Valuation Flashcards
What are the main drivers that have an impact on value?
location, planning status, economic conditions and infrastructure provisions.
The principles and application of the latest relevant valuation standards
Ethical standards and regulatory frameworks governing valuations including the RICS Valuation – Global Standards (‘Red Book’) Red Book UK National Supplement and International Valuation Standards (IVS)
What are the relevant RICS best practice guidance notes and Professional Statements?
- RICS Valuation - Global Standards (Red Book) (31st Jan 25) with UK National Supplement (2023)
- Specific Asset Class Valuations - Valuation of Development Property
- Valuation Methodologies –
1Comparable Evidence in Real Estate Valuations, 2019
2 Depreciated Replacement Cost Method of Valuation for Financial Reporting (1st Edition - Prof Std)
3 Discounted Cash Flow (DCF) Valuation (1st Ed - 2023)
What is the International Valuation Standards (IVS)
International Valuation Standards Council (IVSC). 31st Jan 24.
Regulatable framwork
What are the 5 methods of valuaiton?
Comparable
Investment
Residual
DRC
Profit
What is the Residual Method?
Used to value land with development potential. Estimate the GDV of the completed project and then deducting all associated costs for land value.
It is used to value land with development potential.
What is the Comparison (Market) Approach?
Similar properties that have recently sold in the same market, djustments are made reflecting differences in characteristics and analysis of the local market whilst applying professional scepticism – need similar and most comparable
What is the income Approach (Investment Method)?
Used to value commercial premises on the basis of a flow of rental income. Estimating future income (e.g., rent) and discounting it back to the present value using a capitalisation rate or discounted cash flow (DCF)
What is the profits method?
Value operational assets where profitability of the business is a key component of value.
e.g. care home, restaurant, hotel, pub.
FMOP (Fair Maintainable Operating Profit), which is then capitalised at an appropriate yield to achieve Market Value.
Cost Approach
Value sets which rarely transact on the open market, therefore very limited comparable evidence
Depreciating Replacement Cost – cost to obtain an asset of equal utility.
Reproduction cost method – a direct replica
If the yield is increased in an investment valuation, what happens to the capital value?
If the yield increases, the capital value decreases.
What is a yield?
A measure of investment return, expressed as a percentage of capital value invested.
How do you calculate a yield?
Income/Price x 100
How do you calculate years purchased?
100 / yield
What is the major factor in determining a yield?
Risk.
prospects for rental and capital growth
quality of location
quality of covenant strength
lease terms
voids
liquidity (how quickly it can sell)
What is a gross yield?
The yield not adjusted for purchasers costs
What is a net yield?
he yield adjusted for purchasers costs
What is an initial yield?
Simple income yield for current income and current price.
What are Automated Valuation Models (AVMs)?
statistical modelling and algorithms to estimate property values. Quick and cost-effective valuations, often for mortgage lending or portfolio valuations
Define Gross Development Value?
The aggregate market value of the proposed development,
What is an arm’s length transaction?
Where the seller and purchaser don’t know each other, there’s no personal interest and no special purchasers.
Define synergistic/marriage value?
Synergistic Value is the result of a combination of two or more assets or interests where the combined value is more than the sum of the separate values
How are Discount rates calculated for a valuer -
(a) a capital asset pricing model (CAPM),
(b) a weighted average cost of capital (WACC),
(c) observed or inferred rates/yields,
(d) a build-up method.
Is there any guidance note on the Comparable Method? What does it say?
Comparable Evidence in Real Estate Valuations, 2019 (effective 2019).
* Provides guidance on the sources of comparable evidence, how to record and how to analyse.
* Provides information on the hierarchy of evidence.
IVS Standards
What was your valuation task for OWS hotel?
- Site inspection
- Local and regional market, estimated the likely price per bed at an agreed occupancy for similar standard of hotels, assessing the likely yield through engagement with an agent
- Calculated the yearly income (occupancy rates at an agreed price) and multiplied this by the yield to generate the Gross Development Value
- Comparable cost plans and BCIS, finance costs deducting the grant funding available (at 7%) and developer’s profit (at 20%)
- Sensitivity Analysis.
- £5m
Outline the new guidance note on Valuing Development Property?
Valuation of Development Property, 2019 (effective 2020)
The purpose of the guidance note is to supplement International Valuation Standard (IVS) 410 ‘Development Property’.
Confirms best practise when valuing development property that both the residual and comparable methods should be used together. The residual method should be cross-checked with comparable evidence.
What is the margin of error for valuation reports?
There is a permissible range allowed by courts as found in numerous cases.
This ranges from 5 - 15% depending on the nature of the valuation,
What is a special purchaser?
Is someone who a particular asset will have a special value to them due to the advantages arising from its ownership, that would not be available to other buyers
When would a DCF valuation be used?
Used where the projected cash flows are explicitly estimated for a long period
Includes phased development projects.
Describe the process of using a DCF?
1 Estimate cash flow (Income less expenditure)
2 Estimate Exit Value at the end of the holding period
3 Select discount rate
4 Discount cash flow
5 Provides NPV - sum of discounted cash flow
What is IRR?
The rate of return at which all future cashflows must be discounted to produce an NPV of zero.
It assesses the total returns from an investment opportunity making some assumptions on rental growth, re-letting and exit assumptions
Who can carry out Red Book Valuations?
Register Valuar under the Valuer Registration Scheme
