Valuation Flashcards
Tell me what the 5 methods of valuation are
Comparable
Investment
Residual
Contractors (Depreciated Replacement Costs)
Profits
What is CIL?
Community Infrastructure Levy
A type of tax that authorities in Wales and England can charge on new developments in an area.
Its purpose is to help fund the infrastructure needed for new developments - road, schools, healthcare
Amount is chosen by size and type of development.
What is a S106 payment
A legal agreement for planning obligations to gain consent (must build a school, infrastructure, affordable housing).
Used to mitigate the impact of developments on communities.
What is Section 278?
Payment for the improvement of highway works in order to have planning granted to the LPA.
What are the differences between a CIL & a S106?
PURPOSE - CIL funds wide range of infrastructure. S106 mitigates the effect of the development
CALCULATION - CIL based on size and type of development. S106 is case by case.
ENFORCEMENT - CIL is through planning agreement. S106 is legal requirement.
SPENDING - CIL can be spent on wide range. S106 must be spent on mitigating outlined measures
What is CIL charged on?
The size and type of a development
Tell me how you would value a building use the profits method?
Used when there is a monopoly situation, where the value of a property is based on the profitability of a business and trading potential - such as a pub, nursery, hotel, care homes.
Must have 3 years records. Audited are senior to management accounts.
= Annual turnover
- (less) Costs/Purchases
= Gross Profit
- (less) Reasonable Working Expenses
= Unadjusted net profit
- (less) Operators Remuneration
= Adjusted Net Profit/FMOP (Fair Maintainable Operating Profit)
Capitalised at an appropriate yield to achieve MV.
Cross checked
Tell me how you would value a building use the comparative method?
Comparative method would be used when there is sufficient comparable evidence in a similar area for similar properties.
- Search for the comparable evidence
- Confirm and verify the evidence, adjust for headline rent - net effectives
- Collate in a schedule
- Adjust for the hierarchy of evidence (RICS GN Comparable Evidence in Real Estate Valuation - RICS GN 109 CEiREV)
- Analyse and opinion of value
- Report to the client.
Tell me about the RICS GN Comparable Evidence in Real Estate Valuation? And what year?
2019.
1. Outlines principles of the use of comparable evidence
2. Outlines consistency in approach to comparable evidence
3. Addresses issues of availability of comparable evidence
4. Considers potential sources of comparable data
Tell me how you would value a building use the investment method?
Used when there a is a stream of income to value. The rent is capitalised to produce a capital value.
A yield is applied to the income to represent risk which the produces a years purchase. This is the number of years an investment would take to repay the purchased price, which is then multiplied by the income.
3 Different Methods:
Conventional - Rent Received x YP = MV.
Term and Reversion - used on a property is under rented. Term capitalised until next review or break at initial yield.
Reversion to market rent valued into perpetuity at reversionary yield.
Layer/Hardcore Method - used on a property when income is over rented. Slice income horizontally. Bottom slice = market rent. Top slice = Rent passing les market rent.
Higher yield on top slice to reflect risk.
What is a yield?
Measure of investment return, expressed as a percentage of capital invested. Income/Price x 100.
What is a Years Purchase?
The number of years required for an investment income to repay its purchase price.
What are the risks which affect the yield?
- Prospect for rental growth
- Rent
- Covenant
- Lease terms
- Location
- Liquidity
- Voids
- Obsolescense
- Use of the property
What is the return?
Term used to describe the performance of a property.
Measured retrospectively and uses a DCF calculation to find the IRR.
What is an All Risks Yield?
Rate of interest used in valuation of fully let property let at market rent reflecting all prospects and risks attached to the investment.
What is a True Yield?
Assumes rent is paid in advance and not arrears
What is a nominal yield?
Initial yield assuming rent is paid in arrears
What is a gross yield?
Yield not adjusted for purchasers costs
What is the net yield?
Yield after deductions of purchasers costs
What is the equivalent yield?
Average weighted yield when a reversionary property is valued using an initial yield and reversionary yield
What is an initial yield?
Simple income yield for current income and current price
What is a reversionary yield?
MR divided by current price on an investment let at below the MR.
What is the running yield?
Yield at one moment in time.
Is the profits/DRC method used for specialised or specialist property?
Profits method is used for specialist property such as pubs, hotels, care homes, nurseries.
DRC method is used for specialised property or owner occupied. Specialised includes sewage works, lighthouse, oil refineries, docks etc. Where there is limited market evidence
What RICS guidance relates to the use of comparable evidence?
RICS GN 2019 Comparable Evidence in Real Estate Valuation
RICS GN 2019 CEinREV
What is an internal valuer?
Employed by a company to value the assets of the company for internal use only.
No third party reliance.
Can an external valuer provide an internal purpose valuation?
Yes - although Terms of Engagement and written advice need to clearly say about non disclosure about third party liability and about the exclusion of liability becomes important.
Tell me about how you would value a building using the contractors/DRC method of valuation?
RICS GN 2018 DRCMofVfFR
RICS GN 2018 Depreciation Replacement Cost Method of Valuation for Financial Reporting
This is used when there is a lack of evidence or limited evidence for specialised properties such as sewage works, docks, lighthouses or owner occupied.
Accounts purposes for specialised properties.
Two methods -
Valued of land in existing use and existing planning permission.
Add cost to replace current building, less fees, less discount for obsolesence/depreciation.
3 types pf obso
Physical - wear and tear
Economic - economy makes use not applicable anymore
Functional - deisgn/spec not longer fulfil function
When and why would you use one of these methods?
To determine the market value or an investment. It would depend on if the property is income producing;