Valuation Flashcards
What is DCF valuation?
A Growth Explicit investment method of valuation
Where I project an estimated cashflow over an assumed investment holding period, with an exit value at the end of that period. Cashflow is then discounted back using a discount rate to establish the Net Present Value
Why is a DCF used?
Takes into consideration the timings of the cashflow
Allows for multiple assumptions and costs
Allows for risk to be taken on different premiums
Why do you use a 50-year cashflow?
These are long term assets as most we value have a minimum lease of 80 years
It would make little difference using a 30 year as in the 50th year we capitalize into perp
What is a Local Housing Allowance Rate?
Used to calculate the maximum amount people renting from a private landlord can claim in Housing Benefit or Universal Credit
How do you establish the Local Housing Allowance?
Established by the Department for Work and Pensions from data provided by the Valuation Office Agency
Based on the average private rent being paid in the Broad Rental Market Area
The Benefit rate is then based on the 30th percentile of the established figure for the BRMA rent and the number of bedrooms
What happens if the rent you receive in the data from HA are above the LHA CAP? - (And why?)
I would communicate this to the Borrower and ensure the data is correct
I would CAP the rent at each of the LHA rates for each bedroom type
This is to mitigate the additional risk of the income that was above the CAP as any income above is not guaranteed and Government backed
How are EUV-SH rents calculated?
Formula Rent can be used by the government on any given property with Market Values
It uses Locality, Relative Value, Local/National Income levels and bedroom weighting
The Values are subject to the LHA CAP
What is the Formula for Formula Rent?
Establish the Jan 99 multiplier for the county
- Established 70% of National Average rent x by Relative County Earnings
- x the result by the bedroom weighting
- Establish 30% of National Average earnings x by Relative Property Value
Add the two figures to form Jan 99 rent
Allow for inflation from Jan 2001 - Valuation Date
Final inflation increase is the Social Rent subject to LHA CAP
What is a Yield?
A measure of investment shown as a percentage of capital invested
What is a Capitalization rate?
Real estate investment measure used to compare different investments
- Net Operating Income / Market Value
What is an All Risks Yield?
Remunerative rate of interest
Used for the valuation of fully let properties
Reflects all the prospects and risks attached to the particular investment
How do you Calculate NPV
How much an investment is worth through out its life
- Discount the cashflow as the discount rate
How did you arrive at a discount rate of 5.25%
I established the risk free rate (based off the yield of Gov’t 30-year Bonds)
- 3.5%
I added this to a risk premium based off my research into;
- Demand
- Passing rent
- Average wages
- Inflation
- External market conditions
- 1.75%
What was the Risk Free Rate at the time of valuation?
3.5%
Based of a Risk Free Rate of 3.5% your Risk premiums only accumulated to 1.75%?
Risk Premium
- Series of incremental risks which when added together give me 1.75%
Low due to;
- London is a good market with lots of demand (244,000 households on the waiting lists)
- Peoples wages are higher
- These properties have lower passing rents as they are social housing
Is the discount rate of 5.25% in you opinion high or low? and why?
It is low
- London especially Fulham and the West is low risk
- High Demand
- Lower Void Rates
What factors did you take into account when setting up the DCF?
- Location of the stock
- Age
- Condition
- Passing rents
- Local rent level
- Local wages
- Interest rates
- Govt policy
- Likely repair costs (cyclical and day to day)
- Management costs
What was your end Valuation?
EUV-SH - £1,250,000
MV-VP - £10,670,000
A value of £1,250,000 is rather low, how much was the loan amount?
That information would be subject to confirmation by the lender
However usually the loan amount needs at least 120% - 150% value from the portfolio for these types of valuations
How did you set up you comparable analysis?
Using websites such as Rightmove Plus and LonRes
I search for properties using the hierarchy of evidence
I called local agents to back up my opinions of value
What is the Hierarchy of evidence?
Sets out how comparable should be weighted giving the best chance of achieving an accurate value
Category A - Direct Comparables of completed transactions
- Identical property (full accurate data)
- Similar property (full accurate data)
- Similar property (enough reliable data)
Category B - General Market Data
- Information from Published sources
- Historical Evidence
- Indices (house price index)
Category C - Other sources
- Transactional data from other real estate types
- Other background data (interest rates)
What factors influenced the decision to model a 1% yearly rent increase?
Current legislation states that Social rented properties rent can only increase by CPI + 1%
What sources and data did you consult to establish rent assumptions?
What factors did you consider when establishing the risk premium for the Discount Rate?
30 year Govt Bond yield (3.5%)
+
- Interest rates
- Risks from government policy
- Tenure risk
- Construction cost increasing
How did you account for cost increases over the 50-year valuation period?
I model separate inflators into each cost
Expenditure - 1%
Management cost - 1%
Major repairs (CapEx) - Increase by £25 every 5 years
How did you establish your CapEx?
I consult the Capital Expenditure matrix whihc has been put together from my firms in house building consutany team they have put a cost profil together over 30 years based of unit types and age and it is updated regularly
How did you determine management cost for the portfolio?
Through data gathetred from the Global Accounts analysis file which all RP must submit to each year
- Location
- Averag cost acorss the sector
- Average cost for the RP
What was the rational for selecting repair costs for the properties?
These are social rented units
- As rented units repair costs are dealt with by the owner, I value this as if the bank has taken over the properties
- As they are social rented units there is a general consensus that they are likely to be of inferior internal specification and might be susceptible to degrade at a faster rate than a property that might be rented privately
What is an Exit Yield?
Capital value of the investment property at the end of the holding period expressed as a percentage
What was your exit yield?
Why do you discount in the final year?
Because £1 today is worth more than £1 tomorrow
So I will discount future income flows more the further in the future they stretch as they will effectively be deflating
Can you explain your cashflow please? how does it work?
It takes the in-goings and projects them into the future with a predicted % increase per year
- Weekly rent x by 52
It will then deduct the various out- goings
- Bad debts / voids / Management / Major repairs / Cyclical / day to day
These will be taken off the income on a yearly basis giving me the yearly Net income
Net income is then x by the Discount rate to establish Cumulative Present Value per year
In the final year the model capitalize value into perp
Are you valuation Real or Nominal?
Real
What is a REAL Value?
Where a value has had inflation taken into account
Why do you value on the basis of MV-VP?
It allows me to bench mark my figures
What was your capitalisation rate?
5%
How did you choose your Capitalisation rate? and why?
Established as 0.25 base points lower than the discount rate
The bips reduction reflects higher rent increases in real terms versus our management cost growth rate
Important to note the NPV between year 51 and perp represents a very small percentage of the over all value
How would EPC information help provide a better valuation?
It would de-risk the valuation
- I could make better cost growth assumptions
