Valuation Flashcards
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 willing seller
- In an arm’s length transaction
- After proper marketing
- Where the parties had each acted knowledgeably, prudently and without compulsion.
What is yield
Investment return expressed as a percentage of the capital value
What is capital value
Capital value is the price that would have been paid for a given asset or group of assets if they had been purchased at the time of their evaluation
What are the different methods of valuation
-Comparable
-Residual
-Profits
-Investment
-Depreciated Replacement Cost
Talk me through the valuation you undertook at Walton
-Undertook a valuation of a potential freehold site for Lidl. Here I used the comparable method.
-I used Nimbus to search and select comparable of similar simlar size location, tenure and transaction date
-I assembled comparables in a schedule
-And adjusted order of comparables using hierarchy of evidence
-This enabled me to analyse comps to form an opinion on value
What is the hierarchy of evidence
The heirachy of evidence is included within Comparable Evidence in Real Estate Valuation, 1st Edition 2019
-It allocated weight to a transaction
Category A - direct comparable (near identical properties)
Category B - general market date (published reports)
Category C - General Market Data (transactional evidence from other wider market and other real estate types
Talk me through a valuation you undertook at Chester
£6m at 7% NIY.
12psf (400k)
Pets
Halfords
Rightway
B&M
I assisted with valuing a standing investment for Lidl of Caldy Valley Retail Park
I needed to use the comparable method of valuation to adopt a yield
Here I used the comparable method to adopt a yield profile based on comparable retail park investment sales
Created a schedule of comps and added weight based off hierarchy of evidence
When adding weight to comps, i Had to consider similarities to Caldy Valley RP to enable me to adopt an appropriate yield profit
-Caldy Valley is a..
- strong modern retail park
-Secondly,Tenants have strong covenants, good trading histories and always paid rent
-Thirdly, all rack rented and FRI
Adopted 7% yield based on the above coupled with
recent similar transactions on available retail park type investments. These should offer a fair reflection of the current market and give a good indication of the attractive yield/ value achievable if the proposed price can be achieved.
What is an FRI lease
-Fully repairing insuring lease
- tenant has responsibility for all external and internal maintenance, decorations and repairs as well as the liability for insuring the building
How was your Caldy Valley reort prepared in accordance with RICS Red Book
-Although this was not a red book valuation as I am not a registered valuer, it offered a useful reference source when undertaking the internal valuation.
Where would you check the covenant strength of a company?
Dunn and Bradstreet
-Credit Check
How do you undertake an investment valuation?
-The rental income is capitalised to produce a capital value
Passing rent/yield = capital value
What is the investment method valuation
Used when there is an income producing property. Rental income is capitalised to produce a capital value. Implied growth rate is derived from market capitalisation rate (yield).
What makes a good comparable
-Near identical transactions
-recent, representative of current market
-as a result of an arms length transaction in the open market
How do you find relevant comparables
Nimbus
Agents
How are yields found
By comparable evidence
What are the major factors when determining a yield
-Location
-Covenant
-Lease terms
At Chester Chester Caldy Valley, if you plan to include a Lidl store within the scheme and refuse a new lease under what grounds would you do this
s30
7 grounds A-G
F - redevelopment
G - Owner occupation
For redevelopment - can redevelop anytime if has firm intention i.e planning app
For re-occupation - Landlord must have owned for 5 years and prove intention to occupy
What is security of tenure
Tenant can ask for new lease under 54 act
If the lease is silent
What is s25 of LTA
Landlords notice served
6-12 months before end to terminate a lease with the view to:
-offer new lease or
-obtain possession
What is s26 of LTA
T can serve notice requesting a new tenancy
6-12 months before lease end
What is s27 LTA
Notice served by Tenant if they want to leave
must serve 3 month notice
OR could vacate on the last day
What are the statutory compensation if the Landlord obtains possession
E
F
G
Tenant is entitled to compensation of 2RV of if in occupation for 14 years or more
1 RV if in occupation for less than 14 years
What is a lease and license
a lease gives a tenant exclusive right of possession
A license gives someone permission to do something on the owners land
What is a lease renewal
A statutory procedure laid down by 54 act
What is a rent review
contractual procedure contained within a lease
What does the 54 act do?
Gives security of tenure to occupying business’
Whens the investment method used?
To value properties that are
-let as investments
-owner occupied
-vacant
Why is the capitalisation rate also called the ARY
-takes into account all the risks of an investment
-property
-cov strength
-lease terms
-location
How is growth taken into account in a conventional investment method
rent and capital growth are implicit in the capitalisation rate (ARY)
How did you work out the capital value at Chester
Passing rent/yield = capital value
Capital value/ purchasers costs = final value
define all risks yield
Yield of a fully let property at MR reflecting all prospects and risks attached to the particular investment
define Net Initial Yield
the current annual rent expressed as a percentage of capital value, after adding purchaser’s costs.
What is net yield
Net yield – resulting yield adjusted for purchaser’s costs
What is initial yield
yield for current income and current price
What are costs must a purchaser incur when buying a commercial property
SDLT
Agent fees
Legal fees @0.5%
Non Recoverable VAT
total = 1.8%
What are the development costs within a residual appraisal
-demolition
-Construction
-Cost of finance
-Contingency
-Agent fees
-Legal fees
-Acquisition costs
How would you calculate developers profit
-percentage of TDC
What is a reversionary freehold investment
-an investment let at a rent other than MR
What techniques can be used to value an under-rented reversionary investment
-term and reversion
At Caldy Valley, how would you value the park if it was under rented?
- Term and reversion is used where market rent is more than passing rent
At Caldy Valley, how would you value the park if it was over rented?
Layer/hardcore method
In simplistic terms, how is a yield calculated?
-income/price x 100
What is Years Purchased?
The number of years required for an investments income to repay its purchase price
100/yield
Whats a return
The term used to describe the performance of a property
What is true yield
Assumes rent paid in advance and not in arrears
What is nominal yield?
-Initial yield assuming rent is paid in arrears
Gross yield
-yield is not adjusted for purchasers costs
e.g auction result
For the comparable method, if you were evaluating leasehold properties, would you take the comparables at face value
No
I’d analyse the Net Effective Rate, taking any incentives into account
What is the DCF method in RICS?
It is an explicit approach where all future cash flows are estimated and discounted to their present value.
What is the NPV
Determine if investment gives a positive return
What is IRR
Measures the profitability of investments
How do you establish MV?
-comparable method
How do you establish appropriate yields
Investment return expressed as a percentage of the capital value
-comparable method
What does the Red Book do
-sets out mandatory rules and best practice guidance for approved valuers undertaking valuations
When was the red book published and when did it become effective
-2021, effective 22
What is the structure of the Red Book
-Intro
-Glossary
- Professional Standards (PS)
-Valuation Technical and Performance Standards (VPS)
-Valuations Applications (VPGA)
-IVS
