Valuation Flashcards
What is a Net Initial yield
Rent/ capital value plus purchasers costs
What is a Gross Initial yield
Rent/ capital value
What is an equivalent yield
weighted average between term and reversion yield
What is a nominal yield
The initial yield assuming rent is paid in arrears
What is a true yield
The initial yield assuming rent is paid in advance
What factors make up the all risks yield?
Risk, return and growth
What are the main contents of the Terms of Engagement for a Valuation?
A. Identification and status of valuer
B. Identification of the client
C. Identification of any other intended users
D. The asset to be valued
E. Currency
F. Purpose of the valuation
G. Basis of Valuer
H. Valuation Date
I. Extent of investigation
J. Nature and Source of the information to be relied upon
K. Assumptions and special assumptions
L. Format of the report
M. Restrictions for use, distribution and publication
N. Confirmation of Red Book/ IVS standards
O. Fee Basis
P. Complaints handling procedure to be made available
q. statement - compliance with RICS
r. limitation on liability agreed
What are the red book professional standards?
PS1 - compliance with standards and practice statements
PS2 - Ethics, competency,objectiviy and disclosures.
What are the red book valuation performance standards?
VPS 1 - Terms of engagement VPS 2 - Inspections VPS 3 - Reporting VPS 4 - Bases of value VPS 5 - valuation approach and method
What are the five exceptions to the valuation performance standards?
- Agency work
- Litigation or Negotiation (rent review)
- Internal purposes only
- Expert witness val
- Statutory basis
(ALIES)
What is the purpose of the red book?
Consistency, objectivity and transparency (COT)
What is an assumption?
Where it is reasonable for the valuer to accept something that is true without the need for specific investigation or verification.
What is a special assumption?
This is where the valuer assumes facts that differ from those existing at the valuation date
What does ‘material’ mean?
‘Material’ means where the degree of uncertainty…falls outside any parameters that might normally be expected and accepted’
What is the hierarchy of evidence?
Hierarchy gives broad indication of relative importance, but is not prescriptive
RICS Guidance Note Comparable Evidence in Real Estate Valuation 2019:
Category A – Direct comparables
Category B – General market data
Category C – Other sources
When might you have a shortage of evidence/how do you deal with it?
A common occurrence, for several reasons:
Inactive market, few transactions
Rapidly moving market, transactions soon become out of date
Unusual property
Lack of market transparency
Shortage of evidence likely to lead to valuation uncertainty
Give examples of the different bases of value?
Market Value, Market Rent, Fair Value, Investment Worth
What is the definition of MV?
“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 knowledgably,
prudently and without compulsion”.
What is the definition of MR?
“The estimated amount for which a property would be leased on
the valuation date between a willing lessor and a willing lessee on appropriate lease terms in
an arm’s length transaction, after proper marketing and where
the parties had each acted knowledgeably, prudently and without compulsion”.
What is the investment method?
When there is an income stream to value, the rental income is capitalised to produce a capital
value
Implied growth rate is derived from the market cap rate (yield)
Term ∧ reversion = reversionary when MR = more than passing)
Hardcore – over rented (passing rent more than MR) – market practise
What is a DCF?
Involves projecting estimated cash flows of an assumed investment holding period. The cash flow is then discounted back to the present day at a discount rate ( also known as rate of return to reflect perceived levels of risk)
Explain a DCF valuation?
Projected estimated cash flows of an investment. The cash flow if then discounted back to the present day at a discount rate ( also known as rate of return to reflect perceived levels of risk)
The investor will have a target rate
- Put the purchase price in one column
- Display the net income in a table. predicted cash flows for say 5 years
- Multiply these by PV of £1 at the target rate for the 5 years (future money)
- Assume an exit value at say 10 years and capitalise this at a market yield (reflecting risk) (In the case of leaseholds where the cash flow duration coincides with the lease expiry, the exit value will be zero, or may even be negative if dilapidations are expected)
- Add up all the discounted cash flows
- NPV = Discounted cash flows - purchase price
- If the NPV is more than 0 then the target rate is met
What is the Internal rate of return
It is the discount rate that makes the net present value (NPV) equal to zero
Explain a term and reversion?
Term
Passing rent capitalised using YP for the amount of years until the next rent review and an appropriate Yield
Reversion
-Markent rent capitalised using YP in perp using appropriate yield
x
-Discount using present value (PV) to give you a deffered YP until the next rent review
Add the term and the reversion to get the capital value
Talk me through Hardcore and slice method?
This is when the passing rent is higher than the MR
Bottom slice
Passing rent capitalised using YP at a market yield
Top Slice
MR - passing rent
Capitalised using YP until next rent review or lease end
Add together to get capital value
What red books have been in place since you’ve been a surveyor?
RICS Valuation – Global Standards 2017
RICS Valuation - Global Standards 2020
What international standards impact the real estate sector?
IFRS – financial reporting
International Valuation Standards (IVS)
International Property Measurement Standards (IPMS) - Property Measurement
International Ethics Standards (2016)
Example of Guidance Notes not in the Red Book / other guidance you might refer to when valuing?
Sustainability and commercial property valuation (2013)
Comparable evidence in real estate valuation (2019)
Conflicts of Interest 2017
What does ‘material’ mean?
‘Material’ means where the degree of uncertainty…falls outside any parameters that might normally be expected and accepted’
How do you record comparable evidence?
Tabular, spreadsheet or other as appropriate
Must be clear to valuer and others using the file
Rationale and relevance must be clear
Ranking of relative importance in relation to property being valued
How do you analyse comps?
Converting raw data into useable evidence
Identical units of comparison
Floor areas (net, gross, IPMS or local standard etc)
Lease terms (e.g repairing covenants)
Allowance for condition, age, location etc
When might you have a shortage of evidence/how do you deal with it?
Inactive market, few transactions
Rapidly moving market, transactions soon become out of date
Unusual property
Lack of market transparency
Shortage of evidence likely to lead to valuation uncertainty
Give examples of the different bases of value?
Market Value, Market Rent, Fair Value, Investment Worth
Tell me about the RICS valuer Registration Scheme?
It is risk monitoring quality assurance scheme which ensure compliance with the red book
- To improve the quality of valuation and ensure high professional standards
- To meet the RICS requirement to self regulate
- To protect and raise the status of the valuation profession
How would you adjust if outside and inside
Tenant paying more rent if inside the act,
Tenant pay more if inside the act - security
Did you look at net effective rents? How would you work this out?
A net lease is the opposite of a gross lease in terms of payment for utilities, taxes, repairs and any other additional expenses. In a net lease, the predetermined rent is typically lower and the additional costs aren’t included in that set rate.
What is the difference between CIL and S106?
Community Infrastructure Levy is a payment based the area or use, its charged to support facilities and infrastructure which support the development.
S106 agreements are legal agreements between Local Authorities and developers in terms of the planning obligations. The planning obligation will aim to balance out the pressure created by the development with improvements to the surrounding area.
How does the fact that the property is owner occupied affect the value?
Because the property is owner occupied you value it as vacant therefore there would be a discount for the fact that there is no tenant and therefore no income stream. You have to then build in a void period and associated costs before it reverts to market rent.
How often should valuations be carried out under the code?
5 yearly as a minimum but more regularly where a 5 yrly valuation is insufficient to keep pace with material changes to fair value.
What problems might you encounter when valuing a school adopting the DRC method?
When they have playing fields within the curtilage. This land will be considered separately from the land on which the buildings are constructed as no prudent purchaser would buy land with consent for residential or commercial development for use as a playing field. The potential on the existing site is not relevant in the DRC calculation, as the purchased of the equivalent asset would acquire land for which playing field use would be the only permitted form of development.
What is a positive and negative of the straight line method?
Simplicity = advantage
Does not represent the way in which asset values are normally reflected in the market place = disad.
Talk me through when you would value using the S-Curve.
Recommended where sufficient data is available for the valuer to be confident that the curve represents the likely reality. In some cases it presents the most realistic representation of the asset’s depreciation by assuming that depreciation is at a low rate in the early years, then accelerates in the middle years and reduces again in the final years.
You carried out an investment valuation of an industrial unit, can you tell me how you would value the property if it were vacant?
I would first use comparable method to value a vacant industrial but I would carry out a cross check using the investment method factoring in a void period to let. (deferring using PV £1 at net initial yield)
What is the net effective rent?
NER - this is spreading the cost of a rent free period (or stepped rent) till next review. For example if a 5 year lease is granted at a headline rent of £10,000 with a 1 year rent free period the net effective rent is 10,000 X 4 years paid / 5 year lease = 8,000 NER.
How would you factor in a void period?
Void periods can be factored in by deferring the capital value using PV £1. (use net initial yield)
What is the cipfa code
The Code specifies the principles and practices of accounting required to prepare financial statements which give a true and fair view of the financial position and transactions of a local authority.
Tell me about the proposed changes to the redbook?
- incorporating further emphasis on sustainbility and the envrionmenal social and coporate governance
- emphasis on the need to be clear on terms of engagement even for the exceptions (ALIES)
- quasi, non redbook shouldn’t be used but a statement explaining the departure from the redbook.
What do you know about the latest review of valuation?
There has been an independent review of Real Estate investment valuations.
- 13 recommendations listed. 3 pivotal recommendations;
- The creation of an independently-led valuation regulatory quality assurance panel.
- The creation of a formal Valuation Compliance Officer role to ensure standards are observed.
-The need for further RICS guidance to clarify RICS’ expectations around the culture and behaviours expected of RICS professionals in
valuation activities.
** Conflict of interest
Important for valuers to understand that conflict is not extinguished through declaration alone. And the assessment of conflicts of interest should be ‘absolute’, as they cannot be seen to be ‘negotiable’.
The RICS needs to strengthen valuers understanding of how they can apply RICS’ requirements, as set out in its Rules of Conduct.
What came first the rate per sq ft or the £9,500?
- The rate per sq ft
- It actually has been rounded down from £8.30 to make the £8.27
- GIllingstool, FRI old building so would be more
- Parkwall, similar but subject property has more funded children so slightly less
- Bowsland - very similar but slightly less as bowsland is a licence
Why take 5% when using the turnover?
Savills reported recently that turnover rents requested by retailers range from 1 to 15%, with an average of 7%. This figure was based on analysis of their rent negotiations in the UK, and pointed out that almost all details are in some way unique.
What is WAULT?
Weighted average unexpired lease term
Currently contracted rental income between now and the time the leases expire for any given tenant, summed across tenants, and then divided by the total annual income of the property.
The result is expressed in years.
What is an Arm’s Length Transaction?
Parties act independely without influencing each other
