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Valuation Flashcards

1
Q

What is the profits method of valuation?

A

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

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2
Q

What is depreciated replacement cos method of valuation?

A

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

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3
Q

What is the comparable method of valuation?

A

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

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4
Q

When is valuation used?

A

For reporting, lending, mortgages, taxation, compulsory purchase and compensation

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5
Q

What is the Red Book?

A

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),

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6
Q

Steps to take upon receipt of valuation instruction?

A

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

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7
Q

Steps when in receipt of bank letter of instruction

A

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

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8
Q

What are the five methods of valuation

A

Comparable
Profits
Residual
Depreciation replacement cost
Income

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9
Q

Define market value

A

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

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10
Q

Define market rent

A

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

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11
Q

Define hope value

A

Value based on expectation of planning

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12
Q

Define marriage value

A

Extra value from merge of physical or legal interest

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13
Q

Define special value

A

Extraordinary value over and above market value

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14
Q

What is TEGOVA

A

The European Group of Valuers Association

70,000 valuers, 38 countries

Aims: common residential valuation report
Guidance information on subjects of interest

Valuation methodology

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15
Q

What is the IVSC

A

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

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16
Q

What is the difference between specialist and specialised property?

A

Specialist = trade from i.e cinema, pub with a specific purpose

Specialised = worship, places that rarely sell

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17
Q

What is the difference between market rent and estimated rental value?

A

Market rent = assumed vacant, rent of ruse and uses comparables

Estimated rental value = assumed occupied and has specific lease terms

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18
Q

Explain the term and reversion method

A

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

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19
Q

What is the hardcore/layer approach?

A

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

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20
Q

What is an equivalent yield?

A

Weighted average from current and future income

Example
- 5% at hardcore and 6% are reversionary = 5.5%

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21
Q

What is an equated yield?

A

Accounts for future growth

Not at reversionary - increase in income at reversionary to market rent

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22
Q

Explain understanding of goodwill

A

Intangible

Value higher than net fair value

For specialist feature = brand name

Special value over and above land and building

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23
Q

What is purchased and inherent goodwill?

A

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

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24
Q

Different between residual and development appraisal?

A

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

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25
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
26
Technique to value without comparables
DCF = estimate cash flows over time and exit value = discount cash flows back to present day at discount rate
27
What affects yields?
Covenant Location Specification Rent Growth Asset management Development value
28
Define face rent
Rent excluding incentives such as rent free
29
Define effective rent
Rent including incentives
30
What is an ARY?
All Risk Yield Revenue of annual percentage of property cost Income / value x 100
31
What is deleterious material and its effect?
Prohibited and can affect structural integrity and longevity
32
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
33
How to report structural defects?
Show the client Include comment in survey Advise expert opinion Cost to remediate
34
Can a valuer request knowledge of the purchase price?
Yes - verify and request If opinion differs, why and evidence
35
If a claim for negligence, what can the client do?
Demonstrate the loss and pursue valuer/company Merritt V Babb = valuer not firm PII
36
What to caveat in a valuation report?
Publication Confidentiality Deleterious material Planning Tax Information supplied Environmental matters
37
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
38
What is passing rent?
Annual rent +/- estimated rental value Excludes incentives Actual income
39
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
40
Purpose of valuation
Taxation Rating Loan Accounts
41
What are the types of assumptions?
Special - facts differ from those at valuation date Assumption - valuer accept without investigation
42
Purpose of the Red Book
Provide consistency, transparency and objectivity for those undertaking asset valuations
43
What is not to the Red Book?
Rent reviews Internal val Agency
44
Basis of valuation?
Market rent Market value Fair value Investment value
45
Basis of valuation?
Market rent Market value Fair value Investment value
46
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
47
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
48
Types of due diligence checks?
Competence Conflicts Instruction ToE Asbestos Rating Contamination Equality Environmental matters Flooding Fire safety
49
Order of the hierarchy of evidence
New letting LR RR Expert Opinion Arbitration Asking price
50
Types of analysis
Straight line YP appropriate / time value of money - first rent review DCF
51
What is a residual value?
Values site GDV = all cost to develop incl profit
52
What is a development appraisal?
GDV = all costs to development (including land) = profit
53
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
54
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
55
What is the investment method?
Technique based on passing rent Reversion time and value = clients needs Policy and process Comparables
56
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
57
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
58
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
59
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
60
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
61
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
62
View on IPMS?
Useful with consistency across markets UK slow to adopt Awaiting updated professional statement
63
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
64
What is the UK version of the red book?
UK National supplement effective 1 May 20024 Application for Global Standards for UK
65
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
66
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.
67
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
68
What are the international valuation standards?
IVP 2022 is included in part 6 of the Red Book
69
What are the types of comparable and their weighting?
Comparable evidence in real estate valuation outlines: Direct comparables General market data Other sources
70
What is included under VPS2 of the Red Book?
Inspection and investigation
71
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)
72
What are Terms of engagement?
Set out under VPS1 of the Red Book and lists 18 items including identification, status of value, bases, purpose
73
What are valuation approaches?
VPS5 outlines three approaches: market - comparable income - capitalisation Cost - pay no more than cost to obtain equal one
74
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
75
What should make up comparable evidence?
Comprehensive - several Similar Recent Arms length transactions Verifiable Consistent with local practice Result of demand
76
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
77
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
78
Factors to consider during investment valuation?
Term Break option Financial strength of tenant Rent review
79
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
80
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
81
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
82
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)
83
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
84
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
85
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
86
How do market conditions affect development appraisals?
Rising inflation Borrowing costs up Office for demand down Increased build costs

APC Revision (17 decks)

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