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Core Competencies > Valuation Methods and Techniques > Flashcards

Valuation Methods and Techniques Flashcards

1
Q

What are the five methods of valuation?

A
  1. Comparable Method
  2. Investment Method
  3. Profits Method
  4. Depreciated Replacement Cost (DRC) Method
  5. Residual Method
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2
Q

What steps would you take when using the comparable method of valuaton?

A
  1. Search and select comparables
  2. Verify the details
  3. Assemble into a schedule
  4. Adjust using the hierarchy of evidence
  5. Analyse HR to NER
  6. Report value and prepare file note
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3
Q

What do you know about the hierarchy of evidence?

A
  1. Open Market Letting
  2. Lease Renewal
  3. Rent Review
  4. 3rd Party Determination
  5. Sale and Leaseback
  6. Inter-company Transactions
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4
Q

How would you go about finding comparables?

A 
Speak to agents
Look for agents boards
Internal databases
External databases - CoStar, Egi
Auction Results - BE CAREFUL
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5
Q

Why do you have to be careful when using auction results as comparables?

A

They are gross prices

Be careful of special purchasers / insolvency sales

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6
Q

What makes a good comparable?

A

One with similar characteristics

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7
Q

What is crucial consideration in a volatile market?

A

Date of the transaction

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8
Q

What is important at the moment when valuing retail assets?

A

Market sentiment and up to date market knowledge to accompany comparable evidence

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9
Q

Is there any RICS information that you know of relating to the comparable method of valuation?

A

Yes

RICS Guidance Note: Comparable evidence in real estate valuation (2019)

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10
Q

What is the profits method of valuation used for?

A

Trade Related Property / where there is a ‘monopoly’ position
e.g. pubs, hotels, petrol stations, nurseries, healthcare

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11
Q

Why is the profits method of valuation used for trade related property?

A

Because the value depends on the profit generated from the business rather than the property itself
Think pub owner selling to pub owner

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12
Q

What do you need to undertake a valuation using the profits method?

A

3 years of accurate audited accounts

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13
Q

When undertaking a valuation using the profits method of valuation, do you need to adjust the accounts for anything?

A

Yes any exceptional items and also maturity of the business

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14
Q

How would you value a trade related property if it was a new business?

A

Use estimate accounts / business plan

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15
Q

Talk me through the process of undertaking a valuation using the profits method.

A 
Annual Turnover 
Less Costs / Purchases 
= GROSS PROFIT 
Less Reasonable working expenses
= Unadjusted net profit 
Less Operator's remuneration
= Adjusted Net Profit (EBITDA)
CAPITALISED AT A YIELD  
Cross check with comparable sales evidence if possible
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16
Q

When would you use the Depreciated Replacement cost method of valuation?

A

Where evidence is limited / unavailable for specialist property for example churches, sewage works, lighthouses, schools

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17
Q

What is the DRC used for?

A

Owner occupied property, accounts / rating valuation of specialist property

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18
Q

Is DRC Red Book?

A

NO, because it is not used for selling a property therefore not calculating MV

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19
Q

Can the DRC method be used for secured lending purposes?

A

No

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20
Q

What can the DRC method be used for?

A

MV of specialist properties only for valuations for financial statements

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21
Q

How would you undertake a DRC valuation?

A

Value of the site with planning consent for existing use
Plus current cost to replace the building (incl. fees)
Less a discount for depreciation, obsolescence / deterioration

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22
Q

What different types of obsolescence should you factor in when undertaking a DRC valuation?

A

Physical, functional and economic

23
Q

What is physical obsolescence?

A

Wear and tear over the years

24
Q

What is functional obsolescence?

A

Design / Spec no longer fulfils the function of what it was originally designed for

25
Q

What is economic obsolescence?

A

Changing market conditions for the use of the asset

26
Q

When undertaking a DRC valuation in the private sector, what should be included?

A

Include that it is subject to adequate profitability & viability of the business, paying due regard to the value of the total assets employed

27
Q

When undertaking a DRC valuation in the public sector, what should be included?

A

Include that it is subject to the prospect and viability of the continued occupation and use

28
Q

Is there any RICS guidance relating to DRC?

A

Yes, the RICS Guidance Note on Depreciated Replacement Cost Method of Valuation for Financial Reporting (2018)

29
Q

How would you undertake a residual valuation?

A

Site Value = GDV - costs - developers profit

Using market inputs

30
Q

What are the two types of investment method of valuation?

A

Conventional and DCF

31
Q

What is the conventional method of valuation?

A

Rent capitalised at a yield
The yield in growth implicit
MV = Rent / Yield less PCs

32
Q

What is a DCF?

A

Forecast future income and expenditure including a rental growth rate and exit yield and discount the cash flow at a required rate of return

33
Q

What is the Term and Reversion method of valuation?

A

Draw it out

Term capitalised at an IY and reversion to MR valued into perp at RY

34
Q

For what type of property would the term and reversion method be used?

A

Reversionary property

35
Q

How would you value a reversionary property?

A

I would use an equivalent yield

36
Q

Why would you use an equivalent yield and not the term and reversion method?

A

Because the term and reversion method does not factor in all the other risks associated with property - void, rent free, costs etc.

37
Q

When would you use the layer and hardcore approach to valuation?

A

When valuing an over-rented property

38
Q

What is the layer and hardcore method of valuation?

A

Value the bottom slice (MR) into perpetuity and the top slice at a higher yield to reflect the additional risk

39
Q

What is a yield a measure of?

A

Return on investment

40
Q

Can assumptions which are made explicit in a DCF be wrapped up in a yield?

A

YES - yields are growth implicit and often many assumptions made explicit in a DCF approach are reflected in the yield

41
Q

What is years purchase and how would you calculate it?

A

It is the number of years for the income to repay the purchase price
YP = 1/yield i.e. 1/5% = 20

42
Q

What is an all risks yield?

A

All risk factors of the investment are implicitly wrapped up in the yield

43
Q

What is a true yield?

A

Rent paid quarterly in advance

44
Q

What is a nominal yield?

A

Rent paid annually in arrears

45
Q

Why do we use a nominal yield?

A

Market norm

46
Q

What is a gross yield?

A

A yield which has not been adjusted for purchasers costs

47
Q

What is a net yield?

A

yield adjusted for purchasers costs

48
Q

What is an equivalent yield?

A

Average weighted yield using the initial and the reversionary yield - weighted by time

49
Q

What is an initial yield?

A

Current Rent / Current Price

50
Q

What is a reversionary yield?

A

MR / Current Price

51
Q

What is a running yield?

A

The yield at any moment in time

52
Q

Why are different yields applied to different property?

A

To reflect different risk

53
Q

What factors influence risk and therefore the yield?

A

Location, tenant covenant, length of lease, specification, condition, tenure, use, lease terms, rental and capital growth prospects

54
Q

Why is there a yield gap between prime and secondary yields?

A

To reflect additional risk

Core Competencies (5 decks)

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