Valuation Flashcards
What is the DRC method?
Not a basis of valuation but a method – value land in existing use, add current cost of replacing building plus fees less discount for depreciation.
NOT for loan security, MV only for financial statements, must report alternative use values where appropriate
What is the profits method?
Trade related – monopoly position (3 years of audited accounts)
Income – costs = gross profit – less expenses & operator’s remuneration = adjusted Net Profit. Capitalised at yield
What are the 5 methods of Valuation?
- Investment
- Comparison
- Residual
- Profits
- DRC – Depreciated Replacement Cost
What is some Statutory Due Diligence you would do before undertaking a valuation?
- Asbestos register
- BR/Council tax
- Contamination
- Equality Act compliance
- Environmental matters
- EPC
- Flooding
- Fire safety
- Health & Safety
- Highways
- Legal title
- Planning history
What are the benefits of the Valuation Registration Scheme?
- Improve quality and ensure professional standards
- Meets RICS requirement to self-regulate
- Raise status of valuation profession
What is VPGA 10?
VPGA 10 – Matters that may give rise to material valuation uncertainty
• Valuer should draw attention to the issue affecting the certainty
• Should consider using special assumptions and sensitivity analysis
• Degree of uncertainty caveat must be specific to each valuation
What is the definition of Market Value (or Rent)?
Market Value (Rent)
The estimated amount that an asset or liability should exchange:
• On the valuation date
• Between a willing buyer and seller
• Arm’s length transaction
• (Appropriate lease terms (Market Rent))
• After proper marketing
• Knowledgably, prudently & without compulsion
What is the definition of Fair Value?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
What is Investment Value?
The value of an asset to the owner, or prospective owner
• For individual or investment or operational objectives
• May differ from MV
What is SDLT?
- £0 - £150,000 = 0%
- £150,001 - £250,000 = 2%
- £250,000+ = 5%
What are Purchasers Costs?
Stamp Duty Land Tax = c.5%
Agents fees = 1%
Legal fees = 0.5%
VAT on fees = 0.3%
What is the Hierarchy of Evidence?
- Open market lettings
- Lease renewals
- Rent reviews
- Third party determinations
- Sale and Leasebacks
- Intercompany transactions
What are three steps to commencing a valuation instruction?
Competence
Conflicts of Interest
Terms of Engagement
How would you check your competence?
Competence – Skills, Understanding, Knowledge (SUK)
What are the valuation approaches?
Income approach – converting cash into future cash flows (investment, residual and profits method)
Cost approach – reference to the cost of the asset (DRC method)
Market approach – using comparable evidence available (Comparable method)
How would you value using the comparable methodology?
- Search and select comps
- Verify / Confirm and analyse headline rents (UKGN 6 – Analysis of commercial lease transactions)
- Assemble comparable in a schedule
- Adjust comparables using hierarchy of evidence
- Analyse comparable to form opinion of value
- Report value and prepare file
What are the weaknesses of Auction Comparables?
- Special purchaser
- Solvency sale
- Sale price is a gross of costs
When would you use the Investment Method?
Used when there is an income stream to value
Rental income is capitalised to produce a capital value
Conventional method assumes growth Implicit valuation approach
An implied growth rate is derived from the market capitalisation rate (yield)
What is the conventional Investment Method?
Rent received (or market rent) X Years Purchase = market value
What is the Term and Reversion Method?
Used for under-rented properties (reversionary)
Term capitalised until next review / lease expiry at an initial yield
Reversion to market rent valued into perpetuity at a reversionary yield
What is the Hardcore and Layer method?
Used for over-rented investments
Income flow divided horizontally
Bottom slice = market rent
Top slice (froth) = Rent passing less market rent
Higher yield applied to top slice to reflect additional risk
Different yields used for different scenarios having regard to comparable evidence and relative risk
What is a yield?
A measure of investment return expressed as a percentage of capital invested
How is a yield calculated?
Income / Price X 100
Why are different yields used for different properties?
Depends if they are over-rented, under-rented, rack rented etc.
What is a Year’s purchase and how do you calculate it?
The number of years required for income to repay purchase price
Calculated by = 100/Yield
- What factors do you take into account when determining a yield (risk)?
- Location
- Covenant
- Use
- Lease terms
- Obsolescence
- Voids
- Security of income
- Liquidity
- Prospects for rental and capital growth
What is a return?
Property performance - use a DCF – find the IRR
What is a secondary yield?
Takes into account additional risk – obsolescence, longer voids, lower rental growth prospects etc
What does All Growth Implicit mean?
Yield adopted assumes many of the assumptions that are made explicit in a DCF approach and risks hidden in yield selected
What is an All Risk Yield?
The remunerative rate of interest used in the valuation of fully let property let at market rent reflecting all prospects and risk attached
What is a True Yield?
Initial Yield assuming rent is paid in advance
What is a Nominal Yield?
Initial yield assuming rent is paid in arrears
What is a Gross Yield?
Current rent/price paid*100
What is a Net Yield?
Current rent/price+purchaser’s costs*100
What is an Equivalent Yield?
Average weighted yield when a reversionary property is valued using an initial and reversionary yield
What is a Running Yield?
The yield at one moment in time
When would you expect an equivalent yield to be more than the initial?
When you have a reversionary property (under rented)
When would you use an EY over an IY?
- Property is severely over/under rented
* When the property is vacant
What is a DCF?
Growth explicit investment method of valuation
Projected future cash flows + Projected exit value (from ARY) discounted back to present value via a discount rate (known as the target rate of return- reflects perceived risk)
= Capital Value (sum of completed DCF to provide NPV)
What is an NPV?
Sum of the discounted cash flows
When positive – investment has exceeded investors target rate of return
When negative – it has not achieved rate of return
What is the IRR?
- Rate of return that all future cash flows are discounted to produce NPV of 0
- Total return from an investment
How do you calculate an IRR?
- Current market value as a negative cash flow
- Input projected rents
- Input projected exit value
- IRR is rate chosen to provide an NPV of 0
- If NPV > 0 = target rate of return met
What are the benefits of a DCF?
- Sensitivity analysis
- Project future cash flow
- Takes into account time periods
- Set different interest rates
What is the purpose of the Profits method?
Used for valuations of specialist properties – works on valuing business profits rather than physical building / location.
Pubs, Petrol Stations, Hotels
What is the approach of the profits method?
- I have not used this method before but am familiar with the methodology.
- 3 years audited accounts
- Gross turnover
- Net Profits less tenants remuneration
- = Adjusted Net Profits (aka FMT or EBITDA) (What a hypothetical reasonable business operator could trade at in the building)
- Adjusted Net Profit x Appropriate Yield (ARY from comps)
- = Capital Value
What does EBITDA mean?
Earnings Before Taxation Depreciation Amortisation (adjusted net profit)
What does FMT mean?
Fair Maintainable Trade
How would you conduct a DRC?
- Value of land in existing use (assume planning)
- Add current cost of replacing the building
- Plus fees
- Less a discount for depreciation and obsolescence
- Use BCIS and then judge level of obsolescence
What are regulated purpose valuations?
Valuations relied upon by third parties who have not commissioned the valuation and they are subject to valuation monitoring