Valuation Flashcards
What are the five methods of valuation?
- Comparable - Market comparison
- Investment - Capitalising income flows
- Residual - Working backwards from gross development value deducting costs to find site value
- Profits - Capitalising reasonable net profit
- DRC - Last resort method - Using costs to work out how much to build a modern equivalent and depreciation reflecting age and obsolescence
What RICS standards/guidance are available for valuation?
- RICS Valuation Global Standards 2022
1.1 RICS PS RICS Valuation Global Standards: UK national supplement (Eff May 24) - RICS GN: Discounted cash flow valuations, 2023
- RICS PS Comparable Evidence in Real Estate Valuation 2019 (Now PS from April 23)
- RICS PS DRC method of valuation for financial reporting Jan 2019
Name statutory due diligence expected when carrying out a valuation?
- Asbestos Register
- Business rates / council tax
- Contamination
- Equality Act 2010
- Environmental matters e.g. high voltage power lines, electricity sub-stations
- EPC rating if available
- Flooding – check the Environment Agency website
- Fire safety compliance
- Health and safety compliance
- Highways – check local highways agency
- Legal title and tenure e.g. boundaries, ownership, rights of way
- Public rights of way – from an OS sheet
Planning history and compliance – check planning conditions, whether the property is in a conservation area / listed and subject to a s.106 agreement or CIL
What is the difference between a TOE and a report?
TOE
Fees, CHP and client objectives.
Report -
Commentary on market uncertainty
Valuation figures
Valuation approach and reasoning
Tell me why terms of engagement are important.
Terms of engagement are important because they are a mandatory requirement set out the Red Book. They include identification, address, scope and extent of works, valuation dates, restrictions, fees etc.
Describe internal/external valuer?
INTERNAL VALUER:
* Employed by a company to value the assets of a company
* Valuation for internal use only
* No third-party reliance
EXTERNAL VALUER:
No material links with the asset to be valued or the client
Talk me through the make up of the RICS red book?
P1 - Intro
P2 - Glossary
P3 PS1 Compliance with standards when undertaking written instruction. PS2 ECOD
P4 - Valuation technical and performance standards
VPS 1- TOE
VPS 2 - Bases of value and assumptions
VPS 3 Valuation approach and methods
VPS 4- Inspections, investigation and records
VPS 5 - Valuation modelling
VPS 6 - Valuation report
P5 - VPGA
P6 International valuation standards
What is the historical background of the RICS redbook?
Property/banking crash 1974
no valuation rules!
RICS commitee formed 1974
1st ed. in 1976, followed by 2012,14,17,20 and 22
VPS 6 - VENRA CVA DCA
Explain what is included in a rics report
- id and status of valuer
- id of client and other intended report users
- report purpose
- id of asset(s)/ liabilities to be valued
- basis of valuation adopted
- Valuation date
- extend and scope of investigation
- nature of resources relied upon
- restrictions on use, publication, distribution
- assumptions/special assumptions
- Confirmation that valuation is in accordance with IVS
- Valuation approach and reasoning
- amount of valuation
- Date of valuation
- Commentary on market uncertainty
- Statement setting out any limitations
- Concideration for ESG
Define what is a basis of value?
A Statement of the fundamental measurement assumptions of a Valuation (VPS 2)
Define what is a comparable
“item of information used during the valuation process as evidence to support the valuation of another, similar item”
PCAS
What is the main purpose of the RICS comp evidence PS 2019
x4 purposes
1) Outlines PRINCIPLES of comp evidence
2) Encourage CONSISTENCY
3) Address issues of AVAILABILITY of evidence
4) Considers potential SOURCES of evidance
Define what is a valuation method?
Defined as ‘within a valuation approach, a specific technique
to conclude a value’.
Define MV, FV, IV and MR?
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 arm’s length transaction after proper marketing and where both parties have acted knowledgeably, prudently and without compulsion
Market Rent
The estimated amount for which an interest in real property should be leased
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 to market approach - financial reporting). IFRS 13
Investment Value
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives
Name different valuation approaches?
Market - comparable method
Income - converting current and future cash flow into a capital value: investment, residual & profits
Cost - cost of an asset whether by purchase or construction: DRC
ASIA - E
Name 5 exemptions to the RICS RED BOOK
- Advice prepared for negotiation or litigation
- Stat function
- Internal purposes
- Agency
- Expert witness
A valuation for rating is made within a statutory framework, and so is not bound by the Red Book’s valuation technical and performance standards. However, the mandatory requirements of professional standards PS1 (compliance) and PS2 (Ethics) in the RICS Red Book Global Standards 2020 must still be observed.
What is the investment method and when is it used?
1.Used when there is an income stream to value
2. Rental income is capitalised to produce a capital value
3. Assumes growth implicit valuation approach
4. An implied growth rate is derived from the market capitalisation rate
CONVENTIONAL INVESTMENT METHOD
Rent received or market rent X years purchase (multiplier) = Market Value*
Used for following
* Advice prepared for negotiation or litigation
* Stat function
* Internal purposes
* Agency
* Expert witness
When is Term and reversion used?
Reversionary investments (MARKET RENT HIGHER THAN THE PASSING RENT)
PRINCIPLE:
Term - capitalised until next review OR lease expiry at the initial yield
Reversion - to market rent valued in perpetuity at a reversionary yield (Can be higher yield to reflect risk)
What is included in purchaser costs?
SDLT
legals
agency fees
When is the hardcore method used?
Over-rented investments (passing rent higher than market rent)
What is a yield and what factors affect a yield?
Measure of investment return expressed as a percentage
* Quality of location and covenant * Use of the property * Lease terms * Obsolescence - what is the likely future rate? * Voids - what is the risk? * Security and regularity of income * Liquidity - ease of sale Prospects for rental and capital growth
Name different kinds of yields?
True Yield
Assumes rent is paid in advance and not arrears (traditional valuation practice assumes the rent is paid in arrears
Nominal Yield
Initial yield assuming the rent is paid in arrears
Gross /Net Yield
Gross The yield not adjusted for purchasers’ costs e.g. auction result
Net The resulting yield adjusted for purchasers’ costs
Initial Yield
Simple income yield for current income and current price
Reversionary Yield
Market rent divided by current price on an investment let at a rent below the market rent
Running Yield
The yield at one moment in time
Equivalent yield
This is the weighted average between the term and reversion.
Equated yield
Is the IRR applied to the flow of income expected during the life of the investment so that the total amount of income discounted at this rate equals the capital outlay.
What is a DCF , what guidance is available and describe its methodology?
Growth explicit investment method of valuation that calculates an investment’s value based on the ability to receive a predicted future cash flow.
RICS GN DCF Valuations Nov 2023
METHODOLOGY:
1. Estimate the cash flow (income less expenditure ie net cashflow)
2. Estimate the exit value at the end of the holding period
3. Select the discount rate
4. Discount cash flow at the discount rate
5. Value is the sum of the completed discounted cash flow to provide a net present value (NPV)
NPV = Sum of discounted cash flows of the project
* Used to determine if an investment gives a positive return against the target rate of return
* Positive NPV = investment exceeds investor’s target rate of return
Negative NPV = not achieved investor’s rate of return
Explain the profits method and when it is used?
USED FOR
* Trade related properties
* Where value of the property depends on the profitability of a business
* Pubs, petrol stations, hotels, leisure ad healthcare [VPGA 4]
METHODOLOGY:
* Annual turnover (income received)
* Less costs/purchases
* = Gross Profit
* Less Reasonable working Expenses
* = Unadjusted Net Profit
* Less operator’s remuneration
* = Adjusted Net Profit (KNOWN AS: Fair Maintainable Operating Profit (FMOP)
* Can be expressed as EBITDA (Earnings Before, Interest, Tax, Depreciation & Amortisation)
* Capitalised at appropriate Yield (Years purchase multiplier) to achieve Market Value
* Cross check with comp sales evidence
Profits Method
* Capital
○ Get 3 years accounts
○ Work out fair maintainable trade
○ Deduct costs and expenses to get to fair maintainable operating profit for a reasonably efficient operator
○ FMOP X YP = Capital value
* Rental
○ Fair maintainable Operating Profit = divisible balance
50/50 Landlord and Tenant
