Valuation Basics Flashcards
What are the 3 approaches to Valuation?
- Income Approach
- Cost Approach
- Market Approach
What are the 5 methods of Valuation?
- Investment Method
- Profits Method
- Comparable Method
- DRC Method
- Residual Method
Talk me through the profits method
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
Talk me through the DRC method
Establish the value of the land assuming planning consent has been granted
Deduct the cost of building and less for depreciation and obsolescence
Can you use the DRC for Red Book Vals?
Cannot be used for LSV, only be used to estimate the Market Value for accounts vals.
Can you talk me through the comparable method?
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.
Is there any RICS Guidance on the comparable method?
Yes - RICS Guidance Note Comparable Evidence in Property Valuation, 2019
What does the RICS Guidance Note Comparable Evidence in Real Estate Valuation say?
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
Are Auction results considered to be good comparable evidence?
Only if used with caution - they are gross prices and often buyers may be considered to be special purchasers,
What is a special purchaser?
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
Can you talk me through the residual method?
Establish the GDV through the comparable method
Deduct build and other costs
Make an allowance for developers profit
= RLV
Can you talk me through the investment method?
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.
What is a yield?
A measure of return of an investment expressed as a percentage
What is included within opex?
- Maintenance and repairs
- Running costs
Why did you use 25% opex?
I looked at other BTR schemes and found comparable opex costs. Standard assumption is 20%-30%
What did you deduct for purchasers costs?
6.8%
What is included within purchasers costs?
SDLT (approx. 5% and 1.8% sales and legal fee)
What is a special assumption
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.
what is an assumption
An assumption is a supposition taken to be true
What is marriage value
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.
What is an external valuer
No material connection to the client
What is an internal valuer
Someone who is conducting a valuation on assets owned by the company who also employs them. Unable to provide a valuation for secured lending.
What is a years purchase?
The number of years it will take for a property to repay its purchase price
What factors may have an affect on the yield?
- Location
- Voids
- Security of income
What is a DCF?
Discounted Cash Flow
How would you use a DCF?
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
What is the IRR?
The rate at which a cashflow must be discounted to achieve an NPV of zero
What is the NPV
Sum of the discounted cash flow
What is included in professional fees?
- Architects
- Planning consultants
- Project Managers
- CDM Principle designer
What is the interest rate inclusive of
Bank of England base rate (0.75%) plus a risk premium plus entry and exit fees.
What is SONIA
Sterling Overnight Index Average - the risk-free rate for sterling markets.
How would you calculate finance without argus
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
Why do you calculate the construction cost on an S curve
To reflect the variance in costs during the construction period
What happens in the lead in period for construction?
Allows time for a developer to assemble a team and conduct any DD.
What is the agreed liability cap for your company
Dependent on the instruction
What is Golden Brick
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
