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APC > Valuation > Flashcards

Valuation Flashcards

1
Q

What are the three valuation approaches in VPS5?

A

Markets approach (I.E. comparable)
Income approach (I.E. investment/profit)
Cost approach (I.E. residual/ DRC)

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2
Q

What is the red book?

A

Set of global standards which sets out procedural rules and guidance for written valuations.
Not a valuation manual.

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3
Q

What are the Redbook 2022 updates?

A

Focus on sustainability and ESG
Language is clearer and more robust throughout

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4
Q

What is the purpose of the Redbook?

A

To provide consistency, objectivity and transparency.
COT

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5
Q

What is the definition of market rent?

A

Estimated amount of interest in real estate on the valuation date
Between a willing Lessor and Lessee on appropriate, lease terms, in an arms length transaction
Proper marketing undertaken, where each party has acted prudently without compulsion

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6
Q

What is fair value?

A

The price that will be received to sell an asset, or paid to transfer a liability, in all the transaction between market participants at the valuation date

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7
Q

When is fair value used?

A

Accounts purposes
Assets that do not transact in the market frequently

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8
Q

What is an asset? What is a liability?

A

Asset = Something that adds value
Liability = something that decreases in value (debt, wages, loans, etc.)

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9
Q

Four Main investment methods?

A

Term and reversion
Hard-core and Layer
Hard-core and top slice
Discounted cash flow

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10
Q

Four disposal techniques of purchase and sale?

A

Informal tender
Formal tender
Auction
Private treaty

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11
Q

What is a special assumption in valuation?

A

An assumption made/ taken to be true, involves facts, conditions, or situations affecting the subject for the purpose of the valuation

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12
Q

What is depreciated Replacement cost method?

A

The cost of replacing an asset with a modern equivalent less deductions for physical deterioration

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13
Q

Exceptions to Redbook valuations?

A

ALIES
Agency
Litigation
Internal purpose.
Expert witness.
Statutory

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14
Q

Mandatory sections of the red book?

A

Professional standard 1 - compliance.
Professional standard 2 - ethics.
VPS 1 - terms of engagement
VPS 2 - inspections
VPS 3 - reporting
VPS 4 - basis of valuation
VPS 5 - valuation approach

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15
Q

What are the contents of the Redbook?

A

Professional standards - 2
Valuation practice statements - 5
Valuation practice global applications - 10

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16
Q

Principles of comparable evidence

A

Comprehensive evidence
Similar or identical property
Recent and representative of the market
Arms length, open market transactions
Verifiable

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17
Q

Different purposes valuations may be required?

A

Taxation
Loan security
Accounts purposes
Rating
Corporate advice

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18
Q

What is term and reversion?

A

Used in under rented property
Capitalise the passing rent for remaining term
Capitalise the reversion into perpetuity using higher yield
Add together

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19
Q

What is hard-core and Layer?

A

Use for investment valuations - under rented properties
Reversion is close in time
Capitalise term into perpetuity using equivalent yield
Capitalise reversionary top slice at equivalent yield, deferred until reversion
Add together

20
Q

The hierarchy comparable evidence

A

New letting
Lease renewal.
Rent review
Independent experts?
Opinion/hearsay.
Arbitration
Asking/quoting rents

21
Q

What is internal rate of return?

A

Anticipating the future, income and expense feature are used to assess whether or not to proceed with the project
Higher internal rate of return is better/more viable.
Must exceed the cost of capital.

22
Q

Define all risks yield?

A

Comparable info
Based on market assumptions - Risk, Return, Growth, demand

23
Q

Define gross yield

A

Investment income divided by price

24
Q

Define net initial yield

A

Add purchases cost to price, then divide the income by the purchase price

25
Q

Define equivalent yield

A

Weighted average between term and reversion

26
Q

Define equated yield

A

Internal rate of return with explicit growth

27
Q

Define nominal yield

A

Initial yield, assuming in arrears payment

28
Q

Why are Terms of Engagement important?

A

Enhance client understanding of service
Show fees and scope of work
Assurance that work will be carried out by RICS professionals

29
Q

What is included in terms of engagement for a valuation?

A

Identification and status of valuer
Identification of client
Identification of other intended users
Identification of property
Valuation currency
Purpose
Basis
Dates of valuation
Scope of works
Source of information valuer, relied upon
Assumptions/special assumptions
Format of report
Restrictions on use
Confirmation of valuation is in accordance with international valuation standards
How fee is calculated
Reference to complaints handling procedure
Compliance statement
Statement of any limitation

30
Q

Four main investment method techniques

A

Term and reversion
Hard-core and layer
Hard-core and top slice
Discounted cash flow

31
Q

Challenges values have?

A

Limited/infrequent transactions
Lack of up-to-date evidence
Evidence created by special purchaser - skewed data
Lack of similar evidence
Lack of market transparency

32
Q

Calculate net effective rent?

A

Gross annual rent x lease length
Less rent free incentive as value
Divide value by lease length
Net annual rent
Divide net annual rent by square-foot = net rent. PSF

33
Q

Two types of development calculations, and what are they used for?

A

Development appraisal - viability
Residual valuation - site land value

34
Q

Different types or methods of valuation?

A

Comparable method
Investment method
Profit method
Residual method
Depreciated replacement cost method 

35
Q

How do you carry out an investment valuation?

A

If income is rack rented/market rent, multiply by all risks yield
If not, then term and reversion method is used

36
Q

When do you not need a Redbook valuation?

A

ALIES
Agency purpose
Litigation or negotiation
Internal purposes
Expert witness valuation
Statutory basis

37
Q

How do you carry out an over rented valuation?

A

Hard-core and top slice method
Bottom slice is market rent
Top slice is over-rented I.E. passing rent, less market rent
Higher yield applies to top slice to reflect additional risk
Add together

38
Q

Comparable evidence hierarchy?

A

Category A - direct transactional evidence/open markets evidence
Category B - general market data; guidance, not direct indication of value
Category C - other sources, property, types, and locations

39
Q

What is the hierarchy of evidence?

A

Open market lettings
Rent, reviews and lease renewals
Independent experts
Arbitration
Courts determinations under the landlords and tenants act 1954
Hearsay evidence
Sales and lease back
Inter company arrangement

40
Q

What does VPS stand for within the Red Book?

A

Valuation Practice Statement-
Mandatory
5 VPS -
1. TOEs/Scope,
2. Inspections,
3. Valuation Reports,
4. Basis of value
5. Assumptions, Valuation Method

41
Q

What does VPGA stand for?

A

Valuation Practice Global Advice
10 headings/statements
1. Financial statements
2. Secure lending
3. Businesses and business interests
4. Individual trade related property
5. Plant and equipments
6. Intangible assets
7. Personal property inc. Art and antiques
8. Realty property interests
9. Identification of portfolios
10. Matters of material valuation uncertainty

42
Q

Talk me though a development appraisals?

A

GDV - costs = Profit
Client provided info on development scheme planned.
Client confirms costs of land or you assume value of land
Client provided costs for construction (BCIS or market knowledge - £135-£150psf atm)
Assume professional fees of 7% (industry acceptable of 6-8%)
Client confirms finance costs
Client confirmed profit was 15% GDV (c.20% atm)
10 months planning, 3 months lead, 12 months build, 6 month void
S-curve finance - less costs at start, more costs as development underway. Tails off towards end as Costs reduce and income starts.

43
Q

Sensitivity check for developments?

A

Could be costs - build, professional, etc
Could be finance interest increase
Could be return - rents or capital values reduced
Variance of 5-10% usually acceptable each side as a sensitivity

44
Q

What are the 5 Valuation Practice Statements?

A

VPS 1 - Terms of Engagement
VPS 2 - Inspection
VPS 3 - Reporting
VPS 4 - Basis of Valuation
VPS 5 - Valuation Approach

45
Q

Name a some of the 10 Valuation Practice Global Applications

A

VPGA 3 - Reporting
VPGA 4 - Profits Valuation
VPGA 5 - Valuation Approach
VPGA 8 - Valuation of Real Property Interests
VPGA 10 - Material Valuation Uncertainty

46
Q

Process of valuation

A

Identify Property
Identify Purpose of valuation
Confirm Basis of valuation
Terms
Method of valuations
Valuation Technique
Advice reported to client

APC (10 decks)

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