Methods of Valuation

Question 1

Describe the comparable method

Answer 1

1. Look at subject
2. Select comps
3. Analyse comps
4. Display in matrix
5. Value property
6. Stand back & look

Question 2

4 different valuation methods of the investment method?

Answer 2

1. Term & reversion
2. Hardcore & Layer
3. Hardcore & topslice
4. DCF

Question 3

Explain a term and reversion valuation technique?

Answer 3

1. Capitalise rent passing using YP at a yield discounted from a market rate
2. Capitalise reversion using Market Rent into perp, using YP from a market rate discounted using PV
3. Add together
4. Stand back

Question 4

Explain hardcore and layer valuation technique and where it might be used?

Answer 4

1. Capitalise term into perp at an equivalent yield
2. Capitalise reversionary top slice at equivalent yield deferred until reversion
3. Add together
4. Stand back

used in the institutional investment market for prime office or when the reversion is close in time (EQUIVALENT YIELD USED).

Question 5

Explain the Hardcore & Top Slice technique

Answer 5

1. Establish Market Rent via comps
2. Establish passing rent by lease review
3. Establish Market yield using comps + risk analysis
4. Capitalise the Market Rent into perp using a market yield
5. Capitalise the top slice until next lease event (adjust yield to reflect risk)
6. Add together
7. Stand back

Used where the rent passing is higher than market rent (NET INITIAL YIELD)

Question 6

Explain the DCF technique

PDM AAN

Answer 6

Investor has a target rate - DCF (set out in a table)

1. Purchase price in row one - no discount
2. Display net income in a table
3. Multiply by PV £1 at a target rate for yrs until received (future money)
4. Assume an exit value at say 10 years with a capitalisation at Market Yield
5. Add up all the discounted cash flows in end column
6. If NPV is more than 0 target rate is met

(can also be used to establish internal rate of return - EQUATED YIELD via analysis

Question 7

Describe the profits method?

Answer 7

Properties changing hands on the basis of trading potential, calculated by

1. Get 3 years accounts
2. Work out fair maintainable trade
3. Deduct costs & expenses to get Fair Maintainable Operating Profit (FMOP)
4. FMOP X YP (from benchmarks) = Capital Value

Rental

1. FMOP = divisible balance
2. 50/50 Landlord & Tenant

Question 8

Key points to note in regards to residual valuations?

Answer 8

S curve repayment model (=50% of actual time)
Debt v Equity
Sensitivity analysis - rerun model for what if scenario

Question 9

How do you calculate the net effective rent?

Answer 9

You have three options

1. Straight line - add actual income up and divide by lease length
2. YP approach/ Time value of money
3. DCF

Question 10

DRC Method please explain

Answer 10

1. Establish replacement cost modern equivalent
2. Depreciate for age and obsolescence
3. Add site value

= Capital value

or 5. Depreciate at a statutory decap rate for rating

= Rental value