Valuation Flashcards
What are the 5 key methods of Valuation?
- Comparable method
- Investment method
- Residual method
- Profits method (R&E)
- Replacement cost (Contractors) method
What does the comparable method of Valuation entail?
Direct comparison with other similar properties at the same point in time, with rental adjustment and analysis required to reflect the difference - no two properties are identical.
What does the Investment method of Valuation entail?
Uses DCF techniques to establish value through the incoming producing nature of the asset. We then capital the rental income from a property and then analyse comparable transactions to establish a yield
What does the Residual method of Valuation entail?
Used to assess the Market Value of land or buildings where there is potential for the land to be put to a more valuable use (I.e. farm land being sold for residential, existing buildings that can be cleared for redevelopment)
It is calculated by establishing the Gross Development Value, then deduct all development costs. This leads to an estimated land value
What is Hope Value?
Value in excess of existing use value to reflect the prospect of some more valuable future use or development
What is the Profits (R&E) method of Valuation?
Based on the notion that a Tenant’s bid would relate to the profits achievable. Typically used for pubs, hotels, and cinemas.
It is calculated by the Net Receipts (with an agreed % of this used to help set the RV) and this is split to work out the Tenant and Landlord’s share
What is the Contractors method of Valuation and how is it calculated?
Used for properties where there is no defined market or where they don’t normally sell on the open market (I.e. museums, schools and hospitals).
Calculated by:
- Estimating the cost of construction (ERC)
- Adjusted Replacement Cost
- Value of Land
- Decapitilisation
- Review (stand back and look)
2.
What is a Yield?
A measure of potential return, usually expressed as a percentage
What is a Gross Yield?
A gross yield is the income return on an investment before expenses are deducted.
This is calculated by:
Annual Rent / Property Value = Gross Yield
What is a Net Yield?
A Net Yield is the income return on an investment after expenses have been deducted.
(Annual Rent - Operational Costs) / Property Value = Net Yield
What is an All Risks Yield?
A yield that takes the standard calculations for yield and adjusts them to reflect the perceived risks of the properties investment.
What is an Equated Yield?
The equated yield is the yield on a property investment which takes into account growth in future income.
(This is not applicable to reversionary situations, where the increase in income on reversion is to the market value as estimated at the present time.)
What is an Equivalent Yield?
The equivalent yield, in providing an overall yield, means that reversionary property has a single yield which can be compared with the returns on other investments, either property or non-property.
When would you use the Investment Method of Valuation?
When you are valuing an income stream
What is a reversionary yield?
A term used in the property market to describe the yield that should be achieved if the passing rent adjusts to the level of the estimated rental value.
