically incur acquisition costs in addition to the price. Steps 1) Find the Gross Value. 2) Deduct the PV of future Capital Costs. 3) Work out the Net Value which, with % acquisition costs added, calculates to the Gross Value less the PV of Capital Costs. The easiest way to determine the Net Value is to calculate the Acquisition Costs and Net Value out of order. Net Value is calculated before Acquisition Costs in the section below. Total Gross Value 5,000,000 PV of Capital costs 1,400,000 Subtotal 3,600,000 Gross Value PV of Capital Costs Acquisition Costs 6.80% 229,213 Subtotal figure Net Value Net Value 3,370,787 Standard 3,600,000 ( %) Excel 3,600,000 / ( %) What would the Net Value need to be for NV + Acquisition Costs to come to the subtotal figure? PV of Future Capital Costs Standard f x (1 + i) -n Excel format f * (1 + i) ^-n f = future sum i = discount rate pa n = (cost date valuation date) in years