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RICS APC1 > Valuation - Comparable Method > Flashcards

Valuation - Comparable Method Flashcards

1
Q

Under VPS 5 of the Red Book, the comparable method falls under which approach?

A

Market Approach

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2
Q

Why is the comparable method used?

A

Direct and simple approach comparing like for like

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3
Q

What RICS guidance is there for the comparable method?

A

RICS Guidance Note Comparable Evidence in real estate valuation 1st edition 2019

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4
Q

What is a comparable?

A

Item of information used during the valuation process as evidence to support the valuation of another similar item

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5
Q

What is the economic principle behind the comparable method?

A

Substitution - the buyer of an item would not pay more for it that the cost acquiring a satisfactory substitute

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6
Q

What should a comparable be?

A
  1. Comprehensive
  2. Very similar
  3. Recent
  4. Result of an arms length transaction
  5. Verifiable
  6. Consistent with local market practices
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7
Q

How many comparables do you need?

A

More than one, as many as are relevant and recent

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8
Q

What are the RICS 3 categories of comparables?

A

Category A - Direct transactional evidence

Category B - general market data providing guidance rather than a direct indication of value, such evidence from published sources, commercial databases, indices, historic data supply/demand data.

Category C - other sources, such as transactional evidence from other property types and locations and other relevant background data

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9
Q

Why can the comparable method be challenging?

A

Unique nature of property make it hard to find comps
Rapidly moving market -out of date data
Limited evidence due to market conditions
Poor quality comparables
Unverified comparables

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10
Q

Outline the Hierarchy of rental evidence?

A
  1. New letting
  2. Lease renewal
  3. Rent review
  4. Independent expert
  5. Opinion
  6. Arbitration / court decision
  7. Asking rents
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11
Q

When is the market approach (market sales comparison approach) used?

A

Straightforward residential assets
Straightforward commercial assets
Straightforward rural assets

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12
Q

Could you apply comparable methods to other valuation approaches?

A

Investment - for net rental income & yield
Profits (income approach) asses Fair Maintainable Trade
DCF (income approach) to derive key inputs
DRC (cost approach) land and building values
RLV (cost approach) find GDV and development value

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13
Q

Where can you source comparables from?

A 
Direct transactional evidence
Publicly available information
Databases
Press
Asking prices
Sale prices
Historic evidence
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14
Q

What must you do when researching evidence?

A

Verify it with the parties involved

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15
Q

What evidence gives the highest weight as comparable evidence?

A

Recently completed transactions of other similar property for which full and accurate information is available

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16
Q

What are the two stages of analysing comparable evidence?

A

Establishing a common measurement or other comparison standard.

Adjusting comparable evidence

17
Q

When adjusting comparables what is most important?

A 
Age and condition
Specification and layout
Efficiency and adaptability
Legal
Limitations on use
Location 
Size
Transaction date
18
Q

What length of fitting out rent free would usually not regard as an incentive?

A

3 months - market dependent

19
Q

What are key methods to establish an effective rent?

A

DCF approach

Set total income and expenditure against an equivalent lease that assumes no incentives to let had been granted (applying discount rate)

Set total income and expenditure (including incentives) against equivalent lease that assumes no incentives to let had been granted (ignore timing of cash flows)

20
Q

in the UK what are the main ways of dealing with comps?

A

Devalue each comparable to an effective rent and then apply all of them to arrive at one net effective rent for the subject premises, after making appropriate adjustments.

Use the comparable evidence which would likely be agreed in the marketplace for the subject, adjust for assumed lease terms, enabling the calculation of effective rent.

21
Q

What write off period could you apply?

A

lease end
1st rent review
1st break option

22
Q

What would you use zoning for in the comparable context?

A

Comparing rents on retail shops

23
Q

Why is zoning adopted?

A

Because the front of the shop is considered to be worth more

24
Q

What is the depth of a zone?

A

6.1m 20foot

25
Q

How do zones relate to each other?

A

Halving back - the next zone is worth half the value

26
Q

Where might you use deeper zones?

A

30ft on some prime London streets e.g. Oxford St

RICS APC1 (18 decks)

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