Valuation Flashcards
- At Brook Street how did the retail frontage impact on value?
- How did you adjust the Brook Street evidence?
- How did you proceed with negotiations post valuation?
- Why did you consider yourself competent to value a mixed resi/ commercial property in the Fraser Road example?
- How did the Hyde Street evidence impact your valuation of Fraser Road?
What is the comparable method of valuation
Guidance ‘ comparable evidence in real estate valuation 2019’ this sets of a hierarchy of evidence.
1)direct comparable sales/lettings/sublettings
2)rent review and lease renewals
3) expert determinations
4)agents advise and hearsay
The comparable method is primarily uses sales data of properties that have recently been sold focusing on assets that have similar size, location, condition, features and specification.
comparable evidence is identified and analysed and is fundamental to producing a sound valuation that can be scrutinised from the client and market.
The valuer produces a schedule which contains details of size, quality, location, tenure, transaction price, date of sale and price per sq ft.
The comparable should be recent and there should be several to represent market conditions
what are the different methods of valuation
1)comparable
2)Investment
3)Profits
4)Residual
5)Contractors or DRC
what are the different valuation approaches
Income approach - converting current and future cash flows into a capital value (investment, residual and profits)
Cost approach - reference to the cost of the asset whether by purchase or construction (DRC method)
Market approach - using the comparable method of valuation
Investment method of Valuation.
used when there is an income stream available.
The income is capitalised to produce a capital value using a yield.
Comparable evidence for rent and yield.
Term and reversion method is used for under rented properties
Layer/hardcore method is used for over rented properties. Bottom slice is market rent. Top slice or froth is the rent passing - the market rent until the next lease event. different yields applied to reflect the risk
lower yield for the secure income, a higher yield for the risky rent.
what is the red book?
The RICS red book contains mandatory rules and best practice guidance for members who undertake asset valuations.
The red book includes the international valuation standards and red book supplement
DCF Discounted cash flow
growth explicit investment method of valuation
It projects cash flows over a certain time period plus an exit yield.
useful with properties with void periods, phased developments
non standard investments with lengthly reviews say over 21 years.
this approach seperates out and identifies growth assumptions rather than using an all risks yield.
Method:
estimate the cash flow
estimate the exit value
select the discount rate - amount of £1
the value is the Net present value
when the NPV is positive the project is viable, if its negative its not achieved the investors target rate of return.
Profits method
used for trade related properties such as pubs, petrol stations, hotels, guest houses, leisure and healthcare.
where the value of the property relies on the profit generated from the business.
must have accurate audited accounts for 3 years, audited accounts are superior to management accounts but are usually delayed for 9 months.
business plan is useful for new businesses.
simple method:
annual turnover less costs/purchases = gross profit
less reasonable working expenses = unadjusted net profit
less operators remunerations = adjusted net profit know as the fair maintainable operating profit
this can be expressed as the earnings before interest, taxation, depreciation, and amortisation EBITDA
this is capitalised at the appropriate yield YP multiplier to achieve market value. Then can be cross checked with comparable sales evidence if possible.
RED book valuations
Are mandatory for all valuations except for the following 5.
1) internal valuations
2) statutory valuations except for accounting purposes
3)Agency valuation
4) negotiations or litigation
5)giving evidence as an expert witness
this must be specified in the terms of engagement.
red book terms of engagement
1)identification of the valuer
2)identification of the client)
3)other users)
4)the details of the asset to be valued
5)currency
6)purpose of the valuation
7)basis of value
8)valuation date
9)nature and source of information
10)assumptions and special assumptions
11)format of the report
12) restriction for use and publication
13) confirmation of red book compliance
14)fee basis
15)complaints handling
16)statement of compliance by RICS
17)Limitation on liability
assumption - planning permission granted
special assumption - development value in the future not guaranteed
basis of value
Market value;
The estimated amount for which as asset or liability should exchange, on the valuation date, between an willing buyer and seller, in an arms length transaction, after property marketing, where the parties have acted knowledgeably, prudently and without compulsion
Market rent
The estimated amount for which an interest in real property should be leased, on the valuation date, between an willing buyer and seller, in an arms length transaction, after property marketing, where the parties have acted knowledgeably, prudently and without compulsion.
Fair value;
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The basis of valuation is now required if the International reporting standards have been adopted by the client.
The RICS view is that this is generally consistent with Market value.
Investment value or worth.
may differ from market value. this is sometimes used as a measure of worth to reflect the value against the clients own investment.
