Valuation Basics

Question 1

What are the 3 approaches to Valuation?

Answer 1

• Income Approach
• Cost Approach
• Market Approach

Question 2

What are the 5 methods of Valuation?

Answer 2

• Investment Method
• Profits Method
• Comparable Method
• DRC Method
• Residual Method

Question 3

Talk me through the profits method

Answer 3

Establish annual turnover
Deduct costs and expenses
Deduct operators remuneration
to establish FMOP - Fair Maintainable Operating Profit and capitalise at an appropriate yield`

Apply an all-risk YP multiplier to the fair maintainable operating profit to provide a capital value

Question 4

Talk me through the DRC method

Answer 4

Establish the value of the land assuming planning consent has been granted
Deduct the cost of building and less for depreciation and obsolescence

Question 5

Can you use the DRC for Red Book Vals?

Answer 5

Cannot be used for LSV, only be used to estimate the Market Value for accounts vals.

Question 6

Can you talk me through the comparable method?

Answer 6

Search for evidence of recent transaction in the immediate vicinity of the property which match the size, spec and location of the property as closely as possible.

Question 7

Is there any RICS Guidance on the comparable method?

Answer 7

Yes - RICS Guidance Note Comparable Evidence in Property Valuation, 2019

Question 8

What does the RICS Guidance Note Comparable Evidence in Real Estate Valuation say?

Answer 8

Outlines the Hierarchy of Comparable Evidence:

• Category A Evidence - Direct Comparables:
  
  • Completed transactions of near-identical properties for which full and accurate information is available; may include information from the subject property itself.
  • Completed transactions of near-identical properties for which some information is available.
  • Where offers have been made but there is no binding contract.
  • Asking Prices
• Category B Evidence - General Market Data that can provide evidence:
  
  • Historic evidence/ demand and supply data from renta, owner occupier or investment data,
• Category C evidence -
  
  • Transactional evidence from other real estate types and locations
  • other background data, i.e. interest rates

Question 9

Are Auction results considered to be good comparable evidence?

Answer 9

Only if used with caution - they are gross prices and often buyers may be considered to be special purchasers,

Question 10

What is a special purchaser?

Answer 10

A special purchaser is someone who may derive special value from a particular asset because of advantages arising from its ownership that would not be available to other buyers in a market

Question 11

Can you talk me through the residual method?

Answer 11

Establish the GDV through the comparable method

Deduct build and other costs

Make an allowance for developers profit

= RLV

Question 12

Can you talk me through the investment method?

Answer 12

I used the investment method as this would be an income generating asset.

I established the estimated market rent through the use of the comparable method.

Deducted Opex of 25%.

I then used the comparable method to find an appropriate yield.

I capitalised the rent to ascertain the MV

I then deducted purchasers costs to establish MV net of purchasers costs.

Question 13

What is a yield?

Answer 13

A measure of return of an investment expressed as a percentage

Question 14

What is included within opex?

Answer 14

• Maintenance and repairs
• Running costs

Question 15

Why did you use 25% opex?

Answer 15

I looked at other BTR schemes and found comparable opex costs. Standard assumption is 20%-30%

Question 16

What did you deduct for purchasers costs?

Answer 16

6.8%

Question 17

What is included within purchasers costs?

Answer 17

SDLT (approx. 5% and 1.8% sales and legal fee)

Question 18

What is a special assumption

Answer 18

An assumption that assumes facts that differ from the actual facts existing at the valuation date - something you know not to be true but assume anyway.

Question 19

what is an assumption

Answer 19

An assumption is a supposition taken to be true

Question 20

What is marriage value

Answer 20

Marriage value is additional value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values.

Question 21

What is an external valuer

Answer 21

No material connection to the client

Question 22

What is an internal valuer

Answer 22

Someone who is conducting a valuation on assets owned by the company who also employs them. Unable to provide a valuation for secured lending.

Question 23

What is a years purchase?

Answer 23

The number of years it will take for a property to repay its purchase price

Question 24

What factors may have an affect on the yield?

Answer 24

• Location
• Voids
• Security of income

Question 25

What is a DCF?

Answer 25

Discounted Cash Flow

Question 26

How would you use a DCF?

Answer 26

Estimate the cash flow (income less expenses)

Estimate the value at the end of the hold period

Select an appropriate discount rate and discount the cash flow

Question 27

What is the IRR?

Answer 27

The rate at which a cashflow must be discounted to achieve an NPV of zero

Question 28

What is the NPV

Answer 28

Sum of the discounted cash flow

Question 29

What is included in professional fees?

Answer 29

• Architects
• Planning consultants
• Project Managers
• CDM Principle designer

Question 30

What is the interest rate inclusive of

Answer 30

Bank of England base rate (0.75%) plus a risk premium plus entry and exit fees.

Question 31

What is SONIA

Answer 31

Sterling Overnight Index Average - the risk-free rate for sterling markets.

Question 32

How would you calculate finance without argus

Answer 32

For the land purchase, I would calculate this as straight line compound interest across the whole development project

For the construction, I would calculate on an as curve, taking half the cost over the construction period

For the hold, I would calculate this as straight line compound interest over the hold period

Question 33

Why do you calculate the construction cost on an S curve

Answer 33

To reflect the variance in costs during the construction period

Question 34

What happens in the lead in period for construction?

Answer 34

Allows time for a developer to assemble a team and conduct any DD.

Question 35

What is the agreed liability cap for your company

Answer 35

Dependent on the instruction

Question 36

What is Golden Brick

Answer 36

the level of construction a new development needs to reach in order for housing associations (who can’t recover VAT) to purchase land free of VAT