Valuation - General Flashcards
What are the 3 approaches to valuation ?
- Income - (Investment, Profits)
- Market Approach (market evidence)
- Cost approach (Depreciated Replacement Cost)
What is the traditional/conventional method ?
Rent received or market rent multiplied by yield.
What is the Layer/Hardcore method used for ? and what is it ?
- Over rented properties.
- The income flow is divided horizontally
- Bottom slice being market rent
- Top slice being rent passing minus market rent (until rent review/expiry)
- A higher yield is applied to top slice to reflect additional risk
How do you calculate the yield of a property ?
Income % price
x 100
What are the risk factors involved in determining a yield ?
- Prospects of rental/ capital growth
- Location
- Covenant
- Lease terms
- Voids
What does DCF involved ?
A DCF valuation involves
- projecting estimated cash flows over an assumed holding period, plus an exit value at the end of the holding period.
- The cash flow is then discounted at a discount rate (rate of return) that reflects the perceived level of risk.
- The approach explicitly identifies growth assumptions
What are the various stages used in a DCF ?
- Estimate cash flow
- Estimate Exit Value
- Select the Discount Rate
- Discount Cash flow
- Value in the sum of a completed DCF to provide Net Present Value
What is Net Present Value (NPV)?
- The sum of the discounted cash flow for a project.
- When positive - the investment has exceeded investors target rate of return
- When negative - the investment has not achieved the investors rate of return.
What are the elements of finance , a developer would need to borrow money for?
- Site purchase
- Construction costs
- holding costs
How are professional costs calculated for a development appraisal ?
10 - 15% of total construction costs.
What is the contingency based on?
5 - 10% of total construction costs.
What is an S curve?
Reflects the payment of construction costs, shaped over the length of the development.
How do you calculate developers profit ?
It done as percentage of Gross development value/ or total construction costs.
It’s usually 15 % to 20% depending upon risk.
Give me some examples of development costs?
- Site preparation (clearance/demolition)
- Planning costs (Section 75’s)
- Build costs
- Professional fees (10 - 15% of total construction costs)
- Contingency
- Marketing costs and fee’s
What are the LBTT levels ?
Up to £150,000 = 0%
£150,001 to £250,000 1%
Above £250,00 = 5%
What are the basis of value?
- Market Value
- Market Rent
- Investment Value
- Fair Value
- Equitable Value
- Liquidation Value
Define market value ?
- The estimated amount for which an asset or liability should exchange on the valuation date
- between a willing buyer and a willing seller
- in an arm’s length transaction, after proper marketing and - where the parties had each acted knowledgeably, prudently and without compulsion.
Define fair value?
The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
Is a Depreciated replacement cost Red Book compliant ?
NO
When is the Red Book not mandatory?
- Agency reports
- Statutory
- Expert witness
- Internal purposes.
What does PS2 cover?
Ethics
Objectivity
Conflcits
What are assumptions ?
Assumptions are made where it is reasonable for the valuer to accept something as true, without the need for investigation.
What is a special assumption ?
Is a supposition that is taken to be true and accepted as fact, even though it isn’t a fact.
Define investment value ?
The value of an asset to a particular owner based on individual investment or operational value.
What part of the red book provide information on valuation for secured lending ?
VPGA 2
What does VPGA 1 cover?
Valuation for financial accounts
What financing standards need to be considered ?
International Financial Reporting Standards
What examples of conflicts of interest are there for secured lending ?
- If the valuer has provided advice to the borrower
- ## If the valuer has a long standing business relationship with the borrower
What is the STAMP duty for commercial property ?
0 - £150,000 = 0%
£150,001 - £250,000 = 1%
£250,0001 + = 5%
What are the 3 main aims of the RICS Valuer Registration Scheme ? (PIM)
- Improve the quality of valuation
- Meet RICS requirements to self regulate
- Protect and raise status of valuation proffesion
What are the most common bases of value ?
- Market Value - amount it would transact
- Market Rent
- Investment Value
- Equitable value
- Synergistic value
- Liquidation value.
