Valuation Flashcards
Define market rent?
The estimated amount for which an interest in real property should be leased on the valuation date:
- between a willing lessor and willing
lessee on appropriate lease terms
- in an arm’s length transaction, after proper marketing
- and where the parties had each acted knowledgeably, prudently and without compulsion
Define Market Value
The estimated amount for which an asset or liability should exchange on
the valuation date:
- between a willing buyer and a willing seller in an arm’s length transaction
- after proper marketing
- and where the parties had each acted knowledgeably, prudently and without compulsion
Define 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
Define investment value
The value of an asset to the owner or a prospective owner for individual
investment or operational objectives
Tell us about the term and reversion method
It is used for REVERSIONARY (under-rented) investments
Income flow is divided vertically.
Term (passing rent) is capitalised until next lease event (review/expiry) at an INITIAL yield
Reversion to Market Rent valued in perpetuity at a reversionary yield
There is a yield differential; term at a keener yield to reflect lower risk.
Tell us about the hardcore and layer method
It is used for REVERSIONARY (under-rented) properties.
Income flow is divided horizontally.
Both the hardcore (PR) and layer (MR-PR) are valued into perpetuity, but the layer is deferred to the next lease event.
An Equivalent Yield is applied to both the hardcore and layer.
Tell us about the hardcore and top slice method
It is used for OVER RENTED investments.
Income flow is divided horizontally. The hardcore (MR) is valued into perpetuity at a net initial yield.
The top slice (PR-MR) is capitalised to next lease event at a net initial yield with a risk adjustment.
There is a yield differential; top slice at an inflated yield to reflect higher risk of over-renting.
Different yield type can be used based on market comparable evidence.
NO PV of £1 needed as both layers of income are being received NOW.
What is the simple methodology to undertake a Profit method valuation?
(Annual Turnover – Costs/Purchases) = Gross Profit
(Gross Profit – Reasonable Working Expenses) =
Unadjusted Net Profit
(Unadjusted Net Profit – Tenant’s/share) = Fair Maintainable Operating Profit (FMOP)
CAPITALISE at an appropriate yield to achieve capital value
Cross check with comparable method
What is the method for a Residual Site Valuation?
GDV – Development Costs – Profit = Land Value
What is method for Development Appraisal?
GDV – Development Costs – Land Value = Profit
How is DRC Calculated?
- Value of the land in its existing use (assume planning permission exists)
- Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence/deterioration. (Use BCIS then judge level of obsolescence).
Describe the Methodology of the Comparable Method of Valuation?
- Search and select comps
- Verify information (triangulated approach, analyse headline rent)
- Assemble comps into Schedule
- Adjust comparables according to a hierarchy of evidence
- Analyse comparable evidence to form opinion of value
- Report value and prepare file note
What is the methodology for DCF?
- Estimate the cash flow
- Estimate the exit value at the end of the holding period
- Select a discount rate
- Discount cash flow at discount rate
- Value is the sum of the completed discounted cash flow to provide the NPV
