Valuation Flashcards
what are the approaches to valuation? and which document outlines these?
International Valuation Standard 105: 1) income approach 2)Cost Approach 3)Market Approach
5 methods of valuation?
- Comparative 2. Investment 3.Profits 4.Residual 5.DRC
name of RICS Valuation standard
RICS Valuation - Global Standards (2022)
RICS document on comparables
RICS Professional Standard: Comparable Evidence in Real Estate Valuation (2019)
what does the standard for comparable evidence outline?
principles in the use of comparable evidence. Valuer should use professional judgement to assess the relative importance of evidence on a case by case basis.
Categories of the Hierarchy of Evidence
A) Direct comps B)general market data C)Other Sources e.g transactions from other RE assets.
what is Category B evidence?
info from published sources / commercial databases. Historic evidence. other indirect evidence
Category A evidence
completed transactions of near identical properties where information is available. Completed transactions of other similar RE assets where info is available.
what are the investment methods of valuation?
conventional. Term & reversion. Hard core.
conventional method of valuation equation
Net income x Multiplier = Market Value (NPV)
Difference between DCF and investment method
Implicit assumptions in conventional investment. DCF explicitly states assumptions.
Term and reversion method
Underrented properties. Higher yield applied to top slice. depends on comps and risk.
yield calculation
rent passing/price x 100
years purchase calculation
100 / yield. this means the years it takes to repay its purchase price.
Explain the DCF technique?
growth explict version of the investment method. Future net income is discounted to obtain the NPV.
How can NPV determine an investors TRR?
NPV - Positive it means they have exceeded TRR. If negative they haven’t exceeded it.
what is an IRR?
rate of return at which all future cashflows must be discounted to produce a NPV of 0.
name of the guidance on DCF valuation
RICS Practice Information: Discounted cash flow valuations, Nov 2023
name of guidance in relation to development property
RICS Professional Standard: Valuation of development property, 2019
Prime distrubution yields
5.00% - Stable sentiment
what are Greater London Estates yields?
5.00% - positive sentiment
Secondary South East Towns office yields?
11.50% + - negative sentiment
Industrial South East Estates yields?
5.25% - positive sentiment
ARY definition?
remunerative rate of interest used in the valuation of a fully let property let at MR, reflecting all the risks
True Yield
yield when rent is paid in advance not arrears
Nominal Yield
Initial yield assuming rent paid in arrears.
Net Yield
yield adjusted for purchaser’s costs
Equivalent
weighted average between NIY and RY (term and reversion)
Reversionary yield
market rent / current price x 100
Simple methodology for a DCF?
- Estimate cash flow (income less expenditure)
- Estimate exit value at end of holding period
- select discount rate
- value is the sum of completed DCF to provude NPV
Which part of the RBG details the DCF method?
VPS 5
when might you adopt the DCF method instead of conventional investment method?
when there is lack of comparable evidence, unique assets
what are the assumptions you need to make in a DCF valuation?
current market rent
expected rental growth
rent review period
holding period
discount rent
ARY
Last line into perpetuity
what is the RICS guidance on DCF?
RICS Practice Information: Discounted Cash Flow valuations, Nov 2023
detail the profits method of valuation?
trade related property:
pubs hotels.
Annual turnover - less costs/purchases = Gross profit
Less working expenses = Unadjusted net profit
Less remuneration = FMOP
then capitalise this at yield (years purchase) = MV.
Residual valuation purpose
to find the market value of the site based on market inputs at the valuation date. special assumption that development is complete as at the date of valuation
Residual method of valuation?
- Establish GDV (Comparable method to establish rent and yields)
- ARY used
- Assumption on marketing void, RF
- Take away total development costs (site prep, building costs, professional fees, contingency)
- finance costs
- developer’s profit % of GDV.
types of dev finance
debt or equity
typical LTV ration for dev finance?
60%
DRC method ?
value land in existing use. Add current cost of replacing the building plus fees less a discount for depreciation.
