Valuation Flashcards
What are the 5 methods of Valuation?
- Comparable
- Investment
- Profit
- Residual
- Depreciated Replacement Costs (DRC)
What are the 3 approaches to valuation?
IVS 105 Valuation Approaches and Method. Set out these approaches as:
- Income (profit/investment)
- Market (comparable)
- Cost (Depreciated Replacement costs)
Explain the Comparable Method?
- The Comparable method is typically used to assess market value and market rent for both commercial and residential properties
- Its process is:
- Select Comps
- Confirm/Verify Details
- Assemble Comps Schedule
- Form opinion of Value
- Report Value
Explain the Investment method?
- Used when there is an income stream to value
- Rental income is capitalised to produce a capital value
- Implied Growth Rate comes from the applied yield
- The Conventional Method is:
Market Rent x Years Purchase = Market Value
- Depended on comparable method for rent and yield evidence
- Other investment techniques include Term and Reversion and Hardcore/layer
Explain the Profit method?
- Used for valuations Pubs, Petrol Stations, Hotels etc where value is depended on profitability and trading potential of the business
- Must have accounts for 3yrs
- Method:
- Annual turnover - Costs = Gross Profit
- Gross Profit - Reasonable working expenses =
- unadjusted net profit - operations remuneration =
- Fair Maintainable Operating Profit
Then
- Capitalised at a appropriate yield to = Market Value
Explain the Residual method?
- Used to determine the land value of a site given market inputs
- Comps for GDV (All risk yield used)
- GDC ( Build costs, Professional fees, Finance, Contingency, Marketing fees)
- Red book valuation
- Method:
- Gross Development Value - Gross Development Costs- Developers Profit = Land value
Explain DRC method?
Depreciated Replacement Cost
- Used when property isn’t traded on the open market such as Schools, Stadiums and Hospitals
- Can’t be used for secured lending
- Method:
Value of land in existing use + cost of replacing the building + fees - depreciation and deterioration
What are the bases of value?
VPS4
- Market Value
- Market Rent
- Investment Value
- Fair Value
- Equitable Value
- Liquidation Value
Define Market Value?
- The estimated amount for which an asset or liability should exchange
- On the valuation date
- Between a willing buyer and a willing seller
- In an arms length transaction
- after proper marketing
- Where the parties had each acted knowledgeably, prudently and without compulsion
Define Market rent?
- The estimated amount for which an interest in real property should be leased
- On the valuation date
- Between a willing lessor and a willing lessee
- On appropriate lease terms
- In an arms length transaction
- After proper marketing
- Where both parties had acted knowledgeably, prudently and without compulsion
Define 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
Define Investment value?
The value of an asset to a particular owner based on individual investment or operational value
What are the purposes of valuation?
- loan security
- agency (disposal/acquisition)
- rating
- rent review
- lease renewal
- internal (asset management)
Can you tell me the Hierarchy of Evidence for the comparable method?
OLRTSI
- Open market
- Lease renewals
- Rent reviews
- Third party determinations
- Sale and leasebacks
- Inter company transactions
Also A-C evidence
- A: Direct comps
- B: Genera Market data (co-star)
- C: Other Sources
- Comparable Evidence in Real Estate Valuation 1st Edition 2019
What is a Yield?
- Measure of return
- Income/price X 100
- Lower the yield, higher the Capital value
Explain Initial Yield?
- Simple income yield for current income and price
Rent/ current price X 100
What is an All Risk Yield (ARY)?
- Rate of interest used to value fully let property at Market Rent
- Reflects all risks and benefits attached to investment
Define Equivalent Yield?
- Average weighted yield when a reversionary property is valued using then Inital Yield and Reversionary yield
Explain Reversionary Yield?
- For an under rented investment
- current income/price on under rented property X100
What types of Investment Method are there?
- Conventional (Initial Yield)
- Term and Reversion
- Hardcore and Layer
- DCF
Explain Term and Reversion method of investment?
- Used when property is under rented (MR more than Rent)
- Term: Lease to next review is capitalised at an Initial Yield
- Reversion: Is Market Rent valued in perpetuity at a Reversionary yield
- Both added together to produce a value
- Traditionally Term rate is lower than Reversion Rate to reflect security of income
Term = YP single rate for N years @ %
Reversion = YP into perp (1/n) Present Value N years at %
Explain Hardcore/Layer Method of investment?
- Used when property is over rented (Rent more than MR)
- Income divided horizontally into:
BOTTOM SLICE = Market Rent
TOP SLICE = Rent Passing - MR until next lease event
- Higher yield applied to top slice to reflect risk
- Yields used differ due to comparable evidence and relative risk
Explain Discounted Cash Flow (DCF) method of investment?
- Growth explict method
- Involves projecting estimated cash flows and discounting back to present day to show growth
- not used in practice
Stages include:
- Estimate Cash Flow
- Estimate Exit Value
- Select the Discount Rate
- Discount Cash Flow
- Value in the sum of a complete DCF to provide Net Present Value
( if asked in depth say don’t have experience and this is only my knowledge I would ask a senior professional to further knowledge if needed)
What is Net Present Value (NPV)?
- The sum of the discounted cash flows of a project
- used to determine if an investment gives a positive return
- NPV Positive: Investment has exceeded investors Target Rate of Return
- NPV Negative: Investment has not achieved the investors Target Rate of Return
What is Internal Rate of Return (IRR)?
- Used to assess the total return from an investment opportunity and making assumptions (rental growth, Exit assumptions)
What are Assumptions?
- Where it is reasonable for a valuer to assume something is true without the need to investigate
eg) Connected to mains
What are special assumptions?
- An assumption that is assumed to be true but is not
eg) Planning, Vacant Possession
What is the DCF?
- Discounted Cash Flow
- It is a growth explicit method of valuation
What is the difference between an Internal and External Valuer?
Internal:
- Employed by company to value the assets of the company
- For internal use only
- No third party reliance
External:
- Has no material links with the asset to be valued or the client
What are the 3 important steps prior to carrying out a Valuation?
CIT
- Competence
(Correct skills, Understanding and Knowledge) - Independence
(Check any Conflict of Interests) - Terms of Engagement
(Confirmation of the instruction and the extent/limitations of the report)
Give examples of statutory Due Diligence regarded for carrying out Valuations?
- Check Asbestos Register
- Business rates
- Contamination
- EPC Rating
- Flooding (SEPA)
- Planning History + Listed or con area
- Legal Title
- Fire Safety Compilance
Hamilton Road or Hardengreen
Talk me through a valuation instruction/process?
- Receive instruction from client
- Check Competence
- Check Conflicts of Interest
- Issue ToE’s to client
- Receive signed ToE from client
- Gather info (lease details, planning, Plans etc)
- Due Diligence ( Asbestos, flooding etc)
- Inspect and Measure
- Research Market and analyse/assemble Comparable’s
- Undertake Valuation
- Draft report
- Get report checked
- Finalise and get Report signed
- Send Report to Client
- Issue Invoice
- File in good order for archiving
What is a Years Purchase?
The number of years required for a properties income to repay its purchase price
How do you calculate Years Purchase?
YP= 100 Divided by the Yield
What factors affect risk?
- Quality of Covenant
- Lease Terms
- Void Periods
- Use of Property
What are some limitations to the Comparable Method?
- Limited transactions
- Lack of up to date evidence
- Existence of a special purchaser
What are the RICS Guidance is there for Valuation?
- RICS Valuation – Global Standards (Red Book Global Standards)
- Effective 31st January 2022
What Method is used for Zoning?
- Zone A used for Comparable
What premium is usually added to a Class 3 unit when valuing?
10%
What is a Premium?
A capital payment made by one party to another
What is a Ransom Strip?
A piece of land which controls the access to another piece of land
Do you know any ransom strip Case Law?
- Stokes v Cambridge (1961)
- value of 1/3 of uplift in development site value was awarded to the owner of the ransom strip
What is a Marriage Value?
- Created by merger of interests
- Negotiated outcome after valuation to give 50/50 split
What is a WAULT?
This is the weighted average unexpired lease term remaining to the first break
What would you do prior to carrying out a Valuation?
- Check Competence
- Conflict of Interest check
- Issue and receive signed ToE’s
How does ESG and Sustainability affect valuations?
- If EPC rating is poor this could limit marketability of property
- ESG and Sustainability should be in assumptions and advice
Hamilton Road
You mention Secured Lending, explain what this is?
- Valuation for the purposes of a Commercial loan
- Property is used as security against a loan amount
Hamilton Road
Where you aware of issues surrounding Secured Lending?
- Yes
- Conflict of Interest
- Suitability for Mortgage
- Condition of Property
Hamilton Road
What factors did you consider when assessing your comparable evidence?
- Hierarchy of Evidence
- Condition
- Size
- Distance from property
- Use
Hamilton Road
How did you apply the relevant valuation standards and guidance to the valuation?
- I made sure I carried out my Valuation inline with Red Book Standards and Guidance
- VPS1-5
-VPGA 2 - Checked Competency
- ToE’s Sent and signed
- Worked under supervision of registered valuer
Hamilton Road
What approach did you carry this valuation out?
- Market Approach
(Comparable Evidence)
Hamilton Road
What challenges did you face when undertaking the valuation?
- Lack of rental evidence for offices in the area
- Had to widen scope of evidence for rental comparable evidence
Hamilton Road
How did you ensure that the valuation was accurate and reliable?
- Checked Competency
- ToE signed
- Chose appropriate approach
- Steps of carrying out a Valuation report
- Ensured all limitations were stated
Hamilton Road
Was there a passing rent on Hamilton Road?
- No as it was valued on vacant possession
Hamilton Road
For Market Value what rate per sq ft did you apply?
- £160 per sqft
Hamilton Road
For Market Rent what was your rate per sq ft?
- £12 per sqft
Hamilton Road
How did you measure Hamilton Road?
- Net Internal Area (NIA)
- 1,255 sq ft
Hamilton Road
What steps did you take to carry out this Valuation?
- Receive instruction from client
- Check Competence
- Check Conflicts of Interest
- Issue ToE’s to client
- Receive signed ToE from client
- Gather info (lease details, planning, Plans etc)
- Due Diligence ( Asbestos, flooding etc)
- Inspect and Measure
- Research Market and analyse/assemble Comparable’s
- Undertake Valuation
- Draft report
- Get report checked
- Finalise and get Report signed
- Send Report to Client
- Issue Invoice
- File in good order for archiving
Hardengreen
Can you explain the key steps involved in this residual land valuation process?
- Terms of Engagement
- Site inspection
- Gathered Information (LDP allocation, size etc)
- Calculated GDV (comps and yields)
- Calculated GDC (Build costs £184 per sqft , professional fees 10%, Finance, Contingency 5%)
- Establish Target Profit with the client (20% of GDC)
- Calculated Residual site value
- Report to client
Hardengreen
How did you calculate the Gross Development Value (GDV) for this project, and what data and variables were taken into account?
- Comparable Evidence: gather data on comparable properties and recent sales in the area. This data includes:
- Location
- Size
- Consideration of the number of units
GDV = (Number of Units) x (Estimated Selling Price per Unit)
Hardengreen
What market conditions and trends influenced your GDV estimate
- Location
- Comps of sales
- Interest rates
Hardengreen
What were the major components included in the Gross Development Costs (GDC)?
- Build Costs 185 per sqft
- Professional Fees (8%)
- Contingency (5%)
- Finance Costs 5.5% +3
- Demolition (20k)
pro fees and contingency low as smaller scheme
Hardengreen
How did you estimate Build Costs for the project?
- Spoke to BS team for their opinion
- They reviewed BCIS
Hardengreen
How did the results of the residual land valuation impact the overall financial viability of the project?
- The land value came out as a negative value given the inputs
- This meant the project was not viable for the client
Do you know any reviews that have been carried out within Valuation?
Independent review into real estate investment valuations 2021
