Real Estate/Property Valuation in the UK - In the Uk there is a traditional approach to capitalizing future income streams which is used to to apply a yield on the current income until the next review of the rent which is the Uk is often called the reversion. Usually then one applies a different and usually a higher, capitalisation rate to the whole of the reversion on the basis that it has the greater risk than the current rent. 

The hardcore arguemt is that in normal conditions the upward reviews the current income may be expected to run in perpetuity so the higher risk rate will need to be applied to the reversionary increase. 

For example if a piece of real estate is let at $50,000 per annum and has an estimated rental value of $60,000 and there is a rent review in 2 years. The calculations are as follows.

Term & Reversion

Current income $50,000

YP (years purchase) in 2 years at 8% is 1.7833 so therefore $50,000 x 1.7833 = $89,163

In 2 years there is a rent review and there is an income reversion to $60,000

YP in perpetuity at 10% which is deferred for 2 years is 8.2645 so therefore $60,000 x 8.2645 = $495,870

$89,163 + $495,870 = $585,033

Hard core Approach

Core income $50,000

YP in perpetuity at 8% is 12.5 = $625,000

Reversionary increase $10,000

YP in perpetuity at 10% deferred 2 years = 8.2645 = $82,645

$625,000 + $82,645 = $707,645

Where the property is rented the open market rent (rack rented) then the valuations should produce the same value. 

If we use the same rates for current and reversionary income, hardcoare gives the higher value because we value most of the income at the lower cap rate.