Valuation Module 3 Flashcards
What would you do if you could not find any evidence when creating an ARY?
Construct it by:
Take risk-free rate (gilt)
Add risk premium
Deduct growth
How is rental and capital growth accounted for in a conventional investment valuation?
Implicitly in the ARY.
What is reversionary investment?
Let at a rent other than market rent, normally under rented.
What techniques can be used to value an under-rented reversionary investment?
Term & reversion (block income)
Hard-core (layer)
Explain the process of the term and reversion technique for under rented properties?
Capitalise the term to reversion.
At reversion capitalise the market rent into perpetuity.
Defer it for the term period at a higher yield to reflect risk
Explain the process of hard-core technique for under rented property?
Capitalise the passing rent into perpetuity.
Then capitalise the top slice into perpetuity.
Then, defer it for period up to reversion, at a higher rate for the top slice.
How do you value an over rented property?
Use block income
or core income.
How does block income work for an over rented property?
Capitalise the passing rent to review.
Capitalise market rent into perpetuity.
Defer for period until review at a higher rate for the term.
How does core investment method work for over rated properties?
Capitalise market rent into perpetuity.
Capitalise overage (froth) to reversion at a higher rate to reflect risk.
What is an initial yield?
Market rent is expressed as a percentage of the purchase price.
What is the equivalent yield?
The weighted average of the initial yield and reversionary yield. Also known as the IRR (discounting growth).
What is an equated yield?
The weighted average of the initial yield and reversionary yield. Also known as the IRR including growth.
What is true equivalent yield?
The yield accounting for rent is received quarterly in advance?
What is top slice?
- Additional rent expected at review in an under rented property.
- It is the overage/froth if the property is over rented.
- Leasehold profit rent.
How is the top slice valued?
At a higher yield reflecting the increased rent.
How would you value a leasehold interest/ascertain if a premium can be charged for an assignment of a lease?
Capitalise the profit rent.
1. YP dual rate
2. YP dual rate tax adjusted
3. YP single rate
What are the names of the two yields in the YP Dual Rate?
Renumeration rate (return on capital).
Accumulated rate (risk-free interest on sinking fund 2.25% Sportelli.
Earl Cadogan v Sportelli [2007]
What effect does rent received quarterly in advance have on the yield?
It increases the nominal yield.
What is the fundamental difference between conventional investment valuation techniques and discounted cash flow techniques?
In conventional methods, growth is implicit.
In DCF, it’s explicit.
How would you arrive at a discount rate when carrying out a discounted cash flow?
DCF finds the present value of money to see if returns will be higher than the investment.
Rate = Start with risk-free rate and on a risk premium.
What is a risk free rate?
The yield from UK government stock (gilt).
What is risk premium?
It’s the additional return over and above gilts accounting for market and property specific risks.
Why do property investors require a risk premium?
Because investing in property has a higher risk than investing in bonds.
What is RICS Professional Statement?
Mandatory requirements for RICS members and RICS regulated firms.
What is RICS guidance note?
Provides users with recommendations or an approach for accepted good practice as followed by competent and conscientious practitioners. Not mandatory.
What is RICS Practice Information?
Information to support the practice, knowledge, and performance of RICS members and RICS related firms. It’s not mandatory.
What are investment opportunities qualities (risk and difficulties)?
- Capital security
- Income security
- Management
- Liquidity
- Transfer costs
- Divisibility
What is a running yield?
The present income expressed as a percentage of the market value.
What do you need to know to calculate an equivalent yield?
The passing rent
The market value
The WAULT to break
The purchase price
How would you ascertain if a premium can be charged for the assignment of a lease?
By capitalising the profit rent.
How do you capitalise the profit rent?
Using the YP dual rate, YP dual rate adjusted for tax or YP single rate.
What is the remunerative rate in YP dual rate?
It’s 1% to 2% above the freehold market rent that profit rent is the top slice, inconvenience, transfer issues, and dilaps issues.
What is the accumulative rate in YP dual rate?
It’s the interest rate paid on the sinking fund element used to replace the capital outlay. It can be adjusted for tax.
What agency type is used in the UK?
South East - multiple
North - sole
What is BICS?
Building Cost Information Service owned by RICS. It’s a building cost database.
What is a reversionary yield?
Reversionary yield is a term used in the property market to describe the yield that should be achieved if the passing rent adjusts to the level of the estimated rental value.
- What is an equivalent yield?
The weighted average of the initial yield and reversionary yield. Also known as the IRR (DISCOUNTING growth).
- What is an equated yield?
- What is an equated yield?
The weighted average of the initial yield and reversionary yield. Also known as the IRR INCLUDING growth.
5 methods of valuation
Comparable
Investment
Residual/Development Appraisal
Profits
Red Book exemptions
Litigation
Arbitration
Negotiations
Internal Valuations
Agency or brokerage works
Purpose of the Red book
Consistency
Objectivity
Transparency
Valuation uses
Loan security
Ratings
Tax
L&T functions
Accounts
Corporate Real Estate
7 principles of GDPR
- Lawfulness, fairness & transparency
- Purpose limitation
- Data minisation
- Accuracy
- Storage limitation
- Integrity & confidentiality
- Accountability
7 principles of GDPR
- Lawfulness, fairness & transparency
- Purpose limitation
- Data minisation
- Accuracy
- Storage limitation
- Integrity & confidentiality
- Accountability
