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CRE APC 2024 > Valuation Module 2 > Flashcards

Valuation Module 2 Flashcards

1
Q

Name the conventional methods of valuation?

A
  1. Direct comparison
  2. Investment
  3. Residual
  4. Profit (accounts)
  5. Cost (DRC (Depreciated replacement cost))
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2
Q

What are contemporary valuation methods?

A
  1. Market
  2. Income
  3. Cost
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3
Q

What makes a property transaction comparable to the property being valued?

A

Similarities in physical, location, time, use and tenure.

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4
Q

How many comparables are needed to produce a valuation?

A

Enough to establish a clear tone of valuation.

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5
Q

What is the longest time period before a valuation date that a transaction could be accepted as comparable?

A

Depends on the property, location, and market (static 6m ok but not in a rapidly changing market).

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6
Q

What do you understand by the expression weighting of comparable evidence?

A

Attaching the most weight to the greatest similarities.

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7
Q

What is the hierarchy of evidence?

A

Ranking transactions by transactions type, starting with open market, then lease renewal, then rent review, then expert witness and finally arbitration.

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8
Q

What is interpolation?

A

Valuing between known points. Value up from bottom and down from top. Statistically preferable.

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9
Q

What is extrapolation?

A

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.

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10
Q

What is the purpose of zoning?

A

To analyse and value retail units with different frontage to depth ratios, ie. the shapes differ.

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11
Q

What is the standard zone depth?

A

6.1m. Scotland 9.14m.

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12
Q

How would you arrive at the market rent for the first floor of a retail unit?

A

Depends on its use.
Retail: zoneA/10
Other: Comparison sales method

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13
Q

How would you arrive at the market rent of a retail unit with a return frontage?

A

Uplift the zone rate where the frontage exists.

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14
Q

How would you value a through unit (frontage at both ends)?

A

Zone back from both frontages.

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15
Q

How would you determine the market value of an investment property let on IRI terms?

A

Work out net income by deducting repairing, insurance, and management cost, then capitalise this, using appropriate yield.

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16
Q

How do you calculate the ARY?

A

Income/capital value as a percentage.

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17
Q

What factors make up the ARY?

A

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

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18
Q

What is the market capitalisation rate?

A

ARY All risks yield

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19
Q

How would you value a green field site with planning permission for residential?

A

Use a residual valuation method.

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20
Q

How do you carry out a residual valuation?

A

Calculate the sales value.
Deduct the development costs.
Deduct the developer profits.
Giving the site value.

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21
Q

What costs do you deduct in a residual valuation.

A
  1. Site clearance
  2. Construction
  3. Professional fees
  4. Finance
  5. Contingency
  6. Disposal
  7. Acquisition
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22
Q

How do you calculate developers’ profit in a residual valuation?

A
  1. As a percentage of gross development value
    Or
  2. As a percentage of total costs
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23
Q

What is the preferred rate of developers profit.

A

Varies with risk appetite. I understand that 15% of GDV or 20% of GDC is the mid point.

24
Q

What are the usual acquisition costs of a development site?

A

Agency, legal +non recoverable VAT and SDLT.

25
Q

What is SDLT

A

Stamp duty land tax
0% to £150k
2% £150-250k
5% £250k +

26
Q

What is a ransom strip?

A

A piece of land that is used to access development land.

27
Q

What is ransom value?

A

The value of a ransom strip?

28
Q

How do you value a ransom strip?

A

As a percentage of development lands uplift in value once access is secured. Normally 1/3 following Stokes v Cambridge.

29
Q

What is Stokes v Cambridge?

A

Leading case for ransom strip. Compulsory purchase case determined by Land tribunal, 1/3 of increase in development value.

30
Q

What is the Profits method known as?

A

Accounts method

31
Q

Which properties are valued by the profits method?

A

Leisure properties, where you can’t separate their use from their value?

32
Q

How does the Profits method work?

A

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.

33
Q

What valuation checks can be carried out on a valuation produced by the profits method?

A

By comparing the base value, such as price per bed, per table, etc.

34
Q

When is the contactors method used in practice?

A

As a last resort when no other method can be used.

35
Q

What is another name for the Contractors method?

A

Depreciated replacement cost method.

36
Q

Explain how the DRC method works?

A

Calculate the gross replacement cost (modern substitution).
Deduct depreciation.
This gives you the net replacement cost
Add the site value from comparables.

37
Q

What is included in the Reinstatement Costs Assessment?

A

It is for insurance purposes and includes demolition and site clearance, weather proofing, shoring boundary walls, rebuilding, and professional fees.

38
Q

How would you value a property where there are no comparables?

A

I would look for a similar property and make the appropriate adjustments, declaring the high level of uncertainty.

39
Q

What is market value?

A

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.

40
Q

What is market rent?

A

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.

41
Q

What is the importance of Bruxelles Lambert SA v John D Wood Commercial Ltd 1994 case?

A

The sale price is the most cogent evidence of open market value.

42
Q

What is the importance of CIL Securities Ltd v Brisnt Champion Long 1993

A

The valuer was negligent as they failed to analyze sufficient transactions to correctly understand the tone.

43
Q

What is the importance of GREA Real Property Investments Ltd v Williams 1979?

A

Greater adjustment to the valuation affords greater uncertainty.

44
Q

What is YP single rate?

A

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.

45
Q

What is PV of £1?

A

It’s the current worth of receiving £1 each year in the future, discounted back to the present at a specified rate of interest.

46
Q

What are the three principal sources of investment?

A

Gilt, equity and property.

47
Q

What is a bond investment?

A

Fixed capital, fixed return, fixed life, and at the end, we get back the capital invested.

48
Q

What is the major attraction of property as an investment?

A

Through proactive management, you can improve performance.

49
Q

What are the disadvantages of property as an investment?

A
  1. Illiquid
  2. Not easily divisible
  3. Need to manage actively investment
  4. High transfer costs
50
Q

How did ARY get its name?

A

It includes all risks of an investment.

51
Q

What is another name for All Risk Yield?

A

The market capitalisation rate

52
Q

What is the gross yield?

A

It’s the rent as a percentage of the purchase price.

53
Q

What is a net yield?

A

It’s the rent as a percentage of the gross cost of acquisition.

54
Q

Name the costs that a purchaser must incur when acquiring a property investment?

A
  1. SDLT
  2. Agency
  3. Legal
  4. Non-recoverable VAT on professional fees
55
Q

Quantify purchasers cost in percentage terms.

A

Professional fees 1.8%
Agent fee 1%
Legal 0.5%
Vat on fees 0.3%

CRE APC 2024 (11 decks)

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