Valuation Module 2 Flashcards
Name the conventional methods of valuation?
- Direct comparison
- Investment
- Residual
- Profit (accounts)
- Cost (DRC (Depreciated replacement cost))
What are contemporary valuation methods?
- Market
- Income
- Cost
What makes a property transaction comparable to the property being valued?
Similarities in physical, location, time, use and tenure.
How many comparables are needed to produce a valuation?
Enough to establish a clear tone of valuation.
What is the longest time period before a valuation date that a transaction could be accepted as comparable?
Depends on the property, location, and market (static 6m ok but not in a rapidly changing market).
What do you understand by the expression weighting of comparable evidence?
Attaching the most weight to the greatest similarities.
What is the hierarchy of evidence?
Ranking transactions by transactions type, starting with open market, then lease renewal, then rent review, then expert witness and finally arbitration.
What is interpolation?
Valuing between known points. Value up from bottom and down from top. Statistically preferable.
What is extrapolation?
Working outside of known points. Considered statistically dangerous. Limitations must be disclosed. E.g after covid the known points were thrown up in the air.
What is the purpose of zoning?
To analyse and value retail units with different frontage to depth ratios, ie. the shapes differ.
What is the standard zone depth?
6.1m. Scotland 9.14m.
How would you arrive at the market rent for the first floor of a retail unit?
Depends on its use.
Retail: zoneA/10
Other: Comparison sales method
How would you arrive at the market rent of a retail unit with a return frontage?
Uplift the zone rate where the frontage exists.
How would you value a through unit (frontage at both ends)?
Zone back from both frontages.
How would you determine the market value of an investment property let on IRI terms?
Work out net income by deducting repairing, insurance, and management cost, then capitalise this, using appropriate yield.
How do you calculate the ARY?
Income/capital value as a percentage.
What factors make up the ARY?
ARY implicitly factors all known risks associated with:
1. Property (condition, ESG, flexibility, maintenance etc).
2. Market
3. Tenant
4. Rent
5. Wault
6. Lease terms
7. Rental growth
What is the market capitalisation rate?
ARY All risks yield
How would you value a green field site with planning permission for residential?
Use a residual valuation method.
How do you carry out a residual valuation?
Calculate the sales value.
Deduct the development costs.
Deduct the developer profits.
Giving the site value.
What costs do you deduct in a residual valuation.
- Site clearance
- Construction
- Professional fees
- Finance
- Contingency
- Disposal
- Acquisition
How do you calculate developers’ profit in a residual valuation?
- As a percentage of gross development value
Or - As a percentage of total costs
What is the preferred rate of developers profit.
Varies with risk appetite. I understand that 15% of GDV or 20% of GDC is the mid point.
What are the usual acquisition costs of a development site?
Agency, legal +non recoverable VAT and SDLT.
What is SDLT
Stamp duty land tax
0% to £150k
2% £150-250k
5% £250k +
What is a ransom strip?
A piece of land that is used to access development land.
What is ransom value?
The value of a ransom strip?
How do you value a ransom strip?
As a percentage of development lands uplift in value once access is secured. Normally 1/3 following Stokes v Cambridge.
What is Stokes v Cambridge?
Leading case for ransom strip. Compulsory purchase case determined by Land tribunal, 1/3 of increase in development value.
What is the Profits method known as?
Accounts method
Which properties are valued by the profits method?
Leisure properties, where you can’t separate their use from their value?
How does the Profits method work?
I wouldn’t do one as im not experienced. But a valuer would:
Estimate the gross turnover.
Deduct cost of the turnover.
Giving you the net operating profit which is capitalised.
What valuation checks can be carried out on a valuation produced by the profits method?
By comparing the base value, such as price per bed, per table, etc.
When is the contactors method used in practice?
As a last resort when no other method can be used.
What is another name for the Contractors method?
Depreciated replacement cost method.
Explain how the DRC method works?
Calculate the gross replacement cost (modern substitution).
Deduct depreciation.
This gives you the net replacement cost
Add the site value from comparables.
What is included in the Reinstatement Costs Assessment?
It is for insurance purposes and includes demolition and site clearance, weather proofing, shoring boundary walls, rebuilding, and professional fees.
How would you value a property where there are no comparables?
I would look for a similar property and make the appropriate adjustments, declaring the high level of uncertainty.
What is market value?
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and willing seller in an arms length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
What is market rent?
The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arms length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
What is the importance of Bruxelles Lambert SA v John D Wood Commercial Ltd 1994 case?
The sale price is the most cogent evidence of open market value.
What is the importance of CIL Securities Ltd v Brisnt Champion Long 1993
The valuer was negligent as they failed to analyze sufficient transactions to correctly understand the tone.
What is the importance of GREA Real Property Investments Ltd v Williams 1979?
Greater adjustment to the valuation affords greater uncertainty.
What is YP single rate?
Years’ purchase single rate is the present value of a series of years up to and including that year. It calculates how many years it will take to make a desired return on investment.
What is PV of £1?
It’s the current worth of receiving £1 each year in the future, discounted back to the present at a specified rate of interest.
What are the three principal sources of investment?
Gilt, equity and property.
What is a bond investment?
Fixed capital, fixed return, fixed life, and at the end, we get back the capital invested.
What is the major attraction of property as an investment?
Through proactive management, you can improve performance.
What are the disadvantages of property as an investment?
- Illiquid
- Not easily divisible
- Need to manage actively investment
- High transfer costs
How did ARY get its name?
It includes all risks of an investment.
What is another name for All Risk Yield?
The market capitalisation rate
What is the gross yield?
It’s the rent as a percentage of the purchase price.
What is a net yield?
It’s the rent as a percentage of the gross cost of acquisition.
Name the costs that a purchaser must incur when acquiring a property investment?
- SDLT
- Agency
- Legal
- Non-recoverable VAT on professional fees
Quantify purchasers cost in percentage terms.
Professional fees 1.8%
Agent fee 1%
Legal 0.5%
Vat on fees 0.3%
