10.2.1 Comparison method

The comparison method is normally preferred, but it does require information on similar assets in a similar location. In the case of development property, valuation by comparison is potentially reliable if evidence of sales can be found and analysed on a common unit basis, such as price per hectare, site price as a proportion of the value of the completed development or price per unit or habitable room. Care is required because simple unit metrics can hide factors that may influence value in individual cases.

The comparison method may be most appropriate where there is an active market and/or a relatively straightforward low‐density form of development is proposed. Examples might include greenfield land in rural areas where infrastructure costs are consistent and not excessive, or small residential developments or small commercial and industrial estates where it is likely that the density, form and unit cost of the development will be similar. Less frequently, it may be possible to compare larger sites for housing or other developments on this basis.

In comparing sites, the condition of each site, any remediation costs, construction costs, infrastructure and service requirements will need careful consideration. Site prices can differ considerably within a small geographical area.

For assets where work on the development has commenced but not completed, the market approach is unlikely to be the most appropriate choice because comparable transactions of partly completed developments are unlikely to be found. The residual method is more likely to take account of the individuality that will exist.

Where development has begun, the assumption of optimum development is expected to apply. Where the actual development taking place is not the optimum development, the cost of removing the existing works must be included unless improving them forms part of the optimum development.

When valuing a partly completed development property, all the inputs, including the cost of completing the development, must be assessed as at the valuation date. The valuation should reflect the risks remaining at the valuation date, which may be different from the commencement of the scheme and a re‐assessment of the rate of return is required. This may be affected by the stage the project has reached, whether building contracts remain in place or whether any agreements to purchase/let the whole or part of the completed development are in place. A project that is nearing completion will normally be viewed as being less risky than one at an early stage.

10.2.2 Residual method

As explained in Chapter 8, the residual method is based on the simple concept that the value of a property with development potential is the value of the completed development minus the cost of undertaking that development. Because it is derived from what remains after costs have been deducted from the value of the completed development, it is widely referred to as residual land value. The method can be used to determine other residual sums such as developer's profit, but the focus here is on land value as the residual amount.

The simple residual valuation concept is complicated by the fact that development takes time while the valuation is snapshot. Two techniques have evolved to handle this, a basic residual valuation technique and a more detailed discounted cash‐flow (DCF) technique. Choice of technique will depend on the purpose of the valuation, the stage in the development process that the valuation is performed and the type of development property that is being valued. A basic residual valuation might be used for less‐complex assets or early in the development process to consider various proposals in the search for the optimum development. A DCF valuation may be used for more complex assets with phased construction or disposal, where the timing of events needs to be fully accounted for in the valuation.

Revenues and costs that are typically considered in residual valuations are:

• Value of completed development, usually based on sale prices or capitalised rental income
• Site clearance, remediation and preparation costs
• Costs of construction, including professional fees and a contingency allowance
• Costs and fees relating to planning, including infrastructure levies, development fees or planning obligations
• Finance costs of debt used to fund construction and site costs
• Developer's profit
• Any other costs or inflows related to the development

In Chapter 8, the residual method of valuation was described, covering two techniques, the basic residual and the DCF. These techniques are discussed further below.

10.3.1 Estimating the investment value of development property

10.3.2 Financial appraisals of development property

It is possible to use the DCF technique to conduct appraisals which take account of the level of borrowing and different costs of borrowing on different forms of debt. When developing these models, the role and purpose of the valuation must be fully recognised. Market valuations require market‐based inputs and assumptions as to highest and best use. Specific funding arrangements and rates of return required by individual developers are not necessarily based on market indicators.

As the purpose of the development appraisal shifts from the estimation of market value to investment value, the 100% debt financing assumption in the basic residual and DCF techniques can be altered. Instead, it is useful to consider a combination of debt and equity funding. Appraisals of real‐estate development projects (as opposed to standing investments) often involve multiple sources of finance. Therefore, a post‐finance cash flow is an important component of the appraisal and is used to estimate a return on equity. Perusal of various development appraisals will reveal that there is no standard form that these post‐finance cash flows take but, in general, they follow a pattern. The following example is an attempt to illustrate the rudiments of a typical financial appraisal of a development project.

A simple one‐year quarterly cash flow is shown below.

The IRR of the net cash flow is 4.77% per quarter (20.48% per annum). If it is assumed that, rather than using 100% debt finance to fund all the costs, 75% is financed by ‘senior’ debt at a cost of 2.41% per quarter (10% per annum equivalent), accrued in arrears. The remaining 25% of costs are funded by the developer's own funds (equity). The debt and the equity funding are provided on a side‐by‐side basis and because the revenue from the project is received at the end, no debt is repaid until this point and interest on the debt is rolled up until the end of the scheme. The senior debt finance is shown below.

The equity costs and receipts are shown below. The total equity costs are 10 000 and the total revenue (after the finance costs have been paid) is 45 000 – 31 852 = 13 148. This means the cash profit to the developer is 13 148 – 10 000 = 3148.

Three common performance metrics for equity return are:

• Equity multiple: equity revenue/equity costs = 13 148/10 000 = 1.31
• Return on equity: equity profit/equity costs = 3148/10 000 = 31.48%
• Equity IRR: 53.20% per annum

Gearing the funding in this way has increased the developer's IRR from 20% to 53%.

Further ‘mezzanine’ debt finance is now introduced so that 15% of the costs are funded on a side‐by‐side basis at an annual cost of 18% per annum (4.22% per quarter). The mezzanine debt finance is shown below.

And the equity cash flow is as follows.

Total equity costs are now 4000 and revenue is 45 000–31 852–6660 = 6488. Cash profit is therefore 2488.

• Equity multiple: 6488/4000 = 1.62
• Return on equity: 2488/4000 = 62.20%
• Equity IRR: 109.56% per annum

Additional gearing from the mezzanine finance increases the equity IRR further.

Some lenders might be keen to participate in some of this equity return, in the form of a profit‐sharing arrangement perhaps. Continuing the example above, assume the developer sets a threshold equity return of say 25%, and the mezzanine lender takes a 50% share of any profit earned over this rate. By participating in the equity in this way, the mezzanine lender offers to reduce the interest rate on their debt to say 14%. The senior debt is as before, but with mezzanine finance at 14% per annum (3.33% per quarter), the mezzanine debt table is shown below.

The developer's threshold return at 25% per annum (5.74% per quarter) is calculated as follows.

The profit after all these costs is: 45 000 – 31 852 – 6516 – 4608 = 2024. 50% of this (1012) is paid to the mezzanine funder and 1012 is paid to the developer, whose equity cash flow is shown below.

Total equity input is 4000. Total revenue is the closing balance from the threshold return calculation plus the profit share: 4608 + 1012 = 5620. Cash profit is 5620 – 4000 = 1620 and the performance metrics are:

• Equity multiple: 5620/4000 = 1.40
• Return on equity: 1620/4000 = 40.05%
• Equity IRR = 69.34% per annum

Sharing profit reduces the IRR significantly.

The next example shows how revenue might be received in phases rather than all at the end of the scheme and pays back the debt in a specified order of priority. A developer has recently acquired a residential development site for £10m. To finance the project, two options are being considered:

1. Senior debt finance of 65% of any negative cash flow per quarter at an interest rate of 2% per quarter. Interest and principal are rolled up until the cash flow turns positive and then the loan is paid off before any return on equity.
2. As (a) plus mezzanine finance for 15% of any negative cash flow per quarter (excluding interest) at an interest rate of 4% per quarter. The mezzanine finance is second priority loan but receives a 50% share of any surplus above a 5% per quarter return on equity.

The table below begins with the pre‐finance cash flow. The IRR is 22% and when the net cash flow is in credit, there are funds available for distribution to lenders as and when necessary. The second stage of the appraisal calculates the return to equity following the debt finance arrangement described in (a) above. 65% of the costs are debt funded and interest is calculated on the balance carried forward from the previous quarter. The remaining 35% is funded by equity. Distribution funds are used to pay down the debt from the fourth quarter until the sixth quarter. In the sixth quarter, the debt is paid off and there is a net cash flow to equity which continues until the eighth and final quarter. The IRR on equity is 39%; the gearing has had a positive impact compared to the project IRR.

The third stage incorporates the mezzanine finance that is used to meet 15% of the costs in each quarter. The calculations work in the same way as the senior debt but because the senior debt is serviced first, there are no funds available to pay down the mezzanine debt until the sixth quarter. The debt is paid off in full by the seventh quarter and the IRR on equity is 60%. The fourth stage introduces the profit share arrangement. A surplus occurs in the last two quarters and must be distributed evenly between the equity provider and mezzanine finance provider. This is done by taking the flow to equity in [C], discounting it at the equity provider's target rate of return (5% per quarter). This takes care of the ‘normal’ return to the equity provider. Deducting the discounted equity cash flow from the net equity cash flow leaves the surplus, half of which goes to the equity provider and is therefore added to the DCF. Having done this in quarters seven and eight, the resulting IRR on equity is 46%.

Profit‐sharing arrangements, like the ones illustrated in the examples above, are used to provide a developer or operating partner (referred to as the sponsor) in a joint venture (JV) with an extra share of profit, known as a promote. Hence, they are often referred to as promote structures. They can be structured in a variety of ways. One relatively common approach is a waterfall model (imagine cascading pools of water that fill up with cash flow and then spill over to the next pool once full). In a waterfall model, the sponsor receives an increased share of profit if the project IRR is greater than expected and a reduced share if it is less than expected. Common waterfall model components include:

• Return hurdle: This is the rate that must be achieved to trigger model stages (profit splits for example). IRRs and equity multiples are common return hurdles. It is necessary to state from which perspective the return hurdle is to be measured – project, sponsor equity or investor equity.
• Preferred return or ‘pref’: This is the first claim on profit until first return hurdle is achieved. Key parameters are:
  • Who gets pref? Some or all the equity investors?
  • Is it cumulative? This is relevant if there is not sufficient cash flow to pay the pref in any one period. If the pref is cumulative, then it will be added to the investment balance for the next period and accumulate until it is paid out.
  • Is it compounded? If the pref is cumulative, is unpaid cash flow compounded at the pref as it accumulates? If so, what is the compounding frequency?
• The Lookback Provision: This allows sponsor to look back at the end of the project and, if the investor does not achieve a pre‐determined rate of return, the sponsor will be required to give up a portion of its already distributed profits so that the investor achieves a pre‐determined return. This provision is typically favoured by the sponsor.
• The Catchup Provision: This provides the investor with all the profit until a pre‐determined rate of return is achieved; then all the profit goes to the sponsor until caught up. This provision is typically preferred by the investor.

Below is an example of a promote structure. A promoter (developer or sponsor) invests 10% of required equity and receives 10% of shares in the Special Purpose Vehicle (SPV) formed to undertake a development project. An investor invests 90% of the equity required and receives 90% of shares in the SPV. Shareholders receive a pref of 10% per annum (2.41% per quarter) IRR generated by the levered project. The promoter receives a promote payment of 25% of any cash surplus above the 10% pref. All remaining funds will be distributed to shareholders in accordance with shareholdings.

The table below shows the cash flow for this project. The IRR of the project (SPV) cash flow is 4.07% per quarter (17.28% per annum). The IRR of the promoter's net cash flow is 7.26% per quarter (32.36% per annum) and the IRR of the investor's net cash flow is 3.67% per quarter (15.50% per annum).

The next example illustrates a slightly more complex three‐tier waterfall promote structure. The sponsor invests 10% of the project costs and the investor invests 90% of the project costs. Profits are split pari passu up to 10% IRR and then profits are split disproportionately, i.e. both sponsor and investor receive 10% per annum as their pref on invested capital (pari passu). If distributions fall below 10% in any year, the deficiency is carried over to following years and compounded annually at the pref (the pref is cumulative and compounded). After the 10% pref hurdle is achieved, all profit up to 15% IRR is allocated at 20% to sponsor and 80% to investor. So, the sponsor gets an additional 10% profit above the original 10% pro rata share. This additional 10% is the promote. Above 15% IRR, the split is 60% to the investor and 40% to the sponsor. So, the sponsor gets a 30% promote after the final 15% IRR is achieved. The structure can be summarised as follows.

^a IRR hurdle calculations are at the project level.

1. A development site has permission for three self‐contained two‐storey office buildings, one with GIA 3000 square metres and the other two having 2500 square metres each. Costs of construction are £1500 per square metre of GIA, the efficiency ratio is 80% and it is estimated that construction will take 18 months. The rental value is estimated to be £300 per square metre of net internal area and the yield is 6.5%. Making any further assumptions regarding other costs of construction, development periods and phasing of lettings and sales, construct a quarterly cash flow to estimate the land value. The developer's target rate of return is 15% per annum, and this includes the cost of finance. Value the site.
2. You have been asked to estimate the investment value of an office development opportunity. The site has been acquired for £1.5m (plus acquisition costs) and the proposed scheme has a GIA of 2000 square metres with an efficiency ratio of 90%. Site preparation costs are £250 000, building costs are £1000 per square metre and professional fees of 11% of building costs and contingencies are 5% of site preparation costs, construction costs and professional fees combined. The market rent is estimated to be £220 per square metre, the yield is 6.50%, disposal costs are 2% of NDV and a letting fee of 10% of market rent. The scheme will take 1.5 years to complete.
   1. Construct quarterly cash flows assuming:
      1. An even spread of construction costs over Q2–Q6 and site prep costs in Q1
      2. An s‐curve of construction costs over Q2–Q6 and site prep costs in Q1
      3. 5% per annum growth in costs and values
      4. A nine‐month void after completion
   2. Calculate the NPV of (i) to (iv) using a target rate of 5% per quarter.
   3. Calculate the IRR for (i) to (iv) and state them as annual rates.
   4. Add 100% finance to the cash flow from (iv) using a quarterly rate of 4% per quarter.

1. 
   

   Inputs and assumptions
   Land price (£)	8 000 000
   Yield	6.50%
   GIA (m2)	8000
   NIA (m2)	6400
   Build cost (£/m2)	1500
   Rent (£/m2)	300
   Land purchase costs (% land price)	6.50%
   Sale fee	2.00%
   Letting fee (% ERV)	10%
   Lead‐in and void periods	6 months each
   Contingency (% building cost and professional fees)	5%
   Professional fees (% building cost)	10%
   Calculations
   Build costs	12 000 000
   Estimated MR (£ p.a.)	1 920 000
   GDV (£)	29 538 462
   NDV (£)	28 959 276
   Quarterly target rate of return	3.56%

   Using a spreadsheet, it is possible to estimate the land value by iteration (the Goal Seek function in Excel). The NPV is set to zero by adjusting the land price input, which, here, is £8 653 760.

   	0	1	2	3	4	5	6	7	8	9
   Land price (£)	(8 653 760)
   Land purchase costs (£)	(497 591)
   Building costs (£)			(600 000)	(1 800  000)	(3 600 000)	(3 600 000)	(1 800 000)	(600 000)
   Professional fees (£)			(60 000)	(180 000)	(360 000)	(360 000)	(180 000)	(60 000)
   Contingencies (£)			(33 000)	(99 000)	(198 000)	(198 000)	(99 000)	(33 000)
   Letting fee (£)										(192 000)
   NDV (£)										28 959 276
   NET CASH FLOW (£)	(9 151 351)	0	(693 000)	(2 079 000)	(4 158 000)	(4 158 000)	(2 079 000)	(693 000)	0	28 767 276
   NPV @ 15% p.a. (3.56% p.q.)	0

2. 
   

   Inputs
   Contingencies (% site prep, construction and fees)	5%
   Professional fees (% construction costs)	11%
   Building costs (£/m2)	1000
   Site preparation costs (£)	250 000
   GIA (m2)	2000
   Efficiency ratio	90%
   Yield	6.50%
   Estimated MR (£/m2)	220
   Disposal fees (% NDV)	2.00%
   Land purchase costs (% land price)	6.50%
   Land price (£)	1 500 000
   Development period (years)	1.5
   Letting fee (% MR)	10%
   Target rate of return	5.00%
   Calculations
   NIA (m2)	1800
   Estimated MR (£ p.a.)	396 000
   GDV (£)	6 092 308
   NDV (£)	5 972 851
   Building cost (£)	2 000 000

   a. i. Even spread of construction costs over Q2–Q6 and site prep costs in Q1

   	0	1	2	3	4	5	6
   Land price (£)	(1 500 000)
   Land purchase costs (£)	(97 500)
   Site preparation costs (£)		(250 000)
   Building cost (£)			(400 000)	(400 000)	(400 000)	(400 000)	(400 000)
   Professional fees (£)			(44 000)	(44 000)	(44 000)	(44 000)	(44 000)
   Contingency (£)		(12 500)	(22 200)	(22 200)	(22 200)	(22 200)	(22 200)
   Letting fee (£)							(39 600)
   NDV (£)							5 972 851
   Net cash flow (£)	(1 597 500)	(262 500)	(466 200)	(466 200)	(466 200)	(466 200)	5 467 051
   b. NPV (£)	657 695
   c. IRR	42.56%

   a. ii. S‐curve spread of construction costs over Q2–Q6 and site prep costs in Q1

   	0	1	2	3	4	5	6
   Land price (£)	(1 500 000)
   Land purchase costs (£)	(97 500)
   Site preparation costs (£)		(250 000)
   Building cost (£)			(200 000)	(400 000)	(800 000)	(400 000)	(200 000)
   Professional fees (£)			(22 000)	(44 000)	(88 000)	(44 000)	(22 000)
   Contingency (£)		(12 500)	(11 100)	(22 200)	(44 400)	(22 200)	(11 100)
   Letting fee (£)							(39 600)
   NDV (£)							5 972 851
   Net cash flow (£)	(1 597 500)	(262 500)	(233 100)	(466 200)	(932 400)	(466 200)	5 700 151
   b. NPV (£)	659 523
   c. IRR	42.77%

   a. iii. 5% per annum growth in costs and values equates to 1.23% p.q.

   	0	1	2	3	4	5	6
   Quarterly growth rate	1.0000	1.0123	1.0247	1.0373	1.0500	1.0629	1.0759
   Land price (£)	(1 500 000)
   Land purchase costs (£)	(97 500)
   Site preparation costs (£)		(253 068)
   Building cost (£)			(204 939)	(414 908)	(840 000)	(425 154)	(215 186)
   Professional fees (£)			(22 543)	(45 640)	(92 400)	(46 767)	(23 670)
   Contingency (£)		(12 653)	(11 374)	(23 027)	(46 620)	(23 596)	(11 943)
   Letting fee (£)							(42 607)
   NDV (£)							6 426 368
   Net cash flow (£)	(1 597 500)	(265 721)	(238 856)	(483 575)	(979 020)	(495 517)	6  132 96
   b. NPV (£)	897 869
   c. IRR	49.91%

   a. iv. 9 months void after completion

   	0	1	2	3	4	5	6	7	8	9
   Quarterly growth rate	1.0000	1.0123	1.0247	1.0373	1.0500	1.0629	1.0759	1.0891	1.1025	1.1160
   Land price (£)	(1 500 000)
   Land purchase costs (£)	(97 500)
   Site preparation costs (£)		(253 068)
   Building cost (£)			(204 939)	(414 908)	(840 000)	(425 154)	(215 186)
   Professional fees (£)			(22 543)	(45 640)	(92 400)	(46 767)	(23 670)
   Contingency (£)		(12 653)	(11 374)	(23 027)	(46 620)	(23 596)	(11 943)
   Letting fee (£)										(44 195)
   NDV (£)										6  665 881
   Net cash flow (£)	(1 597 500)	(265 721)	(238 856)	(483 575)	(979 020)	(495 517)	(250 799)	0	0	6  621 687
   b. NPV (£)	402 606
   c. IRR	28.73%
   d. Finance accounting at 4.00% p.q.
   Opening balance (£)	0	(1 597 500)	(1 927 121)	(2 243 063)	(2 816 361)	(3 908 035)	(4 559 874)	(4 993 068)	(5 192 791)	(5 400 502)
   Interest (£)	0	(63 900)	(77 085)	(89 723)	(112 654)	(156 321)	(182 395)	(199 723)	(207 712)	(216 020)
   Closing balance (£)	(1 597 500)	(1 927 121)	(2 243 063)	(2 816 361)	(3 908 035)	(4 559 874)	(4 993 068)	(5 192 791)	(5 400 502)	1 00 5 164
   Total interest payable (£)	1 305 533

Sheet 1: Inputs

Sheet 2: Cash flow

Sheet 3: Residual land valuation

A lump sum developer's profit of 20% of development value has been added to the development costs and the cash flow has been discounted at the quarterly equivalent of a 6% per annum finance rate.

It is then possible to use the cash flow to iterate the residual land value by setting the NPV to 0, as shown below.

Sheet 4: Ungeared (unlevered) cash flow

Reverting to the original cash flow (but keeping the revised land price), it is possible to calculate performance metrics. Profitability has increased compared to the residual land valuation because finance costs are not included in this project cash flow.

Sheet 5: Geared (levered) cash flow – senior debt – side‐by‐side arrangement

Assumes senior lender pays share of ALL costs, including land. If developer is to pay all land cost, then set drawdown in period 0 to zero.

Sheet 6: Geared (levered) cash flow – senior and mezzanine debt – side‐by‐side arrangement

Sheet 7: Geared (levered) cash flow – senior debt – equity first arrangement

Sheet 8: Geared (levered) cash flow – senior and mezzanine debt – equity first arrangement

Sheet 9: Geared cash flow – senior debt side‐by‐side arrangement with a simple profit share arrangement

^a The net cash‐flow line could be swapped for any other on which the promote structure could be applied.

^b Tier 1 = 20% return to developer; tier 2 = split of surplus between developer and investor.

Sheet 10: Geared cash flow ‐ senior debt side‐by‐side arrangement with a waterfall promote structure

Some sites may be contaminated because of their previous use and valuers have a responsibility to investigate, consider and report on its impact where appropriate. Taylor et al. (2016) investigated the impact of contamination on house prices and found that contamination more than doubles the negative influence commercial properties have on neighbouring dwelling values. However, they found little evidence of stigma effects once a contaminated site is remedied. The negative spill‐over effects associated with remediated contaminated sites are largely indistinguishable from spill‐over effects from commercial properties with no known contamination.

Valuers should investigate previous land uses of the subject property and neighbours and should report possible or actual contamination if spotted. Types of environmental matters/contamination that valuers should look out for include building materials that are known to cause problems (such as asbestos), disused mines and quarries, flood risk, coastal erosion and other abnormal ground conditions, waste and high‐voltage equipment. Information might be obtained from local authority sources such as building control, planning and environmental health. Also, environmental protection authorities, utility companies, historic maps and aerial photography may provide valuable insight.

It is often difficult to find comparable evidence to help value a contaminated site because the variability of location‐specific contaminants and resultant severity and extent of contamination will often lead to different estimates of impaired value. The accepted approach, in the likely absence of comparable evidence, seems to be the ‘cost to correct’ approach, where the valuer values the site assuming the no contamination and then deduct the cost of remediation (where feasible) and any adjustment for the effect of stigma (see below). Heavily contaminated sites may require remediation that costs more than the site is worth, resulting in a negative value (a liability rather than an asset).

Stigma refers to the value impact of potential risk and uncertainty surrounding the future use of a contaminated site, even though the contamination may have been removed. The degree of stigma may depend on future regulations and liability regimes in relation to the contamination. Developers might seek discounts to reflect stigma or may decline development altogether. Initial perception of problem may induce a substantial drop in value (dread factors) but as understanding improves, value may increase to point where it relates to logical factors such as clean‐up costs, control measures, delay and contingent liabilities. Not all purchasers will be equally risk sensitive; local developers may be prepared to outbid institutional investors. The attitude of lenders is also important; if the proposed use is residential, lenders may not be prepared to offer mortgages on the dwellings. In practice the valuation impact of stigma is difficult to quantify; it may be accounted for by either adjusting the yield or making an end allowance.

For example, a valuation is required of a freehold factory situated on contaminated land. The freeholder has legal responsibility for the contamination. The current rent is £800 000 per annum and the 15‐year lease has two years remaining. The current tenant does not intend to renew the lease and remediation is deemed necessary. An environmental impact assessment suggests a £2 000 000 remediation cost and a period of one year in which to complete the work. The yield for uncontaminated comparable property investments is 9.5%. The current market rent is £850 000 per annum.

^a Although the security of a term rent below market rent would normally attract a reduction from the yield, in this case, because of the contaminated state of the site, the yield has not been reduced.

^b The yield has been increased by 1% to reflect stigma.

^c Discounting the reversionary value over three years builds in the one‐year clean‐up period.

^d It is assumed the clean‐up costs are debt‐financed at 8% per annum, but the costs are spread evenly over the year (i.e. interest only paid on total cost over six months).

^e Costs are deferred until the end of the current lease at the finance rate of 8% (it is assumed money can be invested at the same rate that it can be borrowed).

The adjustment to the yield to account for uncertainty at re‐letting due to possible residual contamination and stigma is subjective and it might be argued that an explicit end allowance would be more appropriate. An adjustment to the yield will have a greater effect on property investments that are valued at lower yields than those valued at higher yields. For example, take two investment opportunities, a factory in the north of England and a shop in the West End of London, both valued at £500 000 and both requiring the same expenditure on remediation:

Ceteris paribus the shop suffers a greater depreciation in value. One solution is to adjust the yield proportionately, say an increase of 10% would mean an impaired yield for the factory of 11% and 5.5% for the shop, thus producing the same diminution in value for the shop and factory.