Valuation Methods Flashcards
Importance of accurate and up-to-date market knowledge and timing
Understand the importance of accurate and up-to-date market knowledge and timing when finding comparables and consider what makes a good comparable
Comparative Method of Valuation - Methodology steps
- Search and select comparables
- Confirm/verity details and analyse headline rent to give a net effective rent as appropriate
- Assemble comparables in schedule
- Adjust comparables using the hierarchy of evidence
- Analyse comparables to form opinion of value
- Report value and prepare file note
RICS Professional Standard ‘Comparable Evidence in Real Estate Valuation’
This document outlines principles in the use of comparable evidence. It provides advice in dealing with situations where there is limited availability of evidence and sets out a non-prescriptive hierarchy of evidence, noting that the valuer should use professional judgement to assess the relative importance of evidence on a case-by-case basis
1st edition, 2019
Hierarchy of evidence - Category A
Category A - direct comparables of contemporary:
- completed transactions of near-identical properties for which full and accurate information is available
- 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, and
- asking prices (only with careful analysis)
Hierarchy of evidence - Category B
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 (e.g. indices)
- historic evidence
- demand/supply data for rent, owner-occupation or investment
Hierarchy of evidence - Category C
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)
How to find relevant comparables
Inspection of an area to find recent market activity by seeking agents’ boards
Visit/speak to local agents
Auction results (beware that these are gross prices)
In-house records/databases and websites, such as Egi and Focus.
Care needs to be taken when using auction comparables as there may be a special purchaser or an insolvency sale. The sale price is gross of costs.
Market sentiment can be important when there is a lack of transactional evidence
The date of the evidence is crucial, hence the focus on ‘contemporary’ in the hierarchy above
Investment Method of Valuation
Used when there is an income stream to value
The rental income is capitalised to produce a capital value
Conventional method assumes growth implicit valuation approach
An implied growth rate is derived from the market capitalisation rate (yield)
The conventional investment method
Rent received, or Market Rent multiplied by the years purchase to calculate the Market Value
Importance of comparables for rent and yield
Term and reversion method
Used for reversionary investments (Market Rent more that passing rent), i.e. when under-rented
Term capitalised until next review/lease expiry at an initial yield
Reversion to Market Rent valued in perpetuity at a reversionary yield
Layer/hardcore method
Used for over rented investments (Passing rent more than Market Rent)
Income flow divided horizontally
Bottom slice = Market Rent
Top slice = Rent passing less Market Rent until next
Higher yield applied to top slice to reflect additional risk
Different yields used depending on comparable investment evidence and relative risk.
