Valuation Flashcards
What is an internal valuer?
”- Employed by a company to value the assets of the company/enterprise
- Valuation for internal use only
- No third-party reliance “
What is an external valuer?
The valuer has no material links with the asset to be valued or the client
What three steps do you need to undertake for valuation work?
“1. Assess your competence
2. Independence - check for any conflicts/personal interests - Who and Why?
3. Agree terms of Engagement “
What should be included in Terms of Engagement for Valuation?
”- Set out in writing your full confirmation of instructions to the client prior to starting work and receive written confirmation of instruction
- Confirm the competence of the valuer
- The extent and limitations of the valuer’s inspection must be stated”
What are the 5 main methods of valuation?
“1. Comparative method
2. Investment method
3. Profits method
4. Residual method
5. Contractors method (Depreciated replacement cost)”
What is net effective rent and how is it calculated?
…
What are the different types of methodologies you would use with the investment method?
“1. Conventional
2. Term and reversion
3. Layer/hardcore
4. DCF “
What statutory due diligence do you need to carry out before a valuation?
”- Asbestos register
- Business rates/council tax
- Contamination
- Equality Act 2010 compliance
- Environmental matters (electricity sub stations, power lines etc)
- EPC Ratings if available
- Flooding
- Fire safety compliance
- Health and safety compliance
- Highways (check roads adopted with the local highways agency)
- Legal title and tenure
- Public rights of way”
What is the 16 step timeline of a valuation instruction?
“1. Receive instruction (purpose of valuation)
2. Check competence (SUK)
3. Check independence (conflicts of interest)
4. Issue terms of engagement (CIT)
5. Receive terms of engagement signed by the client
6. Gather information - lease, OS maps etc
7. Undertake due diligence (anything that would adversely impact upon value)
8. Inspect and measure
9. Research market and assemble, verify comparables
10. Undertake valuation
11. Draft report
12. Have valuation and report considered by another surveyor for checking purposes
13. Finalise and sign report
14. Report to client
15. Issue invoice
16. Ensure valuation file in good order order for archiving”
What three valuation approaches are set out in the IVS 105?
“1. Income approach - converting current and future cash flows into a capital value
2. Cost approach - reference to the cost of the asset whether by purchase or construction
3. Market approach - use comparable evidence”
What are the 6 steps of the comparative method of valuation?
“1. Search and select comparables
2. Confirm / verify the details and analyse headline rent to give net effective rent
3. Assemble comparables in schedule
4. Adjust comparables using the hierachy of evidence
5. Analyse comparables to form opinion of value
6. Report value and prepare file note”
What guidance note outlines the principles in the use of comparable evidence?
RICS Guidance Note ‘Comparable Evidence in Real Estate Valuation’ (1st Edition, 2019)
How would you find relevant comparable information?
”- Inspection of an area to find recent market activity by seeking agent’s boards
- Visit/speak to local agents
- Auction results (beware that these are gross prices)
- In house records/databases and websites, such as EGI and Focus
“
Why must care be taken if using auction comparables?
There may be a special purchaser or an insolvency sale. The sale price is gross of costs.
What is key when there is no comparable evidence?
Market sentiment
What is the investment method of valuation?
”- Used when there is an income stream to value
- The 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/market rent multiplied by the Years purchase (YP) = Market Value
You need good comparables for rent & yield”
What is the Term and Reversion method?
”- Used for reversionary investments (ie when underrented)
- Term capitalised until next lease expiry/rent review at an initial yield
- Reversion to market rent valued in perpetuity at a reversionary yield”
What is the Layer/Hardcore method?
”- Used for overrented investments
- income flow divided horizontally
- Bottom slice = Market Rent
- Top slice = Rent passing less Market Rent until next lease event
- Higher yield applied to Top slice to reflect additional risk
- Different yields used depending on comparable investment evidence and relative risk”
What is ‘Yield’?
A measure of investment return, expressed as a percentage of capital invested
How is Yield calculated?
Income divided by price x 100
Why are there different yields for different uses of property?
…
What are current primary and secondary yields for all major use classes?
Prime retail 6% to secondary upwards of 8%
Shopping centres 7.50% to upwards of 9%
Warehouse/industrial 3.00% to 5% upwards
Offices 3.75% to 6.75%
How is Years Purchase calculated?
Dividing 100 by the yield.