lecture 5-investment yield and return

8/8/2019 Lecture 5-Investment Yield and Return

1/17

Aspect of Land ValuationDr Mariana Mohamed Osman 1

LECTURE 5- ASPECTS OF LAND

VALUATION

CONCEPTOF VALUE,PRICEANDCOST

DEFINITION OF VALUEGROUND VALUEANDTYPES OF VALUEFACTORS INFLUENCINGVALUE,PRICES ANDCOST


2/17

Introduction

Purpose of property ownership Investment an investment decision can be defined as

an act of foregoing present use of money for future

income flows and capital gains Property as investment purchased for its present and

future income and for it capital growth Property investment income received is present and

future income flow i.e present through rent receivedand future through capital gains (value in future)

Factors influencing future capital gains/appreciationcan be due to general overall economic growth,increase demand for the property , availability ofinfrastructure eg LRT line, Shopping mall



3/17

Investment returns/ yields

The yield measurement

Yield indicate the level of earnings of that

particular investment or the speed the investmentwill earn money

Definition-investment yield as the incomegenerated or the capital gain achieved from an

investment measured as a percentage % of thecapital outlay/value



4/17

examples

An investment giving a 5% yield the return

will only be rm5 for every rm100 invested per

annum If property worth rm300,000 and giving return rm

950/ month so how much the yield???

Yield = (annual return /value of investment)x 100%

Yield = (RM950x12) / 300,000 x100% = Yield =



5/17

How much is the yield: exercise 1

Yield = (annual return /value of investment)x 100%

1. If shop houses bought forRM1.5 million and givingmonthly rental ofRm4000 per month

2. If low cost flat 3 bedroom bought for RM42,000 andhaving rental for RM320 per month

3. A terrace at sri gombak costingRM165, 000 and rentalaround RM650 per month

4. Bungalow costing RM385,000 and rent aroundRM1,200

5. Condominium unit costing RM865,000 and rentalaround RM1870 per month



6/17

Assumptions on yield

All other things being equal the higher the yield the attractive theinvestment

The higher return will have to be offered on riskier investment in orderto tempt investor to invest

i.e. greater return i.e yield- greater/ higher risk and problems associatedwith the investment and vise- versa

A yield also gives an indication of the degree of greater risk attached toan investment

The yield calculation show the return of investment at that particulartime. A similar calculation at different time (earlier or later date ) may show different

yield result depending on circumstances. Although the actual annual returnremain constant, the changes in capital values may result in there being a seriesof varying yield over a period of time for one investment

The yield vary as a result of Varying capital values Varying annual returns

Aspect of Land Valuation Dr Mariana Mohamed Osman 6


7/17

Calculate the yield, rental return

annuallyProperty types Rental return Capital values

(RM)

Investment

yield

2 bedroom apartment Rm500/month 75,000

3 bedroom low costflats

Rm430/month 46,000

3 bedroom apartment Rm700/month 135,000

D/s terrace Rm1000/month 340,000

4 storey shop /offices Grd-RM4000/mth1st- rm1500/mth2nd- rm1000/mth3th rm850/mthTotal??/month& annual

Rm1,000,000

3 storey shop/ offices Grd-RM2000/mth1st- rm1200/mth2nd- rm900/mth

RM850,000



8/17

PROPERTY INVESTMENTRETURN

Property investment

Purchase for letting the return in form of rental

income and /or capital appreciation If purchase for occupation- the return would be in

the form of saving in rental outgoing and thepossibility of capital appreciation



9/17

FACTORS INFLUENCING PROPERTY INVESTMENT

RETURN

Economic factors inflation rates

Taxation- tax in income,

tax on transfer Stamp Duty on transfer @1! On 1st RM100,000

Taxation on gains on Disposal

Risk of irregularity in income

Possibility of lost of capital market crash

The cost of transfer stamp duty, mot, lawyer The cost and trouble of management- management

fees, quit rent, property assessment etc

Property types and characteristic of investment



10/17

Property types and characteristic

of investment

Generally the most popular types of property have beenthose which appear to offer security in real term


Property types Investment characteristics Security as investment

Residential Lack of govt. control, best

type of location, moderndesign enabling flexibility ofuse, not likely to be obsoleteat an early stage

Good security and low yield

Shops Modern and in prime location,presence of reputable tenant

Good security with moderateyields i.e. higher yield thanresidential

Factories and warehouses Greater rate of wear and tearand the greater risk of earlyobsolescence with changes intechnology

Higher yield than shops


11/17

Investment return calculation Compound interest Yearly compound interest

Examples of the above calculation to be discussed inclass next week

Next would be examples on calculation of investmentin property



12/17

Example Calculate the total value of a property

investment which possess the following incometrend

Capital outlay : RM75,000

Rental income : 1st 5 years Rm500x12 month=$ 6000 per annum

2nd 5 years Rm55012 month=$6600 per annum

Capital appreciation

after 5 years , estimated market value is RM95,000 After 10 years estimated market value RM115,000

Rental income is reinvested at 5.0% per annumcompounded investment return



13/17

year Capital outlay Year end rental

received

Rental

compounded

yearly (5% p.a)

Yearly compounded

rental income

Estimated

capital value

at end of

investment

period

1 75,000 (a) 6,000 - 6,000.00

2 - 6,000 300.00 12,300.00

3 - 6,000 615.00 18,915.00

4 - 6,000 976.50 25,891.50

5 - 6,000 1325.325 33,216.825 95,0006 - 6,600 1691.591 42,123.416

7 - 6,600 2106.171 50,829.587

8 - 6,600 2541.479 59,971.066

9 - 6,600 2998.553 69,569.619

10 - 6,600 3478.481 79,648.10(b) 115,000 c


Capital = rm75,000 (a);total invested rental income at the end of 10 years = RM79,648.10 (b);

assuming market increase at 10 years = rm115,000. total 10 years value ofinvestment = b+c = 79,648.10 +115,000 = RM194,648.10

calculate total return for 5yrs.


14/17

Exercise 2 Calculate the return from the property if, Capital outlay : RM75,000

Rental income 1st 5 years Rm600x12 month=$ 7200 per annum 2nd 5 years Rm700x12 month=$8400 per annum annual rental income is reinvested at @10%p.a compounded

investment return

capital appreciation at the end of investment period of 5 yrs = rm100,000; 10 years= RM120,0000

CALCULATE the initial investment yield the investment yield after 5 years Total value of investment at the end of 5 years and 10 years THEEND NXTWEEKLECTUREWEEK 3 AND 4 (LAND LAW)



15/17

year Capital outlay Year end rental

received

Rental

compounded

yearly (10%

p.a)

Yearly

compounded

rental income

Estimated

capital value at

end of

investment

period

1 75,000 (a) 7,200 - 7,200.00

2

3

4

5

6

7

8

9

10 Aspect of Land ValuationDr Mariana Mohamed Osman 15


16/17

Exercise 3 Calculate the return of the 4 storey the Shop/ offices property , Capital outlay : RM1,000,000 Rental income :

1st 5 years Grd-RM2500/mth, 1st- rm1500/mth 2nd- rm1000/mth and3th rm850/mt

2nd

5 years Grd-RM3500/mth, 1st

- rm2000/mth 2nd

- rm1500/mth and3th rm1000/mt annual rental income is reinvested at @10% p.a compounded

investment return

capital appreciation at the end of investment period of 5 yrs = rm1,500,000;

10 years= RM2,000,0000 CALCULATE

the initial investment yield the investment yield after 5 years Total value of investment at the end of 5 years and 10 years



17/17

Exercise 4y C

alculate the total value of a property investment which possess thefollowing income trend

y Capital outlay rm175,000

y Rental income y 1st 2 years RM 600 per month

y 2nd 3 years RMRM650 per month

y Remaining 5 years RM800 per monthy Capital appreciation

y after 2 years , estimated market value is RM215, 000y After 5, estimated market value is RM235, 000

y 10 years estimated market value RM250,000y Rental income is reinvested at 6% per annum compounded investment

return CALCULATE

the initial investment yield

the investment yield after 2 and 5 years Total value of investment at the end of 2, 5 years and 10 years


lecture 5-investment yield and return

Documents