Abstract
Abstract This study is a design of an alternative real value hybrid model for the valuation of reversionary leasehold investment properties characterized by divergence in the revision period of sub-rent and head rent respectively. The development of this model commenced with a synthesis of inputs for the modified rational- and real value hybrid models, and the derivation of an equivalent cash flow multiplier for terminal investments. With exception of the generic real value model, term incomes across all other contemporary models including the alternative real value hybrid model were discounted using the equated yield. The discounted reversionary cash flows in the valuation template associated with the alternative real value hybrid model appears identical to that in the generic real value model, while exhibiting itself as a surrogate reversionary income multiplier for the modified rational, and the real value/short-cut DCF models respectively. The alternative real value hybrid model was validated as capable of producing valuations that are identical to those churned out from all the existing contemporary models for the valuation of this category of reversionary leasehold investment property. The study is a novel attempt towards redesigning the modified rational model of leasehold investment property valuation and according it a real value perspective.
Highlights
Property investment valuation is predicated on the discounting of streams of cash flows from landed property
There is a possibility that the current equation and template for the modified rational model of leasehold valuation could be redesigned to use the same inputs as the real value hybrid model, and replace the 3-in-1 composite Years Purchase [YP] formula with a surrogate function which incorporates the deferment of the reversionary capital value using the present value [PV] of ₦1 in the period to the rent review at the inflation risk free yield
Unlike Crosby's real value hybrid model which entails the calculation of a composite 3-in-1 YP function to arrive at the reversionary income multiplier, the alternative real value hybrid model is devoid of such composite YP function by mimicking the modified rational model and the generic real value model in the use of YP in perpetuity function
Summary
Property investment valuation is predicated on the discounting of streams of cash flows from landed property. There is a possibility that the current equation and template for the modified rational model of leasehold valuation could be redesigned to use the same inputs as the real value hybrid model, and replace the 3-in-1 composite Years Purchase [YP] formula with a surrogate function which incorporates the deferment of the reversionary capital value using the present value [PV] of ₦1 in the period to the rent review at the inflation risk free yield. It is arguable to say that the contemporary value models were not designed to compete for supremacy but to avail valuers with an array of alternative valuation models for use in practice (Crosby, 1996; Crosby, et al, 1997), the research question put forward is: In what other form can the modified rational model be redesigned to mimic and use the same inputs as the real value hybrid model for the purpose of valuing reversionary leaseholds characterized by simultaneous revision of sub-rent and head rent but at different review periods? It is expected that a synthesis of the modified rational model developed by Baum and Shi Ming (1985b) with the analytical surrogates of inputs in the existing real value hybrid model by (Crosby, 1983, 1984) would accord "real value" dimension to the modified rational model and evolve into an alternative real value hybrid model for the valuation of reversionary leaseholds
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