Spreadsheet Iteration of Reversionary Leasehold Rental Growth Rate Within The Framework of Explicit DCF Appraisals

Abstract

Income growth rates are required to justify decisions and strategies for property investments. Although existing studies addressed this phenomenon in freehold investments, a relative question regarding the determination of rental growth rates of leasehold investment properties valued part-way through rent review periods has not been addressed before now. This study examined the spreadsheet-assistedscenario analysis tools and techniques that are required for the determination of rental growth rates of leasehold investment properties valued part-way through rent review periods. A precursorto the scenario analysis was the development of a hybrid leasehold DCF valuation model arising from the equation of the formula for reversionary leasehold equivalent yield valuation to the formula for reversionary leasehold growth explicit DCF valuation model; thereby culminating into the identification of four unknown variables comprising the all risks yield and the implied growth rates of leasehold cash inflows and cash outflows which were subsequently derived using the solver tool of Excel®. From a total of eleven scenarios generated, the 9th successive scenario produced optimal resultsindicating zero slack between iterated and calculated values for the growth rates of leasehold cash inflows and cash outflows respectively. With recourse to the hybrid leasehold DCF valuation model, the spreadsheet-assisted scenariowas found to produce mathematically valid growth rates that justify the valuation of leasehold investment properties part-way through rent review periods. The value of this research is the analytical tools and rigour it avails investors seeking income returns and growth from reversionary leasehold property as an instance of terminable investments

Keywords

• explicit dcf appraisal
• equivalent yield valuation
• implied rental growth
• reversionary leaseholds
• scenario analysis