In property valuation,how important is covenant strength and how is it reflected in valuation - Essay Example

Covenant Strength in Property Valuation Property ownership is an objective of every person living in United Kingdom. Due to the financial implications of property ownership, most people consider it a long-term objective. With the recent economic crisis, security and valuation has become an important aspect in the housing industry. This paper will explain some important factors associated with property transactions. The paper will focus on the importance of covenant strength using Fisher model of yield construction.

The covenant strength refers to the financial ability or worth of a potential or an existing tenant. Determining the financial capabilities of tenants is important since it gives clear details about potential or existing tenant who can be an individual or a corporate. The credit worthiness of existing and potential tenants contributes to the value of a property. It is therefore an important factor in yield adjustments. Firstly determining the strength has great importance to property owners. According to Fishers model, return on investment is a reward for liquidity loss, risk assumed, and expected inflation (Norman, 2008).

Property owners also consider covenant strength to be an important aspect of the housing industry. Property owners are investors in the housing industry and therefore they assume risks. In addition, the value of rent is subject to inflation considering the appreciation and depreciation of property value. The variable enables property owners to determine the possible income from their investment for a given period. Determining tenant’s financial abilities also enables the property owners to determine their expected income or possible losses.

The proprietors also need to determine the value of their property at a given time. The strength therefore enables property owners to determine their yield with a high degree of accuracy.Properties are common form of security for loans due to their low liquidity. Lenders also consider covenant strength as an important factor on their business. The factor gives the reward of liquidity on a property (Norman, Alastair, & Nicky, 2011). It also gives the possible risks in constant inflation. These variables are important to lenders since they enable them to determine the credit worthiness of a property owner.

The factors also enable lenders to determine the optimum capital that a given property can secure. Finally, lenders also need to determine the return on liquidity in case they need to recover their cash from a defaulter. In such cases, tenant’s financial position proves to be of great importance. Assignees are key players in the property market. Assignees act as guarantors in property deals and they are liable under contract laws. The covenant strength is therefore important to assignees since it enables them to evaluate the ability of tenants to meet their obligations or to pay their rents.

Assignees are risk takers and therefore the measure enables them to compare the risks assumed with the expected returns. Evaluating the credit worthiness of tenants assists assignees to make appropriate decisions in their business.Although the factor is the most important in determine yield, market forces such as market competition and expectation acts as determinants of yield.In conclusion, covenant strength has different implication to various players in the property market and this determines it importance.

ReferencesNorman, E. H., 2008. Covenant strength in shopping centers: a diversified risk? Journal of Property Investment & Finance. 26 (4), pp. 329-341.Norman, E. H., Alastair, S. A. & Nicky, F., 2011. The impact of covenant strength on property pricing. Journal of Property Research, 28:2, 167-188