VALUATION Flashcards
What are the 3 types of comparable
1) direct transactional evidence
2) General market data
3) Data from other property types and other locations
What is comparable evidence
Item of information used during a valuation to support the value of another similar item
What is the investment method
Capitalisation of rental evidence to find the capital value of an asset
What is a yield
How much annual return you are likely to receive in comparison to the capital value of the property
How is residual value calculated
GDV - (cost + profit)
How is viability calculated
GDV - (Cost + profit + cost of land) to find residual value and then compare this with EUV+
What are the stages of depreciated replacement cost
1) market value of land
2) BCIS cost of rebuilding
3) include professional fee and finance cost
4) Deductions for obsolescence
5) Final adjustment
6) Stand back and look
7) Decapitalise to find rent
Name the 3 types of obsolescence
1) Economic, due to changing economic conditions and demand
2) Physical, to reflect ware and tear created from the premises
3) Functional, removing areas that were needed to accommodate a process no longer needed
When is a DRC method used
Market with no comparable evidence and is not occupied in the pursuit of profit
When is a profits method used
Used where there is some form of monopoly due to type or use of property
How do you value using the profits method
1) Establish fair maintainable trade of a reasonably efficient operator
2) calculate fair maintainable profit by deducting expenditure (wages and operating cost) and costs
3) capitalise fair maintainable operating profit by an all risks yield
4) to find rent net profit is split by the divisible balance in order to find the rent a landlord would charge. Net profit is found by deducting expenses for the business
What are the five methods of valuation
Comparable Investment Profits Residual Depreciated replacement cost
What types of valuation are exempt from a Red Book report
Agency Statutory Expert witness Advocate Internal valuation
Under what section of the global standards contains valuation report writing
VPS3
What do you need to do first when taking on a valuation instruction
1) Check you are competent enough to take on the work
2) Check for any conflicts of interest
3) Issue terms of engagement
4) Due diligence check to see that no material matters will impact value e.g. flooding, asbestos etc.
Are you liable for oral advice given
Yes
What is the hierarchy of evidence for leased properties
1) Open market sale
2) Lease renewal
3) Rent review
4) Third party determination
5) Sale and Lease back
6) inter company transaction
When is the investment method of value used
Where there is an income stream to value
What is years purchase
number of years required for an assets income to yield its purchase price
How is market rent defined in VPS 4
The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
What sections of the Red Book are mandatory for members?
PS 1-2 and VPS 1-5
Which section of the VPS provides standards for report writing?
VPS 3
What forms of valuation are exempt from the Red Book?
Agency, statutory purpose, expert witness, advocate, internal purposes
What is a yield?
The return on an investment based on the annual rent in comparison to the capital value of the property
What does the present value formula indicate?
The PV formula is used to reflect the time value of money
How is an investment approach to valuation conducted?
Capitalisation of rental incomes over a term and reversion.
When would you use an investment method?
Typically used where a tenant is providing the landlord with an investment return on his capital cost
When would you use a DRC method of valuation?
Market with no comparable evidence and is not occupied in the pursuit of profit
What is a reasonably efficient operator?
An operator that conducts their business in a manor expected of the average occupier of such a unit.
What are the stages of a comparable valuation
- Search for comps
- Analyse rate per m2
- Collate evidence in matrix or schedule
- Adopt common measurement for comparison
- Form opinion of value
- Stand back and look
Name and explain the different types of yield
All Risks Yield
A yield which accounts for all of the risks of owning the property such as inflation, obsolescence and void periods
Equivalent Yield
It is the overall yield between the term and reversionary incomes. Growth and risk are not reflected in this yield
Equated Yield
This is the IRR for a cash flow and reflects growth and risk of an investment
Reversionary Yield
The yield likely to be achieved when the passing rent is adjusted in line with market values
What are the rates for industrial, shops and offices in your area
Industrials
- Prime rent £15-16 sq ft
- Supply increased 64%
- Fall in prime space around the centre
Offices
- £40 sq ft
- 4.75% yield
- 50% of office take up has been science and technology related
- Epicentre for COVID research
Shops
- £300 ITZA
- 4% yield (2017)
How is marriage value calculated
For Leasehold Extensions
Value of old interest is subtracted by the value of the new interest and split 50/50 with the landlord and tenant in line with the Leasehold Reform Act. Marriage value is only considered for properties with leases of less than 80 years remaining
For Freehold
Looking at the residual land value if planning permission is granted
On what basis of value are local authority and central government asset valuations conducted and why?
Existing use value is used for operational property e.g. those being used by the local authority
Fair value is used for assets which are held for sale e.g. surplus property
These are requirements set out in the UK Red Book National Supplement
What is basis of value?
Nature of the assumed transaction based on the relationship and motivation of the parties
What is the hierarchy of direct comparable evidence outlined in the RICS Comparable evidence in real estate valuation, 2019?
- Contemporary, completed transactions of near-identical properties for which full and accurate information is available (may include the subject property)
- Contemporary, completed transactions of other, similar real estate assets for which full and accurate information is available
- Contemporary, completed transactions of similar real estate for which full data may not be available
- Similar real estate being marketed where offers have been made but a binding contract has not been completed
- Asking prices (with careful analysis)
What were the main takeaways from the RICS ‘Beyond Covid-19’ practice statement
- Valuers may have to use a greater reliance on knowledge of local market
- Material uncertainty is at the discretion of valuer
- Consideration of security of future income streams when conducting an investment method valuation
What are the recent changes made to the EPC standards
All domestic lettings must have a rating of E or above as of 01-APR-2020 regardless of it being a new or current lease. All let non-domestic properties are set to increase to an E rating from April 2023
How would you analyse a premium in a rental valuation
Find the capital value of the property, add that to the premium received and then decapitalise back to a rental figure
For private sector assets on what basis are they valued for financial reporting under the UK National Supplement?
Fair value which is the sale of the property in an orderly manner
If the asset is highly speciaised then the property will be valued on an investment approach or depreciated replacement cost
What is the difference between a growth implicit and growth explicit yield
Growth implicit means that growth is implied in the value
Growth explicit means that growth is explicitly stated.
What did the Sportelli case find
Established that a deferment rate of 5.25% should be applied to South East leasehold extensions. Stated that hope value was excluded from the valuation and that marriage value was the additional value added through the merger of the existing lease and the extension of the lease.
How do you know what a reasonably efficient operator is?
It depends on what comparable properties in the area indicate in regards to income
How would you value a pub which is currently trading at a loss?
Turn to comparables in the locality as this may indicate that the property is currently under trading and indicate what a reasonably efficient operator would trade at.
