Valuation

Question 1

What are the three valuation approaches according to the IVS 105?

Answer 1

1. Income
2. Cost
3. Market

Question 2

What is the Hierarchy of evidence?

Answer 2

Cat A: Direct Transactional Evidence
Cat B: General Market Data
Cat C: Other sources. e.g. evidence from another property type

Question 3

What is the investment method of Val?

Answer 3

Used when there is an Income Stream to value.

Rent is capitalised to produce a value.

Implied growth rate (yield is derived from the market)

Question 4

How to value a property using the conventional investment method of valuation?

Yield equations

Answer 4

Rent x YP = Value

Rent / Value x1 00 = yield

Rent / Yield x 100 = value

Question 5

What is YP?

Answer 5

Years Purchase. It is a reciprocal if the yield

1 / yield = YP

Question 6

What is a yield?

Answer 6

A measure of return of an investment over time expressed as a percentage.

Question 7

What is the Hardcore and Slice Method?

Answer 7

Used for overrented investments (passing rent greater than MR)

Bottom slice represents MR and is capitalised into perp.

Top slice represents the rental amount between current passing rent and MR. until the next expiry or break.

A higher yield is applied to the top slice to account for the increased risk of tenant default.

Question 8

What is the term and reversion method?

Answer 8

Used for under rented /reversionary investments.

Term is capitalised until next lease break or expiry at a lower (initial) yield.

The reversion is then valued into perp at a higher (reversionary) yield.

Question 9

What is DCF valuation?

Answer 9

A growth explicit investment method of valuation.

Involves projecting future cashflows over an assumed investment holding period and an exit value at the end of that period arrived on an ARY basis.
The cash flow is then discounted to the present day at a discount rate that reflects the perceived level of risk.

They are then summarised to produce and NPV.

Question 10

How to do a DCF?

Answer 10

Estimate cashflow (income less expenditure)
Estimate the exit value after the holding period
select discount rate
discount the cash flow
value the sum of cashflows to get NPV.

Question 11

What is ITZA?

Answer 11

Zoning is a valuation technique and comparison tool used to compare retail units of different sizes and layouts with greater value placed on the shop frontage.

Question 12

How do you do an ITZA Val?

Answer 12

The value decreases every 6.1m (20ft) back from the shop frontage which is zone A. You measure from the building line when the shop floor starts.

The value halfbacks every time until you reach a solid wall with the rest of the property is remainder value.

Your A/1 value is based on the comparable evidence.

Question 13

What is the All Risks Yield?

Answer 13

The remunerative rate of interest used in the valuation of a fully let property reflecting all the risks attached to the investment.

Question 14

What is an Equivalent yield

Answer 14

The average weighted yield when a reversionary property is valued using an initial and reversionary yield.

Question 15

What is an initial yield

Answer 15

Simple income yield for current income and current price

Question 16

What is an reversionary yield

Answer 16

MR divided by the current price on an investment let below MR

Question 17

What is a residual valuation?

Answer 17

Used to value development sites based on market inputs taken at the date of valuation.

It is a form of development appraisal.

Question 18

What is the method behind residual vals?

Answer 18

GDV is calculated based on inputs from completed development. I.e. total sales of resi units.

Development costs then taken away. This includes:
-Site prep
-planning
-build costs
-professional fees (10-15%) Architects
-contingency (5-10%)
-marketing (1-2%)
-finance costs

Developers profit then removed. (Can be 10-20% total costs or of GDV)

The remaining figure is the RLV.

Question 19

Whats the difference between and RLV and a development appraisal?

Answer 19

A development appraisal will typically give you the profitability of a proposed development and a residual valuation will give you the value of the land.

A residual will give you the Market Value and therefore you would need to use market led costs, either from the BCIS website or if your client has a tendered scheme where they have gone to the market to actively obtained costs.

A development appraisal assesses a property with or without planning permission to establish the likely value of a future use or the value as a cleared site for redevelopment. More akin to a viability analysis

Question 20

What is Depreciated Replacement Cost Valuation?

Answer 20

Form of valuation to value specialised properties in which there is limited or not direct market evidence .

Used for owner occupied properties and is not suitable for Loan Sec valuations.

Question 21

How to undertake A DRC Valuation?

Answer 21

Value the land in its current use.

Obtain the costs of replacing the property with a modern counterpart and then discount for depreciation and obsolescence.

Question 22

How many types of obsolescence are there?

Answer 22

Three.

Physical -wear an tear
Functional - no longer fulfils its function
Economic - change market conditions surrounding the use of the asset.

Question 23

Has there been any recent updates?

Answer 23

Update to the UK Red Book Supplement from 19th Oct, eff. 1 May 24.

Introduced mandatory rotation rules to Prevent Firms From Valuing an Asset For More Than 10 Years.

The rotation requirements include:
* a maximum single engagement period of five years,
* a maximum period of ten years before the rotation of a valuation firm - this might include multiple engagements,
* a maximum period of five years before the rotation of an individual ‘responsible’ valuer,
* a minimum three-year break after rotating off an engagement,

Improve standards
Enhance integrity and transparency
Grow confidence in the sector
Increase public trust

Question 24

Vals: What are the purposes behind vals?

Answer 24

Loan Security
Accounts
Financial Reporting
Internal purposes
Inheritance Tax
Acquisition Purposes
In support of a statutory function

Question 25

Vals: When should each method be used?

Answer 25

Comparable
The comparable method is the most widespread valuation method, typically to assess the market rent and market value of both commercial and residential properties.

Investment
The investment method is used where there is an income stream to value, i.e. the property is tenanted.

Profits
The profits method is also used for income-producing properties where the value is in the business not the property.

The residual method is typically used for property or land with development potential.

The depreciated replacement cost
(DRC) method is used for owner-occupied or specialised property that is rarely sold on the open market.

Question 26

Vals North Wales LV2: Why would the lack discharge consent cause the park to close?

Answer 26

This was because the park would no longer be able to discharge their waste unless they had a compliant discharge licence.

In this instance the sewage treatment plant was at the end of its economic lifespan and there could be issues in regards to the cleansing on waste prior to discharge. and I was informed by the client the cost budgeted for the removal and replacement was £250k. base on my experience I knew that the purchaser would likely seek to recover this cap expenditure by reducing the purchase price. I therefore reduced my MV accordingly and report on the SA that works had been completed.

Question 27

Vals North Wales LV2: Was the SA of works completed agreed with client before instruction?

Answer 27

Yes it was.

Question 28

Vals Retail Bristol LV3: What was the rate for the VP for the retail unit?

What was the yield you applied on MV1?

What was your yield on the top slice

What was your opinion of rent per sqft?

What was the passing rent

Answer 28

£180 per sqft

TS: 9%
Hardcore: 8%

£25.00 Zone A.

Equivalent Yield

£32 ITZA

Question 29

Vals Retail Bristol LV3: What is the hardcore and slice method?

Answer 29

The way of valuing over rented properties.

A yield is applied to market rent in perp.

A higher yield is applied to the top slice that represents the amount of rent between the passing rent and current market rent. This is applied until the next break and the higher yield reflects the tenants increased risk of tenant default.

Question 30

Vals Retail Bristol LV3: How long was the void period and where was this derived from?

Answer 30

I applied a void period of 12 months.

This represented a 9 month marketing period and a 3 month rent free incentive.

This was based off conversations with my colleagues in the office with relevant departments.

Question 31

Vals yorkshire park LV 3: What were the assumptions behind your assessment in your calculation of FMT/FMOP? ?

Answer 31

My assumptions were based on the fact 2019 was the last normalised trade year for caravan parks.
2020 was affected by Covid-19, there was relief measure but lack of income.
2021: Was still affected by Covid 19 which affect the and 2022 was the bounce back and represented and abnormal trading year.

Question 32

Vals yorkshire park LV3: What is the relevant information you requested?

Answer 32

Copy of the site licence, accounting information, sales records, copy of any planning permissions, confirmation of service connections

Question 33

Vals Retail LV3: hat are the primary and secondary yields and rents for retail premises on Bristol?

Answer 33

Yields
P: 7%
S: 8-9%

Rents
S: £18 - £22
P: £32

Question 34

Vals Industrial LV2: What are the current rents and yields for the industrial sector?

Answer 34

£12:50 for larger units
£15 for city centre trade counter

5% - prime

6% - 7% - sub prime

Question 35

Vals Industrial LV2: How and why did you undertake the term and reversion method of val?

Answer 35

I used it as the property is under rented /reversionary investments.

Term is capitalised until next lease break or expiry at a lower (initial) yield.

The reversion is then valued into perp at a higher (reversionary) yield.

Question 36

Bristol Retail Market Last 24 months?

Answer 36

In general less lettings and rents still adjusting / decreasing from pre-covid. Occupiers still reeling from the squeeze on cost of living crisis and energy price rises. Increase focus on value for money but footfall has risen. More opportunities from the decrease in Ratables Values.

Question 37

Vals: Whats the difference between and assumption and a special assumption

Answer 37

Assumption: A supposition taken to be true. an assumption is made where specific investigation by the valuer
is not required in order to prove that something is true.

Special A: 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.

Question 38

Yorkshire LV3: What are the market norms in the caravan industry?

Answer 38

Statics - £10k year hf

If hire fleet - 40-60 % occupancy

Caravan sales churn 10-20%

Sales margin - 40%

Repairs and maintenance - 3-5%

FMOP/ EBITDA - 40-60% fluctuates on the above.