L2 - Valuation Flashcards
What is Freehold / Private Freehold?
Freehold means the property is located within an area of freehold title ie. non GCC or Emirati can own the property
Private Freehold denotes that only GCC and Emirati Nationals can buy
What is the definition for Fair Value?
(RICS Valuation - Global Standards 2017) aka Red Book 2017
The price that would be received to sell and asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date
Definition is derived from IFRS 13
What is the definition for Market Value?
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 arm’s length
transaction, after proper marketing and where the
parties had each acted knowledgeably, prudently and without compulsion
(see IVS 104 paragraph 30.1).
What is the definition for Market Rent?
The estimated amount for which an interest in
real property should be leased on the valuation
date between a willing lessor and willing lessee
on appropriate lease terms in an arm’s length
transaction, after proper marketing and where the
parties had each acted knowledgeably, prudently and without compulsion
(see IVS 104 paragraph 40.1).
What is a measurement date?
Measurement date, as per the International Account Board Standards (IABS) is the current price that should be achieved at the date in question - ie the value at todays date, reflective of the valuation date
If you were carrying out a valuation for loan security what would you do differently?
- Include a statement within the report and terms of engagement whether the valuer has had any previous involvement / relationship with the borrower, asset or any other parties connected in the transaction
- Conduct COI measures
- It would be based at Market Value, not Fair Value
- Summary of occupational leases
- Statement of current rental income compared to Market Rent
- Covenant strength assumption or commentary
What are the characteristics of a Grade A Building?
- High quality finishes
- Flagship building
- Good accessibility
- Good location
- Tend to be newer or refurbished
- Well maintained by a professional firm
- Sufficient amount of lifts
- Air conditioning
- International occupiers
- Sustainable certification
- Built by a reputable developer
- Sufficient parking
- Strong amenities (f&b, gyms, parks, conference centers)
What did you check measure during inspections?
I did check measurements on vacant units and in areas of potential leasable areas
What are general building defects that you see?
- Damp areas
- Tile slippage / damage
- Hairline cracking
What are the 5 methods of valuation?
- Comparable
- Investment
- Depreciated Replacement Cost
- Profits
- Residual
What is the Comparable Method?
Used in all valuations.
What is an investment method?
Used on income producing properties with the value of the property depending on the return expected from such an investment. Conventionally, the investment value is a product of income and yield. Each of these elements are derived using comparison techniques.
What is the depreciated replacement cost method used for?
Used for properties which do not generally exchange on the open market as they are quite specialised properties such as schools, hospitals and other public buildings and therefore, comparable date does not exist.
Assumed value relates to cost. The valuation is undertaken by assessing the value of the site of the building and the building itself deducing an amount to allow for the buildings age and obsolescence and a further sum for any necessary repairs.
What is the profits method used for?
Its applied to properties who’s value is derived from the profitability of the businesses for which the buildings are designed such as hotels and cinemas. Comparison is used in the assessment of the multiplier used to capitalize the net profit produced by the property.
What is the residual method?
It is used to assess development site values, requires calculation of the value of the completed development less the cost of the development works. Thus the value of the finished development is calculated and the costs of development (including fees, interest of money and allowance for profit) deducted, to give a residual amount available for the purchase of the undeveloped interest.
If you didn’t have any comparable evidence of yields what would you do?
I would use the Capital Asset Pricing Model (CAPM)
Yield = Risk Free Rate (Gov Bond or Gilt) + Property Specific Risk + Country Risk taking account of growth
What are the characteristics of your yield comparable’s? Are they similar to your subject property?
Are tenant covenant similar?
Are lease terms similar?
Location similar?
Similar asset?
Similar tenure?
Similar occupancy level?
Would you apply differing yields to different tenants?
Yes - to reflect individual risk ie the perception of some tenants covenant strength is better than others
When a prospective purchaser looks at the building they will likely only look at the equivalent yield anyway
What would effect a value more - a drop in the term yield or reversion yield?
Reversion yield - as this is applied into perpetuity
As an under rented property you would therefore be capitalizing at a lower reversion yield on a higher income stream - this would produce a greater value
What is a conflict of interest?
It is where a personal, firm or financial interest can be established
What other than purchasers cost would you include within a model?
- Leasing fees
- Voids
- Service charges
What is the equated yield and the equivalent yield?
Equated yield - This is the exit yield at which you would capitalize a cash flow. It can also represent IRR. It is the average annual return an investor requires for the holding period of an investment.
Equivalent yield - IS the weighted average between an initial yield (term) and a reversion yield
What is the difference between Hardcore and Term & Reversion?
Hardcore - Used for over rented investments - ie passing rent is higher than market rent
The income flow is divided horizontally with the bottom slice acting as market rent