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HD APC OCT 21 > Valuation > Flashcards

Valuation Flashcards

1
Q

What are the first steps you should take at the start of any valuation?

A
  1. Are you competent?
    —> SUK
    —> Skill, Knowledge, Understanding
  2. Conflict checked
  3. Terms of engagement
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2
Q

What are some examples of due diligence necessary for any valuation?

A 
Asbestos
Contamination
Environmental matters
EPC
Flooding
Title
Tenure
Planning history
Public rights of way 
Fire safety 
Rates and council tax
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3
Q

What are the main methods of valuation?

A
  1. Comparison
  2. Investment
  3. Residual
  4. Profits
  5. Costs
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4
Q

Please describe how you would use the comparison method to value a property.

A
  1. Source comparables
  2. Verify and analyse to get a net effective rent
  3. Create schedule of comps
  4. Adjust comps to subject using hierarchy of evidence
  5. Form opinion of value (MR or MV)
  6. Report and save file note
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5
Q

When using the comparison method, is there any specific guidance you might adhere to?

A

RICS GN ‘Comparable Evidence in Real Estate Valuation’ 2019.

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6
Q

Please outline why ‘Comparable Evidence in Real Estate Valuation, 2019’ is important?

A

It set out the hierarchy of evidence. This is important for all valuation, but most important to the comparison method.

Cat A = Direct comparable

  • completed transactions near identical
  • completed transaction similar
  • under offer similar
  • asking prices

Cat B = General market data

  • databases
  • historic evidence
  • supply / demand

Cat C = other sources
- interest rates etc.

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7
Q

What makes a good comparable?

A

The best comparable will be an almost identical property, next door to the subject property which transacted yesterday and you have fully information on the deal. Think:

  • recency
  • location
  • similarity
  • transparency
  • arms length
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8
Q

How would you find comparable evidence?

A
  • Inspection (GOAD and boards)
  • CoStar
  • Agents
  • Auctions
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9
Q

What would you do when there is a lack of comparable evidence?

A

Have to rely on older data and asking prices. Also consider Cat B evidence like demand and supply data. Always consider market sentiment.

Could also look at using an alternative valuation method which is less based on comparable evidence. Seek prof. advice as not competent.

Also consider VPGA 10 due to the market uncertainty.

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10
Q

When would you use the investment method?

A

When you have an income producing asset and a decent pool of similar comparable evidence to rely upon.

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11
Q

Please outline the basics of the investment method.

A

The capitalisation of a properties current and future income streams at an appropriate capitalisation rate to produce a value.

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12
Q

When would you use the term and reversion method?

A

I would use the term and reversion when the properties passing rent is below the market level. I would capitalise the passing rent until the reversion in annuity, and then capitalise the market rent at a higher yield in perpetuity, discounting the uplift to account for its delayed start, an the time value of money.

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13
Q

Please describe how and when you would use the layer and hardcore method.

A

I would use the layer and hardcore method when the property is over rented. I would capitalise the core in perpetuity at a lower yield, as it is guaranteed. I would then capitalise the layer at a higher yield, to reflect its higher risk, in annuity, until the point where it could fall eg. LR / Break.

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14
Q

If you had a rack rented property, how would you value the property?

A

I would value the property in perpetuity. I would calculate the years purchase using my assumed all risks yield. This is done by multiplying the yield’s YP with the rental income to come to a capital value.

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15
Q

What is the purpose of a yield?

A

It reflects the annual return on an investment, expressed as a percentage. In property, it represents the rental income in proportion to the capital value of the property.

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16
Q

What are current prime yields in:

  1. Office
  2. Retail
  3. Industrial
A

Prime

  1. 3.25%
  2. 6.00% (high street)
  3. 3.50%
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17
Q

What is an all risks yield?

A

Used on a fully let property at market rent. Growth and risk implicit and used to YP an income stream to get a capital value.

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18
Q

What is an initial yield?

A

The yield initially achieved when purchasing a property. This will be the passing rent over the price paid for the property. Growth implicit all risks yield.

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19
Q

What is a reversionary yield?

A

The yield you will receive on reversion. This is the market rent over the CAPITAL VALUE of a property.

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20
Q

What is an equivalent yield?

A

The weighted average yield between the initial and the reversionary yield.

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21
Q

If you had to calculate investment value under the investment method, how would you do it? Please also describe the process.

A

DCF

  1. Estimate cash flow
  2. Estimate exit value
  3. Select discount rate
  4. Discount CF
  5. Sum of discounted CF is NPV
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22
Q

What is the NPV?

A

It shows the investment will likely give a positive return at the investors target rate of return.

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23
Q

What is the IRR?

A

An IRR is the discount rate at which the NPV of all income streams will equal zero. Used to assess investment quality.

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24
Q

Please outline when you would use the profits method.

A

The profits method is used to value the profitability of a business trading from a specific unit. It is often used for assets which rarely transact and have limited comparable evidence e.g. pubs, pharmacies etc.

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25
Q

Please outline the basic process of the profits method.

A
  1. Get three years audited accounts for the business
  2. Calculate a fair maintainable operating profit
  3. Capitalise at yield to calculate MV
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26
Q

What is the purpose of the residual method?

A

A tool to financially assess either:

  1. Viability of development (development appraisal); or
  2. Establish suitable site value (residual site valuation)
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27
Q

Please outline the general method of a residual valuation.

A
  1. Calculate value of completed development
  2. Deduct costs of construction
  3. Deduct developers profits
  4. Deduct cost of finance
  5. Remainder is residual site value
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28
Q

What are the limitations of the residual method?

A
  1. Reliant on accurate inputs
  2. Small adjustment can mean big change
  3. Doesn’t consider the timing of payments
  4. Deals with finance in basic manner
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29
Q

What guidance is available with regards to the residual method?

A

RICS GN ‘Valuation of Development Property’ 2019:

  • cross check with other vals
  • sensitivity analysis
  • DCF for complex schemes
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30
Q

What is the DRC method used for?

A

DRC is used when a unique asset that does produce an income, or an attributable income, is to be valued.

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31
Q

What is the general method of the DRC?

A
  1. Value land, assuming planning is granted.

2. Deduct costs of rebuilding the building on the site, depreciating it afterwards.

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32
Q

What are the sections of the RICS global standards?

A
  1. Intro
  2. Glossary
  3. Professional standards (PS)
  4. Valuation technical & performance standards (VPS)
  5. Valuation applications (VPGAs)
  6. International Valuations standards (IVS)
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33
Q

What role does IVS play in the formation of the red book?

A

They are the global standard setter for professional valuation. Therefore, there policy on best practice is implemented into the real estate valuation profession via the Red Book. We can see IVS 101-105 as reflected in VPS 1-5 for example.

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34
Q

What is the benefit of IVS’ involvement in the formation of the red book?

A

Transparency
Consistency
Confidence

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35
Q

When was the latest version of the red book effective from? What were the changes?

A

January 2020

  • PS1 where written can now mean AVM
  • PS2 where “professional scepticism” now mandatory
  • VPS3 reinforcing that reports must state valuation approach, rational and a new focus on sustainability
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36
Q

What is PS1?

A

Compliance with standards where a written valuation is provided.
- basically, when is a valuation a red book valuation?

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37
Q

When is a valuation a red book valuation?

A

All valuations are red book valuations apart from the following:

  1. Negotiation / litigations
  2. Statutory function
  3. Internal purposes
  4. Agency
  5. Expert witness
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38
Q

What is PS2?

A

Ethics, competency, objectivity, disclosure.

  • must comply with 5 global ethical standards and rules of conduct
  • must remain objective, implement conflict check and use “prof. Scepticism”
  • terms of engagement should understand requirements, comply w/ VPS1 and show competence
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39
Q

What is professional scepticism?

A

New requirement to not just take information or evidence at face value. If it seems irregular or doesn’t make sense, look into it or omit it.

40
Q

What is VPS1? Please give an outline.

A

Terms of engagement. Sets out the 18 minimum requirements.

  1. ID valued
  2. ID client
  3. ID other intended users
  4. ID asset
  5. Currency
  6. Purpose
  7. Basis
  8. Date
  9. Investigation
  10. Source of info
  11. Assumption / special
  12. Format
  13. Restrictions of use
  14. Confirm red book compliance
  15. Fees
  16. Complaints procedure
  17. Statement of RICS compliance
  18. Liability limitations
41
Q

What is an assumption? How does it differ from a special assumption?

A

Assumption = made were reasonable for valuer to accept something is true, without full investigation

Special = supposition taken as fact, even though it’s not true

42
Q

What is VPS 2?

A

Inspection, investigation and records.

  • Valuers must take necessary steps to verify info.
  • covers desktop assessments which remain red book. Should agree restriction in terms of engagement and state in report
  • covers re-valuation without inspection. Acceptable where no material change. Confirm in terms and state in report
43
Q

What is VPS 3? Please outline what it includes.

A

Valuation reports - Min 16 requirements:

  1. ID valuer
  2. ID client
  3. ID asset
  4. Purpose
  5. Basis
  6. Date of val
  7. Investigation
  8. Source of info.
  9. Assumption / special
  10. Restrictions on use
  11. Accordance w/ RICS
  12. Val approach / rational
  13. Val figure(s)
  14. Date of report
  15. Market uncertainty (VPGA 10)
  16. Limitations to liability
44
Q

What does VPS 3 say about giving draft valuation advice?

A

Can be given but must:

  1. Label as draft
  2. Not let val be influenced by client comments
  3. Later amendments must be documented w/ rationale.
45
Q

What is VPS 4?

A

Basis of value, assumptions and special assumptions.

46
Q

What are the RICS basis of value?

A

Know in detail:

  1. Market value
  2. Market rent
  3. Fair value
  4. Investment value

Know of, but not used in UK:

  1. Equitable value
  2. Liquidation value
47
Q

What is market value?

A

The estimated amount for which an asset or liability should exchange:

  • valuation date
  • willing buyer / seller
  • arms length
  • proper marketing
  • knowledgeably, prudently, without compulsion
48
Q

What is market rent?

A

The estimated amount for which an interest in real property should lease:

  • valuation date
  • willing lessor / lessee
  • appropriate lease terms
  • arms length
  • proper marketing
  • knowledgeably, prudently, without compulsion
49
Q

What is fair value?

A

Under IFRS 13: “the price which would be recieved to sell an asset, or paid to transfer a liability in:

  • orderly transaction
  • market participants
  • measurement date
50
Q

What is investment value?

A

The value of an asset to a:

  • particular owner
  • individual investment; or
  • operational objective
51
Q

What are VPGAs?

A

Valuation Practice Guidance Applications. Under Red Book Global, 10 in total. The represent best practice for certain types of valuation.

52
Q

What are some important VPGAs

A

1 - valuation for inclusion in financial accounts. FAIR value.

2 - valuation for secured lending. Greater detail on conflicts (involvement in past 2 years refused) and more detail in reporting and due diligence

8 - valuation of real property interests. Covers inspection, investigation w/ new focus on environment and sustainability

10 - matters that may give rise to material uncertainty. Reports must not mislead. Draw attention to areas of uncertainty. RICS Covid practice alerts November 2020.

53
Q

What are included in international valuation standards of the red book?

A
  1. General standards
    - terms of engagement
    - approaches
    - bases
    - reporting
  2. Asset standards
    - requirements for asset type
54
Q

What is the purpose of the uk national supplement?

A

Ensures UK Red Book augments red book global. Sets specific requirements for UK jurisdiction w/ 18 other VPGAs. Examples:

  • gov assets
  • local authority assets
  • charities
  • financial reporting etc.
55
Q

What is the acceptable margin of error in a valuation?

A

No set margin as it varies with complexity. General guide is 10%.
—> Singer & Friedlander v J. D. Wood

56
Q

What is hope value?

A

The value attributed to the potential future circumstances eg. Planning.

57
Q

What assists with the valuation of a charity?

A

VPGA 8

- must advise if it’s in their best interest

58
Q

What are purchasers costs?

A
  1. SDLT - variable
  2. Agents fees - 1%
  3. Solicitors fees - 0.5%
59
Q

What is a premium?

A

A payment made from on party to another to account for the transfer of a benefit:

  • prime location
  • surrender
  • removal or term
  • profit rent
60
Q

What is the WAULT?

A

Weighted average unexpired lease term.

  • to break / lease end
  • used to analyse multi-let investments
  • can include rent on weighted basis
61
Q

What is SDLT?

A

A tax paid on the transfer of real property interests (sale and letting). Bands are progressive.

Sale:
£0 - £150k = 0%
£150k - £250k = 2%
£250+ = 5%

On lettings, done in NPV of all rents across term, discounted at RPI:
£0 - £150k = 0%
£150k - £5m = 1%
£5m + = 2%

62
Q

Why must you analyse headline rents with the rent free? How might you do this?

A

To understand the real rent agreed (effective rent). Common to deduct 3 months rent free before devaluing.

  1. Straight line method
  2. Straight line w/ yields
  3. DCF
63
Q

What is the purpose of the RICS Valuer Registration Scheme (VRS)?

A
  1. Ensure quality and high professional standards
  2. Meet RICS self regulation requirements
  3. Raise status of valuation profession

Will give client transparency, confidence and protection.

64
Q

How do you become a RICS registered valuer?

A

Level 3 vals or subsequent qualification logging a series of vals and time. Must pay sub fee to remain.

65
Q

What was the basis of value in your Covent Garden example?

A

Market Value

66
Q

Is there any additional guidance for tax planning valuations?

A

There is under VPGA 15 in the UK national supplement

67
Q

What does the additional guidance say for tax planning valuations under VPGA 15?

A

It provides guidance and advice on some factors to consider for specific tax valuations with case law in difficult cases.

68
Q

What method within the investment method did you use in your Covent Garden valuation? Why?

A

Hardcore and Layer as its overrented

69
Q

Please talk me through the Hardcore and layer process.

A

Value the hardcore into perp. at lower yield. Value layer in annuity at higher yield.

70
Q

What type of yield did you use in your Covent Garden valuation? Why?

A

Equivalent at 4.5% increasing this to 4.75% for the layer. EY as comps were rack rented. Wouldn’t be appropriate to compare initial yield of subject to rack rented comparables.

71
Q

Why did you adjust your yield between the hardcore and the layer in your Covent Garden example? What factors did you consider?

A

As the property was overrented, this all relates to risk. In this instance, short term remaining, slow lettings market, overrented.

72
Q

What were your void and rent free assumptions in your Covent Garden example? How did you estimate these?

A

12 months void and 6 months rent free. Gauged this off a limited pool of comparables plus calls with agents.

73
Q

Define market value

A

The estimated amount for which an asset or liability would exchange on the valuation date between a willing buyer and willing seller, in an arms length transaction, after proper marketing, and where each side has acted knowledgably, prudently and without compulsion.

74
Q

As there was a lack of evidence in your Covent Garden example, did the RICS provide any guidance on this?

A

Yes - VPGA 10 ‘Matters that may give rise to material uncertainty. We did include this clause on our valuation as, at the time, the market was inherently uncertain.

75
Q

What was the passing rent in your Covent Garden example? What was your ERV?

A

Passing £95,000 pa but ERV was lower at £51,000 pa (£180 ZA)

76
Q

What were your floor areas in your Covent Garden example?

A

909 sq. ft. over ground and basement. ITZA was 283 sq. ft.

77
Q

What was you final valuation figure in your Covent Garden example?

A

£945k

78
Q

Was you Hoddesdon example a Red Book valuation?

A

No - As it was for internal purposes, this was not a Red Book valuation.

79
Q

What are the five exemptions from Red Book valuations?

A

Agency, Internal, Statutory, Independent Expert, Negotiation/Litigation

80
Q

What were the differences in specification between the new and old units in your Hoddesdon example?

A

New had steel portal frame, insulated steel sheet cladding, 6m eaves, 4.5m roller shutter. Old had steel portal frame, cinder block and corrugated steel cladding w/ asbestos insulation, 4.5m eaves and 4m roller shutter.

81
Q

What was the passing rents in the older and newer units in Hoddesdon?

A

£5.50 - £6.00 per sq. ft. in the old and £9.50 per sq. ft. in the new.

82
Q

What is the WAULT?

A

The weighted average unexpired lease term.

83
Q

How did you analyse the covenant strength of each tenant in Hoddesdon?

A

D&B checks

84
Q

What valuation methods did you use within the investment method for Hoddesdon?

A

Term and reversion.

85
Q

What were the yields you applied in Hoddesdon?

A

Initial yields. 4.25% to the newer units and 5.50% to the older units.

86
Q

What were your void and rent free assumptions in Hoddesdon?

A

3 / 3

87
Q

Please outline the 5 VPS

A 
VPS1 = Terms of engagement
VPS2 = Inspection, Investigation, Records 
VPS3 = Reporting 
VPS4 = Basis of value, assumption, special assumptions
VPS5 = Valuation approaches and methods
88
Q

Please outline the 2 PS

A 
PS1 = Compliance where a written valuation is given
PS2 = Ethics, competency, objectivity, disclosure
89
Q

What are the three types of valuation under IVS?

A

Market, Income, Cost (Made in Chelsea)

90
Q

Please outline the process under the DRC.

A

Work out land value assuming it has planning permission. Then add the cost of replacing the building, discounting it for depreciation and obsolescence.

91
Q

Please outline the process of the profits method.

A

Annual turnover less costs, working expenses and operators remunerations equals Fair Maintainable Operating Profits. Then capitalise this to reach value.

92
Q

What are regulated purpose valuations?

A

Valuations relied on by third parties who have not commissioned the valuation.

93
Q

What section of the red book governs regulated purpose valuations?

A

VPS 3 under the UK supplement

94
Q

What are some examples of regulated purpose valuations?

A

Financial reporting, fund valuations, takeovers and mergers

95
Q

Do you have another example of a valuation you have been involved in?

A

Portman Square

96
Q

What did you learn in your CPD on Comparable Evidence in RE Valuation.

A

Layout of the new hierarchy, how it differs and how evidence should be considered in markets with limited evidence.

HD APC OCT 21 (18 decks)

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