Vals & Loan Sec Flashcards
What are the two types/definitions of valuer?
Internal valuer - employed by a company to value assets for internal use only
External valuer - has not material links with the asset of the client. Instructed to undertake work
What process should you go through prior to commencing an instruction?
Three steps
Check competence
Conflict of interest check - conflicts or personal interests
Set out terms of engagement - in writing, get signed
What statutory due diligence would you carry out for valuations?
Business rates/council tax
EPC rating
Flood risk (environment agency)
Contamination
Asbestos register/survey
Fire safety compliance
Planning history
Highways
Legal title and tenure
Public rights of way
What process would you go through during a valuation instruction?
Receive instructions
Check competence
Check independence and no conflicts of interest
issue terms of engagement and receive back signed by the client
Gather information - leases, title documents, floor plans, works etc
Inspect and measure
Research market and assemble
Undertake valuation
Draft report
Have valuation and report considered by a colleague
Finalise and sign off
Report to client
Issue invoice
Ensure file in good order for archiving
What are the 5 methods of valuation?
- Comparative method
- Investment method
- Profits method
- Residual method
- Depreciated replacement cost (contractor’s method)
What are the 3 valuation approaches under IVS 105?
Income approach - converting current and future cash flows into a capital value (similar to investment residual and profits methods)
Cost approach - reference to the cost of the asset whether by purchase or construction (i.e. DRC)
Market approach - using comparable evidence (i.e. comparative method)
What is the comparative method of valuation?
Using comparable evidence to ascertain a realistic value of an asset
Process:
Search and select comparables
Confirm/verify details and analyse
Consider hierarchy of evidence and adjust
Form opinion of value using best evidence available
What is the hierarchy of evidence?
Ranks the quality of comparable evidence and importance valuers should place upon each type
Category A - direct, contemporary comparables (ideally near-identical with full and accurate information, but weaker evidence can be used if considered carefully e.g. asking prices)
Category B - general market data e.g. commercial databases, indices, MSCI, historic evidence
Category C - other information e.g. evidence from other real estate types and locations, other background data such as interest rates/economy
What is the investment method of valuation?
Used when there is an income stream to value - rental income is capitalised at an appropriate yield
What is the difference between implicit and explicit valuations?
Implicit valuations imply assumptions around growth & costs within a yield (e.g. term and reversion)
Explicit valuation specify future expectations around growth, costs, inflation etc (e.g. DCF)
What is the term and reversion approach?
The term is capitalised at an initial yield until the next lease event (review/expiry)
The Market Rent is then capitalised in perpetuity at a reversionary yield
Typically used for under-rented properties
What is the Hardcore/layer approach?
Capitalise the market rent ‘bottom slice’ at an appropriate yield
Capitalise the ‘top slice’ which is the passing rent over and above the market rent, until the next lease event, at a higher yield to reflect the additional risk
Used for over-rented properties
What is Years Purchase?
The yield expressed as a number of years i.e. how many years for an asset’s income to total its purchase price.
Value divided by yield = YP
If the yield is 5% then YP = 20 i.e. 100/5
If the yield is 10% then YP = 10 i.e. 100/10
What is a yield?
The income/return of a property expressed as a % of capital invested/value
Income divided by price x 100
What factors impact a yield/what does a yield reflect?
Risk and Growth.
Prospects for rental growth
Future demand
Quality of location
Covenant
Use
Lease terms
Obsolescence
Voids
Security of income
Liquidity - ease of sale
All risks yield
an implicit yield used in an investment valuation that reflects all of the risks & growth prospects of the subject property
True yield
Assumes rent is paid in advance not in arrears (this is the reality but valuation practice assumes rent is paid in arrears)
Nominal yield
Assumes rent is paid annually in arrears
Gross yield
The yield of a property against the gross purchase price i.e. not adjusted for costs
Net yield
The yield of a property once the price has been adjusted for purchaser’s costs
Equivalent yield
Average weighted yield - considers the entire income flow as opposed to just initial or reversionary
Initial yield
Yield reflecting the initial rent (current income current price)
Reversionary yield
Yield reflecting the rent upon reversion against current price/value (future income current price)
Running yield
The yield at one moment in time
What’s your understanding of where yields are currently?
Offices:
West end prime - 4% (Mayfair) 4.5/4.75% (Soho/fitzrovia)
City prime - 5.5-5.75%
South east towns 7%-8% or 10%+ for secondary
FLIGHT TO QUALITY
Retail:
Prime towns 6.75%
Bond Street 2.75-3%
Oxford Street 4.5%
Supermarkets:
5-5.5% - morrisons higher than tesco/sainsburys
Industrial:
Prime c. 5%, can be stronger inside M25
Estates c. 5.25-5.5% prime or 6.5-7% secondary
Residential:
Prime London c. 5% (e.g. Zone 2 good quality)
What is the discounted cash flow (DCF) technique?
A form of investment method/income approach
Growth explicit
Take future incomes and expenses, including exit yield/price, and discounts those to arrive at a current value
used for valuations where cash flows are explicitly estimated over a period of time e.g. short leasehold interests, social housing, some alternative investments
Net Present Value (NPV)
The sum of discounted cash flows of the project, can be compared against target rate of return
Internal Rate of Return (IRR)
The rate of return/discount rate that makes the NPV of a project zero, used to assess the total return from an investment opportunity