Valuation 2 Flashcards
Name the conventional methods of valuation
- Comparative
- Investment
- Residual
- Profits / Accounts
- Contractor’s / Depreciated Replacement Cost
What are contemporary valuation methods?
Valuations where Discounted Cash Flow (DCF) techniques are used
What makes a property transaction comparable to the property being valued?
There must be similarities.
1. Physical characteristics
2. Location
3. Use
4. Tenure (and lease terms if appropriate)
5. Time scale
How many comparables are needed to produce a valuation?
Enough to establish a trend, no set number
What is the longest time period before a valuation date that a transaction could be accepted as being comparable?
No time period. Depends on market conditions at the time. Ideally, not before March 2020 due to the Coronavirus Pandemic. More recent the better.
What do you understand by the expression weighting of comparable evidence?
A valuer must weight and rank each piece
Some may be disregarded
Attach the greatest weight to the greatest similarity.
What do you understand by the expression hierarchy of evidence?
Valuation: Principles into Practice (6th Edition, 2008) - chapter on Lease Renewals and Rent Reviews of Commercial Property p404:
1. Open market lettings
2. Lease renewals
3. Rent Reviews
4. Independent expert’s determination
5. Arbitrator’s awards
What is interpolation of comparable evidence?
Is calculating or, plotting on a graph, a value that lies between two extreme points of comparable evidence
What is extrapolation of comparable evidence?
Is calculating or, plotting on a graph, a value that lies outside two extreme points of comparable evidence
What is the purpose of Zoning?
A comparable technique to analyse and value retail space with different frontage to depth ratios.
What is the standard Zone depth?
Zones of 6.1m (20ft). Oxford Street - 9.14m.
How would you arrive at the Market Rent the first floor of a retail unit?
X / 10 is commonly used for first floor accommodation be it retail space or storage
How would arrive at the Market Rent of a retail unit with a return frontage?
- a percentage uplift for the depth of the return (5% seems usual) depending on the pedestrian flow
- all of the unit becoming Zone A if both frontages have equal pedestrian flow (could have a reduction for excessive Zone A)
- a percentage reduction for a lack of internal space for shelving and display racks
How would you value a shop unit for rent review with frontages on two roads i.e. it is a through unit?
in halving-back from both frontages at the same or different Zone A rate(s)
How would you determine the Market Value of an investment property let on internal repairing terms?
The market rent less external repairs, insurance and additional management which leaves the net rent to be capitalised.
What factors make up the all risks yield?
- The construction (age, design, specification)
- The quality of the tenant’s covenant
- The amount of rent (i.e. market-rented, under-rented, over-rented)
- The unexpired lease term
- The other lease terms
- Anticipated rental growth (location)
What is the market capitalisation rate?
The all risks yield is called the market capitalisation rate because it is the rate at which the market capitalises the income
How would you value a green-field site with planning permission for residential development?
When it is not possible to value by comparison, the residual method is used to value land and properties with development, redevelopment and refurbishment potential.
Describe how you have carried out (or would carry out) a Residual Valuation.
Value of completed development
Deduct
All development costs
Deduct
Developer’s profit
To arrive at
The residual land value
What costs did you deduct (are deducted) in your / a Residual Valuation?
- Demolition
- Cost of Construction
- Construction Fees
- Cost of Finance
- Contingency
- Agent’s / Legal Fees
- Acquisition Costs
How did you calculate (would you calculate) developer’s profit in your / a Residual Valuation?
Can be calculated by either a percentage of total cost (22% to 25%) or a percentage of gross development value (15% to 17%). *Depends on risk; not set in stone.
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?
Is land that gives access to development land and has ransom value
What is ransom value?
Value of the ransom strip
How did you (would you) value a ransom strip?
1/3 of the increase in value of the development land resulting from the access
What does the case of Stokes v Cambridge mean to you?
- A compulsory purchase case
- the valuation of 12.6 acres of farmland
- agreed that planning permission for industrial development must be assumed
- Subject to satisfactory access and provision of estate roads
- Land which could provide satisfactory access was a track with an area of 0.7 acres
- third of extra value attributed
What is the Profits Method also known as?
Accounts Method
Name three property types that would be valued by the Profits Method.
Casinos, golf courses and theatres
Why are certain properties valued by the Profits Method?
Where the land is specific to that use and you cannot differentiate.
Explain and basic approach to the Profits Method.
Turnover (net of VAT)
Less Costs of generating the Turnover
= Net Operating Profit
Which is Capitalised
What valuation checks can be carried out on a valuation produced by the Profits Method?
In practice, the valuation of leisure property is sometimes carried out by capitalising
- the gross turnover, excluding VAT or,
- the adjusted net profit by the required return on capital.
Other valuation checks are
- unit prices per seat (cinemas)
- per bedroom (hotels, rest homes and nursing homes).
When is the Contractor’s Method used in practice?
The method of last resort. Is used to value:
properties which do not usually change hands on the Market (Specialised Properties)
- Inclusion in Company Accounts and other Financial Statements (Asset Valuations)
- Compulsory Purchase (Rule 5)
- Rating
Non-Specialised Properties when there is no direct / inconclusive comparable evidence
- this is why it is sometimes called the Contractor’s Test
What is another name for the Contractor’s Method?
Depreciated Replacement Cost
Explain the basic approach to the Depreciated Replacement Cost Method.
The Gross Replacement Cost (maybe not mention)
Cost of Modern Building
Less Depreciation
Net Replacement Cost
Plus Site Value
Equals Value as Existing
Explain what is included in a Reinstatement / Replacement Cost for Insurance Purposes.
- Demolition
- Shoring up and weather-protection of adjoining buildings
- Rebuilding in accordance with current Building Regulations
- Professional Fees
How would you value a property for which there are no comparables?
The Contractors Method
