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CRE APC 2024 > Valuation Module 3 > Flashcards

Valuation Module 3 Flashcards

1
Q

What would you do if you could not find any evidence when creating an ARY?

A

Construct it by:
Take risk-free rate (gilt)
Add risk premium
Deduct growth

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2
Q

How is rental and capital growth accounted for in a conventional investment valuation?

A

Implicitly in the ARY.

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3
Q

What is reversionary investment?

A

Let at a rent rent other than market rent, normally under rented.

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4
Q

What techniques can be used to value an under-rented reversionary investment?

A

Term & reversion (block income)
Hard-core (layer)

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5
Q

Explain the process of the term and reversion technique for under rented properties?

A

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

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6
Q

Explain the process of hard-core technique for under rented property?

A

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.

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7
Q

How do you value an over rented property?

A

Use block income
or core income.

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8
Q

How does block income work for an over rented property?

A

Capitalise the passing rent to review.
Capitalise market rent into perpetuity.
Defer for period until review at a higher rate for the term.

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9
Q

How does core investment method work for over rated properties?

A

Capitalise market rent into perpetuity.
Capitalise overage (froth) to reversion at a higher rate to reflect risk.

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10
Q

What is an initial yield?

A

Market rent is expressed as a percentage of the purchase price.

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11
Q

What is the equivalent yield?

A

The weighted average of the initial yield and reversionary yield. Also known as the IRR (discounting growth).

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12
Q

What is an equated yield?

A

The weighted average of the initial yield and reversionary yield. Also known as the IRR including growth.

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13
Q

What is true equivalent yield?

A

The yield accounting for rent is received quarterly in advance?

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14
Q

What is top slice?

A
  1. Additional rent expected at review in an under rented property.
  2. It is the overage/froth if the property is over rented.
  3. Leasehold profit rent.
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15
Q

How is the top slice valued?

A

At a higher yield reflecting the increased rent.

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16
Q

How would you value a leasehold interest/ascertain if a premium can be charged for an assignment of a lease?

A

Capitalise the profit rent.
1. YP dual rate
2. YP dual rate tax adjusted
3. YP single rate

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17
Q

What are the names of the two yields in the YP Dual Rate?

A

Renumeration rate (return on capital).

Accumulated rate (risk-free interest on sinking fund 2.25% Sportelli.

Earl Cadogan v Sportelli [2007]

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18
Q

What effect does rent received quarterly in advance have on the yield?

A

It increases the nominal yield.

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19
Q

What is the fundamental difference between conventional investment valuation techniques and discounted cash flow techniques?

A

In conventional methods, growth is implicit.
In DCF, it’s explicit.

20
Q

How would you arrive at a discount rate when carrying out a discounted cash flow?

A

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.

21
Q

What is a risk free rate?

A

The yield from UK government stock (gilt).

22
Q

What is risk premium?

A

It’s the additional return over and above gilts accounting for market and property specific risks.

23
Q

Why do property investors require a risk premium?

A

Because investing in property has a higher risk than investing in bonds.

24
Q

What is RICS Professional Statement?

A

Mandatory requirements for RICS members and RICS regulated firms.

25
Q

What is RICS guidance note?

A

Provides users with recommendations or an approach for accepted good practice as followed by competent and conscientious practitioners. Not mandatory.

26
Q

What is RICS Practice Information?

A

Information to support the practice, knowledge, and performance of RICS members and RICS related firms. It’s not mandatory.

27
Q

What are investment opportunities qualities (risk and difficulties)?

A
  1. Capital security
  2. Income security
  3. Management
  4. Liquidity
  5. Transfer costs
  6. Divisibility
28
Q

What is a running yield?

A

The present income expressed as a percentage of the market value.

29
Q

What do you need to know to calculate an equivalent yield?

A

The passing rent
The market value
The WAULT to break
The purchase price

30
Q

How would you ascertain if a premium can be charged for the assignment of a lease?

A

By capitalising the profit rent.

31
Q

How do you capitalise the profit rent?

A

Using the YP dual rate, YP dual rate adjusted for tax or YP single rate.

32
Q

What is the remunerative rate in YP dual rate?

A

It’s 1% to 2% above the freehold market rent that profit rent is the top slice, inconvenience, transfer issues, and dilaps issues.

33
Q

What is the accumulative rate in YP dual rate?

A

It’s the interest rate paid on the sinking fund element used to replace the capital outlay. It can be adjusted for tax.

34
Q

What agency type is used in the UK?

A

South East - multiple
North - sole

35
Q

What is BICS?

A

Building Cost Information Service owned by RICS. It’s a building cost database.

36
Q

What is a reversionary yield?

A

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.

37
Q
  1. What is an equivalent yield?
A

The weighted average of the initial yield and reversionary yield. Also known as the IRR (DISCOUNTING growth).

38
Q
  1. What is an equated yield?
A
  1. What is an equated yield?
    The weighted average of the initial yield and reversionary yield. Also known as the IRR INCLUDING growth.
39
Q
A
40
Q

5 methods of valuation

A

Comparable
Investment
Residual/Development Appraisal
Profits

41
Q

Red Book exemptions

A

Litigation
Arbitration
Negotiations
Internal Valuations
Agency or brokerage works

42
Q

Purpose of the Red book

A

Consistency
Objectivity
Transparency

43
Q

Valuation uses

A

Loan security
Ratings
Tax
L&T functions
Accounts
Corporate Real Estate

44
Q

7 principles of GDPR

A
  1. Lawfulness, fairness & transparency
  2. Purpose limitation
  3. Data minisation
  4. Accuracy
  5. Storage limitation
  6. Integrity & confidentiality
  7. Accountability
45
Q

7 principles of GDPR

A
  1. Lawfulness, fairness & transparency
  2. Purpose limitation
  3. Data minisation
  4. Accuracy
  5. Storage limitation
  6. Integrity & confidentiality
  7. Accountability

CRE APC 2024 (11 decks)

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