Valuation - Methods Flashcards
Name the 5 conventional Methods of Valuation.
Comparable
Investment
Residual
Profits/Accounts
Depreciated Replacement Cost/Contractors
Name three situations that can adversely affect the certainty of valuations ?
When there is an unusual property (in design or location) e.g. very nice office building in middle of an undesirable estate
When there is market volatility e.g. mid-covid pandemic where there is high level of uncertainty / disrupted market
Where we have not carried out usual inspections e.g. not inspected interior of the property and not got the lease to hand
Comparable with the subject property if there are similarities in terms of:
Physical characteristics
Location
Use
Tenure (& lease terms if appropriate)
Timescale
What are contemporary valuation techniques?
Discounted Cash Flow - rose to prominence in 80s
How many comparables are needed to produce a valuation?
- As many as possible
- Enough to provide sufficient information to help establish trends
- Some prices distorted i.e when the property hasn’t been subject to proper marketing
Types of comparable evidence.
- Non-transactional evidence - market reports
- Transactional evidence
What is the longest time period before a valuation date that a transaction could be accepted as being comparable?
This is dependent on number of comparables available but essentially the time it takes for a transaction to become out of date depending on market conditions
Any comparables post lockdown – 2021 onwards
What do you understand by the expression weighting of comparable evidence?
Attaching the greatest weight to those transactions that are most similar to the subject property, for example more recent transactions and those similar in condition.
What is Hierarchy of Evidence?
Ranking evidence by transaction type
Open market lettings
Lease renewals
Rent reviews
Independent expert determination
Arbitrators awards.
What is interpolation of comparable evidence
Calculating or plotting on a graph, a value that lies between two extreme points. This is considered permissible.
What is extrapolation of comparable evidence?
Calculating or plotting on a graph, a value outside of two extreme points. This is considered dangerous.
You have a graph with a top value and a bottom value, and your value falls outside of these two points. Say you have a high street shop, and 4 different business have had to move out, and each time the rent reviews have stayed static as they are upward-only but market value has gone down.
Therefore, you’d need to extrapolate your comparable evidence, as you would need to work outside the known data. This is considered statistically dangerous.
What is Zoning?
- Zoning is used to establish the rental value of shops.
- It is a comparable technique that allows us to calculate the rental value of units that may have the same size but different to depth frontages
What is a standard Zone depth?
Typically, 6.1m (20ft) but differs in prime retail such as oxford street (9.1m).
The zones are halved back:
Zone A being X
Zone B being X/2
Zone C being X/4
Remainder being X/8
X/10 – usually used for 1st floors, basements etc.
How would you assess the market rent of a ground floor unit with a return frontage?
A percentage uplift for the depth of return (usually 5%) depending on pedestrian flow
All of the unit becomes Zone A if all frontages have the same pedestrian flow, (could have reduction for excessive Zone A)
A % reduction is made for lack of internal space for shelving and displays racks
How would assess the market rent of a ground floor with frontages on two roads (through Unit)?
In halving back from both frontages at the same or different zone A rates (different zone A rates are more likely as there is likely to be different footfall on each road).
How would you determine market value of an investment property let on internal repairing terms?
-Assuming it is let at market rent or if not use comparable method to determine to market rent
-You have to discount landlords’ liabilities (insurance and external repairs and additional mgmt fees) as known as landlord outgoings
-Use investment method to capitalise into perpetuity all the all-risk yields, determine market value
What is yield?
Rate of return
What factors make up the all risks yield?
Buildings physical characteristics
Tenants covenant strength
Market rent to see if property is under or over rented
Other lease terms - likely to be some uncertainty in net rent
Anticipated rental growth (links to location)
What is the market capitalisation rate?
- Same as all risks yield
- Point at which market capitalises the income
How would you value a green field site with planning permission for a residential development?
Value by direct capital comparison if I could and had enough comparable evidence but if not I would use residual
Describe how you have carried out (or would carry out) a Residual Valuation.
Gross Development Value – (developers costs + developers profits) = Land Value
What costs did you deduct in your residual valuation?
- Demolition/site prep
- Cost of construction (Building cost)
- Professional fees (architects, engineers etc.)
- Cost of finance
- Contingency to allow for fluctuations in these costs
- Agent and legal fees (in disposing the development)
- Acquisition costs - Fees and stamp duty land tax on acquisition when you buy the site
How did you calculate developers profit in you Residual Valuation?
Developers profit can be calculated by either a percentage of total cost (22-25%) or a percentage of Gross Development Value (15-17%) *Depends upon risk
The riskier the development, the greater the percentage
Would say ‘I used 15% because there was only a moderate risk’
What are the usual acquisition costs of a development site?
Stamp duty land tax
Acquisition agents fees
Legal fees
VAT on the agent and legal fees
1.8%= 1% lettings fees 0.5% for sols fees + 20% VAT= 1.8%
What are the stamp duty rates?
0% on the first £150K
2% on the next £100K
5% above £250K
For purchases above £250K the SDLT can be calculated from the Gross Acquisition Price net of agent and legal fees.
What is a ransom strip?
A strip of land that provides access to another piece of land. Access to the other piece of land can only be made by crossing the ransom strip.
What is Ransom Value?
The value attributable the ransom Strip.
How would you value a ransom strip?
Would be valued at a percentage of the uplift in value resulting from the owner of the land having access over the ransom strip
(Don’t mention 1/3 here unless asked - it is case specific, and 1/3 is just typical).
What does Stokes v Cambridge mean to you?
Compulsory purchase case in 1961
A case in which agricultural land was valued as an industrial piece of land as it provided access to an industrial site
It was held that the value of the ransom strip was 1/3 of the uplift in the value of the development land
Since then, 1/3 of the uplift in value for the ransom strip has been accepted as an industry stanard (there is a 1/3 - 2/3 split)
What is the profits Method also known as?
Accounts method
Name 3 property types that would be valued by the profits method?
Leisure properties: Arcade, casinos, Cinema, hotels, golf courses, theatres
Why are certain properties valued by the profits method?
When we can’t separate the property from its use - Used to value properties that’s Use/ Nature of business use adds to its value
What valuation checks can be carried out on a valuation produced by the profits method?
Unit prices per seat (e.g. cinemas)
Per Bedroom (e.g. hotels)
When is the contractors’ method used in practice?
Last resort, when no comparables, properties that do not usually change hands. Also, for company accounts, CPSEs and ratings.
What is another name for the contractors’ method?
DRC
Explain what is included in a Reinstatement/ Replacement Cost for insurance purposes?
- Ensure the building so that if it were to be damaged by fire/storm etc - need to know the cost to demolish it, rebuild it in accordance with current regulations, plus professional fees.
- Demolition
- Shoring up and weather protection of adjoining buildings
- Re-building in accordance with current building regulations
- Professional fees
How would you value a property for which there are no comparables?
DRC/Contractors
Explain the basic approach to the Profits Method.
The profits method calculates a business profit as a result of its trade at the subject property. It then uses profit to determine value
Turnover (net of VAT) less costs of generating turnover (wages, purchases, utilities etc) = Net Operating Profit (which is then capitalised).
- Explain the basic approach to the Depreciated Replacement Cost Method.
Cost of modern building less depreciation = net deprecation cost + site value = Current value
For example, you would get a football stadium, work out the cost to rebuild it now, and then take away the depreciation it has had since it was first built, to give you the DRC.
The depreciated replacement cost method provides an indication of value based on the buyer paying no more or no less than the cost to obtain the asset based on the current equivalent.
