In property valuation,how important is covenant strength and how is it Essay

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