Valuation - L1 extra Flashcards
Valuation L1 knowledge
RICS Valuation - Global Standards (Red Book)
x2 Red Books
- RICS Valuation - Global Standards (Red Book, effective 2022)
–> Greater emphasis on sustainability - The Red Book UK National Supplement was published on 19 October 2023 and will become effective 1 May 2024.
The relationship between Global Red Book and the UK national supplement
The UK national supplement supports the Global Red Book for valuations that are subject to UK jurisdiction but does not replace them.
The new UK supplement update addresses recommendations found in the Independent Review of Real Estate Investment Valuations, published in January 2022.
What is the New Red Book UK National Supplement advice on rotation rules
The new rules will prevent valuation firms from valuing an asset for regulated purposes for more than ten consecutive years, requiring a change or “rotation” to a different valuation firm.
These critical changes will improve transparency, ultimately serving the public interest.
When should it not be a Red Book valuation
- Statutory purposes
- Agency
- Internal
- Expert witness
- Litigation / Negotiation
Three steps before undertaking valuation
Competence
–> Are you com to undertake this instruction. Correct skills, understanding and knowledge. (Good knowledge of the area.)
Independence
–> Think first then check for conflict of interests
Terms of Engagement
–> Set out in writing your full confirmation of instructions to the client prior to starting work and receive written confirmation of instruction
–> Confirm the competency of the valuer
–> The extent and limitation of the valuer’s inspection must be stated i.e. limited access to roof
Due Diligence. Why?
Required to check that there are no material matters which could impact upon the value
Examples of DD
- Asbestos Register
- Business rates/ council tac
- Cntamination
Equality Act 21010 complience
- Envir matters (high voltage power lines, masts)
- EPC rating is avaiable/ applicable
- Flooding (check envir agency website)
- Fire Safety compliance
- Health and Safety compliance
- Highways
- Legal title and tenure
- Planning History
Timeline of valuation instruction
- Receive instruction from the client
- Check Competence (SUK)
- Check Independence - conflict of interest)
- Issue terms of engagement to the client, signed.
- Gather information - leases and DD (EPC) to check there are not matters that could adversely impact upon value
- Inspect and measure
- Research and assembly/analyse comps
- Undertake valuation and draft report
- Get another surveyor to check it.
10 Finalise and sign report, report to client, issue invoice, ensure filed in good order
5 Methods of Valuation
Comparable Method
- comparative
Investment Method
- T&R (under)
- Layer and hardcore (over)
- DCF (long period of time)
Residual Method
- Development
Profits
Depreciate replacement cost
- Contractors method
3 Valuation approaches (as per IVS 105 Valuation approaches and method)
Income Approach - converting current and future CF into capital value e.g. investment, residual, profit
Cost approach - reference to the cost f the asset whether by purchase or construction (DCR)
Market approach - using comparable evidence available - comparable method
Comparable Method Professional Standard
Comparable evidence in real estate valuation (1st edition)
This document was reissued in April 2023 as a professional standard.
(It was previously published in October 2019 as a professional statement.)
Comparable method - 6 steps
- Search and select comps
- confirm details and analyse headline rent to give a net effective rent
- Assemble comparable in schedule
- Adjust comparable using hierarchy of evidence
- Analyse comp to form an opinion of value
- Report value and prepare file note
RICS Professional Standard Comparable evidence in real estate valuation (1st edition) 2019 - reissued as Professional Standard in April 2023
Provides guidance/advice in dealing with situations where there is limited availability if evidence .
Sets a hierarchy of evidence noting the valuer should use personal judgement to assess evidence
Hierarchy of evidence
The relative weight attached to different types of evidence
▪ Cat A - direct comp, near identical. Similar to subject property
▪ Cat B - General market data that can provide guidance e.g. historic data i.e. Barking retail unit
▪ Cat C - Other sources - using other types and locations
How to find rel comparables
- Inspection of an area to find recent market activity
- local agents
- The date of evidence is crucial
- In House records/ databases and websites such as Focus, Egi, Co-Star, Qube/Coyote
Investment Method
Used when there is an income stream to value
The rental income is capitalise d to produced a capital value.
Conventional investment method
Rent received or market rent X YP = Market Value
(using comparables to get the rent and yield)
Term and reversion method
If property is under rented where the market rent is more than the passing rent
Term capitalised until the next review/leave expiry at an initial yield
Reversion to market rent valued in perpetuity at a reversionary yield
Layer and Hardcore method
Used for over rented investments where the passing rent is more than the market rent
Income flow divided horizontally
Bottom slice = is market rent
Top slice = Rent passing less market rent until next lease event
It is used for OVER RENTED investments.
Income flow is divided horizontally. The hardcore (MR) is valued into perpetuity at a net initial yield.
The top slice (PR-MR) is capitalised to next lease event at a net initial yield with a risk adjustment.
NO PV of £1 needed as both layers of income are being received NOW.
Discounted cash flow (DCF)
Involves projecting estimated cash flows over an assumed investment holding period
Plus an exit value at the end of that period.
The cash flow is then discounted back to present day at the discount rate (aka IRR) that reflects the perceived level of risk
DCF process
- Estimate the cash flow (income less expenditure)
- Estimate the exit value at the end of the holding period
- select the discount rate
- Discount the cash flow at discount rate
- The value is the sum of the completed discounted cash flow to provide the NPV (net present value)
Net present value
The sum of the DCF of the project
Can be used to determine of an investment gives a positive return against the target rate of return
If NPV is positive then the investment has exceeded the investor’s TRR
When the NPV is negative, it has not achieved the TRR
Internal rate of return
The rate of return at which all future CF must be discounted to produce a NPV of zero
Used to assess the total return from an investment opportunity
(If the NPV is more than zero then the TRR is met)
RICS guidance on DCF
RICS Guidance Note on Discounted Cash Flow for commercial property investment 2010
Yields
What is a yield…
▪ Annual rate of return of investment expressed as a %.
▪ Relationship between income and capital value.
▪ A yield comprises ‘Risk free rate + risk (taking into account anticipated rental growth)
Examples of risk are as follows:
‒ Tenant risk – covenant strength
‒ Sector risk
‒ Structural risk – split ownership
‒ Legislations risk (e.g. upwards and downwards rent reviews)
‒ Planning risk – development
‒ Legal risk – tenure/restrictive covenants
PV = Present Value
▪ Present Value is the current worth of a future sum of money.
Market Value definition
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.
Market Rent definition
Market Rent
The estimated amount for which an interest in
real property should be leased
on the valuation date between a willing lessor and a willing lessee
on appropriate lease terms
in an arm’s length transaction,
after proper marketing
and where the parties had each acted knowledgeably, prudently and without
compulsion.
Fair Value
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.
Calculated the same as Market Value, used
for Regulatory Valuations.