Property Economics Valuation – Math Problem Example
The paper "Property Economics – Valuation" is an excellent example of a math problem on macro and microeconomics.
Valuation is the process of estimating the worth of an asset or liability. Valuations are necessary for analyzing investments, determination of tax liability in a taxable event, and litigation. Notably, the present scenario is equated to an investment analysis problem.
This is a case of annuities which is a series of equal payments or receipts that occur at evenly spaced intervals including Leases and rentals (Huston, 2004; Pg. 55).
Valuation of an out of town retail warehouse, 900 sq. m let at £300,000 p.a with a lease expiring in a period of 3 years, with no rent reviews scheduled in the period.
The present value of an annuity for n payment periods.
The formula is given by:
PV (A) = A / I (1 - 1/ (1 + i)n )
Where PV = the present value
A = the annuity payments
I = the rate of interest or return on investment
N = the number of years or period.
Assuming a return on investment rate of 5%, the present value of lease payments will be:
PV (A) = £300,000/0.05 (1- 1/ (1+0.05)3)
PV (A) = -945750
The amount of £945,750 is the present value of lease rentals payable within a period of three years at an interest rate of 5%. The retail warehouse offers a viable investment option owing to its low lease rental payments as opposed to the neighboring unit let for £450psm (£450 * 900sq m) – £405,000 p.a and a similar retail unit let recently at £420,000 p.a with 5 yearly rent reviews purchased for £7 million. This is because the warehouse provides the lowest lease payments with no provision for rent reviews within the period. A lease contract offering a long period can be of a great opportunity to an investor. Rent review provisions in lease contracts do impact negatively on the business in the event of substantial increment in rental payments.
Age of the cycle
The acceptable percentage of disposing of the property
Original price without discount
Original price with 5% discount
The above shows the longer the years of the transaction the lower the price of the property.
The office property in the city of Lunbury occupied by UpTheCreek Adventures, which is a travel firm that has recently gone into receivership, which seems to be a very risky investment. The location of this property in a secondary area of the city makes it face with technically of negative competitive advantage compared to the offices located in the central business district (Schulte, 2001; Pg. 291). The property’s location must have caused the occupying company to be placed in receivership due to its incapacity to compete with companies housed in strategic positions.
The council’s confirmation plans to construct a new footbridge to link the office property at the city center could only offer limited hope on completion of the footbridge. This is because motorists would still be compelled to source for parking space distance away from the property office. It would have been advantageous if the proposed bridge would accommodate motorists. It would also have been of great benefit if the footbridge could be constructed.
Comparing 1 which is a modern office located in the central business district in a prime street enjoys a strategic position. It is a better option as compared to the property office in question. The only disadvantage is that it requires a longer period to recover the initial investment amount (£6,250,000/£500,000), twelve and a half years (MäLer, 2005; Pg. 171).
Comparable 2, is a similar modern office strategically located in the central business district enjoys a payback period of the initial investment of exactly ten years. (£2.5m/£250,000); this is a viable option due to its shorter payback period.
Comparable 3, is another viable option for investment. Even though the property enjoys an attractive annual income, the reported decline in the economy places the investor in a precarious position due to the greatest risk of uncertainty on the future annual income. It is also evident that assuming a constant rate of income annually, the payback period exceeds ten years.