Valuation Flashcards
Three methods of valuation
Market Approach (comparable)
Income Approach (investment, profits)
Cost Approach (DRC)
Residual is a hybrid of all
RICS guidance on Comparable Method
Comparable evidence in real estate valuation (1st edition) (professional standard)
What does RICS Comparable evidence in real estate valuation (1st edition) (professional standard) outline
Principles of the use of comparable evidence. Encourages consistency of the use of comparable evidence. Addressed the availability of comparable evidence in challenging marketing conditions. Potential sources of comparable evidence and relative importance.
Ideal comparable evidence
Comprehensive
Identical or similar to subject
Close to valuation date
Arms length transaction
Verifiable
Consistent with local practice
Active market with multiple bidders
What to do in lack of evidence cases
Material Uncertainty (VPGA 10)
Hindsight evidence when to use
Red Book: Only use evidence available to a valuer on the date of a valuation
Chifley Holdings Ltd v HMRC 2024 basket of evidence. Disregard events not known at date of valuation. Comparable evidence after date can provide assistance to the valuer as long as it is weighted correctly.
Hierarchy of Evidence
- Direct comparable (Cat A)
- General market data (Cat B)
- Other sources (Cat C)
Analysis of evidence
Establish a common measurement
Make adjustments
Stand back and weight evidence
Types of Yield
All Risk Yield
Net/Gross Yield
Equivalent Yield
Equated Yield
Reversionary Yield
All Risks Yield
Growth Implicit, takes account of all risks, derived from a rack rented investment
Net/Gross Yield
Initial rental income divided by purchase price exclusive or inclusive of notional purchasers costs
Equivalent Yield
The average weighted yield between term and reversionary income
Equated Yield
Growth explicit the cash flow discounted at this rate equates to the purchase price also known as IRR
Reversionary Yield
Reversionary income divided by purchase price
What is Hope Value?
Prospect of future development or marriage/synergistic value if reflected in market and not special purchaser.
Which case states Hope Value should be properly reflected in a valuation for taxation purposes?
Palliser v HMRC (2018) 88.4% share of maisonette inherited from his father and modernised and requiring refurbishment and it was decide that it should include the prospect of improvement
What was the Keighley DWP property?
A piece of land on the outskirts of Keighley in West Yorkshire. Originally a large plot of land split into small parcels and sold at auction. The subject land was segregated by a small wire fence and used as an allotment.
Why did the Keighley case have no hope value?
The land was poor quality, in an agricultural area, and it was very unlikely that planning permission would be granted.
What was the HMPPS property?
A brick built 1950s property in a residential area. At one point it had been a large residential dwelling but had been extended over the years. 11 bedrooms and associated parking.
What was the condition of the HMPPS property?
The property was in reasonable condition commensurate with its age, but had been extended on a number of occasions and had an internal refurbishment and new windows and doors fitted within the last year.
What was the value of the land in Keighley?
The land was valued at 3 dates 2018 2021 and 2024 the valuations were £840 for 2018 and 2021 and £1,050 for 2023 based on an increase in the market.
Why did land values increase in 2021?
Demand for agricultural land increased post-covid part due to investors seeing a shift in global regulatory accountability for environmental impact and seeing farmland as a real asset investment opportunity high in ESG (Environmental Social and Corporate Governance) value.
What ESG benefits does the farmland have?
Agricultural soils have potential to sequester 5 gigatons of CO2 annually until 2050. Buying land can be used to offset the carbon footprint of a company.
How did you value the HMPPS property?
Comparable basis at a value per bedroom. Reviewed recent sales in the surrounding areas and HMOs this provided a range of values between £20-25k per bedroom. Based on comparability I adopted £20,000 per bedroom accounting for the local area and other value significant factors.
How did you value the car park?
Due to a lack of rental evidence, the car park was valued on a percentage of Fair Maintainable Receipts.
How did you establish fair, maintainable receipts (FMR) for the car park?
Gathered receipts from the occupier and reviewed these based on comparable evidence to see if they were reasonable accounting for location size and other factors.
How is the car park value determined?
Price per space basis. This enables direct comparison of sites of different sizes. A standard space is taken as the norm.
What is the standard size of a parking space?
2.4 meters wide by 4.8 meters long
What percentage of receipts did you adopt?
The levels are agreed with the representatives at revaluation. Poor 30-35%
Average 35%-40%
Good 40%-45%
Prime 45%
Prime+ 50%
How did you establish the rateability of the Car Park?
ABET
Actual as used for parking
Beneficial as gained income
Exclusive as signs and notices indicated ownership
Not too Transient fixed payment booths and signage fenced off.
What advice did you provide on the car parking?
I spoke to the ratepayer who questioned some values based on the adopted % of FMR I explained my reasoning by justifying the adopted % based on the occupancy, location, quality of the car parks and compared these with car parks in other locations and they accepted the valuation.
What is an informal valuation?
Provides a general estimate of the properties value also referred to as a calculation of value.
Why did you provide an informal valuation?
It was requested by the client. I caveated the report with the details that I had not been able to fully check all relevant detail and that the valuation could be subject to change and would provide a more detailed valuation if requested.
What were the ranges of Yield for this type of property?
It varied depending on a range of factors, but comparable properties were between 7 and 12% within the local area
What Yield did you adopt?
9% based on the closest comparable at 10%, the subject, however, had a stronger covenant strength and was in a slightly better location.
What would you have done if the property was over-rented?
Hardcore and Top slice method. Value divided horizontally, the hardcore is valued into perpetuity at a net initial yield. The top slice is capitalised to the next lease event at a net initial yield with a risk adjustment. Yield based on market comparable evidence.
What if the property was under-rented?
Term and Reversion. Income flow is divided vertically. The term (passing rent) is capitalised until the next lease event at an initial yield. Reversion to market rent valued in perpetuity at a reversionary yield. The term is valued at a sharper yield to reflect the risk.
What is DCF and when would you use it?
A valuation technique that uses expected future cash flows in conjunction with a discount rate to estimate the present fair value of an investment. For investment valuations with guaranteed income for a specific term.
