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APC Autum 2021 > Valuation > Flashcards

Valuation Flashcards

1
Q

What is an internal valuer?

A
  • Someone employed by a company to value the assets of the company
  • Valuation for internal use only
  • No 3rd party reliance
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2
Q

What is an external valuer?

A

Someone who has no material links with the asset to be valued or the client

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3
Q

What are the 3 important steps when commencing a valuation?

A

1) Competence - are you competent to undertake the work, do you have the correct skills, understanding and knowledge
2) Independence - are there any conflicts of interest?
3) Terms of engagement - set out in writing your full confirmation of instructions to the client prior to starting work and receive written confirmation of the instruction

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4
Q

Why are statutory checks done in valuation?

A

To check there are no material matters which could impact upon the valuation

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5
Q

What are the statutory checks that should be carried out?

A
  • Asbestos register
  • Business rates
  • Contamination
  • Equality Act 2010 compliance
  • Environmental matters
  • EPC rating if available
  • Flooding (check environmental agency)
  • Fire safety compliance
  • Health and Safety compliance
  • Legal title and tenure
  • Public rights of way
  • Planning history and compliance
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6
Q

What are the three IVS 105 Valuation approaches?

A

1) Income approach
2) Cost approach
3) Market approach

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7
Q

What are the different categories of comparables?

A

Category A - direct comparables

Category B - general market data (indirect evidence/historic evidence/ demand and supply data)

Category C - other sources (transactional evidence from other real estate types and locations / other background data eg: interest rates, stock market movements and returns.

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8
Q

How to find relevant comparables?

A
  • inspection of an area to find recent market activity by seeking agents’ boards
  • visiting and speaking to local agents
  • auction results
  • in-house records/databases and websites
  • market sentiment good when lack of evidence
  • date of the evidence is crucial
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9
Q

What is growth implicit?

A

An ‘implicit method’ of valuation consists of using a capitalisation rate and current market rent based on comparable evidence. The capitalisation rate is often referred to as an ‘all risks yield’, with all risks hidden in the selected yield.

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10
Q

What is growth explicit?

A

The present value of future cash flows represents the value of an asset, meaning that an investment valuation method could be used in order to determine expected cash flows and discount them.

An investment valuation method that could be used in this instance is an ‘explicit method’, whereby the expected cash flows are determined and discounted at a target rate of return.

Note Bene!

The approach separates out and explicitly identifies growth assumptions rather than incorporating them within an ARY

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11
Q

Risk is a major factor when determining yield, in relation to what specific factors?

A
  • location
  • prospects for rental and capital growth
  • use of the property
  • lease terms
  • obsolescence
  • voids
  • security and regularity of income
  • liquidity ie: ease of sale
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12
Q

What is an All Risks Yield?

A

A remunerative rate of interest used in the valuation of fully let property let at Market Rent reflecting all prospects and risks attached to the particular investment

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13
Q

What is an equivalent yield?

A

An average weighted yield when a reversionary property is valued using an initial and reversionary yield

Used when there is a very little under rent or over rent

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14
Q

What is a running yield?

A

The yield at one moment in time

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15
Q

What is a DCF valuation?

A

A growth explicit investment method of valuation which involves projecting estimated cash flows over an assumed investment holding period, plus an exit value at the end of that period, usually arrived on a conventional ARY basis.

The cash flow is then discounted back to the present day at a discount rate (also known as the desired rate of return) that reflects the perceived level of risk

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16
Q

When is DCF valuation used?

A

Used for a number of valuations where the projected cash flows are explicitly estimated over a finite period, such as for:

  • short leasehold interests and properties with income voids or complex tenures
  • phased development projects
  • some ‘alternative’ investments
  • non standard investments
  • over rented properties and social housing

The approach separates out and explicitly identifies growth assumptions rather than incorporating them within an ARY

The RICS Guidance Note on ‘Discounted cash flow for commercial property Investments’ (2010) provides a useful summary on this technique’s methodology

17
Q

What is the DCF methodology?

A
  • estimate the cash flow (income less expenditure)
  • estimate the exit value at the end of the holding period
  • select the discount rate
  • discount cash flow at discount rate
  • value is the sum of the completed discount cash flor to provide the NPV
18
Q

What is a development appraisal and why are they used?

A

A tool to financially assess the viability of a development scheme.

One can be used to establish a residual site value and can also be used to assess the profitability of a proposed scheme and its sensitivity to changing inputs, or assessing the viability of different uses, rents yields or financial contributions, such as an s.106 /CIL payment.

19
Q

What is a residual site valuation?

A

This is a form of development appraisal

  • most common purpose is for a specific valuation of a property holding to find the market value of the site based on market inputs at one moment in time, at the valuation date, for a particular purpose.
  • it can be based upon a simple residual valuation or the DCF method
  • all inputs are always taken at the date of valuation
20
Q

What the the TDC (TOTAL DEVELOPMENT COSTS) that are important to be aware of?

A

1) Site preparation (demolition)
2) Planning costs (s.106 / CIL)
3) Build costs
4) Professional fees (architects/M&E consultants/structural engineers)
5) Contingency (5-10% of construction costs depending upon level of risk and likely movements in building costs)
6) Marketing costs and fees (eg: buying an EPC)

21
Q

Limits of residual valuation methodology?

A
  • importance of accurate information and inputs
  • a residual valuation does not consider the timing of cash flows
  • very sensitive to minor adjustments
  • implicit assumptions hidden and not explicit
  • always cross-check with a comparable site valuation if possible
22
Q

What RICS guidance note is a useful reference for development valuations?

A

RICS Guidance Note ‘Valuation of Development Property’ 1st Edition 2019 effective Feb 2020.

23
Q

What is the Depreciated Replacement Cost method?

A

Also known as the contractor’s method.

Should only be used when there is a lack of direct market evidence ie for specialised properties including sewage works, lighthouses, oil refineries, submarine base

Calculated:

  • The value of the land in its existing use (assumes planning permission exists)
  • Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence (Use BCIS and then judge level of obsolescence)
24
Q

Purpose of DRC valuations?

A
  • used for owner-occupied property
  • used for accounts purposes for specialised properties
  • used for rating valuations of specialised properties.
25
Q

DRC methodology?

A

1) value of land in its existing use (assume planning permission exists)
2) add current cost of replacing the building plus fees less a discount for depreciation and obsolescence/deterioration (Use BCIS and then judge level of obsolescence ie deterioration)

26
Q

Types of obsolescence

A

Physical - the result of deterioration/wear and tear over the years

Functional - where the design or specification of the asset no longer fulfils the function for what it was originally designed

Economic - due to changing market conditions for the use of the asset

27
Q

RED BOOK GLOOOOOBAL

A

DRC not suitable method to be used for red book global compliant valuations for secured lending purposes.

28
Q

What RICS guidance note can be referred to?

A

RICS Guidance Note on Depreciated Replacement Cost Method of Valuation for financial reporting, 2018

29
Q

Ongoing valuation technique review RICS - tell me about this?

A

RICS is undertaking an independent review into the way commercial property is valued and whether updated guidance is needed.

The review is being led by Peter Pereira Gray FRICS who has been appointed by the RICS Standards & Regulation Board

The review is required to maintain confidence in the valuation practices of RICS members

The four main areas being considered are:

  • valuation methodology
  • property risk analysis, including the forward look
  • maintaining independence and objectivity
  • measuring the market confiendece in RICS valuer performance

The consultation period ended 31 March 2021 and recommendations are expected by Q4 2021

30
Q

Tell me about permissible margin of error within valuations

A

This is defined as the permissible

APC Autum 2021 (16 decks)

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