Valuation Flashcards
What are the 5 methods of valuation?
- Comparable
- Investment
- Profits
- Residual
- Depreciated Replacement Costs (Contractors)
What 3 things should you consider before undertaking a valuation?
- Competence
- Independence (no COI)
3.Terms of engagement
What is an internal valuer?
- employed by the company to value the internal assets of a company
- Internal use of valuation only
- No third party reliance
What is set out in TOE?
- Full written instruction - Confirm competence
- Limitations
- Fee
- Extra costs
- Complaints handling procedure (available)
Why are statutory due diligence checks important?
To ensure no material matters have an impact on a valuation
Can you name some statutory due diligence checks?
- Asbestos register
- Contamination
- EPC
- Flooding
- Environmental matters (substation)
- Highways (adopted)
- Business Rates
- Legal / tenure (boundaries, covenanr, easement)
- public ROW
What is an external valuer?
No material links with the asset to be valued or the client
What is the timeline of a Valuation?
- Receive instruction
- Check competence and no COI
- TOEs (receive signature)
- Gather info on site (TS, title docs)
- Undertake DD (no matters adversely impact valuation)
- Inspect and measure
- Research and market analysis
- Undertake Val
- Draft report
- Check with senior surveyor and obtain sign off
- Issue invoice
- File / save valuation
What is the IVS?
International Valuation Standards 2022
- Standards for undertaking valuation assignments
- promote transparency and consistency in valuation practice
*RICS Redbook Global updated to reflect this
What is IVS 105?
The international valuation standards section 105 sets out the valuation approach and methods.
What are the valuation approach’s IVS 105?
- Market approach
- Income approach
- Cost approach
MIC
What is the income approach?
Converting current and future cashflows into capital value
i.e.
- Investment method
- Residual method
- Profits method
What is the cost approach?
- Reference to cost of an asset whether by purchase or construction
i.e.
Depreciated Replacement Costs
What is the market approach?
Using comparable evidence.
i.e. Comparable method
What are the steps of the comparative method?
6 steps:
1. Search and collect comparable evidence (i.e. Co-star)
- Confirm and verify information (CPA)
- Assemble evidence into a schedule using a hierarchy of evidence
- Determine HR and adjust to reflect differences with subject property and identify MR
- Report value
What is the RICS Professional Standard on the Comparable Method?
RICS Professional Standard Comparable Evidence in Real Estate Valuation 2023
** Previously a GN (2019)
What is the purpose of the RICS Professional Standard Comparable Evidence in Real Estate Valuation 2023?
- outlines principles in the use of comparable evidence
- advises on the hierarchy of evidence
(professional judgment case by case basis) - advice dealing with lack of comparable evidence
What is the Hierarchy of comparable evidence?
Cat A - Direct comparable (completed transactions same or similar building with full accurate information)
Cat B - General market data (commercial database / historic evidence)
Cat C - other sources (evidence from other locations / types)
How do you find comparable evidence?
- Speak to agents
- Inspection (marketing boards)
-In house records - Databases (Costar)
What are limitations / challenges of the comparable method?
-limited transaction
- lack of up-to-date evidence
- lack of similar evidence
What is the investment method?
The investment method is used where there is an income stream to value, i.e. the property is tenanted.
The rental income is capitalised to produce a capital value.
What is a yield?
The annual return on an investment expressed as a percentage of capital value.
What are the methods for determining an investment value?
- Term and Reversion (under-rented - MR greater than PR)
- Hard core layer (overrented - PR more than MR)
- Discounted Cash Flow (DCF) - cashflow is explicitly modelled incorporating a wide range of valuer-inputted assumptions.
Explain how you would undertake an investment valuation (Term and Reversion).
An example would be MS where I undertook an investment valuation to determine capital value
- desktop study of the parade gathering information (tenancy schedule)
- no access to the building, used measurements provided by the investment agent
- Undertook market research using Costar collecting rental and sales evidence
Identified yield and MR (greater than the passing).
Term and reversion approach capitalising the term to the next lease event and the MR valued in perpetuity at a reversionary yield.
Provided to my supervisor before being sent to my client
What is the hard core layer method?
Used for over rented property
- 2 layers of income
- bottom layer is more secure and is received into perpetuity
- top layer is the riskier element as it compares the difference between the passing rent and market rent
- Top layer is also valued into perpetuity but at a higher yield to reflect the greater risk
How does a Term and Reversion differ from a Hard Core Layer?
T+R - Under rented
HCL - Overrented
- We still assume that all rental cash flows are received into perpetuity when were looking at hardcore/layer method
- Do not use of YP Single Rate
- We separate the rental income on a horizontal basis
(Still traditional valuation but only value to the first reversion only
Still use an All Risks Yield)
What is the calculation of a yield?
Income divided by purchase price x 100
What is years purchase and how do you calculate this?
It is the number of years required for it’s income to repay purchase price.
Calculated by dividing 100 by the yield.
What would you consider to be a risk when determining a yield?
- Prospects of rental growth
- Location
- Covenant strength
- Lease terms
- Current / Risk of void
What is a return?
This is the term used to describe the performance of a property
What is a prime yield vs a secondary yield?
Prime - low yielding investment (more secure)
Secondary - High yield, reflecting uncertain income
What is an all risks yield?
Shows the rental value of an investment as an annual percentage of the property cost.
Reflects the risks and uncertainty attached to a property investment
Based on comparable evidence
(i.e. divide the annual rental income by property value X by 100)
What is the purpose of an ARY?
To provide an indication of the likely risks apparent in a particular investment
What is a reversionary yield?
Reflects the return once the rent has increased to Market Rent
Calculation: Market rent divided by purchase price x 100
Can you explain a DCF?
- projecting estimated cashflows over an assumed investment holding period plus an exit value
- cash is discounted back to the present day at a discounted rate that reflects the level of risk
When would you use a DCF?
- Short leasehold interest and properties with income voids
- phased development projects
- Non-standard investment (i.e. 21 year rent review)
Is there any RICS notes or guidance on DCF?
Yes, RICS Guidance note, discounted cash flow for commercial property investments 2010
What is the methodology for DCF?
- Estimate cash flow (income less expenditure)
- Estimate exit value at end of holding period
- Select discount rate
- Discount cash flow at discount rate
- Value is the sum of the completed discounted cashflow to provide NPV
What is the NPV?
Net Present Value
- Sum of discounted cash flows of a project
- Used to determine if an investment gives a positive return over a target rate of return
(if NPV is positive - Investment exceeded investors target rate
if NPV is negative - it has not achieved the investors target rate of return)
What is IRR?
Internal Rate of Return
-Used to assess the total return from an investment opportunity, making assumptions on rental growth, re-letting and exit assumptions
Why might a valuation need to be carried out?
Valuations may be carried out for the following purposes:
- Loan security
- Accounts
- Tax (CGT/IHT)
What is the Red Book?
The Red Book is a set of global standards which set out procedural rules and guidance for written valuations.
What is the purpose of the Red Book?
Consistency
Objectivity
Transparency
What is the definition of 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 parties acted knowledgeably, prudently and without compulsion.
What is the definition of 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 market terms, in an arms length transaction, after proper marketing
Where parties acted knowledgeably, prudently and without compulsion
What is 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. IFRS 13
used for accounts purposes
IVS advises FV is generally consistent with MV.
What is marriage value?
An additional element of value created by the combination of two or more
assets or interests where the combined value is more than the sum of the
separate values.
What is a special assumption?
An assumption that either assumes facts that differ from the actual facts
existing at the valuation date or that would not be made by a typical
market participant in a transaction on the valuation date.
(e.g. assuming a land or property has obtained planning consent)
What is a special purchaser?
A particular buyer for whom a particular asset has a special value because
of advantages arising from its ownership that would not be available to
other buyers in a market.
What is a initial yield?
Immediate return to an investor from the current rent received
Calculation: Passing Rent divided by PP X 100
What is an equivalent yield?
Average of the initial yield and reversionary yield
(constant rate of return through the life of an investment - also known as IRR which could be achieved assuming no change in MR)
How do you analyse yields (comps)?
- Potential for rental growth (RR)
- Location
-Tenant Covenant - Lease terms (length, any breaks, likelihood of T exit)
What is rack rent / rack rented proeprty?
- Current rental income reflects the market rent
(calculation: MR divided by Yield = MV)
Why would you come across a rack rented property?
- Property recently let
- Recently been a RR to MR
- MR not changed