It is becoming
increasingly common for the valuer to be called upon to prepare an
investment report for a building project. The investment report is
designed for a potential investor in the project and is a cash flow
showing the expected rates of return over the development period
including sale on completion. An investment report can also be used as
part of the marketing program for an existing investment property,
particularly for a building subject to low level leases which will
shortly fall due.
RULES FOR GOOD INVESTMENT REPORT CONSTRUCTION
- The report
should show the equated yield (internal rate of return)
rate of return as this return is the only one which can be compared
directly with opportunity cost investments. The equated yield is an IRR
measure and therefore should be supplemented with other decision rules
particularly the NPV rule and NPV rate of return.
- The cash
flow should be as short as possible and only include projections and
forecasts which are reasonably reliable. The cash flow should be
truncated at that point where there is a large error in the forecasted
cash flows. Therefore, the investment report should ideally be for a
period of about 2/3 years and never any more than 5 years.
from the above, for existing investment properties, the period of the
cash flow is the most common period remaining for the current leases.