Valuation Flashcards
What RICS guide would you refer to for the Comparable method
Comparable Method Hierarchy of Evidence (from RICS Professional Standard - Comparable Evidence in Real Estate Valuation 2019):
- Category A - Direct Comparable evidence (example achieved prices of similar properties to subject)
- Category B - General Market data that can provide guidance (such as information from public sources which is verifiable)
- Category C - other sources (such as comparables from other asset classes and locations)
What are the 5 methods of valuation ?
IVS 105 - 5 methods of valuation:
* Comparable – When comparable data is available to form an opinion of value
* Investment – When there is an income stream to value
* Residual – When valuating sites or undertaking development appraisals
* Profit method - for trade-related properties - value by working out the adjusted profit and calculating the fair operating profit
* DRC – When direct market evidence is limited for specialised properties
What due diligence would you conduct for a valuation?
For Valuation - RICS Red book, UK National Supplement (2017)
UK VPGA 11 - Valuation of residential property
- Asbestos register
- Contamination
- Equality Act 2010 compliance
- EPC Rating
- Flood Risk
- Fire Safety Compliance
- Legal title and tenure
Define Market Value
Market Value - (IVS 104 paragraph 30.1)
- 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
Tell me about Residual valuations and Development Appraisals - and what is the difference?
Residual value - (Market inputs) - GDV - Development costs = site value
Development Appraisal - (Client Inputs) GDV - development cost - site value = profits
What are the 3 important first steps to first undertake before a valuation
- Competence - am I competent to undertake the work?
- Independence - think first and then check for any conflicts or personal interests - Who and Why?
- Terms of Engagement
What are the different yields
- Yield calculated by income divided by price x 100
- Yields are a measure of investment return. Types of yields include:
Gross Yield - Not adjusted for purchasers costs
Net Yield - Adjusted for purchasers costs
Reversionary yield - MR divided by the current price let at below MR
Equivalent Yield - Average weighted yield. when a reversionary property is valued using an initial and reversionary yield
Initial Yield - Current income and Current Price
True Yield - rent in advance
Nominal Yield - rent in arrears
IRR - a rate that makes the net present value (NPV) of all cash flows equal to zero. Assesses profitability of an investment
Linear interpolation can be used to figure out IRR
Running yield - the yield at one moment in time
All risks yield - the remunerative rate of interest used in the valuation of fully let property let at market rent reflecting all the prospects and risks attached to the particular investment
Define Market Rent
- The estimated amount for which an interest in property should be leased
- On the valuation date
- Between a willing Lessor and willing Lessee
- On appropriate terms in an arm’s length transaction
- After proper marketing
- With parties acting knowledgeably, prudently and without compulsion
Investment Value
Tell me how to use the Profits Method?
Profits Method
Used for valuations of trade related properties such as:
* Pubs
* Casinos
* Nurseries
Profits method approach
* Ask for audited accounts of the past 3 years
* Work out the adjusted net profit AKA Fair maintainable operating profit
* Capitalise the Fair maintainable operating profit at a suitable yield
Methodology:
* Annual turnover (income received) less costs/purchases = gross profit
- Less reasonable working expenses = unadjusted net profit
- Less operator’s remuneration = Adjusted net profit known as the Fair Maintainable Operating Profit (FMOP)
Define Fair Value?
a. The price that would be received to sell an asset
b. Or paid to transfer a liability
c. Orderly transaction
d. Between market participants
e. At measurement date
Define Investment Value?
a. Value of an asset
b. To a particular owner, or prospective owner
c. For individual investment or operational objectives
Define Equitable value?
The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties
Define an assumption?
Something that you can reasonably assume to be true
Define a special assumptions?
things which are not true but have been assumed to be true
Tell me everything about the residual method of valuation?
a. Method for valuing sites or undertaking development appraisals
b. GDV = market value of proposed development at valuation date
c. All risks yield is used
d. GDV – Costs = Residual site value
Define a residual site valuation?
Valuation of a property holding to find the market value of the site based on market inputs
Define a development appraisal?
a. A calculation to establish the value/profitability/viability of a proposed development based on a clients inputs
b. A site value can be assumed, or calculated
Tell me everything about the DRC method of valuation?
a. AKA contractor’s method
b. Used where market evidence is limited for specialised properties
c. Including oil refineries, docks, lighthouses
d. Value of land in existing use + current cost of replacing the building + (fees minus a discount for depreciation of obsolescence)
What is included in a valuation report?
a. Identification and status of valuer
b. Client and any other intended users
c. Purpose of valuation
d. Basis of value
e. Valuation date and date of valuation report
f. Extent of investigation
g. Assumptions and special assumptions
h. Valuation approach and reasoning
i. Market commentary
j. Statement on limited liability
What section of the Red Book Global gives information about reports?
VPS3
Define EUV-SH?
a. Refers to property value if it were to be used for social housing in perpetuity
b. Assumes hypothetical sale to another RP On the valuation date
c. On the assumption that there is a willing seller and a reasonable marketing period prior to valuation date and
d. that it will be used for social housing and any voids will be re-let on the same tenure and not sold as MV-VP
e. Vacant properties should be valued as EUV-SH if there is a letting demand
f. Vendor only disposes to similar organisations (RPs)
g. Subsequent sales must follow same assumptions
Where is information on EUV-SH found?
a. UK Red Book National Supplement
b. UK VPGA 4.3 – Operational property, plant and equipment
C. VPGA 7
What the 3 types of depreciation?
a) Physical obsolescence - deterioration/wear over the years
b) Functional obsolescence - spec no longer fulfils the function
c) Economic obsolesce - changing market conditions
What methods are used to value on EUV-SH?
a. DCF
b. Beacon approach
Tell me about the Beacon Approach?
a. collect stock information
b. divide stock into asset groups
c. establish archetype groups
d. identify beacon properties
e. inspect beacon property
f. beacon record sheet
g. comparable sales evidence
h. adjusting sales evidence
i. beacon valuation
j. beacon variations
k. valuation of the archetype group
l. adjustment factor
m. valuation of asset group
Define MV-T?
a. Refers to property value if property was sold on open market with current tenancy in place
b. Assumes a hypothetical sale that is not bound by restrictions to use and can be sold on the open market
c. The sale would see an increase in rents to market levels
What assumption did you consider for your residual valuation in Worthing?
a. Contingency – 5% (private), 3% (SR and AR)
b. Professional fees – 10%
c. Finance - 7% (assumed 100% debt)
d. Profit - 20% (private)
e. SDLT (applied at the prevailing rate for private)
f. Purchase agent fees - 1%
g. Purchase legal fees - 0.5%
h. Sales agent fees - 1% (private)
j. Sale agent fees - 1% (private)
l. Sales legal fees - 0.5% (private)
m. Marketing costs - £1,500 per unit (private)
n. CIL obligations - £5,000 per unit (private)
o. Construction period - 12 months
p. Grant funding - £480,000 (SR & AR)
q. construction costs - £2.8m (SR & AR) and £1.8m (private)
How were EUV-SH figures inputted into Argus for your residual valuation in Worthing?
a. Contingency – 5%
b. Professional fees – 10%
……………
What finance rate did you use for your residual valuation and how did you calculate this?
a. 7% - bank of England base rate plus a premium
b. For the site purchase we calculated the finance on a straight line basis, using compound interest
c. For costs we assumed the finance required was calculated on an S-curve basis – the total construction costs are assumed to be over half of the time-period
d. For the holding costs from completion to disposal we calculated the finance on a straight line basis
What are the 3 elements for finance for a residual valuation?
- Site purchase - compound interest (straight-line basis)
- Total construction and associated costs - - calculation
- Holding costs to cover voids until the disposal of the scheme (empty rates, service charge and interest charges) - compound interest on a straight-line basis
Why did you run multiple scenarios?
a. As a form of sensitivity analysis to provide clarity on how changes would impact value
b. I amended interest rates (down 0.5%)
c. I amended build costs (down 0.5%)
d. I amended GDV (changed 5 SR flats to private sale)
Why did you choose to run multiple scenarios instead of a sensitivity analysis?
a. To advise the client on various possible outcomes
What is the benefit of including off plan sales?
a. Income comes in earlier, which offsets your costs so you have less finance. This increases your land value. Also reduces risk as you have less units to sell post completion
How does your firms internal model work?
a. DCF that calculates restricted value of units by modelling future income streams and outgoing costs and discounts them to give current value
What is the time length of your firm’s internal model?
a. 250 years for residual valuations. Most of the income is through the first 50 years but a longer period allows a greater degree of accuracy
What are the pros and cons of Argus?
a. Advantages:
i. Reliable and used across the industry
ii. Allows for a good degree of customisation
b. Disadvantages:
i. Hard to see how its calculating everything behind the scenes
ii. This makes understanding the impact of any changes harder
iii. Also makes it harder to spot any potential mistakes
Where did your client get their build costs from?
From a reputable firm of quantity surveyors – I cross referenced with BCIS data
Where does BCIS get its data?
Construction companies and surveyors will upload their data from tender details
Did your site have planning permission, and if not what adjustments did you make?
a. No – made a special assumption that it had full planning permission
Was the Residual valuation Red Book compliant and if so, what sections were in the report?
………………….
What is a GOR?
Government Office Region (subdivisions of England)
- Define Valuation date?
The date on which the opinion of value applies
What are the different valuation approaches covered under IVS 105?
a. Income approach – conveying current and future cash flows into a capital value (Investment, Residual and Profits methods)
i. An approach that provides an indication of value by converting future cash flows to a single current capital value
b. Cost approach – DRC method
i. An approach that provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or construction
c. Market approach – Using comps (Comparable method)
i. An approach that provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available
What are the parts in the Red Book Global?
a. Part 1 – Introduction
b. Part 2 – Glossary
c. Part 3 – Professional Standards (PS1 & PS2)
d. Part 4 – Valuation technical and performance standards (VPS1-5)
e. Past 5 – Valuation applications (VPGA 1-10)
f. Part 6 – IVS
What is the difference between worth and price?
a) worth is the property’s value based on an investor’s own assumptions as opposed to market assumptions
b) price is …..
What are the different valuation approaches?
a. Income approach – conveying current and future cash flows into a capital value (Investment, Residual and Profits methods)
i. An approach that provides an indication of value by converting future cash flows to a single current capital value
b. Cost approach – DRC method
i. An approach that provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or construction
c. Market approach – Using comps (Comparable method)
i. An approach that provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available
What is a yield
Your annual income expressed as a percentage
