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RICS APC Oct 2023 > L1 Valuation > Flashcards

L1 Valuation Flashcards

1
Q

What are the five methods of valuation?

A

a. Comparable
b. Investment
c. Residual
d. Profits
e. DRC – Depreciated Replacement Cost

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2
Q

What is the Comparable Method used for?

A

When comparable data is available to form an opinion of value

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3
Q

What is the Investment Method used for?

A

When there is an income stream to value

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4
Q

What is the Residual Method used for?

A

When valuing sites or undertaking development appraisals

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5
Q

What is the Profits Method used for?

A

Use for properties where their value is directly linked to their business -Pubs, petrol stations, hotels, healthcare

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6
Q

What is the DRC Method used for?

A

When direct market evidence is limited for specialised properties

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7
Q

Explain the Residual method of valuation?

A

I would establish the GDV

  • Less Developers Profits (% of development costs (Acquisition fees, finances OR % of GDV)
  • Less Total Development Costs (Build costs, planning fees, prof fees)

= Land Value

(Known as Residual Land Value, what is left from the value of the scheme less total development costs and is the amount a developer should be prepared to pay for a site)

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8
Q

Explain the DRC method of valuation?

A

Value of land in its existing use (assumes planning permission exists)

+ Add Current costs of replacing the building MES

+ Fees

  • Deduct for depreciation, obsolesces and deterioration
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9
Q

Explain the Comparable method of valuation?

A

Weights the comparables you find to give you the best idea of an accurate value

Category A (completed transactions)
- Near identical properties with full data available
- Similar assets with full data
- Similar assets with enough data to make comparison
- Asking prices (only with careful analysis)

Category B (general Data for guidance)
- Indices
- Historical Evidence
- Information from published sources

Category C (other sources)
- Other real estate asset types
- Interest rates, stock market

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10
Q

Explain the Investment method of valuation?

A

Term & Reversion

Passing rent capitalised at the initial yield until next rent review/lease event

Reversion to Market rent after the event which is capitalised into perpetuity as a reversionary yield

Higher yield showcases greater risk

Layered & Hardcore

Passing rent is capitalised at a higher yield until the next lese event showcasing greater risk involved with a higher rent

The market rent is then capitalised at a lower yield into perpetuity

Discounts Cashflow
- Use for valuations where the projected cash flows are explicitly estimated over a finite period
- You project a cashflow over an assumed holding period
- Plus an exit value at the end of that period
- Cashflow is then discounted back to present day at a discount rate that reflects the perceived level of risk

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11
Q

Explain the Profits method of valuation?

A

Requires 3 years of audited accounts to establish the average annual turnover

  • Less costs (food / drink)
    = Gross Profit
  • Less reasonable working expenses (Business rate / tax)
    = Unadjusted Net Profit
  • Less operators remunerations (Salaries)
    = Adjusted Net Profit (FMOP)

This FMOP is then capitalised at an appropriate yield (years Purchase multiplier) to achieve market value

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12
Q

What are the Key sections of a Loan Security Valuation Report?

A

1) Lender Actions Points (S.W.O.T)
2) Sensitivity analysis
3) Properties / Locations
4) PII stated
5) Fire safety
6) Hazards / contamination
7) Assumptions used for the DCF
8) Valuation

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13
Q

Define a Residual Site Valuation?

A

Valuation of a property holding to find the market value of the site based on market inputs

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14
Q

Define a Development Appraisal?

A

A valuation to establish the value / profitability / viability of a proposed development based on a clients inputs

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15
Q

Define EUV-SH?

A

Follows the definition of Market Value
But subject to the following requirements:

1) That the property is continued to be let by a body pursuant to the
delivery of existing use
2) That the vendor should only dispose of the property to organisation
with the intention to manager their stock in line with regulation
3) Any void units should be valued on the premise that they are to be let
as opposed to VP
4) Any sales are subject to the above assumptions

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16
Q

Where is information on EUV-SH found?

A

Section 6. UK VPGA

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17
Q

Define MV-T?

A

The current value a unit would sell for if its existing tenancy was still in place

You would have to;
- Assume a hypothetical sale that is not bound by restrictions to use
- Can be sold on the open market

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18
Q

Why do you use a 50-year DCF?

A

Social housing assets normally have a minimum lease of 80 years or they are freehold
- These portfolios are long income investment generating vehicles
- We capitalize at the end of the 50 year period so it wouldn’t make a large
difference to the valuation if we used a 30-year

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19
Q

How do you establish a Discount Rate?

A

Using the cumulative method I would add a risk premium onto a Risk free rate

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20
Q

What is the Risk Free Rate?

A

This is based of 30-year government bond yields

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21
Q

What is the Risk Premium?

A

Factor;
- Inflation
- Income Security
- likely future rental growth
- Portfolio condition
- Outgoing required to hold income stream
- Performance in regards to profile and location

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22
Q

I understand the various inputs of the Risk Premium but where is the current transactional data to back up you end figure?

A

The Housing consultancy team records the transactional evidence of Registered Providers buying and selling units and portfolios on the open market.

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23
Q

In development what is the benefit of including off plan sales?

A

Grants you a income stream while you are still building

Off sets costs so you wont have to pay back finance for as long

Reduces risk as you have less units to sell at the end

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24
Q

What are the Pros of Argus?

A

1) It is reliable and used across the industry

2) Allows for a good degree of customization

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25
Q

What are the Cons of Argus?

A

It is hard to see how everything is actually calculated
- Makes understanding the impacts of any changes you might make
harder to understand
- Makes it harder to spot and potential mistakes

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26
Q

What does a Nil Value unit mean?

A

The property requires more information to be included in a valuation

Examples;
- S.O. units with no % of equity data
- Potential fire risks to unit/s and no know solutions

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27
Q

What is a valuation date?

A

The date on which the opinion of value applies

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28
Q

What are the valuation approaches?

A

1) Income - (Profits, Residual, Investment)
2) Cost - (Depreciated Replacement Cost)
3) Market - (Comparable)

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29
Q

Define Market Value?

A

The estimated amount for which an asset will exchange at the valuation date between a willing buyer and seller in an arms length transaction after appropriate marketing and assuming both parties have acted knowledgably, prudently and without compulsion

30
Q

Define Market Rent?

A

The estimated amount for which the asset will lease at the valuation date between a willing lessee and lessor in an arms length transaction after appropriate marketing and assuming both parties have acted knowledgably, prudently and without compulsion

31
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

32
Q

Define Investment Value?

A

The value of an asset to a particular owner or perspective owner for individual investment or operational objectives

33
Q

What is an Assumption?

A

Something you can reasonably assume to be true for the purposes of a valuation

34
Q

What is a Special Assumption?

A

Something that is not true but you assume to be true for the purpose of a valuation
- Must be agreed with the client and in the signed ToE

35
Q

How is the Global Red Book laid out?

A

Part 1 - Introduction
Part 2 - Glossary
Part 3 - Professional Standards
Part 4 - Valuation Technical and Performance Standards
Part 5 - Valuation Practical Guidance Applications
Part 6 - International Valuation Standards

36
Q

What are the Professional Standards / Section 3 of the Red Book?

A

PS1 - Compliance with standards where a written valuation is provided

PS2 - Ethics, competence, objectivity and disclosures

37
Q

What are the Valuation Performance Standards / Section 4 of the Red Book?

A

VPS 1) Terms of Engagement
VPS 2) Inspections & Records
VPS 3) Reports
VPS 4) Basis of value, Assumptions & Special Assumptions
VPS 5) Methods of valuation

38
Q

What are the Valuation Practical Guidance Applications / Section 5 of the Red Book?

A

VPGA 1) Financial Statements
VPGA 2) Secured Lending
VPGA 8) Valuation of real Property Interest
VPGA 10) Material Uncertainty

39
Q

What is the Layout of the UK National Supplement?

A

Part 1 - Introduction
Part 2 - UK Professional Valuation Standards
Part 3 - UK Valuation Practice Guidance Applications
Part 4 - Summary

40
Q

What does Part 2 of the UK National Supplement consist of?

A
  1. Compliance with valuation standards
  2. Terms of Engagement
    2.1 Regulated purpose valuations-supplementary requirements
41
Q

What does Part 3 of the UK national Supplement consist of?

A

UK VPGA 1 - Financial Reporting
UK VPGA 2 - Valuation for Regulated Purpose
UK VPGA 4 - Local authority assets for accounting purposes
UK VPGA 6 - LA & Government accounting - EUV-SH basis of value
UK VPGA 7 - Valuation of social housing providers assets for financial statement
UK VPGA 11 - Valuation for residential mortgage purposes
UK VPGA 13 - Residential secured lending guidance
UK VPGA 14 - Valuation of social housing for loan security purposes
UK VPGA 18 - Affordable rent and market rent under housing acts in regulatory
context

42
Q

What is a years purchase?

A

Shows you the number of years required for your income to equal purchase price

43
Q

How often is BCIS updated?

A

Every Quarter

44
Q

What does BCIS stand for?

A

Build Cost Information Services

45
Q

Define All Risk Yield?

A

Yield used to value fully let properties at market rent, reflects all prospects and risks attached to the investment

46
Q

What is True Yield?

A

Assumes rent is paid in advance

47
Q

What is a Nominal Yield?

A

Initial yield assuming rent is paid in arrears

48
Q

Define Gross Yield?

A

Yield not adjusted for purchasers costs

49
Q

What is Net Yield?

A

Yield adjusted for purchasers costs

50
Q

What is an Equivalent Yield?

A

Average weighted yield for a term and reversion

  • Better Option than Initial Yield where voids might be expected
51
Q

What is an Initial Yield?

A

Simple income yield for current income and current price

52
Q

What is a Reversionary Yield?

A

Yield that allows for additional risk of increasing rent at reversion

53
Q

What is a Running Yield?

A

The yield at one moment in time

54
Q

What is an Exit Yield?

A

Capitalisation rate applied to the net income at the end of a DCF to provide an exit value which shows the value of the asset after the holding period

55
Q

What is the NPV?

A

Sum of the DCF

56
Q

What is the IRR?

A

Internal Rate of Return

Assess total return

The rate of return at which all future cashflows must be discounted to a NPV of 0

57
Q

What does the Red Book state on Revaluations & Desktop valuations?

A

Red Book unless for 5 exempt reasons

1) Restrictions must be agreed in writing and included in the ToE
2) Implications of restriction must be confirmed in ToE
3) Is the restriction Reasonable
4) Refer to the restriction explicitly within the report
5) Revaluations must only be completed without inspections if the valuer is happy there have been no material changes to the property or nature of the location since last valuation

58
Q

What valuations are red book exempt?

A

1) Agency or brokerage services
2) Acting or preparing to act as an expert witness
3) Statutory functions
4) Valuation for internal purposes
5) Valuation advice for negotiation or litigation

59
Q

Can you issue a draft / preliminary valuation advice

A

Yes;
- Must be market as DRAFT
- Cannot be relied upon
- any changes to you valuation after this must be noted with reasons

60
Q

Is there a margin of error for valuation?

A

Singer & Frielander Ltd vs J D Wood
- General Margin 10%

K/S Lincoln vs CBRE Hotels
Margins;
Resi- 5%
Commercial -10%
Property with exceptional features - 15%
- Margins can vary for more complex valuations

61
Q

What is Hope Value?

A

Value arising from any expectation that future circumstances affecting the property may change

  • Prospect of securing planning permission
  • The realisation of marriage value arising from the merger of two interests
    in land
62
Q

What is Marriage value?

A

The increase in value of a property following the completion of the lease extension

63
Q

What is the most up to date version of the national supplement?

A

Global Standards National Supplement published on the 19th October

  • In effect 1st May 2024
64
Q

What is the difference between a development and residual appraisal?

A

A development appraisal takes into account the clients costs and assumptions where as a residual appraisal uses market factors

65
Q

In VPS 1 what are the last 5 specific requirements of a Terms of Engagement to be included for IVS

A
  • Agreed Fee
  • Disclose Complaints Handling Procedure
  • RICS will be monitoring reports
  • Terms of Engagement will comply with IVS
  • PII liability Cap
66
Q

How do you structure your fees?

A

1) Fixed rate + VAT
2) Hourly
3) Commission based

67
Q

What do you understand by inaccurate valuation?

A

In the case of CBRE Hotel v KS Linkin
- Margin of Error set at 10% general
- 5% for residential

68
Q

What are lender appetites for risk at the moment?

A

Low
- More chance of people defaulting on their loans

69
Q

What are the general Loan to Value ratios?

A

75-85% Social Housing

65-70% Private Sector

70
Q
A

RICS APC Oct 2023 (20 decks)

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