PROPERTY VALUATION (ESM711)

LECTURE NOTE

CONSTRUCTION AND USE OF VALUATION TABLE

Why we need valuation table and formula

1. To have understanding of how the table and their formulas were derived
2. It enable us manipulate to arrive at our answer
3. It saves time

The development of valuation table is based on the principles of compound interest. Compound interest is
the interest earned by an original capital sum plus its own interest. In other words, an amount invested this
year earn an interest, this interest is added to the initial capital and reinvested in the second year. The total
sum invested then yield another interest at the end of the second year. This continues until the end of the
investment period. On the contrary, simple interest is when the interest earned on capital invested is not
added to the original capital invested to earn interest.

Illustration
Calculate the compound and simple interest of an initial capital #50,000.00 at the rate of 9% after three
years

Solution
a) Compound interest
Year Capital @ the Interest earned at the Amount at the end of
beginning of the year # end of the year # the year #
1 1 0.09 1.09
2 1.09 (1.09x0.09) = 0.098 (1.09+0.098)=1.1881
3 1.1881 (1.881x0.09)=0.1069 (1.881+0.1069)=1.2950
Amount at the end of 3yrs = 50,000.00 x 1.2950 = #64750.00
Compound interest at the end of 3yrs = 64750 – 50,000 = #14, 750.00

b) Simple interest
P XRXT
Formula: I=
100
Where I = interest
P = principal = 50,000.00
R = rate = 9% (0.09)
T = time = 3yrs
50 ,000 X 0.09 X 3
I= = ₦13,500.00
100
Amount at the end of 3yrs = 50,000 + 13,500 = 63, 500.00

Difference between compound and simple interest

Compound interest Simple interest
The interest is compounded. i.e. the interest The interest is not compounded, i.e. the
is added to the capital to earn interest at the interest is not added to the capital to earn
end of the next year interest at the end of the next year

AMOUNT OF #1 TABLE
The amount which a capital sum of #1 will accumulate if invested at a compound interest for a given
number of years.

Derivation of formula;
Year Capital invested at the Interest earned during Amount at the end of the
beginning of year the year year
1 1 i 1+i
2 1+i (1 + i)i (1 + i) + (1 + i)i = (1 + i)2
3 (1 + i)2 (1 + i)2 i (1 + i)2i + (1 + i) = (1 + i)3
n (1 + i)n

Example
A property investor purchased an agricultural land for #100,000.00 and insisted that the land be used for
commercial farming in 4yrs time. If compound interest rate is 5% and the investment period is 4yrs,
calculate;
i) The equivalent cost of the land to the property investor at the end of the investment period
ii) The loss to the investor for not leasing the land

Solution
i) The equivalent cost of the land
Year Capital invested at Interest earned during the Amount at the end of the
the beginning of year year year
1 1 0.05 1.05
2 1.05 0.0525 (0.05 x 1.05) 1.1025 (0.0525 + 1.05)
3 1.1025 0.055125 1.157625
4 1.157625 0.05788125 1.21550625
Rounding off to 4 decimal place (d.p), we have 1.2155

Valuation
Cost of agricultural land 100,000.00
Amount of #1 @ 5% in 4yrs (1 + i)n 1. 2155
Equivalent cost of land 121, 550.00

ii) The loss to the investor for not leasing the land
Amount of #1 at the end of 4yr 121, 550.00
Initial cost of land 100, 000.00
Loss to the investor #21, 550.00
Using valuation table
Cost of agricultural land 100,000.00
Amount of #1 @ 5% in 4yrs 1. 2155
Equivalent cost of land #121, 550.00
Using formula
Amount of #1 (A) = (1 + i)n

Where; n = no. of years = 4yrs,

i = interest rate = 5% (0.05)
Therefore, A = (1 + 0.05)4 = (1.05)4 = 1.2155
Valuation
Cost of land 100, 000.00
Amount of #1 in 4yrs @5% 1.2155
Equivalent cost of land 121, 550.00

Importance of Amount of #1 Table

i) It forms the foundation for the rest of the other tables
ii) It is useful in calculating the loss of interest involve where capital sums are expected on
property which for the time being is unproductive
iii) It can be used to determine inflationary increase of equipment or machines where the historic
cost is known and where the market value cannot be ascertained by other methods

PRESENT VALUE OF #1
The amount which when invested now will accumulate to #1 at a compound interest in a giving number of
years. It is the inverse of the amount of #1 table. It is a discounting table which is always less than one (1)

Example
An investor purchased an agricultural land which at a 5% compound interest will amount to #121, 550.00
in 4yrs time. How much will the investor purchase the land today?

Solution
Using valuation table
Cost of land 121, 550
PV of #1 in 4yrs @ 5% 0.8227
Cost of land now #99,999.185
Using formula
1
Present value =
( 1+ i )n
1 1 1
= 4 = 4 = = 0. 8227
( 1+ 0.05 ) ( 1.05 ) 1.2155
Valuation
Cost of land 121, 550
PV of #1 in 4yrs @ 5% 0.8227
Cost of land now #99,999.185
Approximately #100, 00.00

Importance of present value of #1

1. It is relevant in calculating the worth today of a capital sum of money receivable in future.
2. It enables the valuer to make allowance today for a future expenditure in connection with property.
3. It is used as a proof of the correctness of the calculation of the amount of #1 table.

NATURE OF A AND PV AND THEIR CURVE

A = (1 + i)n PV = 1/A
n=0 n=0
A=1 PV = 1
n = infinity n = infinity
A = infinity PV = 0

A
 1

0 PV No of years

AMOUNT OF #1 PER ANNUM TABLE

The table represent the summation of series of #1 table. It shows the amount which series of fresh deposit
of #1 at the end of every year will accumulate at a compound interest in a giving investment period.

Derivation of formula
Let the period = n years and interest rate = i
1st payment = n – 1yr
2nd payment = n – 2yrs
3rd payment = n – 3yrs
Period to which payment will be earned
1st payment = (1 + i)n-1
2nd payment = (1 + i)n-2
3rd payment = (1 + i)n-3
A = (1 + i)n-1 +(1 + i)n-2 + (1 + i)n-3 + …
Geometric progression
1 + (1 + i) + (1 + i)2 + (1 + i)3 + … + (1 + i)n-1
S = a(rn – 1) / r – 1, A = (1 + i)n
S = A, a =1, r = 1 + i
n
1{ ( 1+ i ) −1}
A=
( 1−i ) −1
( 1+ i )n −1} A−1
A= or
i i

Example
An investor bought an old block of flats which will be renovated and let in 4yrs time. However, the
property will take #10,000.00 annually for maintenance. What will be the trust cost of maintenance when
the property is due for letting in 4yrs time, if the developer has to borrow from a primary mortgage bank at
10% interest.

Solution
Annual cost of maintenance = #10,000.00
Rate = 10%
Time = 4yrs
To determine the amount of #1 for 4yrs
year Capital invested Period for which Accumulated amount (1 + i)n
(#) interest is earned
1 1 (4 – 1) = 3yrs Amount of #1 in 3yrs @ 10% = 1.331
2 1 (4 – 2) = 2yrs Amount of #1 in 2yrs @ 10% = 1.21
3 1 (4 – 3) = 1yrs Amount of #1 in 1yrs @ 10% = 1.1
4 1 (4 – 4) = 0yrs Amount of #1 in 0yrs @ 10% = 1.0
Amount of #1 p.a. in 4yrs at 10% = 1.331 + 1.21 + 1.1 + 1.0 = 4.641

Valuation
Annual cost of maintenance 10, 000.00
Amount of #1 p.a. in 4yrs at 10% 4.641
Cost of maintenance in 4yrs 46, 410.00

Importance of amount of #1 p. a
1. It enables surveyors to determine maintenance liability
2. It can be used as a check for the calculation involving annual sinking fund.

ANNUAL SINKING FUND

It shows the amount which must be invested at the end of every year which at a compound interest will
accumulate to #1 in a given investment period. The value will always be less than one. It represent the
inverse of the amount of #1 per annum table.

Derivation of formula
A−1
Formula for the amount of #1 p. a. =
i
1
Invert the formula, we have A−1
i
1 i
This can be rewritten as x
1 A−1
i
Therefore annual singing fund (ASF) =
A−1

Example
A property developer requires #50,000.00 to buy an old block of flats in 6yrs time. if money can be
invested today at 5% rate of interest, how much should be invested annually at the end of each year to meet
the expenses?

Solution
Using valuation table
Amount required 50,000.00
ASF to replace #1 in 6yrs @ 5% 0.147
Amount to be invested annually #7,350.00

Using formula
ASF in 6yrs @ 5% = i/A – 1, where i = 5% (0.05), period = 6yrs
= 0.05/(1 + 0.05)6 – 1
= 0.05/(1.05)6 – 1
= 0.05/1.340095641 – 1
= 0.05/ 0.340095641
= 0.1470

Valuation
Amount of capital required 50,000.00
ASF to replace #1 in 6yrs @ 5% 0.1470
Amount to be invested annually #7, 350.00

Check
The result can be checked using the amount of #1 table, thus;
Amount to be invested 7,350.00
Amount of #1p. a in 6yrs @ 5% 6.8020
Amount to be invested annually #50,000.00

Importance of the annual sinking fund table

1. It enables the manager to know how much of the rent due to the property to set aside annually.
2. It enables the manager to advise the property owner on how much of the annual income from the
property he can afford to treat as spendable income.
3. It avoid the possible inconveniences of the property investor to meet the expenses out of a single
year’s income.

PRESENT VALUE OF #1 PER ANNUM (YEAR’S PURCHASE OR YP)

Year’s purchase is defined as the capital sum required to be invested in order to receive a net annual
income as an annuity of one naira at a fixed rate of interest. This is commonly called year’s purchase (YP)
table. The YP may be single or dual rate.

PRESENT VALUE OF #1 PER ANNUM (SINGLE RATE) TABLE

This shows the present value of the right to receive #1 at the end of each year for a giving number of years
at a compound rate of interest. It is the addition of the present value of #1 for a giving investment period
and it is used for valuing the income receivable for any stated number of years.

DERIVATION OF PRESENT VALUE OF #1 P.A (SINGLE RATE) FORMULAR

It is the summation of the present value of #1 table.
e.g.
PV of #1 in 1yr @ i rate = 1/ (1 + i)
PV of #1 in 2yrs @ i rate = 1/ (1 + i)2
PV of #1 in 3yrs @ i rate = 1/ (1 + i)3
PV of #1 in n years @ i rate = 1/ (1 + i)n
This can be summed up as a geometric progression ie
1/ (1 + i)1 + 1/ (1 + i)2 + 1/ (1 + i)3 + … + 1/ (1 + i)n
1−1 1−PV
= n or
( 1+ i ) i
Where i = interest rate, n = no. of years

Example 1
Find without using valuation table the present value of #1 receivable annually at a compound interest of 5%
for 4 years

Solution
PV of #1 in 1yr @ 5% = 0.9523810
PV of #1 in 2yrs @ 5% = 0.9070295
PV of #1 in 3yrs @ 5% = 0.8638576
PV of #1 in 4yr @ 5% = 0.8227025
PV of #1 p.a. in 4yr @ 5% = 3.5459706
Example 2
Find the capital value of an income of #20,000.00 p.a. for 12years at 8% compound interest.

Solution
Derivation of YP
 1−PV
YP = , where i = 8% {(8/100) = 0.08)
i
1 1
PV = =
A ( 1+ 0.08 )12
1
= = 0.3971
2.5182

1−0.3971
YP = = 7.54
0.08

Valuation
Net income p.a. = 20,000.00
YP for 12years @ 8% = 7.54
Capital value (CV) = #150, 500.00

Importance of the present value of #1 p. a (single rate)

This table is useful in the calculation of freehold interest where the income changes after a period of years.

PRESENT VALUE OF #1 PER ANNIUM RECEIVABLE IN PERPETUITY

The table represent the present value of an income of #1 receivable at the end of each year at a compound
interest rate in perpetuity. The income does not change over time, rather it is receivable in perpetuity.
1
YP in pep is giving by:
i
Example
Find the capital value of a freehold interest in a shop yielding a net income of #50,000 p. a. assuming a 7%
compound interest.

Solution
1 1
YP in Pep = = = 14.2857
i 0.07

Valuation
Net income = #50,000.00
YP in Pep 14. 2857
CV #714, 285. 00

PRESENT VALUE OF #1 PER ANNIUM OF A REVERSION TO PERPETUITY

The table shows the present value of the right to receive an income of #1 at the end of each year at a
compound interest in perpetuity but receivable after a defined investment period. The table combine the use
of two tables;

1. The present value of #1 p. a. in perpetuity (1/i) and

2. Present value of #1 table (1/A) which covers the period the income is deferred.

1
The formula is;
iA

Example
A freehold property is expected to receive a net income of #100, 000.00p.a, commencing in 5 year time.
Assuming a return of 8%, value his interest.

Solution
Derivation of YP in Rev. to Pep
1
YP in reversion to perpetuity =
iA
Or
First determine the YP in Perpetuity after 5yrs @ 8%
Yp in pep =1/i = 1/0.08 = 12.5 ………….………....................................... (1)

Then determine the present value of #1 in 5yrs @ 8%

PV of #1 in 5yrs @ 8% = 1/A = 1/(1 + 0.08)5 = 0.68 ………………... (2)
Multiply 1 and 2
We have 12.5 x 0.68 = 8.5
Therefore, YP in pep @ 8% diff. for 5yrs = 8.5

Valuation
Net income 100, 000.00
YP in pep @ 8% diff. for 5yrs 8.50
CV #850, 000.00

PRESENT VALUE OF #1 PER ANNUM (DUAL RATE) TABLE

This table is the present value of the right to receive an income of #1 at a compound interest for a defined
investment period but allowing for a sinking fund to recoup the original capital at the end of the investment
period. This table adopts two different rates of interest in capitalization. They are remunerative rate
(interest on capital) and the accumulative rate (interest on sinking fund instalment). The dual rate formula
is the only formula that cater for the difference in accumulative and remunerative rates.

Derivation of formula
Let the interest rate on #1 = i
Let the ASF of an income of #1 at the end of investment period = S
Let the income from a property with a capital value of #1 = i + s
Let the capital value of a property = C
Then the income required = C x (i + S)

Note that, Capital value = Net income x YP

Therefore, C = C (i+ S) x YP
C
YP =
C(i+ S)
1
YP =
i+ S

Example
Find the capital value of a net income of #50,000.00 for 21yrs @ 5% and 3%

Solution
1
YP =
i+ S
Where i = interest on capital = 5% (0.05)
S = sinking fund = i / A – 1.
Where i = accumulative rate = 3% (0.03)
We then have,
YP = 1 / 0.05 + [0.03 / (1 + i)21 – 1]
= 1 / 0.05 + (0.03 / 0.8603)
= 1 / 0.05 + 0.0349
= 1 / 0.0849
= 11.78

Valuation
Net income 50,000.00
YP in 21yrs @ 5% and 3% 11.78
CV #589,000.00

ANNUITY #1 WILL PURCHASE TABLE

It represent an annual income receivable every year at the end of each year if #1 is invested at a compound
interest and sinking fund is provided at the accumulative rate to recoup the #1 at the end of the investment
period. The table is the inverse of the YP dual rate table.

The formula is; Annuity #1 will purchase = i + s

Example
An investor recently bought a leasehold interest for an unexpired term of 21yrs at 5% and 3% sinking fund
for #589,000. Calculate the net income receivable annually from the property.

Solution
Annuity #1 will purchase in 21yrs @ 5% and 3%
=i+s
= 0.05 + [0.03/(1.03)21 – 1]
= 0.05 + 0.0349 = 0.0849
Valuation
Net income p.a 589,000.00
Annuity #1 will purchase in 21yrs @ 5% and 3% 0.0849
Net income #50,006.10

MORTGAGE INSTALLMENT TABLE

The table shows an equal sum to be paid every month to redeem each #100.00 capital borrowed at a
compound interest over the redemption period.

(i+ s)100
Formula:
12

Example
A property investor is interested in buying a property valued at #500,000.00. He approached a primary
mortgage institution who is willing to lend him at a compound interest of 10% provided he redeem the loan
in 20yrs. Advice the investor on what instalment he will pay every month.

Solution
(i+ s)100
Mortgage instalment =
12
Where i = interest rate, and S = sinking fund
 0.1
[0.1+{ }]100
Therefore, mortgage instalment = ( 1.1 )20
12
(0.1+0.0174596)100
=
12
= 0.97883
Valuation
Capital sum to be borrowed = 500,000.00
Amount to be borrowed in unit of 100 = 500,000.00/100 = 5,000.00
Mortgage instalment for 20yrs @ 10% = 0.97883
Monthly instalment to redeem #500,000.00 in 20yrs @10% = 4,894.00