Valuation Flashcards
Define the 3 types of Valuation
Income - converting current and future cashflows into a capital value - Investment, Residual and Profits
Market - Using comparable evidence available - Comparable
Cost - Reference to the cost of the asset, whether by purchase or construction - DRC method
Is there a difference between RICS Global Standards & IVS
No because the Red Book incorporated the IVS
What is the purpose of the red book
Sets out the professional and & technical standards for valuation to ensure consistency, objectivity and transparency
What is the purpose of the RICS Guidelines Note on Comaprable evidence
It sets out the use of comprable evidence in the valuation process
- it outlines the principle use of comp evidence
- encourages consitency in the use of comps
- addresses issues with availability and use of comps
- considers the potential source of comps
What’s included in your ToE
- identification of client, valuer, and any third party
- The property
- purpose of the valuation
- Date of the valuation]
- Assumptions and special assumptions
- fee basis
- FG complaints handling procedure
- Insurance - any limitations on liability and PI cover
What’s the difference between assumptions and special assumptions
An assumption is something that is reasonable to be true
A special assumption is a supposition that is taken to be true and accepted as fact, even though it is not true.
What were the rents for the retail unit in Fulham
I zoned the property and the Zone A was £70 psf
What were the cap values comps and what yield did you use for the retail unit in Fulham
5.5-7%
I applied 7.5%
Describe the retail unit in Fulham?
On a terrace of properties, just off the Fulham Road. Had pink and white render with brick construction above.
What is the rationale for zoning and how do you zone
The rental value of the property, reduces as you move away from the street.
You zone using the halving back principle with 6.1m zones
It is then used as a unit of comparison
Return frontage adds a 10% uplift
What happened to yields as a result of covid?
There has been a shift in yields across all markets - for retail yields have moved outwards
Why is there more investment activity than owner-occupier in Fulham Road?
Despite yields shifting outwards Fulham Road, the yield profiles are relatively attractive. Fulham is a well connected area of London with high footfall.
What is the investment method?
Used when there is an income stream to value.
The rental income is capitalised to produce a capital value
If you didn’t use the investment method, how would you have valued the retail unit?
I would have looked for vacant/owner-occupier comps to establish indication of value.
Cap value per sq ft
Why apply a higher yield to reflect VP?
- to reflect risk
- I assessed and couldn’t see development potential
How did you assess/obtain what void and rent free periods were current market?
- spoke to local agents who advised what the market rent free and voids were for similar properties
Industrial unit - North London - How did you present your comparable evidence
In the hierarchy of evidence. Attach a relevant weight to the comparable evidence with the most comparable being at the top of the table
Level 3 - Office Pall Mall - Decirbe the property
Comprises of a 7 storey 1920s period building concrete framed construction with Portland stone façade.
What were the rental levels for the office in Pall Mall
£65-£70 (but applied a lower rent on the ground and basement.
What were the yields for the office in Pall Mall
5.25%
What werre the voids and rent free period that you applied
6 months void/6 months rent fre
did you account for any costs - industrial unit
Yes purchasers costs
- Agent - 1%
Legal - 0.8%
- Stamp duty -5%
If it was for accounting purposes what bases were you valuing and define Fair Valiue
Fair Value IFRS13
The price that would be received to sell an asset, or transfer a liability in an orderly transaction between market participants at the measurement date.
When would you use Fair Value
Would be required if the international Financial Reporting Standards have been adopted by the client.
What is the difference between Fair Value and Market Value?
Fair value is valued on the basis that the property isn’t going to be sold therefore is not influenced by market forces. Fair value is on the measurement date and market value is on the valuation date/
What is the WAULT and how do you calculate it?
Weighted average unexpired lease term remaining to the first break or expiry of the lease.
Sum of all the contracted income for the remainder of the respective term, divided by the annual rent, expressed in years.
How did you carry out the valuation for Pall Mall, what yields did you apply?
I valued the rent until the rent review using an all risk yield at 5.5%. I then capitalised the market rent into perpetuity using a reversionary yield.
When would you use an equivalent yield?
You would use it when there is a short income or if the property is vacant meaning a NIY is irrelevant.
Pall Mall - How would you have advised the client differently if the property was over-rented?
Firstly I would assess the situation to understand the terms of the lease the current market rent then tenants financial strength.
If I felt it was going to have an impact on the property I would advise negotiating a rent reduction at the next rent review (if the clause permitted it). Also could consider selling the property.
Office in Camden - Describe it
A modern 3 storey converted open plan office and basement comprising brick eleveations.
What rents applied to office in Camden
Passing rent was £59.66 agreed at 2019rent review. Came to agreement it was rack rented.
What does it mean being rack-rented?
Horizontak line graph. I used a NIY to capitalise the rent.
What was the yield did you use? and what was the resultant yield profiles? - Office in Camden
4.5%
What cashflow adjustments did you make? - Office in Camden
9 months void and 9 months rent free
What is an attractive configuration? - Office in Camden
Functional, efficient and visually appealing. In this case it was well-designed and functional office. Modern as well.
What is the reasoning for your opinion of the cap rate being towards the upper end of the investment comparables? - Office in Camden
It had a short unexpired term on lease which poses a risk to the rental income.
Explain the Hardcore Method of valuation?
Valued the market rent into perpetuity at a lower cap rate.
I would have valued the froth rate (difference between rent passing and ERV) for the remaining term at a higher cap rate, because it is only secured by the rent passing. Then would have adjusted for PC’s.
What is a special purchaser?
A particular buyer for whom an asset has a special value because of advantages arising from its ownership that wouldn’t be available to other buyers.
What is stamp duty and the current rents?
Tax that is paid by the purchaser in respect of the transfer of the land or building?
£0-£150,000 - Nil
£150,001-£250,000 - 2%
Over £250,000 - 5%
What are the Valuation technical and performance standards (VPS)?
VPS 1 - Terms of Engagement
VPS 2 Inspections, investigations and records
VPs 3 - Valuation reports
VPS 4 - Bases of valuation, assumptions and special assumptions
VPS 5 - Valuation approaches and method
Which part of the red book does Secured lending come under?
VPGA 2
What is market value?
The estimated amount for which an asset or liability should exchange:
- On the valuation date
- Between a willing buyer and a wiling seller
- in an arms length transaction
- After proper marketing
- Where parties had each acted knowledgably, prudently and without compulsion.
What is market rent?
The estimated amount for which an interest in property should be leased:
- On the valuation date
- Between a willing lessor and a wiling lessee
- in an arms length transaction
- After proper marketing
- Where parties had each acted knowledgably, prudently and without compulsion.
What is a nominal yield?
You assume rent is paid in arrears
What is an all risks yield?
The remunerative rate of interest in the valuation of fully let property let at market rent reflecting all the prospects and risk attached to the particular investment.
What is the difference between DCF and a ‘normal valuation’?
DCF assumes growth is explicit
What is a good covenant?
A tenant that is able to comply with the obligations in the lease including paying rent and maintaining the repairs
What is EBITDA?
Earning before interest tax and deprecation and amortisation.
What is Fair maintainable Operating turnover?
This is the annual level of trade (excluding VAT ) your pub is expected to achieve if operated in a reasonably efficient way.
Turnover
-less costs
- less expenses
- less operator’s remnuneration
What case relates to margin of error?
Singer & Friedlander Ltd
In a scenario where rents are stating and the capital value increases would you expect yield to go up or down?
Increase
