Property Valuation, 3rd Edition

Chapter 7Income Approach

7.1 Introduction

Land and property can be held as investments where the holder of tenure rights passes some of those rights to another party in return for regular payments. The most common arrangement is where an owner leases occupation rights to a tenant. The tenant pays rent to the owner and the level of rent is determined by the supply of and demand for that type of property in the occupier market.

To the owner, rent represents the income return on the investment and the present value of the property may be determined by capitalising the rent at a suitable yield or capitalisation rate. The yield is usually derived from analysis of recent transactions involving comparable properties. Alfred Marshall was the first to expound methods of capitalising urban rental income as a means of pricing property investments. He focused on the scenario whereby landowners let sites on long ground leases, for 99 years say, and stated that the

capitalized value of any plot of land is the actuarial ‘discounted’ value of all the net incomes which it is likely to afford, allowance being made on the one hand for all incidental expenses, including those of collecting the rents, and on the other for its mineral wealth, its capabilities of development for any kind of business, and its advantages, material, social and æsthetic, for the purposes of residence (Marshall 1920: Book Five, Chapter 11).

The cash flows of some income‐producing properties can be complex, such as an ...