Valuation Flashcards
- What are the five methods of valuation?
a. Comparable
b. Investment
c. Residual
d. Profits
e. DRC – Depreciated Replacement Cost
- What is each valuation method used for?
a. Comparable – When comparable data is available to form an opinion of value
b. Investment – When there is an income stream to value
c. Residual – When valuating sites or undertaking development appraisals
d. Profits – Pubs, petrol stations, hotels, healthcare
e. DRC – When direct market evidence is limited for specialised properties
- Tell me everything about the comparable method of valuation?
a. Using comps to form opinion of value
b. Find comps, assemble comps into schedule, sort in hierarchy of evidence, analyse comps to form value, report value
c. Hierarchy of evidence has 3 parts:
i. Category A – Direct comps
ii. Category B – General market data for guidance
iii. Category C – Transactional evidence from other locations
- Tell me everything about the residual method of valuation?
a. Method for valuing sites or undertaking development appraisals
b. GDV = market value of proposed development at valuation date
c. All risks yield is used
d. GDV – Costs = Residual site value
- Define a residual site valuation?
a. Valuation of a property holding to find the market value of the site based on market inputs
- Define a development appraisal?
a. A calculation to establish the value/profitability/viability of a proposed development based on a clients inputs
b. A site value can be assumed, or calculated
- Tell me everything about the profits method of valuation?
a. Used for trade properties where the value depends on profitability
b. Requires accurate audited accounts for the last 3 years or estimates for newer businesses
c. Annual turnover – costs = gross pofit
d. Gross profit – reasonable working expenses = unadjusted net profit
e. UNP – Operators remuneration = fair maintainable operating profit
f. FMOP = EBITDA
Finally, the value is capitalised using an all risks yield
- Tell me everything about the DRC method of valuation?
a. AKA contractor’s method
b. Used where market evidence is limited for specialised properties
c. Including oil refineries, docks, lighthouses
d. Value of land in existing use + current cost of replacing the building + (fees minus a discount for depreciation of obsolescence)
- What is included in a valuation report?
a. Identification and status of valuer
b. Client and any other intended users
c. Purpose of valuation
d. Basis of value
e. Valuation date and date of valuation report
f. Extent of investigation
g. Assumptions and special assumptions
h. Valuation approach and reasoning
i. Market commentary
j. Statement on limited liability
- Define EUV-SH?
a. Refers to property value if it were to be used for social housing in perpetuity
b. Assumes hypothetical sale to another RP On the valuation date
c. On the assumption that there is a willing seller and a reasonable marketing period prior to valuation date and
d. that it will be used for social housing and any voids will be re-let on the same tenure and not sold as MV-VP
e. Vacant properties should be valued as EUV-SH if there is a letting demand
f. Vendor only disposes to similar organisations (RPs)
g. Subsequent sales must follow same assumptions
- Where is information on EUV-SH found?
a. UK Red Book National Supplement
b. UK VPGA 4.3 – Operational property, plant and equipment
- What methods are used to value on EUV-SH?
a. DCF
b. Beacon approach
- Tell me about the Beacon Approach?
a. collect stock information
b. divide stock into asset groups
c. establish archetype groups
d. identify beacon properties
e. inspect beacon property
f. beacon record sheet
g. comparable sales evidence
h. adjusting sales evidence
i. beacon valuation
j. beacon variations
k. valuation of the archetype group
l. adjustment factor
m. valuation of asset group
- Define MV-T?
a. Refers to property value if property was sold on open market with current tenancy in place
b. Assumes a hypothetical sale that is not bound by restrictions to use and can be sold on the open market
c. The sale would see an increase in rents to market levels
- Why did you use a 50-year DCF?
a. The assets we value have a minimum lease of 80 years or they are freehold so we have explicit assumptions for 50 years. It doesn’t make a difference if it’s 50 or 30 years as we capitalise the net income into perpetuity in the final year of the CF
How did you calculate finance for the residual valuation?
b. For the site purchase we calculated the finance on a straight line basis, using compound interest
c. For costs we assumed the finance required was calculated on an S-curve basis – the total construction costs are assumed to be over half of the time-period
d. For the holding costs from completion to disposal we calculated the finance on a straight line basis
- How do you select an appropriate discount rate?
a. Risk Free rate + risk premium
b. Risk free rate = 30 year gilt yield (4.42%)
c. Risk premium = Factor in demand for property type, demand for tenure type, demand for property in that location and also factor in earnings
- What is the benefit of including off plan sales (residual val)?
a. Income comes in earlier, which offsets your costs so you have less finance. This increases your land value. Also reduces risk as you have less units to sell post completion
- What are the pros and cons of Argus?
a. Advantages:
i. Reliable and used across the industry
ii. Allows for a good degree of customisation
b. Disadvantages:
i. Hard to see how its calculating everything behind the scenes
ii. This makes understanding the impact of any changes harder
iii. Also makes it harder to spot any potential mistakes
- Where did your client get their build costs from?
a. From a reputable firm of quantity surveyors – I cross referenced with BCIS data
- Where does BCIS get its data?
Cost and price information is collected by BCIS from across the UK construction industry, then collated, analysed, modelled, interpreted
- Why does a different location and business stream need to be split?
a. Different levels of demand and supply for affordable housing
b. Greater risk in NE for example compared to SE or London
c. Business streams come with different risk and costs, eg a sheltered scheme will have different day-to-day costs/maintenance costs etc
- Does a nil valuation mean a property is worthless?
a. No, it means the valuer can’t provide a value at that moment in time – they require more info.
- Define Valuation date?
a. The date on which the opinion of value applies
- What are the different valuation approaches?
a. Income approach – conveying current and future cash flows into a capital value (Investment, Residual and Profits methods)
i. An approach that provides an indication of value by converting future cash flows to a single current capital value
b. Cost approach – DRC method
i. An approach that provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or construction
c. Market approach – Using comps (Comparable method)
i. An approach that provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available
- Define Market Value?
a. Estimated amount for which an asset/liability could exchange,
b. At the valuation date
c. Willing buyer and seller
d. Arm’s length transaction
e. After proper marketing
f. All parties act knowledgably, prudently and without compulsion.
- Define Market Rent?
a. Estimated amount for which an interest in a real property should be leased
b. At the valuation date
c. Between a willing lessee or lessor
d. On appropriate lease terms
e. Arm’s length transaction
f. After proper marketing
g. All parties act knowledgeable, prudently and without compulsion
- Define Fair Value?
a. The price that would be received to sell an asset
b. Or paid to transfer a liability
c. Orderly transaction
d. Between market participants
e. At measurement date
- Define Investment Value?
a. Value of an asset
b. To a particular owner, or prospective owner
c. For individual investment or operational objectives
- Define Equitable value?
a. The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties
- Define an assumption?
a. Something that you can reasonably assume to be true
- Define a special assumptions?
a. Something that you know is not true
- What are the parts in the RBG?
a. Part 1 – Introduction
b. Part 2 – Glossary
c. Part 3 – Professional Standards (PS1 & PS2)
d. Part 4 – Valuation technical and performance standards (VPS1-5)
e. Past 5 – Valuation applications (VPGA 1-10)
f. Part 6 – IVS