Lecture 2 TRP 625

TRP 625
Applied Real Estate Valuation

Lecture 2: Annuities
Dr Olayiwola Oladiran
Annuities
Amount of £1 per anum
Structure
Annual Sinking Fund (ASF)
Present Value of £1 per annum (YP)
YP in perpetuity
Exercises
3 © Oladiran, The University of Sheffield 2021 18/01/2023

Annuities
18/01/2023 4
© Oladiran, The University of Sheffield 2021
Annuities
• A series of periodic payments

• There are two types
- periodic payments made/receivable at the end of each
period = an ordinary annuity
- periodic payment made/receivable at the beginning of each
period = an annuity due
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Amount of
£1 per
annum
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Amount of £1 p.a. time diagram
• Amount to which a series of payments of £1 invested annually at the end of the year will
accumulate over a given period of years if compound interest is earned at a given rate
?
0 1 2 3 4 5 6 7 n
£1 £1 £1 £1 £1 £1 £1 £1
£1
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© Oladiran, The University of Sheffield 2021 7
Amount of £1 p.a. formula
• Invest £1 every year for 10 years at 10%. What will the capital sum
be?

Amount of £1 p.a. formula (continued)
• I invest £7,000 at the end of each year. If the interest is 5% how much
would I have accumulated in 7 years time
• I receive rental payments of £8,000 at the end of each year for the
next 3 years which I can invest at 4%. What is the capital value of my
investments at the end of the 3 years?
=
Annual
Sinking
Fund
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Annual Sinking Fund (ASF)
• Amount invested annually at the end of each year to provide £1 at the end of a given
period at a given rate of interest.
• If it is known that a sum will be required in the future (e.g. for repairs), an ASF can be
set up.
• The amount to be paid into the fund can be calculated using the formula:
• Used to calculate how much rental income should be invested to recoup investment
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outlay 11
Annual Sinking Fund (ASF)time diagram
£1
0 1 2 3 4 5 6 7 n
? ? ? ? ? ? ? ? ?
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© Oladiran, The University of Sheffield 2021 12
Annual Sinking Fund calculation I
• I need £10,000 in 10 years time. How much should I invest at the end of each
year if i is 10%?
• I would have to invest £627.45 every year to accumulate to £10,000 in 10 years

time
Annual Sinking Fund calculation II
• You have purchased a small warehouse and the roof needs to be

replaced in 6 years time. It is estimated that this will cost £15,000.
How much should you set aside each year to pay for the roof if you
can secure interest at 3.5% p.a.?
=

Present Value
of £1 p.a
(discounting)
or Years
Purchase (YP)
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PV of £1 per annum (discounting) or YP
• Present value of the right to receive an annual income
of £1 at the end of each year for a given number of
years, each year’s income being discounted at a given
rate.
• Used to calculate capital values by discounting annual

income received from the property
PV of £1 p.a. time diagram
• PV of £1 p.a.
£1 £1 £1 £1 £1 £1 £1 £1 £1
0 1 2 3 4 5 6 7 n
?
17
PV of £1 p.a. calculation I
• Value an income of £1 receivable at the end of every year for 10 years if the ARY is
10%
£1 x
• Value an income of £50,000 p.a. receivable at the end of every year for 15 years if the
ARY is 7.5%.

18
PV of £1 p.a. calculation II
• I wish to sell an office property that is producing an income of

£50,000 p.a. for the next 5 years. The current market yield is 6.75%.
How much should I accept?
=

YP perp
• If income is receivable in perpetuity, such as freehold property let at Market Rent,

then the formula used to value the interest is known as the YP in Perp
• What is the value of an investment paying £1 p.a. in perpetuity at 10%?
– In perpetuity the formula is simply
– So, is applied to the income.
– Thus, the value of £1 p.a. in perp @ 10% is £10
• Value a property let at the MR of £75,000 if the ARY is 6%

=
20
Reading / References
• Baum, A, Mackmin, D and Nunnington, N (2017) The Income
Approach to Property Valuation, International Thomson Business
Press.
– Chapter 3 Fundamental financial concepts for the income approach
(covers this topic and the last topic)
• Look at the other recommended texts, for example
– Blackledge, M. (2017) Introducing Property Valuation, Routledge,
Oxon.
• Part 2 (but it goes on to cover more advanced material)
– Millington, A. F. (2000) An Introduction to Property Valuation,
Routledge, Oxon.
• Chapter 14
– Wyatt, P. (2013) Property Valuation, Wiley-Blackwell, Chichester.
• Chapter 4 (but it goes on to cover©more
18/01/2023 advanced
Oladiran, material)
The University of Sheffield 2021 21
Exercises
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Exercises for next session
3. I purchase a leasehold
1. I receive rental payments 2. If I invest £2,500 per annum at
investment for £450,000. I rent
totalling £105,000 at the end of the end of each year for the
the property to a tenant for a fixed
each year for the next 4 years and remaining 20 years of my
term of 10 years at £60,000 p.a.
I can invest the sum at 5.75%. working life, as a nest egg for my
How much of this income would I
What is the capital value of my retirement. How much would I
need to invest in a sinking fund to
investments at the end of the 4 have saved? My bank will give
recoup the capital invested. The
years? me a fixed savings rate of 4%.
rate of interest is 4%.
5. I wish to sell an investment

4. You have purchased a small
opportunity that is producing an
office investment property for
income of £110,000 p.a. for the
£35,000. How much rent would
next 10 years. The opportunity
you need to charge to recoup this
cost of capital is 8.25%. I am
sum in 10 years time, if the
offered £650,250. Should I
opportunity cost of capital is 6%?
accept?

23
Additional practice
Practice practice practice practice practice practice practice
TRP625 – Blackboard folder
On-line Real Estate Valuation

Resource (self test)
• Amount of £1 per annum
• Annual Sinking Fund (ASF)
• Present Value of £1 per annum (YP)
• YP in perpetuity

Questions?
18/01/2023 25

Lecture 2 TRP 625

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Lecture 2 TRP 625

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TRP 625

Applied Real Estate Valuation

Amount of £1 per anum

Present Value of £1 per annum (YP)

3 © Oladiran, The University of Sheffield 2021 18/01/2023

• A series of periodic payments

18/01/2023 © Oladiran, The University of Sheffield 2021 5

18/01/2023 © Oladiran, The University of Sheffield 2021 8

• I would have to invest £627.45 every year to accumulate to £10,000 in 10 years

• You have purchased a small warehouse and the roof needs to be

18/01/2023 © Oladiran, The University of Sheffield 2021 14

• Used to calculate capital values by discounting annual

18/01/2023 © Oladiran, The University of Sheffield 2021

• I wish to sell an office property that is producing an income of

18/01/2023 © Oladiran, The University of Sheffield 2021 19

• If income is receivable in perpetuity, such as freehold property let at Market Rent,

– So, is applied to the income.

– Thus, the value of £1 p.a. in perp @ 10% is £10

• Value a property let at the MR of £75,000 if the ARY is 6%

5. I wish to sell an investment

18/01/2023 © Oladiran, The University of Sheffield 2021

TRP625 – Blackboard folder

On-line Real Estate Valuation

18/01/2023 © Oladiran, The University of Sheffield 2021 24

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