Vals Flashcards
IVS 103 - valuation approaches
Income - convert current and future income into capital value (investment, residual, profits method)
Cost- reference to cost of the asset either by purchase or construction (Depreciated Replacement Cost method)
Market - using comparable evidence available (comparable method)
Comparable method
Search for /select comparables, verify details, assemble in schedule, adjust, analyse to form opinion of value, report value
RICS Comparable Evidence in Real Estate Valuation Professional Standard
2019
Outlines principles for using comparable evidence, advice for situations where there’s limited evidence , also sets out non- prescriptive hierarchy of evidence
Hierarchy of Evidence
non-prescriptive hierarchy. Valuer should use judgement on case-by-case basis.
- Direct Comps
- General market data
- Other sources
Investment Method
Used when there is an income stream to value. Rental income capitalised to produce capital value.
3 types of investment methods
Conventional method - rent or market rent multiplied by years purchase
Term and reversion - for reversionary investments. Term capitalised at initial yield until next lease event. Reversion to market rent valued into perp at reversionary yield.
Hardcore and Layer - over rented investments. Income split horizontally.
Bottom slice is market rent capitalised at initial yield.
Layer (top slice) is extra for the passing rent which is capitalised at higher yield until next lease event.
What is a yield?
A measure of investment return, expressed as a percentage.
Impict yield vs explicit
Implicit includes risk factor and prospect for growth.
Implicit includes assumptions and risks which are made explicit in DCF.
What risks are considered when determining yield
Prospects for rental growth
Location quality
Covenant strength of tenant
Use of property
Lease terms
Voids - what is the risk
What is the definition of a Return
Describes performance of a property
- measured retrospectively
- use DCF to find IRR
Initial Yeild
Simple income yield for Current rent / current price
Reversionary Yield
Market rent / current price on an investment let below market rent
Equivalent yield
Average weighted yield when a reversionary property is valued using an initial and reversionary yield
Running yield
The yield at any one time
Gross yeild
Not adjusted for purchasers costs
Net yield
Yield adjusted for purchasers costs
True yeild
Assumes rent is not paid in arrears
Nominal yeild
Assumes rent is paid in arrears
All risks yield
Remunerative risk of interest used in valuation of fully let property at market rent reflecting all risks and prospects attached to that investment
DCF
Growth explicit method of valuation.
Examines future net income and then discounting the cash flow to get to the current value.
Separates our and explicitly identifies growth assumptions rather than incorporating them into an implicit yield
When may a DCF be used
Properties with income voids or complex tenures
Phased development projects
Social housing
NPV
Net present value
Can be used to determine if an investment gives a positive return against a target rate of return
Positive NPV means that investment exceeds investors rate of return
IRR
Internal Rate of Return
Rate of return at which future cashflows must be discounted by to achieve an NPV of zero
Assess total return from an investment Opportunity making assumptions regarding rental growth, re-letting and exit assumptions
Profits Method
Used for valuations of trade related property which depends upon the profitability of its business or its trading potential not the physical building e.g hotel, pub or leisure.
Profits Method methodology
Need 3 years accounts , can use estimates if needed for new businesses.
Annual turnover, less costs/purchases, less reasonable working expenses, less operators remuneration = adjusted net profit AKA Fair Maintainable Operating Profit.
Fair Maintainable Operating Profit capitalised at years purchase multiplier to achieve market value
Residual Method
Most commonly used for valuation of a property holding to find market value of the site based on inputs.
GDV-TDC=residual site value
Elements of finance and
Calculation of finance
Bank of England base rate + premium OR rate at which developer can borrow money
- site purchase (compound on straight line basis)
- total construction costs (based on s-curve taking half the costs over length of build programme)
- holding costs (compound on straight line basis)
2 Types of development finance
Debt finance - money has been lended to you
Equity funding - own money used
Overage
Arrangement for sharing receipts of any extra receipts over and above originally expected profits in a pre-agreed formula
AKA claw back
Profit erosion period
The length of time that it will take for the development profit to be eroded by holding charges following completion.
Limits of residual method
Important of accurate info
Does not consider timing of cash flows
Sensitive to minor adjustments
Implicit assumptions not outlined like in a DCF
RICS professional standard : Valuation of Development Property
- Supplements IVS in relation to valuing development property.
Defines development property as ‘interests where redevelopment is required to achieve the highest and best use’
- typical basis is MV
- assumptions and SA’s must be clear
- use of residual and comparable method to cross reference
- a DCF may be used for complex or lengthy development schemes
- typically Val should report one single figure
Depreciated Replacement Cost Method
Method of last resort when there is limited/no available market evidence for specialised property e.g oil refinery or dilapidated castle with protections.
Owner-occupied property
Only suitable for accounts purpose or ratings valuations
Depreciated Replacement Cost Method Methodology
- Value land in existing use
- Add current cost of replacing building (BCIS) less a discount for depreciation or physical, functional or market obsolescence (judgement)
What is the Red Book
Called the RICS valuation- global standards. Effective 31.01.25.
Includes IVS
Provides valuers with mandatory and best practice guidance when undertaking valuations.
Structure of the Red Book
- Intro
- Glossary
- Professional Standards (PS 1-2)
- Valuation Performance and Technical Standards (VPS1-6)
- Valuation Practice Guidance Applications (VGPA 1-11)
- IVS
Key changes for new Red Book
Alignment with new IVS
New content on valuation modelling and methods in line with Indep Review of Real Estate Vals 2021
Updates material relating to ESG and use of AI in valuations.
Fair Value
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
RICS consider this to be generally consistent with Market Value
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
Market rent
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 in an arm’s length transaction, after proper marketing, where the parties acted knowledgeably, prudently, and without compulsion
Investment value
the value of an asset to a specific owner or prospective owner, considering their individual investment or operational objectives.
may also be known as “worth”
Assumptions vs Special Assumptions
Assumption is where it is reasonable for the valuer to accept that something is true with need for specific investigation.
Special Assumption is something that is not true at the valuation date which is taken to be fact. Must be agreed in writing with client at outset of valuation.
Margin of error
Permissible range allowed by the courts in respect of valuation.
Margin of error will vary according to complexity of the valuation. In line with case law.
Hope Value
The value arising from any expectation that future circumstances impacting the property may change.
E.g chance of gaining planning in the future.
Marriage value
AKA Synergistic value
Created by merger of separate interests. Before and After Valuation undertaken to assess level of marriage value created.
Typically split 50:50 or a pro-rata basis.
WAULT
Weighted Average Unexpired Lease Term
To calculate Weighted Average Unexpired Lease Term (WAULT), multiply each tenant’s annual rent by the years remaining on their lease, sum these products, and then divide the total by the sum of all tenants’ annual rents
Ransom strips
Piece of land which controls access to another piece of land.
Stokes v Cambridge set out a third of value in uplift in dev value can be awarded to owner of ransom. However, each case needs to be considered on its own merits
What needs to be included in valuation TOE?
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Minimum reporting requirements for a valuation
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Typical Val timeline?
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Internal vs external valuer
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Uk national supplement
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Valuations for Charities
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Building cost reinstatement valuations / estimations
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Zoning
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Analysis of rent free periods / headline rents
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