Valuation L2 Flashcards
Explain the comparable method and the propose of its use?
Use for insurance valuations and it provides the current market value of an asset.
What are the Valuation approaches?
- Income approach – investment, residual abd profit
- Cost approach – Cost of asset by construction – depreciation replacement cost method
- Market approach – comparable method
What are the Methods of valuation?
- Comparable method
- Profits method
- Investment method
- Residual method
- Depreciated replacement cost (DRC) – cost method
What are the 5 steps for comparable method of valuation?
- Gather list of comparable properties
- Assemble comparable schedule
- Adjust the comparables using hierarchy of evidence
- Analysis comparables to form opinion of value
- Report value and prepare file note
What is the hierarchy of evidence in comparable method of valuation?
- Open market transaction data/ direct comparables
- General market data
- Transactional evidence from other locations.
What are the main components of a residual valuation?
Purchase price/site acquisition value = GDV – (Construction +fees + Profit)
When would you have regard to marriage value?
Additional value created by the combination of two or more assets or interest. E.G lease extension.
What is the (COST) Depreciated replacement cost method and when is it used?
- The current cost of replacing the asset – deductions for physical deterioration.
- Used to value lighthouse, churches, airports
What RICS guidance is there on Valuations?
Comparable evidence in real estate Valuation 2019.
What impact does the length of a lease have on the valuation?
Value depreciation affect. Marriage Value
What are the bases of Value?
- Market Value
- Market rent
- Fair Value
- Investment Value
- Equitable Value
- Liquidation Value
What is the investment Method and when is it used?
- It is used to determine the market value of a freehold or leasehold property from its potential to generate an income.
- The future rental income, which is discounted back to the present day = NPV
What 3 Steps must you take before accepting an instruction?
- You level of competence
- Independence COI
- Terms of engagement
CIT
What is a protected or regulated tenancy?
- It is a tenancy which was signed before 15 January 1989 – governed by the Rent Act 1977
- Tenants had strong rights in relation to rent, security of tenure and succession rights
- Rent must be fair and is determined by the valuation office.
How would you value an office building?
I would use the income approach, which involves calculating the porperties potentiel income(Net Operating income-NOI) and applying a cap rate to determine the market value.
What other valuation methods are there?
a) Comparable Method
b) Investment method
c) Income method
d) Residual method
e) Contractors (Depreciated replacement cost)
How would you value a lighthouse?
I would use the DRC method as there is limited transactions of this asset
How would you value a hotel?
I would use the income method to value a hotel as the value directly relates to the income generated by the asset.
What are ToE and what is included?
The Terms of engagement are the agreed terms between the firm and the client:
i. Purpose of valuation
ii. Client information
iii. Assets being valued
iv. Valuation approach
v. Date
vi. Agreed fees and how they paid
vii. Valuation assumptions and special assumptions
viii. Timeframe
ix. Valuation limitations
x. Dispute resolution
What is included in a valuation report?
a) Introduction
b) Market analysis
c) Property description
d) Method of valuation
e) Adjustment comparables
f) Calculations and analysis
g) Client information
h) Date
i) Valuation assumptions and special assumptions
j) Valuation limitations
k) Currency of valuation
What is the red book and what version ware we using?
RICS Valuation Global Standards is used to promote and support the highest strands in valuation’s. the latest version is 2024 which came into effect on 31st January 2025
What is the difference between a PS and a Guidance note?
A PS is mandatory and a GN is best practice
How do you find comparable evidence for an investment valuation?
Using data of similar properties which have recently traded on the open market.
How would you value the property in 4 Merton assuming it was let?
I would use the current rental value and use the income approach and investment method.
How do you value an overvalued property?
What is marriage value?
Marriage value is the increase in a property’s value when a lease is extended.
How does the length of a lease affect the value?
The longer the lease the higher the value of the property they are directly affected.
How does tenant covenant affect the value?
A tenant covenant affects the value of a property by influencing the perceived risk of a tenant defaulting on their lease payments, with a strong tenant covenant generally increasing the property’s value due to the higher likelihood of reliable rent collection, while a weak covenant can decrease the value due to the increased risk of non-payment and potential legal issues involved in eviction.
How do the clauses in a lease affect the valuation?
The clauses within a lease significantly impact the valuation of a property by influencing factors like rent amount, lease term, rent review mechanisms, break clauses, and restrictive covenants, which can either increase or decrease the property’s perceived value depending on their terms, potentially making it more or less attractive to potential buyers or investors.
What makes a good comparable property?
a) comprehensive – there should be several comparables rather than a single transaction or event
b) very similar or, if possible, identical to the item being valued
c) recent, i.e. representative of the market on the date of valuation
d) the result of an arm’s-length transaction in the market
e) verifiable
f) consistent with local market practice and
g) the result of underlying demand, i.e. comparable transactions have taken place with enough potential bidders to create an active market.
What is the hierarchy of evidence?
a) Category A -Direct Comparables
i. contemporary, completed transactions of near-identical properties for which full and accurate information is available; this may include data from the subject property itself
ii. contemporary, completed transactions of other, similar real estate assets for which full and accurate information is available
iii. contemporary, completed transactions of similar real estate for which full data may not be available, but for which enough reliable data can be obtained to use as evidence
iv. similar real estate being marketed where offers may have been made but a binding contract has not been completed and
v. asking prices
b) Category B - General market data
i. information from published sources or commercial databases; its relative importance will depend on relevance, authority and verifiability
ii. other indirect evidence (e.g. indices)
iii. historic evidence and
iv. demand/supply data for rent, owner-occupation or investment.
c) Category C - other sources
i. information from published sources or commercial databases; its relative importance will depend on relevance, authority and verifiability
ii. other indirect evidence (e.g. indices)
iii. historic evidence and
iv. demand/supply data for rent, owner-occupation or investment.
What is EBITDA?
earnings before interest, taxes, depreciation, and amortisation
What are the different purposes of valuations?
a) Financial reporting
b) Residential mortgages
c) Establish capital gain tax, stamp duty and land tax
What are the Professional standards in the redbook?
- PS 1 – Compliance with standards where a written valuation is provided
- PS 2 – Ethics, competency, objectivity and disclosures
What are the Valuation technical and performance standards VPS – mandatory
- VPS 1 – Terms of engagement (scope of work)
- VPS 2 – Bases of value, assumptions and special assumptions
- VPS 3 – Valuation approaches and methods
- VPS 4 – Inspections, investigations and records
- VPS 5 – Valuation models
- VPS 6 – Valuation reports
What are the RICS global valuation practice guidance applications (VPGAs) – advisory
- VPGA 1 – Valuations for financial reporting
- VPGA 2 – Valuations for secured lending
- VPGA 3 – Valuation of businesses and business interests
- VPGA 4 – Valuation of trade related properties
- VPGA 5 – Valuation of plant and equipment (including infrastructure)
- VPGA 6 – Valuation of intangible assets
- VPGA 7 – Valuation of arts and antiques
- VPGA 8 – Valuation of real property interests
- VPGA 9 – Valuing portfolios and groups of assets
- VPGA 10 – Material valuation uncertainty (MVU)
- VPGA 11 – Relationship with auditors
