Valuation Basics

Question 1

What is an external valuer?

Answer 1

They have no material links to the assets being valued, or to the client.

Question 2

What three steps should you undertake before commencing a valuation?

Answer 2

1. Competence – do you have the correct skills, understanding and knowledge?
2. Independence - think, first then check for conflicts – who and why?
3. 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

Question 3

Statutory due diligence for valuations

Answer 3

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

Question 4

What are the five methods of valuation?

Answer 4

1. Comparable
2. investment
3. profits
4. residual
5. contractors/depreciated replacement cost

Question 5

What are the three approaches as outlined in IVS105. Valuation approaches and methods. And also VPS 5?

Answer 5

1. Income approach. (Investment/residual/profits)
2. Cost approach (costs eg DRC)
3. Market approach. (comps)

Question 6

How should you analyse rents in comparable evidence in valuation reports?

Answer 6

Analyse headline rent to give the net effective rent

Question 7

What RICS guidance note is there for comparable evidence?

Answer 7

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

Question 8

Briefly explain the investment method

Answer 8

The rental income is capitalised to produce a capital value

Question 9

When is the term and reversion method used?

Answer 9

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.

Question 10

Explain layer hard-core method

Answer 10

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

Question 11

Define yield

Answer 11

A measure of investment return expressed as a percentage of capital invested

Question 12

Define all risks yield

Answer 12

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

Question 13

Define true yield

Answer 13

Assumes rent is paid in advance, not in arrears

Question 14

Define nominal yield

Answer 14

Also known as an initial yield and assumes rent is paid in arrears

Question 15

Define gross yield

Answer 15

Measure of investment return, the yield has not been adjusted for purchases cost

Question 16

Define net yield

Answer 16

Measure of investment return, after adjustment for purchases costs

Question 17

Define equivalent yield

Answer 17

The average weighted yield when a reversionary property is valued, using an initial and reversionary yield

Question 18

Define initial yield

Answer 18

The simple income yield for current income and current price

Question 19

Define reversionary yield

Answer 19

Market rent divided by current price on an investment, let at below the market rent

Question 20

Define running yield

Answer 20

Yield at one moment in Time

Question 21

When would you use the depreciated replacement cost method/contractors method?

Answer 21

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

Question 22

Explain the profits method

Answer 22

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.

Question 23

What is the methodology for the profits method?

Answer 23

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

Question 24

Explain the residual method

Answer 24

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