Valuation Flashcards
Assumption
Matters that are reasonable to accept as fact without specific investigation or verification
Special assumption
Assumption that either assumes facts that differ from the actual facts at the valuation date or that would not be made by a typical market participant at the valuation date
Yield
Annual rate of return on an investment expressed as a percentage of the capital invested
Return
Expected rental and capital growth a purchaser will receive over the lifetime of an investment
Year’s Purchase
A yield expressed as a multiplier which tells the time it will take for a the purchase price of an investment to be paid back
All risks yield
Capitalisation rate which reflects all the prospects and risk attached to an investment, used in implicit valuation methods
Implicit assumptions within all risks yield
Tenant risk (lease renewal/default), lease risks, rental growth, capital growth, void risks, rent review mechanism, capital costs
Net initial yield
Current rent divided by gross value, adjusted for purchaser’s costs (SDLT, agency, legal fees)
Reversionary yield
Market rent divided by gross value
Equivalent yield
Blend of yields throughout the cash flow (time weighted average)
Running yield
The yield at one moment in time
Discount rate
The rate used when calculating the present value of future cash flows (reflecting market and property specific risks)
IRR
The single discount rate that must be applied to a series of future values to bring them back to a specified present day purchase price (discount rate for which with NPV equals 0)
Present value
Current worth of a future sum of money
Headline rent
Contracted paid rent
Net effective rent
Average contracted rent per annum over the term certain when accounting for incentives (industry standard to exclude the first 3 months of rent free for fit out time)
Specialised property
A property rarely if ever sold in the market expect by way of sale of the business or entity of which it is part due to the uniqueness arising from specialised design, configuration, size, location of otherwise
Hope value
An element of market value in excess of the existing use value reflecting the prospect of some more valuable future use
Marriage value
An additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values
Investment method of valuation
Used where there is an income stream and rental income is capitalised to produce a capital value
Hierarchy of evidence
Category A - direct comparables
Category B - general market data (published databases, indices, demand/supply data)
Category C - other sources
Term and reversion
Term rent is capitalised until the next lease event at an initial yield. The reversion to market rent is capitalised into perpetuity an all risks yield
Layer and hardcore
Income flow is divided horizontally. The bottom slice which is the rent passing if the asset is reversionary and the market rent of the asset is over rented is capitalised at a lower rate to reflect the lower risk. The top slice which is less secure is capitalised at a higher rate
Discounted cash flow
Financial modelling technique in which future inflows and outflows of cash associated with an investment, including the exit value are expressed in present day terms by discounting
How do you run a discounted cash flow
Estimate the cash flow (income less expenditure)
Estimate the exit value at the end of the holding period (usually using conventional ARY)
Select the discount rate (based on risk free rate + market risk + growth)
Discount the cash flow at the discount rate
Value is the sum of the completed discounted cash flow providing NPV
Methods for choosing a discount rate
Comparable evidence (can be challenging to get), market sentiment and understanding where your asset fits within an investors risk profile, hurdle rate based on specific investors requirements, cumulative method where you start with a risk free rate based on government bonds then add property risk and market risk
Advantages and disadvantages of DCF
It is explicit, transparent, useful where there is little market evidence and where there is complexity
It is complicated, open to interpretation and can become very subjective, forecasting can lead to uncertainty and lack of reliability
How would you do a profits valuation
I don’t have experience myself but am aware of the steps
Need 3 years of audited accounts
Analyse the accounts to establish a Fair Maintainable Turnover - considering whether the income and expenses reflect a typical business of that kind for example whether turnover could be improved with better management
Deduct costs to give a Fair Maintainable Operating Profit
Capitalise the profit at an appropriate yield based on market evidence
What are the main components of a DRC
Calculate the cost of constructing a substitute building - the modern equivalent asset reflecting any optimisation
Depreciate based on physical, functional and economic obsolescence
Calculate the land value - considering whether current site is still the most appropriate
Add the depreciated cost and land value together