Valuation Methods

Question 1

What are the 5 methods of valuation?

Answer 1

1. Investment
2. Comparable
3. Residual
4. Profits
5. DRC

Question 2

What is the principle of a DRC valuation and when would you use it?

Answer 2

Based on the principle that someone wouldn’t pay more for a property than what it would cost to build an equivalent. It is a method of last resort and is used for properties where there is no market. e.g. Toilet blocks

Question 3

What are the steps to a DRC valuation?

Answer 3

1. Calculate construction costs for building modern equivalent.
2. Make an allowance for depreciation based on the remaining useful economic life of the building.
3. Add the value of an equivalent parcel of land in a similar location.

Question 4

When would you use the Profits method?

Answer 4

Trade related property where the value of the property is directly linked to the profit generated by the business. i.e. golf club, hotel.

Question 5

What do you require to undertake a profits valuation?

Answer 5

3 years of audited accounts or if a new business use business plan and estimates.

Question 6

What is EBITDA?

Answer 6

Earnings before interest, tax, depreciation and amortisation).

Question 7

How would you undertake a profits valuation?

Answer 7

1. Obtain 3 years of audited accounts.
2. Calculate Fair Maintainable Trade
3. Deduct costs and expenses to ascertain the Fair Maintainable Operating Profit for a reasonably efficient operator
4. Capitalise in perpetuity at appropriate market yield
5. Verify with comparable transactions (if available)

Question 8

What is Fair Maintainable Turnover?

Answer 8

The level of trade a reasonably efficient operator would be expected to achieve on the assumption that the property is well equipped, repaired, maintained and decorated.

Question 9

What is Fair Maintainable Operating Profit?

Answer 9

The level of profit before depreciation and finance costs of the asset itself that a REO would be expected to achieve from the Fair Maintainable Turnover.

Should reflect all costs and outgoings, including an annual allowance for decoration, refurbishment and renewal of trade inventory.

Question 10

What is Zoning?

Answer 10

It is a unit of measurement and a valuation technique used for ground floor retail areas

Question 11

What are the principles of Zoning?

Answer 11

It is based on the principle that the frontage area is the most valuable of a shop and the deeper you go into the shop is less valuable.

Question 12

How would you zone a shop?

Answer 12

I would assume zones are 6.1m deep from the shop front and the halve back the areas of each zone. e.g. 60m, 30m and then 15m.

Question 13

How are basement and upper floors usually treated in retail properties?

Answer 13

I would apply a standard rate per square foot or adjust the measurements to 10% of Zone A, depending on comparable evidence.

Question 14

What is a return frontage on a shop?

Answer 14

Where a shop is located on a corner and has glazing on all or part of the side elevation.

Question 15

What are the benefits of a return frontage?

Answer 15

1. Adds prominence to the shop
2. Tenants opportunity to attract more customers
3. Tenants can see more inside the shop.

Question 16

How would you deal with a return frontage on retail property?

Answer 16

I would add a percentage increase to the the zone based on the quality of the return frontage and the comparable evidence. Typically somewhere between 2.5% - 10%.

1. Does it face on to a busy street / other retails shops?
2. Does it benefit from a secondary entrance?
3. Does it make the shop more prominent?

Question 17

What is mirror zoning?

Answer 17

Used where the frontage has an irregular shape or is not in line with other shops.

Valuers should adopt mirror zoning where the hypothetical zones / measurements should replicate that of Zone A, so that both the left and right hand side measures back 6.1m.

Question 18

How would you value an over rented property?

Answer 18

I would use the Hardcore and Topslice technique

Question 19

Talk me through a Hardcore and Topslice technique?

Answer 19

1. Establish the market rent for the property by comparable analysis
2. Establish the passing rent by reviewing the lease.
3. Split the income horizontally, so the the bottom portion (hardcore) becomes the market rent and the top portion (top slice) becomes the over rented element.
4. I would capitalise the hardcore into perpetuity using a market yield and then capitalise the top slice to the next lease event or lease expiry at a higher yield to reflect the additional risk.
5. Add both together.

Question 20

What is the difference between a residual valuation and a development appraisal?

Answer 20

A residual valuation assesses the market value of the land and a development appraisal assesses viability for development.

1. Residual valuation - GDV less costs and profit margin = Land Value
2. Development Appraisal - GDV less costs = Developers profit

Question 21

What are the inputs in a residual valuation?

Answer 21

1. Calculate GDV
2. Establish construction costs
3. Professional fees
4. Letting / Sale fees
5. Contingency
6. Finance Costs
7. Developers profit
   10 Add all costs up and the deduct from GDV = Residual value

Question 22

What is a DCF used for?

Answer 22

Where the investor has a target rate of return

Question 23

How would you layout a DCF table?

Answer 23

.

Question 24

How would you value a long leasehold interest?

Answer 24

1. Ascertain passing rent
2. Ascertain market rent
3. Adjust freehold yields by circa 2% to reflect the fact a leasehold interest is a wasting asset
4. Capitalise profit rent to next lease event at market yield