5 Methods of Valuation Flashcards
Comparative Method steps?
- Search and select comparables
- Confirm and verify details and analyse headline rent to provide net effective rent
- Assemble comparables in a schedule
- Adjust comparables using the hierarchy of evidence
- Analyse comparables to form opinion of value
- Report value and prepare file notes
RICS Prof Standard: “Comparable Evidence in Real Estate Valuation”, 1st edition, 2019
what is it?
- outlines principles in the use of comparable evidence
- provides advice when there is limited availability of evidence
- sets out hierarchy of evidence
- notes: “valuer should use professional judgement to assess the relative importance of evidence on a case-by-case basis”
Explain the hierarchy of evidence?
HoE can be split into 3 categories:
CAT A - direct comparables
- completed transactions of near-identical properties for which full and accurate information is available
- completed transactions of similar real estate assets where full & accurate info is available
- same as above but where data isn’t full but it is reliable
- similar real estate being marketing where offers have been made
- asking prices BUT only with careful analysis
CAT B - general market data to provide guidance
- information from published sources or commercial databases
- historic evidence
- demand/supply data for rent, owner occupation or investment
CAT C - other sources
- transaction evidence from other real estate types and location
- other background data (e.g. interest rates, stock market movements…)
How do you go about finding relevant comparables?
- Inspection of areas recent transactions (agents boards, etc)
- Speak to local agents
- In house records or data bases such as CoStar
Why do you need to be careful using auction comparables?
- They are gross price
- purchaser could be ‘special purchaser’ or an insolvency sale
Investment Method overview?
This is used when dealing with an investment, i.e. and income stream attached to the value .
The rental income is capitalised to produce a capital value.
Conventional method assumes growth implicit valuation approach.
An implied growth rate is derived from the market capitalisation rate (yield)
Conventional method overview?
Rent received (or Market Rent) multiplied by the ‘years purchase’ = Market Value
Importance of comparables for rent & yield.
Explain ‘Years Purchase (YP)’?
YP is the capital sum required to be invested in order to receive an annuity of Re 1.00 at a certain rate of interest.
YP is the yield expressed as an integer (number zero)
E.G:
5% yield would be
100/5 = 20
20 x ‘rent’ = Market Value
Term & Reversion method overview?
This is used for reversionary investments (Market Rent more than passing rent) i.e. under-rented
The term is capitalised until the next review / lease event at an initial yield.
Reversion to Market Rent valued in perpetuity at a reversionary yield.
Layer / Hardcore method overview?
This is used for over rented investments (passing rent more than market rent)
Income flow is divided horizontally
Bottom slice = Market rent
Top slice = Rent passing less the Market Rent until the next lease event
There is a higher yield applied to top slice to reflect the additional risk
Different yields used depending on comparable investment evidence and relative risk.
Profits method overview?
This method is used for valuations of trade related properties, where there is a ‘monopoly’ position.
It is used where the value of the property depends upon the profitability of its business and its trading potential.
The basic principle is that the value of the property depends on the profit generated from the business, not the physical building or location.
If possible you must use audited accounts of the last 3 years and these are superior to management accounts.
If its a new business you use estimates or a business plan.
Adjust for maturity of a business and any unacceptable or exceptional items of expenditure.
Examples where you would use the profits method?
Pubs
Petrol Stations
Hotels
leisure & healthcare properties
Care homes
Run through a simple methodology? To come to a Fair Maintainable Operating Profit (FMOP)…
Annual turnover - costs = gross profit
gross profit - reasonable working expenses = unadjusted net profit
unadjusted net profit - operators remuneration = adjusted net profit AKA FMOP
This can be expressed as the EBITDA - earning before interest, taxation, depreciation and amortisation
It is capitalised at appropriate yields (YP multiplier) to achieve the market value
Try to use comparables as evidence where possible.
