Conventional Valuation Methods and their application - Module 2

Question 1

Name the conventional methods of valuation?

Answer 1

1. Comparable Method
2. Investment Method
3. Residual
4. Profits/Accounts Method
5. Contractors/DRC Method

Question 2

What are contemporary valuation methods?

Answer 2

Discounted Cash Flow Methods

Question 3

What makes a property transaction comparable to the property being valued?

Answer 3

Similarities such as:

Physical

Location

Time scale

Use

Tenure

Question 4

How many comparables are needed to produce a valuation?

Answer 4

As many as it takes to arrive at the value.

Question 5

What is the longest time period before a valuation date that a transaction could be accepted as being comparable?

Answer 5

It depends upon the property, location and market conditions at the time.

Static market maybe 4 years ago.

A changing market maybe 6 months.

Question 6

What do you understand by the expression weighting of comparabel evidence?

Answer 6

We attach the greatest weight to those comparisions which have the greatest similarity to the subject property.

Question 7

What do you understand by the expression hierarchy of evidence?

Answer 7

The heirarchy of evidence by transaction type for commercial.

Open market lettings

Lease renewals

Rent reviews

Independent expert’s determination

Arbitrator’s awards

Question 8

What is interpolation of comparable evidence?

Answer 8

Working between two extreme points with the lowest possible value and highest possible value.

We then work down from the top and up from the bottom.

Considered statisticaly safe.

Question 9

What is extrapolation of comparable evidence?

Answer 9

Extrapolation is working outside of the known points.

It is considered statistically dangerous.

Question 10

What is the purpose of Zoning?

Answer 10

Is that we can analyse and value retail units adding different frontage to depth ratios.

Question 11

What is the standard Zone depth?

Answer 11

6.1m or 20ft in UK

Question 12

How would you arrive at the Market Rent of the first floor of a retail unit?

Answer 12

If used as retail purposes take X as Zone A divided by 10.

If not used as retail and used as storage etc take a rate per sq ft independant of X by comparison of other upper floor rents.

Question 13

How would you arrive at the Market Rent of a retail unit with a return frontage?

Answer 13

You would make an uplift to the Zone rates.

So if extends to zone A then an uplift to Zone A and Zone B etc etc.

If half of Zone B then half the number of Zone B

Question 14

How would you value a shop unit for rent review with frontages on two roads i.e. it is a through unit?

Answer 14

You would Zone back from both frontages.

Question 15

How would you determine the Market Value of an investment property let on internal repairing terms?

Answer 15

Assuming let at Market Rent we would need to deduct the outgoings for

External Repairs

Insurance

Management

This leaves the Net Income which we then Capitalise at the appropriate yield.

Question 16

What factors make up the all risks yield?

Answer 16

Takes into account all the risks of the investment.

1. the construction (age, design, specification)
2. Tenant covenant strength
3. amount of rent (over-rented, market rent under-rented)
4. unexpired lease term
5. other lease terms
6. anticipated rental growth

Question 17

What is the market capitalisation rate?

Answer 17

Is the rate used to capitalise the income/rent received.

An alternative expression for the all risks yield.

Question 18

How would you value a green-field site with planning permission for residential development?

Answer 18

By using the rent capital comparision if I could if enough comparative evidence.

If not enough evidennce then I would use the Residual Method.

Question 19

Describe how you have carried out (or would carry out) a Residual Valuation?

Answer 19

1. Work out the GDV
2. deduct development costs
3. deduct developers’ profit
4. = Land Value

Question 20

What costs did you deduct (are deducted) in your / a Residual Valuation?

Answer 20

1. Demolition
2. Contamination (if any)
3. Cost of Construction
4. Professional Fees
5. Cost of Finance
6. Contingency say 5%
7. Disposal Costs such as Agenst/Legal Fees
8. Asquisition Costs = Agents Fees/Legal Fees Stamp Duty & VAT

Question 21

How did you calculate (would you calculate) developer’s profit in your / a Residual Valuation?

Answer 21

A percentage of the GDV or a percentage of Total Costs

Depending upon the site could be 15% of GDV.

Possibly 22-25% of total costs.

Question 22

What are the usual acquisition costs of a development site?

Answer 22

1. Stamp Duty
2. Legal Fees
3. Agents Fees
4. Non recoverable VAT on Agents Fees

Question 23

What is a ransom strip?

Answer 23

A ransom stript is a piece/strip of land giving access to development land.

Question 24

What is ransom value?

Answer 24

Ransom is the value attributable to a ransom strip or ransom land.

Question 25

How did you (would you) value a ransom strip?

Answer 25

By taking a percentage% of the uplift in value of development land.

Question 26

What does the case study of Stokes v Cambridge mean to you?

Answer 26

This is the leading case where it comes to Ransom strips.

The Lands Tribunal decided that the increase in value wass 1/3.

Question 27

What is the Profits Method also known as?

Answer 27

The Accounts Method.

Question 28

Name three property types that would be valued by the Profits Method?

Answer 28

1. Golf Course
2. Casinos
3. Cinemas
4. Bingo Halls
5. Amusement/Theme Parks

Question 29

Why are certain properties valued by the Profits Method?

Answer 29

Because you can’t seperate the use from the property.

Question 30

Explain the basic approch to the Profits Method?

Answer 30

Turnover (net of VAT)

Less Costs of generating the Turnover

= Net Operating Profit

Which is Capitalised

Question 31

What valuation checks can be carried out on a valuation produced by the Profits Method?

Answer 31

• Price per bedroom (Hotels/Care homes/Rest Homes)
• Price per seat (Cinemas)
• Price per Court (Squash/Tennis)
• Price per table (snooker/pool halls)

Question 32

When is the Contractor’s Method used in practice?

Answer 32

This is used as a method of last resort when we are unable to use asny of teh other four methods.

Question 33

What is another name for the Contractor’s Method?

Answer 33

Depreciated Replacement Cost (DRC)

Question 34

Explain the basic approach to the Depreciated Replacement Cost Method?

Answer 34

• Gross Replacement Cost =

1. Cost of Modern Building
2. Less Depreciation
3. = Net Replacement Cost
4. Add Site Value (arrive at by capital comparison)
5. = Value as Existing

Question 35

Explain what is included in a Reinstatement/ Replacement Cost for Insurance Purposes?

Answer 35

1. Demolition
2. Shoring up and weather-protection of adjoining buildings
3. Rebuilding in accordance with current Building Regulations
4. Professional Fees

Question 36

How would you value a property for which there are no comparables?

Answer 36

There has got to be some comparables but they may not be very good comparables.

Any evidence of any transactions that have any simularity whatsoever to the subject property.

Then make appropriate adjustments to it which could be large adjustments.

Any valuation figure would have a high level of uncertainty.

Use the contractors method/Depreciated Replacement Cost