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APC I&F > Valuations > Flashcards

Valuations Flashcards

1
Q

What are the steps to take prior to undertaking a valuation?

A

Competence
Independence
TOE

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2
Q

What are the statutory DD for valuation?

A
  • Asbestos register
  • Business rates and council tax
  • Contamination
  • Equality Act 2010 compliant
  • Environmental matter (voltage lines)
  • Contamination
  • Flooding
  • EPC if available
  • FS compliance
  • H&S compliance
  • Highways
  • Legal title and tenure
  • Public right of way
  • Planning - Onerous, Conservation, S106 & CIL
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3
Q

What are the types of valuation?

A

Income - Current and future cashflows into capital value
Cost - Reference to costs (purchase or construction)
Market - Comparable evidence

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4
Q

What are the methods of valuation?

A

Comparable, Investment, Residual, DRC, Profit

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5
Q

What is the comparable method?

A
  1. Search & select comps
  2. Confirm/verify details and analyze headline to net effective as appropriate
  3. Assemble in schedule
  4. Adjust comps using hierarchy
  5. Analyze to form opinion on value
  6. Report value and prep file note
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6
Q

How do you rank comparables?

A

RICS guidance note - comparable evidence in RE Valuation 2019 - The valuer should use professional judgement to assess the relative importance of evidence on a case-by-case basis but 3 categories:

Category A -
Completed and near identical transaction with full and accurate info
Completed and similar transaction with full and accurate info
Completed and similar transaction with some accurate info
Similar where offers made, no contract
Asking prices with careful analysis

Category B -
Public information and databases depending on relevance, authority and reliance
Indirect evidence (indexes)
Historic
Demand & Supply

Category C -
Transactional data from other RE types
Other background data (IR, stocks etc.)

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7
Q

What is the investment method?

A

Used when there’s an income stream
Capitalize income at appropriate yield
Growth implicit - derived from market cap rate

Conventional: MR * Years Purchase = MV

Importance of comps and yields

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8
Q

Explain the term and reversion calculation?

A

When property under rented.

The passing rent is capitalized for the number of years remaining on the lease

Then the market rent is capitalized into perpetuity from the expiry of the initial lease and present valued

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9
Q

What would you do if a property was overrented?

A

Layer and hardcore method

Capitalised the market rent from day one into perpetuity - Bottom slice

Capitalised the difference between market rent and the passing rent until lease expiry - top slice

Higher yield on the top slice because of risk

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10
Q

What is a yield? what is years purchase?

A

Measure of investment return on an asset as a % of capital invested

100/yield = years purchase i.e. the number of years to repay

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11
Q

What are some of the risk factors in determining yield?

A 
Rental/Capital Growth
Quality of location and covenant
Liquidity
Use of prop
Lease terms
Voids
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12
Q

What is an all risks yield?

A

Fully let at market rent reflecting all risks

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13
Q

What is an equivalent yield?

A

Average weighted yield when initial and reversionary yields used

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14
Q

What is the reversionary yield?

A

Market Rent/Price

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15
Q

What is gross yield?

A

Does not take into account purchasers costs

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16
Q

What is net yield?

A

Takes into account purchasers costs

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17
Q

What is the Discounted Cashflow technique?

A

Project estimated cashflow over the hold period and exit value using ARY. Cashflow then discounted at discount rate (desired rate of return) that perceives risk.

Guidance in the guidance note DCF for RE valuation 2010

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18
Q

When is the discounted cashflow method used?

A

Complex transactions
Multiple phasing
Assumptions are explicit

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19
Q

Explain the step by step method of the discounted cashflow technique?

A

Understand PP - Estimate Cashflow - Estimate Exit Value - Discount Cashflows - Sum of discounted cashflow = NPV

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20
Q

What is NPV?

A

Sum of cashflow when discounted - positive returns if >0

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21
Q

What is IRR?

A

Required DR to make NPV = 0
Assess total return based on assumptions on growth, reletting & exit assumptions
Also annual rate of return

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22
Q

What is the profits method? When is it used?

A

Profits method is used for operating business, value based on profits and trading rather than location and real estate e.g. pubs, petrol stations
Accurate and audited account required
Adjust for maturity and any exceptional income/expenditure

Expressed simply as EBITDA capitalized at an appropriate yield to achieve MV - cross check

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23
Q

What is the depreciated replacement costs method? When is it used?

A

Used for specialized props or when there is a lack of comparable data.

Method:
1. Value of site in existing use (assuming planning permission)
2. Add Cost of replacing building plus fees less a discount for depreciation and obsolescence.
Estimate depreciation for physical, functional and economic obsolescence - wear and tear, function seizes, market condition vary

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24
Q

Use of the depreciated replacement cost method?

A

Not for loan security

Used for FS of specialized props

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25
Q

• What are the RICS Valuation Global Standards?

A

All members providing a written valuation are required to comply with the standards set out in it – in other words, unless stated otherwise, they are mandatory.

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26
Q

What is the structure of the Red Book?

A
  1. Preface
  2. Introduction
  3. Professional Standards
  4. Technical and performance standards
  5. Applications
  6. IVS
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27
Q

• What are the exceptions to the red book?

A 
According to Professional Standard 1: 
Internal purposes
Advice during litigation
Statutory duty - tax return
Anticipation of work
Giving evidence
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28
Q

Can you name some of the matter included in a terms of engagement?

A 
VPS 1:
ID of valuer
ID of client
ID of intended users
Asset to be valued
Currency
Purpose of valuation
Basis of value
Valuation date
extent of investigation
Source of infor
Assumptions and special assumptions
format
restrictions on use/distribution
Fee basis
CHP
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29
Q

Why is an inspection necessary for a valuation and when is it not?

A

VPS2:
Verify necessary information that is being relied upon is professionally reliable.

Restricted information - desktop, no inspection - has to be set out in TOE and referred to in report

Re-valuing - inspection required unless satisfied no material changes since last inspection - records to be held

30
Q

What would be required in a valuation report?

A 
VPS 3:
ID & status of valuer
ID of client and intended users
Purpose
ID of asset
Basis of Value
Valuation date
Extent of investigations
Assumptions and special assumptions
restrictions on use and distribution
Valuation approach and reasoning
Valuation figure
date of report
31
Q

Can preliminary advice be given on a valuation?

A

Yes - but marked as a draft and no impact on value. If any changes on value from additional information must be recorded.

32
Q

Where would you find Market Value referred to in the red book and how would you define it?

A

VPS 4 - Basis of Valuation

The price agreed for an asset or liability:
between a willing buyer and seller
on the valuation date
in an arms length transaction
after proper marketing
where both parties act knowledgably, prudently and without compulsion

33
Q

Can you define Market Rent?

A

VPS 4:

The amount for which a prop should be leased for:
Between a willing lessor and lessee at appropriate terms
On the valuation date
In an arms length transaction
after proper marketing
where both parties act knowledgably, prudently and without compulsion

34
Q

What is fair value according to the red book?

A

The price received to sell asset/liability in an orderly transaction between market participants on the measurement date
Required for IFRS
Generally aligned to MV

35
Q

What is investment value?

A

The value of an asset or liability to a specific owner or potential owner
May differ from MV
Measured against investment criteria

36
Q

Give an example of a valuation application?

A

VPGA 1 : valuation for the inclusion in financial accounts - Fair value for IFRS
VPGA 2: Valuations for secured lending - dealing with COI - any previous involvement with lender in last 2 years to be stated.
VPGA 10: Material uncertainty - wording to be used regarding COVID - encouraged not to since November 2020

37
Q

What is the margin for error for residential and commercial property valuations?

A

+/- 5% for Resi

+/- 10% for commercial (15% if complex)

38
Q

What is the hope value?

A

Value from future circumstances changing i.e. planning granted - Could be reflected in the yield

39
Q

Techniques for valuing for charities?

A

VPGA 8 - best interest of charity

40
Q

What’s the difference between an assumptions and special assumptions?

A

An assumptions is something that is generally held as fact - A special assumption that either assumes facts that differ from the actual facts
existing at the valuation date or that would not be made by a typical market
participant in a transaction on the valuation date.

41
Q

How would you calculate SDLT?

A

Commercial:
<150k = 0%
150-250k = 2%
250k> = 5%

Resi:
<125k = 0%
125k-250k = 2%
250-925k =5%
925-1.5m = 10%
1.5m> = 12%
42
Q

What is a particular buyer?

A

Physical, functional or economic benefit such as adjoining land - advantage to ownership

43
Q

What is a special value?

A

Advantage arising from ownership not available to others

44
Q

What makes up purchasers costs?

A

6.8%
SDLT : 5%
Agency : 1% (0.2% VAT)
Legal : 0.5% (0.1% VAT)

45
Q

What is a premium?

A

Capital payment from one party to another i.e. fixtures and fittings, secure prime shop

46
Q

What is net effective rent?

A

Take into account rent frees
Total sum of rent received / term = net effective
i.e. £50 for 5 years with 1 year rent free = £200 / 5 =$40

47
Q

How do you value ransom strips?

A

Piece of land that controls access to another - upper tribunal suggest value of 15-50% of GDV unlocked by including

48
Q

What is the zoning technique?

A 
used for comparison of retail units
rental value falls away from street
6.1m zones - 9.14m in London
allowances for hard fronts
mirror zoning
natural zoning 
masking - obscured areas
49
Q

What is the RICS valuer registration scheme?

A 
monitoring with 3 aims:
1. improve quality of valuations, increase professional standards
2. Self regulate
3. protect and raise status of profession
Clients expect:
1. openness & transparency
2. RICS protection
3. expertise and clear reporting
50
Q

What method of valuation did you use for your fund valuation?

A

Investment - it was under rented and so the term and reversion method was used

51
Q

How did you source comparables in your valuation for the property in the fund?

A

Calling agents,

Internal system

52
Q

How did you weight your comaprables for the London valuation?

A

According to the guidance note - comparable evidence in RE valuation 2019 aligned to 3 categories. Fortunately there was comparable evidence where all information was available and accurate internally that could be used in the local vicinity.

ERV = £50psf
Yield = 4-5%
53
Q

What was some of the key information in the London fund valuation you carried out?

A 
Fully Let
Freehold
WAULT = 4.3
8000 sq ft. 
EPC rating C
54
Q

What was the structure and fit out of your London valuation?

A

Reception and Common Parts recently refurbished.
LG and 4 upper floors
Steel and concrete frame
Grade A - LED lighting, Air Con, Lift, Suspended Ceiling, Natural Daylight

55
Q

What was the structure and fit out of your London valuation?

A

Reception and Common Parts recently refurbished.
LG and 4 upper floors
Steel and concrete frame
Grade A - LED lighting, Air Con, Lift, Suspended Ceiling, Natural Daylight

56
Q

What was the impact on the fund of you London valuation?

A

The value of the building rose due to one of the tenants agreeing a lease renewal for 8 years with 8 months rent free and a 5 year break. The value rose by 5% or £250k

57
Q

What was the evidence and implication for the longer voids and rent frees?

A

Voids and Rent Frees had been extended due to COVID - from 12 to 18 months rent frees and voids as high as 21.

If there was less than a year on the tenancy then the severed scenario would be put in place.

These were referred to at the next quarter date.

58
Q

Give an example property where you moved the rent free and voids out - What impact did this have on pricing?

A

City - Tenant lease was set to expire in 6 months and there was no tenant incoming.

Rent free was moved out to 18 and void 21 months as the comparable data had suggested

Value of that floor and building fell - After capitalizing the existing term the delay to the next lease being signed is now longer, the PV value of that income stream is no lower. The extension in the rent free means that the net effective rent will be lower and so the income stream is less.

59
Q

Two main statement docs in valuations?

A

Professional Standards - PS1 compliance with standards in written valuation and exceptions
PS2 - Ethics, competency, objectivity and disclosures

60
Q

Specialities to include in loan security?

A

Suitability
Transaction
(Look for others)

61
Q

Timeline of a valuation?

A 
Receive instruction
Check competence
Check independence
Issue TOE
Receive signed TOE
Gather Info
DD
Inspect/Measure
Research and assemble schedule
Undertake valuation
Draft Report
Cross checked by another valuer
finalize and sign
report
invoice
archive
62
Q

Yields for prime in each sector?

A 
retail - bond street 2.75% 
retail OOT - 6%
Shopping centres - 10%
Leisure - 8%
SA - 3-5% depending on structure
Retirement - 3-4% dependent on structure
Office - 3-4%
63
Q

Talk me through a term and reversion valuation?

A

Draw it
Term capitalized
Reversion capitalized and present valued

64
Q

What method for over-rented property? Talk me through it

A

Hardcore-Layer

Market rent into perpetuity
Top slice capitalized at higher yield

65
Q

What is the purpose of the red book?

A

RICS Valuation - Global Standards (‘Red Book Global Standards’) contains mandatory rules, best practice guidance and related commentary for all members undertaking asset valuations.

The Red Book is issued by RICS as part of our commitment to promote and support high standards in valuation delivery worldwide. The publication details mandatory practices for RICS members undertaking valuation services. It also offers a useful reference resource for valuation users and other stakeholders.

66
Q

You mentioned Professional Indemnity Insurance – what is this?

A

Professional indemnity insurance protects you against claims for loss or damage made by clients or third parties as a result of the impact of negligent services you provided or negligent advice you offered. Compensation claims can be brought against you even if you provided a service or offered advice for free.

67
Q

Special circumstances for a loan valuation?

A

Dealing with COI - <2yrs disclosed
RICS code of conduct
Arrangements recorded
Reporting: terms around COI, Val method, recent transaction, suitability for mortgage, circumstances affected price, special assumptions and deviation from MV stated.

67
Q

Special circumstances for a loan valuation?

A

Dealing with COI - <2yrs disclosed
RICS code of conduct
Arrangements recorded
Reporting: terms around COI, Val method, recent transaction, suitability for mortgage, circumstances affected price, special assumptions and deviation from MV stated.

68
Q

What to do when valuation with restricted info?

A

nature of restriction agreed
restriction in writing
restriction reasonable
restriction in report

69
Q

Can you value with restricted info?

A 
Yes:
nature agreed in writing
val implications in writing
reasonable
included in report
70
Q

Updates to Red Book?

A
  • TOE to clear and accurate even when members are valuing exemptions
  • Not to refer to exemptions as quasi red book
  • Emphasis on the inclusion of sustainability and ESG with regard to applications
71
Q

Any Valuation review?

A

The RICS Standards and regulation board has commissioned a review of real estate investment valuation.

Creation of a valuation quality assurance panel
Creation of valuation compliance officer role within firms
Guidance from RICS to clarify their expectations around the culture and behaviors expected of RICS professionals undertaking valuations.

APC I&F (20 decks)

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