Loan Security Valuation Flashcards
What RICS guide would you refer to for a sensitivity analysis and how is it defined?
a) RICS Guidance Note - Valuation of development
property (1st Edition, Oct 2019)
b) A series of calculations resulting from the residual appraisal involving one or more variables (rent, sales values, build costs,
etc.) that are varied to show the differing results.
Why did you use 50 years in your CF?
a) The assets we value have a minimum lease of 80 years or they are freehold so we have explicit assumptions for 50 years.
b) It doesn’t make a difference if it’s 50 or 30 years (or the years) as we capitalise the net income into perpetuity in the final year of the CF
Tell me about the Practice Information: Risk, Liability and Insurance, 1st edition, April 2019?
a. Understanding risks in transactions & operations and risk management strategies
b. Examining liabilities and legal obligations
c. Allocating risks through contracts and insurance
d. PII cap recommended
e. Considering emerging risks and industry trends
f. Staying informed about legal requirements
g. Effective from April 2021
Tell me about the RICS Professional Standard on Conflicts of Interest (Global, 1st Edition, March 2017)?
a. An agency cannot have a contractual relationship with buyer and seller
b. Three steps to consider when a conflict arises:
a. Conflict avoidance – is conflict unavoidable? If so, do not accept the instruction
b. Written advice to both parties – If you want to accept the instruction, the following must be set out in writing:
i. Disclose nature of conflict, and how your firm will deal with this
ii. Be as clear as possible
iii. Request written confirmation of clients’ informed consent
c. Conflict management – After receiving informed consent, setup information barrier with provisions agreed by both clients
How do you manage a conflict?
- Conflict Avoidance - say no to job
- Conflict Management - steps agreed to manage conflict
Get Informed Consent - given in writing explaining surveyors position is transparent about any material factors and client understands what’s being done
* Informed consent should only be done if satisfied that it best served to do so for all parties.
What are the different levels of PII?
In accordance with the RICS Professional Indemnity Insurance Requirements (effective April 2022)
Current PII requirements based on turnover:
Firms Turnover Proceeding year Minimum level of Indemnity for each claim
£100,000 or less = £250,000
£100,001 to £200,000 = £500,000
£200,001 and more = £1,000,000
How are LHA caps calculated?
a. (Learn how to find an LHA rate for a particular postcode)
b. Based on private market rents being paid by tenants in a broad rental market area.
c. BRMA – an area where a person may be assumed to live
d. 30th centile point between what the local rent officers opinion are the highest and lowest non exceptional rents in a BRMA point – A rent officer is looking
e. The analysis looks at local properties and differentiates on bedroom number, not property type
Explain the Social Housing Act 2023?
a. Bought in to give more control to the regulator of social housing
b. Began in July 2023
c. They can inspect RPs properties with only 48 hours of notice
d. Ensures RPs keep on top of property defects
e. Requires all RPs to have a health and safety officer
What is the time value of money?
a. Money in the future is worth less than money today due to things like inflation
b. Also because money today can be used/invested and gain a return hence it is worth more than tomorrow
What is IRR and why do we not use an IRR in the CF?
a) The discount rate required to make the NPV of all future cash flows equal to zero
b) We look at CFs over a long term period so it’s not helpful given the nature of the stock
What assumptions did you use in the DCF?
a. Discount rate of 5%
b. Bad debts and voids at 2% in year 1 and for years 2 & onwards
c. Management costs at £700 pa
d. Cyclical costs at £375 pa
e. Day-to-day costs at £450 pa
What is the NPV?
1.The sum of the discounted cash flows of the project
What are the 3 forms of sensitivity analysis?
- Simple sensitivity analysis of key variables (e.g. yield, GDV, build costs, finance rate)
- Scenario analysis - change scenarios for the development content/ timing/costs (e.g. phasing the scheme or modifying its design
- Monte Carlo simulation - using probability theory (e.g. Crystal Ball)
How do you select an appropriate discount rate?
a. Risk Free rate + risk premium
b. Risk free rate = 30 year gilt yield (4.38%)
c. Risk premium = Factor in demand for property type, demand for tenure type, demand for property in that location and also factor in earnings
What is a DCF?
- Explicit growth investment method used to estimate the value of an investment
- It Involves projected estimated cashflows over an assumed holding period,
- Cashflows are discounted back to present value at a discount rate.
- plus an exit value at the end of that period.
