**REVERSIONARY
CAPITALIZATION RATE (RCR)**

**The
reversionary method of valuation shows that the reversionary interest
assumes that the expected income will be the expected market rents
capitalized at the reversionary capitalization rate. This rate is one
of the most important statistics in the valuation of investment
properties as it measures the market's confidence and assessment in
the property in the long run.**

**Sales
of investment properties should be analyzed for the RCR. This is done
by using the reversionary method formula below. If the RCR falls, it
indicates that the market has greater confidence in the investment
potential of comparable properties in the future. The risk to
expected rental returns is safer and vice versa. This underlines the
important valuation principle that the capitalisation rates used in
the valuation of investment properties are determined by the market's
opinion of the future.**

**EXAMPLE
ANALYZING FOR THE RCR**

**Sale
price: $1 000 000**

**Current
net income: $50 000 pa**

**Residue
term of lease: 3 years**

**Market
or imputed rent or reversionary net income: $80 000 pa**

• **STEP
1:**

**Determine
the value of the lease:**

**For
short term periods (eg 3-5 years), state government bond rates plus
2-3% for the extra risk of real estate can be used.**

**State
government bonds @ 8% + 3% = 11 % pa**

**PVPMT
= (1 111.113)/0.11 = 2.444 **

**LEEI = 2.444 * (80
000-50 000) = $73 320**

**STEP
2:**

**Determine
the lessor's interest:**

**LORI
= $1000 000 - 73 320 = $926 680**

**Less
PV of lease rent: **
**$50
000 * 2.444 = (122200)**

**Reversionary
value = $804 480**

**REVERSIONARY
CAPITALIZATION RATE**

**The
Reversionary Capitalization Rate (RCR) is derived from the following
formula:**

**Reversionary
value = PV(11%) * (market rent * 100/RCR)**

**804
480 = 0.7312 * (80 000 * 100/RCR) RCR = 7.271**

**The
reversionary capitalization rate of 7.27% pa is a measure of investor
confidence or measure of risk of the subject investment property in
the future.**

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