Valuation Flashcards
what does VPGA8 state about valuation of real property interests?
- covers inspections and investigations with particular emphasis on ESG constraints and issues
- identifies ESG issues including the need to consider direct valuation factors (storm or flood risk), indirect valuation factors (resilience or carbon emissions), physical risks (heat or wildfire) and transition risks (regulatory change or carbon emissions).
what does the red book global define special value as?
an amount that reflects particular attributes of an asset that are only of value to a special purchaser. This could arise from the physical, functional or economic association of the property with some other property, such as an adjoining property
define external valuer
no material links with asset to be valued or the client
define all risks yield
the remunerative rate of interest used in the valuation of fully let property let at MR reflecting all the prospects and risks attached to the particular investment
when would you use the DCF technique?
valuations where the projected cash flows are explicitly estimated over a finite period. e.g.
- short leasehold interests and properties with income voids or complex tenures
- phased development projects
- over-rented properties and social housing
using the DRC method you need to estimate the amount of depreciation appropriate for physical, functional and economic obsolescence - explain each.
physical = result of deterioration/wear and tear
functional = where design or specification no longer fulfils function it was originally designed for
economic = changing market conditions for use of the asset
with regard to vps4, what are the assumptions for market value and market rent?
- on the valuation date
- between a willing buyer/lesser and a willing seller/lessee
- in an arms length transaction
- after proper marketing
- when the parties had each acted knowledgably, prudently and without compulsion
- *on appropriate lease terms for market rent
What was the conclusion of the Singer & Friedlander Ltd vs J.D. Wood (1977) case in relation to margin of error?
margin of error can be varied and it will be narrower for a relatively straightforward valuation case and wider for a more complex case
Describe the independent review of real estate investment valuations (2021)
Review undertaken by Peter Pereira Gray , commissioned by the RICS standards & regulation board. The findings have been fully accepted by the RICS and will be implemented in due course. He made 13 wide-ranging recommendations.
The RICS hopes these recommendations/changes will increase trust in the profession and confidence that clients will have in the quality of valuation process.
how is the NPV defined with regard to SDLT payable on the grant of new leases and premiums payable?
the total rent payable over the term of the lease, reduced by an annualised discount rate. there is a calculator on the hmrc website. break clauses are excluded from calculations
When a property is introduced or purchased by the valuer’s firm what does UK VPS3 state?
It cannot be valued for regulated purpose valuation for 12 months by the same firm
when is the investment method used ?
when there is an income stream to value
describe NPV
The sum of the discounted cash flows of the project used to determine whether an investment gives a positive return against a target rate of return. When NPV is positive the investment has achieved investor’s target rate of return
with regard to vps4, when is fair value required?
if the IFRS have been adopted by the client. The RICS view is that this definition is generally consistent with the definition of the market value
what does VPS2 state about inspections?
Valuers must verify the information being relied upon for a valuation to ensure that the information is adequate for its purpose
describe IRR
rate of return at which all future cashflows must be discounted to produce a NPV of zero. Used to assess the total return from an investment making assumptions regarding rental growth, re-letting and exit assumptions.
is the DRC method Red Book compliant? Explain
No it is not compliant for secured lending purposes, it can only be used for financial statement valuations. The valuer must also state the MV for any alternative use
define yield and how it is calculated
measure of investment return , expressed as a percentage of capital invested. Calculated by dividing income by price and multiplying by 100
define true yield
assumes rent is paid in advance not in arrears (traditional valuation practice assumes rent is paid in arrears)
define nominal yield
initial yield assuming rent is paid in arrears
define net yield
yield adjusted for purchasers’ costs
what does VPGA 10 state about matters that may give rise to material valuation uncertainty?
- valuation report must not be misleading
- report should comment on any issues resulting in material uncertainty in the valuation on the specified date relating to the risk surrounding the valuation of the asset
- a standard caveat should not be used
how is SDLT calculated for the grant of new leases and premiums payable?
calculated on the NPV of the lease, discounted at the RPI at different rates as an incremental tax
What does VPGA stand for and how many are included in Part 5 Valuation Applications?
Valuation Practice Guidance Applications and there are 10.
define SDLT
rate of tax payable by a purchaser in respect of the transfer of land and buildings charged on an incremental basis at different rates depending on the portion of the purchase price that falls into each rate band
risk is a major factor when determining a yield. what factors do you need to account for?
- prospects for rental and capital growth
- quality of location and covenant
- use of property
- lease terms
- obsolescence
- voids
- security and regularity of income
- liquidity - ease of sale
describe category C in the hierarchy of evidence from rics guidance note
other sources
- transactions from other real estate types and locations
- other background data (interest rates, stock market movements)
what does the red book global define a special buyer as?
a particular buyer for whom a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market. An example would be a tenant purchasing their freehold interest
describe all growth implicit
- the yield adopted assumes many of the assumptions that are made explicit by in a DCF approach and the risks are hidden in the selected yield.
- need to use comparable method to decide the yield
When re-valuing a property is it acceptable to value without re-inspection?
Yes if the valuer is satisfied there have been no material changes to the property or nature of its location since the last inspection. This must be confirmed in the ToE and in valuation report
How do you calculate a WAULT?
- multiply the current rent by the remaining lease term for each of the tenants
- sum the total of results from step 1
- divide the result from step 2 by the current rent for each of the tenants
describe category B in the hierarchy of evidence from rics guidance note
general market data that can provide guidance
- information from public sources/commercial databases
- other indirect evidence (indices)
- historic evidence
- demand/supply data for rent/sales
is Red book compliance required for building cost reinstatement values?
No because it is not a written opinion of value
with regard to vps2, talk about what records need to be kept?
records must be held of inspections and investigations of other key inputs. also noting the importance of ESG and sustainability
