Valuation 2 Flashcards
Name the Conventional Methods of Valuation
- Comparison
- Investment
- Profits
- Residual
- Contractors (Depreciation Replacement Cost )
What are contemporarty valuation methods
- Discounted Cash Flow
What makes a property transaction comparable to the property being valued
Similarities to the subject property in:
- physical characteristics
- location
- use
- tenure
- Timescale
How many comparable are needed to produce a valuation
As many as possible.
Enough comparables to establish a trend
What is the longest time period before a valuation date that a transaction could be accepted as being comparable
Subject to property and market conditions.
i.e Covid would have distorted comparable
What do you understand by the expression weighting of comparable evidence
Attach more weight to the evidence most similar to the subject property.
What do you understand by the expression ‘hierarchy of evidence’
Rank comparables by order of transaction type
- Open Market lettings
- Lease renewals
- Rent reviews
- Independent expert’s determination
- Arbitrator’s awards
What is interpolation of comparable evidence
Working on a valuation which sits between two known points of value.
what is extrapolation of comparable evidence
Working outside the range of known comparables.
what is the purpose of zoning
Technique used to calculate value at retail units with different depths and widths.
What is the standard zone depth
6.1m = 20ft
How would you assess the market rent of the first floor of a retail unit?
At 1/10th ITOZA
How would you arrive at the Market Rent of a retail unit with a return frontage?
put a % uplift on the area of the return frontage.
Usually 5%
How would you value a shop unit for rent review with frontages on two roads (through unit)
You would zone back from both shop fronts, this can be completed at different rates.
How would you determine the market value of an investment property let on IRI terms?
Check any comparable on similar terms.
Deduct external repairs, management fee and insurance to give you your net rent, which is capitalised.
what factors make up the all risks yields.
All risks yield is made up of all the risks associated with the investment:
- Construction
- Rental Growth
- Tenant’s covenant
- Lease terms
- Unexpired lease term
What is the market capitalisation rate?
the rate that the market will capitalise the income i.e all risk yield
How would you value a green field site with planning permission for development?
First instance use comparative method.
If there is a lack of evidence use the residual method.
Describe how you have carried out a residual Valuation?
Gross Development Value - development costs - developers profit = land value.
What costs would you deduct in a residual valuation
- Demolition
- Construction
- Construction fees on construction (surveyors)
- finance
- contingency costs (allowance for fluctuation of costs)
- legal fees
- acquisition costs
- Developer’s profit
What costs have you attributed to professional fees?
10%
What cost would you attribute to finance
7%-8%
How did you calculate developer’s profits in a residual valuation?
I used the industry norm at between 15-20% of GDV
Which reflected risk associated with the location.
22-25% of Total Construction cost
What are the disadvantages of the residual method?
- relies on a lot of assumptions and estimates
- Does not account for the opportunity cost of the land. The value that you could be earned by using the land for another purpose.
What are the usual acquisition costs of a development site?
- Stamp duty land tax (0% on first 150k, 2% on next 100k, 5% thereafter)
- Agents fees (1%)
- Legal fees (0.5%)
- Non recoverable VAT (0.3%)
What is a ransom strip?
Land that gives sole access to the development land
What is ransom value?
Value attributable to the ransom strip
How did you value a ransom strip?
1/3 of the increase in value to the development land as a result of access.
What does the Stokes v Cambridge case mean to you?
A 1/3 of the increase in value of the industrial unit
What is the profits method also know as?
Accounts method
Name three property types that would be valued by the profits method
- Hotel
- Cinema
- Casinos
- Golf Courses
- Leisure Centres
Why are certain properties valued by the profits method
- Cannot be valued by comparison
- Where use is integral to the property
- Value of the property lies within the use
Explain the basic approach of the profits method
Turnover (net of VAT)
LESS costs of generating turnover
= Net operating Profit
Which is then capitalised
What valuation checks can be carried out on a valuation produced by the profits Method?
- capitalising gross turnover
- adjusted net profit by the required return on capital
- price per seat, table, room
When is the contractor’s method used in practice
It is a method of last resort.
- specified properties
- inclusion in company accounts
what is another name for the contractor’s method?
Depreciated Replacement Cost (DRC)
Explain the basic approach to the Depreciated Replacement Cost (DRC)
Gross Replacement cost
LESS Depreciation
= Net Replacement Cost
PLUS Value of Land
Explain what is included in Reinstatement cost for insurance purposes
Demolition
Shoring up adjoining buildings
rebuilding in line with current building regs
Professional fees
How would you value a property for which there is no comparables
Must resort to contract method
What are the purposes of valuation
- loan security
- investment
- taxation
- internal purposes
Is the red book mandatory?
- You should confirm with the red book where possible
- There are certain exclusions to the red book such as XYZ
- If you do complete a valuation outside of the red book guidance, state in the red book.
