A Modified UK Real Value/Short-Cut DCF Model for the Valuation of a Nigerian Sub-Leased Commercial Property

Abstract

A UK real value/short-cut DCF model that addresses the valuation of geared profit rents generated by sub-let commercial investment properties especially in climes with nationalized land policy has been elusive. This study examines the modification of the extant UK real value/short-cut DCF model for the valuation of head-leased occupancy rights with fixed and non-revisable ground rents pursuant to the provisions of the Nigeria Land Use Act. The model is developed by blending the inputs of the modified rational model with that of the Crosby's real value/short-cut DCF model leading to a valuation model that appears simplified compared to the existing UK contemporary value models. The gearing effect for the hypothetical case of sub-let head-lease occupancy right in Nigeria is manifested as having a diminishing impact of fixed ground rent on profit rent calculation. For the valuation case study involving this hypothetical head-leased occupancy right in Nigeria, it was found that the modified UK real value/short-cut DCF model produced valuation that is identical to those churned out from the full DCF, modified rational, and Crosby's real value/short-cut DCF models. For the same hypothetical case study, less than 1% difference is observed between valuations from the all risks real yield (ARRY) model, which evolved in New Zealand and the valuation produced from the modified UK real value/short-cut DCF model, thereby validating all methods against each other. In consonance with the International Valuation Standards pertaining to income valuation approach, a sustained pedagogy of emerging real value models alongside the extant nominal valuation models is suggested as a way forward. Nevertheless, the modified UK real value/short-cut DCF model is recommended as an alternative to the extant variants of real value and explicit DCF techniques for the valuation of sub-let head-lease occupancy rights with fixed/non-revisable ground rents payable especially in climes with nationalized land policy.