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Al APC Case Study > Valuation > Flashcards

Valuation Flashcards

1
Q

What is DCF valuation?

A

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

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2
Q

Why is a DCF used?

A

Takes into consideration the timings of the cashflow

Allows for multiple assumptions and costs

Allows for risk to be taken on different premiums

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3
Q

Why do you use a 50-year cashflow?

A

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

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4
Q

What is a Local Housing Allowance Rate?

A

Used to calculate the maximum amount people renting from a private landlord can claim in Housing Benefit or Universal Credit

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5
Q

How do you establish the Local Housing Allowance?

A

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

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6
Q

What happens if the rent you receive in the data from HA are above the LHA CAP? - (And why?)

A

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

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7
Q

How are EUV-SH rents calculated?

A

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

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8
Q

What is the Formula for Formula Rent?

A

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

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9
Q

What is a Yield?

A

A measure of investment shown as a percentage of capital invested

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10
Q

What is a Capitalization rate?

A

Real estate investment measure used to compare different investments

  • Net Operating Income / Market Value
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11
Q

What is an All Risks Yield?

A

Remunerative rate of interest
Used for the valuation of fully let properties
Reflects all the prospects and risks attached to the particular investment

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12
Q

How do you Calculate NPV

A

How much an investment is worth through out its life
- Discount the cashflow as the discount rate

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13
Q

How did you arrive at a discount rate of 5.25%

A

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%

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14
Q

What was the Risk Free Rate at the time of valuation?

A

3.5%

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15
Q

Based of a Risk Free Rate of 3.5% your Risk premiums only accumulated to 1.75%?

A

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

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16
Q

Is the discount rate of 5.25% in you opinion high or low? and why?

A

It is low
- London especially Fulham and the West is low risk
- High Demand
- Lower Void Rates

17
Q

What factors did you take into account when setting up the DCF?

A
  • 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
18
Q

What was your end Valuation?

A

EUV-SH - £1,250,000

MV-VP - £10,670,000

19
Q

A value of £1,250,000 is rather low, how much was the loan amount?

A

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

20
Q

How did you set up you comparable analysis?

A

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

21
Q

What is the Hierarchy of evidence?

A

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)

22
Q

What factors influenced the decision to model a 1% yearly rent increase?

A

Current legislation states that Social rented properties rent can only increase by CPI + 1%

23
Q

What sources and data did you consult to establish rent assumptions?

A
24
Q

What factors did you consider when establishing the risk premium for the Discount Rate?

A

30 year Govt Bond yield (3.5%)
+
- Interest rates
- Risks from government policy
- Tenure risk
- Construction cost increasing

25
Q

How did you account for cost increases over the 50-year valuation period?

A

I model separate inflators into each cost

Expenditure - 1%

Management cost - 1%

Major repairs (CapEx) - Increase by £25 every 5 years

26
Q

How did you establish your CapEx?

A

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

27
Q

How did you determine management cost for the portfolio?

A

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

28
Q

What was the rational for selecting repair costs for the properties?

A

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
29
Q

What is an Exit Yield?

A

Capital value of the investment property at the end of the holding period expressed as a percentage

30
Q

What was your exit yield?

A
31
Q

Why do you discount in the final year?

A

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

32
Q

Can you explain your cashflow please? how does it work?

A

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

33
Q

Are you valuation Real or Nominal?

A

Real

34
Q

What is a REAL Value?

A

Where a value has had inflation taken into account

35
Q

Why do you value on the basis of MV-VP?

A

It allows me to bench mark my figures

36
Q

What was your capitalisation rate?

A

5%

37
Q

How did you choose your Capitalisation rate? and why?

A

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

38
Q

How would EPC information help provide a better valuation?

A

It would de-risk the valuation
- I could make better cost growth assumptions

39
Q
A

Al APC Case Study (8 decks)

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