VALUATION Flashcards
What is a year’s purchase multiplier?
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
Give me an example of a good covenant and how this might impact a valuation.
A good covenant strength would lead to a valuation with less risk, you may adopt a lower yield.
How did the decision in Hart v Large affect PII?
Sued for not making the correct observations as a building surveyor.
Emphasis on surveyors to have adequate PII for these situations.
Where in your valuation report do you state any limitations on liability?
This would be stated up front in the terms of engagement.
What is the SAAMCO cap?
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
Is there a separate UK National Supplement?
What was changed in the last update to the UK National Supplement?
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.
Which do you follow - the latest IVS or the Red Book Global?
You would follow the Red Book.
This incorporates latest IVS.
Tell me what the definition of MR/MV/investment value/fair value?
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.
Where does the definition of fair value come from?
It comes from accounting regulation.
International Financial Reporting Standards (IFRS)
What are the 3 approaches under VPS5?
Market approach
Income approach
Cost approach
What additional criteria apply to secured lending valuations?
Forced sale value is often included (value of something when sold quicky).
What is a SORP?
A SORP (Statement of Recommended Practice) is a set of guidelines and best practices issued to provide detailed recommendations on accounting and reporting
What is a Net Initial Yield?
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.
What is a Reversionary yield?
When a property is under rented, i.e. will achieve more in the future.
Annual income at reversion / purchase price x 100
What is an equivalent yield?
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
What purchaser’s costs do you deduct from a valuation?
Purchaser’s costs are the expenses that a buyer would typically incur in the process of acquiring the property.
Legal and land agent.
How does a term and reversion differ to a DCF?
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.
What is the difference between a growth explicit and a growth implicit yield?
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.
How would you value an under/over rented investment property?
Term and reversion approach for underrated schemes and
Hardcore and topslice for over-rented income streams
What is NPV?
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.
What is a term and reversion?
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.
What is IRR?
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).
What is a hardcore and topslice?
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
When would you use a DCF?
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
