VAL L2 - Charlton Flashcards
How did you determine the most appropriate valuation method?
Given that the block was fully let and produced an income stream, I identified the Investment Method as the most suitable valuation approach. The individual unit sizes were small, limiting their marketability for individual sale, meaning a sale of the entire block as an investment would achieve the highest and best value.
How did you establish the Gross Market Rent?
I analysed rental comparable evidence from co-living schemes in the immediate area. As there were limited comparables, I expanded my research to include similar schemes in wider locations, student accommodation blocks, and studio apartments. Adjustments were made for location, unit size, and amenity offering to derive an appropriate Market Rent.
How did you determine the Net Operating Income (NOI)?
I deduced operational costs from the Gross Market Rent. These costs were established by reviewing comparables schemes, analysing financial data from similar properties, and consulting my firm’s operational term to ensure accuracy.
How did you determine the Net Initial Yield (NIY)?
I complied a schedule of investment transactions for comparable blocks and analysed their yields. I ensured comparability by considering factors such as location, tenant covenant strength and specification.
Adjustments were made where necessary to align with the subject property.
How did you calculate the Fair Value?
I capitalised the Market Rent at the derived Net Initial Yield to establish the Capital Value. I then deducted the purchaser’s costs to reflect the net price a buyer would pay in the market, providing my opinion of Fair Value.
What challenges did you face in the valuation process, and how did you overcome them?
One challenge was the limited number of directly comparable co-living schemes in the immediate area. To address this, I expanded my search to include wider locations and alternative property types (e.g., student accommodation and studio flats). Another challenge was determining operational costs, which I overcame by consulting internal experts and reviewing comparable financial data.
What operational costs did you consider when calculating Net Operating Income (NOI)?
I considered a range of operational costs, including:
Management fees – Typically a percentage of rental income to cover property management services.
Repairs and maintenance – Routine upkeep and servicing of communal areas, mechanical and electrical systems, and furnishings.
Utilities and services – Costs associated with communal electricity, water, heating, and Wi-Fi provisions.
Void and bad debt provisions – An allowance for potential void periods and non-payment of rent.
Insurance costs – Covering the building and landlord liabilities.
Service charges (if applicable) – Any costs recoverable or payable for maintaining communal areas.
What is the Investment Method of Valuation?
The Investment method is a valuation approach used to determine the value of income-generating properties. It capitalised the expected income (Net Operating Income) at the appropriate yield derived from market transactions or similar properties.
What is Fair Value, and how does it differ from Market Value?
Fair Value defined by (IFRS 13) as ‘the price that would be received to sell an asset or paid to transfer a liability between market participants at the measurement date’.
Market Value as defined in the Red Book, is the estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction.
Fair Value may consider factors beyond market forces, such as specific investor requirements.
The RICS view is that this definition is generally considered consistent with the definition of Market Value.
What are the key considerations when selecting investment comparables?
Key considerations include: Location, Tenant profile and lease terms, Asset type and condition, Size and specification, Yield trends and market sentiment
What is Gross Yield?
The yield not adjusted for purchasers costs (such as an auction result)
What is Net yield?
The resulting yield adjusted for purchasers cost
What is Initial yield?
Simple income yield for current income and current price
What is IFRS 13?
IFRS 13 Fair Measurement - stated that a fair value measurement of a non-financial asset takes into account the highest and best use of the asset.
How did you ensure the operational costs were accurate and in line with market expectations?
I verified the operational costs by:
Reviewing financial data from comparable co-living schemes where available.
Consulting with my firm’s operational team, who manage similar properties, to confirm typical cost levels.
Analysing service charge budgets and historical expenditure data where applicable.
Cross-referencing against industry benchmarks and published data for similar asset types.
By triangulating multiple data sources, I ensured my cost assumptions were reflective of market norms.
Did you account for any void periods or letting risks in your valuation?
Yes, I factored in void risks by:
Reviewing historical occupancy levels for the subject property and comparable schemes.
Considering typical lease lengths and tenant churn rates within the co-living sector.
Applying a void allowance in my NOI calculation to reflect potential future vacancy periods.
Given that the block was fully let at the time of valuation, the risk of voids was low, but I still made an allowance based on market norms to ensure a prudent valuation approach.
Why did you provide an opinion of Fair Value rather than Market Value?
The valuation was conducted for accounts purposes, which typically required an opinion of Fair Value in accordance with IFRS 13. While the two definitions are similar, Fair Value may consider specific investor motivations, whereas Market Value is purely based on open market forces.
How would the valuation differ if you were valuing the block for loan security purposes?
For loan security purposes, a lender would typically require a Market Value assessment rather than Fair Value. The key differences would be:
Yield selection: I would need to consider a yield reflecting a typical buyer’s expectations rather than a specific investor’s assumptions.
Risk adjustments: A lender may expect a more cautious approach, factoring in potential void periods and operational risks.
Vacant possession scenario: Some lenders may also request a valuation assuming vacant possession to assess downside risk.
If a potential buyer intended to sell the units individually, how would this affect the valuation?
If a buyer intended to break up the block and sell the units individually, I would consider a Gross Development Value (GDV) approach, based on the aggregate Market Value of the individual units. However, I would also need to apply:
A discount for bulk sale, as an investor purchasing the entire block would typically seek a discount to reflect the risk and time involved in selling units separately.
Sales and marketing costs, including agency fees, legal costs, and potential incentives to attract buyers.
Holding costs, such as financing, service charges, and maintenance during the sales period.
Depending on market demand for small co-living units, the block’s total value might be higher or lower than its value as a single investment asset.
Did you carry out any sensitivity analysis in your valuation? If so, what were the key findings?
Yes, I conducted sensitivity analysis to assess how changes in key variables would impact the valuation. This included:
Yield sensitivity: I tested the impact of a ±25bps change in the Net Initial Yield, which showed a material impact on capital value.
Rental growth scenarios: I analysed different rental growth assumptions, factoring in both positive and negative market trends.
Void assumptions: I modelled potential void periods and their effect on Net Operating Income (NOI).
The analysis showed that yield movements had the most significant impact on valuation, highlighting the importance of selecting an appropriate market-derived yield.
What risks did you identify in this valuation, and how did you mitigate them?
Key risks included:
Limited rental comparables: The co-living market in the immediate area was not well-established, so I used wider market evidence and adjusted accordingly.
Operational cost uncertainty: As operational costs can vary significantly, I consulted my firm’s operational team and reviewed industry benchmarks.
Market fluctuations: Changes in interest rates and investor sentiment could affect yields and values. I accounted for this by using a market-derived yield range.
Liquidity risk: Co-living schemes have a niche investor pool, which could impact exit strategy. I addressed this by considering alternative use values
How would changes in market conditions, such as rising interest rates or shifts in tenant demand, impact your valuation?
Rising interest rates would likely lead to yield softening (increasing), reducing capital values as investors require higher returns.
Shifts in tenant demand could affect rental levels—if demand weakens, rental growth may slow, impacting income projections.
Economic downturn could increase void periods and operational costs, reducing Net Operating Income (NOI).
To account for these risks, I conducted sensitivity analysis and applied prudent assumptions to ensure my valuation reflected potential market volatility.
