Valuation Flashcards
What new Red Book features are coming out?
A draft ‘Valuation of investment property’ Professional Standard that focuses on DCF’s. This is a consequence of the Peter Pereira Review.
Discounted cash flow should be adopted as the principal model applied in preparing property investment valuations to improve confidence and align more closely with financial analytics.
How would you carry out a DCF?
- Forecast expected cashflows using a growth rate
- Discount the cashflow
- Assume an exit yield
- Sum the discounted cashflows minus the initial investment
What’s included in a service charge budget?
Maintenance and repair. Exterior improvements. Insurance.
What is the full name for the Red Book?
RICS Valuation - Global Standards 2022
What is an arms length transaction?
A transactions where two or more unrelated parties agree to business, acting independently
What is special value?
An amount that reflects particular attributes of an asset that are only of value to a special purchaser.
Which of the ToE are RICS specific?
- Fee basis
- Statement setting out any limitations on liability
- Reference to CPH
- Statement that valuation can be investigated by the RICS
What are the mandatory sections of the Red Book?
Professional Standards (PS), Valuation Technical and Performance Standards (VPS)
What is the structure of RICS valuation - Global Standards 2022?
Intro
Glossary
2 Professional Standards
PS1: Compliance with the standards and statements
PS2: Ethics and Objectivity
5 Valuation Technical and Performance Standards
VPS1: ToE
VPS2: Inspections and records
VPS3: Vals reports
VPS4: Basis of Value
VPS5: Approaches and Methods
What’s in a terms of engagement for vals?
- ID and status of valuer
- ID of client
- ID of other users
- Asset being valued
- Currency
- Purpose of Valuation
- Basis of Value
- Valuation Date
- Sources of info
- Assumptions
- Format of report
Confirmation the report is prepared in accordance with IVS
Difference between Fair Value and Market Value?
Fair Value: “The price that would be received to sell an asset or paid to transfer a liability on an orderly transaction between market participants at the measurement date”
Market Value: “The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and willing seller in an arms length transaction, after proper marketing”.
What are the bases of value?
- Market Value
- Market Rent
- Fair Value
- Investment Value
- Synergistic Value
- Liquidation Value
What is the hierarchy of evidence for investment properties?
Category A - Direct Comps
1. OML,LR,RR, Under Offers, Asking Price
Category B - General Market Data
1. Historic evidence, demand/supply
Category C -Other sources
1. Background data
When would you use the Hardcore Layer Method and how does it work?
Investment method.
Uses EY.
Used for reversionary properties.
1.Cap term into perp at EY
2. Cap MR at EY until reversion
3. Add together
What is the 10 year gilt rate?
Why do clients need valuations for financial reporting purposes?
Accounting valuations
What is net effective rent and how is it calculated?
Rent minus incentives.
What is empty property relief?
Exemption on first 3 months.
Industrial is 6 months
Listed buildings - until reoccupation
What is the minimum content of a valuation report? (VPS 3)
-ID valuer
-ID Client
- ID of intended users
-ID of asset
-Bases of value adopted
- Val date
- Date of Val report
What are three important steps to undertake before commencing a valuation instruction?
- Competence
- Independence
- Terms of Engagement
What different office grades are there?
Grade A, B and C
How big is a hectare relative to acres?
1 acre to 0.4046 hectares
Difference between freehold and leasehold?
What are permissible margins of error?
10% for one off commercial properties. 15% if there are any exceptional features
Do you always get your valuations vetted?
Yes - good practice
Did you discuss the valuation with the client? Are they able to influence your opinion?
Yes - useful. Evidence based not opinion based
What is a ground lease?
The freehold owner grants a long lease usually for a one off payments and at a low rent. The leaseholder generally has relatively unrestricted rights to construct, rebuild and use the let buildings on the land.
What are exemptions from the Red Book?
- Statutory
- Agency
- Internal Vals
- Negotiation
- Expert Witness
What are the three valuation approaches?
Market, Income, Cost
What statutory due diligence should be carried out?
RTL, EPC, Report on Title, Environmental Survey, Asbestos Reg, Business Rates
What types of fee basis are there?
Fixed, Commission, Day Rate
What is the difference between an equivalent and equated yield?
Equiv is growth implicit and Equated is growth explicit
What is a running yield?
Yield at one moment in time
How do you calculate the reversionary yield?
ERV/ Cap Val
How do you calculate WAULT?
Sum contracted income between now and lease break/contracted annual rent
When could initial yield be lower than NIY?
Excessive voids
Weakness in DCF methodology?
What is the difference between a nominal and true equivalent yield?
True assumes rents are received quarterly in advance. Nominal assumes rents are received annually in arrears.
What is the conventional method of valuation?
MR multiplied by YP
What is a net initial yield?
Passing rent expressed as a % of total acquisition cost
What is an all risk yield?
Used for rack rent properties
What is years purchased?
Number of years required for income to reach purchase price. 1/yield.
Five methods of valuation?
- Comp
- Investment
- Profits
- Residual
- DRC
What is the Red Book?
Adopted 31/01/22
Mandatory practices for RICS members undertaking valuation services.
Tell me about the RICS Professional Standard on Comparable Evidence?
-Sources of comparable evidence
- Hierarchy of Evidence
- Analysis of comparable evidence
- How to record comparable evidence
- Dealing with shortages of evidence
What taxes are applied at valuation?
SDLT. Capital gains. Inheritance. Corporation tax. Income tax.
When is the investment method used?
Income producing real estate.
What are the different investment method techniques?
- Conventional
- Hardcore and Layer (reversionary, income split horizontally, EY)
- Hardcore and Topslice (Over rented,income split horizontally, NIY and RY)
- Term and Reversion
- DCF
What’s the method for DRC?
- Value of land in EUV
- Add current replacement cost of new building
- Depreciate this cost to reflect actual property
What is the principal behind the DRC method?
“A buyer will pay no more for an asset the cost to obtain an asset of equal utility whether by purchase or by construction”
What is the principle behind the profit method?
Value of property is related to it’s earning capacity.
When would you use term and reversion? How does it work?
- Term capitalised until next lease event at NIY
- Reversion to MR valued in perp at Reversionary Yield. There is a yield differential
- Add values together and deduct purchasers costs
What are the steps for valuing under the profit method?
- Gross profit
- Operating profit
- Capitalise the Operating Profit
What is the stamp duty rate?
£150,000 - 0%
£150,001 - £250,000 - 2%
£250,000 or higher - 5%
Do fair value and market value result in the same valuation?
Yes.
What method of valuation is used for fund valuation?
Hardcore Layer
Do BCIS cost ranges incorporate the cost of improving buildings EPC rating?
No, but refurbs will likely make the building more energy efficient
What is an equivalent yield? What are the advantages?
Time weighted average of IY and RY.
Highly reversionary higher than IY.
NIY is the passing rent expressed as % of rent. Doesn’t give indication of reversionary potential.
What is an assumption?
Reasonable to expect something as the truth without extensive due diligence
What is marriage value?
Value from the merge of two interests
What is special value?
Value derived form the advantage of ownership for a particular purchaser
What is a prime yield?
Yield applied on Grade A property, strong covenant and WAULT of at least 6 yrs
What is an all risks yield?
Yield used for rack rented property that is fully let.
What is a special assumption?
An assumption untrue at the time of valuation.
Are there any additional requirements when undertaking a valuation in which the public has an interest, or third parties may rely?
Are there any additional requirements for a loan security valuation?
What does the Red Book say about inspections?
Was the Camden Val Red Book?
What were the valuation assumptions you applied?
Why did you consider term and reversion the most appropriate approach? Could another approach have been used?
How did you ascertain appropriate yields for Term and Reversion?
Why was Fair Value appropriate for Fenchurch?
Was it necessary to adjust MR between floors?
Was Fenchurch Red Book?
Tell me about your conflict check and terms of business for the valuation at Fenchurch?
