Valuation Argus

ARGUS Software: ARGUS Valuation-Capitalisation Calculations Manual
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Build date: 9 October 2008 12:53 am
Version: 2.50 Doc. Version: 1.0 Rev. Date: 9/10/08 ARGUS Valuation-Capitalisation Calculations Manual
i
CONTENTS
Table of Contents
Chapter 1
Traditional Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Valuation Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Gross Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Net Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Acquisition Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Net Initial Yield (NIY) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Reversionary Yield (RY) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Equivalent Yield (EY) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Running Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Chapter 2
Discounted Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Internal Rate of Return and Net Present Value . . . . . . . . . . . . . . . . . . . . . . . . . 13
Portfolio Asset Management Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Chapter 3
Performance Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Rental Value Growth in period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Total Return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Capital Employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Capital Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Income Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Exit Initial Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exit Reversion Yield A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exit Reversion Yield B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Exit Net Rent/Present Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Yield on Actual Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ERV (gross) Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Vacancy % at Exit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Rent Cover % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Loan to Value (LTV) % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Chapter 4
Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Loans, Mortgages and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Simple/Interest Only Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Interest & Capital Repayment (Mortgage) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Equity Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

ii Chapter 2:
Auto-Regulating Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Chapter 5
Contact details. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Chapter 1: Traditional Valuation 1
CHAPTER 1
Traditional Valuation
Valuation Methodology
Traditional valuation in ARGUS Valuation-Capitalisation follows four standard methods of
valuation computation, namely:
• Term and reversion;
• Hardcore;
• Initial Yield;
• Shortcut DCF.
Basic formulae for these valuation methods are set out below, assuming a simple freehold property,
let and income-producing with a single reversion to market rental value at a future date.
Years Purchase and Present Value multipliers may be sourced from valuation tables. For leasehold
properties Years Purchase dual rate may be used to provide for leasehold sinking fund and tax.
Term and Reversion

The term and reversion valuation method applies different capitalisation rates to current (‘term’)
and future (‘reversion’) income flows to reflect the relative security of these income flows. Rental
income is valued in period steps, applying the term rate to the current income, which is deemed to
be lower risk income, over the period of its duration. A reversion rate is then applied to more
uncertain future income likely to be received on rent review or reversion, discounted to a present
value.
The basic formula for valuation by the term and reversion method is as follows:
GV = [ NI × Years Purchase for term period ] + [ NR × Years Purchase into perpetuity × Present Value ]
-n
 1- ( 1 + i t )  1 -n
GV = NI ×  --------------------------- + NR × --- × ( 1 + i r )
 i t  i r
where:
GV = gross unrounded capital value
NI = net current rent per annum (net of non-recoverable running costs and ground rent)
NR = net open market rental value (ERV) per annum (net of non-recoverable running costs and
ground rent)
it = term rate (yield)
ir = reversion rate (yield)
n = number of years from the valuation date to the reversion to market rent

2 Chapter 1: Traditional Valuation
Example
For example, a property let at £100,000 per annum, with a rent review in four years’ time to market
rent. Current market rent is £150,000 per annum. Applying a term rate of 8.00% and a reversion
rate of 9.00%, the valuation is calculated as follows:
-4
1- ( 1 + 0.08 ) 1
GV = 100, 000 ×  ---------------------------------- + 150, 000 × ---------- × ( 1 + 0.09 )
-4
 0.08  0.09
GV = 331, 213 + 1, 180, 708 = 1, 511, 921
Tenant lease and rent input
Valuation

Hardcore
The Hardcore method values rental income in layers. The lowest risk “core” income is valued into
perpetuity at the hardcore rate and any anticipated future uplifts in income are valued at the same
rate (or, if selected in the Assumptions menu in ARGUS Valuation-Capitalisation, a layer rate) and
discounted to a present value.
The basic formula for valuation by the hardcore method is as follows:
GV = [ NI × Years Purchase into perpetuity ] + [ ( NR-NI ) × Years Purchase into perp. × Present Value ]
1 1 -n
GV = NI × --- + ( N R-NI ) × --- × ( 1 + i )
i i
where:
ground rent)
i = hardcore rate (yield)
n = number of years from the valuation date to the reversion to market rent
Example
As an example, using our sample property set out above with a current rent of £100,000 per annum,
a current market rent of £150,000 per annum anticipated at review in four years’ time, and adopting
a hardcore rate of 8.00%, the valuation is calculated as follows:
1 1 -4
GV = 100, 000 × ---------- + 50, 000 × ---------- × ( 1 + 0.08 )
0.08 0.08
GV = 1, 250, 000 + 459, 394 = 1, 709, 394

Initial Yield
The Initial Yield method applies a capitalisation rate to the current net rental income at the
valuation date and values this income into perpetuity. This method effectively ignores future
changes in income.
An Initial Yield valuation is therefore calculated as follows:
GV = NI × Years Purchase into perpetuity

1
GV = NI × ---
i
where:
i = initial yield
Example
For the sample property set out above, the calculation is as follows:
1
GV = 100, 000 × ---------- = 1, 250, 000
0.08
Shortcut DCF
This is a special method that is used primarily to value over-rented property more accurately than
conventional valuation methods and applies All Risks and Target yields.
The Shortcut DCF method considers the actual situation - that income will remain at the level of
the current rent passing (assuming upward only rent reviews) until the rental value exceeds the
passing rent.
All risks yields often imply rental growth. ARGUS Valuation-Capitalisation uses implied rental
growth analysis to establish the implied growth rate from comparable yield evidence (assuming a
five yearly upwards only rent review pattern).

An all risks yield and a target rate of return must be defined, and from these the implied growth rate
for the core rental income (or ERV) can be calculated.
The implied growth rate is calculated as follows:
r ( YP into perp @ all risks yield )- ( YP for r years @ target yield )

( 1 + g ) = ---------------------------------------------------------------------------------------------------------------------------------------------
( YP into perp @ all risks yield ) × ( Present Value for r years @ target yield )
-r
1- ( 1 + i t ) 
1-  --------------------------
--- - 
r
ia  it 
( 1 + g ) = --------------------------------------- = X
1- -r
--- × ( 1 + it )
ia
So the implied growth rate per annum is:
1---
r
g = X -1
where:
r = rent review cycle (in years) of comparable (i.e. 5 years)
g = implied rental growth rate (pa)
ia = all risks yield of comparable
it = target rate of return
The ERV is inflated at the implied growth rate on a compound basis to calculate its growth at rent
review dates during the lease term, to determine at which rent review date the inflated ERV will
exceed the rent passing. This is known as the breakthrough rent review date.
This is determined by inflating the ERV at the implied growth rate for the period of years to the
next review date, to establish whether the inflated ERV will exceed the rent passing at each future
rent review until this event occurs. The ERV (pa) is inflated by the implied growth rate as follows:
n
ERV at review = ERV × ( 1 + g )
where:
n = years to next rent review from the valuation date
The passing rent is then capitalised until the breakthrough rent review at the target yield. The
reversion is capitalised at an all risks yield and deferred at the target rate. The basic formula for this
calculation is as follows:
GV = ( NI × Years Purchase single rate ) + ( Inflated NR × Years purchase into perpetuity × Present Value )
-n
 1- ( 1 + i t )  n 1 -n
GV = NI ×  --------------------------- + NR × ( 1 + g ) × ---- × ( 1 + i t )
 i t  i a
where:
ground rent)

n = number of years to the breakthrough rent review from the valuation date
ia = all risks yield
it = target yield
Example
Assuming a single let freehold property, let for 25 years from 1 January 2000 with five yearly
upward only rent reviews at a passing rent of £200,000 per annum. The current ERV is £100,000
per annum.
The valuation date is 1 January 2002. The next review is in three years’ time. An all risks yield of
6% and a target rate of 11% are defined.
From the above rates, ARGUS Valuation-Capitalisation calculates the implied growth rate as
follows:
-5
1 -  1- ( 1 + 0.11 ) 
--------- - ----------------------------------
5 0.06  0.11 
( 1 + g ) = ----------------------------------------------------- = 1.3114
1- -5
--------- × ( 1 + 0.11 )
0.11
So the implied growth rate per annum is:
1---
5
g = ( 1.3114 ) -1 = 0.05571
The implied growth rate is therefore 5.571%.
Using this implied growth rate, ARGUS Valuation-Capitalisation calculates the breakthrough rent
review date - the first review at which the rental value, inflated by the implied growth rate, will
exceed the passing rent. This is done by testing whether the ERV, inflated at the implied growth
rate, will exceed the rent passing of £200,000 per annum at each future rent review until this event
occurs.
in 2005 ERV * (1+0.05571)^3 = 117,663
in 2010 ERV * (1+0.05571)^8 = 154,302
in 2015 ERV * (1+0.05571)^13 = 202,350
in 2020 ERV * (1+0.05571)^18 = 265,360
In this case, therefore, the ERV will exceed the current rent at review in 2015, i.e. 13 years from the
valuation date.
The valuation can now be calculated as follows:
-13
1- ( 1 + 0.11 ) 1
GV = 200000 ×  ------------------------------------ + 202350 × ---------- × ( 1 + 0.11 )
-13
 0.11  0.06
GV = 1349974 + 868466 = 2218440

Gross Value
This is the capitalisation of net income before deduction of acquisition fees and any capital
expenditure, and excluding any capital receipts.
Traditional Valuation screen in ARGUS Valuation-Capitalisation
Net Value
The gross value less capital expenditure, plus capital receipts, and net of purchaser’s costs.
V = GV- ( a + c ) + d
where:
V = net unrounded capital value
a = acquisition costs (also referred to as purchaser’s costs)
c = capital expenditure
d = capital receipts
Acquisition Costs
Acquisition costs are calculated on the price paid for an investment, in other words, on the net
value.
Purchaser’s costs comprise stamp duty, sale agents fees and sale legal fees, totalled to give a single
percentage figure.

Costs are residualised on the net unrounded value (or locked “Say Value” if selected in
Assumptions), which may be calculated by the following formula:
( G V-c + d )
V =  ----------------------------
 (1 + a) 
Once the net capital value is known, then acquisition costs can be calculated as follows:
A = V×a
where
a = purchaser’s costs, expressed as a percentage
c = capital expenditure
d = capital receipts
A = purchaser’s costs, expressed as an amount
Net Initial Yield (NIY)

The initial net income expressed as a percentage of the gross capital value.
NI
NIY =  -------- × 100
 GV
where:
GV = gross unrounded capital value1
When a tenant lease has an outstanding rent review, and an assumption of the rent that will be
achieved on settlement of the review has been entered, two initial yields will be displayed in the
Valuation Reports:
The Initial Yield (Contracted) is calculated on the current rent that the tenant is still paying prior
to conclusion of the rent review.
The Initial Yield (Deemed) is calculated on the valuer’s assumption of the rent that will be
achieved on settlement of the rent review.

Reversionary Yield (RY)

The net rental income on final reversion expressed as a percentage of the gross capital value.
NR
RY =  -------- × 100
GV
where:
NR = net market rental value (ERV) per annum (net of non-recoverable running costs and
ground rent)
payable on final reversion date
Equivalent Yield (EY)

The equivalent yield is the discount rate applied to the income flow from a property or portfolio,
expected during the life of the investment, so that the total income discounted at this rate equals the
initial capital outlay, or gross value1. The equivalent yield is growth implicit.
The equivalent yield is calculated by solving the following expression iteratively for the term ‘r’:
 NI ( t + 1 )   NI ( t + 2 )   NI ( t + ( n-1 ) )  NR 
GV t =  ------------------1- +  ------------------2- + ... +  --------------------------
- + ---------------------
(1 + r)  (1 + r)   ( 1 + r ) ( n-1 )  r ( 1 + r ) n
where:
r = equivalent yield

NIt = net annual rental income (net of non-recoverable running costs and ground rent) at a
given date ‘t’
NR = net market rental value (ERV) per annum (net of non-recoverable running costs and
ground rent)
n = the number of years that must elapse from year t before all tenancies have been
reviewed to full market rent
Note that in ARGUS Valuation-Capitalisation, future capital expenditure may be discounted at a
rate specified in the discount rates section of the Cost Schedule. In the Assumptions form there is
an option to allow the equivalent yield to iterate either using this specified discount rate for capital
expenditure or by using trial equivalent yield rates until the desired target capital value has been
found (EY - Cap. Costs Option).
The display of the equivalent yield in ARGUS Valuation-Capitalisation varies depending on the
Valuation Tables selected in Assumptions. If Annually in Arrears tables are selected, then the
Nominal Equivalent Yield is shown, with the True Equivalent Yield displayed below. If Quarterly
in Advance tables are selected, then only the True Equivalent Yield is displayed.
Running Yield
The present net rental income from a property or portfolio expressed as a percentage of the gross
value.
NI t
Running Yield =  -------- × 100
GV
where:
NIt = net annual rent passing (net of running costs, ground rent and non-recoverable
expenditure) at a given date ‘t’
In ARGUS Valuation-Capitalisation, running yields can be selected to display Annual in Arrears
return yields or Quarterly in Advance.
1 In ARGUS Valuation-Capitalisation, the default target basis for running yields is gross unrounded
value.
This may be changed in the Assumptions form to net unrounded value, rounded value, or Say Value,
including or excluding acquisition costs and capital expenditure (see following picture).

Sensitivity Analysis
In the Traditional Valuation, sensitivity analysis can be calculated based on steps in both the market
rental value and yield.
In the DCF, sensitivity analysis may be calculated on increments in rental growth and exit yield
assumptions. In both cases, the sensitivity steps can be defined as relative or absolute steps.
Relative
Relative steps calculate as a percentage of the original input amount.
So, for example, a 10% relative step on an 8% yield, up and down, will run calculations using the
following yields:
8.80% (8% + (8% * 0.1))
8.00%
7.20% (8% - (8% * 0.1))
Absolute
Absolute steps will add the specified step to the original input amount.
So, for example, a 0.25% absolute step on an 8% yield, up and down, will run calculations using
the following yields:
8.25% (8% + 0.25%)
8.00%
7.75% (8% - 0.25%)


Chapter 2: Discounted Cash Flow 13
CHAPTER 2
Discounted Cash Flow
Internal Rate of Return and Net Present Value

Discounted Cash Flows in ARGUS Valuation-Capitalisation and ARGUS Developer follow the
standard formulae for computation of the Internal Rate of Return and Net Present Value.
Basically, this is the sum of discounted successive positive and negative amounts.
The primary difference for ARGUS Valuation-Capitalisation is that the discount periods can be
based on the actual dates for future events as well as the monthly assumption.
The standard formula applied in the mathematics is:
R x1 R x2   R x ( n -1 )   R xn + V xn
V 0 =  ------------ +  ---------------------
- + ... +  -----------------------------
- +  -----------------------
 1 + a  ( 1 + a ) x2  ( 1 + a ) x ( n -1 )  ( 1 + a ) xn 
where:
V0 = Initial value as a manual figure, or residual through iteration mathematics.
a = the discount rate
n = number of periods
x = measure standard for the period (monthly or daily)
R = Net Operating Income after operating costs

14 Chapter 2: Discounted Cash Flow
Vxn = Valuation net of associated costs

The Cash Flow works through for each period resulting in the accumulation by:
xn
Ri V xn
V0 = ∑ -----------------
(1 + a) (1 + a)
- + ---------------------
i xn
i=1
where:
Ri = Recurring periodic net revenue
Any capital sums (costs or revenues) after the discount period can be included or ignored. If
included, then the user has the choice of discounting at any required rate.
The practical effects of x and n are illustrated below.
ARGUS Valuation-Capitalisation Discounted Cash Flow offers several options for calculating
results.
There are two primary modes:
• Calculation of the Internal Rate of Return (IRR)
• Calculation of the Present Value (PV)
The standard principles for discounting are applied so that the NET PRESENT VALUE is zero.
For mode 1, calculation of the internal rate of return, the program finds the IRR by iterating
(produces multiple calculated guess rates) over the time based series of costs and revenues in the
cash flow spreadsheet until the difference between the sum of the discounted receipts and the sum
of the discounted costs is zero.
For mode 2, calculation of the present value, a single pass is made through the cash flow on all
future items discounting at the selected IRR to find the resulting difference between the sum of
discounted receipts and the sum of the discounted costs. This result is the Present Value.
The accuracy of the result depends on the timing basis chosen for the calculation.
Monthly Discounting
ARGUS Valuation-Capitalisation offers monthly discounting where all future figures are assumed
to be timed at the start of each month. The aggregate figure for each month is discounted from the
first of the month. Therefore total expenditure in month 4 of the cash flow is discounted from the
1st of the 4th month back to the valuation date in the spreadsheet.
For example, $100,000 in month 4 @ 12% = PV of $1 for 4 months.
To be precise, it is discounted by the number of days from the first of the month back to the
valuation date.
(1+i)0.3342 [where i = IRR and 0.3342 is the fractional number of days (122 / 365)] = 1.03860
$100,000 divided by 1.03860
= $96,283
Daily Discounting
In this case all costs and revenues are handled on an accurate daily basis. This means each item in
the cash flow is discounted to that anticipated date of payment or receipt.
ARGUS Valuation-Capitalisation stores all DCF items with dates, and each monthly cell of the
cash flow can contain unlimited dated items, several even being on the same date. This, where a
cost of $50,000 is to be paid on the 7th of June 2010 and $25,000 is to be paid on 11th June 2010,
the program will handle this by discounting over the number of days between the valuation date
and the payment dates.

Chapter 2: Discounted Cash Flow 15
Example: Assuming a valuation date of 1st January 2000 for the above figures @ 12% IRR:
PV of $50,000 @ 12% over 3,810 days
$50,000 divided by 3.2640
= $15,318
PV of $25,000 @ 12% over 3,814 days

$25,000 divided by 3.2680
= $7,650
The total of these discounted figures is:

$15,318 + $7,650 = $22,968
Portfolio Asset Management Fees

Multiple Portfolio Asset Management Fees can be defined on a number of bases:
• Fixed amount;
• % gross value;
• % gross rent;
• % net rent;
• % of change in gross value calculates based on the projected change in value over the
following period.
The percentage rates can be defined as a simple flat rate or based on cumulative or non-cumulative
bands.

16 Chapter 2: Discounted Cash Flow
The fees are displayed in the Portfolio DCF (outlined in green for illustrative purposes):

Chapter 3: Performance Measures 17
CHAPTER 3
Performance Measures
Performance measures are used to calculate both property, portfolio and market returns.
When portfolio returns are calculated these typically include all investment properties within the
portfolio, including those bought and sold part way through the period. In comparison, market
returns are based on screened standing investments only to reflect underlying market movements.
Performance measures therefore allow comparison of property/portfolio investment returns relative
to the performance of the market.
Performance measures are generated in the Projections Analysis (in the DCF window) and the
Performance Analysis window.
Projections screen
Rental Value Growth in period

The increase in the market rental value of the property or portfolio during the period measured,
expressed as a percentage of the rental value at the beginning of the period.
NR t n
RVG =  ----------------- -1 × 100
 NR ( t-1 )
where:

18 Chapter 3: Performance Measures
RVG = rental value growth, expressed as a percentage

NRt = net market rental value in period t
n = number of periods per year (so, for example, for monthly results, n would be 12)
Total Return
An annual return measurement which applies changes in value and income over the period, less
capital expenditure during the period, divided by capital employed.
In ARGUS Valuation-Capitalisation both money weighted and time weighted returns are
calculated. With effect from December 2004 IPD introduced a standardised method of calculating
annual investment returns, with a new annual time-weighted return calculation. This has been
incorporated into ARGUS Valuation-Capitalisation, and the formulae for the calculations are set
out below.
Money weighted Total Return

( V t -V ( t-1 ) -C t + NI t )
TR = ------------------------------------------------
V 1 1 
--- ---
 ( t-1 ) + 2 C t - 2 NI t
where:
TR = Total Return
NIt = net annual rental income (net of non-recoverable running costs and ground rent) in period t
Ct = total capital expenditure less capital receipts in period t
Time weighted Total Return

( V t -V ( t-1 ) -C t + NI t )
TR = -----------------------------------------------
( V ( t-1 ) + C t )
where:
TR = Total Return
Returns are calculated for each individual month and then chain-linked over twelve months to
calculate the annual return. Equal weight is given to each month’s return, whatever the period over
which returns are calculated.
Time weighted Total Return (old)

Prior to December 2004 annual time weighted returns were calculated by compounding monthly
money weighted returns. This assumed that capital expenditure and income were weighted to the
mid point of the month.
Capital Employed
The initial value of the property or portfolio plus any ongoing net investment (weighted to reflect
an even distribution throughout the period) less half the net rental income over the period.

1 1
CE = ∑  V( t-1 ) + --2- Ct - --2- NIt
where:
CE = Capital Employed
Capital Growth
The increase in value of the property or portfolio throughout the period, net of any capital
expenditure, expressed as a percentage of capital employed over the period.
Money weighted Capital Growth

( V t -V ( t-1 ) -C t )
CG = -----------------------------------------------
V 1--- 1--- 
+ C - NI
 ( t-1 ) 2 t 2 t
where:
CG = Capital Growth
Time weighted Capital Growth

( V t -V ( t-1 ) -C t )
CG = ---------------------------------
( V ( t-1 ) + C t )
where:
CG = Capital Growth
Returns are calculated for each individual month and then chain-linked over twelve months to
calculate the annual return. Equal weight is given to each month’s return. Calculated in this way,
the Capital Growth and Income Return for a period longer than one month may not sum exactly to
the Total Return.
Income Return
The net rental income from the property or portfolio for the year, expressed as a percentage of the
capital employed over the period.

Money weighted Income Return

NI t
IR = -----------------------------------------------
V 1--- 1--- 
 ( t-1 ) + 2 C t - 2 NI t
where:
IR = Income Return
Time weighted Income Return

NI t
IR = -----------------------------
( V ( t-1 ) + C t )
where:
IR = Income Return
Returns are calculated for each individual month and then compounded over twelve months to
calculate the annual return. Calculated in this way, the Capital Growth and Income Return for a
period longer than one month may not sum exactly to the Total Return.
Exit Initial Yield

The exit net rent expressed as a percentage of the gross exit value.
Exit Reversion Yield A

The exit net rental value expressed as a percentage of the gross exit value.

Exit Reversion Yield B

The exit net rental value (net of ground rent only) expressed as a percentage of the gross exit value.
Exit Net Rent/Present Value

The exit net rent expressed as a percentage of the net purchase price at start, or present value.
Yield on Actual Income

The period actual net income expressed as a percentage of the gross exit value.
ERV (gross) Yield

This is the gross exit reversion yield, with no deductions from the rental value, expressed as a
percentage of the gross exit value.
Vacancy % at Exit
This is the exit net rental value of any vacant units expressed as a percentage of the total rental
value at exit.

Rent Cover %
This is the net rent expressed as a percentage of the debt payment.
Loan to Value (LTV) %

This is a measure of the outstanding debt balance expressed as a percentage of the net value at exit.

Chapter 4: Finance 23
CHAPTER 4
Finance
Loans, Mortgages and Equity

Debt can be included in cash flows in ARGUS Valuation-Capitalisation using the Finance module.
This module allows users to input an unlimited number of debt arrangements at property and
portfolio levels, choosing from Loans, Mortgages and Equity deals. Loans can be set up to finance
the purchase of a property or portfolio or non-purchase items of capital expenditure, such as
refurbishment costs.
Interest Rate Type

An Effective rate, or APR, is the final rate achieved at the end of the year including compounding.
This is calculated as follows:
p
 1 + --i- -1
 p
where:
i = nominal annual rate of interest
p = number of compounding periods per year
For example, an interest rate of 10% per annum compounded quarterly would produce:
4
 1 + 0.1
------- -1 × 100 = 10.38% Effective rate
 4
A Nominal rate is the 10% which produces the 10.38% effective rate above.
The debit rate is the rate of interest charged by the lender on the loan amount and represents an
outflow from the cash flow. The credit rate is the rate at which interest is earned when the finance
arrangement is in credit. It represents an inflow of money to the cash flow.
Finance Type
In ARGUS Valuation-Capitalisation, four types of finance are available:
• Interest only loan (or simple loan)
• Mortgage (interest & capital)
• Equity investor
• Auto-regulating loan.
Simple/Interest Only Loan

A standard loan based on straight sums with interest and future repayment of the loan at the end of
the loan term.
For example, assuming a loan of £500,000 at an effective rate of 10.38% with monthly payments,
the formula to calculate a monthly interest payment is as follows:

24 Chapter 4: Finance
1
L × ( 1 + i ) -1-
--------------------------------
p
where:
i = effective rate of interest
p = number of payment periods per year
L = loan amount
Therefore, using the example outlined above:
1
500, 000 × ( ( 1 + 0.1038 ) -1 )
----------------------------------------------------------------------- = 4, 325
12
Simple/interest only loan (outlined in green for illustrative purposes)
Interest rolled up
Interest may be rolled up in which case no payments are made during the course of the loan.
Instead, interest is compounded each period during the term of the loan and is payable as a lump
sum at the end of the loan.
Interest & Capital Repayment (Mortgage)

In this finance type, both interest and capital repayments are made during the term of the loan.
Capital repayments are made to repay the total loan amount by the end of the loan period.
In ARGUS Valuation-Capitalisation, the Net Interest row in the cash flow represents the interest
payments made (see figure below). The Mortgage Repayments row shows the capital payments
made to offset the amount borrowed.

Options for both payment periods and compounding periods in ARGUS Valuation-Capitalisation
are: Monthly, Quarterly and Annually.
Mortgage loan (outlined in green for illustrative purposes)
The multiplier for mortgage instalments (which calculates the total payment: interest plus capital
repayment) may be sourced from Valuation Tables.
Parrys Tables use annual compounding and monthly payment periods, for which the formulae are
as follows:
Monthly mortgage instalment:
(------------------------
i + s) × L
12
where:
i
s = -----------------------
n
-
( 1 + i ) -1
i = interest rate
L = loan amount
n = loan term
This monthly mortgage instalment comprises interest plus capital repayment.
Interest may be calculated as follows:
i- 1 
  1 + ----- -1 × L
 12 
The capital repayment is then calculated:

Capital repayment = Mortgage instalment - Interest payment
Equity Finance
This represents cash injections made by parties or consortia into the acquisition of a property or
portfolio.
In return for this loan, interest is paid to the equity investor on the amount invested. This interest is
calculated as for a simple loan.
The equity investor is also entitled to an agreed share of net income during the period of the loan.
This is defined in ARGUS Valuation-Capitalisation as the Equity % on monthly balance. This share
of net income will be reduced if there are insufficient funds in the cash flow in any period. In
certain circumstances equity investors may be required to make further capital injections into the
cash flow if there are insufficient funds to meet financial obligations under superior finance
agreements.
The basic formula for the calculation of the ‘priority share’ of net income payable to the equity
investor is:
( NI t -x t ) × E
where:
NIt = total net income receivable during period t
xt = interest payable on loan for period t (calculated as for a simple loan)
E = agreed priority share (%)
In addition, the equity investor receives a final settlement at the end of the equity arrangement: a
percentage share of the exit value.
Equity finance, showing a 70% priority share of net income (outlined in green for illustrative purposes)

Auto-Regulating Loan
The auto-regulating loan acts in a similar manner to an overdraft and cannot be used in conjunction
with other loan types.
The borrower is able to offset the outstanding debt with all, or a proportion, of the cash flow
balance when this is in credit. If the borrower elects to retain a percentage of cash flow credits
(defined in the Retained Surplus field in ARGUS Valuation-Capitalisation) this proportion will then
be retained by the borrower. The balance of cash flow credits, after deduction of the retained
surplus, is then offset against the outstanding loan amount.
If the cash flow is in deficit or interest against the loan cannot be met, the loan is extended to make
up the difference.
When the entire debt has been repaid and the auto-regulating loan account is in credit, interest is
payable to the owner of the investment at the credit rates. The investor has the option of either
collecting this interest and taking it out of the loan and the cash flow, or leaving it in the auto-
regulating loan to accumulate interest. In ARGUS Valuation-Capitalisation, the Interest rolled up to
end option should be ticked if the user intends to leave the interest in the loan.
Interest is calculated on the debt balance as for a simple loan.
An auto-regulating loan, with 50% retained surplus (outlined in green for illustrative purposes)


Chapter 5: Contact details 29
CHAPTER 5
Contact details
Find us on the Web: http://www.argussoftware.com or http://www.arguszone.com
UK contact details:
ARGUS Software (UK) Tel: +44 (0)20 8906 4059 or 0845 6440 400
London
Fax: +44 (0)020 8959 6079
UNITED KINGDOM
Support Tel : +44 (0)20 8238 8345
Support email: [email protected]
Info email: [email protected]
US contact details:
ARGUS Software Tel: +1 713 621 4343
Houston, TX Fax: +1 713 621 2787
USA
Support Tel: +1 888 472 1005

Plano, TX Fax: +1 469 791 1810
USA
Support Tel: +1 888 472 1005

Mount Laurel, NJ Fax: +1 856 439 5019
USA
Support Tel: +1 888 472 1005

Clearwater, FL
USA
Support Tel: +1 888 472 1005

30 Chapter 5: Contact details
Canada contact details:

ARGUS Software Toll-free: 1 888 472 1005
Coquitlam, BC Tel: +1 604 472 1001
CANADA Fax: +1 604 472 1002
Australia and Asia Pacific region contact details:

Sydney NSW
Fax: +61 2 9262 1350
AUSTRALIA
Singapore region contact details:

ARGUS Software Tel: +65 6411 2288
SINGAPORE
Fax: +65 6338 7959
Japan region contact details:

Tokyo
Fax: +81 3 5404 8585
JAPAN
South Africa region contact details:

ABO Software Toll-free: 080 226 7638
Cape Town
Tel: +27 (0)21 447 9592
SOUTH AFRICA
Fax: +27 (0)21 426 2708

31 INDEX
A Interest
Credit Rate 23
Debit rate 23
All Risks Yield 4 Effective rate (APR) 23
ARGUS Software web address 29 Interest Rate Type 23
Auto-Regulating Loan 27 Nominal Rate 23
Retained Surplus 27 Interest Only/Simple Loan 23
Interest rolled up 24
Internal Rate of Return 13
C
Capital Employed 18 M
Capital Growth 19
Capitalisation rates 1 Mortgage 24
Contact details 29 Capital Repayment 24, 25
Interest payment 25
Monthly mortgage installment 25
D
Discounted Cash Flow 13 N

Daily Discounting 14
Internal Rate of Return 13 Net Present Value 13
Monthly Discounting 14 Net Value 7
Net Present Value 13
Projections Analysis 17
P
E
Performance Measures 17
Capital Employed 18
Equity Finance 26 Capital Growth 19
Equity % on monthly balance 26 Income Return 19
Priority Share 26 Projections Analysis 17
Equivalent Yield 9 Rental Value Growth 17
Cap. Costs Option 10 Total Return 18
Nominal Equivalent Yield 10 Projections Analysis 17
True Equivalent Yield 10
Valuation Tables 10
R
F
Rental Value Growth 17
Reversionary Yield 9
Finance 23 Running Yield 10
Auto-Regulating Loan 27
Equity Finance 26
Finance/Loan Type 23 S
Interest Rate Type 23
Mortgage 24 Say Value 8
Simple/Interest Only Loan 23 Shortcut DCF 4
Breakthrough rent review 5
Implied growth rate 5
G Simple/Interest Only Loan 23
Interest rolled up 24
Gross Value 7
T
H
Target Yield 4
Hardcore method 3 Term and Reversion method 1
Core income 3 Total Return 18
Layer rate 3 Money weighted 18
Time weighted 18
Traditional Valuation 1
I
Income Return 19
V
Initial Yield 8
Initial Yield method 4 Valuation

INDEX 32
Gross value 7
Hardcore method 3
Initial Yield method 4
Net value 7
Say Value 8
Shortcut DCF method 4
Term & Reversion method 1
Valuation Methodology 1
Valuation Tables 10
Yields 1
All Risks yield 4
Equivalent yield 9
Initial yield 8
Layer rate 3
Reversionary yield 9
Running yield 10
Target yield 4

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ARGUS Software: ARGUS Valuation-Capitalisation Calculations Manual

ARGUS Developer was formerly known as CircleDeveloper.

Build date: 9 October 2008 12:53 am

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

Term and Reversion

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

Tenant lease and rent input

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

GV = 1, 250, 000 + 459, 394 = 1, 709, 394

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

GV = NI × Years Purchase into perpetuity

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

r ( YP into perp @ all risks yield )- ( YP for r years @ target yield )

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

Traditional Valuation screen in ARGUS Valuation-Capitalisation

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

Net Initial Yield (NIY)

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

Reversionary Yield (RY)

Equivalent Yield (EY)

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

8.80% (8% + (8% * 0.1))

7.20% (8% - (8% * 0.1))

8.25% (8% + 0.25%)

7.75% (8% - 0.25%)

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

Internal Rate of Return and Net Present Value

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

Vxn = Valuation net of associated costs

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

PV of $25,000 @ 12% over 3,814 days

The total of these discounted figures is:

Portfolio Asset Management Fees

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

Rental Value Growth in period

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

RVG = rental value growth, expressed as a percentage

Money weighted Total Return

Time weighted Total Return

Time weighted Total Return (old)

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

Money weighted Capital Growth

Time weighted Capital Growth

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

Money weighted Income Return

Time weighted Income Return

Exit Initial Yield

Exit Reversion Yield A

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual

Exit Reversion Yield B

Exit Net Rent/Present Value

Yield on Actual Income

ERV (gross) Yield

ARGUS Valuation-Capitalisation version 2.50 Calculations Manual