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Ethan APC Summary of Experience Mock Questions > Valuation - Summary of Experience > Flashcards

Valuation - Summary of Experience Flashcards

1
Q

Explain the process of the term and reversion technique?

A

1) Capitalise passing rent until review(reversion) – PASSING RENT X YP for number of years to reversion
2) Take market rent to be received at reversion and then capitalise into perpetuity = market value (capitalisation = multiplying by the YP)
3) Defer this further at a PV of £1, for the period of the term
4) Reversion gets capitalised at market rented rate – term gets capitalised at a lower rate due to lower risk

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2
Q

What accounts would you review for profits valuation?

A

Profit / Loss account - Audited accounts
- Need to see turnover and net operating profit (turnover LESS expenses)

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3
Q

What could statutory due diligence include for a valuation?

A
  • Asbestos register
  • Business rates / council tax
  • Contamination
  • EPC rating
  • Flooding
  • Planning history and compliance
  • Environmental matters
  • Equality act compliance
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4
Q

What is a true yield?

A

Assumes rent is paid in advance not in arrears (traditional valuation practice assumes rent is paid in arrears) (money produced by an investment considering effect of time value of money)

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5
Q

What is a reversionary investment?

A

Investment let at a rent other than market rent

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6
Q

Where did you locate your building costs in your residual valuation of Foundry Lane?

A
  • Used the RICS building cost information service (BCIS), which is usually based on a GEA basis
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7
Q

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

A

Ranking comparables with greatest similarities so they have the most weight – Not all are as relevant and therefore have less weighting

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8
Q

How did the all risks yield get its name?

A
  • Accounts for all risks of the investment
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9
Q

How would you determine the Market Value of an investment property let on internal repairing terms?

A

Market rent (net of outgoings) X YP = Market Value

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10
Q

What is YP in perp?

A

Years Purchase into Perpetuity
- Property’s income where a stream of cashflows continue indefinitely

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11
Q

What were the building fees at Foundry Lane?

A

10% of building cost

General professional fees:
- architect
- QS
- M&E Consultant
- Building Survyor
- Project Manager

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12
Q

How is NDV calculated?

A

Deduct disposal costs from GDV

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13
Q

What yield did you select at Foundry Lane, Horsham?

A

5%. This was increased slightly due to the poor condition of the property

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14
Q

How did you gather your comparable evidence?

A

Internal database, confirmed with local agent and external database (EGI, Costar)

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15
Q

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

A
  • Stamp duty land tax (bands 0%/2%/5%)
  • Agents fees (1%)
  • Legal fees (0.5%)
  • Non-recoverable VAT on fees (0.3% or 20% of total)
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16
Q

Please name the UK-Specific Bases of Value?

A

Existing use value, Existing value for social housing

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17
Q

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

A

Term and reversion
Hardcore / layer

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18
Q

What purchasers cost did you deduct from your valuation at Foundry Lane, Horsham?

A
  • Agent fee
  • Legal fee
  • Stamp duty land tax
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19
Q

What is the key difference between the UK national supp and red book?

A

Assists with the application of global standards within a local context

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20
Q

How would you undertake the profits method?

A

1) Annual turnover LESS costs/purchases = gross profit
2) Gross profit LESS reasonable working expenses = unadjusted net profit
3) Unadjusted net profit LESS operators remuneration = ADJUSTED NET PROFIT / FAIR MAINTAINABLE OPERATING PROFIT

Can be expressed as the EBITDA
- Capitalised at appropriate yield to achieve market value
- Cross check with comparables if possible

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21
Q

Is DRC suitable for Red Book compliance?

A
  • Not suitable for Red Book Compliant valuation for secured lending
  • Can be used to Calculate Market Rent for specialised properties in valuations for financial statements
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22
Q

What would you do if you had to value an investment property but could not find any evidence of yields?

A

Constructing a yield – looking at gilts and adding a risk premium (look at market/property risks and deduct growth)

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23
Q

What is CIL?

A

Community Infrastructure Levy
- Charge that can be set by local authorities on new developments to raise funds for infrastructure and services in the community

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24
Q

How do term and reversion and DCF differ?

A

DCF = useful for multi-let props with changing rental income
Term and reversion = simplified DCF (only two time windows are considered (term and reversion))

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25
Q

What is the simple formula for DRC?

A

Value of land in its existing use PLUS current cost of replacing building PLUS fees LESS discount for depreciation and obsolescence (use BCIS and judgement)

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26
Q

What is the conventional method of valuation?

A

Rent received OR market rent x YP @ chosen yield = Market value

  • Get rent and yield from comparables
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27
Q

Please name the Red Book Global Bases of Value?

A

(VPS4) – Market value, market rent, investment value (worth), fair value

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28
Q

How is the dual rate method used say for a property generating income and appreciating in value?

A

Remunerative rate = income producing capability of prop (rental income)
Accumulative rate = applies to future capital appreciation (increase in prop value over time)

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29
Q

Name the conventional methods of valuation.

A
  • Profits/accounts
  • Comparable
  • Investment
  • Residual
  • Contractors
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30
Q

What is profit rent?

A

Difference between annual rent (market) and rent achieved

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31
Q

What are the current SDLT bands?

A

As of 17th March 2016:
- 0% in first £150k
- 2% on next £100k
- 5% above £250k

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32
Q

Name the two professional valuations standards (PS)

A
  • PS 1 Compliance with standards where a written valuation is provided
  • PS 2 Ethics, competency, objectivity and disclosures
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33
Q

What is Fair value?

A

Price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (consideration of market discounts do not come into play) – Usually no difference between this and market value -

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34
Q

What do planning costs include?

A
  • Costs of planning consultant
  • Cost of planning application and building reg fees
  • Community infrastructure levy
  • Section 106 of town and country planning act 1990 payment
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35
Q

What is a running yield?

A

The yield at one moment in time

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36
Q

When did the UK national supplement come into force?

A

1st May 2024

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37
Q

How would you assess if a premium could be charged on a lease assignment?

A

Capitalise profit rent (difference between passing and market rent) and YP (dual/dual-tax adjusted/single) rate

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38
Q

What is the market capitalisation rate?

A

All Risks Yield – Rate at which market capitalises the income

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39
Q

What is the planned site coverage at Foundry Lane?

A

40%

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40
Q

What are the major disadvantages of property over the other two major investment opportunities?

A
  • Liquidity, transfer costs and management required
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41
Q

How would you value a shop unit for rent review with frontages on two roads i.e. it is a through unit?

A

Halve back from both frontages

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42
Q

What is a Regulated Purpose Valuation?

A

Disclosures where the public has an interest or upon which a 3rd party may rely – financial reporting, takeovers and mergers or unregulated property unit trusts.

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43
Q

What is a nominal yield?

A

Initial yield assuming rent is paid in arrears

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44
Q

What was the GDV of Foundry Lane, how did you calculate it?

A

£2,053m = MR x YP in perp @ 5%

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45
Q

What developers profit did you allow for?

A

15% of GDV (based on risk)

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46
Q

What is an Asset Valuation?

A

Valuation for financial reporting. IFRS and UK GAAP (Generally Accepted Accounting Practice)

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47
Q

Where do you find comparable evidence?

A
  • Local letting agents
  • In house data bases
  • External data bases e.g. Costar, EGI
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48
Q

What do your Valuation Files contain?

A
  • TOE
  • Conflict of interest check
  • Inspection notes
  • Comparables
  • Valuation calculations
  • Limitations of valuation
  • Valuation report
  • Environmental searches
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49
Q

What is extrapolation of comparable evidence?

A

Calculating a value outside of known data – considered statistically uncertain

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50
Q

When is DRC (Depreciated replacement cost) used in Asset Valuations?

A

To value specialised properties that are rarely sold on the open market – DRC is current cost to replacing an asset with its modern equivalent asset, less deductions for physical deterioration and all relevant forms of obsolescence and optimisation.

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51
Q

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

A

It goes up

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52
Q

What is the Valuers Registration Scheme? is it a good thing?

A

Scheme that regulates and monitors valuations
- Meets RICS self regulation requirements
- Raises status of valuation profession
- Improves quality of vals and ensures high standards

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53
Q

When is DRC used and what is its purpose?

A

When direct market evidence is limited or unavailable (SPECIALISED PROPS E.G. LIGHTHOUSES, SCHOOLS)
- Used for owner-occupier
- Accounts purposes for specialised prop
- Rating valuations for specialised prop

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54
Q

Did you make any adjustments to the yield at Unit 3, Merton Road?

A

No, no adjustment for reduced/increased risk required as let at market rate and no reversion or differing condition/location of properties (most props in area of similar condition)

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55
Q

Describe how Departure from the Red Book mandatory requirements may be possible?

A

May be possible but would have to be in agreement with client beforehand – Documented under TOE + valuation report

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56
Q

Assume a property is let with a 10 year term, 5 year break. How would you value?

A

Capitalise rent up to 5th year only, reflecting the certain term
-> then value the reversion

If over-rented, i may assume the tenant breaks and include void/marketing period in the valuation

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57
Q

What is a development appraisal?

A

A series of calculations to establish the value/viability of a proposed development based on clients inputs

  • Valuation is a possible output
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58
Q

What makes good comparable evidence?

A

A property with same or very similar characteristics as the property you are valuing - e.g. location, size, term, tenant

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59
Q

What are the associated valuation approaches?

A

1) Income approach - converting current and future cash flows into capital value (investment, residual and profits method)
2) Cost approach - Reference to the cost of the asset whether by purchase or construction (DRC)
3) Market approach - Using comparable evidence

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60
Q

In your comparables, did you give a headline or net effective rent?

A

These were headline rents

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61
Q

What is BCIS?

A

Building Cost Information Service
- Obtains monthly updates from quantity surveyors and building surveyor sources and most recent contract price tenders agreed
- Paid subscription service for members

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62
Q

What is interpolation and extrapolation?

A

Adjustments made to comparable evidence to value a property may be referred to as interpolation and extrapolation

  • Extrapolation acceptable when interpolation not possible
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63
Q

How do you value a ransom strip?

A

1/3 of the increase in value of the development land resulting from the access given

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64
Q

What is Marriage Value?

A

Similar to synergistic value but add on that is an additional element of value.

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65
Q

What is a Special Purchaser?

A

Someone to whom an asset has a particular or higher value to – e.g. own the property next door.

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66
Q

Who are the International Valuation Standards Council?

A

Non-profit organisation acting as global standard setter for the valuation profession, whilst serving public interest.

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67
Q

How did you undertake the redevelopment valuation at Foundry Lane, Horsham?

A
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68
Q

What is the difference between Valuation Technical and Performance Standards (VPS) and Valuation Practice Guidance – applications (VPGA)?

A

VPS are mandatory, VPGA are advisory

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69
Q

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

A

No time limit – but closer to valuation date the better (depends on the market)

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70
Q

What is PV?

A

Present value
- Current value of a future sum of money or stream of cash flows given a specified rate of return

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71
Q

What was the construction of Foundry Lane?

A

Old
- Brick/block shell
- Clad in concrete / aluminium
- Corrugated concrete roof - Not asbestos

New
- Steel portal frame
- Insulated metal panneling
- Two storey ancillary office
- LED lighting throughout

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72
Q

What is Synergistic Value?

A

Where value of two combined assets higher than if they were sold/let separately.

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73
Q

What is a Special Assumption + three situations where they are appropriate?

A

Assumption that either assumes facts differ from those at valuation date or would not be made by a typical market participant in a transaction on that valuation date:

  • Property vacant (occupied at valuation date)
  • Property let on define terms (when vacant at valuation date)
  • Planning consent has/will be granted
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74
Q

Why is the YP single rate table also known as the Present Value of £1 per annum?

A
  • It tells us the present value of £1 to be received each year, for a given number of years
  • Tells us present value of annual series of incomes – further in future = lower sum as it is against today’s terms
  • £1 in future = not worth £1 today
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75
Q

What are the three principal sources of investment?

A
  • Gilts, equities, properties
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76
Q

How do you calculate gross acquisition price?

A

PV of £1 in 12 months @ interest rate X GRV

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77
Q

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

A

Included within the all-risk yield calculation

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78
Q

What contingency did you allow for Foundry Lane and why?

A

5% of build costs based on risk and market conditions

79
Q

What was the site value of Foundry Lane and how did you calculate it?

A

£355,000 = GDV subtract developer costs, profit AND X PV of that sum for the period of development (12 months)

80
Q

What would you include in a valuation report?

A
  • Client name
  • Valuation purpose
  • Valuation subject
  • Property info
  • Basis of value
  • Date of valuation
  • Status of valuer
  • Currency
  • Assumptions / special assumptions
  • Departures
  • Source of info
  • Valuation approach
  • Competency
  • Restrictions on publications
81
Q

What is the margin for error on valuations?

A

5-15% typically

82
Q

What is another name for the all risks yield?

A
  • Market capitalisation rate
83
Q

What is the major attraction of property over the other two major investment opportunities?

A
  • Can improve performance through proactive property management
84
Q

Name three situations that can adversely affect the Certainty of valuations.

A
  • Asset having characteristics that make it difficult to value (unique/unusual)
  • Limited/restricted information
  • Disrupted markets - financial/legal/political
85
Q

What is the full title of the Red Book?

A

RICS Valuation - Global Standards 2022

86
Q

How is GRV calculated?

A

Deduce build costs, interest, contingency and developers profit from NDV

87
Q

What were the build costs for Foundry Lane, how did you calculate them?

A

£101 psf - These were found on BCIS, using location and use specific information

88
Q

Describe three Assumptions that are usually made in producing a valuation?

A

Something that can be assumed to be true without investigation
- Property fit for occupation
- Premises free from contamination
- Title

89
Q

What are the VPGAs?

A

VPGA 1 - Valuation for inclusion in financial statements
VPGA 2 - Valuation of interests for secured lending
VPGA 3 - Valuation of businesses and business interests
VPGA 4 - Valuation of individual trade related properties
VPGA 5 - Valuation of plant and equipment
VPGA 6 - Valuation of intangible assets
VPGA 7 - Valuation of personal property including arts and antiques
VPGA 8 - Valuation of real property interest
VPGA 9 - Identification of portfolios, collections and groups of properties
VPGA 10 - Matters that may give rise to material valuation uncertainty

90
Q

How would you respond to a request to value a property from a Drive-by only?

A

1) Check competency to do so
2) Advise limited information can affect the certainty of the valuation – Note in TOE and valuation report
3) Ask for all relevant plans and documents to assist

91
Q

What other refinements were made to the Red Book update in 2022?

A
  • More details on TOE when applying to exceptions from VPS
  • Definitions/commentary on sustainability/ESG
  • Clarifying/improving existing text
92
Q

What is the purpose of Zoning?

A

Used due to retail units having different depth and frontage ratios – Allows you to value account for this difference

93
Q

How do you calculate a yield?

A

Annual rent / prop value X 100 = Yield

94
Q

How did you / would you value an over-rented investment?

A
  • Hardcore/layer method
95
Q

What is the hardcore layer method used for?

A

Used to value reversionary investments (over-rented)

96
Q

How would you respond to a request to value a property from a Drive-by only?

A

1) Check competency to do so
2) Advise limited information can affect the certainty of the valuation – Note in TOE and valuation report
3) Ask for all relevant plans and documents to assist

97
Q

When would you use the profits method?

A

Used for valuations of trade related property
- Used for investment prop, when investment or comparable method can’t be used

e.g. pubs, casinos, hotel, cinema

98
Q

What editions of the Red Book have been in effect during APC training period?

A

Just the November 2021 version, effective of 31st January 2022

99
Q

To what valuations does the Red Book apply?

A

All valuations except those listed as exemptions under PS1 (Internal, expert witness, agency/brokerage, statutory purposes (company accounts), negotiation/litigation)

100
Q

What was the market value at Unit 3 Merton Road?

A

£1.239m (£66,505 X 20 YP in perp @ 5%)

101
Q

What is a gross yield?

A
  • Rent expressed as a percentage of the purchase price
102
Q

Can you talk me through the method for completing comparable valuations?

A

1) Search and select comparables
2) Verify details and analyse headline rent to give a net effective rent

103
Q

Which sections of the Red Book are mandatory?

A

Part3 - Professional standards
Part4 - Valuation Technical and Performance Standards (VPS)

104
Q

What is GPV?

A

Gross present value - GPV worth to investor

105
Q

What changes were made to the current edition of the Red Book?

A
  • Reflects changes in the international valuation standards
  • Reflects progress in international standard for ethics and measurement
106
Q

Why would finance be needed in residual land valuation?

A
  • Site purchase - Compound interest
  • Total construction costs - interest taken at half of costs over length of the build programme
  • Holding costs to cover voids until disposal - compound interest on a straight line basis
107
Q

What is a contigency?

A

An allowance for potential costs that is factored into to the project’s budget

108
Q

What are the professional fees in a residual land valuation?

A
  • 10/15% of total construction costs for architect, M&E consultants, project managers
109
Q

What do consider Proper Marketing to be in the Market Value definition?

A

Property exposed to market in most appropriate way at the most appropriate time.

110
Q

What was the construction of Unit 3?

A
  • 1980s
  • Brick and concrete
  • Previously removed asbestos
  • 2 storey ancillary office / kitchen / WC
111
Q

What is a net yield?

A
  • Rent expressed as a percentage of the gross acquisition price (includes fees e.g. acquisition and stamp duty)
112
Q

What are the possible consequences if a valuer does not comply with a VPS?

A

Disciplined and if severe, struck off by RICS

113
Q

How does risk affect yields?

A

Higher risk = higher yield

e.g. use of prop, lease terms, voids, quality of location or covenant

114
Q

What is net-effective rent?

A

Actual rent cost with deductions related to incentives and concessions

115
Q

When can a desktop valuation be undertaken for a client?

A
  • Restriction agreed in TOE
  • Implication of restriction agreed in writing
  • Refer to restriction in report
116
Q

What is the principle of the profits method?

A

Value of property depends on the profit generated from the business (NOT THE BUILDING/LOCATION)

117
Q

What interest rate would be used in residual land valuation?

A
  • London inter bank offer rate (LIBOR) - Variable lending rate plus premium to reflect interest rate achievable
  • Bank of England rate plus premium
118
Q

What yield did you select at Unit 3, Merton Road and why?

A

5% based on comparables and this was confirmed with the local letting agent.

119
Q

Which sections of the red book are advisory?

A

Part5 - Valuation Applications (VPGA)

120
Q

What is a ransom strip?

A

Land that gives access to development land - can’t access development without using that land

121
Q

What contigency did you use in your valuation?

A

5-10% of total construction costs depending on risk and market
- I used 10%

122
Q

What do you understand by the stokes v cambridge case?

A

Compulsory purchase of a road widening scheme that resulted in 1/3rd of the increase in development land
- Determined that if a parcel of land would allow access to a neighbouring property, in a compulsory purchase of the land its owner is entitled to one-third of the resulting prop value

123
Q

What were the disposal costs at Foundry Lane?

A
  • Letting fees - 10% of MR
  • Sales fees - 1.5% of MR
124
Q

What is the Purpose of the Red Book?

A

Although the Red Book does not instruct how to value properties, it ensures consistency, objectivity and transparency with regards to mandatory obligations that are placed on valuers.

125
Q

What does PS1 and PS2 relate to?

A

PS 1 - Compliance standards where written valuation is provided

PS 2 - Ethics, competency, objectivity and disclosures

126
Q

How would you respond to a request for a pavement assessment only?

A

Valuation subject to restricted info -> pre-agreed and written into ToE and report

127
Q

What are the main factors impacting property value?

A
  • Number of tenants
  • Location, tenure, lease terms
  • Physical prop attributes
  • Market conditions
128
Q

Did you subtract any fees from market value at unit 3, merton road?

A

Yes
- Agents fees 1%
- Sols fees 0.5%
- VAT 0.3%
- SDLT

129
Q

What is the timeline when receiving a valuation instruction?

A

1) Check competance upon receiving instruction
2) Conflicts of interest check
3) Issue ToE and receive signed
4 )Gather information (leases, licences, title docs, planning info, OS maps)
5) Due diligence check (ensure no matters could adversely impact value)
6) Inspect and measure
7) Research market and assemble, verify and analyse comparables
8) Undertake valuation
9) Draft report
10) Have report reviewed by another surveyor
11) Finalise and sign report
12) Report to Client
13) Issue invoice
14) Ensure files kept for archiving

130
Q

How would you arrive at the Market Rent the first floor of a retail unit?

A
  • Divide the ITZA value by 10 or if sales and storage
  • ITZA/10 for sales area
  • spot figure per sq m for storage space
131
Q

What is WAULT?

A

Weighted average unexpired lease term
- This is remaining to first break/expiry

132
Q

When is Fair Value the appropriate valuation basis?

A

Valuation for statutory functions such as reporting for company accounts

133
Q

What is a s.106?

A

Agreement between developer and local planning authority about the measured the developer must take to reduce impact on community

134
Q

What is an Arm’s Length Transaction?

A

Transaction between parties with no prior relationship or connection.

135
Q

When is the residual method of valuation used?

A

Valuation of land + properties with development/refurb potential

  • Assesses the viability of a development scheme
136
Q

What is statutory due diligence done prior to valuation?

A

This is required to check there are no material matters which could impact upon the valuation

137
Q

What is ITZA?

A

In terms of Zone A

138
Q

What information would you require from a telephone enquirer who asked: Can you do me a valuation?

A
  • Client/owner of prop
  • Buyer of prop – For conflict-of-interest check
  • Know what the property is and its location
  • If I am competent to undertake
139
Q

What is the fundamental difference between Market Value and Existing Use Value?

A

Existing use value used when there is an expectation that it will be possible to get planning permission to develop the land. (Is sometimes market value)

140
Q

When is Market Rent not appropriate as a Basis of Value in providing a report on the rental value of a property and why not?

A

Rent reviews – Actual definitions of rent and assumptions/disregards as per the lease have to be used.

141
Q

How did you determine developers profit in your valuation at Foundry Lane?

A
  • 15% risk due to lower risk of development
142
Q

What is the standard Zone depth?

A

6.1m / 20 feet (30ft on Oxford and Regent st)

143
Q

What is the method for DCF?

A

1) Estimate cash flow (income - expenditure)
2) Estimated the exit value at end of holding period
3) Select discount rate
4) Discount cash flow at discount rate
5) Value is sum of completed discounted cash flow - Providing the NPV

144
Q

How do you calculate divisible balance?

A

Amount to be shared between tenant and landlord (tenant as gross profit and remaining as rental value to the landlord)
- Gross profit LESS working expenses = divisible balance

145
Q

How do you calculate site value?

A

Gross acquisition price LESS agents fees, legal fees, SDLT

146
Q

What rate is the remunerative rate set at?

A

1-2% above freehold market rent to reflect
- profit rent is top slice
- inconvenience of having landlord and lease
- Possibility of liability for dilaps

147
Q

What valuations are Exceptions to the Red Book (PS1)?

A

Internal, expert witness, agency/brokerage, statutory purposes ( business rates, tax), negotiation/litigation

148
Q

What is included within development costs?

A
  • Demolition
  • Building costs
  • Site clearance
  • Levelling
149
Q

Define Market Value in your own words.

A

Amount asset is likely to exchange on the open market between a willing buyer and willing seller in an arms length transaction after a proper marketing period whereby both parties have acted knowledgably, prudently and without compulsion.

150
Q

What is fair maintainable operating profit?

A

The analysis of accounts (profits method)

151
Q

What is headline rent?

A

Rent payable after short-term incentive/rent free period has expired (inflated rent as ignores rent free)

152
Q

What is a reversionary yield?

A

Yield achieved if the passing rent adjusts to the level of estimated rental value

Market rent divided by current price on an investment let at a rent below the Market Rent

153
Q

What is the market rent at Unit 3?

A

£66,505 (or £11.85 psf)

154
Q

What is the layout of the red book?

A

Part 1: Introduction
Part 2: Glossary
Part 3: Professional Standards (PS)
Part 4: Valuation Technical and Performance Standards (VPS)
Part 5: Valuation Applications (VPGA)
Part 6 International Valuation Standards (IVS)

155
Q

When is Existing Use Value the valuation basis?

A

If the property is operational – Value of site or property in its existing use – different to market value on the expectation to gain planning permission to develop. (Also include that this basis may be used if it possible to get planning permission on the land)

156
Q

What is IRR?

A

Internal rate of return
- The rate at which all future cash flows must be discounted to produce an NPV of 0
- Determines profit of potential investment

157
Q

What is a building cost reinstatement valuation?

A

Cost of reinstating building without profit
- Used for insurance purposes

158
Q

What is hope value?

A

The value arising from any expectation that future circumstances affecting the property may change

e.g. realising marriage value, future prospect of securing planning permission

159
Q

What is NPV?

A

Net present value
- Sum of discounted cash flows of the project
- Used to determine if an investment gives a positive return against target rate
- If positive, investment exceeds target and vice versa

160
Q

What are the possible consequences if a Valuer does not comply with a VPGA?

A

Can be sued for negligence

161
Q

What information do you need to undertake the profits method?

A

Accurate and audited accounts (last 3 years if poss)
- Use estimates (business plan) if new business
- Adjust for maturity for business + any exceptional items of expenditure

162
Q

Can you take me through your valuation at Foundry lane?

A

1) Agreed TOE with client + completed COI check
2) Inspected site, measured unit - In line with surveying safely and code of measuring practice
3) Undertook comparable method of valuation - Got market rent and yield from this
4) Capitalised MR into perpetuity - This gave me GDV
5) Deducted disposal costs from GDV = NDV
6) Deducted developer costs and profit from NDV = GRV
7) PV of £1 X GRV = Gross acquisition price
8) Deduced purchasers costs from this to get site value

163
Q

What is an equivalent yield?

A

Weighted average yield
- Average weighted yield when a reversionary property is valued using an initial and reversionary yield (represents return a property will produce based upon the timing of the income received)

164
Q

What is YP?

A

Years purchase
- Amount yielded by the annual income of the property

165
Q

What is interpolation of comparable evidence?

A

Calculating a value that lies between two extreme points

166
Q

How do you calculated GDV?

A

Market rent X YP into perp @ initial yield

167
Q

How did you calculate the market rent at Foundry Lane?

A

Using market comparables - these were confirmed with the letting agent

168
Q

How many comparables are needed to produce a valuation?

A

Enough comparable to establish a trend – As many as can be obtained

169
Q

When did the current edition of the Red Book come into force?

A

31st January 2022

170
Q

When is the investment method of valuation used?

A

Used when there is an income stream to value

171
Q

Can you name some valuations that are carried out for a Statutory Function?

A

Preparing company account/financial accounts, mergers and takeovers

172
Q

Explain the process of the hardcore / layer technique?

A

1) Capitalise passing rent into perpetuity
2) Take additional rent expected to be received at review and capitalise into perpetuity (forever)
3) The top slice value (froth) is then given at that moment - Needs to be deferred for the period of the term
4) Bottom slice capitalised below market rent due to reduced risk – top slice capitalised above rate due to higher risk
5) Risk at review that you wont receive increased rent

173
Q

Are there any upcoming changes to the red book?

A
  • Consultation held in July/August 2024
  • To be published in late 2024
  • View to come effective in Jan 2025
174
Q

What were the purchasers costs at Foundry Lane?

A
  • Agents - 1%
  • Legal - 0.5%
  • VAT on fees - 0.3%

and SDLT

175
Q

How do you calculated a tenants proportion of rent in a profits valuation?

A

A % of the net operating profit to arrive at market rent
- Usually 50%

176
Q

What is the basic process of undertaking an RLV?

A

Value of completed development LESS development costs and developers profit = Land Value (GDV)

177
Q

What is the market rent at Foundry Lane

A

£102,650 (or £11.03 psf)

178
Q

When would you use a DCF?

A

For a complex property
- You wanted to include assumptions not included within the yield e.g. long marketing periods

  • Large-multi let props
  • Phased development projects
  • Properties with income voids or complex tenures
179
Q

What is the purpose of the UK National Supplement?

A

To be used alongside the Red book, providing country specific guidance within the UK – Ensures UK valuations consistent with UK accounting standards

180
Q

Can you tell me about the hardcore-top slice method?

A

It is used for OVER RENTED investments.
1) Income flow is divided horizontally. The hardcore (MR) is valued into perpetuity at a net initial yield.
2) The top slice (PR-MR) is capitalised to next lease event at a net initial yield with a risk adjustment.
3) There is a yield differential; top slice at an inflated yield to reflect higher risk of over-renting.
4) Different yield type can be used based on market comparable evidence.
5) NO PV of £1 needed as both layers of income are being received NOW.

181
Q

What interest rate did you use for Foundry Lane?

A

6% - Bank of England rate and adjusted plus 0.5% for risk

182
Q

What is a bond investment?

A
  • Fixed capital, fixed return for a fixed period
  • Can be govt or corporate
183
Q

What is top slice rent?

A

Difference between market and passing rent (overrage)

184
Q

What is the difference between market value and investment worth?

A

Market value is what the market would pay and worth is individual value to an investor

185
Q

What is a DCF?

A

Discounted Cash Flow
- Method of valuation that projects estimated cash flows over assumed holding period
- Cash flow discounted back to present day at a discount rate to reflect perceived risk

186
Q

What do you understand by the expression hierarchy of evidence?

A

Order in which recent transactions are weighted – most weight attached to:
1 Open market lettings
2 Lease renewals
3 Rent review
4 Independent expert determination
5 Arbitrator awards

187
Q

How often should a firm valuing your properties be rotated?

A

RICS recommend every 7 years due to quality control measures

188
Q

When would you use a dual rate investment calculation?

A

To value a leasehold interest with value - e.g. when lease has profit rent and unexpired term of 1 year
- Remunerative is rent for year
- Accumulative is appreciation in prop value

189
Q

Name a development appraisal?

A

Residual land valuation

190
Q

What factors make up the all risks yield?

A

Property characteristics, covenant strength, rent, unexpired lease term, rental growth

191
Q

What is an initial yield?

A

Simple income yield for current income and current price (amount of income an investment yields when it is bought)

192
Q

What is the difference between a Basis of Value and a Method of Valuation?

A

Basis = figure arrived at valuation
Method = technique used to arrive at that basis

193
Q

What are the 5 VPS?

A

VPS 1 - Terms of engagement (scope of work)
VPS 2 - Inspections, investigations and records
VPS 3 - Valuation reports
VPS 4 - Bases of value, assumptions and special assumptions
VPS 5 - Valuation approaches and methods

194
Q

What is an equated yield?

A

The internal rate of return taking into account future growth (growth in future income)

Ethan APC Summary of Experience Mock Questions (16 decks)

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