Valuation Flashcards
What is the current rate of inflation?
3%
What is the definition of market value?
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and willing seller in an arms length transaction, proper marketing and where parties have acted knowledgeably and without compulsion
What is the definition of market rent?
The estimated amount for which an interest in property should be leased on the valuation date between a willing lessor and willing lessee on appropriate lease terms in an arms length transaction, after proper marketing and where both parties have acted knowledgeably and without compulsion.
What are the three steps you need to take before proceeding with a valuation?
- Competence check
- Conflict of interest
- Terms of engagement
What is and internal and external valuesr?
Internal valuer - employed by the company to value their assets. Internal purposes only
External valuer - no material links to the asset being valued for the client
What is the timeline of a valuation?
- Receive instructions
- Check competence, conflict of interest check and terms of engagement signed by client
- Gather all info (lease, planning, title docs, plans)
- Due diligence on docs
- Inspect and measure
- Research market and assemble comps
- Undertake valuation
- Draft report
- Get colleague to check work
- Finalise and sign report
- Report to client
- Issue invoice
What are assumptions?
Assumptions are used by the valuer in arriving at their opinion of value and will be stated in their report.
What are special assumptions?
A special assumption is a term used to describe an assumption which is untrue at the time of valuation
For example a property without planning permission could be valued on the special assumption that is has planning permission or the special assumption that the property will undergo development
What is the comparative method? And define comparable?
-used to assess the market rent and market value of commercial properties
Comparable is defined as an item of information used during the valuation process as evidence to support the valuation of another item
What is the investment method?
Used when there is an income stream to value. The rental income is capitalised to produce a capital value
Market rent x years purchase = market value
What is the term and reversion method ?
Used for reversionary investments (under rented)
Term capitalised until next review / expiry at an initial yield
Reversion to market rent valued in perpetuity
What is the Layer / Hardcore method?
• Used for overpriced investments
• income flow is divided
• bottom slice is market rent
• top slice is rent passing less market rent until next lease event and a higher yield applied to the top slice to reflect additional risk
• different yields used depending on comparable investment evidence and relative risk
What is a yield?
A measure of return expressed as a percentage of capital invested
Calculated by income divided by price x 100
Yields are adopted by comparables
What is a years purchase and a yield ?
• years purchase is calculated by dividing 100 by the yield
• years purchase is the number of years required for its income to repay its purchase price
• yields are what I use to assess covenant strength. Lower yield the better and an indication of a better asset.
• high yield is riskier and therefore a worse asset
Why use into perpetuity?
To find the present value
What is the net present value?
The net present value shows todays value of a future income stream
What is a discounted cash flow?
A valuation model which determines the value of a property by examining its future net income or projected cash flow. Then discounting the cash flow to arrive at an estimated current value.
Used for income producing properties
What is the profits method?
Used for income producing properties, the freehold value of the property depends on the profit generated from the business. Pubs, petrol stations ect
What is the profits method?
Used for income producing properties, the freehold value of the property depends on the profit generated from the business. Pubs, petrol stations ect
How do you value using the profits method? Give example:
You will need 3 years of audited accounts!
- Annual turnover less costs of stock
- Less property costs and operational costs = EBITDA
- EBITDA is capitalised with an appropriate yield = market value
What is the residual method? How would you do it?
Used for property or land with property potential
- First you added the development potential of the land
- Next calculate the value of the finished scheme, known as the gross development value (GDV) based on market comparable evidence
- Special assumption that development will complete on the date of valuation
- all development costs are then deducted from GDV, including developers profit and finance costs
What are some costs that are deducted form a GDV of a residual valuation ?
• contingency fees
• professional fees
• sales and marketing
What is the difference between a residual appraisal and a residual valuation?
A residual valuation you are finding out how much you can afford to pay for the land
A development appraisal you know the value of the land and you are trying to find out the profitability and feasibility of the development
What is the contractors method of valuation? (Depreciated replacement cost) how would you do it?
Method of last resort - bunkers / lighthouses
Cost of the property + add the cost of constructing a similar building and then minus depreciation and obsolescence at a certain percentage
What is obsolescence ?
3 types
- Physical obsolescence - result of deterioration and wear and tear
- Functional obsolescence - result of design is no longer suitable for the function of the operation
- Economic obsolescence - result of changing market conditions for the use of the asset
What is the red book?
RICS Valuation Global Standards 2021 ( Red Book Global)
Sets out mandatory practices for registered values undertaking valuations
Who can carry out a red book valuation?
Only a registered valuer not just any member of RICs
What is the new definition of ESG in VPGA8 ? (Valuation of real property interest)
ESG comprises of three pillars: environmental, Social and Governance
All of which contribute to effective performance with positive benefits for the wider market, society and world as a whole
How could ESG affect value / what are the risks?
Physical: flooding, wildfires, storms
Transitional: energy efficiency, climate
Think EPCS - ESG effects rents and yields
When does the Red Book Global need to be used?
Required for all valuations. 5 exceptions:
- During negotiations and litigation
- Statutory function such as business rates
- For internal purposes
- Agency work in anticipation of recieving an instruction
- When acting as an expert witness
What is the difference between VPS and VPGA’s ?
Valuation practice standards (VPS) which are mandatory
Valuation practice Guidance Application (VPGA’s) which are advisory and good pratice
What is headline rent?
The rent that is paid under a lease after the end of any rent-free period
What is net-effective rent?
A rental figure that accounts for any rent free period and other incentive s provided to you as the tenant. It’s the amount you’ll pay each month or year when averaged over your lease term
What is the exception to net effect rent?
3 months rent free (fit out period) disregarded
What is SDLT?
Stamp Duty Land Tax
Tenants responsibility to calculate and pay
Needs to be paid within 14 days of the effective date of the transaction and when you have a lease longer than 7 years
What commercial tenants when else might SDLT need to be paid? How can you calculate?
• assignment
• surrender
• grant
You can calculate it on the governments website.
Up to £150,000 SDLT is 0
£150,000-£250,000 is 2%
£250,000+ is 5%
What are the different types of yield?
All risks yield - a growth implicit yield used in an investment valuation that reflects all of the risks and rewards of a subject property
Gross yield - the yield not adjusted for purchasers costs (eg auction)
Net yield - the resulted yield adjusted for purchasers costs
Initial yield - based on current rent income
Reversionary yield - based on the difference between current rent and the rent which could be achieved in the market at the time of reversion. The yield the property could generate once these changes are implemented
What affects a yield?
•Covenant strength
• rent
• term
• potential of rent and capital growth
• use of property
What affects a yield?
•Covenant strength
• rent
• term
• potential of rent and capital growth
• use of property
What is an assumption? Describe three assumptions that are usually made in producing a valuation?
An assumption is something which is likely to be true
• title
• condition of a building
• services
• planning
Hardcore layer method
Higher yield applied to the top slice
Hardcore and layer method
Over rented properties
Income flow divided horizontally
Bottom slice = market rent
Top slice = rent passing less market rent until next lease event
