VALUATION

Question 1

What is a year’s purchase multiplier?

Answer 1

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

Question 2

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

Answer 2

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

Question 3

How did the decision in Hart v Large affect PII?

Answer 3

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

Emphasis on surveyors to have adequate PII for these situations.

Question 4

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

Answer 4

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

Question 5

What is the SAAMCO cap?

Answer 5

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

Question 6

Is there a separate UK National Supplement?

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

Answer 6

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.

Question 7

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

Answer 7

You would follow the Red Book.

This incorporates latest IVS.

Question 8

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

Answer 8

MR - the estimated amount for which an interest in real property should be leased (willing parties, appropriate arms length, prudently without compulsion).

MV - As above but for the sale.

Investment value - Worth to a particular party.

Fair value - The price of an arms length transaction.

Question 9

Where does the definition of fair value come from?

Answer 9

It comes from accounting regulation.

International Financial Reporting Standards (IFRS)

Question 10

What are the 3 approaches under VPS5?

Answer 10

Market approach

Income approach

Cost approach

Question 11

What additional criteria apply to secured lending valuations?

Answer 11

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

Question 12

What is a SORP?

Answer 12

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

Question 13

What is a Net Initial Yield?

Answer 13

Measure of financial return.

Net annual income / purchase price x 100

Question 14

What is a Reversionary yield?

Answer 14

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

Annual income at reversion / purchase price x 100

Question 15

What is an equated yield?

Answer 15

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

Question 16

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

Answer 16

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

Legal and land agent.

Question 17

How does a term and reversion differ to a DCF?

Answer 17

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.

Question 18

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

Answer 18

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.

Question 19

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

Answer 19

Term and reversion approach for underrated schemes and

Hardcore and topslice for over-rented income streams

Question 20

What is NPV?

Answer 20

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.

Question 21

What is a term and reversion?

Answer 21

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.

Question 22

What is IRR?

Answer 22

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).

Question 23

What is a hardcore and topslice?

Answer 23

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.

Question 24

When would you use a DCF?

Answer 24

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

Question 25

What are the advantages of a DCF?

Answer 25

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

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

Question 26

What is marriage value?

Answer 26

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.

Question 27

What is EBITDA?

Answer 27

Earnings Before Interest, Taxes, Depreciation, and Amortization

(Depreciation - decrease of value over time)

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

Question 28

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

Answer 28

CBRE overvalued a hotel.

They were negligent / sued for an incorrect valuation.

Question 29

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

Answer 29

Yield would decrease.

This would be as this is a better investment.

Question 30

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.

Answer 30

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.

Question 31

Talk me through another valuation you have completed.

Answer 31

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.

Question 32

What is a regulated purpose valuation?

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

Answer 32

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.

Question 33

What is the basis of value for a statutory valuation?

What is the definition of the statutory basis of valuation?

Answer 33

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.

Question 34

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

Answer 34

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

Question 35

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

Answer 35

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.

Question 36

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

Answer 36

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.

Question 37

How would you value a ransom strip?

Answer 37

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

Question 38

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

Answer 38

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.

Question 39

What is a WAULT

Answer 39

WAULT stands for Weighted Average Unexpired Lease Term

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