Valuation Flashcards

1
Q

Tell me what the 5 methods of valuation are

A

Comparable
Investment
Residual
Contractors (Depreciated Replacement Costs)
Profits

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2
Q

What is CIL?

A

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.

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3
Q

What is a S106 payment

A

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.

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4
Q

What is Section 278?

A

Payment for the improvement of highway works in order to have planning granted to the LPA.

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5
Q

What are the differences between a CIL & a S106?

A

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

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6
Q

What is CIL charged on?

A

The size and type of a development

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7
Q

Tell me how you would value a building use the profits method?

A

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

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8
Q

Tell me how you would value a building use the comparative method?

A

Comparative method would be used when there is sufficient comparable evidence in a similar area for similar properties.

  1. Search for the comparable evidence
  2. Confirm and verify the evidence, adjust for headline rent - net effectives
  3. Collate in a schedule
  4. Adjust for the hierarchy of evidence (RICS GN Comparable Evidence in Real Estate Valuation - RICS GN 109 CEiREV)
  5. Analyse and opinion of value
  6. Report to the client.
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9
Q

Tell me about the RICS GN Comparable Evidence in Real Estate Valuation? And what year?

A

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

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10
Q

Tell me how you would value a building use the investment method?

A

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.

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11
Q

What is a yield?

A

Measure of investment return, expressed as a percentage of capital invested. Income/Price x 100.

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12
Q

What is a Years Purchase?

A

The number of years required for an investment income to repay its purchase price.

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13
Q

What are the risks which affect the yield?

A
  • Prospect for rental growth
  • Rent
  • Covenant
  • Lease terms
  • Location
  • Liquidity
  • Voids
  • Obsolescense
  • Use of the property
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14
Q

What is the return?

A

Term used to describe the performance of a property.
Measured retrospectively and uses a DCF calculation to find the IRR.

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15
Q

What is an All Risks Yield?

A

Rate of interest used in valuation of fully let property let at market rent reflecting all prospects and risks attached to the investment.

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16
Q

What is a True Yield?

A

Assumes rent is paid in advance and not arrears

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17
Q

What is a nominal yield?

A

Initial yield assuming rent is paid in arrears

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18
Q

What is a gross yield?

A

Yield not adjusted for purchasers costs

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19
Q

What is the net yield?

A

Yield after deductions of purchasers costs

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20
Q

What is the equivalent yield?

A

Average weighted yield when a reversionary property is valued using an initial yield and reversionary yield

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21
Q

What is an initial yield?

A

Simple income yield for current income and current price

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22
Q

What is a reversionary yield?

A

MR divided by current price on an investment let at below the MR.

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23
Q

What is the running yield?

A

Yield at one moment in time.

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24
Q

Is the profits/DRC method used for specialised or specialist property?

A

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

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25
Q

What RICS guidance relates to the use of comparable evidence?

A

RICS GN 2019 Comparable Evidence in Real Estate Valuation

RICS GN 2019 CEinREV

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26
Q

What is an internal valuer?

A

Employed by a company to value the assets of the company for internal use only.
No third party reliance.

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27
Q

Can an external valuer provide an internal purpose valuation?

A

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.

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28
Q

Tell me about how you would value a building using the contractors/DRC method of valuation?

A

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

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29
Q

When and why would you use one of these methods?

A

To determine the market value or an investment. It would depend on if the property is income producing;

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30
Q

Give me an example of a good covenant and how this might impact a valuation.

A

The government is an example of a very strong covenant. The stronger the covenant the more stronger the yield as investors have more confidence that the stronger covenant will pay rent and thus provide stronger security.

31
Q

What is PI Insurance (PII)?

A

Professional Indemnity Insurance. It provides financial support to firms if a claim is made against them or their firm.
RICS GN 2012 PIIR V7

32
Q

Why do surveyors need PII?

A

To ensure if any occurs they are not directly liable and they are covered by their insurer.

33
Q

Tell me about the RICS requirements in relation to PII.

A

RICS GN PIIR V7 2020
RICS Professional Indemnity Insurance Requirements Version 7 (2020)
- underwritten by approved insurance firm
- adequate and appropriate level of insurance
- Minimum requirements based on company turnover. Very minimum is £250k
- Annual return must send in PII certificate

34
Q

Tell me about the RICS requirements in relation to PII.

A

RICS GN PIIR V7 2020
RICS Professional Indemnity Insurance Requirements Version 7(2020)
- underwritten by approved firm
- adequate and appropriate level of insurance
- Minimum requirements based on company turnover. Very minimum is £250k
- Annual return must send in PII certificate

35
Q

How did the decision in Hart v Large effect PII?

A

The decision led to changes in PII policies to include aggregate coverage, which allows for coverage of multiple claims arising from a single policy period instead of the single claim clause.

36
Q

Explain why the RICS are carrying out an Independent Valuation Review

A

The review, carred out by Peter Pererra Gray in 2021, was commissioned by the Standards an Regulations Board to futureproof the valuation of investment assets as a result of market trends, COVID 19, investor and client demand. Mr Gray provided 13 reccomendations

37
Q

Can you provide some recommendations from the Independent Valuation Review

A

There were three main recommendations:
1. Introduce an independent Regulatory Valuation Quality Assurance Panel
2. Valuation Compliance Officer
3. Behaviours and Conduct - guidance

Others include:
Inclusion
Analytic Approaches - DCF
Analytic Approaches - Analytic Advancements
Global Standards
Post Qualification Revision
Rotation
Property Risk Advice
Valuation Trail
Raising Concern

38
Q

Who is leading the Independent Valuation Review?

A

Peter Periera Gray

39
Q

How would a yield reported from an auction differ from a Net Initial Yield?

A

A NIY means that purchasers costs have been deducted whereas auction prices are reported as gross yields and have not been adjusted for purchasers costs.

40
Q

When do you deduct purchasers costs from a valuation?

A

Typically deducted at the end of a valuation to determine market value. They can include SDLT, agency fees, legal fees and VAT.

41
Q

How would you value a property in uncertain market conditions - does
the Red Book give any guidance?

A

Yes the

42
Q

How does a term and reversion differ to a DCF?

A

Term and reversion is used for under rented investments. The term is calculated at an appropriate yield and the reversion to market rent at a different yield, these are then added together to produce a value.

A DCF is an explicit investment method of valuation.
- Projected cashflows assumed over holding period, plus an exit value at end of period.
- Cashflow is then discounted to present day at discount rate or desired rate of return.
- The sum of completed discounted cashflows provides the NPV.

43
Q

What is the difference between a growth implicit and a growth explicit?

A

Growth implicit yield is where any growth is factored into the yield

Growth explicit yield is factored into a cashflow explicitly, by clearly identifying when in the cashflow that growth is occurring.

44
Q

Give an example of growth explicit yield and a growth implicit yield

A

Growth implicit yield is an all risks yield

Growth explicit

45
Q

How would you value an under/over rented investment property?

A

Under rented would use a term and reversion.
Term capitalised on an initial yield basis.
Reversion to market rent capitalised in perp at a reversionary yield.
Add these two figures together to make capital value.

Over Rented would use a Hardcore/Layer method.
Income is sliced horizontally.
Bottom slice = market rent
Top slice = Over rent.
Higher yield applied to top slice to reflect additional risk.
Different yields used depending on comparables

46
Q

When would you use a dual rate investment method?

A

When valuing a long leasehold interest:

Deduct ground rent from the gross rent to calculate the net rent received.

Then can either:
* Capitalise at a yield for the remaining length of the lease
* Use a dual rate to adjust the valuation to set up a sinking fund, so it is comparable to freehold investments
* Discounted cash flow (DCF) * Capitalise into perpetuity at an adjusted yield to reflect the additional element of risk for the wasting asset

47
Q

Where can you find yield evidence from?

A

According to the RICS GN 2019 Comparable Evidence in Real Estate Valuation
RICS GN 2019 CEinREV

Direct Transactional Evidence
Publicly available information - Government Websites, Press, agent websites
Published databases - PropertyData, PropertyWeek, Rightmove

48
Q

What is the hierarchy of evidence?

A

It is stated in the RICS 2019 Guidance Note Comparable Evidence in Real Estate Valuation
RICS GN 2019 CEinREV

The guidance splits the orders the hierarchy in 3 categories:
1. Direct Comparables
- Contemporary & Completed, near identical, with full information
- Contemporary & Completed, similar, full info
- Contemporary & Completed, similar, not full info
- SImilar being marketed, offers but no contract.
- Asking prices

  1. General Market Data
    - Published sources/commercial databases
    - historic Data
  2. Other Sources
    - Transactional evidence from other types/location
    - other data, interest rates/stock market movements
49
Q

What makes a good comparable?

A

Contemporary
Arms Length Deal
Similar
Comprehensive
Verifiable

50
Q

What would you do if comparable evidence was limited?

A

If there is a lack of evidence the RICS GN 2018 CEinREV indicates this should not prevent a valuation from taking place. A surveyors skills, judgement and expertise are important.

Look at a wider range of indices such as local or national economic data.

Guidance in the Red Book Global Standards 2022 VPS 3 requires the valuer to comment on any material uncertainty in the valuation where it is essential to ensure clarity.

The RICS published guidance for the lack of evidence throughout COVID 19 releasing RICS Publication - Beyond COVID 19 valuation approaches and evidence during the COVID-19 health crisis (June 2020)

51
Q

What is NPV?

A

Net Present Value is the sum of the discounted cashflows of project.
It can be used to determine if an investment gives a positive return against a target IRR

52
Q

What is IRR?

A

Internal Rate of Return is the rate of return all future cashflows must be discounted to produce an NPV of 0.
It is used to measure a total return of an investment opportunity making assumptions around rental growth, reletting and exit price.

Calculated:
1. Purchase price as negative
2. Income as rent as positive income
3. Projected exit value as positive
4. IRR using excel

53
Q

What is a term and reversion?

A

Term and Reversion is an investment method used to value under rented or reversionary investments.

Where the market rent is above the passing rent.

  • The term is capitalised to the next review/lease expiry using an initial yield.
  • The reversion to market rent is capitalised into perpetuity using the reversionary yield.
54
Q

What is a hardcore and topslice?

A

Hardcore and topslice method is used to value over rented properties.
The income flow divided horizontally.
The bottom slice is the market rent.
The top slice is the rent passing minus the market rent until the next lease event.
The over rent is capitalised at a higher yield to reflect the additional risk.
Different yields used depending on comparable evidence.

55
Q

What is Discounted Cashflow (DCF)?

A

RICS GN 2010 Discounted Cash Flow for Commercial Property Investment
RICS GN 2010 DCFforCPI

Growth explicit method of valuation

DCF projects estimated cashflow over holding period, plus an assumed exit value, at the end usually arrived using ARY. Cashflow is then discounted back using targeted rate of return to produce NPV.

Currently a consultation on the use of DCF in real estate investment valuation. This includes the production of DCF Valuation Practice Information.

56
Q

When would you use a DCF method?

A

Short leasehold tenures and properties with complex tenures
Phased development projects
Some ‘alternative developments’
Non standard investments (21 year RR)
Over rented properties and social housing

57
Q

What is a short-cut DCF?

A

Adv
Takes into account timing of cashflows
Builds growth explicitly into cashflows

Disadv
Relies on accurate assumptions
Relies on future cashflows and discount rates which can be difficult to accurately predict

58
Q

What is obscelence?

A

?

59
Q

What does heterogenous mean in terms of comparable evidence?

A

It refers to the the different characteristics in properties.
It means it is often not possible to to find market evidence of transactions involving identical or similar assets.

60
Q

In a scenario where rents are static and the capital value increases, would
you expect yields to increase or decrease?

A

Yields would decrease in nature. The lower a yield the higher capital value the asset will be.

61
Q

How can a NIY of zero be achieved?

A

If the purchase price of the property is equal to the expected net income generated by the property over its entire life.

62
Q

Explain the precent set in Hyde and another v Nygate and another (2021) in relation to the valuation of high-profile development sites

A

Property development is a complexed, high capital costs environment with considerable risks.
The importance that provenance of others is verified by those who rely on them.
- Also held that judgements can take place online and remotely.

63
Q

Explain your understanding of K/S Lincoln v CBRE Hotels (2010).

A

It refers to whether a DOC was owed to the claimant in the purchasing of hotels.
C purchased hotels based on a projected rental yield and claimed that the valuation report was inaccurate.
Followed that D would only be liable if valuation fell outside permissible bracket of reasonable valuations.

64
Q

What caselaw relates to margins of error?

A

Singer and Friedlander v John D Wood & Co 1977.

  • 10% either side of a figure that be said to be the right figure that a competent careful and experienced valuer arrives at after making all the necessary enquiries and state of the market.
65
Q

Explain what you understand by the term, margin of error.

A

The permitted margin of error when carrying out a valuation of a property.
- Case law refers to 10 - 15% depending on facts.
- Singer and Friedlander v John D Wood 7 Co 1977

66
Q

Explain why the RICS are carrying out an Independent Valuation Review?

A

To futureproof the valuation of assets for investment purposes, as a result of market changes, impact of Covid 19 and structural shifts in occupier and investor demand.

67
Q

Who is leading the Independent Valuation Review?

A

Peter Pereira Gray

68
Q

What liabilities may be created through valuation?

A

Negligence, breach of contract, misrepresentation

69
Q

What is a liability cap and when would one be used?

A

Contractual agreement that a client can only claim damages up to the amount agreed.
It is used as a way to manage risk in professional work.

RICS GN Risk, Liability and Insurance Apr 2021

RICS Valuation - Global Standards 2022
VPS 1: Terms of Engagement
VPS 3: Valuation Reports

70
Q

How might onerous lease terms, e.g. restrictive user, break clause, impact
upon capital or rental value?

A

Restrictive user clause will mean only a certain type of tenant is allowed to take occupation and so the level of rent which can be paid will have a ceiling. The rental value will directly effect the capital value. Lower the rental value the lower the capital value.

71
Q

Is the cost approach a market valuation?

A

Yes according to the International Valuation Standards 105 Valuation Approaches and Methods 2022.
It refers to the cost of the asset whether by purchase or construction.

72
Q

What are the three ways to deal with depreciation?

A

Straight line depreciation: assets value is reduced by a constant amount each year over assets life

Accelerated Depreciation: Allows for larger depreciation in the early years, then reduced in later years.

Impairment; If value of an asset drops below book value would then reduce the book value on balance sheet to reflect current value.

73
Q

What types of obsolescence are there?

A

Physical - physical depreciation or mismanagement.

Functional - changes in market taste or standards. Design/style/technology

Economic - external factors such as markets that cannot be controlled