Valuation Flashcards
What are the five methods of Valuation?
Comparable, Profits, Residual, Investment and Depreciated Replacement Cost
What is the Comparable method?
Using transaction data of assets the same/similar to subject asset to arrive at indication of value
What is the Residual method?
Determining value of land based on its value if developed
b. Development value minus costs and profit = residual value
c. Market-based assumptions and at valuation date.
What is the Investment method?
a. Used when there’s an income stream to value.
b. Calculation of rental income capitalised using a market-based yield (return on investment as % of capital invested - income divided by price *100)
What is the profits method?
a. Used for income producing properties.
b. Typically speciality properties sold as part of a business and design specifically for intended use (Hotels, golf course, petrol stations)
What is the Depreciated Replacement Cost (DRC) method?
a. Used for owner-occupied specialised property that is rarely sold on open market.
b. Based on assumption that the market will pay no more than the amount it would cost to by equivalent site + cost of construction of equivalent building (less any depreciation/obsolete costs)
What are the preferred and least preferred methods of valuation?
a. Preferred: Comparable - evidenced by data from the market
b. Least preferred: Depreciated Replacement Cost method - “the last resort”
What is a yield?
A yield is a return on investment
What is an initial yield?
Based on property’s current annual income
How is the initial yield calculated?
Annual income / Capital Value
What is a reversionary Yield?
Based on an estimated rental value
How is the reversionary Yield calculated?
Estimated rental income / capital value
What is the equivalent Yield?
Average between initial yield and reversionary yield
What factors effect Yields?
Tenant’s covenant
Location
Specification
Rent Levels
Growth Potential
Development Value
What is the hierarchy of evidence?
a) Direct Transactional Data
b) General Market Data
c) Other Sources
What year is the Red Book Global Effective?
2022
What is the red book?
The Red Book is issued by RICS as part of our commitment to promote and support high standards in valuation delivery worldwide.
What does VPS 3 Valuation reports set out?
a. Report must clearly and accurately set out conclusions of the valuations
b. Must be non-ambiguous or misleading
c. Should address any issues affecting degree of certainty
d. Deal with all matters agreed in the ToE
What does VGPA 2 set out?
Conflict checks and reporting guidance for secured lending
Name elements included in the Terms of Engagement?
Name and status of value, name of client, interested 3rd parties, the asset to be valued, currency, purpose of valuation, basis of valuation, extent of survey, valuation date, any assumptions made, format of report, limitation of liability, fee basis.
What are the bases of valuation accordingly VPS4?
Market Value - estimate for which an asset should exchange
Market Rent - estimate for which an asset should be leased
Investment Value - value to a particular owner/buyer for individual investment or operational purposes
Equitable Value - estimate price at which asset would sell in orderly transaction at measurement date and current market conditions
Synergistic Value - value created by the combination of multiple interests where combined value is greater than sum of separate values
Liquidation Value - amount realised when assets sold on piecemeal basis (unsystematic)
How many exemptions from the red book are there?
5
What are the five exemptions?
a. Providing agency or brokerage service in respect to the acquisition or disposal of one or more assets.
b. Acting or preparing to act as an expert witness.
c. Performing statutory functions.
d. Valuation purely for internal purposes without liability and without communication to a third party.
e. Providing valuation advice expressly in preparation for or during the course of negotiations or litigation including where the valuer is acting as advocate.
When would you use DRC?
Where there is no market for the properties
