Valuation Flashcards

1
Q
  1. What are the five methods of valuation?
A

a. Comparable
b. Investment
c. Residual
d. Profits
e. DRC – Depreciated Replacement Cost

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2
Q
  1. What is each valuation method used for?
A

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

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3
Q
  1. Tell me everything about the comparable method of valuation?
A

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

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4
Q
  1. Tell me everything about the residual method of valuation?
A

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

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5
Q
  1. Define a residual site valuation?
A

a. Valuation of a property holding to find the market value of the site based on market inputs

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6
Q
  1. Define a development appraisal?
A

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

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7
Q
  1. Tell me everything about the profits method of valuation?
A

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

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8
Q
  1. Tell me everything about the DRC method of valuation?
A

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)

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9
Q
  1. What is included in a valuation report?
A

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

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10
Q
  1. Define EUV-SH?
A

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

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11
Q
  1. Where is information on EUV-SH found?
A

a. UK Red Book National Supplement
b. UK VPGA 4.3 – Operational property, plant and equipment

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12
Q
  1. What methods are used to value on EUV-SH?
A

a. DCF
b. Beacon approach

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13
Q
  1. Tell me about the Beacon Approach?
A

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

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14
Q
  1. Define MV-T?
A

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

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15
Q
  1. Why did you use a 50-year DCF?
A

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

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16
Q

How did you calculate finance for the residual valuation?

A

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

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17
Q
  1. How do you select an appropriate discount rate?
A

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

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18
Q
  1. What is the benefit of including off plan sales (residual val)?
A

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

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19
Q
  1. What are the pros and cons of Argus?
A

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

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20
Q
  1. Where did your client get their build costs from?
A

a. From a reputable firm of quantity surveyors – I cross referenced with BCIS data

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21
Q
  1. Where does BCIS get its data?
A

Cost and price information is collected by BCIS from across the UK construction industry, then collated, analysed, modelled, interpreted

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22
Q
  1. Why does a different location and business stream need to be split?
A

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

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23
Q
  1. Does a nil valuation mean a property is worthless?
A

a. No, it means the valuer can’t provide a value at that moment in time – they require more info.

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24
Q
  1. Define Valuation date?
A

a. The date on which the opinion of value applies

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25
Q
  1. What are the different valuation approaches?
A

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

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26
Q
  1. Define Market Value?
A

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.

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27
Q
  1. Define Market Rent?
A

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

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28
Q
  1. Define Fair Value?
A

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

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29
Q
  1. Define Investment Value?
A

a. Value of an asset
b. To a particular owner, or prospective owner
c. For individual investment or operational objectives

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30
Q
  1. Define Equitable value?
A

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

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31
Q
  1. Define an assumption?
A

a. Something that you can reasonably assume to be true

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32
Q
  1. Define a special assumptions?
A

a. Something that you know is not true

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33
Q
  1. What are the parts in the RBG?
A

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

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34
Q
  1. What is the capital value?
A

a. Known as the market value
b. Effectively the price agreed by the buyer and seller based on market assumptions
c. Capital value of an asset is often referred to as the fair value when the value is derived under the IFRS framework

35
Q
  1. What is worth?
A

a. The property’s value based on an investor’s own assumptions as opposed to market assumptions
b. Also referred to as investment value
c. This differs from market value as an investor will have different assumptions to the market assumptions

36
Q
  1. What are the approaches to the investment method?
A

a. Implicit
i. Rent and yield approach (aka traditional approach or direct capitalisation approach)
b. Explicit
i. DCF approach

37
Q
  1. What are the techniques within the rent and yield approach?
A

a. Initial yield method
b. Equivalent yield method
c. Term and reversion method
d. Layer and hardcore method

38
Q
  1. What do you get from the Global Accounts Analysis?
A

a. Provide data on Registered Providers expenditure on maintenance and repairs per unit

39
Q
  1. What is some RICS info on comparable evidence?
A

a. RICS Professional Statement on Comparable Evidence in Real Estate Valuation (1st edition 2019)
b. Aims to ensure consistent application of comparable evidence based on robust principles
c. Hierarchy of evidence (direct comps, general market data, other data)

40
Q
  1. How do you calculate years purchase? What does years purchase show?
A

a. Divide 100 by the yield
b. Gives you length of time needed to break even (time for income to equal purchase price)

41
Q
  1. What are the contents of part 3 in the RBG?
A

a. Professional Standards
b. PS1 = Compliance with standards where a written valuation is provided
c. PS2 = Ethics, competency, objectivity and disclosures

42
Q
  1. How often is BCIS updated?
A

a. Every quarter

43
Q
  1. BCIS stands for?
A

a. Build cost information services

44
Q
  1. What is the definition of affordable housing?
A

a. Social rented, affordable rented and intermediate housing, provided to eligible households whose needs are not met by the market – National Planning Policy Framework (NPPF)

45
Q
  1. Define All risks yield?
A

a. The rate of interest used to value a fully let property at market rent, reflecting all prospects and risks attached to the investment
b. Implicit of risk

46
Q
  1. Define True yield?
A

a. Assumes rent is paid in advance not in arrears

47
Q
  1. Define Nominal yield?
A

a. The initial yield assuming rent is paid in arrears

48
Q
  1. Define Gross yield?
A

a. The yield not adjusted for purchasers’ costs

49
Q
  1. Define Net yield?
A

a. The resulting yield adjusted for purchasers’ costs

50
Q
  1. Define Equivalent yield?
A

a. Average weighted yield where a reversionary property is valued at an initial yield and a reversionary yield
b. This is better option than an initial yield when void periods are possible

51
Q
  1. Define Initial yield?
A

a. Simple income yield for current income and current price

52
Q
  1. Define Reversionary yield?
A

a. Rent/price on an under rented property

53
Q
  1. Define Running yield?
A

a. The yield at one moment in time

54
Q
  1. Define Exit yield?
A

a. Is the capitalisation rate applied to the net income at the end of the discounted cash flow model period to provide an exit value which an entity expects to obtain for an asset after this period.

55
Q
  1. What is a DCF?
A

a. Growth explicit method of valuation
b. Project’s estimated cash flows over a term, plus an exit value at the end
c. Cash flow is then discounted to give a NPV using a discount rate
d. Used when projected cash flows are estimated over a finite period of time such as:
i. Short term leasehold interests
ii. Properties with income voids or complex tenures
iii. Phases development projects
iv. Non-standard investments
v. Over-rented properties
e. Growth assumptions are set out explicitly

56
Q
  1. What is the NPV?
A

a. Sum of the DCF
b. Can be used to determine if the investment gives a positive return against the target rate of return
c. When NPV is positive – investment has exceeded investor’s target rate of return
d. When NPV is negative – investment is lower than investor’s target rate of return

57
Q
  1. What is the IRR?
A

a. The rate of return at which all future cashflows must be discounted to produce a NPV of 0
b. Used to assess total return

58
Q
  1. Tell me about Calculation of finance?
A

a. 3 choices for interest rates:
i. Bank of England Base Rate plus premium
ii. Current SONIA rate (Sterling Overnight Index Average)
iii. Rate at which the developer can borrow the money

59
Q
  1. What does the RBG state on draft, desktop and revaluations?
A

a. These are all RBG valuations unless the purpose is for the 5 exempt reasons
b. Considerations valuers must take on these:
i. Restrictions must be agreed in writing and included in ToE’s
ii. Implications of restrictions must be confirmed in writing in ToE’s
iii. Is the restriction reasonable?
iv. Refer to the restriction explicitly within the valuation repor
v. Revaluations must only be completed without inspections IF the valuer can satisfy themselves there have been no material changes to the property or nature of the location since the last inspection – this must be stated in ToE’s

60
Q
  1. What valuations are exempt from the red book?
A

a. Providing agency or brokerage service in respect of the acquisition or disposal of one or more assets
b. Acting or preparing to act as an expert witness
c. Performing statutory functions
d. Valuation purely for internal purposes, without liability, and without communication to a third party.
e. Providing valuation advice expressly in preparation for, or during the course of, negotiations or litigation, including where the valuer is acting as advocate

61
Q
  1. Can you issue draft/preliminary valuation advice?
A

a. Yes, but must be marked as draft, for internal purposes only. Cannot be relied upon
b. Valuer cannot be influenced by client on final figure
c. Changes to preliminary valuation must be noted on file with reasons provided

62
Q
  1. Is there room for margin of error in valuation?
A

a. Singer & Friedlander Ltd vs J D Wood (1997) established margin can be varied for more complex valuations
b. K/S Lincoln and Others v CB Richard Ellis (2010) established resi margin as 5%, commercial margin for one off property as 10% and if a property has exceptional features then 15%.
c. Generally the margin of error is 10%

63
Q
  1. What is Hope Value?
A

a. The value arising from any expectation that future circumstances affecting the property may change. Two examples of hope value being created:
i. The prospect of securing planning permission for development of land, where no planning permission exists at the time
ii. The realisation of marriage value arising from the merger of two interests in land

64
Q
  1. What is marriage value?
A

a. The increase in value of the property following the completion of the lease extension
b. Red book - 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

65
Q
  1. What is WAULT?
A

a. Weighted Average Unexpired Lease Term (WAULT) remaining to the first break or expiry of a lease across asset weighted by the contracted rent
b. It’s a calculation used when valuing an asset or considering appropriate investment yield comparables for multi-occupied individual investments or portfolios

66
Q
  1. Define special buyer?
A

a. A particular buyer for whom a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in the market

67
Q
  1. Define special value?
A

a. An amount that reflects particular attributed of an asset tat are only of value to a special buyer
b. EG: Tenant purchasing freehold interest

68
Q
  1. How would you value a long leasehold interest?
A

a. Rent received less ground rent. Capitalise at appropriate yield for rest of lease
b. DCF can also be used

69
Q
  1. Tell me about term and reversion?
A

a. You apply an initial yield on the current rent term income – yield will be lower due to less risk
b. You apply a separate yield on the reversionary rent income into perpetuity – yield is higher as rent will revert to higher level
c. You then discount them to give two present values and add the them up
d. The cash-flow is sliced vertically

70
Q
  1. Tell me about layer and hardcore?
A

a. Cash-flow is sliced horizontally
b. You apply an initial yield on the current rent term income – yield will be higher due to over-rented asset meaning more risk
c. You apply a separate yield on the reversionary rent income into perpetuity – yield is lower as rent will revert to lower level
d. You then discount them to give two present values and add the them up

71
Q
  1. In the hierarchy of comparable evidence, how would you weight something that was, let’s say on the same street but was asking price rather than having been sold?
A

a. I would weight that lower than the sold price because it’s not confirmed price and often there’s a premium or a discount to the asking price as that is only effectively based on a market appraisal

72
Q
  1. Can you talk me through the advantages of using an explicit growth based model rather than an implicit please?
A

a. It allows you to make specific growth assumptions over the course of the income stream, which in this case would have been various lengths of leases. It means that you can make assumptions and changes in growth rates. So for instance, if you wanted to account for the currently high inflation, you could have high inflation assumptions which then taper off, whereas a growth implicit would just include one overall growth rate assumption across the entire formula

73
Q
  1. And how could you use a DCF to calculate an internal rate of return?
A

a. Umm, we would calculate that across the length of the cashflow to give you the rate of return that is equivalent to the present value of the investment being 0

74
Q
  1. What is a regulated purpose valuation?
A

a. A valuation relied on by third parties who have not commissioned the valuation and they are subject to valuation monitoring

75
Q
  1. RICS guidance on investment method?
A

a. Guidance note – DCF for commercial property investments, 2010
b. Advises on use of the DCF rather than ARY investment method
c. Price paid reflects investor’s expectations as to its cashflows and risks so assumptions should be made explicit
d. Can be used to assess investment value/worth to a specific investor using their assumptions or market value using observed market assumptions
e. Also preferable if there are no comparables for the ARY framework

76
Q

Can you tell me about the Monte Carlo method for sensitivity analysis?

A
  • Probability theory and a risk modelling technique used when there is a number of uncertain variables
  • EG we might use the normal distribution, or “bell curve” to model inputs like rental growth rates. We would use estimates of the mean and standard deviation of this growth rate based on historical data as inputs to the normal distribution. The resulting outputs are then recorded as this process is repeated hundreds or even thousands of times, culminating in a distribution of outputs
77
Q

Tell me the difference between a dev appraisal and residual val?

A
  • Residual determines market value of land using market assumptions
  • Dev appraisal calculates profit
  • Residual is red book, dev appraisal is not
78
Q

What do professional fees allow for?

A
  • Planning
  • Architects
  • Quantity surveyors
  • Engineers
79
Q

What do contingency fees allow for?

A
  • Depend on the level of risk and market conditions
80
Q

How do you determine the developers profit within a residual?

A
  • Profit on cost
  • Based on construction risk, planning risks and sales risks
  • Profit on cost = Profit/(GDV-Costs)
81
Q

What is an appropriate land value?

A
  • It’s in line with comparable evidence
82
Q

What’s the difference between a basis of valuation and valuation methodology?

A
  • Valuation methodology is how to undertake a valuation. Basis of value is “a statement of the fundamental measurement assumptions of a valuation”
83
Q

What is the difference between FH and LH?

A

d. Freehold – You own the property and the land it’s built on for as long as you want. Leasehold – You own the property for a set period, but not the land it’s built on

84
Q

Changes to UK national supplement?

A

Mandatory rotation in UK VPS 3

Exclusion of all public sector valuations

Update on DRC (where the value of a site is greater with an alternative use it must be stated)

Unless agreed in ToE, no need to provide valuation on alternative basis of value

In the interim, no changes to valuation for secured lending purposes