Property Valuation, 3rd Edition

Chapter 4Valuation Mathematics

4.1 Introduction

Property is usually demanded not as an end in itself but as a means to an end – as a factor of production or as an investment asset – it is a derived demand and the opportunity cost of capital invested in property must be measured against other factors of production for occupiers and other investment asset types for investors. Valuers rely on this feature of property demand when attempting to quantify financially the opportunity cost of owning or leasing property. Economists (and valuers) use financial mathematics when measuring the opportunity cost of capital spent on property, and this is necessary because property usually requires large amounts of money to be invested over periods lasting several years, so the ‘time value of money’ should be factored into calculations. This time value of money is an expression used to refer to the fact that, although in nominal terms £1000 tucked under the mattress today will be £1000 in say 10 years' time, in real terms it will be worth less because inflation will have partially eroded its real (purchasing) value. This means that the further into the future an amount of money (rent for example) is received, the less it is worth in today's terms.

This chapter begins by introducing formulae for calculating investment value that take into account the time value of money. It then describes simple ratios of the price paid to the financial return expected from a property acquisition. The focus is ...