Valuation Flashcards
Define an Internal Valuer
Values assets within company ownership
Internal purposes only
Not to be relied upon by third parties
Define an External Valuer
Person with no material connections to asset or client
What three important first steps must you undertaken when commencing a valuation instruction ? CIT
Competence - Do you have the skills/experience to undertake the job, if not refer to the RICS Find a Surveyor service on the RICS Website
Independence - After competence are their any personal interests or conflicts
Terms of Engagement - Set out in writing confirmation of instructions, and receive signed copy, confirm competence and note any inspection limitations
Why do you undertake due diligence for Valuations ?
Required to check that there are not material maters which could impact upon the Valuation
Can you name forms of due diligence for Valuations ?
Asbestos Register
Council Tax/Business Rates
Contamination
EPC rating (if available)
Flooding
Fire Safety compliance
Planning History
What are the 5 methods of Valuation ?
- Comparative Method
- Investment Method
- Residual Method
- Profit Method
- DRC (Depreciated Replacement Cost) Method / Contractor’s Method
According to the IVS 105 Valuation Approaches and Methods what are the 3 valuation approaches ?
- Income Approach (Investment, Residual and Profit)
- Cost Approach (DRC Method)
- Market Approach (Comparative Method)
Comparative method - 6 steps
- Search and Select Comparables
- Confirm and Verify details
- Create a schedule of evidence
- Adjust comparables based on Hierarchy of evidence
- Analyse comps to form opinion of value
- Report value
Summaries the RICS Professional Standard: “Comparable Evidence in Real Estate Valuation”
Outlines principles in the use of comparable evidence.
Provides advice in dealing with limited evidence.
Quote the RICS Professional Standard: “Comparable Evidence in Real Estate Valuation”
“The Valuer should use professional judgement to assess the relevant importance of evidence on a case-by-case basis.”
How to find relevant comparables (6)
- Inspection of local area finding recent activity or agent boards
- Speaking with local agents
- Auction results (being mindful these are gross prices)
- In-house records
When do you use the Investment Method of Valuation ?
When there is an income stream to value
What does the Investment Method do with rental income ?
The rental income is capitalised to produce a capital value
What does the conventional Investment Method assume ?
Conventional method assumes growth implicit valuation approach
What does the Investment Method produce ?
An implied growth rate is derived from the market capitalisation rate (yeild)
Describe the Conventional Investment method
Market Rent multiplied by the years purchase to calculate market value.
Years purchase, 100 divided by yield.
Yield identified through comparables
Investment Method: Describe the Term and Reversion Method
Used when property is reversionary / under-rented
Term capitalised until the next lease event at an initial yield using the passing rent.
Reversion using Market Rent valued into perpetuity at a reversionary yield
Outcomes are then added together to identify the Gross Capital Value, by removing purchasers cost, you identify the Net Capital Value
Investment Method: Layer/Hardcore Method - used and method ?
Used for over-rented investments
Approached laterally, you value the bottom slice into perpetuity at market rent using an all risk yield. (MR X YP in perp = CV)
Top slice of passing rent multiplied by an initial yield. A higher yield is applied to the top slice to reflect additional risk, different yields used depending on comparable investment evidence and relative risk.
(PR x YP for number of years remaining/until lease event = CV)
Add both together to get Capital Value
Risk is the major factor when determining yield, relating to what factors ?
- Prospects for rental and capital growth
- Quality of location and covenant
- Use of property
- Lease Terms
- Obsolescence - which is the likely future rate ?
- Voids - What is the risk ?
- Security and regularity of income
- Liquidity - ease of sale
What is return, how is it measured and how do you calculate it ?
A term used to describe the performance of a property
Measured retrospectively
Calculated using DCF to find the internal rate of return
What are secondary yields ?
Yields that are higher than prime to reflect additional risk for whatever reason (Property type/Security/Lease terms etc)
What is a growth implicit yield ?
Growth Implicit Yields build the expectation of growth into the yield rather than explicitly modeling it in the calculation - e.g All Risk Yield
This method is appropriate when there is consistent market evidence and the valuation scenario is simple.
The yield adopted assumes many of the assumptions that are made explicit in a DCF approach and the risks are hidden in the selected yield.
What is a growth explicit yield ?
Growth explicit yields allow for the expectation of growth in the cash flow which is then discounted at a required rate of return.
This method is more complex, but it can be used to model a wider variety of scenarios and assumptions.
When would you use the RICS Red Book ?
