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
What is the meaning of a discount rate?
The discount rate is the amount as a percentage that the investor requires as a return
What is WACC?
Weighted Average Cost of Capital
A model used to build a discount rate
WACC = ((Equity / Total Debt + Equity) * Cost of Equity + ((Debt / Total Debt + Equity) * Cost of Debt) * (1 - Tax %))
What is the meaning of NPV and IRR?
NPV is Net Present Value
The total sum of the discounted cash flow of the project
It can be used to gauge the return against the target return of the project - ie if a positive figure is produce then you have exceeded your target return and is deemed a good investment
IRR is the Internal Rate of Return
This is the actual rate of return
It is the discount rate at which point the NPV would produce a figure of zero if applied to the cash flow
What methods of finance do we have in Dubai?
- Pre sales
- Debt - loans, alternative funding
- Equity - selling shares, JV, own money
What is the typical loan to value ratio for Dubai?
25/75
Talk me through a profits method
Typically used on properties where the value is dependent on the net profit produced. Such as hotels:
- I would initially ask for all required information including profit and loss accounts, balance sheets (3 years worth) and future projections if available.
Based on these accounts and trading performance as well as agencies such as STR I will be able to work out the gross operating cost of the property
Usually information regarding no of keys, F&B outlets, facilities such as spa’s, gyms and swimming pools) is provided by the client
Gross Operating Profit =
Room revenue - over a number of years adopting a suitable occupancy (% may increase or decrease depending on a number of factors such as 1st year of operation, Dubai Shopping Festival, New Years, Summer Months, Standard rooms with higher occupancy and presidential suites with lower
The trading performance and STR can establish an appropriate average daily rate depending on a number of factors such as star, location, supply, competition, etc to calculate room revenue
Same process with F&B - second highest contributor
Then other income from spa, gyms, water activities, phone calls etc
- Calculate the costs of operations
Operating expenses - utilities, admin, wages, stationary, minor repairs
- Calculate net profit
Gross operating - Cost of operations - Deduct management fee - if on management contract
Management contract the hotel would want in the range of 2-7% depending on the involvement of the business - Net cashflow
Would you value a school and hotel in the same way?
In Dubai, schools are run as an operational asset so yes this is possible
We would run both (depreciated replacement cost)
What is the difference between gross and net rent?
Gross rent = the headline rent not taking into account any incentives
Net rent = the adjusted rent taking into account incentives such as rent free periods
What are the various ownership structures in Dubai?
Private freehold: Only GCC & Emirati’s can own
Freehold: Expat ownership is permissible
Granted / Gifted: Cannot transfer by way of sale, mortgage or swap unless express permission given from the ruler of the emirate
Leasehold: Ground / Investment lease for property - such as JAFZA, Al Quoz
What is a ransom strip?
Refers to a parcel of land needed to access an adjacent property - there was a case where Al Ghurair who owned a large number of building next to the Burjuman development and there was a building in which they believed brought down the image of the area so they want to buy, demolish and rebuild. It was held at ransom with AG offering above and beyond MV
What is hope value?
The hope of holding an asset and that future development and circumstance will increase the value of the asset
What is marriage value?
This is where land or property (physical) or the interest in land or property (legal) are merged to create a value higher than the sum of the parts
What are infrastructure costs?
Any costs associated with services to the asset ie plumbing for the district, electricity provision, roads etc.
Can you get finance on development land?
Technically, as per RERA, guidelines for a developer is meant to wholly own the land subject to any finance being given for a development as well as depositing 20% of the cost development into the escrow account. However, I am aware of investors acquiring finance having not completely paid the land cost.
How would you build your discount rate?
The discount rate is the return an investor would require to invest in a project. This can be taken from comparable evidence or where there is no comparable evidence - WACC or CAPM
How would you know if a project is feasable?
If a positive NPV is produced
For a DCF the project IRR would need to be higher than the discount rate applied to produce a +NPV
When would you use a WACC analysis?
For discounted cash flows and when the client provides the details
What is meant by an arms length transaction?
This refers to the open market - therefore there is no intertwined relationship between the parties
For eg. TECOM Group buying the Injaz Building from Dubai Properties - this may not be a true arms length transaction as they are both part of Dubai Holding
What is the difference between a valuation and an appraisal?
An appraisal looks at the interests specifically for a party ie developers profit based on the developers assumptions and therefore geared towards investment value
A valuation is based around market dynamics such as supply and demand
Valuation - market derived
Appraisal - investor derived
What types of valuations have you undertaken?
Loan security, transfer purposes, internal decision making and accounting
…. acquisition purposes
What creates value in a property?
Income, expenditure, physical condition, legal interest, occupier covenant
What is the difference between a DCF and an All Risks Yield?
The DCF approach seperates out and explicitly identifies growth assumptions rather than incorporating them within an all risks yield
How does a DCF work in detail?
The DCF sets out a projected estimated cash flow over an assumed investment holding period plus an exit value at the end of the period usually arrived at using an all risks yield. The cash flow is then discounted back to the present day at a discount rate (the desired rate of return) that reflects the perceived level of risk.
What are the benefits of a DCF?
The benefit is that the valuation takes into account the timing of cash flows and builds growth explicitly into the calculation
What is the relevant guidance for Discounted Cash Flows?
The RICS Discounted Cash Flows for Property Investments 2010
What is Net Present Value?
The total sum of the discounted cash flows of the project
What can a NPV be used for?
An NPV can be used to determine if an investment gives a positive return against a target rate of return. It allows an understanding of how profitable an investment can be
What is shown when an NPV is positive?
It identifies that the investment has exceeded the investors target rate of return and is therefore a good investment
What is shown when an NPV is negative?
It identifies that the investment has not met the desired rate of return
What is an Internal Rate of Return?
Is is the discount rate which produces a Net Present Value of zero when applied to the assets cash flow
What is a yield?
A yield is an annual return on investment expressed as a percentage of capital value
What is an All Risks Yield?
A remunerative rate of interest used in the conventional valuation of freehold and leasehold interests, reflecting all the prospects and risks attached to a particular investment
What are the key issues when using the hardcore method for an over rented property?
- Double counting?
- Top slice is highly geared
- Arbitrary division of income
- Subjective adjustments
- Hard to build in complex circumstances or voids
How would you value a leasehold property?
- Dual rate (with a sinking fund)
- Single rate
- DCF
How would you calculate an exit value in a DCF?
Apply a YP into perpetuity (NIY) rather than use an equated yield
How would you choose a discount rate for a DCF?
- CAPM - Risk free rake + risk premium (market and property specific risk)
- Investors target discount rate
