Valuation Flashcards
Level 2
Name 3 steps to consider before undertaking a Valuation?
1) Competence
- SUK - Skills, Understanding & Knowledge
2) Independence
- Conflicts of Interest, Clinets or Personal?
3) Terms of Engagement
- Set out instruction in writing to client prior to starting work and recieve written confirmation
What are the 5 main methods of Valuation?
1) Comparative Method
2) Investment Method
3) Profits Method
4) Residual Method
5) Contractors Method / Cost Method (Depreciated replacement Cost)
What are the 3 Valuation Approaches which are set out in VPS 5 of the Red Book?
- Market Approach
- Using comparable evidence available
- Includes Comparative Method - Income Approach
- Converting current and future cash flows into a capital value
- Includes Investment Method, Profits Method & Residual Method - Cost Approach
- Reference to the cost of the asset, to replace or reproduce the property
- Includes Contractor’s/Cost Method (Depreciated replacement Cost)
What is the comparative method?
Estimates the value of a property based on sale prices of similar properties that have recently sold. The comparables would be analysed and adjusted to determine the subject properties value.
What would the process be in using the comparative method?
1) Search for and select comparables
2) Confirm/verify details and analyse accordingly
3) Assemble comparables in an appropiate schedule
4) Adjust comparables
5) Analyse the comparables to form opinion of value
6) Report value
What is the relevant RICS document of the comparative method?
RICS Guidance Note ‘Comparable Evidence in Real Estate Valuation’, 1st edition, 2019
When would the Comparative Method be used?
When there is sufficient market evidence of recent sales or lettings of similar properties in the same location and condition.
What is the Investment Method?
The investment method is used to value properties that produce an income by capitalising the net rental income using an appropiate yield.
When undertaking the Investment Method, how do you know the yield?
This is based on comparable properties of recent sales in the area to assess the yield. It is then the valuer’s interpretation of the yield to assess what should be attached to the subject premises.
What is the conventional investment method?
Rent recieved or market rent multiplied by the years purchase = Market Value.
What is the Term & Reversion Method? When would it be used?
This would be used for under rented properties when the market rent is more than the passing rent.
The current Term would be capitalised until the next review/lease expiry at an initial yield.
Reversion to Market Rent valued in perpetuity at a reversionary yield.
What is the Layer/Hardocre Method?
Used for over rented properties (passing rent more than the market rent)
Bottom slice = Market Rent
Top SLice = Rent Passing less Market Rent until next lease event
Higher yield used for top slice to reflect additional risk.
What is a Yield?
A Yield reprents the return of investment, expressed as a percentage. Used to capitalise income into value.
Income / Price x 100 = Yield
What is Year Purchase & How is it calculated?
A Years Purchase is calculated by dividing 1 by the Yield as a decimal percentage. This is the number of years required for it’s income to repay its purchase price.
When determining the Yield, what is the major factor?
RISK
The higher the risk of the income the higher the yield and therefore will result in a lower capital value.
Factors of risk include:
Location
Covenant strength of the tenant
Lease terms
Liklihood of void period
What is an all risk yield?
All Risk Yield (ARY) - Used when the property is fully let, at a market rent reflecting all the prospects and risks attached to the particular investment.
What is a Gross Yield?
Yield is not adjusted ofr costs such as management, auction costs, insurance etc.
What is a Discounted Cash Flow and When would it be used?
Works out present value of future cash flows. This accounts for the time value of money of these future cash flows meaning that money recieved in the future is worth less than money recieved today.
Examples would be:
Long-term leases with multiple fixed reviews
Phased development projects
Office building with multiple tenants
Essentially, when projecting future cash flow is crucial to the valuation
What is the Profits Method and when would it be used?
Used for valuations of trade and depends on profitability and its trading potential.
Used for Pubs, hotels, petrol stations, children’s nurseries etc.
Essentially, the value of the property depends on the profit generated from the business, not the physical building or location.
Must have accurate and audited accounts if possible from the last 3 years.
What is the basic formula to undertake the Profits method?
Annual Turnover (income recieved)
LESS costs/purchases
= Gross Profit
LESS reasonable working expenses
=Unadjusted net profit
LESS operator’s remuneration
=Adjusted net profit known as the Fair Maintable Operating Profit (FMOP)
Expressed as EBITDA (earning before interest, taxation, depreciation & amortisation)
Capitalised at a appropiate yield to achieve market value.
What are Key exceptions of a Red Book Valuation and when are they listed?
- Negotiations (Lease Renewals & Rent Reviews)
- Agency or Marketing Advice
- Clients Internal Purposes Only
- Acting as Expert Witness
PS1, Section 5 ‘VPS 1-6 Exceptions’
What is VPS?
Valuation Technical & Performance Standards
What is VPS 1?
Terms of Engagement
Name 5 details which should be included in Terms of Engagement?
- Identification of the Client
- Identification of the Asset being valued
- Valuation currency being stated
- Purpose of Valuation
- Valuation Date
- All Assumptions & Special Assumptions to be made
- The basis on which the fee to be calculated
- Reference to Complaint Handling Procedure
- Consideration of any significant environemental, social givernance
