Valuation Flashcards
What is the DRC method?
Not a basis of valuation but a method – value land in existing use, add current cost of replacing building plus fees less discount for depreciation.
NOT for loan security, MV only for financial statements, must report alternative use values where appropriate
What is the profits method?
Trade related – monopoly position (3 years of audited accounts)
Income – costs = gross profit – less expenses & operator’s remuneration = adjusted Net Profit. Capitalised at yield
What are the 5 methods of Valuation?
- Investment
- Comparison
- Residual
- Profits
- DRC – Depreciated Replacement Cost
What is some Statutory Due Diligence you would do before undertaking a valuation?
- Asbestos register
- BR/Council tax
- Contamination
- Equality Act compliance
- Environmental matters
- EPC
- Flooding
- Fire safety
- Health & Safety
- Highways
- Legal title
- Planning history
What are the benefits of the Valuation Registration Scheme?
- Improve quality and ensure professional standards
- Meets RICS requirement to self-regulate
- Raise status of valuation profession
What is VPGA 10?
VPGA 10 – Valuation in markets susceptible to change
• Valuer should draw attention to the issue affecting the certainty
• Should consider using special assumptions and sensitivity analysis
• Degree of uncertainty caveat must be specific to each valuation
What is UKVS4?
UKVS 4 – Regulated Purpose Valuations
• 3rd Party Reliance
- 5 Purposes: Financial Statements, Stock Exchange Listings, Takeovers and Mergers, Collective investment schemes, unregulated property unit trusts
- Rules to comply with: cannot value if firm has acted as agent within last 12 months, must state whether 5% or more of annual fee income comes from client, RICS recommends a 7 year valuer rotation policy
What is the definition of Market Value (or Rent)?
Market Value (Rent)
The estimated amount that an asset or liability should exchange:
• On the valuation date
• Between a willing buyer and seller
• Arm’s length transaction
• (Appropriate lease terms (Market Rent))
• After proper marketing
• Knowledgably, prudently & without compulsion
What is the definition of Fair Value?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
What is Investment Value?
The value of an asset to the owner, or prospective owner
• For individual or investment or operational objectives
• May differ from MV
What is SDLT?
- £0 - £150,000 = 0%
- £150,001 - £250,000 = 2%
- £250,000+ = 5%
What are Purchasers Costs?
Stamp Duty Land Tax = c.5%
Agents fees = 1%
Legal fees = 0.5%
VAT on fees = 0.3%
What is the Hierarchy of Evidence?
- Open market lettings
- Lease renewals
- Rent reviews
- Third party determinations
- Sale and Leasebacks
- Intercompany transactions
What are three steps to commencing a valuation instruction?
Competence
Conflicts of Interest
Terms of Engagement
How would you check your competence?
Competence – Skills, Understanding, Knowledge (SUK)
What are the valuation approaches?
Income approach – converting cash into future cash flows (investment, residual and profits method)
Cost approach – reference to the cost of the asset (DRC method)
Market approach – using comparable evidence available (Comparable method)
How would you value using the comparable methodology?
- Search and select comps
- Verify / Confirm and analyse headline rents (UKGN 6 – Analysis of commercial lease transactions)
- Assemble comparable in a schedule
- Adjust comparables using hierarchy of evidence
- Analyse comparable to form opinion of value
- Report value and prepare file
What are the weaknesses of Auction Comparables?
- Special purchaser
- Solvency sale
- Sale price is a gross of costs
When would you use the Investment Method?
Used when there is an income stream to value
Rental income is capitalised to produce a capital value
Conventional method assumes growth Implicit valuation approach
An implied growth rate is derived from the market capitalisation rate (yield)
What is the conventional Investment Method?
Rent received (or market rent) X Years Purchase = market value
What is the Term and Reversion Method?
Used for under-rented properties (reversionary)
Term capitalised until next review / lease expiry at an initial yield
Reversion to market rent valued into perpetuity at a reversionary yield
What is the Hardcore and Layer method?
Used for over-rented investments
Income flow divided horizontally
Bottom slice = market rent
Top slice (froth) = Rent passing less market rent
Higher yield applied to top slice to reflect additional risk
Different yields used for different scenarios having regard to comparable evidence and relative risk
What is a yield?
A measure of investment return expressed as a percentage of capital invested
How is a yield calculated?
Income / Price X 100
Why are different yields used for different properties?
Depends if they are over-rented, under-rented, rack rented etc.
What is a Year’s purchase and how do you calculate it?
The number of years required for income to repay purchase price
Calculated by = 100/Yield
- What factors do you take into account when determining a yield (risk)?
- Location
- Covenant
- Use
- Lease terms
- Obsolescence
- Voids
- Security of income
- Liquidity
- Prospects for rental and capital growth
What is a return?
Property performance - use a DCF – find the IRR
What is a secondary yield?
Takes into account additional risk – obsolescence, longer voids, lower rental growth prospects etc
What does All Growth Implicit mean?
Yield adopted assumes many of the assumptions that are made explicit in a DCF approach and risks hidden in yield selected
What is an All Risk Yield?
The remunerative rate of interest used in the valuation of fully let property let at market rent reflecting all prospects and risk attached
What is a True Yield?
Initial Yield assuming rent is paid in advance
What is a Nominal Yield?
Initial yield assuming rent is paid in arrears
What is a Gross Yield?
Current rent/price paid*100
What is a Net Yield?
Current rent/price+purchaser’s costs*100
What is an Equivalent Yield?
Average weighted yield when a reversionary property is valued using an initial and reversionary yield
What is a Running Yield?
The yield at one moment in time
When would you expect an equivalent yield to be more than the initial?
When you have a reversionary property (under rented)
When would you use an EY over an IY?
- Property is severely over/under rented
* When the property is vacant
What is a DCF?
Growth explicit investment method of valuation
Projected future cash flows + Projected exit value (from ARY) discounted back to present value via a discount rate (known as the target rate of return- reflects perceived risk)
= Capital Value (sum of completed DCF to provide NPV)
What is an NPV?
Sum of the discounted cash flows
When positive – investment has exceeded investors target rate of return
When negative – it has not achieved rate of return
What is the IRR?
- Rate of return that all future cash flows are discounted to produce NPV of 0
- Total return from an investment
How do you calculate an IRR?
- Current market value as a negative cash flow
- Input projected rents
- Input projected exit value
- IRR is rate chosen to provide an NPV of 0
- If NPV > 0 = target rate of return met
What are the benefits of a DCF?
- Sensitivity analysis
- Project future cash flow
- Takes into account time periods
- Set different interest rates
What is the purpose of the Profits method?
Used for valuations of specialist properties – works on valuing business profits rather than physical building / location.
Pubs, Petrol Stations, Hotels
What is the approach of the profits method?
- I have not used this method before but am familiar with the methodology.
- 3 years audited accounts
- Gross turnover
- Net Profits less tenants remuneration
- = Adjusted Net Profits (aka FMT or EBITDA) (What a hypothetical reasonable business operator could trade at in the building)
- Adjusted Net Profit x Appropriate Yield (ARY from comps)
- = Capital Value
What does EBITDA mean?
Earnings Before Taxation Depreciation Amortisation (adjusted net profit)
What does FMT mean?
Fair Maintainable Trade
How would you conduct a DRC?
- Value of land in existing use (assume planning)
- Add current cost of replacing the building
- Plus fees
- Less a discount for depreciation and obsolescence
- Use BCIS and then judge level of obsolescence
What are regulated purpose valuations?
Valuations relied upon by third parties who have not commissioned the valuation and they are subject to valuation monitoring
What are the 5 regulated purpose valuations?
- Financial statements (company accounts)
- Stock exchange listings
- Takeovers and mergers
- Collective investment schemes
- Unregulated property unit trusts
What are the valuation monitoring requirements for regulated purposes?
Annual declaration to include:
- Length of time valuer has acted for client
- Extent and duration of firms relationship with client
- In last financial year, whether percentage fee income from client is less than or more than 5% of the total income
How often should you rotate personnel for regulated purposes?
• RICS state minimum of 7 years
Can properties introduced or purchased by the valuers firm be valued for regulated purpose by that firm?
No not for 12 months by the same firm.
What is synergistic / marriage value?
A merger of interests – physical or tenurial
If brought together increases the value than the being separate
What is hope value?
Value arising from any expectation that circumstances affecting the property may change in the future
E.g. planning permission and realisation of marriage value
How do you value a long leasehold interest?
Rent received less ground rent = net rental income
Capitalised at an appropriate yield for the remaining length of the lease
= Market value of Leasehold interest
What is zoning?
A valuation technique for comparison of retail properties of different sized buildings
How do you zone a property?
H- Halving back principle with 6.1m (20 ft) zones (Basements and first floor treated as A/10 approx)
U- a zone A rate is a unit of comparison
T – Zoning is a valuation Techniques not a method
How do yuo work out a Net Effective Rent?
UKGN 6 – Analysis of commercial lease transactions
On a straight line basis until end of the lease or next rent review (depends who you are acting for)
A 3 month fitting out period deducted before devaluation
= Months of income (deduct rent free – 3 months)/total lease length*Headline Rent
What are the three approaches to calculate rent free periods?
Straight line basis
Straight line method assuming time value of cash flow using a yield
Use of DCF
What is a part wall and what is the law?
A wall is a party wall if it stands astrde the boundary of land belonging to two or more different land owners
Party Wall Act 1996 – provides a framework for resolving disputes
What are the requirements for registration as a Registered Valuer?
• Annual fee • Type of valuations • Purpose of valuations • Number of valuations • Firms total fee income from Red Book Vals • What data sources used • Quality assurance procedures • History of negligence claims N.B. – RICS monitor through the submission of firms annual return
What impact could flooding have on your valuation?
Valuation report should include advice on risk of flooding
Detrimental impact on marketability and valuation – as might be expensive or difficult to obtain insurance
