When an appraisal is being put together for a particular property, the Investment or Valuation
Professional will refer to ‘Parry’s Valuation & Investment Tables’. This is simply a
reference book full of tables (funnily enough) that assist the practitioner in carrying out
mathematical analysis of investments. Admittedly this doesn’t sound a particularly
interesting read; however it’s a very handy thing to know how to use because it allows a way
of comparing several investments to each other and looking at them in different ways.
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One of the principles of investment is that a particular sum of money available now is worth
more than the same amount at some future date. This is for 2 reasons:
1. The effects of inflation over time. For example £1 now is worth more than £1 in ten
years.
2. The fact that the money could be invested in various forms. So £1, invested at a rate
of 10% per annum will be worth £1.10 next year. This is the 'compensation' for
having to wait for the money. Why would you wait a year and only receive the same
amount you could have now?
Without tables, detailed analysis of financial information would be very tedious. The tables
within the book give the reader a simple multiplier figure to apply to a relevant sum of
money. An example of this is:
A Commercial property lease is agreed to at a rent of £10,000 per annum for 20 years. On
the face of it, this would produce £200,000 for the Landlord (£10,000 x 20).
However because of the effects of inflation, the rent of £10,000 per annum would be worth
considerably less in 20 years time than its present value. Using the relevant table from the
book and an assumed rate of inflation, it’s possible to produce a present value of 20 years
worth of rent. To calculate the present value of £10,000 at an assumed rate of say, 5% the
‘Present Value of £1 per Annum (Quarterly in Advance)’ set of tables can be used. This
produces a multiplier figure of 12.85 (this particular figure is simply a multiplier, and until
it’s used in conjunction with the annual rent figure means very little).
If the annual rent figure of £10,000 is multiplied by 12.85, it produces £128,500.00.
Therefore if inflation is expected to rise at around 5% per year, it would be reasonable to
give the 20 year lease a present value of £128,500.00.
The equation used for this is:
n = Number of years
i = the interest receivable on each £1. Therefore if the rate percentage is R, then i = R/100
In the above example, it’s only the lease of 20 years which is being valued. The Landlord
actually has the ‘facility’ of receiving a similar sum into perpetuity (or until he sells the
property to another investor) because the building will theoretically always have the potential
of producing an income in the form of rent paid to the Landlord. If the investment potential
of the property itself is valued, it produces a different figure:
Again, using a rate of 5%, we can reference a multiplier figure of 20.62 (using the ‘Years
Purchase in Perpetuity’ tables). If this is applied to the annual rent figure of £10,000, a total
of £206,200.00 is produced.
The equation used for this is:
r = effective yield
On reflection, the figure of £206,200.00 does not seem particularly high considering we are
examining earnings into perpetuity. However it should be noted that this is not a reflection of
accumulated future earnings. It simply provides a way of placing a present value of the
ongoing income potential of the property.
These 2 examples demonstrate the simpler aspects of what is possible with Valuation tables.
The tables can and do go much deeper. It’s possible to appraise various investments (not only
property) with allowances for a large range of interest and growth rates and taxes too. For
example, it’s possible to obtain the multipliers for calculation of:
1. The rate of Internal Rate of Return (IRR). This is the actual rate of return received
when all expected rent increases are considered.
2. Annual Sinking Fund. This is the amount that must be put aside each year to provide
capital to replace an asset (remember a leasehold interest is a wasting asset, the closer
to the end of the term the less the legal interest is worth).
3. The Years Purchase with Dual Rate (‘Dual’ because it includes the aspect of a sinking
fund). The additional tables allow consideration of tax rates of between 10% and
50%.
I have found that until an investment or valuation professional gets into the very complicated
aspects of appraisal, it is not really vital to understand the actual equations. The very practice
of knowing where to look to obtain the correct multiplier is far more important. The use of
valuation and investment tables is like almost everything, the more frequently they are used,
the easier the process becomes.
Through the use of Valuation and Investment tables, quite complex calculations can be made
such as Discounted Cash Flow.