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APC Mock Qs > Valuation > Flashcards

Valuation Flashcards

1
Q

What is a Development Appraisal

A

RCIS define as a ‘financial appraisal of developement’

i.e the profitability of the proposed development

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2
Q

What can a development appraisal be used for?

A
  • Analysis of a scheme to consider whether the level of required planning obligations is viable
  • Assessing whether a development is viable or not based on the level of profit achieved
  • Assessing the best and highest use for a property or to compare different schemes or proposals
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3
Q

What is the residual method of valuation

A

The process of valuing land based on its development value

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4
Q

What is the difference between a development appraisal and a residual land valuation

A

A development appraisal will typically give the profitability or viability of a proposed development (i.e to work out developers profit) whereas a residual valuation will give the value of the land

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5
Q

What type of yield did you apply to the yield at Unit 24 Bourne Industrial?

A

An all risks yield

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6
Q

What is an all risks yield and what is included?

A
  • Remunerative rate of interest used in the valuation of fully let property, let at market rent, reflecting all prospects and risks attached to the property
  • a growth implicit yield used in an investment valuation that reflects all of the risks and rewards of the subject property.

The construction (age, design, specification)
The quality of the tenants covenant
The amount of rent
the unexpired lease term
The other lease terms
Anticipated rental growth (location)

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7
Q

What is an all risks yield and what is included?

A
  • Remunerative rate of interest used in the valuation of fully let property, let at market rent, reflecting all prospects and risks attached to the property
  • a growth implicit yield used in an investment valuation that reflects all of the risks and rewards of the subject property.

The construction (age, design, specification)
The quality of the tenants covenant
The amount of rent
the unexpired lease term
The other lease terms
Anticipated rental growth (location)

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8
Q

Is Market value in a residual valuation gross or net of purchasers costs?

A

Net

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9
Q

What is the basic form of the profits method?

A
  • Annual turnover less operating costs to give the unadjusted net profit.
  • Then subtract tenant renumeration/share to give the adjusted net profits.
  • Capitalise adjusted net profit at appropriate yield.
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10
Q

When is the profits method used?

A

Used on trade related property when you cannot value through comparable or investment and profitability determines the value

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11
Q

What is terms of engagement

A

Set out basic facts of your valuation instruction so that there is no confusion about what you have been asked to do

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12
Q

What affects value in a valuation?

A
  • Contamination,
  • non-native invasive species,
  • structural damage,
  • natural flooding risk,
  • restrictive covenants,
  • asbestos,
  • deleterious materials,
  • location,
  • age/specification of building,
  • planning permission,
  • state of economy,
  • presence of radon,
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13
Q

What was the purpose of the valuation at Unit 24 Bourne

A

Internal purposes as instructed by Client

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14
Q

Basic method of DRC

A

Value site using comparable evidence
+ how much it would cost to reinstate the property
+ fees (professional, finance, planning)
Less depreciation for obsolescence

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15
Q

What is depreciated replacement cost?

A

The current cost of replacing an asset with its modern equivalent asset less deductions for physical deterioration and all relevant forms of obsolescence and optimization

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16
Q

When is DRC used?

A

When direct Market evidence is limited or unavailable for specialized properties

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17
Q

When did the RICS 2022 Redbook take effect?

A

31st January 2022

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18
Q

What were the key changes in the RICS Red Book?

A
  • Emphasising the need to agree clear and unambiguous terms of engagement, even when valuations are undertaken for excepted purposes (i.e., VPS 1-5 do not apply) under PS 1 Section 5.
  • more detailed commentary on sustainability/resilience and environmental, social and governance (ESG) matters in VPGA 8 Valuation of Real Property Interests.
  • Various amendments are made to the VPGAs, in particular VPGA 4 Individual Trade Related Properties and the reference to IVS 230 Inventory.
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19
Q

What must terms of engagement include?

A
  • Identification and status of valuer
  • Identification of client
  • Identification of any user
  • The asset
  • Currrency
  • Purpose of valuation
  • Basis of value
  • Valuation date
  • Any limitations
  • Docs relied on
  • Assumptions and special assumptions
  • Format
  • Restrictions of use
  • Confirmation in line with IVS
  • Fee
  • Firm RICS Registered
  • Monitoring by RICS
  • Limitations of liability.
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20
Q

Can you talk me through your valuation of Plat 8A Prospect House?

A

Used comparable evidence to obtain market rent and ARY. Capitalised the MR into perp to get the GDV. Less disposal costs, developers costs and developers profit.

  • PV of £1 to acertain current value
  • Less purchasers costs to give land value
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21
Q

What is the net Development Value?

A

Gross development value minus disposal costs.
GDV is £7,500,000 so NDV is £25,000 less

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22
Q

What is the definition of market rent?

A

The estimated amount for which an interest in real property should be. leased on the valuation date between a willing lessor and willing lessee. on appropriate lease terms in an arm’s length transaction, after proper.

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23
Q

Was your lease at unit 24 inside or outside the 1954 act? How did this affect your valuation?

A

It was inside but all my comparables were so no difference

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24
Q

If we were to consider that this property (unit 24) was vacant what would this be?

A
  • Subtract vacant holding costs
  • Use a higher yield
  • Do a term an reversion where the term is valued at £0 rent for however long the vacant period is
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25
Q

What was your best comparable for Unit 24 Bourne?

A

Unit 30 Bourne Industrial Estate
Same size, rent, condition etc

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26
Q

Tell me about RICS guidance on comparable evidence

A

RICS Comparable Evidence in Real Estate Valuation, 1st Edition, 2019 (guidance note)

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27
Q

What does RICS comparable evidence guidance do?

A
  • Outline the principles of the use of comparable evidence
  • Encourage consistency in the use of comparable evidence
  • Address issues of availability in comparable evidence
  • Consider sources of comparable evidence
    Outlines/discusses Hierarchy of Evidence
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28
Q

What is discounted cash flow valuation?

A

A method of valuation explicitly setting out the inflows and outflows of an investment / development
- Produces NPV and IRR

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29
Q

RICS guidance on residual valuation?

A

RICS Valuation of Development property, 1st Edition, 2019 (guidance note)

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30
Q

What does RICS guidance on residual valuation do?

A

Framework for best practice in development / land valuations

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31
Q

Can you deviate from PS1 and PS2?

A

No only from VPS 1-5

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32
Q

What are the SDLT bands?

A

0% on first 150k
2% on next 100k
5% above 250k

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33
Q

What is VPS 1-5

A

VPS 1 – terms of Engagement
VPS 2 Inspection, investigations and records
VPS 3 Valuation reports
VPS 4 Bases of value, assumptions and special assumptions
VPS 5 Valuation approaches and methods

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34
Q

Define bases of value

A

Statement of fundamental measurement assumptions used in a valuation

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35
Q

Give examples of VPGA

A

VPGA 5 Valuation of plant and equipment
VPGA 6 Valuation of intangible assets
VPGA 3 Valuation of business and business interests
VPGA 1 Valuation for inclusion in financial statements

36
Q

Why was the 2022 Red Book Introduced

A

To promote and support high standards and ensure transparency and consistency
Establish a frame work for best practice

37
Q

What changed in the RICS valuation 2022 Red Book?

A

Updated commentary on requirements for ToE when applying exceptions to VPS1-5
Updated commentary on sustainability and ESG
Improves and clarifies text generally

38
Q

What is in a valuation report?

A

Identification of valuer
Identification of client
Identification of property
Bases of value
Valuation method
Purpose of valuation
Assumptions
Special Assumptions
Extent of investigation and limitations of inspection
Statement that limitations have been agreed
Restrictions on use and publication of report
Confirmation that valuation undertaken in accordance with IVS
Date of valuation
Valuation amount

39
Q

What 2 rates make up the YP dual rate?

A

Renumerative rate
Accumulative rate

40
Q

How would you value a leasehold interest?

A

Capitalise profit rent at YP dual rate or YP dual rate tax adjusted, or single rate

41
Q

How would you value a long leasehold interest?

A

Rent received less ground rent = net rental income
Capitlise net rental income for remaining term
=MV of leasehold interest

42
Q

What is DCF

A

Method of valuation that projects estimated cash flows over an assumed holding period

43
Q

What is the benefit of using DCF?

A

Very detailed
Doesn’t require comparable
Used on complex multi-let properties

44
Q

What is the Red Book Called?

A

RICS Valuation Global Standards – Effective 31st January 2022
RICS Valuation Professional Standards UK Edition January 2014

45
Q

Have you completed a red book valuation?

A

No, i’ve only valued for internal purposes

46
Q

Which Section of the Red Book are mandatory?

A

PS 1-2
VPS 1-5

47
Q

What is the purpose of the red book?

A
  • Provides consistency, objectivity and transparency
  • Assures valuation undertaken in accordance with highest professional standards
  • Sets out rules and guidance which establish framework.
48
Q

What are the 5 methods of valuation?

A

Investment
Depreciated Replacement Cost
Profits
Comparable
Residual

49
Q

Talk me through your valuation at Unit 24, Bourne Industrial Park and the term and reversion method you used?

A
50
Q

What Yield was used? What was the market rent?

A
51
Q

Talk me through how a residual valuation works?

A
52
Q

What makes up a valuation report?

A
  • Client
  • Valuer
  • Property
  • Basis of value
  • Extent of investigation
  • Assumption/special assumption
  • Comparables/reasoning
  • Valuation figure
  • Date
  • Liability
  • Commentary on any uncertainity
53
Q

How does being contracted out of the Landlord and Tenant act affect value?

A

Capital value will dcrease

54
Q

How would you adjust a valuation if a tenant had a capped service charge?

A

Valuation would decrease as Landlord has additional costs to cover the excess from the cap

55
Q

How do you calculate yield?

A

Through comparable evidence
or
Puchase price/ Rent = YP,
- 100/YP = Yield
or
Rent/Purchase price x 100 = yield

56
Q

How do you calculate YP?

A

100/yield

57
Q

What is the difference between DCF and conventional methods?

A

Growth is explicit in DCF

58
Q

What is a special purchaser?

A

Purchaser to whom property has special value as they gian an advantage from owning it (an advantage that a usual market participant would not have)

59
Q

Give an example of a special purchaser?

A

Owner of neighbouring property

60
Q

What are the 5 conventional methods of valuation?

A

Comparable
Investment
Profit
Residual
DRC

61
Q

Name me 3 property types of the profits method

A

Pub
Casino
Cinema

62
Q

RICS red book purpose is to establish a framework of best practice, what do you mean by that?

A

Improve transparency in global transparency to follow structure
Competent to undertake
No conflicts of interest
Agree terms of engagement
Inspect, measure and retain notes
Carry out investigation
Assemble and analyse comaprables
Have analysis and valuation with rationale
Valuation
Report

63
Q

Talk me through a red book valuation from start to finish

A

Competent to undertake
No conflicts of interest
Agree terms of engagement
Inspect, measure and retain notes
Carry out investigation
Assemble and analyse comaprables
Have analysis and valuation with rationale
Valuation
Report

64
Q

Talk me through the contents of your valuation file

A

Conflicts of interest checks
Terms of engagement template
Inspection notes
Complaints handling procedure
Comparables information
Method of valuations
Report template

65
Q

Other than market rent and market value, what bases of value are you also aware of?

A

Investment value
Fair value

66
Q

When is fair value used as a basis?

A

For valuation in financial reporting

67
Q

Can you give me an example of financial reporting

A

IFRS 13
FRS 102 (UK GAAP)
IFRS 16

68
Q

What are on company accounts?

A

Cover page
Contents page
Directors renumeration
Income statement
Balance sheet
Notes from accountant

69
Q

What is the hierarchy of evidence?

A

Open market letting
Lease renewal
Rent review
Independent expert determination
Arbitrator awards

70
Q

What is the relevance of the hierarchy of evidence?

A

The ranking / weighting applied to comparable evidence based on its transaction

71
Q

Why would you attach more weight to an independent experts determination than an arbitrators award

A

Independent expert can make own investigations whereas arbitrator must rely on evidence provided to them

72
Q

Who’s evidence does an Arbitrator rely on?

A

Parties involved in a dispute

73
Q

The capitalization rate used, what is this also known as?

A

Yield or All risks yield in this case

74
Q

What’s included in the ARY? What factors?

A

Age, specification, design, construction of building
Amount of rent
Unexpired lease term
Tenant covenant strength
Other lease terms
Anticipated rental growth (location)

75
Q

Did you use a gross yield or a net yield?

A

Net yield

76
Q

What is a net yield?

A

Yield adjusted for purchasers costs (rent expressed as a % of purchase price plus the purchasers costs)

77
Q

What is a gross yield?

A

Yield adjusted for purchasers costs (rent expressed as a % of purchase price plus the purchasers costs)

78
Q

How is net yield adjusted?

A

Purchasers costs added to purchase price and taken as a % of rental value

79
Q

A gross yield is % of what?

A

Purchase price not adjusted for purchase costs

80
Q

A net yield is a % of what?

A

Purchase price adjusted for purchase costs (added)

81
Q

Are purchases costs added or deducted to achieve a net yield?

A

Added

82
Q

What purchasers costs must a purchaser incur in a typical purchase in England?

A

Agents fee
Legal Fee
VAT on fees
SDLT

83
Q

Talk me through the skeleton outline of a residual approach

A

GDV less disposal costs, development costs, developers profit and purchasers costs to give land value

84
Q

How did you calculate developers profit?

A

15% of GDV

85
Q

Why 15% developers profit?

A

Based on the market and risk

86
Q

If you haven’t taken Developers profit as a % of GDV, what else could you have done?

A

A higher % of total development costs, say 20%

APC Mock Qs (13 decks)

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