Conventional Valuation Methods and their application - Module 2 Flashcards
Name the conventional methods of valuation?
- Comparable Method
- Investment Method
- Residual
- Profits/Accounts Method
- Contractors/DRC Method
What are contemporary valuation methods?
Discounted Cash Flow Methods
What makes a property transaction comparable to the property being valued?
Similarities such as:
Physical
Location
Time scale
Use
Tenure
How many comparables are needed to produce a valuation?
As many as it takes to arrive at the value.
What is the longest time period before a valuation date that a transaction could be accepted as being comparable?
It depends upon the property, location and market conditions at the time.
Static market maybe 4 years ago.
A changing market maybe 6 months.
What do you understand by the expression weighting of comparabel evidence?
We attach the greatest weight to those comparisions which have the greatest similarity to the subject property.
What do you understand by the expression hierarchy of evidence?
The heirarchy of evidence by transaction type for commercial.
Open market lettings
Lease renewals
Rent reviews
Independent expert’s determination
Arbitrator’s awards
What is interpolation of comparable evidence?
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.
What is extrapolation of comparable evidence?
Extrapolation is working outside of the known points.
It is considered statistically dangerous.
What is the purpose of Zoning?
Is that we can analyse and value retail units adding different frontage to depth ratios.
What is the standard Zone depth?
6.1m or 20ft in UK
How would you arrive at the Market Rent of the first floor of a retail unit?
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.
How would you arrive at the Market Rent of a retail unit with a return frontage?
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
How would you value a shop unit for rent review with frontages on two roads i.e. it is a through unit?
You would Zone back from both frontages.
How would you determine the Market Value of an investment property let on internal repairing terms?
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.
What factors make up the all risks yield?
Takes into account all the risks of the investment.
- the construction (age, design, specification)
- Tenant covenant strength
- amount of rent (over-rented, market rent under-rented)
- unexpired lease term
- other lease terms
- anticipated rental growth
What is the market capitalisation rate?
Is the rate used to capitalise the income/rent received.
An alternative expression for the all risks yield.
How would you value a green-field site with planning permission for residential development?
By using the rent capital comparision if I could if enough comparative evidence.
If not enough evidennce then I would use the Residual Method.
Describe how you have carried out (or would carry out) a Residual Valuation?
- Work out the GDV
- deduct development costs
- deduct developers’ profit
- = Land Value
What costs did you deduct (are deducted) in your / a Residual Valuation?
- Demolition
- Contamination (if any)
- Cost of Construction
- Professional Fees
- Cost of Finance
- Contingency say 5%
- Disposal Costs such as Agenst/Legal Fees
- Asquisition Costs = Agents Fees/Legal Fees Stamp Duty & VAT
How did you calculate (would you calculate) developer’s profit in your / a Residual Valuation?
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.
What are the usual acquisition costs of a development site?
- Stamp Duty
- Legal Fees
- Agents Fees
- Non recoverable VAT on Agents Fees
What is a ransom strip?
A ransom stript is a piece/strip of land giving access to development land.
What is ransom value?
Ransom is the value attributable to a ransom strip or ransom land.
How did you (would you) value a ransom strip?
By taking a percentage% of the uplift in value of development land.
What does the case study of Stokes v Cambridge mean to you?
This is the leading case where it comes to Ransom strips.
The Lands Tribunal decided that the increase in value wass 1/3.
What is the Profits Method also known as?
The Accounts Method.
Name three property types that would be valued by the Profits Method?
- Golf Course
- Casinos
- Cinemas
- Bingo Halls
- Amusement/Theme Parks
Why are certain properties valued by the Profits Method?
Because you can’t seperate the use from the property.
Explain the basic approch to the Profits Method?
Turnover (net of VAT)
Less Costs of generating the Turnover
= Net Operating Profit
Which is Capitalised
What valuation checks can be carried out on a valuation produced by the Profits Method?
- Price per bedroom (Hotels/Care homes/Rest Homes)
- Price per seat (Cinemas)
- Price per Court (Squash/Tennis)
- Price per table (snooker/pool halls)
When is the Contractor’s Method used in practice?
This is used as a method of last resort when we are unable to use asny of teh other four methods.
What is another name for the Contractor’s Method?
Depreciated Replacement Cost (DRC)
Explain the basic approach to the Depreciated Replacement Cost Method?
- Gross Replacement Cost =
- Cost of Modern Building
- Less Depreciation
- = Net Replacement Cost
- Add Site Value (arrive at by capital comparison)
- = Value as Existing
Explain what is included in a Reinstatement/ Replacement Cost for Insurance Purposes?
- Demolition
- Shoring up and weather-protection of adjoining buildings
- Rebuilding in accordance with current Building Regulations
- Professional Fees
How would you value a property for which there are no comparables?
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
