Valuation Flashcards
Three steps before instruction?
Competence, independence, signed terms of engagement
What statutory due diligence do you need to carry out prior to instruction?
Environmental, rateable value, EPC, contamination, legal title, tenure, planning history
5 Methods of valuation?
1) Comparative
2) Investment
3) Profits
4) Residual
5) Contractors (depreciated replacement cost)
3 IVS valuation approaches?
1) cost approach
2) income approach
3) market approach
Six step comparative method?
1) Search for comps
2) confirm details
3) assemble in table
4) adjust by hierarchy of evidence
5) analyse comparables to form opinion of value
6) report value
what is the valuation guidance note called on comparables?
Comparable evidence in real estate valuations 2019
What are the three types of evidence in RICS GN Comparable evidence in real estate valuations 2019?
Category A - direct comparables of contemporary
Category B - General market data
Category C - Other sources
How would you find comps?
agency boards
speaking to local agents
property databases
auction results
in house database
What is the investment method?
When there is an income stream to value
Rental income capitalised to produce a capital value
conventional method assumes growth implicit valuation
What is a yield?
It’s a measure of investment return expressed as a % of capital invested
Is is also a measure of growth & risk
Describe the DCF method (5 steps)?
1) Estimate cash flows over holding period
2) Estimate exit value
3) Select discout rate
4) Discount cash flows at discount rate
5) Sum of the cash flows gives the NPV
In a DCF, if NPV is positive what does this mean?
You are achieving more than the required rate of return
When would you use the profits method?
When the value of the property depends on the profitability of the business
What is the profits method methodology?
Annual turnover - less costs
- reasonable working expenses - operators remuneration to give adjusted net profit or (fair maintainable operating profit). then capitalised at a yield
What the residual method of valuation?
A valuation of development land based on a deduction of the costs of development from the anticipated proceeds. The residual is usually the land value. it is based of market inputs
what is a development appraisal?
It is a tool to financially assess the viability of a development scheme
what is the residual methodology
GDV - TDC - developers profit = residual site value
What do you need development finance for?
Site purchase
Construction costs
Holding over costs to cover void periods
Whats the method of calculation for development finance?
100% debt finance
Straight line basis for site purchase compounded interest over the development period)
Construction period is done on an S curve
Holding period done on compounded interest until development is sold
Two types of finace?
Debt finance
Equity finance
What is a typical loan to value?
60-70%
Different levels of debt?
Senior debt - first level of debt to get paid
Junior debt -
Mezzanine debt - additional funding
What is the profit erosion period?
The length of time it takes for development profit to erode due to holding charges
Problems with residual method?
Sensitive to small changes
Implicit valuation approach
accurate data is needed
Types of sensitivity analysis?
Simple sensitivity
Scenario analysis
Simulation
What is overage?
Agreement between parties of the sharing of extra proceeds from a development
DRC method?
Used when direct market data isn’t available
Value of land in existing + current cost of replacing less discount due to depreciation
What is the red book?
Details mandatory practises for RICS members when carrying out valuation services?
When valuing VP using investment method do you use headline or net effective rent?
Headline
Whats the impact of high office content in a industrial unit?
Usually you would apply a 15-20% discount on the office space. It may materially affect the usability of the ground floor space
Describe a prime warehouse
- 8m eaves
- 3 phase power
- plastic coated steel profiled cladding
- 30KN/sqm
- 40% site coverage
- 10-15% office content
- Main services are capped off
- full height loading door
- steel portal frame
If apply investment method to vacant property what costs might you allow for?
Void period to market property
Rent free
letting costs
empty rates
How would you change your yield for VP property?
typically 100bps higher to reflect risk and time to let out the property
What are common defect with industrial units?
- roof leaks around roof lights
- cut edge corrosion
- damaged cladding
- cracks in brickwork
- blocking guttering
Standard acquisition costs?
SDLT
agents fees
legal fees
Whats in PS1?
Compliance with standard and practise statements when written valuations are provided
PS1 exceptions?
1) valuation in advance of negotiations or litigation
2) valuations for statutory functions (expect tax authority)
3) Valuations for internal monitoring purposes
4) Valuations for agency or brokerage work (expect purchase report)
5) Valuation in advance of providing evidence for being expert witness
PS2?
Ethics, competency, objectivity and disclosers
use professional scepticism when reviewing information
VPS1? Min requirements?
Terms of Engagements
a) valuer
b) client
c) other users
d) asset to be valued
e) currency
f) purpose of valuation
g) basis of valuation
h) valuation date
i) extent of investigation
j) nature and source of information
k) assumptions &SA
l) format
m) restrictions on use
n) confirmation of red book compliance
o) fee basis
p) CHP
q) statement its compliance
r) PII
VPS2?
Inspection, investigations and records.
Steps to go through for desktop inspection?
VPS2
1) Nature of restriction confirmed in TOE
2) Consider valuation implications
3) is it reasonable?
4) Refer to it within report
When do you not need to go on reinpection?
When there has been no material change to property or surroundings
Whats included in VPS3 - valuation reporting
valuer
client
intended user
asset
purpose of valuation
extent of investigation
assumption & special assumption
restriction on use
valuation date
valuation figure
basis of value
in accordance with IVS standards
approach & reasoning
comment on market uncertainty
PII
Define market rent
VPS 4
The amount which a property should be leased at on the valuation date between a willing lessor and a lessee tenant on standard lease terms in an arms length transaction after proper marketing with both parties acting knowledgeably, prudently and without compulsion
Define market value
The amount which a property should exchange on the valuation date between a willing buyer and a seller in an arms length transaction after proper marketing with both parties acting knowledgeably, prudently and without compulsion
Define fair value
Defined with IFRS 13
The price that would be received to sell an asset in an orderly transaction between market participants on the measurement date
What is investment value?
The value of an asset to a particular investor. Sometimes a measure or worth
What is equitable value?
Define with IVS 104
Previously was fair value. Takes into account the respective interests of parties
Which Valuation Applications are you aware of
VPGA 1 - Valuations for inclusion financial accounts
VPGA 2 - Valuations for secured lending
VPGA 8 - Valuation of property assets
VPGA 10 - matters that give rise to material uncertainty
What does VPGA 2 outline?
1) Dealing with COI for securing lending valuation. Previously involvement is usually two years
2) additional reporting procedures. Valuation methodology, environmental considerations, comment on suitability for loan security purposes. Special assumption value must be stated differently
what does VPGA 8 outline?
Identifies sustainability factors that may influence value
What is the UK national supplement 2018?
Specific requirements for members carrying out valuations in the UK
do you know any UK VPGAs?
UK VPGA 1 - valuation for financial reporting
UK VPGA 8 - valuation of charity assets
UK VPGA 10 - valuation for commercial secured lending purposes
What is a special purchaser?
Someone who will pay above market value as they have a special interest in the property. Special value arising from ownership of property
What is monto carlo simulation
model used to predict the probability of a variety of outcomes when the potential for random variables is present
