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APC TH > Valuation > Flashcards

Valuation Flashcards

1
Q

What is difference between internal and external valuer?

A

Internal- Employed by company to value assets of enterprise, internal use only, no 3rd party reliance
External – no material links with asset or client

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2
Q

What must you check before undertaking valuation?

A

CIT = Competence, Independence and ToE

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3
Q

What statutory due diligence may you undertake?

A

Business rates, Contamination/flooding/environmental matters, EPC, Fire Safety, legal title, planning history, asbestos register

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4
Q

What is a typical timeline of valuation instruction?

A

Receive instruction, check competence/independence, issue ToE/ receive signed ToE, gather info & DD, inspect/measure, undertake valuation, draft report, peer review by another surveyor, finalise and sign report, report to client, issue invoice, ensure file in good order to archive

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5
Q

What are the 5 methods of Valuation?

A

PRICC
Profit, Residual, Investment, Comparable, Contractors (Depreciated Replacement Cost)

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6
Q

How does the IVS 105 split the approaches?

A

Income approach (Investment, Residual, Profit), Cost Approach (Contractors), Market Approach (Comparable)

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7
Q

What does the Comparable Method involve?

A

Gather comparables and confirm details, assemble in schedule (adjust using ‘Hierarchy of Evidence), analyse to form opinion of Value

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8
Q

When is the Comparable Method used?

A

When there is a good body of recent, reliable comparable evidence

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9
Q

What is the hierarchy of evidence outlined in RICS Prof Stand: ‘Comparable Evidence in Real Estate Valuation’ 2019)?

A

Cat A – Direct comparable (accurate and recent), Cat B – general market data to give guidance (historic and reports), Cat C – other asset classes/locations

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10
Q

What may be some challenges in comparable method?

A

Limited transactions, lack of up-to-date evidence, special purchaser

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11
Q

What is the Investment method of Valuation?

A

Used when there is an income stream, which is capitalised to produce capital value

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12
Q

What are the main investment method techniques and explain when used?

A

Growth implicit (growth implied within yield)
Term & Reversion – For under-rented properties, term is capitalised with current rent at initial yield until reversion, the reversion capitalised into perpetuity at reversionary yield
Hardcore & Top Slice–For overrented investments, horizontally split, and market rent/hardcore (bottom slice) is capitalised into perpetuity at net initial yield, and the top slice (passing rent – market rent) capitalised until next lease event using NIY with a risk adjustment
Hardcore & Layer – Used when reversion is close, capitalise term/hardcore into perpetuity at equivalent yield, capitalise reversionary layer at equivalent yield deferred until reversion
Conventional - Rent x YP
Growth Explicit
Discounted Cash Flow (DCF) – determines value of property by examining future net income and then discounting to arrive at estimated current value

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13
Q

What is the difference between term & reversion and hardcore & top slice?

A

Split differently, different yields used

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14
Q

When does a DCF tend to be used?

A

Short leaseholds/phased developments/overrented properties

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15
Q

How do you undertake a DCF?

A

1) Estimate CF (income-expenditure)
2) Estimate exit value at end of holding period
3) Select discount rates and discount CF at it
4) Value = sum of completed DCF to provide Net Present Value

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16
Q

What is Net Present Value (NPV)?

A

Sum of DCFs – can be used to determine if investment will give +/- return against target rate of return

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17
Q

What is Internal Rate of Return (IRR)?

A

Rate of return where all future CFs must be discounted to produce NPV=0
It is used to assess the total return from investment opportunity

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18
Q

How do you calculate IRR without software?

A

Use linear interpolation
Current MV as -, projected rents as +, projected exit value assumed positive, if NPV>0, target rate of return met

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19
Q

What is the Profits Method?

A

Capitalise the FMOP at an appropriate yield
Income (FMT) – costs = Gross Profit – expenses & operator’s renumeration = FMOP (EBITDA)
This is capitalised at appropriate yield

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20
Q

When is the Profits method used?

A

Trade related/monopoly position e.g. pubs, hotels, guest houses, leisure, care homes

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21
Q

What is the Residual Method?

A

Technique used to estimate the value of land that are going to be developed
GDV – all costs to develop (inc profit) = residual land value

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22
Q

What is Development appraisal?

A

GDV – all costs to develop (inc. land value) = developer’s profit

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23
Q

What is the contractors method?

A

Assesses the costs to replace the land and building with a modern equivalent, making deductions for depreciation and obsolescence

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24
Q

What is the other name for Contractors method?

A

Depreciated replacement cost (DRC)

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25
Q

When is the Contractors method used?

A

Owner-occupied or specialised properties that are rarely sold on the open market e.g. sewage works, libraries, oil refineries, docks

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26
Q

Is the Contractors method Red Book compliant?

A

No, used for account or rating purposes

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27
Q

What is the Professional Standard relating to ESG in regard to valuation?

A

RICS Professional Standard - Sustainability and ESG in commercial property valuation and strategic advice (2021)

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28
Q

What does the ESG Valuation professional Standard include advice on?

A

ToE, valuation purpose, inspection, reporting, relevant sustainability considerations / characteristics / risks and how it should be reflected in choice of Val method

29
Q

What level of margin of error is permissible?

A

K/S Lincoln v CB Richard Ellis (2005) +/- 5% for resi, +/- 10% for one off commercial building

30
Q

What is hope value?

A

Value from any expectations that future circumstances may affect property value

31
Q

When may hope value be created?

A

Future prospect of PP, realisation of marriage value

32
Q

What is Marriage Value?

A

Merger of interest (physical or tenurial)
Typically split 50:50 or divided pro-rata to the value of the individual interest

33
Q

What is an assumption?

A

Something that is reasonable for a valuer to accept is true without the need for specification (e.g. building is structurally sound)

34
Q

What is a special assumption?

A

It is an assumption that is taken to be true and accepted as fact even though it is not true (e.g. VP, the property works are complete, mature)

35
Q

Why would you need a Vacant Possession Valuation?

A

If borrower fails to repay rent repayments, and bank takes on ownership of property and has to sell

36
Q

What is a WAULT?

A

Weighted Average Unexpired Lease Term – Time remaining to first break/expiry across asset weight by contracted rent

37
Q

How do you calculate the WAULT?

A

1) Multiply annual rent paid by each tenants by remaining term
2) Sum these weighted terms
3) Divide the total weighted lease term by the sum of annual rents

38
Q

What is a special buyer?

A

A particular buyer for whom a particular asset has special value because of advantages rising from its ownership that would not be available to other buyers e.g. neighbouring site etc

39
Q

What are Building Cost Reinstatement valuations?

A

The cost of the reinstatement of the building without profit
Use RICS Building Cost Information Service (BCIS), use GIA

40
Q

When are BCR used?

A

This is provided for insurance purposes and is not a ‘written opinion of value’

41
Q

What are purchasers costs?

A

Stamp Duty – at prevailing rate
Agent’s fees – 1% of purchase price + VAT (1.2%)
Legal Fees – 0.5% of purchase price + VAT (0.6%)
Tends to be 6.8% (assuming 5% stamp duty)

42
Q

What is a ransom strip?

A

Piece of land which controls the access to another piece of land

43
Q

How would you value a ransom strip?

A

No statutory framework, but approximately a third of the development value uplift unlocked by the ransom strip

44
Q

How do you value retail property?

A

Halving back principle with 6.1m (20ft) zones

45
Q

What is a party wall?

A

A wall if it stands astride the boundary of land belong to different owners

46
Q

What is the professional standard regarding rights of light?

A

RICS Professional Standard – Rights of Light 2024

47
Q

What does the RICS Professional Standard – Rights of Light 2024 state?

A

Type of easement that arises 20 years after uninterrupted enjoyment of light without the consent of the 3rd party

48
Q

What are the stamp duty levels?

A

£0-£150k = 0%
£150,001 - £250k = 2%
£250k+ = 5%

49
Q

What does the Charities Act 2011 entail regarding valuations?

A

Charities must obtain a valuation prior to the disposal of an asset S.119

50
Q

What is a Gross yield?

A

The yield not adjusted for purchaser’s costs

51
Q

What is a Net yield?

A

The yield adjusted for purchaser’s costs

52
Q

What is an Equivalent yield?

A

Average weighted yield of reversionary and initial yield

53
Q

What is an Initial yield?

A

Simple income yield for current income and current price

54
Q

What is a Reversionary yield?

A

ERV divided by current price, asset let below MR

55
Q

What is the Valuer Registration Scheme?

A

Quality assurance program, monitoring valuers carrying out Red Book Valuations, must undertake annual return

56
Q

What are the aims of the Valuer Registration Scheme?

A

o Improve quality and standards
o Meet RICS’ requirement to self-regulate efficiently
o Protect and raise status of valuation profession

57
Q

13) What is the issue with using auction results as comparables?

A

Gross prices, have not yet accounted for purchaser’s costs. May also involve a special purchaser / insolvency sale.

58
Q

What is a trading property?

A

When a property value is intrinsically linked to the property’s trading potential

59
Q

What is STR?

A

Provides market data on the hotel industry e.g. supply, demand, market share data

60
Q

Can you provide draft advice?

A

Yes - marked as draft, for internal use only, cannot be relied upon, cannot be published
Valuer cannot be influenced - any changes must be noted on file

61
Q

What is a premium?

A

Capital payment on top

62
Q

What are some rules you must comply with regarding Regulated Purpose Valuations?

A

Cannot value if firm has acted as agent within last 12 months, must state whether 5% or more of annual income from client, recommended 7 year valuer rotation policy

63
Q

Why are purchaser’s costs not deducted in Profit method?

A

Due to VPGA4 guidance

64
Q

What is a typical developer’s profit?

A

15%

65
Q

Why didn’t you use DCF instead of Hardcore and Layer?

A

Market for reletting limited and it wasn’t deemed appropriate

66
Q

What are a Special Assumptions conditions?

A

Realistic, relevant, valid

67
Q

When would you measure trading properties?

A
  • Pubs/ restaurants tend to consider SQ FT
  • To make sure they meet hotel/ care home standards
68
Q

What is the material uncertainty clause?

A

A material uncertainty clause ensures that any client relying upon a valuation report understands that it has been prepared under extraordinary circumstances

APC TH (15 decks)

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