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Mocks > Valuation (L1) > Flashcards

Valuation (L1) Flashcards

1
Q

What are prime yields in Scotland?

A

Industrial:
Retail:
Office:

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2
Q

What is the definition of Market Rent?

A

The estimated amount for which an asset should lease:

on the valuation date
with a willing lessee and lessor
in an arms length transaction
after proper marketing
with parties acting knowledgeably, prudently and without compulsion

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3
Q

What is the definition of Market Value?

A

The estimated amount for which an asset should exchange:

on the valuation date
with a willing buyer and seller
in an arms length transaction
after proper markteing
with parties acting knowledgeably, prudently and without compulsion

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4
Q

What re the 5 methods of valuation?

A

Comparative (market)
Investment (income)
Profits (income)
DRC (costs)
Residual (costs)

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5
Q

What valuations are exempt from the red book?

A

Statutory basis
Negotiation or litigation (eg rent review)
Internal purposes only
For agency purposes
Expert witness

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6
Q

What is the difference between an assumption and special assumption?

A

An assumption is made where reasonable to assume it is true and no investigation is required. A special assumption is assumed to be true although it is not true. It still must be reasonable and realistic.

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7
Q

What is a net initial yield?

A
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8
Q

What is the difference between market value and fair value?

A

Basically have the same meanings except Fair is used for internal purposes or for International Financial Reporting Standards (IFRS).

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9
Q

What is the hierarchy of evidence?

A

New letting
Lease Renewal
Rent Review (if open market)
Independent expert
Arbritration / court decisions
Quoting rents

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10
Q

What is an IRR?

A

Internal Rate of Return.
The rate of return at which all future cashflows must be discounted to give an NPV of zero.

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11
Q

What are the approaches to valuation?

A

Income approach (investment, profits)
Cost approach (DRC, residual)
Market approach (comparison)

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12
Q

What are the bases of valuation?

A

Market value
Market rent
Fair value
Investment value

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13
Q

What is a yield?

A

A measure of return.
It is a benchmark used to compare transactions.
Income / price x 100.

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14
Q

What is included within ToE for valuations?

A

Identity and status of valuer
Identity of client
Identity of asset
Currency
Purpose of valuation
Basis of valuation
Assumptions & special assumptions
Compliance with RBG and IVS
Fee basis
Complaints handling procedure

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15
Q

Can you issue draft valuation advice?

A

Yes, but it must be marked as draft and shouldnt be relied upon.
Can be discussed with client but they should not influence the final figure. Any changes should be noted with reasoning provided.

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16
Q

What is quantum?

A

This is where larger than average sized properties are let at lower levels of value per unit than normal sized properties
Inverse quantum is an increase to to the value per unit which is applied to properties that are smaller than average.

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17
Q

What do you do before commencing a valuation instruction?

A

CIT:
Competence
CoI
ToE

18
Q

What due diligence is required on a valuation instruction?

A

Asbestos (pre-2000)
Business rates
Contamination
Equality act compliance
Planning history
Legal title

19
Q

What is a secured lending valuation?

A

For a commercial loan, property is being used as security against a loan.

20
Q

How would a yield reported from an auction sale differ from a NIY?

A

It is gross, doesn’t include purchases costs because they fluctuate

21
Q

How do you calculate an initial yield?

A

income / price x 100

22
Q

What is an equivalent yield?

A

Average weighted yield when a reversionary property is valued using an initial yield and reversionary yield.

23
Q

What is a reversionary yield?

A

Current income / price on an under-rented property.

24
Q

What is a DCF?

A

Discounted Cash Flow.
Growth explicit method of valuation.

25
Q

What are the steps to a profits valuation?

A

Used for trade-related properties (pubs, petrol stations, leisure). Value depends on profitability of the business.

Fair maintainable trade - costs and expenses = Fair maintainable operating profit.

FMOP x YP = cap value.

26
Q

What is a residual valuation and how is it carried out?

A

Process of valuing land with dev potential.
Gross development value - costs.
Costs include professional fees, construction costs, design costs, flattening the land etc

27
Q

What is a DRC valuation and how is it carried out?

A

Depreciated Replacement Cost (Contractors method).
Used when comps are not available, e.g. specialized properties such as schools, lighthouses, fire stations etc.
Normally done for accounts purposes of an owner occupied property or for rating purposes.

Value of land in existing use.
Current costs of replacing the building plus fees, less a discount for deterioration, obsolescence, depreciation.

28
Q

Is there room for margin of error in valuations?

A

Yes but it varies depending on the complexity of the valuation (typicall +/- 10%)

29
Q

What is term and reversion?

A

Used when a property is under-rented. Apply an initial yield to the term certain, then apply a reversionary yield once it reverts to market rent. In reality you would use an equivalent yield to do this.

30
Q

What is the hardcore / layer method?

A

Used when a property is over-rented (think retail). Value market level of rent at an initial yield then anything above market level a higher yield to reflect the risk.

31
Q

When undertaking the industrial inspection for valuation, what observations did you make that in relation to things that could impact on value?

A

eaves height, mezzanine, yard, office content

32
Q

When would you use the depreciated replacement cost method of valuation?

A

Contractors method. Used for specialist properties where there are no direct comparables – lighthouses, sewage works, schools.

33
Q

What is a non-arm’s length transaction?

A

When the parties have a relationship prior to the dealings, either personal or professional

34
Q

How would you value the landlords interest in a property?

A

Investment method, term and reversion

35
Q

Talk me through term and reversion?

A

Valuing the current income for until the next lease event (expiry or rent review) using an initial yield. Then revert to market level rent and value using a reversionary yield (in perpetuity).

36
Q

What factors do you consider when choosing a relevant comparison?

A

As similar as possible to subject property, recent transaction, nearby, similar property

37
Q

How would you analyse a rent free period e.g. if headline rent was £100,000 for a 5 year lease but 6 months RF was provided?

A

Take off 3 months as industry norm for fit out. Analyse the rent free over the period of the lease (or until the break option) to get the net effective rent.

38
Q

What factors would you take into account when determining which yield to use?

A

Is there an income? Is the property fully let? Is the rent being paid in advance / arrears?

39
Q

Can you give me an example of Hope Value? How would you account for this when undertaking a red book valuation?

A

An example is a site that does not have planning permission but you are hopeful it will be able to achieve it.

40
Q

When would you use the comparable method?

A

When the market is stable, when there is a good amount of transactions, when it is a common property type and lots of evidence is available (houses, shops, offices, ind).

41
Q

When would you use the profits method?

A

Normally when a business has an element of monopoly and there is no comparable evidence.
Often used for pubs, hotels etc.

42
Q

What are the 6 main purposes for valuations?

A 
open market transaction
secured lending
taxation
accounts
compulsory purchase
internal management process

Mocks (10 decks)

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