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Valuation Flashcards

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1
Q

What are the 5 methods of Valuation?

A
  1. Comparable
  2. Investment
  3. Profit
  4. Residual
  5. Depreciated Replacement Costs (DRC)
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2
Q

What are the 3 approaches to valuation?

A

IVS 105 Valuation Approaches and Method. Set out these approaches as:

  1. Income (profit/investment)
  2. Market (comparable)
  3. Cost (Depreciated Replacement costs)
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3
Q

Explain the Comparable Method?

A
  • The Comparable method is typically used to assess market value and market rent for both commercial and residential properties
  • Its process is:
  1. Select Comps
  2. Confirm/Verify Details
  3. Assemble Comps Schedule
  4. Form opinion of Value
  5. Report Value
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4
Q

Explain the Investment method?

A
  • Used when there is an income stream to value
  • Rental income is capitalised to produce a capital value
  • Implied Growth Rate comes from the applied yield
  • The Conventional Method is:

Market Rent x Years Purchase = Market Value

  • Depended on comparable method for rent and yield evidence
  • Other investment techniques include Term and Reversion and Hardcore/layer
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5
Q

Explain the Profit method?

A
  • Used for valuations Pubs, Petrol Stations, Hotels etc where value is depended on profitability and trading potential of the business
  • Must have accounts for 3yrs
  • Method:
  1. Annual turnover - Costs = Gross Profit
  2. Gross Profit - Reasonable working expenses =
  3. unadjusted net profit - operations remuneration =
  4. Fair Maintainable Operating Profit

Then

  1. Capitalised at a appropriate yield to = Market Value
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6
Q

Explain the Residual method?

A
  • Used to determine the land value of a site given market inputs
  • Comps for GDV (All risk yield used)
  • GDC ( Build costs, Professional fees, Finance, Contingency, Marketing fees)
  • Red book valuation
  • Method:
  • Gross Development Value - Gross Development Costs- Developers Profit = Land value
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7
Q

Explain DRC method?

Depreciated Replacement Cost

A
  • Used when property isn’t traded on the open market such as Schools, Stadiums and Hospitals
  • Can’t be used for secured lending
  • Method:

Value of land in existing use + cost of replacing the building + fees - depreciation and deterioration

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8
Q

What are the bases of value?

VPS4

A
  1. Market Value
  2. Market Rent
  3. Investment Value
  4. Fair Value
  5. Equitable Value
  6. Liquidation Value
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9
Q

Define Market Value?

A
  • The estimated amount for which an asset or liability should exchange
  • On the valuation date
  • Between a willing buyer and a willing seller
  • In an arms length transaction
  • after proper marketing
  • Where the parties had each acted knowledgeably, prudently and without compulsion
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10
Q

Define Market rent?

A
  • The estimated amount for which an interest in real property should be leased
  • On the valuation date
  • Between a willing lessor and a willing lessee
  • On appropriate lease terms
  • In an arms length transaction
  • After proper marketing
  • Where both parties had acted knowledgeably, prudently and without compulsion
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11
Q

Define Fair value?

A
  • The price that would be received to sell an asset, or
  • paid to transfer a liability, in an orderly transaction between market participants at the measurement date
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12
Q

Define Investment value?

A

The value of an asset to a particular owner based on individual investment or operational value

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13
Q

What are the purposes of valuation?

A
  • loan security
  • agency (disposal/acquisition)
  • rating
  • rent review
  • lease renewal
  • internal (asset management)
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14
Q

Can you tell me the Hierarchy of Evidence for the comparable method?

OLRTSI

A
  1. Open market
  2. Lease renewals
  3. Rent reviews
  4. Third party determinations
  5. Sale and leasebacks
  6. Inter company transactions

Also A-C evidence

  • A: Direct comps
  • B: Genera Market data (co-star)
  • C: Other Sources
  • Comparable Evidence in Real Estate Valuation 1st Edition 2019
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15
Q

What is a Yield?

A
  • Measure of return
  • Income/price X 100
  • Lower the yield, higher the Capital value
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16
Q

Explain Initial Yield?

A
  • Simple income yield for current income and price

Rent/ current price X 100

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17
Q

What is an All Risk Yield (ARY)?

A
  • Rate of interest used to value fully let property at Market Rent
  • Reflects all risks and benefits attached to investment
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18
Q

Define Equivalent Yield?

A
  • Average weighted yield when a reversionary property is valued using then Inital Yield and Reversionary yield
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19
Q

Explain Reversionary Yield?

A
  • For an under rented investment
  • current income/price on under rented property X100
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20
Q

What types of Investment Method are there?

A
  • Conventional (Initial Yield)
  • Term and Reversion
  • Hardcore and Layer
  • DCF
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21
Q

Explain Term and Reversion method of investment?

A
  • Used when property is under rented (MR more than Rent)
  • Term: Lease to next review is capitalised at an Initial Yield
  • Reversion: Is Market Rent valued in perpetuity at a Reversionary yield
  • Both added together to produce a value
  • Traditionally Term rate is lower than Reversion Rate to reflect security of income

Term = YP single rate for N years @ %

Reversion = YP into perp (1/n) Present Value N years at %

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22
Q

Explain Hardcore/Layer Method of investment?

A
  • Used when property is over rented (Rent more than MR)
  • Income divided horizontally into:

BOTTOM SLICE = Market Rent

TOP SLICE = Rent Passing - MR until next lease event

  • Higher yield applied to top slice to reflect risk
  • Yields used differ due to comparable evidence and relative risk
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23
Q

Explain Discounted Cash Flow (DCF) method of investment?

A
  • Growth explict method
  • Involves projecting estimated cash flows and discounting back to present day to show growth
  • not used in practice

Stages include:

  1. Estimate Cash Flow
  2. Estimate Exit Value
  3. Select the Discount Rate
  4. Discount Cash Flow
  5. Value in the sum of a complete DCF to provide Net Present Value

( if asked in depth say don’t have experience and this is only my knowledge I would ask a senior professional to further knowledge if needed)

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24
Q

What is Net Present Value (NPV)?

A
  • The sum of the discounted cash flows of a project
  • used to determine if an investment gives a positive return
  • NPV Positive: Investment has exceeded investors Target Rate of Return
  • NPV Negative: Investment has not achieved the investors Target Rate of Return
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25
What is Internal Rate of Return (IRR)?
- Used to assess the total return from an investment opportunity and making assumptions (rental growth, Exit assumptions)
26
What are Assumptions?
- Where it is reasonable for a valuer to assume something is true without the need to investigate eg) Connected to mains
27
What are special assumptions?
- An assumption that is assumed to be true but is not eg) Planning, Vacant Possession
28
What is the DCF?
- Discounted Cash Flow - It is a growth explicit method of valuation
29
What is the difference between an Internal and External Valuer?
Internal: - Employed by company to value the assets of the company - For internal use only - No third party reliance External: - Has no material links with the asset to be valued or the client
30
What are the 3 important steps prior to carrying out a Valuation? CIT
1. Competence (Correct skills, Understanding and Knowledge) 2. Independence (Check any Conflict of Interests) 3. Terms of Engagement (Confirmation of the instruction and the extent/limitations of the report)
31
Give examples of statutory Due Diligence regarded for carrying out Valuations?
1. Check Asbestos Register 2. Business rates 3. Contamination 4. EPC Rating 5. Flooding (SEPA) 6. Planning History + Listed or con area 7. Legal Title 8. Fire Safety Compilance
32
Hamilton Road or Hardengreen Talk me through a valuation instruction/process?
1. Receive instruction from client 2. Check Competence 3. Check Conflicts of Interest 4. Issue ToE's to client 5. Receive signed ToE from client 6. Gather info (lease details, planning, Plans etc) 7. Due Diligence ( Asbestos, flooding etc) 8. Inspect and Measure 9. Research Market and analyse/assemble Comparable's 10. Undertake Valuation 11. Draft report 12. Get report checked 13. Finalise and get Report signed 14. Send Report to Client 15. Issue Invoice 16. File in good order for archiving
33
What is a Years Purchase?
The number of years required for a properties income to repay its purchase price
34
How do you calculate Years Purchase?
YP= 100 Divided by the Yield
35
What factors affect risk?
- Quality of Covenant - Lease Terms - Void Periods - Use of Property
36
What are some limitations to the Comparable Method?
- Limited transactions - Lack of up to date evidence - Existence of a special purchaser
37
What are the RICS Guidance is there for Valuation?
- RICS Valuation – Global Standards (Red Book Global Standards) - Effective 31st January 2022
38
What Method is used for Zoning?
- Zone A used for Comparable
39
What premium is usually added to a Class 3 unit when valuing?
10%
40
What is a Premium?
A capital payment made by one party to another
41
What is a Ransom Strip?
A piece of land which controls the access to another piece of land
42
Do you know any ransom strip Case Law?
- Stokes v Cambridge (1961) - value of 1/3 of uplift in development site value was awarded to the owner of the ransom strip
43
What is a Marriage Value?
- Created by merger of interests - Negotiated outcome after valuation to give 50/50 split
44
What is a WAULT?
This is the weighted average unexpired lease term remaining to the first break
45
What would you do prior to carrying out a Valuation?
1. Check Competence 2. Conflict of Interest check 3. Issue and receive signed ToE's
46
How does ESG and Sustainability affect valuations?
- If EPC rating is poor this could limit marketability of property - ESG and Sustainability should be in assumptions and advice
47
Hamilton Road You mention Secured Lending, explain what this is?
- Valuation for the purposes of a Commercial loan - Property is used as security against a loan amount
48
Hamilton Road Where you aware of issues surrounding Secured Lending?
- Yes - Conflict of Interest - Suitability for Mortgage - Condition of Property
49
Hamilton Road What factors did you consider when assessing your comparable evidence?
- Hierarchy of Evidence - Condition - Size - Distance from property - Use
50
Hamilton Road How did you apply the relevant valuation standards and guidance to the valuation?
- I made sure I carried out my Valuation inline with Red Book Standards and Guidance - VPS1-5 -VPGA 2 - Checked Competency - ToE's Sent and signed - Worked under supervision of registered valuer
51
Hamilton Road What approach did you carry this valuation out?
- Market Approach (Comparable Evidence)
52
Hamilton Road What challenges did you face when undertaking the valuation?
- Lack of rental evidence for offices in the area - Had to widen scope of evidence for rental comparable evidence
53
Hamilton Road How did you ensure that the valuation was accurate and reliable?
- Checked Competency - ToE signed - Chose appropriate approach - Steps of carrying out a Valuation report - Ensured all limitations were stated
54
Hamilton Road Was there a passing rent on Hamilton Road?
- No as it was valued on vacant possession
55
Hamilton Road For Market Value what rate per sq ft did you apply?
- £160 per sqft
56
Hamilton Road For Market Rent what was your rate per sq ft?
- £12 per sqft
57
Hamilton Road How did you measure Hamilton Road?
- Net Internal Area (NIA) - 1,255 sq ft
58
Hamilton Road What steps did you take to carry out this Valuation?
1. Receive instruction from client 2. Check Competence 3. Check Conflicts of Interest 4. Issue ToE's to client 5. Receive signed ToE from client 6. Gather info (lease details, planning, Plans etc) 7. Due Diligence ( Asbestos, flooding etc) 8. Inspect and Measure 9. Research Market and analyse/assemble Comparable's 10. Undertake Valuation 11. Draft report 12. Get report checked 13. Finalise and get Report signed 14. Send Report to Client 15. Issue Invoice 16. File in good order for archiving
59
Hardengreen Can you explain the key steps involved in this residual land valuation process?
1. Terms of Engagement 2. Site inspection 3. Gathered Information (LDP allocation, size etc) 4. Calculated GDV (comps and yields) 5. Calculated GDC (Build costs £184 per sqft , professional fees 10%, Finance, Contingency 5%) 6. Establish Target Profit with the client (20% of GDC) 7. Calculated Residual site value 8. Report to client
60
Hardengreen How did you calculate the Gross Development Value (GDV) for this project, and what data and variables were taken into account?
1. Comparable Evidence: gather data on comparable properties and recent sales in the area. This data includes: - Location - Size 2. Consideration of the number of units GDV = (Number of Units) x (Estimated Selling Price per Unit)
61
Hardengreen What market conditions and trends influenced your GDV estimate
- Location - Comps of sales - Interest rates
62
Hardengreen What were the major components included in the Gross Development Costs (GDC)?
1. Build Costs 185 per sqft 2. Professional Fees (8%) 3. Contingency (5%) 4. Finance Costs 5.5% +3 5. Demolition (20k) pro fees and contingency low as smaller scheme
63
Hardengreen How did you estimate Build Costs for the project?
- Spoke to BS team for their opinion - They reviewed BCIS
64
Hardengreen How did the results of the residual land valuation impact the overall financial viability of the project?
- The land value came out as a negative value given the inputs - This meant the project was not viable for the client
65
Do you know any reviews that have been carried out within Valuation?
Independent review into real estate investment valuations 2021
RICS APC
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