Valuation Flashcards
Tell me what the 5 methods of valuation are
Comparable method
Investment method
Profits method
Residual method
Depreciated replacement cost method
Tell me when you would use the residual method of valuation
To work out the value of land
What types of properties would you use the profits method for?
Unique Income producing properties where the value is determined by the business profits
Give me an example of a property you would use the profits method on?
Pub
Casino
Cinema
Tell me why the contractor method is considered the method of last resort?
Because there are minimal comparables available and therefore less accurate
What properties would you use the contractors method on?
Church
Lighthouse
Submarine base
If you were to carry out a valuation for accounting purposes, what bases of value would you use?
Fair value
What are some purposes of valuation?
Loan security
Investment
Taxation
Internal purposes
Tell me what is the relevance of the fact that a valuation is carried out for internal purpose?
It is an exception from the Red Book
What are the exceptions to the red book
Agency and brokerage
Statutory purposes
Internal purposes
Litigation or negotiation
Acting as expert witness
If you want to undertake a valuation that is an exception to the Red Book, what d you have to do?
Set it out in the terms of engagement
What do you need to state in the terms of engagement in relation to exceptions?
What the reason for the exception is and that the Client has agreed to the exception
Tell me the bases of value as defined in the Red Book
Fair value
Market rent
Market value
Investment value (worth)
Define market value
The estimated amount real interest in property will exchange for on the valuation date between a willing buyer and willing seller in an arms length transaction after proper marketing, given both parties have acted knowledgeably, prudently and compulsion
What does proper marketing mean?
Appropriate exposure to the market – marketing for the appropriate amount of time and correct method of sale for the property.
You undertook a Red Book valuation, talk me through, what did you do?
Check competency
Conflicts of interest check
Issue terms of engagement
Where does it tell us the definition of competency in valuation?
Red Book – Professional Standards 2 – defined as having the appropriate knowledge and experience of dealing with a particular property
How do you as a valuer, check to make sure there is no conflicts of interest?
Check internal database and files to see if the property has been acted on before
Send an email round the office
How would a conflict arise if you were to undertake a Red Book valuation?
If you are valuing the property but someone else in the office/firm is instructed in the sale once the property has been valued
Talk me through the terms of engagement for a Red Book valuation?
Identification of property
Identification of Client
Identification of valuer
Bases of value
Method of valuation
Purpose of valuation
Limitations on inspection
Assumptions
Special assumptions
Complaints handling procedure
Currency
Valuation date
Fee
Give me an example of what an assumption might mean
Property has all relevant planning
No contamination or hazardous substances
Condition of the building
Give me an example of a special example
Planning consent has or will be granted
Property has changed in a defined way
Property is Vacant when let on the valuation date
Property is let on defined terms when vacant at the valuation date
Talk me through what statutory due diligence would you carry out prior to undertaking your valuation
Asbestos register
EPC check
Flooding risk
Planning
Rateable Value
H&S compliance
Equality Act and Building reg compliance
What Is the hierarchy of evidence
Open market lettings
Lease renewals
Rent review
Independent expert determination
Arbitrator award
Sale and lease back
Why does a lease renewal come above a rent review in the hierarchy of evidence
The tenant can walk away and the rent can go up or down, whereas a rent review is usually upwards only
Where would you put sublettings in the hierarchy of evidence ?
Above lease renewal as subletting you go to the market whereas lease renewal is between 2 parties
What would you consider to be an appropriate capitalization rate for an industrial warehouse in Coventry
Depends on covenant strength
Depends on length of lease
Depends on other terms such as repairing and insuring liability
Depends on the building itself – size, location, specification
How do you capitalize an income stream in order to arrive at a Gross value?
Multiply the market rent by the years purchase into perpetuity and chosen yield
How do you establish the years purchase
100 divided by the yield
What is the yield a factor of?
Risk
You have a gross value, how do you arrive at a net value?
Deduct purchasers costs
Broadly, what are purchasers costs?
SDLT
Agents fees
Legal fees
VAT on agents and legal fees
If a property was under-rented, hat valuation technique might you use?
Term and reversion
Explain briefly how you do a term and reversion
Capitalise the passing rent for the remaining term at the chosen yield / capitalization rate
Capitalise the market rent into perpetuity at a higher reversionary yield. Present value of £1 for the length of term to value the future sum of money.
What is the differential in yield between the term and reversion
Reversion is at a higher yield due to additional risk
How do you find out what the value of the term and reversion is today?
Multiply by the present value of £1
If a property was over rented, what technique would you use?
Hardcore / layer method
How do you do a valuation with vacant possession?
Comparable method or investment method
How do you do a valuation with vacant possession using the investment method?
Ascertain appropriate market rent and capitalize using appropriate yield – higher yield as higher risk due to vacancy
If you didn’t want to increase the yield in your vacant possession valuation, what else can you do?
Could do a term and reversion where the term is valued at £0 rent for however long the vacant period is
Residual valuations are used for the valuations of land, talk me through the method of a residual valuation
Capitalise market rent of the property to achieve GDV. Deduct disposal costs, development costs and developers profit. Deduct purchasers costs to provide land value
How do you work out gross development value in a residual valuation
Comparable evidence to ascertain market rent and yield – capitalize market rent at appropriate yield to give GDV
What costs would you expect to include in your residual valuation?
Demolition costs
Contingency
Building costs
Where do you find your building costs?
Building cost information service – run by the RICS
What unit of measurement does BCIS refer to?
Metres squared
What basis of measurement does BCIS refer to?
Gross external area
What other costs are involved in a residual land valuation?
General professional fees and finance costs
What interest rate would you assume in your residual valuation for a development at the moment?
7-8%
What are interest rates based on in a residual land valuation?
1% a month for the development (roughly) – based on risk
LIBOR + Risk
What do banks consider in terms of their lending rate?
Risk
Tell me about the different types of funding that might be available to a developer
Senior debt
Mezzanine/Bridging
If senior debt is 6-7%, where would you put mezzanine or bridging finance?
Higher – 8-11%
Where does the mezzanine funder sit in terms of charge?
2nd charge – behind senior lender
Tell me about fees in a residual valuation
Architect fees
General professional fees
Can you please expand on general professional fees – what does it include?
Project manager
Independent monitoring surveyor
Building surveyor
Quantity Surveyor
Civil engineer
As a rough guide, what % would you put your professional fees at?
12.5%
What % would you apply to contingency?
2-10% of construction costs – very dependent on risk
How do you calculate developers profit?
15% of GDV or 20% of total development costs
