Valuation Flashcards
What is the difference between an internal valuer and an external valuer?
Internal valuer - employed by the company, valuation for internal use only, no third party reliance
External valuer - has no material links with the asset to be valued or the client
Give me some examples of statutory due diligence undertaken in your valuations…
Business rates/ council tax
EPC rating
Flooding
Planning history
Legal title and tenure
What are the 5 main methods of valuation?
Comparable - comparing similar transactions to give an indication of value
Investment - used when there is an income stream, the rent is capitalised to produce a capital value.
Profits - a property that produces an income and is sold as a going concern (as a business)
Depreciated replacement cost - niche buildings where there is no market (not profit generating), the cost of replacing it is the value.
Residual - value of land with development potential
What are 3 methods of the investment method of valuing?
The conventional one
Term and reversion method
layer/hardcore method
Tell me about the conventional investment method…
Use comparables for market rent and yield
Rent received or market rent multiplied by years purchase = Market Value
Tell me about term and reversion…
Used when the property is under rented
Term capitalised until next review/ lease expiry at an initial yield.
Then reversion to Market Rent valued in perpetuity at a reversionary yield (this is not certain so a higher yield is applied to show the risk)
Tell me about the layer and hardcore method…
Used for over-rented investments
Rent passing less Market Rent until next lease event and then yield applied to this.
Then higher yield applied to MR as this not guaranteed
What is a yield?
A measure of investment return expressed as a percentage of capital invested
How is a yield calculated?
income / price x 100
What is years purchase and how is it calculated?
The number of years required for its income to repay the purchase price
Price / income = YP
What factors is a yield determined by?
Lease terms
Prospects for rental and capital growth
Quality of location
Quality of covenant
Voids
Security and regularity of income
What is an all risks yield?
The yield reflecting all the prospects and risks attached to the particular investment.
What is a gross yield?
Yield not adjusted for purchasers costs
What is a net yield?
Yield adjusted for purchasers costs
What is an initial yield?
Simple income yield for the current income and price
What is a reversionary yield?
Market rent divided by the current price on an investment that is under rented.
What is a DCF valuation? and tell me more about it…
A way to estimate the value of a property based on how much income it is expected to generate in the future.
Money today is worth more than money in the future (because of inflation, risk, and opportunity cost).
To account for this, you “discount” future cash flows using a discount rate (often the required return or cost of capital).
Once all future cash flows are discounted, you add them up to get the net present value (NPV). If this is positive = achieved investors target rate of return.
When would a profits method valuation be carried out?
Where a property and business is being sold as one. Where the value of the property depends on the profitability of the business.
eg. pubs
petrol stations
hotels
care homes
leisure
healthcare
Tell me more about the profits method…
The value depends on the profit generated from the business, not the physical building or location.
Must have accurate and audited accounts of 3 years where possible but can use estimates if a new business.
Audited accounts are superior to management accounts
Tell me about the depreciated replacement cost method of valuation…
This method provides an indication of value based on the buyer paying the cost to replace the asset with its modern equivalent including deductions for physical deterioration.
What is the comparable method of valuation?
This method involves comparing similar transactions to give an indication of value.
What RICS guidance note provides professional guidance to valuers on how to properly use and analyse comparable evidence when conducting real estate valuations?
Comparable evidence in real estate valuation, 2019
What is the Hierarchy of evidence?
The RICS has categorised comparables into three categories, which form a hierarchy of evidence.
they are:
Category A – direct comparables
Category B – general market data providing guidance eg. commercial databases, indices, historic evidence and demand/supply data
Category C – other sources, such as transactional evidence from other property types and locations and other relevant background data
What makes a good comparable?
Recent transaction
Similar property
Similar location
What challenges to valuers face with comparable evidence?
limited transactions
lack of up-to-date evidence
Evidence created by special purchasers - may have paid more than the market value
lack of similar evidence
What happens when there is a lack of robust evidence? Should a valuation still be carried out?
A lack of robust evidence should not prevent a valuation being provided, this is where the skills and experience of the valuer become even more important.
Valuers can also look further afield and at a wider range of evidence or indicators where direct comparables are limited.
How would you carry out a comparable valuation?
Gather comparable evidence
Record the evidence in a schedule, including details like; address, lease terms, floor areas, etc
Then I would analyse the net effective rent (taking any incentives into account) and adopt a comparison standard and then form an opinion of value by adjusting.
What is a residual valuation?
The value of development land.
The value of the land at its current state is equal to the potential projected value of the completed development, less the development costs.
What is the gross development value (GDV)?
the capital value of the completed scheme
How did you carry out your valuation in Chilton?
I undertook a ransom valuation based on the proposed development using the residual method.
For the GDV I used comparable evidence for new build houses to arrive at a sales rate for the 5 houses. This gave me the capital value of the completed scheme.
From the GDV I allowed 2% for disposal costs. Which gave me a NDV of £3.3m.
For the development costs, I deducted;
site preparation costs 5%
planning costs 3%
construction costs (BCIS)
professional fees 10% plus VAT
contingency costs 5%
finance costs 6%
developers profit 15% of GDV
I used BCIS to estimate a total cost of the construction work.
From here I subtracted the development costs from the NDV and then subtracted acquisition costs and stamp duty to arrive at a residual land value, just short of £900k.
Because the valuation was a shared value approach and ransom valuation - from here I subtracted the existing use value which provided the uplift in value and then ransomed from this point.
What are some purposes of valuation?
mortgage lending, taxation, financial reporting and property acquisition/disposal decisions
When is a red book valuation required?
Often requested in instances where tax or legal proceedings are involved.
Other examples, financial purposes eg obtaining finance/ re-mortgaging.
Or if it needs to be carried out by a registered valuer.
When is a red book valuation not required?
Agency
Negotiation
Internal purposes
What is a registered valuer?
A regulated and qualified professional who specialises in property valuation regulated by the RICS.
In performing valuations, the valuer must comply with the Valuer Principles. What are these?
> Ethics (The valuer must follow the ethical principles of integrity, objectivity, impartiality, confidentiality, competence, and professionalism to provide a non-biased valuation and to promote and preserve the public trust)
Competency
Compliance
Professional Scepticism
What are some factors that affect valuation?
Location
market condition
supply and demand
planning
property condition
What is the definition of market value?
The estimated amount an asset or liability should exchange for on the valuation date between a willing buyer and willing seller in an arms length transaction after proper marketing and where both parties have acted knowledgeably, prudently and without compulsion.
What is the definition of market rent?
The estimated amount for which an interest in property should be leased for on the valuation date between a willing lessor and a willing lessee on appropriate lease terms, in an arms length transaction, after proper marketing and where both parties have acted knowledgeably, prudently and without compulsion.
How do you zone a property?
6.1m depth
Zones ABCR, A is full value and BCR get halved.
Then another rate applied to storage, etc.
Essentially saying the first 6.1m is the most valuable section of the shop.
What is VPS 4 now?
This is now VPS 2 which is the bases of value and assumptions and now includes transaction costs
Property has been valued based on its fair market sale price and rental potential.
Market Rent and Market Value.
How do you know if a property is suitable for loan security?
High value
Good condition
Desirable location
Potential for rental income
What were the development costs you deducted for in your residual at Chilton?
For the development costs, I deducted;
site preparation costs 5%
planning costs 3%
construction costs (BCIS)
professional fees 10% plus VAT
contingency costs 5%
finance costs 6%
developers profit 15% of GDV
What are the main changes in the Red Book?
Alignment with the new International Valuation Standards (IVS), published 31 January 2024 and effective 31 January 2025.
The addition of new content relating to modelling and methods.
Adaptation to practice and process changes from evolving areas such as technology and Environmental Social and Governance (ESG).
What is a speculative investor?
A speculative investor is someone who invests in assets with higher risk in the hope of achieving higher returns.
In your Seaton Burn valuation, why did you adopt a yield of 8%?
I adopted a higher yield to reflect higher risk because…
poor location
likely poorer covenant strength
poorer property condition
office market struggling
What makes a property suitable for loan security?
Demand for the property type in the market
good condition
good location
potential for rental income
Why do you round valuations?
For simplicity
What is a ransom valuation and specific case law?
The valuation of a strip of land that unlocks the development. A percentage is taken of the uplift in value of the development land.
Stokes vs Cambridge - 33% - The Court held that one-third of the increase in value should be attributed to the ransom strip as ransom holder would benefit from the development
Ozanne v Hertfordshire County Council - 50% - on the basis that there was only one practicable access.
Batchelor v Kent County Council - 15% - due to the availability of alternative accesses.
What is the difference between an assumption and a special assumption?
Assumption - is a supposition taken to be true, does not need to be verified by the valuer.
Special assumption - An assumption where the facts differ from the actual facts existing at the valuation date
What is a special purchaser?
A buyer for an asset that has special value to them due to the advantages arising from it.
What is fair value?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
What is marriage value?
When two or more assets are combined to create additional value that is more than the sum of their separate values
What is departure?
Advice provided by a valuer that is contrary to the specific provision of VPSs 1-6
What goes into terms of engagement?
Fees
Scope of service
Complaints handling procedure
Liability limitation in terms of professional indemnity insurance
What does a red book valuation require?
limitations on liability
who can read the report
valuation date
special assumptions
terms of engagement
basis of value
What is the ‘highest and best use of a property’?
Most profitable and efficient use of a property.
The value must be based on the use that would produce the highest value for a property, regardless of its actual current use.
What steps would you take following your valuation instruction?
Conflict of interest check
Obtain signed terms of engagement
Valuation due diligence
Inspection and measurement
Valuation and report
Submit to client
What details would you expect to see covered in a Banks Letter Of
Instruction on a valuation for secured lending?
Borrower
Property
Purpose
Special assumptions
What the report should contain
What is hope value?
the market value of land based on the expectation of getting planning permission for development on it.
