Valuation Flashcards
What is the profits method of valuation?
To is used for value trade related properties where profit is reasonably realised
Properties with a specific use = Hotels, cinema, theatres.
Value is based on trade potential include property interest business, goodwill and fixtures and fittings
It uses income and expenditure based on historical takings and comparable evidence
Basis uses fair maintainable turnover and profit to compare with other businesses
Profit is capitalised at a rate of return to reflect risk and reward
What is depreciated replacement cos method of valuation?
Value based on paying no more/less than cost of equivalent
Replacement cost with modern equivalent
Used as a last resort and often the basis for mosque and wharfs
Calculation includes cost to build equivalent, land value, use of new materials and new techniques
Adjustments made for deterioration
What is the comparable method of valuation?
Uses recent sales data and compares the size, location, condition, features, specification
Identify comparables, analyse and apply to the subject property
Schedule of comparables include age, quality, location, tenure, size, price, date, price, $sqft
When is valuation used?
For reporting, lending, mortgages, taxation, compulsory purchase and compensation
What is the Red Book?
RICS Red Book Global Standards eff 31 Jan 2022
Provides rules and best practice guidance
Includes International Valuation Standards
Keys sections - Intro, Glossary, Professional Standards (1. compliance with standards, 2. ethics), Valuation technical and performance standards (VPS1 ToE, VPS2 Inspection, VPS3, Valuation Report, VPS4 Bases of value, assumptions and special assumptions, VPS5 Valuation approaches and methods), Valuation applications (VPGA1 Valuation for inclusion in financial statements, VPGA2 Valuation of interests for secured lending, VPGA3 Valuation of businesses and business interest, VPGA4 Valuation for individual trade related properties, VPGA5 Valuation of plant and equipment, VPGA6 Valuation of tangible assets, VPGA7 Valuation of personal property, VPGA8 Valuation of real property interests, VPGA9 Identification of portfolios, collections, VPGA10 Matters that may give rise to material valuation uncertainty),
Steps to take upon receipt of valuation instruction?
Obtain property details
Run conflicts of interest check
Obtain signed instruction
Confirm purpose
Gather info
Identify rating, planning and environmental info
Research market
Check val
Report and query
Invoice
Steps when in receipt of bank letter of instruction
Check the borrower details
Check property
Understand purpose
Run conflicts of interest check
Obtain details of the loan
Who to report to
Any assumptions
Obtain information and access
Check what the client wants including
What are the five methods of valuation
Comparable
Profits
Residual
Depreciation replacement cost
Income
Define market value
Amount exchange on valuation date between willing parties in an arms length transaction after proper marketing whereby both acted with knowledge, prudence and under no compulsion
Define market rent
Amount let on valuation date between willing parties in an arms length transaction after proper marketing whereby both acted with knowledge, prudence and under no compulsion
Define hope value
Value based on expectation of planning
Define marriage value
Extra value from merge of physical or legal interest
Define special value
Extraordinary value over and above market value
What is TEGOVA
The European Group of Valuers Association
70,000 valuers, 38 countries
Aims: common residential valuation report
Guidance information on subjects of interest
Valuation methodology
What is the IVSC
International Valuation Standards Committee
Set standards and procedure for financial statements
Standards = IVS1 - market value basis of valuation
IVS2 - Value bases other than market value
Applications = IVA1 = Valuation for financial reports
IVA2 = Valuation for lending
What is the difference between specialist and specialised property?
Specialist = trade from i.e cinema, pub with a specific purpose
Specialised = worship, places that rarely sell
What is the difference between market rent and estimated rental value?
Market rent = assumed vacant, rent of ruse and uses comparables
Estimated rental value = assumed occupied and has specific lease terms
Explain the term and reversion method
Used when a lease is ongoing with an income due to change
Approach:
- lease due to expire
- existing lease separate from new terms
- reversionary accounting for new lease
What is the hardcore/layer approach?
Alternative to term and reversion
Market rent applied into perpetuity
Based on difference between rent and expected market rent at lease renewal into perpetuity
Add both values
What is an equivalent yield?
Weighted average from current and future income
Example
- 5% at hardcore and 6% are reversionary = 5.5%
What is an equated yield?
Accounts for future growth
Not at reversionary - increase in income at reversionary to market rent
Explain understanding of goodwill
Intangible
Value higher than net fair value
For specialist feature = brand name
Special value over and above land and building
What is purchased and inherent goodwill?
Purchased = asset exchanged for amount above fair market value
= on balance sheet and only goodwill recognised on accounts
Inherent = created overtime
= location, reputation, customer base
Different between residual and development appraisal?
Development appraisal
- no part of Red Book
- worth - valuation and advice
- accounts time
- client and agent input
- determines profit
Residual value
- market lead
- determines market value
What is a DCF?
Discounted cash flow
No comparables = explicit
Apply if short term volatility i.e terminate lease
Multiple investments = cash flows over time and exit value
Cash flows discounted back at discount rate
Rate of return = perceived risk
Consider = lease renewals, rent reviews, void, relet
Exit value = rental growth and unexpired terms
Assumptions and forecasts included
Technique to value without comparables
DCF = estimate cash flows over time and exit value
= discount cash flows back to present day at discount rate
What affects yields?
Covenant
Location
Specification
Rent
Growth
Asset management
Development value
Define face rent
Rent excluding incentives such as rent free
Define effective rent
Rent including incentives
What is an ARY?
All Risk Yield
Revenue of annual percentage of property cost
Income / value x 100
What is deleterious material and its effect?
Prohibited and can affect structural integrity and longevity
What to include in a valuation report?
Tenure
Val date
Inspection (by who)
Opinion
VAT
Third party references
Clause prohibiting publication
External/independent valuer
Date of report
Statement of valuer qualification
How to report structural defects?
Show the client
Include comment in survey
Advise expert opinion
Cost to remediate
Can a valuer request knowledge of the purchase price?
Yes - verify and request
If opinion differs, why and evidence
If a claim for negligence, what can the client do?
Demonstrate the loss and pursue valuer/company
Merritt V Babb = valuer not firm
PII
What to caveat in a valuation report?
Publication
Confidentiality
Deleterious material
Planning
Tax
Information supplied
Environmental matters
What is a conflict of interest?
Act for buyer and seller
Act for two or more parties competing from one opportunity
Value for lender but advised borrower
Previously valued
Value for third party where other fee earning relationship
Valuing both parties leasehold interest
What is passing rent?
Annual rent
+/- estimated rental value
Excludes incentives
Actual income
Difference between opinion and actual value
Valuation in accordance with Red Book = not wrong
Valuation with reasonable tolerance
Valuation based on actual value - not recommended accurate
Purpose of valuation
Taxation
Rating
Loan
Accounts
What are the types of assumptions?
Special - facts differ from those at valuation date
Assumption - valuer accept without investigation
Purpose of the Red Book
Provide consistency, transparency and objectivity for those undertaking asset valuations
What is not to the Red Book?
Rent reviews
Internal val
Agency
Basis of valuation?
Market rent
Market value
Fair value
Investment value
Basis of valuation?
Market rent
Market value
Fair value
Investment value
Steps upon receipt of valuation
Instruction received
Conflicts of interest check
ToE issued
Due diligence
Inspection and measure
Select method
Research
Analyse
Weight application
Value
Draft
Check
Issue
Record
Types of yields
ARY - include risk, return and growth
GIY - FRV/price
NIY - +P cost to price /FRV
Equivalent - average term + reversion
Equated - IRR
Nominal - assuming payment in arrears
TEY - calculated on payment pattern
Types of due diligence checks?
Competence
Conflicts
Instruction
ToE
Asbestos
Rating
Contamination
Equality
Environmental matters
Flooding
Fire safety
Order of the hierarchy of evidence
New letting
LR
RR
Expert
Opinion
Arbitration
Asking price
Types of analysis
Straight line
YP appropriate / time value of money - first rent review
DCF
What is a residual value?
Values site
GDV = all cost to develop incl profit
What is a development appraisal?
GDV = all costs to development (including land) = profit
How to use a DCF?
Requires investor target rate
Purchase price, net income
XPV $1 at target
Assumed exit value (10years)
Add up cash flows
NPV = 0 = target
How to use the profit method?
Capitalise 3 years accounts
Represent fair trade
Less costs and expenses = FMOP
FMOP x YP = CV
FMOP is divisible = 50/50 = LL/T
FMOP fair maintainable operating profit
What is the investment method?
Technique based on passing rent
Reversion time and value = clients needs
Policy and process
Comparables
What is T&R?
Capitalise term and Year Purchase at yield discounted market
Capitalise reversion market rent into perp using YP discounted to Present Value
Add
Review
Explain hardcore and layer
Reversion close - equivalent yield
Capitalise term to perp at equivalent yield
Capitalise reversion at equivalent yield deferred until reversion
Add
Review
Explain hardcore and top slice
Used when current rent more than market rent
Uses NIY
Establish market rent using comps
Estimate passing rent using lease
Establish market yield using comps and risk analysis
Capitalise top slice until review (rent goes down) or lease end
Add
Review
What is the RICS Discounted Cash Flow Valuation Guidance Note Nov 2023?
Difference between market value and and investment value set out in VPS4
Investment value = investor specific, worth, should be
Market value = applicable to wider market
Use market based inputs when assessing market value, need to pay
Current market conditions?
Rising interest rates and high inflation
Borrowing affects return
High inflation lowers demand
Office demand down due to shift in work pattern
Less specialist lenders
Labour costs high
Current market trends?
JLL highlight 60% prefer hybrid which affects office space demand
70% London commercial space below EPC B and cost to upgrade is $40per sqft
View on IPMS?
Useful with consistency across markets
UK slow to adopt
Awaiting updated professional statement
What is the residual method?
Tells purchaser how much they should pay
GDV less costs incl profit
Left over is what they can pay
Costs include, site prep, construction, sales and marketing, contingency, financing, profit
What is the UK version of the red book?
UK National supplement effective 1 May 20024
Application for Global Standards for UK
What is the difference between a Professional Statement and Guidance Note?
PS - mandatory requirement for members and firms
GN - recommendation and good practice
Practice Information - supports the practice, knowledge and performance of members and firms
What is the difference between implicit and explicit models?
Implicit reflect any expectation in the growth of market rents or capital value in the yield. T&R. Used comparable evidence to information rental value and a market yield built implicitly into the ARY to reach CV.
Explicit allow for any future growth expectation in the cash flor and discount this at a require rate of return. Uses cash flows and explicit assumptions around inputs such as rental growth to reach CV.
What are the basis of valuation?
VPS4 of the Red book defines four bases;
Market value 4.4
Market rent 4.5
Investment value 4.6
Fair value 4.7
What are the international valuation standards?
IVP 2022 is included in part 6 of the Red Book
What are the types of comparable and their weighting?
Comparable evidence in real estate valuation outlines:
Direct comparables
General market data
Other sources
What is included under VPS2 of the Red Book?
Inspection and investigation
When is non-compliance of the Red Book acceptable?
Not have to comply with VPS1-5 (ToE, Inspection, Val reports, Bases of value, Valuation approaches & methods) if:
Five reasons:
Provision of agency or brokerage advice
Acting as an expert witness
Statutory functions
Internal purposes
Negotiation or litigation
However, must comply with PS1 (compliance with standard where a written valuation is provided) and PS2 (ethics)
What are Terms of engagement?
Set out under VPS1 of the Red Book and lists 18 items including identification, status of value, bases, purpose
What are valuation approaches?
VPS5 outlines three approaches:
market - comparable
income - capitalisation
Cost - pay no more than cost to obtain equal one
What is the professional standard Comparable Evidence in Real Estate Valuation eff 9 October 2019 1st edition?
Use of comparables in valuation. Four main purposes
Outline principle of use of comparables evidence
Consistency with use
Address issues of availability and use
Consider potential sources
What should make up comparable evidence?
Comprehensive - several
Similar
Recent
Arms length transactions
Verifiable
Consistent with local practice
Result of demand
Reasons for lack of comparables?
Infrequent
Lack of up to date evidence
Special purchasers pay more due to overriding motivation
Lack of similar/identical
Market not fully tranparent
What are the key factors for valuation in different sectors?
Residential - location, outlook, services, structure, EPC
Retail - location, size, parking, building quality, tenant mix
Office - layout, facilities, EPC, services
Industrial - links, size, age, condition
Factors to consider during investment valuation?
Term
Break option
Financial strength of tenant
Rent review
What are the sources of comparable evidence?
Market evidence (direct - transactions with verified evidence, publicly available - published information, published database - produced by larger firms, asking prices - treat with caution, historic - combine with knowledge)
Indices - RPI, CPI
Automated valuation models - use trends not individual characteristics
Verification - check information provided
Data protection - permission to use data if valuation published
What is the hierarchy of evidence?
Evidence which takes president over others
Direct comparables - nearly identical, full accurate info,/reliable completed, offer made but binding contract not completed
General market data - published sources, indirect i.e indices, historic,
Other - other types/location, other background datat
What headings used for comparable transactions?
Address
Type (office, shop0
Nature (FH/LH)
Location
Legal (lease terms)
Description
Accommodation/area
Type of transaction (sale/letting)
Date
Financial info (sale price, incentives)
Analysis per unit
Parties involved
Sources of info
Comments
Date of confirmation of info
How to analyse comparables?
Establish a common measurement/comparison standard
Making adjustments (quantitative - cost of insurance being LL or T responsibility) (qualitative - experience and knowledge of market = location)
How to deal with a shortage of evidence?
Arises due to inactivity, rapid change and out of date, unusual terms, little info
Look further afield
Red Book requires valuer to comment on confidence so lack of comps leads to more informed client
What is RICS DCF valuation guidance note November 2023?
Outlines difference between investment value and market value
- RICS VPS4
IV = val specific to investor
MV = val applicable to wider market
What is the RICS rotation rules?
From January 2022 recommends mandatory rotation cycle
Valuations for regulation purpose - not repeat more than 10 years
Aim to improve transparency and improve public interest
How do market conditions affect development appraisals?
Rising inflation
Borrowing costs up
Office for demand down
Increased build costs
