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Mick's APC > Subs: Valuation > Flashcards

Subs: Valuation Flashcards

1
Q

What is an internal valuer?

A
  • Employed by a company to value their assets
  • Valuation for internal use only
  • No third-party reliance - not a red book complient valuation
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2
Q

What is an external valuer?

A

Has no material links with the asset to be valued or the client.

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3
Q

What are the THREE steps you should undertake prior to commencing a valuation?

A
  1. Competence - check you have the correct level of skills, understanding and knowledge
  2. Conflict of Interest - check you are able to act independently on the instruction
  3. Terms of engagement - issue to the client and receive written confirmation
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4
Q

Why do you undertake statutory due diligence for valuations?

A

Confirm that there are no material matters which could impact on the valuation

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5
Q

What types of statutory due diligence checks would you undertake when valuing a property? (Name 3)

A
  • Asbestos register
  • Business rates / Council tax
  • Contamination
  • Equality Act Compliance
  • Environmental matters (high voltage power lines, electricity sub-stations, telecoms masts etc.)
  • EPC rating if available
  • Flooding
  • Fire safety compliance
  • Health and safety compliance
  • Highways (check roads adopted with the local highways agency)
  • Legal title and tenure (check boundaries, ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves)
  • Public rights of way (from an OS sheet)
  • Planning history and compliance (check any onerous planning conditions, whether the property is in a conservation area / listed and subject to a s. 106 agreement or CIL)
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6
Q

What are the FIVE main methods of valuation?

A
  1. Comparable method
  2. Investment method
  3. Profits method
  4. Residual method
  5. Depreciated replacement cost method
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7
Q

What are the THREE valuation approaches set out in IVS 105?

A
  1. Income approach - converting current and future cash flows into a capital value
  2. Cost approach - reference to the cost of the asset whether by purchase or construction
  3. Market approach - using available comparable evidence
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8
Q

What are the SIX steps used when collecting comparable evidence?

A
  1. Search and select comparables (agent’s boards, online databases)
  2. Confirm / verify information with a party directly involved in the transaction
  3. Assemble comparables in a schedule
  4. Interpret comparables using hierarchy of evidence
  5. Analyse comaprables to form an opinion of value
  6. Report value and prepare file note
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9
Q

What guidance did the RICS recently release on using comparable evidence?

A

RICS Comparable evidence in real estate valuation, 2019

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10
Q

What are the THREE categories of evidence outlined in RICS Comparable evidence in real estate valuation, 2019?

A

Category A: direct comparables
Category B: general market data
Category C: other sources

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11
Q

When / how would you use the investment method of valuation?

A

Used when there is an income stream to value.

Rental income is capitalised to produce a capital value.

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12
Q

When would you use a Term and Reversion method? How does it work?

A
  1. Used for reversionary investments i.e. where Market Rent is more than passing rent
  2. Term capitalised until next rent review / lease expiry at an initial yield
  3. Reversion to Market Rent valued into perpetuity at reversionary yield
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13
Q

What is a yield?

A
  1. Measure of investment return, expressed as a percentage of capital invested
  2. Calculated as income divided by price x 100
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14
Q

What factors would you considering when determining a yield?

A
  • Prospects for rental and capital growth
  • Quality of location and covenant
  • Use of the property
  • Lease terms
  • Obsolescence
  • Voids
  • Security and regularity of income
  • Liquidity
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15
Q

What is an All Risks yield?

A

Yield which encompasses all the prospects and risks attached to a particular investment

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16
Q

What is a True yield?

A

Assumed rent is paid in advance (traditional valuation practice assumes rent is paid in arrears)

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17
Q

What is a Nominal yield?

A

Initial yield assuming rent is paid in arrears

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18
Q

What is a Gross yield?

A

Yield based on the net purchase price (i.e. not adjusted for purchasers’ costs)

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19
Q

What is a Net yield?

A

It is the yield once taking the annual rental income, deducting any costs and then dividing by the purchase price of a property. (adjusted for purchase costs)

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20
Q

What is an Equivalent yield?

A

Average time weighted yield reversionary property is valued using an initial and reversionary yield

21
Q

What is an Initial yield?

A

Simple income yield for current income and current price

22
Q

What is a Reversionary yield?

A

A yield which is applied to the Market Rent in the reversionary period into perpetuity.

23
Q

What is a Running yield?

A

Yield at one moment in time.

24
Q

When would you use the profits method of valuation

A

Used for the valuation of trade related property where the value of the property is directly linked to the profit generated by the business e.g. pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure, healthcare properties and care homes

25
Q

What is the hierarchy of evidence for establishing Market Rent?

A
  1. Open market lettings
  2. Lease renewals
  3. Rent reviews
  4. Third party determinations
  5. Sale and leasebacks
  6. Inter-company transactions
26
Q

What is an Assumption, as defined in the Red Book Global?

A

Supposition taken to be true and accepted as fact without the need for specific investigation

27
Q

What is a net effective rent?

A

This is the rent that would be agreed between the parties for a letting of the premises on the relevant terms and conditions, with the incentives forming part of the transaction.

28
Q

What is a capitalisation rate?

A

The cap rate is generally calculated as the ratio between the annual rental income produced by a real estate asset to its current market value.

29
Q

Outline the timeline of a valuation instruction…

A
  • Receive the instruction from client.
  • Check competent.
  • Check Conflicts of interest.
  • Issue terms of engagement.
  • Received Signed.
  • Gather information - lease, title docs etc.
  • Undertake due diligence - to check there are no matters that could impact value
  • Inspect / measure
  • Research market and assemble, verify and analyse comps.
  • Undertake valuation and produce report.
  • Competent surveyor check undertaking.
  • Finalise and sign report.
  • Report to client.
  • Invoice
  • Archive file
30
Q

How can you find comparable evidence?

A
  • Inspection of the local area to find recent market activity.
  • Visit / speak with local agents
  • Auction results
  • In-house data bases (comps schedule), websites / portals
  • Always verify
31
Q

When would you use the Layer / Hardcore method?

A
  • Used for overrented properties
  • Income flow is divided horizontally
  • Bottom slice = market rent
  • Top slice = Rent passing less market rent until next lease event
  • Higher yield is applied to top slice to reflect additional risk
32
Q

Risk is a major factor when determining a yield… What factors can affect this?

A
  • Prospect for rental/capital growth
  • Quality of location & covenant
  • Use of the property
  • Lease terms
  • Obsolescence
  • Voids
  • Security and regulatory of income
  • Liquidity
33
Q

What is Net Present Value (NPV)

A
  • Sum of the discounted cashflows of a project.
  • Used to determine if an investment gives a positive return against a target rate of return.
  • When NPV is positive, investment has exceed the target rate of return.
  • When NPV is negative, it has failed to meet target rate of return.
34
Q

What is an IRR?

A
  • The rate of return at which all future cashflows must be discounted to produce a NPV of zero.
  • Used to assess the total return of an investment making assumptions such as rental growth and exit assumptions.
35
Q

How do you calculate the IRR?

A

1) Input current market value as a negative cash flow (purchase price)
2) Input projected rents into cashflow as a positive value
3) Input projected exist value as a positive value
4) Discount rate (IRR) is the rate chosen which provides a NPV of zero.
5) If the NPV is more than zero, the the target rate of return is met

36
Q

What is the structure of the RICS Valuation - Global Standards 2021 (Red Book Global)?

A

1) Part 1 - Introduction
2) Part 2 - Glossary
3) Part 3 - Professional Standards (PS)
4) Part 4 - Valuation technical and performance standards (VPS)
5) Part 5 -Valuation Application (VPGA)
6) Part 6 - The International valuation Standards (IVS)

37
Q

What are some of the recent changes to the Red Book Global?

A
  • Terms of reference must be clear and unambiguous. Either they are RMG compliant or not.
  • Profits method of valuation for certain trade related property valuations such as self-storage, flexible work spaces etc.
  • Sustainability and ESG factors, particularly regarding:
  • Definitions in the glossary
  • Inspections and reporting - valuers should have regard to the relevance and significant of ESG and sustainability factors.
  • Physical and transitional risk. Examples include storm / flood risk. Indirect factors, reliance on carbon. Physical risks e.g wildfire. Transitional risks like regulatory change.
38
Q

What is on the front of the Red Book?

A

Red sphere, dissected into squares.

39
Q

What are the Red Book - RICS professional standards PS?

A

PS 1 - Compliance with standards and practices statements where a written valuation is provided.

PS 2 - Ethics, competency, Objectivity and disclosures.

40
Q

When does a valuation not have to be Red Book Compliant?

A

As per PS1 I am aware there are 5 exceptions outlined in the Red Book:

1) Advise is expressly provided for, or during negotiation or litigation.
2) The valuer is performing a statutory function.
3) The valuation is provided for a client purely for internal purposes.
4) The valuation is provided as part of agency and brokerage work.
5) Valuation advice as giving evidence as an expert whiteness.

41
Q

What are the Valuation Technical & Performance Standards (VPS - 5)?

A

VPS 1 - Terms of Engagement
VPS 2 - Inspection, Investigation and Records.
VPS 3 - Valuation Reports
VPS 4 - Bases of Value, Assumptions and Special Assumptions
VPS 5 - Valuation Approaches & Methods.

42
Q

What is Market Rent?

A

The estimated amount for which an interest in real property should be leased:

  • On the valuation date
  • Between a willing lessor and a willing lessee
  • On appropriate lease terms
  • In an arm’s length transaction
  • After proper marketing
  • Where both parties have each acted Knowledgably, prudently and without compulsion.
43
Q

What is Market Value?

A

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
  • Where both parties have each acted Knowledgably, prudently and without compulsion.
44
Q

What is the difference between the investment method and a market appraisal?

A

A market appraisal does not need to be red book compliant where as a development valuation does?

45
Q

Talk me through your valuation example at Sydenham…

A

This was to determine the Investment Value of a Industrial asset for Internal Valuation purposes (not RBC).

  1. I read the lease and other pertinent legal documentation available.
  2. Prepared a residual cashflow factoring in growth assumptions until next lease event.
  3. Applied a fixed target rate of return & suitable exit yield from using comparable evidence.
  4. Established the market rent of the area again using comps and the hierarchy of evidence.
  5. Appeared the asset had reversionary potential.
46
Q

Talk me through your valuation example in Bermondsey…

A

This valuation was for internal reporting purposes.

  1. I noted to my director that I would value the property against market rent and market value.
  2. To do this I used the comparable method of valuation.
  3. I gathered comparable market transactions from a variety of sources.
  4. I verified this with agents and CoStar.
  5. I was then able to conclude the properties value.
  6. Cross-verified using the investment method and special assumptions (void period, capitalising market rent into perpetuity, on appropriate yield).
  7. Prepared report / file note.
  8. Submitted to my director.
47
Q

What is the Red Book?

A

The RICS Red Book contains mandatory rules and best practice guidance for members that undertake asset valuations.

48
Q

What are the valuation technical and performance standards (VPS)?

A
  • VPS1 - Terms of Engagement
  • VPS2 - Inspection, Investigations & Records
  • VPS3 - Valuation Reports
  • VPS4 - Basis of Valuations
  • VPS5 - Valuation Approaches and Methods

Mick's APC (17 decks)

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