L9 Valuation of Land and Redevelopment

L9 Valuation of Land and Redevelopment

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Unformatted text preview: rea. Residential property will generate rental income one year after construction is completed. First year rental income is $100 and will grow at 11% per year. Property life = 2 years (at the end of yr 2, property is worthless). Construction cost today = $100 Inflation rate of construction cost = 4% per year. Cost of capital reflecting the risk = 20%. The land owner can decide when to develop the land site. How does the land value depend on the timing of development? Example Contd: Analysis Suppose the land is developed today. -100 100 100(1.11) 0 1 2 3 4 5 6 Value of the land site today is: ⎡100 100(1.11) ⎤ V0 = ⎢ + − 100 = $60.42 1.2 1.2 2 ⎥ ⎣ ⎦ Example Contd: Analysis Suppose the land is developed end of yr 1 -100(1.04) 100(1.11) 100(1.11)2 0 1 2 3 4 5 6 Value of the land site today is: ⎡100(1.11) 100(1.11) 2 ⎤1 V0 = ⎢ + − 100(1.04)⎥ * = $61.72 2 1.2 ⎣ 1.2 ⎦ 1.2 Example Contd: Analysis Suppose the land is developed end of yr 2 -100(1.04)2 100(1.11)2 100(1.11)3 0 1 2 3 4 5 6 Value of the land site today is: ⎡100(1.11) 2 100(1.11) 3 ⎤1 V0 = ⎢ + − 100(1.04) 2 ⎥ * 2 = $62.14 1.2 2 ⎣ 1.2 ⎦ 1. 2 Value of land site if developed at yr 3 = $61.87 Value of land site if developed at yr 4 = $61.02 Key Principle in Valuation: The value of a property should reflect the BEST & HIGHEST use. Example Contd: Observation Land value is a function of the timing of development Yr 0 60.42 Land Value if Developed at Yr 1 Yr 2 Yr 3 Yr 4 61.72 62.14 61.87 61.02 Yr 5 <61.0...
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This note was uploaded on 09/06/2010 for the course FINA FINA0805 taught by Professor Tse during the Spring '09 term at HKU.

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