Valuation Flashcards
What are the 5 methods of Valuation?
Comparable Method
Investment Method
Profits Method
Depreciated replacement cost
Residual method
How is the top slice of income calculated?
Top slice – Market rent less rent passing x YP in perp, deferred number of years to next review / break date.
What’s the difference between net yield and gross yield?
Gross yield is the overall return on an investment without expenses and net yield is calculated as the profit from an investment after expenses have been taken away.
What type of properties can you value using DRC ?
The cost approach is used to value unusual properties where there is no active market such as mosques, wharfs or refineries.
What is a Grade A specification of building ?
Grade A – Latest Spec / New or Refurbished / BREEAM rating of good or above. Suspended ceilings, raised floors, A/C etc.
Define Market Value.
VS 3.2 – Market Value
The estimated amount for which a property should exchange;
• On the date of valuation
• Between a Willing B and Willing S
• In an arms length transaction
• After proper marketing
• Wherein both parties had each acted knowledgeable, prudently and without compulsion.
Define Existing Use Value
UKVS 1.3 EUV
The estimated amount for which a property should exchange;
• On the date of valuation
• Between a Willing B and Willing S
• In an arms length transaction
• After proper marketing
• Wherein both parties had each acted knowledgeable, prudently and without compulsion.
• Assuming that the buyer is granted vacant possession of all parts of the property required by the business
• Disregarding potential alternative uses
Define Depreciated Replacement Cost.
GN6 – DRC method of valuation for financial reporting
The current cost of replacing an asset with its modern equivalent asset less deductions for physical deterioration and all relevant forms of obsolescence and optimisation
What are the components of a fire insurance valuation?
An insurance reinstatement cost.
a) Measure the property and then apply unit costs
b) Cost rates from BCIS, quantity surveyors, spons etc
c) Must allow for demolition (removal of debris)
d) Must allow for professional fees
e) Allowance for VAT
f) Have regard to the quality and method of construction
How would contamination affect your valuation?
If contamination is identified, 3 options for the valuer;
1) Adopt conclusions of experts report – ie cost of remediation
2) Adopt appropriate caveat / special assumption
3) Decline instruction as outside area of expertise
How would the presence of deleterious materials affect value?
These are materials used during the construction of a building that degrade with age causing structural problems – materials include High Alumia Cement (typically 60’s / 70’s).
If they are present, valuer must report existence in valuation report. Likely to diminish value, depends on the circumstances. Seek professional advice if necessary.
What are the differences between worth and price?
Price – The amount you are asking
Value – The amount in line with the market
Worth – The amount an individual would pay
How would you conduct a worth valuation?
DCF method
Can include allowances for inflation, tax liability, irregular receipts or payments.
Can incorporate a specific client’s situation and investment requirements – such as rate of return.
2 basic approaches to DCF;
1) Present Value (either gross present value or net present value) – when a final capital value need to be found. This is calculated using a yield either based on market evidence or a ‘target’ figure specific to the clients requirements.
2) IRR (internal rate of return) – when the final capital value of the investment is known and the calculation finds what the rate of return will be based on the capital value.
What is EIBOR, and what is the current rate?
Check online
What is the current gilt rate and why is this important for valuations of overrented properties?
20 year is 3.1%
This is the secure form of investment. Gives guidance on the yield to apply.
What are the different valuation bases?
VS 3.2 – Market Value
VS 3.3 – Market Rent
VS 3.4 – Worth or Investment Value
VS 3.5 – Fair Value
What are the differences between external and independent valuations?
Independent – Impartial, say for accounting or secured lending purposes
External – can be external and for negotiations etc.
What is the effect of covenant on valuations?
Effects the risk attached to the term and therefore the yield.
When can you take account of hope value?
This is the value arising from the expectation that circumstances affecting the property may change in the future;
Eg.
Securing planning permission for development land
Realisation of marriage value arising from the merger of two interests in land
Can you give examples of special purchasers?
A buyer for whom a certain asset has a special value because of advantages arising from its ownership that would not be available to general buyers in the market.
Example – An island site in Croydon where there are two freehold interests, one is to be sold, if the buyer was the owner of the adjacent site he would be a special purchaser as the two sites together are far more valuable than the aggregate of the two single sites
How would you treat the valuation of an over-rented property?
Hardcore, Investment method
• Value the top slice to the years unexpired (ie Current rent x YP for x years at chosen ARY)
• The top slice yield will be risky because the rent is greater than what market achieves. In this instance the ARY will exclude growth because it is overrented and unlikely to realise any growth, but depends on the lease terms (such as upward only RR’s). You would adopt higher yield as riskier, and chance of T default.
• Value the core to perp (ie ERV x YP in perp at ARY)
• The ARY for the core will be lower to reflect the lower risk as the investor is more likely to achieve this market rent.
What are the components of a residual valuation?
GDV less Total Development Costs = Residual Site Value
GDV – Market value of the proposed scheme
Less Development Costs which include;
Initial payments – Site survey / Clearance / Planning
Build Costs – BCIS / Comparable Constructions / QS
Professional Fees – tend to be approx. 10 – 15% of build costs
Finance Costs – Debt finance or Equity Finance. Finance /2 due to S – curve
Marketing Costs
Contingency – tend to be approx. 5 -10% of build costs
Developers Profit – between 15 – 20% of GDV depending on riskiness of scheme
Holding Costs – Costs incurred between construction completion to 1st letting / sale – includes management costs, empty rates etc.
Sales Costs – Letting / Sales agents, allow approx. 1% - 2% of purchase price
Leaves – Residual Value
What are the weaknesses of residual valuations?
1) Unstable & extremely sensitive to minor adjustments
2) Does not take into account timing of cash flows
3) Heavily reliant on quality of information for inputs
4) Implicit assumptions remain hidden
What are the cost of purchase for valuations, and what do they consist of?
Check
What are the main components of a valuation report?
a) Identification of the Client
b) Purpose of valuation
c) Subject of valuation
d) Interest to be valued
e) Type of property and use
f) Basis of valuation and definition
g) The date of the valuation
h) Identiy of the valuer – NEW
i) Currency of the valuation
j) Assumptions / special assumptions
k) Extent of investigations
l) Nature and source of information
m) Consent or restrictions to publications
n) Any limits
o) Confirmation valuation in accordance with appropriate standards
p) Opinion of value (In words)
q) Signature and date of the report
Define initial yield.
Current rent / current price paid – used when no rental growth in market
Define equivalent yield
An average yield when a reversionary property is value using an initial & reversionary yield
Define reversionary yield
Market rent / Current price paid of an investment let at a rent below market rent
Define all risks yield
Market rent / price paid
Define Net Yield
The resulting yield after adjustment for purchasers costs
Define True Yield
Yield assuming that rent is paid quarterly in advance, taking into account the frequency and timing of actual rent being paid.
What is an IRR and how is it calculated?
Internal Rate of Return – using DCF method
What is marriage value?
Now referred to as synergistic value
An additional element of value created by the merger of 2 property interests, physical or tenurial.
To calculate: undertake a ‘before’ valuation
Undertake an ‘after’ valuation
The difference is your marriage value
Usual to add 50% of the marriage value.
For what types of valuation must you use the Red Book?
All valuations unless stated in exceptions section VS1.2
Can you vary the instructions of the Red Book, and if so when?
Yes, in specific circumstances you can depart from the standards – but the reason why and effect must be cleary agreed with the client and specified in the terms of engagement and the report. Detailed in VS 1.2’compliance, regulation and the requirement to disclose departures.
Which recent cases are concerned with negligent valuations?
Lincoln & Others v CBRE Investors (2010)
Margin for error – reinforced general principle of +/- 10% in the valuation of 4 hotels.
How would onerous lease terms impact on the valuation of a landlords investment?
Likely to diminish the rental value and therefore if long term remaining the capital value.
How would structural defects be reflected in your valuation report?
Would have to be mentioned –
could adopt specialist report
Adopt special assumption or caveat
Decline instruction as outside area of expertise
A client asks you to value an oil refinery for him. You have no experience in this field. What would you do?
CIT – decline instruction
Advise he goes to RICS.org and the RICS find a surveyor service
How would you value a hotel?
Outside area of expertise – decline instruction.
But,
VIP No. 6 – Valuation of Hotels
Would assume it would be on a profits method
How would you value a port?
No experience – but,
• First place to look would be are there any comps
• Is there any rent passing
• Could carry out a profits method
• Could undertake a residual if it had development potential
• DRC
How would you value a lease surrender?
Determine the appropriate premium be assessing difference in;
• L existing interest – Current headlease income YP for the remaining years + reversion in x years
• T existing interest – Profit rent YP for remaining years
• L proposed interest – Freehold of the property ERV at YP in perp
• T proposed interest – say value of 125 year lease
If a client phone you and asked you to value an office for him what information would you require?
What is the valuation for
Why do you need a valuation
Where is the property
Who is the valuation for
When do you need it by
You will then need to decide whether it falls into your area of expertise.
How would you value something where there are no comparables?
Widen geographical search for comps – if still nothing then look to alternative methods
Profits
Residual
Contractors Method
What methods are there for valuing an income producing property?
Profits;
Gross turnover
Less
Costs of purchase
Less
Working expenses
Leaves
Divisible balance
Less
Tenants return on capital and allowance for fair wear and tear
Leaves
LL’s share (rent)
Capitalise at appropriate YP
Equals MV
How would you value a freehold investment with a break option in 12 months time?
Term & Reversion
Value to term certain, therefore;
Term
Income / Profit Rent £10,000
YP 1 year @ x%
Reversion
ERV
YP in perp @ x%
Deferred 1 year
Add Term and Reversion = MV
How might the listing of a building affect your valuation?
• Change of use may be restricted
• Planning assumptions more important
• If Leasehold maybe onerous repairing liabilities.
• If residual valuation– factor in to development potential
Advise a client who is about to grant a lease on ways of improving the security of his investment from a valuation point of view?
Term
Tenant Covenant Strength
AGA
Break Clauses
Security of Tenure
Upward only RR
Why do landlords grant incentives when agreeing leases?
To keep headline rent and therefore maintaining capital value.
Which Guidance Note in the Red Book is concerned with the analysis of incentives for comparable evidence?
VIP 8 – Analysis of Commercial Lease Transactions
What factors do you take in to account when you decide upon the yield to apply to a valuation?
• Quality of location
• Quality of T covenant
• Use of the property
• Likely rate of future obsolescence
• Risks of voids
• Ease of sale
• Prospects for rental growth
To be found guilty of negligence what must be proved?
• Breach of your duty of care
• Valuers must exercise care & skill expected of a reasonably competent surveyor
• Always check you are competent to undertake work
• When deciding is a surveyor has acted negligently – great importance place on whether surveyor has followed Valuation Standards, GN’s and VIP’s.
• Margin for error – generally 10 - 15% but dependant on case, narrower where the valuation is straightforward and there are lots of comps
How would you value a pub?
Outside area of expertise – refer enquiry to the RICS find a surveyor service.
VIP No. 2 – Capital and Rental Valuation of public houses, bars, restaurants and nightclubs in Engand and Wales
Profits based valuation
What is Ryde’s Scale used for?
A scale of surveyors fees in respect of property taken under compulsory powers.
How would you value a leasehold property?
Leasehold interests are wasting assets as their value will eventually diminish to 0. To offset this, the investor in leaseholds could set aside part of the profit rent each year to be paid into a sinking fund that will recover the initial expenditure.
Sinking fund interest rates tend to be lower than ARY on a leasehold property investment – this gives rise to the dual rate approach.
Single Rate
Capitalise the profit rent for the remainder of the lease using a single rate that appropriately takes account for the fact that a lease is a wasting asset.
Income / Profit Rent of £80,000 pa for the next 5 years
Profit Rent £80,000 pa
YP for 5 years @ 8% = 3.99
Purchase price = £319,200
Dual Rate
Specifically takes account of a sinking fund – this guarantees that a suitable amount is put away so that you will have some money to re-invest at the end of the lease. You would apply ARY plus say 1% as it is a leasehold interest and a accumulative rate of say 2.5% for the sinking fund.
Income / Profit Rent of £80,000 pa for the next 5 years
Profit Rent £80,000 pa
YP for 5 years @ 7% & 2.5% = 3.84
Purchase price = £307,200
