Valuation Flashcards
What is the RICS Redbook definition of Market Value and where is it found
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
RICS REDBOOK Section 4.1
5 Methods of Valuation
- Comparable
- Residual
- Investment
- Profits and Receipts
- Contractors/ DRC (Depreciated replacement costs)
What is the Red Book
A set of global standards that set out procedures and guidance for written valuations
What does VPS stand for in the Red book
Valuation technical and performance standards (mandatory)
What does PS stand for in the Red Book
Professional standards (mandatory)
What does VPGA stand for in the Red Book
Valuation Practice guidance Applications (advisory)
What are the 3 approaches of valuation
- Cost
- Income
- Market
When is Comparable method applicable
- Most common & reliable
- Used for property types where there is comparable eidnce eg shops, office, industrial, resi for IHT/council tax
Methodology for Comparable method and relevant case law
Lotus and Delta V Culverwell and leicester city council
1. Obtain and select comps
2. Verify comparables
3. Assemble comparables in schedule
4. Adjust comparables using hierarchy of evidence
5. Analyse comparables to form opinion of value
6. Stand back and look
7. Report value and prepare file note
Heirarchy of Evidence
Lotus and Delta V Culverwell
1. Subject rent is starting point
2. Closer comparables are to time, subject and conditions, the more weight attached
3. Other rents of similar properties should be used where available
4. Other assesments of comparable properties
5. Opinion of value formed on actual rent and degree of comparability of other evidence
6. If no comparable evidence available subject rent evidene is givven most weight
What are the 3 types of comparable evidence
Category A - Direct comparables
Category B - general market data
Category C - other sources
What happened in the lotus and delta v culverwell case
When is Profits Method used
- Used for trade related properties that produce income e.g. Pubs, Cinemas, Hotel, Car parks.
Profits methodology
- Annual turnover (review last 3 years of accounts)
- Less costs/purchases=gross profit
- less reasonable working expenses= unadjusted net profit
- Less operators remuneration= adjusted net profit known as Fair Maintainable Operating Profit (FMOP)
- Capitalised at appropriate all risks yield to achieve market value (For rating purposes ignore YP in perp)
- Cross check with comparable sales if possible
Techniques of investment method
Capitalisation, term and reversion, hardcore and layer, hardcore and top slice, discounted cash flow
When is term and Reversion used?
Investment Method
When a property is under rented
(Used for reversionary investments (when market rent is more than passing rent)
When is Layer/hardcore method used
Over rented properties
What are the contemporary methods of valuation
Discounted Cash Flow (DCF)
What do you understand by the expression of weighting of comparable evidence?
Making adjustments to the comparable evidence.
What is interpolation of comparable evidence?
Interpolation is calculating a value that lies between two extreme points.
What is extrapolation of comparable evidence?
Extrapolation is calculating a value that lies outside two extreme points.
What is the purpose of zoning
For valuing purposes for shops based on net internal area
Standard zone depth
6.1 m but it London it is 9.14 m
How would you determine the Market Value of an investment property let on Internal Repairing terms?
By using the investment method and making allowance for External repairs, insurance and management.
What factors make up the all risks yield/impacts it?
1) . The construction (age, design, specification)
2) . The tenant covenant strength
3) . The rent (market, over-rented, under-rented)
4) . Unexpired lease term
5) . Other lease terms
6) . Anticipated rental growth (location)
What is the initial yield
Yield based on properties current income
What is a yield
A yield is a return on investment
What is a yield and how is it calculated
A yield is a return on investment and it is calculated by annual income/capital value x 100 (expressed as a %)
What is the reversionary yield
Based on the estimated rental value (ERV)
What is the reversionary yield
Based on the estimated rental value (ERV)
If the rent is likely to change at reversion, then the yield is likely to change too.
This yield reflects the risk, return, and expectations of growth at the future rent review or renewal.
Discounted by 0.5%-1%
What is the equivalent yield
weighted average of the initial/term and reversionary yields.
ARY
What lease terms impact the yield
- Term
- Break clauses
- Rent reviews
- User
- Repair clauses
- Security on tenure - if it is inside or outside the section 54 act
What is the RICS Valuation - Global Standards commonly referred to as?
Red Book
What does VPS stand for in the context of RICS Valuation?
Valuation Technical and Performance Standards
What does VPS 1 cover?
Terms of engagement
What does VPS 2 become after the changes?
VPS 4, which covers inspections, investigations, and records
What does VPS 3 become after the changes?
VPS 6, which covers valuation reports
What does VPS 4 become after the changes?
VPS 2, which covers bases of value, assumptions, and special assumptions
What happens to VPS 5 after the changes?
It splits into VPS 3 and VPS 5, covering valuation approaches and methods, and valuation models respectively
What are the intended goals of the changes to the VPS?
To be consistent with the latest International Valuation Standards (IVS)
When do the new changes to the RICS Valuation Red Book take effect?
January 31, 2025
List the updated VPS?
VPS 1 - Terms of Engagement (general principles, format and contents/scope of work)
VPS 2 - Bases of Value, assumptions & Special assumptions
VPS 3 - Valuation Approaches and methods
VPS 4 - Inspections, investigations and records
VPS 5 - Valuation Models
VPS 6 - Valuation Reports
What is IRR?
IRR stands for Internal Rate of Return, which is a financial metric used to evaluate the profitability of an investment.
What is IRR?
IRR stands for Internal Rate of Return, which is a financial metric used to evaluate the profitability of an investment.
Why is money in the future wrth less than today
Risk - there is a risk you might not get it.
Return - because of the opportunity cost. It cannot be invested elsewhere and produce an income if you do not have it yet.
Inflation - it will be able to buy fewer goods and services as a result of inflation. In an inflationary economy, goods and services will cost more in the future.
Formula
Formula to calculate PV
1 / i (1 + i) ^ n
£1 in the future is less than £1 today.
This formula establishes the amount that needs to be invested now in order to accumulate at a rate of interest (i) for a number of years (n)
Years Purchase (YP) formula
(1-PV)/i
calculates the present value of the right to receive £1 at the end of each year for n years at a given rate of interest.
It produces the capital equivalent of the right to receive an amount of income for a given number of years.
Years purchase in perpetuity formula
1/i
used where an income flow is fixed or perpetual. In property valuation, it is also used where the property is at market rent because we do not project rents in traditional investment valuation.
Years purchase in perpetuity deferred n years formula
1/i (1+i)^n
Sometimes the perpetual income (or market rent) will be some years away and received after a rent review.
This formula is key to the term and reversion technique and is the present value multiplied by the years purchase in perpetuity. It can be done in two separate steps for present value and years purchase but usually, a single figure is used using this formula.
What factors impact Yields
lease terms, rent-free period, stepped rent, break clause,income risk, tenant covenant risk, economic and political risk
Equated yield
This is also the discount rate in a discounted cash flow and the internal rate of return WITH allowance for growth. It represents the investor’s total return.
growth explicit.
True equivalent yield
Valuation formulae and most traditional valuation tables assume income is received annually in arrears.
Most of the time it is actually received quarterly in advance and this affects the time value of money in the calculation.
This yield takes into account the actual payment pattern rather than the nominal one.
What is the average % of purchasers cost
6%
4% SDLT
1% agent fees
1.5% legal fess
0.5% VAT
