Journal of Environmental Sciences and Resources Management Volume 7, Number 2, 2015

A REVIEW OF ALL RISKS YIELD AND IMPLIED RENTAL GROWTH RATE EMBEDDED
IN THE EQUATED YIELD HYBRID MODEL OF PROPERTY INVESTMENT VALUATION

Ataguba, Joseph Obaje and Tinufa, Anthony Abbey

Department of Estate Management and Valuation
School of Environmental Studies, the Federal Polytechnic Idah, Nigeria
E-mail: josephtgb81@gmail.com

ABSTRACT
The real value/equated yield hybrid model otherwise known as the
Crosby's 3-YPs model is a contemporary value model which deploys
nominal rate of interest (equated yield), rent review, and inflation risk
free yield to the discounting of cash flows of property investments.
Notwithstanding its robust features in the valuation of incomes with
growth potentials, this model has been observed to be implicit about
all risks yield and implied rental growth rate per annum such that they
might only be known to the valuer who prepared the valuation; unless
additional information on these parameters are provided with the
valuation in question. This article evaluates an alternative perspective
of how implied rental growth rate per annum and all risks yield are
embedded in the Crosby’s real value/equated yield hybrid model. An
analytical framework which culminated into the derivation of all risks
yield and implied rental growth rate per annum from the real
value/equated yield model was designed. Thereafter, the synergy
between the 3-YPs model and the derived formulas were evaluated
with recourse to the valuation of fully let- and reversionary freehold
interests respectively. Results indicate that the all risks yield and implied
rental growth rate per annum are embedded in the 3-YPs model. It also
was observed that this phenomenon was facilitate by equated yield
and rent review period which are the variables commonly found in the
formula for all risks yield, implied rental growth rate and the 3-YPs
model. The formula derivation process and results from the individual
valuation cases revealed that all risks yield and implied rental growth
rate are adequately captured in the real value/equated yield hybrid
model such that valuations ensuing from this model would not deviate
from those produced by the growth explicit discounted cash flow
(DCF) technique.

Keywords: Property Investment Valuation, 3-YPs Model, All Risks yield, Implied
Rental Growth Rate, Equated Yield

INTRODUCTION
Contemporary techniques for the valuation of property investments evolved as a
result of the pitfalls identified in the various conventional techniques used by
property valuers over the years (Ajayi, 1998; Baum & Crosby, 2007; Bello & Bello,
2007; Crosby, 1983, 1984; Sykes, 1981). Among these pitfalls include the implicit
manner in which these conventional techniques treat rent review and rental growth
phenomena in freehold and leasehold investment properties (Baum & Crosby, 2007).

ISSN: 2277-0097
Copyright © 20145 Cenresin Publications/www.cenresinpub.org 1
A Review of All Risks Yield and Implied Rental Growth Rate Embedded in the
Equated Yield Hybrid Model of Property Investment Valuation

Ataguba, Joseph Obaje and Tinufa, Anthony Abbey

As an improvement over the conventional techniques, all the variants of the

contemporary techniques otherwise referred to as growth-explicit valuation models
account for specific parameters such as equated yield, implied rental growth rate,
rent review period, and in some instances, inflation risk free yield (real return) or all
risks yield depending on whether cash flows are expressed in real- or nominal terms.
Contrary to nominal cash flow which connotes the current monetary equivalent of
income, real cash flow is the purchasing power of money or income at a given
period of time (Hoesli & MacGregor, 2000). Related to this is the need to value
nominal cash flows using nominal discount rates while real cash flows are valued
using real discount rates (Brown & Matysiak, 2000).

One of the contemporary value models which discount nominal cash flows using
nominal rate of interest (equated yield) is the real value/equated yield hybrid model
otherwise known as the Crosby's 3-YPs model. Specifically, this valuation model
incorporates parameters like nominal rate of interest (equated yield), rent review,
and inflation risk free yield, and has been adjudged to be robust in the valuation of
incomes with growth prospects (Baum & Crosby, 2007; Crosby, 1983, 1986a, 1986b).
The model is however implicit about all risks yield and implied rental growth which
actually mirror this robust characteristic. Hence, the need to examine how these two
parameters (all risks yield and implied rental growth) are embedded in the real
value/equated yield hybrid model.

STATEMENT OF PROBLEM
The three major contemporary models of property investment valuation include the
rational model (McIntosh, 1983; Sykes, 1981), real value/equated yield hybrid model
(Baum & Crosby, 2007; Crosby, 1983, 1986a, 1986b), and the explicit discounted
cash flow (DCF) techniques. Besides explaining the conceptual meaning of
parameters in each contemporary value model, Ajayi (1998), Baum and Crosby
(2007), Brown and Matysiak (2000), Butler and Richmond (1990), Crosby (1996),
Crosby, French, and Ward (1997), Udoekanem (2012), and Udo (1989) among
others, have examined how these variants of contemporary value models are
interrelated in terms of common parameters of equated yield, implied rental growth
rate and all risks yield such that the valuation figures arising from the use of any of
these models tend to reconcile or produce similar results. The only snag however, is
that the Crosby's 3-YPs model tend to be implicit about implied rental growth rate
per annum and the all risks yield, which are vital indices for comparative investment
analysis. In other words, valuation with recourse to the real value/equated yield
model tend to be silent over implied rental growth rate per annum and the all risks
yield such that they might only be known to the valuer who prepared the valuation
unless information on these parameters are provided with the valuation in question.
The overarching question which this research seeks to answer is put forward as
follows: Using inductive quantitative analysis, can it be concluded that all risks yield
and implied rental growth rate are adequately captured in the equated yield hybrid
model of property investment valuation?

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Journal of Environmental Sciences and Resources Management Volume 7, Number 2, 2015

AIM
This study aims to examine an alternative analytical proof that implied rental growth
rate and all risks yield are embedded in the Crosby’s real value/equated yield hybrid
model such that a synergy between these parameters and the real value/equated
yield hybrid model can be deduced.

OBJECTIVES
Specific objectives of this study include to:
(a) Derive implied rental growth rate from the real value model;
(b) Derive all risks yield from the real value model;
(c) Evaluate the synergy between implied rental growth rate and the real value
model; and
(d) Evaluate the synergy between all risks yield and the real value model.

SIGNIFICANCE OF STUDY
While all risks yield have been criticized as being too implicit and “backward looking”
on investors’ expectations (Baum & Crosby, 2007), its use in both conventional and
contemporary models of property investment valuation and analysis still underscores
its relevance just as the valuation of equities still require inputs from the implicit price-
earning (PE) ratio (French, 1997). Albeit, Brown and Matysiak (2000) settled the
furore surrounding the rejection of simple yield capitalization in growth explicit DCF
appraisal by establishing its link with discounted cash flow models, the choice of
variants of contemporary valuation models is informed by investor’s requirement and
rational consideration of property value indicators. In addition to addressing the
analytical gaps in the synergy between real value model, all risks yield, and implied
rental growth rates, the uniqueness of this article stems from the deployment of
inductive approach of working from the real value model to derive these two
parameters as against the conventional framework of discounting streams of cash
flows.

REVIEW OF LITERATURE
Implied Rental Growth Rate
Expressed in percentage, implied rental growth rate is an annual rate at which the
rent derived from a rack-rented property investment increases in order to retain its
real value and produce the appropriate equated yield which justifies the exit yield
(Baum & Crosby, 2007; Parsons, 2003). In property investment appraisal, the implied
rental growth rate is used to revise cash inflows upward and pave the way for
valuation at the appropriate nominal discount rate (equated yield). Ajayi (1998),
Baum and Crosby (2007), Brown and Matysiak (2000), Ifediora (2005), and Wyatt
(2007) among others exemplified the following formulas for determining implied
rental growth per annum:

  1  e t  1  
g   t e  k    1  1 (1)
  e  


3
A Review of All Risks Yield and Implied Rental Growth Rate Embedded in the
Equated Yield Hybrid Model of Property Investment Valuation

Ataguba, Joseph Obaje and Tinufa, Anthony Abbey

Some authors of valuation texts and articles have even attempted to rationalize
equation 1 to derive variants in the form of equations 2, and 3 as follows:
1
 e  k 1  e t  k  t
g    1
 (2)
 e 
1t
 e  k 
g  1  e t  1  1   1
  (3)
 e 

Within the context of the real value model as captured in works of Baum, Crosby,
and MacGregor (1996), Baum and Crosby (2007), and Crosby (1986a), implied rental
growth can be expressed as a function of equated yield and inflation risk free yield:

1e
g 1 (4)
1i

Alternatively, the implied rental growth rate can be expressed in the usual manner
understood by valuers as:
1  g t  YP in Perp. @ k  YP for t years @ e (5)
YP in Perp. @ k  PV in t years @ e

Notwithstanding the variation in the formula for implied rental growth above, the
common determinant have been established to be the equated yield of property
investment, which shall be examined in due course.

All Risks Yield

All Risks Yield (ARY) is that rate of interest which implicitly reflects all risks inherent in
an investment while allowing for value changes throughout its tenor (Ifediora,
2005). In conventional valuation of rack rented freehold properties, it represents the
interest rate at which the annual net income is capitalized to ascertain capital value
at the valuation date. Fraser (1993) describes it as the ratio of rent and capital value
(price) of an investment property, reciprocal of which is the net income multiplier or
years’ purchase of an ordinary annuity in perpetuity. Fundamentally, all risks yield, ko
for a fully let freehold property is expressed as:
r
ko  o (6)
po
Where ro = rent passing and po = market capital value.

Brown and Matysiak (2000), McGough and Tsolacos (2001), and Wyatt (2007)
reiterated that the incorporation of rent review adds a new dimension to the
determination of all risks yield. They argued that if "g" represents the constant growth
rate in the rental income per annum; "e" represents the discount rate (equated yield),
and "t" connotes the period between each rent review, a cash flow model indicated
in equation 7 will ensue:

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Journal of Environmental Sciences and Resources Management Volume 7, Number 2, 2015

t 2t
t
ro t
ro 1  g  t
ro 1  g 
po   m
  t m
  2t  m
 ...... (7)
m 1 1  e  m 1 1  e  m 1 1  e 

Equation 7 is valid if e > g and can be simplified as:

ro
po  (8)
 1  g t  1 
e  e  t


 1  e   1 

Equating (6) and (8) results in the all risks yield formula:
 1  g t  1 
k o  e  e  t

 (9)
 1  e   1 

Brown and Matysiak (2000) expressed the relationship between real and nominal
rates of interest as:

1 1 Δ 
   (10)
1  rr  1  rn 

Such that 1 + rn = (1 + rr)(1 + Δ) (11)

Where the equated yield (nominal rate of interest) is expressed as "rn"; "rr” represents
the real rate of return (inflation risk free yield) and the symbol "Δ" connotes the
expected rate of inflation or the implied rental growth rate. Equation 11 is valid
provided the rental growth rate equals inflation rate such that the relationship
between equated yield, e and implied rental growth rate, g; and the inflation risk free
yield, i is captured in equation 12 as:

1 1g
 (12)
1i 1e

It would be recalled that equation 5 for implied rental growth rate was derived from
equation 12 above. Ifediora (2005) and Udo (2003) provided an analogy that
equation 9 can be simplified in the terminologies understood by valuers as annual
sinking fund, ASF in t years @ e and the percentage change in rental value.

Where the change represents percentage increase in rent, equation 9 translates into
annual sinking fund, ASF in t years @ e times the percentage increase in rent
expressed as {(1+g)t – 1}:

Ko = e – (ASF in t years @ e) × (%age rise in income in t years) (13)

Equation 9 and 13 suggest that when there is income or capital appreciation, the
capitalization rate, ko is less than equated yield, e; that is, ko < e. Drawing two
interesting conclusions from this analogy, Ifediora (2005) explained that a
phenomenon of income or capital loss implies that:

5
A Review of All Risks Yield and Implied Rental Growth Rate Embedded in the
Equated Yield Hybrid Model of Property Investment Valuation

Ataguba, Joseph Obaje and Tinufa, Anthony Abbey

Ko = e – (ASF in t years @ e) × (%age loss in income in t years) (14)

On the other hand, equation 15 applies when the income remains stationary as in
the case of the valuation of the term income for most contemporary value models.

Ko = e (15)

Other Yield Parameters and their Relationships

In addition to all risks yield, other yield parameters used in property investment
valuation include initial yield, reversionary yield, equivalent yield, equated yield, and
inflation risk free yield (real return).

Initial Yield
A technical definition of initial yield is the ratio of rent passing to the capital value or
price achieved during a transaction, which is represented in equation 6. Hoesli and
MacGregor (2000) referred to this yield as income yield or the all risk yield. While
initial yield is among the litany of income yields, it is a misnomer to conclude that it is
synonymous to all risks yield. Illustrative valuations in exhibits 1 and 2 confirm the
fact that the only condition where initial yield equals the all risks yield is during the
valuation of fully let freeholds. Concerning the divergence between initial yield and
all risks yield, Wyatt (2007) explained that the ARY (exit yield) used in discounting
estimated rent at the end of the holding period is usually higher than initial yields on
recently let comparable property investments since it must reflect a decline in the
residual economic life of the property and enormity of risk inherent in estimating the
exit cash-flow. In other words, initial yield may be equal to all risks yield but cannot
be greater than all risks yield.

Yield on Reversion
Yield on reversion (reversionary yield) as exemplified in exhibit 2 is the capitalization
rate used in converting income into the anticipated value of the property at the end
of the term (Ifediora, 2005). It seeks to ascertain the rate at which the reversionary
income (anticipated income) is secure in relation to the capital value. Equation 6
explains how yields on reversion are determined, but in this context, ro represents
rent at reversion.

Equivalent Yield
Equivalent yield is that growth implicit internal rate of return (IRR) which is used to
capitalise both the current and reversionary cash inflows. One of the methods of
calculating equivalent yield entails summing up the term rent and annual equivalent
of gain on reversion and expressing it as a ratio of capital value (Enever & Isaac,
2002; Isaac & Steley, 1999; Wyatt, 2007). Other techniques of equivalent yield
calculation include the use of DCF, spreadsheet iteration and solving the roots of
polynomial equations ensuing from term and reversion valuation in order to
determine the unknown IRR. Among these methods, spreadsheet iteration and
solving the rational positive roots of a DCF polynomial equation produce accurate
equivalent yield. While both methods are best tackled using software packages,

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Journal of Environmental Sciences and Resources Management Volume 7, Number 2, 2015

problem of ensuing multiple roots can be ameliorated if the valuer deploys

commonsense.

Equated Yield
Also referred to as the growth explicit internal rate of return (IRR) or inflation prone
yield of an investment property, Wyatt (2007) defines equated yield as that discount
rate which should adequately compensate an investor for the opportunity cost of
capital and exposure to anticipated risk inherent in same investment. According to
Ifediora (2005), this yield parameter explicitly reflects all risks including inflation risk,
value changes (appreciation or depreciation) and the redemption price of the
property. Scholarly debates indicated four methodologies for calculating equated
yield. The first, being with recourse to the capital asset pricing model (CAPM) which
adds a risk premium to the redemption yield on long-dated gilts to allow for risk
differential between property and federal government securities.

e = Rf +R p (16)

Where Rf is the risk free yield (Yield on long dated-gilts), and Rp is the risk premium
which is a function of the beta coefficient of an investment property, β; and the
expected market return, E(Rm). One of the limitations of this method is the difficulty
inherent in determining risk premium of direct property investment due to its relative
illiquidity (Ifediora, 2005). Another limitation stems from the choice of risk premium.
While 2% risk premium may be argued as the rule of thumb, owing to the
relationship between prime property yields and gilt yields prior to reverse yield gap in
the UK economy, scholars like Hargitay and Yu (1993) have warned that risk
premium could vary over time and differ among property sectors. Related to this
assertion is the possibility of a negative risk premium for certain classes of property
investments in certain economies thereby violating that rule of thumb.

The second method for determining equated yield is with reference to statistical
computation of the volatility of return, β which is a major determining factor for risk
premium, Rp.

If Rp = β[E(Rm) - Rf] (17)

Cov jm
From statistical perspective,  (18)
 m2
Where j is investment class, m is market rate of return, Covjm is the covariance of the
observed investment property j with the market rate of return m, and σ2m is the
variance of the market rate of return; so that equated yield is determined using the
model for security market line:

e = Rf + β[E(Rm) - Rf] (19)

Cov jm
e  Rf  E R m   Rf  (20)
σ m2

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A Review of All Risks Yield and Implied Rental Growth Rate Embedded in the
Equated Yield Hybrid Model of Property Investment Valuation

Ataguba, Joseph Obaje and Tinufa, Anthony Abbey

The third method for determining equated yield is with recourse to DCF appraisals
and computation of IRR using linear interpolation:

 NPV @ R f 
e  Rf   E R m   R f  (21)
 NPV @ E R m   NPV @ R f 

In equation 21, e = equated yield, Rf and E(Rm) retain their previous definitions. NPV
@ Rf connotes net present value at the risk free yield (gilt yield) while the negative
sign in net present value churned out using the market rate of return (NPV @ E(Rm))
is ignored to warrant its treatment as positive real number. The fourth method for
determining equated yield is similar to the growth explicit DCF technique for
calculating IRR; howbeit, cash flow modelling dovetails into determining a positive
rational root of a polynomial equation which represents the investor’s equated yield.

Analogy of equations 16 to 21 indicates interesting relationships that might be used

to determine proximate measures of certain investment parameters:
Cov
β  2 jm Hence, implying that beta coefficient can be approximated using the
σm
NPV @ Rf
formula - β  (22)
NPV @ E R m   NPV @ Rf
Cov jm
Likewise, Risk premium which is originally expressed as Rp  ERm   Rf  can be
σ m2
approximated using the expression:

 NPV @ Rf 
Rp   E R m   Rf  (23)
 NPV @ E Rm   NPV @ Rf 

Contrary to the assertion of Banfield (2005), Hoesli and MacGregor (2000), and
Ifediora (2005) who argued that the CAPM has limited application to direct property
media owing to data constraint, data inconsistency and imperfections of direct
property investments, Brown and Matysiak (2000) opined that the CAPM is highly
applicable to direct property investments in advanced markets save for the abuse of
data requirements necessary to engender its workability. Based on the arguments of
Brown and Matysiak (2000), it is recommended in this article that these interesting
relationships identified in equations 22 and 23 be subject to further empirical
research taking into cognizance the divergence between true IRR and IRR estimate
as put forward by Wyatt (2007). For emerging markets where investment decisions
are predominantly motivated by subjective techniques as against transaction-based
data and valuations, it is obvious that dearth of data shall constitute bottleneck to the
application of CAPM in property valuation.

Inflation Risk Free Yield

Inflation is a systematic risk factor which describes the decline over time in the
purchasing power of the monetary equivalent of an investment. To clarify this
assertion, Adams, Booth, Bowie et al. (2003) opined that the value of an investment

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Journal of Environmental Sciences and Resources Management Volume 7, Number 2, 2015

will increase in terms of local currency and simultaneously declines in real terms as a
result of inflation. Therefore, it is imperative to hedge against inflation and avert
depreciation in rental or capital value of investments. Udo (2003) affirmed that the
degree of proof against inflation is measured in terms of the purchasing power of
the indicated capital value. This implies that the future value of an interest in property
bought today is capable of purchasing an equivalent of that interest at the stated
future date provided the implied rental growth rate is sustained. On this premise,
Ifediora (2005), defined inflation risk free yield (IRFY) or real return as the
capitalization rate when the rate of inflation is zero or equals the implied rental
growth rate. Inflation risk free yield, i can be conveniently derived from equation 12
to yield equation 24 below:

1e
i 1 (24)
1g

The rationale for this yield parameter is to enable upward revised income to cancel
out the effect of inflation and produce its real value at the appropriate review period.

Significance of implied rental growth rate and all risks yield in property analysis
Besides estimating property value, indices of implied rental growth rate and equated
yield are crucial inputs for the formulation and implementation of property portfolio
strategies. Brown and Matysiak (2000) reiterated that these parameters are utilized in
tracking underpriced or overpriced property. For instance, all risks yield (ARY) is
primarily a measure of income return, risk, profitability and implicit measure of
income growth (Ajayi, 1998; Hoesli & MacGregor, 2000; Ifediora, 2005). Ifediora
(2005) further affirms that a higher (lower) ARY signifies increased (decreased)
earnings to an investor and also a higher (lower) risk of default in rent payment.
Another significant application of all risks yield is in the construction and
interpretation of property cycles (Sayce, Smith, Cooper et al., 2006).

Besides the ARY, investors might be concerned with the real return (inflation risk free
yield) on property assets which is a function of equated yield and implied rental
growth rate. According to Ifediora (2005), yield on inflation prone investment must
be higher than what it would have been in the absence of inflation. Hence, a higher
(lower) rate of inflation engenders higher (lower) equated yield. In concluding this
review of yield parameters, it is imperative to note that yields may not always
represent capitalization rates. In agreement with Brown and Matysiak (2000) and
Ifediora (2005), the adoption of yields as capitalization rates should be anchored on
facts and circumstances surrounding the valuation cash flows which might be
expressed in nominal or real terms.

ANALYTICAL FRAMEWORK
Objectives of this study were achieved by drawing upon the works of Baum and
Crosby (2007), Brown and Matysiak (2000), Crosby (1983), Crosby (1986a), Fraser
(1993) and Ifediora (2005). Brown and Matysiak (2000) opined that the application
of yield in a valuation model implies a growth in streams of cash inflows. They
approached this growth in cash inflow from two perspectives comprising the

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A Review of All Risks Yield and Implied Rental Growth Rate Embedded in the
Equated Yield Hybrid Model of Property Investment Valuation

Ataguba, Joseph Obaje and Tinufa, Anthony Abbey

Gordon growth model which allows for review of cash inflow once every year and
the periodic income growth model which allows for a periodic review of cash inflow.

With recourse to the valuation of cash flows, the Gordon growth model is expressed
as:
a
P0  (25)
eg

Equation 25 is valid on the condition that e > g; where g is the annual income
growth rate; e is the equated yield; a is the initial cash inflow and P0 equals the
capital value or price of an investment. Baum and Crosby (2007), Brown and
Matysiak (2000), and Hoesli and MacGregor (2000) observed that the Gordon
growth model is used in the valuation and analysis of equities. Hence, if e – g equals
the capitalization rate, k; then equation 25 bears some synergy with equation 6 in
this paper. Although applicable to valuation of growth incomes, Equation 25 is not
suitable for contemporary valuation of property asset characterized by periodic cash
flow reviews. Hence, it had to be streamlined to suit contemporary property
investment appraisals.

ERV(1+g)3t at third
rent review Rental growth
rate, g% p.a.

ERV(1+g)2t at second
Present value (N)

rent review

ERV(1+g)t at first
rent review Rent review
period, t

Rent passing

0 t 2t 3t

Lease Rent review

start periods

Term (in years)

Figure 1: Growth profile of property cash flows

Another dimension for assessment of growth incomes is the periodic growth model
which is the focus of this paper. Brown and Matysiak (2000) reiterated that periodic
reviews of cash inflows is characterized by progressive step movements such that the
present value of these perpetually stepped income profile represents the value of a
property as depicted in Figure 1.

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Journal of Environmental Sciences and Resources Management Volume 7, Number 2, 2015

Valuation of the cash flow streams in Figure1 can be approached using equation 26

t
a  1  e   1 
P0    where e > g
 (26)
e  1  e t  1  g t 

The equated yield model in equation 26 can be expanded as follows:

t
a a  a 1  g 
P0    t
    (27)
 e 1  e   k 1  e 

Baum and Crosby (2007), Crosby (1983), and Crosby (1986a) demonstrated three
major approaches for the calculation of implied rental growth rate per annum. The
first approach incorporates the explicit determination of all risks yield by setting up
an equation such that the equated yield comprises the sum of all risk yield and
annual sinking fund to recoup capital gain at the equated yield over the review
period for property cash inflows:

 e 
e  k   t
 
1  g t  1  (28)
 1  e   1 

Therefore, the synergy in equations 9, 13, and 28 can be attributed to their ability to
determine the all risks yield of a given property investment.

With respect to determination of implied rental growth, Baum et al. (1996) and
Baum and Crosby (2007) rearranged equation 9 such that k = e – (SF × p) where k
and e retain their original definitions, SF equals annual sinking fund to replace the
capital gain and p connotes the total rental growth over the rent review periods.

With t representing the standard rent review period, implied rental growth rate, g is
defined as the tth root of (1 + p) less unity:

g  t 1  p   1 (29)

The second approach for the calculation of implied rental growth rate is such that
the ensuing equation is derived from equation 28 by subtracting k from the Right-
and Left hand sides and then dividing both sides by the annual sinking fund factor to
arrive at either equation 1 or 4 as presented earlier in this paper.

The third approach for the calculation of implied rental growth rate which they
demonstrated is anchored on the DCF-based equated yield model in equation 27.
Rationalizing that equation churns out equation 2 which many valuers are
conversant with. In a related development, Fraser (1993) demonstrated how the
Gordon growth model can be transformed into periodic growth model for property
investments as follows:

11
A Review of All Risks Yield and Implied Rental Growth Rate Embedded in the
Equated Yield Hybrid Model of Property Investment Valuation

Ataguba, Joseph Obaje and Tinufa, Anthony Abbey

a
If P0  , on the condition that e > g.
e g

Fraser (1993) established that the all risks yield formula (equations 9) ensues from the
 1  g t  1 
Gordon growth model provided g is replaced with the formula - e  t
 . In

 1  e   1 
addition, Fraser (1993) derived the formula for implied rental growth rate using the
same parameters from the Gordon growth model to accommodate the periodic rent
review pattern of property investment as captured in equation 4.

The only proximate attempt towards deriving all risks yield from the real
value/equated yield model was demonstrated by Ifediora (2005) who commenced
by setting up a DCF valuation of annuities subject to upward reviews at a growth
factor, g. With reference to Figure 1, the ensuing annuities include 1, (1+g)t, (1+g)2t,
(1+g)3t,……….., and (1+g)n-t with DCF valuation presented as:

Annuity Present value

First Y.P. for t years @ e
Second (1+g)t × Y.P. for t years @ e × P.V. of N1 in t years @ e
Third (1+g)2t × Y.P. for t years @ e × P.V. of N1 in 2t years @
e
Fourth (1+g)3t × Y.P. for t years @ e × P.V. of N1 in 3t years @
e
. . . .
. . . .
. . . .
(n/t)th (1+g)n-t × Y.P. for t years @ e × P.V. of N1 in (n – t)
years @ e

Capital value of these annuities was expressed as the sum of geometric series with
Y.P. for t years @ e as the first term and (1+g)t × P.V. of N1 in t years @ e as the
common ratio expressed algebraically as

t
 1  g  
  . Therefore the Y.P. of a series of cash flow is expressed as -
 1  e  
n
 
 1   1  g  

Y.P. = Y.P. for t years @ e   1e   (30)
t 
 1   1  g  
 
 1  e  

12
Journal of Environmental Sciences and Resources Management Volume 7, Number 2, 2015

n
1  g 
On condition that 1    in equation 30 equals unity during the valuation of
1 e 
perpetual incomes, Ifediora (2005) derived all risks yield as:

k
 t
e 1  e   1  g 
t
 (31)
1  e t  1
While insights from these fundamental works indicate a number of approaches for
the determination of implied rental growth rates and all risks yield, a cursory
examination of equations 12 and 29 reveals algebraic relationships with the real
value/equated yield hybrid (Crosby’s 3-YPs) model which forms the foundation for
achieving the aim of this study.

MODELLING ALL RISKS YIELD AND IMPLIED RENTAL GROWTH USING THE 3-YPS
FORMULA

Deriving all risks yield from the 3-YPs formula

Crosby’s real value/equated yield hybrid (3-YPs) model is given as:

Y.P. for t years @e

Y.P.  Y.P.for n years @i  (32)
Y.P. for t years @i

The symbolic translation of equation 32 becomes:

 1   1   
1   1    
(1  i) n (1  e) t i (33)
Y.P.     
 i   e   1 
     1  (1  i) t 
     

In order to use the real value/equated yield hybrid model to derive the formula for all
risk yield and implied rental growth rates for any investment property, it shall be
assumed that the investment property in question is a freehold interest with
possibility of upward rent reviews as depicted in Figure 1 above. This assumption
further validates the notion that market rental growth accrues to the freehold
property investor.

In conventional valuation practice, Years purchase in perpetuity is the reciprocal of

the all risk yield, k such that Y.P. for n years @ i as expressed in equation 32 is
replaced with 1/i, while the entire expression on the right hand side (RHS) of
equation 33 is equated to 1/k

13
A Review of All Risks Yield and Implied Rental Growth Rate Embedded in the
Equated Yield Hybrid Model of Property Investment Valuation

Ataguba, Joseph Obaje and Tinufa, Anthony Abbey

Therefore,
1 i
1
1 1 (1  e) t 1
   1 Conveniently reduces to:
k i e (1  i) t
1 1
1 t
1 (1  e) 1
  1
k e (1  i) t

The expression for real return (inflation risk free yield), i in relation to g and e given as
1  e   1 have been substituted for i in the equation obtained so that it further
1  g 
reduces to:

t t t
1 1  e   1 1 1  e  1  e   1
    (34)
k 1  e  e 1  e   1  g  e 1  e t  1  g t
t t t
 

Therefore, the all risks yield is expressed as k 

e 1  e   1  g 
Which is
 t t

1  e t  1
synonymous to equation 31 in the analytical framework of this study. Alternatively,
this all risks yield can be written as:

e
k t
1  e   1

1  e t  1  g t  (35)

Hence, equation 35 can be expressed in the usual format understood by most

valuers as:

k = ASF in t years @ e × {Amount of N1 in t years @ e – Amount of N1 in t years @ g} (36)

Deriving implied rental growth rate from the 3-YPs formula

Within the existing framework of the 3-YPs model, equation 35 have been deployed
to provide an alternative approach towards deriving implied rental growth rate, g:
e
If k  t
1  e   1

1  e t  1  g t 
By induction, k 
 t
e 1  e   1  g 
t

1  e t  1
t
Multiplying both sides of the equation by 1  e   1 yields

 t
  t
k 1  e   1  e 1  e   1  g  ; so that
t


14
Journal of Environmental Sciences and Resources Management Volume 7, Number 2, 2015

t
 t
1  g   e 1  e   k 1  e   1
t 
e

Then g can be isolated using the formula:

  1  e t  1  
t
g  t 1  e   k    1 (37)
  e  

It can be generally observed that equated yield and rent review period are the two
variables that are common to the real value/equated yield hybrid model (equation
32), all risks yield (equation 35) and implied rental growth rate (equation 37).

Furthermore, these analogies have confirmed the relationship between Crosby’s 3-

YPs model, all risks yield, k, and implied rental growth rate, g and underscores the
interdependence among key variables of contemporary value models which
accounts for similarities in valuations ensuing from the application of these models.
Attention shall now be turned towards the application of equations 35 and 37 in
cases of freehold property investment.

SYNERGY OF VALUE MODEL WITH ALL RISKS YIELD AND IMPLIED RENTAL
GROWTH RATE
The synergy between the real value model and the two parameters mentioned
above shall be evaluated with recourse to specific valuation cases. Specifically, case 1
evaluates the synergy between implied rental growth rate per annum (equation 37)
and the real value model (equation 32), while case 2 evaluates the synergy between
all risks yield (equation 35) and the real value model (equation 32).

Case 1
This case pertains to valuation and analysis of a fully let freehold property.
Preliminary data and valuation in Exhibit 1 indicates that the property commands a
current net rental value of N510,000.00 per annum and subject to 2 yearly upward
rent reviews. Market evidence shows that all risks yield on similar properties is 4.5%.
Although the inflation risk free yield of the property is put at 3.730224591% and the
investor's overall return is estimated at 17.8%, the investor wants to know the rental
growth rate necessary to achieve these indices as well as the capital value of her
interest in the property.

15
A Review of All Risks Yield and Implied Rental Growth Rate Embedded in the
Equated Yield Hybrid Model of Property Investment Valuation

Ataguba, Joseph Obaje and Tinufa, Anthony Abbey

Exhibit 1: Valuation and Analysis of fully let freehold

Data
Current net rental value: N510,000.00 p.a.
Equated yield: 17.8%
All risk yield: 4.5%
Rent review period: 2 yearly
Inflation risk free yield: 3.730224591%

Valuation
The real value/equated yield hybrid
Current net rental value (p.a.) ............................................................. N510,000.00
YP for 2 years @ 17.8% YP Perp @ 3.73022459 1%
YP for 2 years @ 3.73022459 1% ............................... 22.22222222
Capital Value ...................................................................................... N 11,333,333.33

Yield analysis
Initial yield: 4.5%
All risks yield: 4.5%
Yield on reversion: Nil
Equivalent yield: 4.5%
Equated yield: 17.8%
Inflation
With risk free yield:
recourse to equation 37,3.730224591%
and available data showing t = 2, k = 0.045, and e =
0.178
  1.178 2  1  
2
Implied rental growth rate per annum, g =  1.178   0.045    1
  0.178  
g = 13.56381466% p.a.

Table 1: Growth explicit DCF valuation of a fully let freehold property

Net
Growth Present
rent Projected
factor @ Y.P. P.V. value of cash
Year receive net rent
13.56381466 @ 17.8% @ 17.8% flow
d N
% N
N
510,00 1.56952159 1.0000000
1–2 1.00000000 510,000.00 800,456.01
0 1 0
510,00 1.56952159 0.7206251
3–4 1.28967400 657,733.74 743,921.03
0 1 6
510,00 1.56952159 0.5193006
5–6 1.66325903 848,262.10 691,379.02
0 1 2
510,00 1,093,981.5 1.56952159 0.3742210
7–8 2.14506192 642,547.98
0 8 1 9
9– 510,00 1,410,879.6 22.2222222 0.2696731
2.76643059 8,455,029.30
Perp 0 0 2* 3
11,333,333.3
Capital value 4
*
Y.P. in perpetuity @ 4.5%

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Journal of Environmental Sciences and Resources Management Volume 7, Number 2, 2015

Commenting on the valuation in Exhibit 1 and the accompanying analysis, the

implied rental growth rate necessary to avail the investor with the capital value of
N11,333,333.33 besides the expected total return and other indices is put at
13.56381466% p.a. By induction, the synergy between the formula for implied rental
growth rate (equation 37) and the real value model (equation 32) was evaluated
with recourse to a discounted cash flow (DCF) valuation in Table 1.

It is observed from Table 1 that the implied rental growth rate of 13.56381466% p.a.
shall produced a capital value of N11,333,333.33 in conjunction with the all risks
yield and equated yield for Case 1. In other words, there is a synergy between the
model of implied rental growth rate (equation 37) and the real value/equated yield
hybrid model (equation 32) notwithstanding the errors of approximation in the DCF
valuation to the tune of N0.01.

Case 2
Case 2 pertains to the valuation and analysis of a reversionary freehold interest.
Preliminary data and valuation in Exhibit 2 reveals this property as commanding a
net contract rent of N702,000.00 per annum subject to 3 yearly upward review,
while the current net rental value of the property stands at N950,000.00 per annum.
Implied rental growth of the subject property is 19.17105781% per annum, inflation
risk free yield is 3.212979956%, while the investor expects an overall return of 23%.
the investor wants to know the all risks yield which captures his expected total
return, rental growth rate, and the capital value of the freehold interest.

17
A Review of All Risks Yield and Implied Rental Growth Rate Embedded in the
Equated Yield Hybrid Model of Property Investment Valuation

Ataguba, Joseph Obaje and Tinufa, Anthony Abbey

Exhibit 2: Valuation of reversionary freehold interest

Data
Net rent passing: N 702,000.00 p.a. subject to 3 yearly rent reviews
Current net rental value: N 950,000.00 p.a. subject to 3 yearly rent reviews
Equated yield: 23%
Implied rental growth rate: 19.17105781%
Inflation risk free yield: 3.212979956%

Valuation
The real value/equated yield hybrid
N N
Term
Rent received per annum .................................................... 702,000.00
Y.P. for 3 years @ 23% ............................................................. 2.011374268 1,411,984.74
Reversion
Current Net rental value per annum ................................... 950,000.00
YP for 3 years @ 23%  YP Perp.@ 3.212979956%
YP for 3 years @ 3.212979956% ... 22.22222222
PV of N1 in 3 years @ 3.212979956% ................. 0.909488157 20.2108479 19,200,305.51
Capital Value .......................................................................................................... 20,612,290.25

Yield analysis
Initial yield: 3.405735082%
* All risks yield: 4.5%
Yield on reversion: 4.608900751%
Equivalent yield: 4.461239150%
Equated yield: 23%
Inflation risk free yield: 3.212979956%
________________________
* Computed with recourse to equation 35

Using equation 35 and available data showing g = 19.17105781%, e = 23%, and t =

3 years, the all risks yield, k was calculated as follows:

0.23
k 3
1.23   1

1.23 3  1.19171057 81 3 
k = 4.5%

Commenting on the valuation in Exhibit 2 and the accompanying analysis above, the
all risks yield necessary to avail the investor with the capital value of N20,612,290.25
besides the expected total return and rental growth rate is put at 4.5%.

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 Journal of Environmental Sciences and Resources Management Volume 7, Number 2, 2015

By induction, a DCF valuation has been carried out in Table 2 to reveal the synergy
between the formula for all risks yield (equation 35) and the real value model
(equation 32).

Table 2: Growth explicit DCF valuation of reversionary freehold property

Net rent Present value
Growth factor @ Projected rent
Year received Y.P. @ 23% P.V. @ 23% of cash flow
19.17105781% N
N N
1 – 3 702,000 1.00000000 702,000.00 2.011374268 1.00000000 1,411,984.74
4 – 6 950,000 1.69243650 1,607,814.68 2.011374268 0.53738392 1,737,855.02
7 – 9 950,000 2.86434131 2,721,124.24 2.011374268 0.28878148 1,580,558.56
10 -
Perp 950,000 4.84771578 4,605,329.99 22.22222222* 0.15518652 15,881,891.97
Capital value ........................ 20,612,290.29
*
Y.P. in perpetuity @ 4.5%

Notwithstanding approximation error to the tune of error of N0.04, inference drawn

from the DCF valuation in Table 2 is that the all risks yield (exit yield) of 4.5%
contributed towards determining a capital value of N20,612,290.25 when used in
conjunction with the implied rental growth rate and equated yield for Case 2. This
result reaffirms the synergy between the real value/equated yield hybrid model
(equation 32) and the model for the determination of all risks yield (equation 35)
which have been derived from the same 3-YPs model in equation 32.

Results from the valuation cases in this paper aligns with previous scholarly works on
the synergy among the contemporary value models (Ajayi, 1998; Baum & Crosby,
2007; Brown & Matysiak, 2000; Butler & Richmond, 1990; Crosby, 1986a, 1986b,
1996; Crosby et al., 1997; Udo, 1989). Most importantly, the implied rental growth
rate per annum and the all risks yield are embedded in the real value/equated yield
hybrid model notwithstanding that this contemporary value model is silent about
them. Instead, the model concentrates on the real value of cash inflows through the
explicit application of real rate of return (inflation risk free yield) which is derived from
an interplay of these two embedded parameters. Finally, it has been observed that
the real value/equated yield hybrid model deploys two major variables notably
equated yield and rent review period to implicitly capture rental growth rate per
annum and the all risks yield of an investment property.

CONCLUSION
This study provided an alternative analysis of how all risks yield and implied rental
growth are embedded in the real value/equated yield hybrid model (3-YPs model).
This was achieved by deriving these parameters from the 3-YPs model, and showing
the synergy among them following the reconciliation of growth explicit valuations of
fully let- and reversionary freehold interests involving the use of these parameters.
Specifically, the real value/equated yield hybrid model of property investment
valuation share two common variables with all risks yield and implied rental growth
rate inasmuch as they remain implicit or embedded in the model. These variables
include equated yield and rent review period. In view of these results, it can be
concluded that all risks yield and implied rental growth rate are embedded in the
equated yield hybrid model of property investment valuation. This conclusion is

19
A Review of All Risks Yield and Implied Rental Growth Rate Embedded in the
Equated Yield Hybrid Model of Property Investment Valuation

Ataguba, Joseph Obaje and Tinufa, Anthony Abbey

founded on the synergy between these two parameters and the real value/equated
yield hybrid model which formed the basis of their derivation in this paper.

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A Review of All Risks Yield and Implied Rental Growth Rate Embedded in the
Equated Yield Hybrid Model of Property Investment Valuation

Ataguba, Joseph Obaje and Tinufa, Anthony Abbey

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Reference to this paper should be made as follows: Ataguba, Joseph Obaje and Tinufa, Anthony
Abbey (2015), A Review of All Risks Yield and Implied Rental Growth Rate Embedded in the Equated
Yield Hybrid Model of Property Investment Valuation. J. of Environmental Sciences and Resource
Management, Vol. 7, No. 2, Pp. 1-22.

Biographical Notes
Mr. Joseph O. Ataguba is a Lecturer in the Department of Estate Management and Valuation at the
Federal Polytechnic, Idah, Nigeria. His research interests encompass real estate investment,
contemporary valuation models, and computerized approaches to real estate and land administration
practice.

Mr. Anthony A. Tinufa is a Lecturer in the Department of Estate Management and Valuation at the
Federal Polytechnic, Idah, Nigeria where he teaches Valuation and Compulsory acquisition and
compensation Law.

22