Valuation Methods and Techniques Flashcards
What are the five methods of valuation?
- Comparable Method
- Investment Method
- Profits Method
- Depreciated Replacement Cost (DRC) Method
- Residual Method
What steps would you take when using the comparable method of valuaton?
- Search and select comparables
- Verify the details
- Assemble into a schedule
- Adjust using the hierarchy of evidence
- Analyse HR to NER
- Report value and prepare file note
What do you know about the hierarchy of evidence?
- Open Market Letting
- Lease Renewal
- Rent Review
- 3rd Party Determination
- Sale and Leaseback
- Inter-company Transactions
How would you go about finding comparables?
Speak to agents Look for agents boards Internal databases External databases - CoStar, Egi Auction Results - BE CAREFUL
Why do you have to be careful when using auction results as comparables?
They are gross prices
Be careful of special purchasers / insolvency sales
What makes a good comparable?
One with similar characteristics
What is crucial consideration in a volatile market?
Date of the transaction
What is important at the moment when valuing retail assets?
Market sentiment and up to date market knowledge to accompany comparable evidence
Is there any RICS information that you know of relating to the comparable method of valuation?
Yes
RICS Guidance Note: Comparable evidence in real estate valuation (2019)
What is the profits method of valuation used for?
Trade Related Property / where there is a ‘monopoly’ position
e.g. pubs, hotels, petrol stations, nurseries, healthcare
Why is the profits method of valuation used for trade related property?
Because the value depends on the profit generated from the business rather than the property itself
Think pub owner selling to pub owner
What do you need to undertake a valuation using the profits method?
3 years of accurate audited accounts
When undertaking a valuation using the profits method of valuation, do you need to adjust the accounts for anything?
Yes any exceptional items and also maturity of the business
How would you value a trade related property if it was a new business?
Use estimate accounts / business plan
Talk me through the process of undertaking a valuation using the profits method.
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
When would you use the Depreciated Replacement cost method of valuation?
Where evidence is limited / unavailable for specialist property for example churches, sewage works, lighthouses, schools
What is the DRC used for?
Owner occupied property, accounts / rating valuation of specialist property
Is DRC Red Book?
NO, because it is not used for selling a property therefore not calculating MV
Can the DRC method be used for secured lending purposes?
No
What can the DRC method be used for?
MV of specialist properties only for valuations for financial statements
How would you undertake a DRC valuation?
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
What different types of obsolescence should you factor in when undertaking a DRC valuation?
Physical, functional and economic
What is physical obsolescence?
Wear and tear over the years
What is functional obsolescence?
Design / Spec no longer fulfils the function of what it was originally designed for
What is economic obsolescence?
Changing market conditions for the use of the asset
When undertaking a DRC valuation in the private sector, what should be included?
Include that it is subject to adequate profitability & viability of the business, paying due regard to the value of the total assets employed
When undertaking a DRC valuation in the public sector, what should be included?
Include that it is subject to the prospect and viability of the continued occupation and use
Is there any RICS guidance relating to DRC?
Yes, the RICS Guidance Note on Depreciated Replacement Cost Method of Valuation for Financial Reporting (2018)
How would you undertake a residual valuation?
Site Value = GDV - costs - developers profit
Using market inputs
What are the two types of investment method of valuation?
Conventional and DCF
What is the conventional method of valuation?
Rent capitalised at a yield
The yield in growth implicit
MV = Rent / Yield less PCs
What is a DCF?
Forecast future income and expenditure including a rental growth rate and exit yield and discount the cash flow at a required rate of return
What is the Term and Reversion method of valuation?
Draw it out
Term capitalised at an IY and reversion to MR valued into perp at RY
For what type of property would the term and reversion method be used?
Reversionary property
How would you value a reversionary property?
I would use an equivalent yield
Why would you use an equivalent yield and not the term and reversion method?
Because the term and reversion method does not factor in all the other risks associated with property - void, rent free, costs etc.
When would you use the layer and hardcore approach to valuation?
When valuing an over-rented property
What is the layer and hardcore method of valuation?
Value the bottom slice (MR) into perpetuity and the top slice at a higher yield to reflect the additional risk
What is a yield a measure of?
Return on investment
Can assumptions which are made explicit in a DCF be wrapped up in a yield?
YES - yields are growth implicit and often many assumptions made explicit in a DCF approach are reflected in the yield
What is years purchase and how would you calculate it?
It is the number of years for the income to repay the purchase price
YP = 1/yield i.e. 1/5% = 20
What is an all risks yield?
All risk factors of the investment are implicitly wrapped up in the yield
What is a true yield?
Rent paid quarterly in advance
What is a nominal yield?
Rent paid annually in arrears
Why do we use a nominal yield?
Market norm
What is a gross yield?
A yield which has not been adjusted for purchasers costs
What is a net yield?
yield adjusted for purchasers costs
What is an equivalent yield?
Average weighted yield using the initial and the reversionary yield - weighted by time
What is an initial yield?
Current Rent / Current Price
What is a reversionary yield?
MR / Current Price
What is a running yield?
The yield at any moment in time
Why are different yields applied to different property?
To reflect different risk
What factors influence risk and therefore the yield?
Location, tenant covenant, length of lease, specification, condition, tenure, use, lease terms, rental and capital growth prospects
Why is there a yield gap between prime and secondary yields?
To reflect additional risk
