Andrew E. Baum - Property Investment Appraisal

1. Chapter 1
2. Chapter 2
3. Chapter 3
4. Chapter 4
5. Chapter 6
6. Chapter 7
7. Chapter 8
8. Chapter 9

1. Chapter 1
2. Chapter 2
3. Chapter 4
4. Chapter 5
5. Chapter 6
6. Chapter 7
7. Chapter 8
8. Chapter 9
9. Chapter 10

Fourth Edition

Andrew E. Baum

University of Oxford, UK

Neil Crosby

University of Reading, UK

Steven Devaney

University of Reading, UK

This edition first published 2021

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Library of Congress Cataloging-in-Publication Data

Names: Baum, Andrew E, author. | Crosby, Neil, author. | Devaney, Steven, author.

Title: Property investment appraisal / Andrew E. Baum, Neil Crosby, Steven Devaney.

Description: Fourth Edition. | Hoboken : Wiley, 2020. | Revised edition of Property investment appraisal, 2008. | Includes bibliographical references and index.

Identifiers: LCCN 2020025429 (print) | LCCN 2020025430 (ebook) | ISBN 9781118399552 (paperback) | ISBN 9781118399545 (adobe pdf) | ISBN 9781118399538 (epub)

Subjects: LCSH: Real propertyValuationGreat Britain. | Real estate investmentGreat Britain.

Classification: LCC HD596 .B385 2020 (print) | LCC HD596 (ebook) | DDC 333.33/20941dc23

LC record available at https://lccn.loc.gov/2020025429

LC ebook record available at https://lccn.loc.gov/2020025430

Cover Design: Wiley

Cover Image: TommL/Getty Images

This is the fourth edition of this text. It is over 10 years since we produced the third edition and over 30 years since the first edition was published in 1988. All of our editions seem to have coincided with peaks and troughs in the UK property market; this may be no accident, as we learn a lot through these market extremes. The first edition was in the late 1980s and a booming occupier market, and the third edition was written near the end of a booming capital market. The second edition benefitted enormously from the lessons learnt from the crash in the occupier markets and subsequent recovery in the 1990s. This time we are writing in the middle of the COVID-19 pandemic, and since the last edition we have observed the aftermath of the Global Financial Crisis ( GFC ) and Brexit.

We think the most significant of these events for the subject of this book is the GFC. It added to our understanding of markets, as it was a very different event to the crash of 1990. In 1990, rental markets collapsed following an economic boom that precipitated a development boom with new development coming on stream as economic growth declined. In 2007 rental markets were relatively stable and the boom in commercial real estate prices was precipitated by sustained demand for investment assets leading to capitalisation rates falling to historic low levels with the GFC precipitated by the inevitable correction in prices. In 19901993, capitalisation rate corrections followed the rent corrections, adding to the falls in capital value. In 20072009, rent falls followed the asset price corrections. In both of these peaks and troughs, a common factor was the increased amount of lending secured on commercial real estate during the up-cycle and a significant brake on lending in the trough, with resulting, albeit different, pressures on property valuations.

The first edition had the stated aim of changing UK professional practice, a necessary objective in our view given that strong rental growth and high inflation rates had fundamentally undermined the applicability of the conventional valuation model to reversions and leaseholds. There was added justification, as valuation was becoming more important, property having established its place as a major asset class for financial institutions. Valuations had become subject to greater scrutiny from investors and analysts from other asset classes, and property valuation methods appeared archaic and static. Most UK texts of the time were little more than a set of cookbook routines predicated on the passing on of perceived wisdom, and no text had focused wholly on a critical examination of the basis and validity of that approach. We attempted to put market valuation processes into their historical perspective and argued that as markets changed so should methods.

By the time of the second edition, the UK market was just beginning to recover from the most significant property market crash in recent recorded history. The emphasis had changed from reversions to over-rented property and how valuation models coped with falling or fallen markets. Models suggested as alternatives to conventional approaches in our first edition began being assimilated into UK professional practice due to the now-obvious failure of traditional methods to cope with over-renting caused by long leases and upwards-only rent reviews. It was beginning to dawn on investors and valuers that a cash flow might be secured against a tenant rather than the property, and understanding the security of that cash flow could be just as important as understanding property fundamentals in producing rational valuations.