VALUATION Flashcards

1
Q

What is a year’s purchase multiplier?

A

Used to estimate the value of an income-producing property.

It tells you how many years’ worth of income you would need to earn to equal the property’s value, based on a desired rate of return or yield.

1 / Yield

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2
Q

Give me an example of a good covenant and how this might impact a valuation.

A

A good covenant strength would lead to a valuation with less risk, you may adopt a lower yield.

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3
Q

How did the decision in Hart v Large affect PII?

A

Sued for not making the correct observations as a building surveyor.

Emphasis on surveyors to have adequate PII for these situations.

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4
Q

Where in your valuation report do you state any limitations on liability?

A

This would be stated up front in the terms of engagement.

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5
Q

What is the SAAMCO cap?

A

Legal principle that limits the scope of a professional’s liability for damages to the extent of the losses directly attributable to their advice or actions

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6
Q

Is there a separate UK National Supplement?

What was changed in the last update to the UK National Supplement?

A

Yes the National Supplement contains additional guidance specific to the UK such as on taxation.

Last update - Mandatory Valuer Rotation Policy: This introduces a maximum period of 5 years before the rotation of an individual. 10 years for a firm.

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7
Q

Which do you follow - the latest IVS or the Red Book Global?

A

You would follow the Red Book.

This incorporates latest IVS.

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8
Q

Tell me what the definition of MR/MV/investment value/fair value?

A

MV - 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 where the parties had each acted knowledgeably, prudently and without compulsion.

MR - Same but leased

Investment value - Worth to a particular party.

Fair value - The price of an arms length transaction.

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9
Q

Where does the definition of fair value come from?

A

It comes from accounting regulation.

International Financial Reporting Standards (IFRS)

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10
Q

What are the 3 approaches under VPS5?

A

Market approach

Income approach

Cost approach

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11
Q

What additional criteria apply to secured lending valuations?

A

Forced sale value is often included (value of something when sold quicky).

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12
Q

What is a SORP?

A

A SORP (Statement of Recommended Practice) is a set of guidelines and best practices issued to provide detailed recommendations on accounting and reporting

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13
Q

What is a Net Initial Yield?

A

As a measure of financial return.
Net annual income / purchase price x 100.

Also, this is the initial yield (at the start of the investment) including purchaser’s costs.

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14
Q

What is a Reversionary yield?

A

When a property is under rented, i.e. will achieve more in the future.

Annual income at reversion / purchase price x 100

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15
Q

What is an equivalent yield?

A

Equivalent Yield is a weighted average of the Net Initial Yield and Reversionary Yield and represents the return a property will produce based upon the timing of the income received

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16
Q

What purchaser’s costs do you deduct from a valuation?

A

Purchaser’s costs are the expenses that a buyer would typically incur in the process of acquiring the property.

Legal and land agent.

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17
Q

How does a term and reversion differ to a DCF?

A

Term and Reversion is a more traditional method in which a property has an income stream which is set to to change a a specific date.

Term value on current rent over specific time. Reversion is the value of after the lease expires or rent changes. Then added together.

DCF is a more complex approach, forecasting cashflows and discounting them back to todays value. Cash flow values added together to get NPV.

T&R used for simple leases, DCF used for varying cash flows.

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18
Q

What is the difference between a growth explicit and a growth implicit yield?

A

Explicit yield takes into account the expected future growth in income or property value explicitly. e.g. an explicit DCF model (forecasting growth and discounting).

Growth implicit yield, meaning that rental growth is built into the choice of yield and not explicitly modelled within the calculation.

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19
Q

How would you value an under/over rented investment property?

A

Term and reversion approach for underrated schemes and

Hardcore and topslice for over-rented income streams

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20
Q

What is NPV?

A

NPV (Net Present Value) is the difference between the present value of cash inflows and the present value of cash outflows, over a given time period.

21
Q

What is a term and reversion?

A

Valuation method typically used when a property is under rented.

The term is calculated on the passing rent until the point of a change in rent.

The reversion is then calculated into perpetuity.

This method the term is discounted with PV.

22
Q

What is IRR?

A

It’s a financial metric that measures the profitability of an investment. It’s the discount rate at which the net present value (NPV) of an investment becomes zero.

In other words, it’s the rate at which the investment’s expected cash inflows equal its initial cash outflows (breaks even).

23
Q

What is a hardcore and topslice?

A

The hardcore income is the amount of rent that corresponds to the current market rent (MR) for the property - valued in perpetuity at NIY.

The topslice is the passing rent which is overrented. Valued at a higher yield as more risky (will go down) until the next lease event.

NO PV of £1 needed as both layers of income are being received NOW (as it is horizontal)

Effectively the first section is the difference between MR and Passing Rent

24
Q

When would you use a DCF?

A

You would use a DCF if you have a cashflow forecast, in particular if you might have variable income.

They are good for comparing two investment opportunities

25
Q

What are the advantages of a DCF?

A

Allows a detailed valuation to occur over a specific hold period.

Accounts for the time value of money.

Can be more detailed than a simpler valuation model but the assumptions need to accurate.

26
Q

What is marriage value?

A

Arises from the combination of two or more assets to create a new asset that has a higher value than the sum of the individual assets.

i.e. a leaseholder buying the freehold would increase the value of their interest.

27
Q

What is EBITDA?

A

Earnings Before Interest, Taxes, Depreciation, and Amortization

(Depreciation - decrease of value over time)

(Amortization - like depreciation but non tangible assets like trademark)

28
Q

Explain your understanding of K/S Lincoln v CBRE Hotels (2010).

A

CBRE overvalued a hotel.

They were negligent / sued for an incorrect valuation.

29
Q

In a scenario where rents are static and the capital value increases, would you expect yields to increase or decrease?

A

Yield would decrease.

This would be as this is a better investment.

30
Q

Axis House, Gildersome, Yorkshire
Why did you require the guidance of a registered valuer for this project?

What is the appropriate valuation method for office use?

What was the purpose of this valuation and how did that influence your choices?

Tell me about your comparable methodology here.

A

Red Book valuation, it was reviewed by a registered valuer.

Typically, the investment method. YP in perp at a relevant yield.

1/yield = YP YP x NOI.

Rental valuation to enter into a lease. the client XBM pension scheme was leasing the property out to XBM limited.

The building was identical in size / specification to a neighbouring building which was rented out at £13.50 psf. This was applied to our area.

31
Q

Talk me through another valuation you have completed.

A

New Bolton Woods - agricultural land valuation.

Council owned agricultural land. although it was allocated for the resi development, the council want to sell the land at agricultural value to development JV company.

32
Q

What is a regulated purpose valuation?

What additional disclosures must be made for a regulated purpose valuation?

A

A set of valuation purposes defined by RICS upon which third parties rely, i.e. financial merger, financial reporting.

The valuer must state how much fees they get from this client. Not the exact figure but whether it’s less than 5% or more than 5%.

This is to show any bias.

Disclosure of the client relationship.

33
Q

What is the basis of value for a statutory valuation?

What is the definition of the statutory basis of valuation?

A

Basis is Market Value

The statutory basis of valuation is a specific method of valuation that is required by law for certain purposes, such as:

Taxation: Determining the value of property for tax purposes, such as council tax or stamp duty.

Compensation: Assessing the amount of compensation to be paid for compulsory purchase orders or other property losses.

34
Q

How would a yield reported from auction differ from a Net Initial Yield?

A

Auction yield would be a Gross Yield not adjusted for purchaser cost, whereas Net Initial Yield adjusts for purchasers costs

35
Q

How would you value a property in uncertain market conditions - does the Red Book give any guidance?

A

Valuer should always state the date and draw attention to how values change over time.

‘After proper marketing’ allows market conditions to be considered.

If there are changes between the valuation date and the date of report, the valuer should draw attention to this.

36
Q

When would you include an element of hope value in a valuation?

A

Hope value can be considered as part of a development appraisal in which the subject is anticipating a change of planning use for example on a greenfield site.

37
Q

How would you value a ransom strip?

A

The value of the ransom strip comes from the uplift in value from the adjacent land.

This may involve highest and best use / the market value of the developed land.

Apply the 1/3 rule

1/3 to the landowner
1/3 to the developer
1/3 to the ransom strip owner

38
Q

What is a dual capitalisation rate and when would you use one?

A

In an under rented scenario you would use the term and reversion. Reversion to market rent is capitalised at reversionary rent.

In an over rented scenario you would use layer and top slice. Higher yield to top slice as more risk.

39
Q

What is a WAULT

A

WAULT stands for Weighted Average Unexpired Lease Term

This is a metric used in valuation to assess the weighted average number of years remaining on leases across all properties in a portfolio.

Landlords assess the risk and stability of rental income over time. Properties with a longer WAULT typically offer more security of income,

40
Q

What is an equated yield?

A

Effectively the IRR - rate that NPV is equal to 0

41
Q

Axis House

What yield did you use?

A

Net initial yield

Through my comparable evidence I found a great comparable being the next door property. This has a 3 month rent free period and a net initial yield applied (and purchasers costs explicitly).

I applied the same in my valuation.

42
Q

What is a yield?

A

A yield is simply the annual return on an investment expressed as a percentage.

It can be calculated by dividing the rental income by the purchase price (and multiplying this by 100).

43
Q

How do you value a long leasehold interest?

A

The ground rent is deducted from the gross income to calculate the net rent received (rent received – ground rent = net rent).

This is capitalised at a yield for the length of the lease to create a market value.

44
Q

What is the margin of error for a valuation?

A

in Dunfermline Building Society vs CBRE - the ruling of this stated that 15% margin of error is acceptable.

45
Q

How is marriage value generated?

A

Can be generated for example where a freehold and leasehold interest are combined.

This marriage value is shared 50/50% between leaseholder and freeholder.

The calculation is the the difference between:

  1. The value of the property with the short lease
  2. The value of the property with the extended lease
46
Q

How is zoning valued in retail?

A

Zone A’ (ITZA) - the first 6.1m

Zone B =A/2;

Zone C=A/4.

Zone D, (which is usually the remainder) =A/8

any ancillary space will probably be valued as A/10.

47
Q

Axis House

Was any covenant strength taken into account?

A

Covenant strength is an important factor when taking into account the yield.

In this specific case, the yield I applied was based on comparable transactions which inherently reflected the markets view of tenant covenant strength.

The comparable I relied on the most was the next door building which was the same specification - this was being rented out by same company and so I knew this yield reflected the covenant strength.

48
Q

Talk me through PS1

A

Compliance with standards where a written valuation is provided 

States the madatory applications, i.e that it must follow VPS

There are exceptions in PS1 which allow valuers to bypass some of the more formal Red Book standards.

eg internal valuations not for a third party.

49
Q

What is all risks yield?

A

Yield that takes into account risks, return and expectations of growth.

It is a growth implicit yield.