Valuation - Level 1 Flashcards
1
Q
Tell me what the 5 methods of valuation are
A
- Comparative method
- Investment method
- Profits method
- Residual method
- Contractors method (depreciated replacement costs)
Red Book Global approaches:
1. Income
2. Cost
3. Market
2
Q
Tell me about how you would value a building using the profits/contractors/investment/comparable/residual method of valuation
A
Comparable:
- Six step methodology
- Search and select comparables > confirm/verify details > assemble comps in schedule > adjust using hierarchy of evidence > analyse to form opinion of value > report value and prepare file note
Investment:
- Used when there is an income stream to value
- The rental income is capitalised to produce a capital value
- Three versions = conventional investment method > term and reversion method > hardcore method
Profits:
- Used where the value of the property depends upon the profitability of its business and its trading potential
e.g. pubs, petrol stations, hotels etc
- EBITDA is capitalised at the appropriate yield to achieve market value
Residual:
- Most common purpose is for a specific valuation of a property holding to find the market value of the site based on market inputs
- Deduct total development costs from GDV to establish site value having allowed for normal purchasers’ costs
DRC:
- Only used where direct market evidence is limited or unavailable for specialised properties
- Two steps
- Value of land in its existing use (assume planning permission exists) > Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence
3
Q
How do you decide which valuation method to apply?
A
Term and reversion for under-rented
Layer/hardcore for over-rented
Residual for site value
4
Q
What is a years purchase multiplier?
A
The multiplier of the net annual income to determine the capital value
5
Q
Give me an example of a good covenant and how this might impact a valuation
A
An example of a good covenant would be Apple
Investors may view a strong covenant position as a positive factor due to the security of the rental income against the covenant of the company, this can increase the attractiveness of the property to investors and drive the value higher
6
Q
What is PII?
A
Professional Indemnity Insurance
7
Q
Why do surveyors need PII?
A
To protect clients, surveyors and third parties against negligence claims where there is a duty of care breached and a claim for damages arises
8
Q
Tell me about the RICS requirements in relation to PII?
A
Mandatory for surveyors working in practice
All policies must be underwitted by an RICS approved insurer
Current min requirements based on a firm’s turnover:
100k or less = £250k cover
100k-200k = £500k cover
200k and above = £1 mil cover
9
Q
What level of PII cover does your firm have?
A
£1,000,000, £2,000,000, £5,000,000 and £10,000,000
If PII above £10m is required referral to inhouse legal counsel is required.
10
Q
Where in your valuation report do you state any limitations on liability?
A
Included in instruction letter and terms of business
11
Q
What limitations does Hart v Large have on your valuation practice?
A
Hart v Large established the principle of margin for error in valuations. The Court held that a valuer is not liable for every inaccuracy in a valuation report, and that a reasonable margin for error must be allowed.
The margin for error is the range within which a valuer’s opinion can be considered reasonable, given the circumstances of the valuation.
Limitations on practice include:
1. Duty of care - the case reinforced the duty of care that valuers owe to their clients, and established the principle that valuers must act with reasonable skill and care.
2. Standard of care - the case established the standard of care that is expected of a valuer, which is that of a reasonably competent valuer in the same field
3. Margin of error - the case established the principle of allowing a margin for error in valuations, which acknowledges that valuations are estimates and are subject to some degree of uncertainty
4. Scope of liability - the case clarified the scope of a valuer’s liability which is limited to losses that are directly caused by the valuer’s negligence or breach of contract
12
Q
What aspect of Hart v Large allowed the judge to award damages without applying the SAAMCO cap?
A
The valuer had breached their duty of care to the client by failing to inspect the property, which was a fundamental part of the valuation exercise. The valuer’s negligence had caused the claimant to suffer a loss that was directly attributable to the valuer’s breach of duty, and that the loss was not outside the scope of the valuer’s duty.
13
Q
What is the SAAMCO cap?
A
Legal principle that limits the liability of professional advisers for losses suffered by their clients.
In the SAAMCO case, the court held that the liability of a professional adviser is limited to the scope of their advice, and tat they cannot be held liable for losses that are outside their scope of advice.
14
Q
Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?
A
No, as this would be considered outside of the scope of advice.
15
Q
Under the SAAMCO cap, is a valuer’s liability usually limited to the overvaluation on the valuation date?
A
It is usually limited to the ‘advice gap’ between the value of the property as it was and the value as it should have been if the valuation had been accurate.
16
Q
What would you do if you received notice of a PII claim from a client or their solicitor?
A
- Notify PII insurer
- Gather all relevant information
- Engage legal counsel
- Cooperate with your insurer
- Maintain professional standards
17
Q
Is there a difference between being negligent when undertaking a survey/valuation and providing negligent advice?
A
Yes, when a surveyor is negligent in their work, it means they have failed to exercise reasonable care and skill in carrying out the survey or valuation. Negligence in this context refers to a failure to meet the required standard of care for a competent valuer/surveyor.
On the other hand, providing negligent advice refers to a situation where a surveyor provides advice or guidance that is incorrect, incomplete or misleading, and which leads to the client suffering a loss or damage.
Whilst there is overlap, negligence in the survey/valuation process relates to errors or omissions in the physical inspection or valuation of the property, while negligent advice relates to errors or omissions in the advice or guidance provided to the client.
18
Q
What is the Red Book?
A
Professional standards and guidance document produced by the RICS for valuers which sets out mandatory rules, best practice guidance and technical standards that RICS members must follow when undertaking property valuations and related services.
19
Q
Why does the Red Book exist?
A
To ensure that property valuations are carried out to a high standard of professionalism and consistency, and to provide a framework for best practice in the industry.
20
Q
Tell me about a factor which may impact value
A
Sustainability
Poor = lower value and vice versa
21
Q
What is your duty of care as a surveyor when undertaking a valuation?
A
To exercise reasonable skill and care in carrying out a valuation. This means that members are to follow the professional standards set out in the RICS Red Book and to ensure that work is carried out to a high standard of professionalism and competence.
22
Q
To whom do you owe this duty of care?
A
Client
Third parties who may rely on the valuation
23
Q
Why is independence and objectivity important when valuing?
A
They help to ensure that the valuation is fair, unbiased and accurate.
24
Q
Is there a separate UK Red Book?
A
Yes
25
What is the UK valuation guidance called?
RICS Valuation - Global Standards (UK National Supplement, 2018)
Effective from 14th January 2019
26
Why does the UK guidance exist?
The UK Red Book augments the Red Book Global requirements for valuations in the UK and is not a substitute for it
It provides specific requirements for members on the application of RICS Valuation - Global Standards to valuations undertaken subject to UK jurisdiction.
27
When was the Red Book last updated?
2021 with effect from 31st January 2022
28
Does this differ from when IVS were last updated?
No
29
What changes were made?
The need for compliance with RBG and adequate Terms of Reference to reflect this (PS 1 and VPS 1):
- Terms of Reference must be clear and unambiguous in that valuations are either RBG compliant or not
Valuation for financial reporting purposes (VPGA 1):
- References to IFRS 13 and IFRS 16 and the need to provide reasonably possible fair value measurements
Sustainability and ESG factors, particularly regarding:
- Definitions (glossary) to be provided
- Inspections and reporting (VPS 2 and VPS 3) - valuer's should have regard to the relevance and significance of ESG and Sustainability factors which should form an integral part of the valuation approach and reasoning. This will necessitate the collection of appropriate data
- Valuation for secured lending purposes (VPGA 2) - noting that ESG and Sustainability factors should form an integral part of the valuation approach, commentary may also be required on the maintainability of income, and future cost liabilities to meet changing regulations and investor expectations
30
Which do you follow - the latest IVS or the Red Book Global?
Both
31
Which sections of the Red Book are mandatory and which are advisory?
Mandatory - Parts 3, 4 and 6
32
What does PS1-2/VPS1-5/VPGAs relate to?
PS 1 = compliance with standards and practice statements where a written valuation is provided
- RBG is mandatory for all valuations except the following FIVE exceptions:
1. Advice is expressly provided in preparation for, or during the course of negotiations or litigation
2. The valuer is performing a statutory function except for the provision of a valuation for inclusion in a statutory return to a tax authority
3. The valuation is provided for a client purely for internal purposes, without liability, and not communicated to any third party
4. The valuation is provided as part of agency and brokerage work in anticipation of receiving instructions to dispose of, or acquire, an asset, except when a purchase report is required which includes a valuation
5. The valuation advice is provided in anticipation of giving evidence as an expert witness
PS2 = ethics, competency, objectivity and disclosures
VPS 1 = Terms of engagement
VPS 2 = Inspections, investigations and records
VPS 3 = Contents of valuation reports
VPS 4 = Bases of value, assumptions and special assumptions
VPS 5 = Valuation approaches and methods
VPGA 1 = Valuation for inclusion in financial accounts
VPGA 2 = Valuations for secured lending
VPGA 8 = Valuation of real property interests
VPGA 10 = Matters that may give rise to material valuation uncertainty (in terms of wider context relates to significant economic or other factors affecting value)
33
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
Clearly state in writing to your client that the advice or report is preliminary and subject to change.
34
Tell me the definition of MR/MV/IV
Market value:
'The estimated amount for which an asset or liability should exchange'
Market rent:
'The estimated amount for which an interest in real property should be leased'
Investment value:
'The value of an asset to a particular owner, or prospective owner for individual investment or operational objectivies'
35
What is the difference between an assumption and a special assumption?
An assumption is a generally accepted statement or proposition that is taken to be true for the purposes of the valuation, while a special assumption is a specific assumption that is unique to the property being valued and agreed upon between the valuer and the client before the valuation is undertaken.
36
What sources of information would you consider when preparing a valuation report?
Sites such as land Registry, CoStar and EGI
Discussions with local agents
37
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
The specific disclosure will depend on the circumstance of the instruction, in general if there has been a change in circumstance or information that could affect the value of the asset since the previous valuation was conducted, the surveyor may need o discolse this information in their new valuation report.
38
When might a conflict of interest exist in relation to a valuation instruction?
When there is a personal or business relationship with the owner of the asset, or if there is a financial interest in the asset
A conflict may also arise where the surveyor has previously provided services to one of the parties involved in the transaction which could impact on objectivity
39
Where is this covered in the Red Book?
PS 2
40
What is a restricted valuation service and can you provide one?
A limited type of valuation that is less comprehensive than a full valuation.
A restricted valuation service may be appropriate in the circumstance that the valuation is provided for a client purely for internal purposes, without liability, and not communicated to any third party
41
How do you deal with limitations on inspection or analysis?
The surveyor should disclose any limitations in the valuation report and take them into account when making any assumptions or conclusions.
The surveyor should clearly state the extent of the limitations, how they may impact upon value and any assumptions that were made as a result. The surveyor should also indicate whether additional information or inspection would be required to provide a more comprehensive valuation.
42
Can you revalue a property without inspecting?
It is generally not recommended to revalue a property without inspecting as the condition and other physical characteristics of the property can have a significant impact on its value.
However, there may be circumstances where revaluing without inspection is appropriate/necessary:
- The property has been recently inspected and no significant changes have been made to its condition
- The property is located in an area where there has been minimal market movement, and recent sales data and other information are available to support the valuation
- The property is new, and its construction and other details are well-documented and can be verified through other means
43
What RICS guidance relates to the use of comparable evidence?
Comparable Evidence In Real Estate Valuation, 2019
44
What is an internal valuer?
A professional employed by a firm to provide valuation services on their behalf.
45
Can an external valuer provide an internal purposes valuation?
Yes, however, the scope and methodology may be different from a valuation provided for external purposes.
The external valuer should still follow professional standards and guidelines, such as the RBG, to ensure objectivity and reliability.
46
What happens if market conditions change between the valuation date and report date?
It could affect the accuracy and reliability of the valuation - in such cases, the valuer may need to adjust the valuation to reflect changes in market conditions.
The valuer should disclose the change in market conditions and the impact that it has had on the valuation in their report. The valuation date, assumptions and extent of market change should be clearly stated.
47
Is special value from a special purchaser reflected in MV?
Not necessarily - market value does not take into account the specific needs or preferences of a particular purpose, the focus is on what a hypothetical willing buyer and willing seller would agree on in an open market transaction
However, in certain scenarios special value may be taken into account in a valuation, for example, if the property is being sold to a particular purchaser for a specific use, and that use is likely to continue in the future, the valuer may consider the specific value that the purchaser places on the property.
48
Where does the definition of fair value come from?
IFRS 13:
'The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction'
This basis of valuation is now required if the International Financial Reporting Standards have been adopted by the client
49
Does this differ from MV?
Fair value is used for financial reporting purposes and takes into account the particular accounting standards and reporting requirements of the relevant jurisdiction
50
What are the 3 approaches under VPS5?
1. Comparable approach
2. Income approach
3. Cost approach
51
What is the Valuer Registration Scheme?
RICS introduced the VRS as a regulatory monitoring scheme for all valuers carrying out Red Book Global valuations from October 2011. There are THREE aims of the scheme:
1. To improve the quality of valuation and ensure the highest possible professional standards
2. To meet the RICS requirement to self-regulate effectively
3. To protect and raise the status of the valuation profession as the leading expertise in valuation
52
Are there any instances where certain sections of the Red Book may not apply?
The valuer must use their professional judgement to determine which sections of the Red Book are relevant to a particular instruction, taking into account the scope of work, client instructions and any relevant regulations or legislation.
If a valuation is being prepared for internal use only, the valuer may determine that certain sections of the Red Book, such as those relating to reporting requirements may not be necessary.
However, the valuer must still adhere to the fundamental principles of the Red Book.
53
What are these and which sections don't apply?
Section 3 - inspections and investigations may not apply if the client only requires a desktop valuation without physical inspection of the property
Section 8 - form of report may not apply if the client has specified a different report format that does not follow Red Book guidance
54
What is the basis of value under UK GAAP FRS 102?
The basis of value for property, plant and equipment is cost less accumulated depreciation and any accumulated impairment losses
55
What is a SORP?
Statement of Recommended Practices - set of UK guidelines providing recommendations on how to prepare and present financial statements for certain types of organisations.
56
When would you use EUV?
Existing Use Value - typically used in the context of compulsory purchase and compensation, where a property or land is acquired by a public authority for a public purpose.
57
What additional criteria apply to secured lending valuations?
Enhanced conflict of interest - written confirmation that there is no relationship between the valuer and the lender
58
What information should you specifically request for a secured lending valuation?
1. Details of the borrower and the purpose of the loan
2. Property details
3. Tenancy information
4. Title information
5. Valuation assumptions - valuation date, basis of value and any special assumptions
59
What is a regulated purpose valuation?
A valuation carried out for a specific purpose and is subject to regulation by a professional body or government agency.
They must be carried out in accordance with specific standards and guidelines, such as the RICS Red Book
60
What additional disclosures must be made for a regulated purpose valuation?
1. Confirmation that the valuer is a member of RICS
2. Any conflicts of interest
3. Description of the purpose of the valuation and the relevant legislation/regulations
4. Confirm that the valuation is Red Book compliant
5. Disclosure of any assumptions, special assumptions or limitations
6. Disclosure of the basis of value
7. A confidentiality statement
61
What is the basis of value for a statutory valuation?
It depends on the purpose of the valuation.
Statutory valuations are usually carried out for a specific legal or regulatory purpose, such as for taxation, compulsory purchase or rating. For example, for compulsory purchase valuation, the basis of value is typically the Market Value.
62
Is this the same for all statutory valuations?
No, it is important that the valuer is familiar with the relevant statutory provisions and guidance to ensure that the valuation is carried out correctly.
63
What is a yield?
A measure of investment return, expressed as a percentage of capital invested
64
What is a Net Initial Yield?
Simple income yield for current income and current price
65
What is a reversionary yield?
Market rent divided by current price on an investment let at a rent below the MR
66
What is an equivalent yield?
Average weighted yield when a reversionary property is valued using an initial and reversionary yield
67
How would a yield reported from auction differ from a Net Initial Yield?
The yield reported from auction is based on the current income generated by the property, while the NIY is based on the expected future income of the property.
68
What purchaser's costs do you deduct from a valuation?
1. Stamp duty
2. Legal fees
3. Agent fees
4. Survey fees
69
When do you deduct purchaser's costs from a valuation?
When the instruction requires the valuation to be conducted on a Market Value basis.
70
How would you value a property in uncertain market conditions - does the Red Book give any guidance?
Yes, the RBG provides guidance on this.
The RBG recommends that in situations where there is a high degree of uncertainty, the valuer may need to consider using a wider range of methods, including scenario-based analysis or sensitivity analysis, in order to impact of different market conditions on the value of the property.
71
How could you value a long leasehold interest?
The ground rent is deducted from the gross income to calculate the net rent received
This is capitalised at a yield for the length of the lease to create a market value
As a leasehold interest can be viewed as a wasting asset, dual rate tables adjust a leasehold valuation to be on the same basis as a freehold by using a sinking fund
However, in practice leaseholders do not use sinking funds so current valuation practice often uses a single rate yield, duly discounted to reflect an additional element of risk for the wasting asset
A DCF calculation can also be used
72
How does a term and reversion differ to a DCF?
Term and reversion is used for under rented properties with the term capitalised until next review/lease expiry at an initial yield with the reversion to market rent valued in perpetuity at a reversionary yield.
A DCF involves estimating the future cash flows that a property is expected to generate and discounting them back to their present value. This method takes into account the time value of money.
73
What is the difference between a growth explicit and a growth implicit yield?
A growth explicit yield explicitly accounts for anticipated rental growth over a specified period taking into account the specific characteristics of the property and expected growth
A growth implicit yield assumes that the rental income will grow with the expected general rental growth in the market and used in cases where it is difficult to estimate future rental growth accurately
74
How would you value an over/under rented investment property?
Under = term and reversion
Over = layer/hardcore method
75
When would you use a dual rate investment calculation?
When a property has more than one income stream, each with its own risk profile and growth rate
76
Where can you find yield evidence from?
Market transaction data
Research reports
Online databases
77
What is the hierarchy of evidence?
Set out in Comparable Evidence in Real Estate Valuation 2019
The relative weight attached to different types of evidence:
1. Category A - direct comparables of contemporary:
- Completed transactions of near-identical properties for which full and accurate information is available; this may include data from the subject property itself
- Completed transactions of other, similar real estate assets for which full and accurate information is available
- 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
- Similar real estate being marketed where offers may have been made but a binding contract has not been completed
- Asking prices (only with careful analysis)
2. Category B - general market data that can provide guidance:
- Information from published sources or commercial databases; its relative importance will depend on relevance, authority and verifiability
- Other indirect evidence
- Historic evidence
- Demand/supply data for rent, owner-occupation or investment
3. Category C - other sources
- Transactional evidence from other real estate types and locations
- Other background data (e.g. interest rates, stock market movements and returns which can give an indication for real estate yields)
78
What would you do if comparable evidence was limited?
Consider alternative sources of information, having regard to the hierarchy of evidence (e.g. widen search parameters)
Seek advice from other professionals if uncertain
Disclose limitations within the report and explain steps taken to arrive at your valuation
79
What is NPV?
Net Present Value:
- The sum of the discounted cash flow of the project
- A NPV can be used to determine if an investment gives a positive return against a target rate of return
- When NPV is positive, the investment has exceeded the investor's target rate of return
- When NPV is negative, it has not achieved the investor's target rate of return
80
What is IRR?
Internal Rate of Return:
-The rate at which all future cashflows must be discounted to produce an NPV of zero
- IRR is used to assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions
81
What is a term and reversion?
- Used for reversionary investments (under rented)
- Term capitalised until next review/lease expiry at an initial yield
- Reversion to MR valued in perpetuity at a reversionary yield
82
What is a hardcore and topslice?
- Used for over rented investments
- Income flow divided horizontally
- Bottom slice = market rent
- Top slice = rent passing less market rent until next lease event
- Higher yield applied to top slice to reflect additional risk
- Different yields used depending on comparable investment evidence and relative risk
83
What is a DCF?
- Growth explicit method of valuation
- DCF valuation involves projecting estimated cash flows over an assumed investment holding period, plus an exit value at the end of that period, usually arrived at on a conventional ARY basis. The cash flow is then discounted back to the present day at a discount rate that reflects the perceived level of risk
84
What is a short-cut DCF?
Simplified method of valuing an asset based on its expected future cash flows. It involves projecting the expected cash flows of an asset over a certain period, usually five years, and applying a discount rate to those cash flows to calculate the present value of the asset.
85
When would you use a DCF?
Where the projected cash flows are explicitly estimated over a finite period, such as for:
- Short leasehold interests and properties with income voids
- Phased development projects
86
What are the advantages of a DCF?
1. Considers the time value of money
2. Future focused - considers the cash flows that an asset will generate in the future
3. Customisable - can be adapted to suit the specific needs of an investor or project
4. Helps identify risks
5. Allows for sensitivity analysis
87
What are the disadvantages of a DCF?
1. Sensitivity to assumptions
2. Difficulty in obtaining accurate data
3. Limited comparability - relies on specific property level assumptions
4. Discount rate uncertainty - involves predicting the risk associated with future cash flows
88
What is marriage value?
- Created by a merger of interests which can be physical or tenurial
- Undertake a before and after valuation and calculate the level of marriage value created
- Typical negotiated outcome is to split the marriage value created 50:50 or divide it pro-rata to the value of the individual interest
89
When would you include an element of hope in a valuation?
Hope value:
- The value arising from any expectation that future circumstances affecting the property may change
- Two typical examples include:
--> The future prospect of securing planning permission for the development of land, where no planning permission exists at the present time
--> The realisation of marriage value arising from the merger of two interests in land
90
Can you include hope value in a secured lending valuation?
It may not be appropriate to include hope value as the focus of secured lending valuation is typically on the current market value of the property as it exists at the time of the valuation, without taking into account potential future events.
91
How would you value a ransom strip?
This is a piece of land which controls the access to another piece of land
The Upper Tribunal (Lands Chamber) evidence suggests that value of a ransom strip could be in the order of 15% to 50% of the development value unlocked by the inclusion of the ransom strip within the proposed development scheme. In some cases, a fixed sum has been awarded. The Upper Tribunal (Lands Chamber) assesses each case on its own facts.
The key case is Stokes v Cambridge (1961) when a value of one third of the uplift in the development site value was awarded to the owner of the ransom strip.
92
What type of properties would you use the profits method for?
Useful for properties that have a strong income stream but may not have many comparable sales or where the capital value is driven by the income generated.
E.g. hotels, leisure complexes, bars etc
93
What type of properties would you use the DRC method for?
Only used where there is no market for the asset.
94
What is intangible goodwill?
A non-physical asset that represents the value of a business's reputation, customer relationships, brand name, intellectual property and other intangible assets that contribute to the business's earning power.
95
What is turnover / gross profit / net profit?
Turnover = the total amount of money generated by a business through the sale of goods or services during a given period
Gross profit = represents the amount of money made from selling products or services after accounting for the direct costs of production
Net profit = total amount of money earned after deducting all expenses, including tax and interest payments
96
What are the steps to providing a profits valuation?
Annual turnover
less costs/purchases
= Gross profit
less reasonable working expenses
= Unadjusted net profit
less operator's remuneration
=Adjusted net profit known as the Fair Maintainable Operating Profit
This can be expressed as the EBITDA
Capitalised at an appropriate yield to achieve market value
Cross check with comparable sales evidence if possible
97
What is Fair Maintainable Turnover?
An estimate of the expected average annual revenue or sales of a business based on its historical performance and future projects.
It represents the level of revenue that the business can realistically maintain over the long term, assuming normal trading conditions.
98
What is a Reasonably Efficient Operator?
A hypothetical operator who has sufficient knowledge and experience to operate a particular business competently and profitably, but who is not an expert in the industry.
99
Does the assessment of the REO include personal goodwill and trading potential?
No, as these are considered to be personal to the business.
100
What is personal goodwill?
The intangible value of a business that is directly associated with an individual, such as the owner - it reflects the value that is generated from the person relationships, reputation and skills of the individual rather than the business itself.
101
What is trading potential?
The ability of a business to generate additional revenue in the future through the utilisation of its existing resources.
102
How do you calculate the tenant's proportion of rent in a profits valuation?
Typically calculated by multiplying the gross profit by the tenant's percentage of turnover (as specified in the lease or market practice)
103
What is EBITDA?
Earnings Before Interest, Taxes, Depreciation and Amortisation - it is a measure of a company's financial performance
104
What is Fair Maintainable Operating Profit?
The estimated average annual profits that a business is expected to generate in the future, assuming no significant changes to the business or market conditions.
105
How do you calculate the divisible balance?
Deduct the following from the net profit of the business:
- Taxation
- Interest
- Remuneration
- Depreciation
- Reserves
106
What accounts information would you want to review for a profits valuation?
Accurate and audited accounts if possible for 3 years
107
When would a cost approach be used?
Typically used to value new or newly new properties that do not have a significant income stream.
108
What is the supposition that a DRC is based on?
That the value of a property is determined by the cost to replace it with a new property of equivalent utility, less an allowance for depreciation due to age, physical deterioration, functional obsolescence.
109
What are the 3 components of the cost approach?
1. Replacement or reproduction cost
2. Accrued depreciation
3. Land value
110
How do you assess the value of land?
1. Comparable method
2. Cost approach
3. Residual approach
111
How do you assess Gross Replacement Cost?
Gross replacement cost is the cost to construct a new building of similar function and utility as the subject property using modern materials and construction methods.
A QS or building cost estimator may be engaged to provide an estimate of the cost to construct the new building.
112
What costs would you consider within GRC?
Size of the building, type and quality of the materials to be used, the complexity of the design and the location of the property.
113
What would you do if the building could be replaced with a modern equivalent?
Assess the cost of the modern replacement, as well as the remaining economic life of the existing building. This assessment would inform the valuer's opinion of value using the cost approach, which involves adding the land value to the depreciated replacement cost of the building.
114
What are the three ways to deal with depreciation?
1. Straight line depreciation - assumes the asset depreciates at a constant rate over its useful life
2. Residual value method - estimating the future value of the property and then deducting the estimated depreciation from that value
3. DRC method - calculating the cost of replacing the property with a similar one and then deducting the amount of depreciation that has occurred
115
Is the cost approach a market valuation?
No, it does not consider the market value of the property
116
How might onerous lease terms (e.g. restrictive user, break clause) impact upon capital or rental value?
e.g. restrictive user clause that limits the permitted use of the property may reduce the market demand for the property, and in turn decrease rental and capital value
e.g. tenant break option also reduces the value of the property due to certainty of income
117
What liabilities may be created through valuation?
1. Professional negligence
2. Tax liability
3. Lender liability
4. Environmental liability
118
How can an NIY of zero be achieved?
If the rent received equals the property's initial value which means that the property is being sold for the same price that it is generating in rent.
119
In a scenario where rents are static and the capital value increases, would you expect yields to increase or decrease?
The yield would decrease because the yield is the inverse of the price, so as the capital value increases, the yield decreases.
The static rental income means that the income return remains the same, while the increase in capital value reduces the percentage return of the investment.
120
What does heterogenous mean in terms of comparable evidence?
No two properties are the same
Heterogenous refers to the fact that properties being compared have different characteristics that may affect their value despite having similarities
121
What does the term 'tone of value' mean to you?
The overall impression or direction of the value conclusion provided in the valuation report.
It is the qualitative description of the value estimate, which considers factors such as the valuer's level of confidence, reliability and completeness of data, and any limitations associated with the valuation.
