Valuation Basics Flashcards
What is an external valuer?
They have no material links to the assets being valued, or to the client.
What three steps should you undertake before commencing a valuation?
- Competence – do you have the correct skills, understanding and knowledge?
- Independence - think, first then check for conflicts – who and why?
- Terms of engagement.
- Set out full confirmation prior to starting the instruction and receive written confirmation. Confirm the competence of the value and declare the extent and limitations of inspections
Statutory due diligence for valuations
This is to ensure no material matters could affect the valuation.
Examples include contamination title, documents, EPC, business rates, council, tax, planning history, health and safety, compliance, flooding, environmental matters, asbestos
What are the five methods of valuation?
- Comparable
- investment
- profits
- residual
- contractors/depreciated replacement cost
What are the three approaches as outlined in IVS105. Valuation approaches and methods. And also VPS 5?
- Income approach. (Investment/residual/profits)
- Cost approach (costs eg DRC)
- Market approach. (comps)
How should you analyse rents in comparable evidence in valuation reports?
Analyse headline rent to give the net effective rent
What RICS guidance note is there for comparable evidence?
RICS guidance note comparable evidence in real estate valuation, 2019
Talks about hierarchy of evidence , three main categories.
Category A - direct comparables of contemporary
Category B - general market data that can provide guidance
Category C. – other sources
Briefly explain the investment method
The rental income is capitalised to produce a capital value
When is the term and reversion method used?
Used for reversionary investment, i.e. Under rented.
The term is capitalised until next lease event at an initial yield.
The market rent is then capitalised in perpetuity at a reversionary yield.
Explain layer hard-core method
Used for over rented properties
Income flow is divided horizontally
The top slice is the passing rent, less the market rent until next lease event
The bottom slice is the market rent
A higher yield is applied to the top slice to reflect additional risk
Define yield
A measure of investment return expressed as a percentage of capital invested
Define all risks yield
The remunerative rate of interest used in the valuation of a fully let property, let at market rent, reflecting all the prospects and risks attached to that particular investment
Define true yield
Assumes rent is paid in advance, not in arrears
Define nominal yield
Also known as an initial yield and assumes rent is paid in arrears
Define gross yield
Measure of investment return, the yield has not been adjusted for purchases cost
Define net yield
Measure of investment return, after adjustment for purchases costs
Define equivalent yield
The average weighted yield when a reversionary property is valued, using an initial and reversionary yield
Define initial yield
The simple income yield for current income and current price
Define reversionary yield
Market rent divided by current price on an investment, let at below the market rent
Define running yield
Yield at one moment in Time
When would you use the depreciated replacement cost method/contractors method?
Where there is a lack of market evidence, or you are valuing a specialist property. For example, a lighthouse, oil refinery, school sewage works.
Also for Owner occupied or accounts purposes or writing valuations for specialist properties
It is the value of the land plus the cost of construction plus fees less the discount for appreciation of obsolescence
Explain the profits method
For trade related properties where there is a monopoly position. It depends on the profitability of a business. For example, pubs, hotels, petrol stations, leisure facilities. Must have accurate and audited accounts for the past three years. If it is a new business use, estimate or business plans.
What is the methodology for the profits method?
The annual turnover (income received)
Less costs/purchases
= gross profit
Less reasonable working expenses
= unadjusted net profit
Less operators renumeration
= adjusted net profit or fair maintainable operating profit (EBITDA)
This is an capitalised at an appropriate yield to form a market value
Explain the residual method
It establishes residual site value and assess is the probability of a scheme and sensitivity to various inputs and its viability.
It is the GDV less total development costs
Including site preparation, planning building and construction, professional fees, contingency, marketing costs and fees and finance and developers profit
