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RICS > Valuation > Flashcards

Valuation Flashcards

1
Q

What does a value need to ensure prior to commencement of an instruction?

A

Competence, independence and terms of engagement

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2
Q

Purposes of a valuation

A

Loan security
Acquisition or disposal
Accounts
Internal

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3
Q

Five methods of valuation

A

Comparable, investment, residual, profits, DRC

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4
Q

Hierarchy of evidence categories

From what RICS document?

A

RICS comparable evidence in real estate valuations guidance notes 2019

Direct comparables/ General market data/ other sources

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5
Q

Hierarchy of evidence used in market practice

A
  1. Open market letting
  2. Lease renewals
  3. Rent review
  4. Third party determinations
  5. Sale and leasebacks
  6. Inter company transactions
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6
Q

Disadvantage of lease renewals and rent reviews over open market lettings

A

Include an element of goodwill

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7
Q

Time value of money

A

Money received now is worth more than the same amount in the future

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8
Q

Yield

A

Measurement of risk on return from investments

Rate of return that a purchaser is seeking in relation to a particular interest

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9
Q

High yield…

A

High risk/low growth/low YP/low capital value

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10
Q

Low yield…

A

Low risk/high growth/high YP/high capital value

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11
Q

YP

A

Years purchase

The number of years it will take for the income to repay the purchase price

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12
Q

Risk factors included in a yield

A 
Prospects for rental and capital growth
Quality of location and covenants
Use of property
Lease terms
Voids
Security and regularity of income
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13
Q

Investment valuation approaches

A

YP Perp
Term and reversion
Hardcore/ topslice

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14
Q

All risks yield

A

Yield reflecting all prospects and risks attached to the property

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15
Q

True equivalent yield

A

Yield assuming rent is paid quarterly in advance (not traditional valuation practice)

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16
Q

Nominal equivalent yield

A

Yield assuming rent is paid annually in arrears (usual valuation assumption, therefore refer to this more often)

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17
Q

Gross yield

A

Yields not adjusted for purchasers costs

Eg Auction comps on EI Group

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18
Q

Net yield

A

Yield adjusted for purchasers cost

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19
Q

Equivalent yield

A

Average weighted yield between net initial and reversionary

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20
Q

Initial yield

A

Yield applied to current income

NI/CV x 100

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21
Q

Reversionary yield

A

Yield applied to market rent

MR/CV x 100

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22
Q

Running yield

A

Yield at moment in time

Based on current income

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23
Q

Triple net yield

A

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

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24
Q

Equated yield

A

Used in DCF

Yield takes into account growth in future income and accounts for growth explicitly

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25
Q

When would you adopt void costs?

A

When there is 5 years or less to lease expiry

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26
Q

RPI

A

Measurement of inflation published by ONS

Favoured by Landlords as benefit from bigger uplift and occurs more often

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27
Q

CPI

A

Measurement of changes to prices of goods and services

28
Q

Types of Rent Reviews

A

Upwards only
Index linked (RPI/ CPI) - cap and collared
Fixed/ stepped rent
Turnover

29
Q

Types of leases

A

FRI
Effective FRI
IRI

30
Q

FRI

A

Tenant responsible for all repairs to property

31
Q

Effective FRI

A

Landlord responsible for external repairs but can claim expense from Tenant, so effectively FRI

32
Q

IRI

A

Tenant responsible for internal repairs only

Landlord responsible for external repairs

33
Q

Types of voids

A

Marketing

Rent free

34
Q

Purchasers Costs

A

Agents fees
Legal fees
Stamp duty

35
Q

Why is there a yield gap between primary and secondary yields?

A 
Reflects heightened risk due to:
Obsolescence 
Longer voids
Lower rental growth prospects
Lower quality covenant/ location
36
Q

DCF

A

Discounted cash flow

More complex and detailed version of investment valuation

37
Q

IRR

A

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

38
Q

Profits method

A

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

39
Q

Examples of properties valued using Profits

A

Pub
Hotel
Petrol station
Leisure and healthcare

40
Q

DRC

A

Depreciated Replacement Cost

Used for specialist properties where there is limited market evidence

41
Q

When should the DRC method be used?

A

METHOD OF LAST RESORT

Shouldn’t be used for Secured Lending vals

42
Q

Example of properties valued using DRC

A

School/College
Lighthouses
Docks
Sewerage works

43
Q

How calculate DRC?

A
  1. Value land as existing
  2. Add cost to build modern equivalent
  3. Deduct a discount for depreciation, age, and obsolescence
44
Q

How do you calculate obsolescence?

A

Valuers judgement

45
Q

Types of obsolescence

A

Physical
Functional
Economic

46
Q

How do you assess the covenant strength?

A

Obtain creditsafe and analyse 3 years of audited accounts

Turnover/ pre-tax profit/ shareholders funds

47
Q

What if financial information is dated?

A

Look on companies house

Conduct general research on web for articles about company eg info about new shareholders/ information about potential CVAs

48
Q

What is an AWULT and how is it calculated?

A

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

49
Q

Ransom strip legislation

A

Stokes v Cambridge 1961

1/3 of development site value awarded to owner of ransom strip

50
Q

Stamp duty land tax for non-residential/ mixed use

A

£0-£150,000= 0%
£150,000-£250,000= 2%
Over £250,000= 5%

51
Q

Stamp duty land tax for residential

A 
£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

52
Q

Buy to Let SDLT

A

3% above residential rates

53
Q

Institutional lease

A

Lease of a high/good standard, acceptable for an institution

54
Q

Asset management opportunities

A
  1. Undertake refurbishment works
  2. Improve unexpired term through proactive re-gears and lease renewal initiatives
  3. Remove landscaping to open up circulation areas
  4. Improve rental tone at review/renewal
  5. Improve signage/branding
  6. Regear the head lease (if long leasehold and below 60 years)
55
Q

What is net effective rent?

A

Rent following deduction of rent free period

56
Q

Why didn’t you use the net effective rents?

A

Difficult to obtain and only reliable if got all info

Headline rents are more readily available and demonstrate what actually agreed

57
Q

RICS Sustainability doc

A

RICS Sustainability and Commercial Property Valuation Guidance Note

58
Q

Marriage Value

A

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

59
Q

Turnover rent

A

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

60
Q

Why do you include purchasers costs within an investment valuation?

A

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

61
Q

Why do you exclude purchasers costs from an owner occupier valuation?

A

Purchasers costs are usually additional costs that the purchaser incurs when buying property therefore does not reflect in offer

62
Q

What would you do if there is a lack of retail comps due to Covid?

A
  1. Explain volatility of the market and advice should review valuation regularly
  2. Speak with agents
  3. Extend radius and adjust
63
Q

New planning use classes

A

Class E – commercial business and service

Class F – local community and learning

Class A/ B1 / D - revoked

64
Q

Aim of new planning use classes

A

Provides flexibility in not needing planning consent to change use if within same use class

65
Q

When do the planning use class changes come into effect?

A

1 September 2020

66
Q

Why do you use ITZA comps for retail?

A

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

RICS (19 decks)

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