Valuation Flashcards
What does a value need to ensure prior to commencement of an instruction?
Competence, independence and terms of engagement
Purposes of a valuation
Loan security
Acquisition or disposal
Accounts
Internal
Five methods of valuation
Comparable, investment, residual, profits, DRC
Hierarchy of evidence categories
From what RICS document?
RICS comparable evidence in real estate valuations guidance notes 2019
Direct comparables/ General market data/ other sources
Hierarchy of evidence used in market practice
- Open market letting
- Lease renewals
- Rent review
- Third party determinations
- Sale and leasebacks
- Inter company transactions
Disadvantage of lease renewals and rent reviews over open market lettings
Include an element of goodwill
Time value of money
Money received now is worth more than the same amount in the future
Yield
Measurement of risk on return from investments
Rate of return that a purchaser is seeking in relation to a particular interest
High yield…
High risk/low growth/low YP/low capital value
Low yield…
Low risk/high growth/high YP/high capital value
YP
Years purchase
The number of years it will take for the income to repay the purchase price
Risk factors included in a yield
Prospects for rental and capital growth Quality of location and covenants Use of property Lease terms Voids Security and regularity of income
Investment valuation approaches
YP Perp
Term and reversion
Hardcore/ topslice
All risks yield
Yield reflecting all prospects and risks attached to the property
True equivalent yield
Yield assuming rent is paid quarterly in advance (not traditional valuation practice)
Nominal equivalent yield
Yield assuming rent is paid annually in arrears (usual valuation assumption, therefore refer to this more often)
Gross yield
Yields not adjusted for purchasers costs
Eg Auction comps on EI Group
Net yield
Yield adjusted for purchasers cost
Equivalent yield
Average weighted yield between net initial and reversionary
Initial yield
Yield applied to current income
NI/CV x 100
Reversionary yield
Yield applied to market rent
MR/CV x 100
Running yield
Yield at moment in time
Based on current income
Triple net yield
Yield after deducting empty rates, service charge shortfall and insurance shortfall costs that the landlord would have to pay
Based on true net income that landlord receives
Equated yield
Used in DCF
Yield takes into account growth in future income and accounts for growth explicitly
When would you adopt void costs?
When there is 5 years or less to lease expiry
RPI
Measurement of inflation published by ONS
Favoured by Landlords as benefit from bigger uplift and occurs more often
CPI
Measurement of changes to prices of goods and services
Types of Rent Reviews
Upwards only
Index linked (RPI/ CPI) - cap and collared
Fixed/ stepped rent
Turnover
Types of leases
FRI
Effective FRI
IRI
FRI
Tenant responsible for all repairs to property
Effective FRI
Landlord responsible for external repairs but can claim expense from Tenant, so effectively FRI
IRI
Tenant responsible for internal repairs only
Landlord responsible for external repairs
Types of voids
Marketing
Rent free
Purchasers Costs
Agents fees
Legal fees
Stamp duty
Why is there a yield gap between primary and secondary yields?
Reflects heightened risk due to: Obsolescence Longer voids Lower rental growth prospects Lower quality covenant/ location
DCF
Discounted cash flow
More complex and detailed version of investment valuation
IRR
Internal rate of return
Rate at which all future cashflows must be discounted to produce a NPV of 0
Used to assess the total return from an investment
Profits method
Used for trade related properties where there is a monopoly situation
Value is dependent on profitability of the business trading within the property as opposed to the physical bricks and mortar
Examples of properties valued using Profits
Pub
Hotel
Petrol station
Leisure and healthcare
DRC
Depreciated Replacement Cost
Used for specialist properties where there is limited market evidence
When should the DRC method be used?
METHOD OF LAST RESORT
Shouldn’t be used for Secured Lending vals
Example of properties valued using DRC
School/College
Lighthouses
Docks
Sewerage works
How calculate DRC?
- Value land as existing
- Add cost to build modern equivalent
- Deduct a discount for depreciation, age, and obsolescence
How do you calculate obsolescence?
Valuers judgement
Types of obsolescence
Physical
Functional
Economic
How do you assess the covenant strength?
Obtain creditsafe and analyse 3 years of audited accounts
Turnover/ pre-tax profit/ shareholders funds
What if financial information is dated?
Look on companies house
Conduct general research on web for articles about company eg info about new shareholders/ information about potential CVAs
What is an AWULT and how is it calculated?
Used for multi let properties to determine the average remaining term waited dependent on the amount of rent payable
Total Annual Rent x No. Years remaining
Add up all units
Divide total by total annual headline rent received
Ransom strip legislation
Stokes v Cambridge 1961
1/3 of development site value awarded to owner of ransom strip
Stamp duty land tax for non-residential/ mixed use
£0-£150,000= 0%
£150,000-£250,000= 2%
Over £250,000= 5%
Stamp duty land tax for residential
£0-£125,000= 0% £125,000-£250,000= 2% £250,000-£925,000= 5% £925,000-£1,500,000= 10% Over £1,500,000= 12%
0% SDLT UP TO £500,000 UNTIL JUNE 2021 DUE TO COVID RELIEF
Buy to Let SDLT
3% above residential rates
Institutional lease
Lease of a high/good standard, acceptable for an institution
Asset management opportunities
- Undertake refurbishment works
- Improve unexpired term through proactive re-gears and lease renewal initiatives
- Remove landscaping to open up circulation areas
- Improve rental tone at review/renewal
- Improve signage/branding
- Regear the head lease (if long leasehold and below 60 years)
What is net effective rent?
Rent following deduction of rent free period
Why didn’t you use the net effective rents?
Difficult to obtain and only reliable if got all info
Headline rents are more readily available and demonstrate what actually agreed
RICS Sustainability doc
RICS Sustainability and Commercial Property Valuation Guidance Note
Marriage Value
Additional element of value created by the combination of two or more assets, where the combined value is more than the sum of separate values
Turnover rent
Rent calculated by reference to turnover generated at the premises
Turnover rent typical in retail sector and usually combined with a fixed base rent that tenant is required to pay irrespective of turnover
Why do you include purchasers costs within an investment valuation?
Allows comparison of property against other assets and liabilities within a portfolio
Allows investor to see not return on income to compare with other net returns within portfolio
Why do you exclude purchasers costs from an owner occupier valuation?
Purchasers costs are usually additional costs that the purchaser incurs when buying property therefore does not reflect in offer
What would you do if there is a lack of retail comps due to Covid?
- Explain volatility of the market and advice should review valuation regularly
- Speak with agents
- Extend radius and adjust
New planning use classes
Class E – commercial business and service
Class F – local community and learning
Class A/ B1 / D - revoked
Aim of new planning use classes
Provides flexibility in not needing planning consent to change use if within same use class
When do the planning use class changes come into effect?
1 September 2020
Why do you use ITZA comps for retail?
Provides consistency as widely used valuation approach for retail
Enables identification of the rent based on the particular layout and configuration of the unit, and assesses the prime Zone A area of the unit
