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RICS APC > Valuation > Flashcards

Valuation Flashcards

1
Q

What does a valuer need to ensure prior to commencement of an instruction?

A
  • Competence
  • Independence
  • Terms of engagement
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2
Q

Purposes of a valuation?

A
  • Loan security
  • Acquisition or disposal
  • Accounts
  • Internal
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3
Q

Five methods of valuation?

A
  1. Comparable
  2. Investment
  3. Profits
  4. DRC
  5. Residual
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4
Q

What are the hierarchy of evidence categories?

A
  • Category A: Direct comparables
  • Category B: General market data
  • Category C: Other sources

(From RICS comparable evidence in real estate valuations guidance notes 2019)

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5
Q

What is the hierarchy of evidence used in market practice?

A
  1. Open market letting
  2. Lease renewals
  3. Rent review
  4. Third party determination
  5. Sale and leasebacks
  6. Inter-company transactions
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6
Q

Disadvantages of lease renewals and rent reviews over open market lettings?

A

Include an element of goodwill

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7
Q

What is time value of money?

A

Money received now is worth more than the same amount in the future.

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8
Q

What is a yield?

A
  • Measurement of risk on return from investments.
  • Rate of return that a purchaser is seeking in relation to a particular interest.
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9
Q

What does a high yield mean?

A
  • High risk
  • Low growth
  • Low YP
  • Low capital value
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10
Q

What does a low yield mean?

A
  • Low risk
  • High growth
  • High YP
  • High capital value
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11
Q

What is YP?

A

Years Purchase

The number of years it will take for the income to repay the purchase price

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12
Q

What are the risk factors included in a yield?

A
  • Prospects for rental and capital growth
  • Quality of location and covenants
  • Use of property
  • Lease terms
  • Voids
  • Security and regularity of income
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13
Q

Investment valuation approaches?

A
  1. YP Perp
  2. Term and reversion
  3. Hardcore/ topslice
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14
Q

What is All Risks Yield?

A

Yield reflecting all prospects and risks attached to the property.

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15
Q

What is True Equivalent Yield?

A

Yield assuming rent is paid quarterly in advance (not traditional valuation practice).

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16
Q

What is nominal equivalent yield?

A

Yield assuming rent is paid annually in arrears (usual valuation assumption, therefore refer to this more often).

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17
Q

What is Gross Yield?

A

Yields not adjusted for purchasers costs

E.g. Auction comps on EI Group

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18
Q

What is Net Yield?

A

Yield adjusted for purchasers cost

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19
Q

What is Equivalent Yield?

A

Average weighted yield between net initial and reversionary

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20
Q

What is Initial Yield?

A

Yield applied to current income

NI/CV x 100

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21
Q

What is Reversionary Yield?

A

Yield applied to Market Rent.

MR/CV x 100

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22
Q

What is Running Yield?

A

Yield at moment in time

Based on current income

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23
Q

What is Triple Net Yield?

A

Yield after deducting empty rates, service charge shortfall and insurance shortfall costs that the landlord would have to pay.

Based on true net income that landlord receives.

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24
Q

What is the equated yield?

A

Used in DCF.

Yield takes into account growth in future income and accounts for growth explicity.

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25
Q

When would you adopt void costs?

A

When there is 5 years or less to lease expiry.

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26
Q

What is RPI?

A

Retail Price Index.

Measurement of inflation published by ONS.

Favoured by Landlords as benefit from bigger uplift and occurs more often.

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27
Q

What is CPI?

A

Consumer Price Index.

Measurement of changes to prices of goods and services.

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28
Q

What are the types of Rent Reviews?

A
  • Upwards only
  • Index linked (RPI/ CPI) - cap and collared
  • Fixed/ stepped rent
  • Turnover
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29
Q

What are the types of leases?

A
  • FRI
  • Effective FRI
  • IRI
30
Q

What is FRI?

A

Full repairing and insuring.

Tenant responsible for all repairs to property.

31
Q

What is Effective FRI?

A

Landlord responsible for external repairs but can claim expense from Tenant, so effectively FRI.

32
Q

What is IRI?

A

Internal Repairing Insuring

Tenant responsible for internal repairs only. Landlord responsible for external repairs.

33
Q

Types of voids?

A
  • Marketing
  • Rent free
34
Q

What are purchasers costs?

A

Agents fees

Legal fees

Stamp duty

35
Q

What is DCF?

A

Discounted cash flow

More complex and detailed version of investment valuation

36
Q

What is IRR?

A

Internal rate of return

Rate at which all future cashflows must be discounted to produce a NPV of 0

Used to assess the total return from an investment

37
Q

What is Profits Method?

A

Used for trade related properties where there is a monopoly situation.

Value is dependent on profitability of the business trading within the property as opposed to the physical bricks and mortar.

38
Q

Examples of properties valued using the Profits Method?

A
  • Pub
  • Hotel
  • Petrol station
  • Leisure and healthcare
39
Q

What is DRC?

A

Depreciated Replacement Cost

Used for specialist properties where there is limited market evidence

40
Q

When is the DRC method used?

A

Method of last resort.

Shouldn’t be used for Secured Lending vals.

41
Q

Example of properties valued using DRC?

A
  • School/ College
  • Lighthouses
  • Docks
  • Sewerage works
42
Q

How to calculate DRC?

A
  1. Value land as existing
  2. Add cost to build modern equivalent
  3. Deduct a discount for depreciation, age and obsolescence
43
Q

How do you calculate obsolescence?

A

Valuers judgement

44
Q

Types of obsolescence?

A
  • Physical
  • Functional
  • Economic
45
Q

How do you assess the covenant strength?

A
  • Obtain Creditsafe and analyse 3 years of audited accounts
  • Turnover/ pre-tax profit/ shareholders funds
46
Q

What if financial information is dated?

A
  • Look on Companies House
  • Conduct general research on web for articles about company e.g. info about new shareholders/ information about potential CVAs
47
Q

What is an AWULT?

A

Average Weighted Unexpired Lease Term

Used for multi let properties to determine the average remaining term weighted dependent on the amount of rent payable

48
Q

How is AWULT calculated?

A

Total Annual Rent x No. Years remaining for each tenant

Add up all units

Divide total by total annual headline rent received

49
Q

Stamp duty land tax for non-residential/ mixed use properties?

A

£0 - £150,000 = 0%

£150,001 - £250,000 = 2%

Over £250,001 = 5%

50
Q

Stamp duty land tax for residential properties?

A

Effective from 23 September 2022

£0 - £250,000 = 0%

£250,001 - £925,000 = 5%

£925,001 - £1,500,000 = 10%

Over £1,500,000 = 12%

First-time buyers:

£0-£425,000 = 0%

£425,001 - £625,000 = 5%

51
Q

What is Buy to Let SDLT?

A

3% above residential rates

52
Q

What are examples of asset management opportunities?

A
  1. Undertake refurbishment works
  2. Improve unexpired term through proactive re-gears and lease renewal initiatives
  3. Remove landscaping to open up circulation areas
  4. Improve rental tone at review/renewal
  5. Improve signage/branding
  6. Regear the head lease (if long leasehold and below 60 years)
53
Q

What is net effective rent?

A

Rent following deduction of rent free period

54
Q

What is marriage value?

A

Additional element of value created by the combination of two or more assets, where the combined value is more than the sum of separate values.

55
Q

What is turnover rent?

A

Rent calculated by reference to turnover generated at the premises.

Turnover rent typical in retail sector and usually combined with a fixed base rent that tenant is required to pay irrespective of turnover.

56
Q

Why do you include purchasers costs within an investment valuation?

A
  • Allows comparison of property against other assets liabilities within a portfolio.
  • Allows investor to see net return on income to compare with other net returns within portfolio.
57
Q

Why do you exclude purchasers costs from an owner occupier valuation?

A

Purchasers costs are usually additional costs that the purchaser incurs when buying property therefore does not reflect in offer.

58
Q

What are the new planning use classes?

A
  1. Class E - commercial business and service
  2. Class F - local community and learning
  3. Class A/ B1/ D - revoked
59
Q

What is the aim of new planning use classes?

A

Provides flexibility in not needing planning consent to change use if within same use class.

60
Q

When did the planning use class changes come into effect?

A

1 September 2020

61
Q

Why do you use ITZA comps for retail?

A
  • Provides consistency as widely used valuation approach for retail.
  • Enables identification of the rent based on the particular layout and configuration of the unit, and assesses the prime Zone A area of the unit.
62
Q

IVS

A

International Valuation Standards

63
Q

VPS

A

Valuation Technical and Performance Standards

64
Q

VPGA

A

Valuation Practice Guidance Application

65
Q

How is the Red Book structured?

A

2 main parts:

1) Mandatory Part (PS1&2 plus VPS 1-5)

2) Technical Guidance Part (VPGA 1-10)

66
Q

What are empty rates?

A

Proportion of business rates that is payable when the property is vacant.

67
Q

What is the current UBR?

A

51.2p (standard)
49.9p (small business less £51,000 RV)

68
Q

Empty rates relief

A

3 months - office and retail

6 months - industrial

69
Q

Buildings exempt from business rates

A
  • Agricultural land and buildings including fish farms
  • Buildings used for training or welfare of disabled people
  • Buildings registered for public religious worship or church halls
70
Q

IVS 105 Valuation Approaches and Methods

A
  1. Income Approach - Investment, Residual, Profits
  2. Cost Approach - DRC
  3. Market Approach - Comparable
71
Q

How to calculate MV using the Profits Method?

A

Annual Turnover - Costs/ Purchases = Gross Profit

Gross Profit - Working Expenses = Unadjusted Net Profit

Unadjusted Net Profit - Operator’s Remuneration = Adjusted Net Profit (EBITDA)

This is capitalised at appropriate yield (YP multiplier) to achieve MV.

72
Q

Japanese Knotweed advice in valuation reports

A

Even if didn’t notice its presence, always protect yourself within valuation reports by stating that it cannot be fully discounted without an ecological survey.

RICS APC (18 decks)

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