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RICS SPA > Valuation Basics > Flashcards

Valuation Basics Flashcards

1
Q

What are the 3 approaches to Valuation?

A
  • Income Approach
  • Cost Approach
  • Market Approach
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2
Q

What are the 5 methods of Valuation?

A
  • Investment Method
  • Profits Method
  • Comparable Method
  • DRC Method
  • Residual Method
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3
Q

Talk me through the profits method

A

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

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4
Q

Talk me through the DRC method

A

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

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5
Q

Can you use the DRC for Red Book Vals?

A

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

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6
Q

Can you talk me through the comparable method?

A

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.

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7
Q

Is there any RICS Guidance on the comparable method?

A

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

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8
Q

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

A

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
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9
Q

Are Auction results considered to be good comparable evidence?

A

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

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10
Q

What is a special purchaser?

A

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

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11
Q

Can you talk me through the residual method?

A

Establish the GDV through the comparable method

Deduct build and other costs

Make an allowance for developers profit

= RLV

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12
Q

Can you talk me through the investment method?

A

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.

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13
Q

What is a yield?

A

A measure of return of an investment expressed as a percentage

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14
Q

What is included within opex?

A
  • Maintenance and repairs
  • Running costs
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15
Q

Why did you use 25% opex?

A

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

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16
Q

What did you deduct for purchasers costs?

A

6.8%

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17
Q

What is included within purchasers costs?

A

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

18
Q

What is a special assumption

A

A special assumption is made by the valuer where an assumption either assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant in a transaction on that valuation date. NEEDS To be Expressly agreed. AND only if they are relevant, realistic and valid.

19
Q

what is an assumption

A

An assumption is a supposition taken to be true

21
Q

What is marriage value

A

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.

21
Q

What is an external valuer

A

No material connection to the client

22
Q

What is an internal valuer

A

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

23
Q

What is a years purchase?

A

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

24
Q

What factors may have an affect on the yield?

A
  • Location
  • Voids
  • Security of income
25
Q

What is a DCF?

A

Discounted Cash Flow

26
Q

How would you use a DCF?

A

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

27
Q

What is the IRR?

A

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

28
Q

What is the NPV

A

Sum of the discounted cash flow

29
Q

What is included in professional fees?

A
  • Architects
  • Planning consultants
  • Project Managers
  • CDM Principle designer
30
Q

What is the interest rate inclusive of

A

Bank of England base rate (5.25%) plus a risk premium plus entry and exit fees.

31
Q

What is SONIA

A

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

32
Q

How would you calculate finance without argus

A

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

33
Q

Why do you calculate the construction cost on an S curve

A

To reflect the variance in costs during the construction period

34
Q

What happens in the lead in period for construction?

A

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

35
Q

What is the agreed liability cap for your company

A

Dependent on the instruction

36
Q

What is Golden Brick

A

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

37
Q

What is market value?

A
  1. The estimated amount for which and asset / or liability would exchange
  2. On the valuation date
  3. Between a willing buyer and willing seller
  4. In an arms length transaction
  5. After Proper Marketing
  6. And where both parties had acted knowledgeably, prudently and without complusion

IVS 104 paragraph 30.1

38
Q

What is market rent?

A
  1. The estimated amount for which an interest in real property should be leased
  2. On the valuation date
  3. Between a willing lessor and willing Lessee on appropriate lease terms
  4. In an arms length transaction
  5. After Proper Marketing
  6. And where both parties had acted knowledgeably, prudently and without complusion

IVS 104 paragraph 40.1

39
Q

what is investment value (worth)?

A

‘the value of an asset to a particular owner or prospective owner for individual
investment or operational objectives.’

IVS 104 paragraph 60.1

40
Q

What are examples of special assumptions?

A

planning (zoning) consent has been, or will be, granted for development (including a change
of use) at the property

the property is vacant when, in reality, at the valuation date it is occupied

RICS SPA (13 decks)

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