A-Z of investment terms

A-Z of investment terms

Article by Property Elite, first published April 2022, giving useful tips and information for all property professionals working in property finance and investment together with valuation and investment management.

Here’s the A-Z…

A – All Risks Yield – a growth implicit yield used in an investment valuation that reflects all of the risks and rewards of the subject property.

B – Beta – this is a measure of volatility or systematic risk used in the capital asset pricing model (CAPM).

C – Capital Stack – this defines the priority of rights to income and profits generated by an investment. It can include common equity, preferred equity, mezzanine debt and senior debt.

D – Debt Service Coverage Ratio – this is a metric to analyse whether an investment generates sufficient cashflow for lending to be repaid. It is calculated by dividing the net annual operating income by the yearly debt payments.

E – Equity Multiple – this is a measure of total return on initial investment, i.e., how much will an investor make / has made from an investment.

F – Full Repairing – this is a type of lease where the tenant is responsible for repairing the whole of the property, meaning that this cost does not fall to the landlord.

G – Gap Analysis – this is used in investment management to compare current performance to expected or desired performance.

H – Holding Period – the holding period is the length of time that an investment will be held for. It is an important consideration when valuing using a discounted cash flow.

I – Internal Rate of Return – this is a measure of an investment’s profitability over it’s lifetime. A higher IRR indicates a more profitable investment.

J – Junior Debt – this is debt that ranks lower priority than senior debt. In the event of default, it will be paid after senior debt is paid back. For this reason it is typically riskier, but also offers higher returns.

K – Key Performance Indicator – KPIs can be used to measure and analyse investment performance and to benchmark investments against each other.

L – Loan to Cost – this is a ratio that compares the finance cost to the total cost of an investment or project, including the purchase price. It can be used to analyse whether an investment should be funded or not by a lender. A higher LTC indicates a riskier investment.

M – Mezzanine Debt – this is a combination of debt and equity financing, ranking behind senior debt. It is typically higher risk, but also offers higher returns.

N – Net Initial Yield – this is the initial yield (at the start of the investment) including purchaser’s costs.

O – Open Market Rent Review – when carrying out a valuation, you need to consider the basis of review and any reversion at this point. If a rent review is on the basis of open market rental value, then you will need to look at comparable evidence to assess the level of rent. Open market rent reviews can be both up or down, depending on the wording of the review clause. Other rent review bases include index-linked and fixed.

P – Purchaser’s Costs – these are typically deducted at the end of an investment valuation to calculate Market Value and to allow comparisons with other asset types. They typically include agent’s fees, legal fees, Stamp Duty Land Tax and VAT.

Q – Quarterly in Advance – valuations typically assume that rental income is received annually in arrears, despite in practice being paid quarterly in advance. Software such as Argus will analyse the Nominal Equivalent Yield (arrears basis) and True Equivalent Yield (advance basis).

R – Risk – risk is an essential component of analysing investments or carrying out investment valuations. Risk can relate to both the wider market and the specific subject property.

S – Senior Debt – this is debt that takes priority over unsecured or junior debt and must be repaid first if a company becomes insolvent.

T – Time Value of Money – this is an important concept as £1 in 1 years’ time is worth less than £1 today. This produces the PV and YP formulae that you may be familiar with in investment valuations.

U – Unsecured – this is debt that is not backed (or secured) by collateral. This is typically riskier and will offer higher returns. Examples include personal loans or some business bonds. This is different from, say, a mortgage, which is secured on the property by a first charge.

V – Value Add – this is an investment strategy where properties are purchased that require action to increase their capital value. This could include regearing leases, refurbishment, repurposing, change of use or reletting void units.

W – Weighted Average Unexpired Lease Term (WAULT) – this is a metric used in valuation to assess the weighted average number of years remaining on leases across all properties in a portfolio. X – eXtra – you can never know enough about investments and valuation, so keep up with gaining eXtra CPD on the subject!

Y – Yield – a yield is simply the annual return on an investment expressed as a percentage. It can be calculated by dividing the rental income by the purchase price (and multiplying this by 100).

Z – Zoning – this is a method of valuation analysis whereby the front of a retail shop is worth more than the rear.

About the author - Jen Lemen BSc (Hons) FRICS 

Jen has extensive experience in providing training services to students, RICS AssocRICS, APC and FRICS candidates and corporate clients, together with academic experience as a Senior Lecturer at the University of the West of England, Lecture at the University of Portsmouth and Associate Tutor at the University College of Estate Management. Her RICS assessment experience includes sitting on final APC interview panels, APC appeal panels and being a lead APC preliminary review assessor.

She has also written published articles in Property Week, ACES Terrier, RICS Modus and the RICS Property Journal. She also writes a regular APC column in Estates Gazette Brick & Mortar podcast series with Sarah Jackman and is a contributing author to the Health & Safety section on RICS iSurv.

For more details on the Built Intelligence APC Structured training sessions available click here

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