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APC > Valuations > Flashcards

Valuations Flashcards

1
Q

what are the five methods of valuation

A
  1. investment method,
  2. comparative method,
  3. profits method,
  4. residual method,
  5. contractors method (depreciated replacement costs)
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2
Q

what are the three approaches?

set out in IVS Valuation approaches and methods

A
  1. income approach - converting current and future cash flows into a capital value (i.e.. investment, residual and profits methods)
  2. cost approach - reference to the cost of an assets whether by purchase or construction ( i.e. DRC method)
  3. Market approach - using comparable evidence available (comparable method)
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3
Q

what are the 6 steps for the comparative method of valuation?

A
  1. search and select comparables.
  2. confirm/ verify details and analyse headline rent to get NER as appropriate.
  3. assemble comparables in schedule.
  4. adjust comparables using the hierarchy of evidence.
  5. analyse comparables to form an opinion of value.
  6. report value and prepare file note.
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4
Q

what does ‘RICS Professional Standard: ‘Comparable evidence in real estate valuation 1st edition (reissued as a professional statement 2023)’ outline?

A
  • principles in the use of comparable evidence.
  • gives advice when dealing with situations where there is limited comparable evidence available.- sets out a non prescriptive hierarchy of evidence - but notes the valuer should use professional judgement to assess the relative importance of evidence on a case by case basis.
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5
Q

what is an internal valuer?

A

employed by the company to value the assets of the company/ enterprise

valuation for internal use only, no third party reliance.

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6
Q

what is an external valuer?

A

has no material links to the asset or the client.

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7
Q

important steps before conducting an instruction?
CIT

A

competence
coi
toe

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8
Q

Give examples of statutory DD for valuations, and tell me why its done?

A

why?

required to check that there are no material matters which could impact upon the valuation.

Examples:

asbestos register
business rates/council tax
contamination
equality act 2010 compliance
environmental matters
EPC rating
flooding (check environmental agency web)
Fire safety compliance
H&S compliance
legal title and tenure (ownership, easements, covenants, deeds)
public right of way
planning history and compliance (CIL S106 conservation areas etc)

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9
Q

what does ‘RICS Professional Standard: ‘Comparable evidence in real estate valuation 1st edition (reissued as a professional statement 2023)’

Hierarchy of evidence (the relative weight attached to different types of evidence)

Explain CATERGORY A

category B
category C

A

Category A - direct comparables of contemporary

completed transactions of near-identical properties for which full and accurate data is available. (may incl. subject property itself)

completed transactions of similar real estate which for full and accurate data is available.

completed transactions where full data not be available but enough reliable data is available.

similar real estate marketed where offers have been made but no binding contract - not completed.

asking prices (with careful analysis)

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10
Q

what does ‘RICS Professional Standard: ‘Comparable evidence in real estate valuation 1st edition (reissued as a professional statement 2023)’

Hierarchy of evidence (the relative weight attached to different types of evidence)

Explain CATERGORY B

category A
category C

A

Category B- General Market Data that can provide guidance

information from published sources, commercial databases, its relative importance will depend on relevance, authority and verifiability.

other indirect evidence (eg indices)

historic evidence

demand and supply data for rent, owner occupation or investment.

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11
Q

what does ‘RICS Professional Standard: ‘Comparable evidence in real estate valuation 1st edition (reissued as a professional statement 2023)’

Hierarchy of evidence (the relative weight attached to different types of evidence)

Explain CATERGORY C

category A
category B

A

Category C - other sources

transactions evidence of other real estate types and locations
other background data (interest rates, stock market, returns which can give an indication for real estate yields)

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12
Q

How would you go about finding relevant comparables?

A

inspection of the area, looking for agents boards.

websites, costar, egi, focus, molior, rightmove plus.

internal data bases and records.

auction results (beware these are gross of costs)

market sentiment can be important when there is a lack of transactional evidence.

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13
Q

when is the investment method used and give me an overview of how it works?

A

used when there is an income stream to value
the rental income is capitalised to produce a capital value.
conventional method assumes growth implicit valuation approach
an implied growth rate is derived from the market capitalised rate (yield.

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14
Q

how do you calculate the MV using the conventional investment method?

A

rent received or market rent X YP = Market Value

importance of comparables for rent & yield.

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15
Q

how do you calculate the MV using the term and reversion investment method?

and when is it used?

A

used for revisionary investments where the MV is higher than the passing rent. ie when the its under rented

TERM is capitalised until the next review/ lease expiry at an INITIAL YIELD

REVERSION to Market Rent valued in PERPETUITY at a REVERSIONARY yield.

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16
Q

how do you calculate the MV using the layer/hardcore investment method?

and when is it used?

A

used for overrented investments (passing rent is more than the Market Rent)

income flow divided horizontally

bottom slice = MR

top slice = rent passing less MR until next lease event

higher yield is applied to the top to reflect additional risk

different yields used depending on comparable investment evidence and relative risk.

17
Q

define an All Risks Yield?

A

the remunerative rate of interest used in the valuation of fully let property let at market rent reflecting all the prospects and risks attached to the particular investment

18
Q

define an True Yield?

A

assumes rent is paid in advance not in arrears

(traditional valuation practise assumes rent is paid in arrears)

19
Q

define an Nominal Yield?

A

initial yield assuming rent is paid in arrears

20
Q

define Gross Yield?

A

the yield is not adjusted for purchasers costs. (such as an auction result)

21
Q

define an Net Yield?

A

the resulting yield adjusted for purchasers costs

22
Q

define an Equivalent Yield?

A

Average weighted yield when a revisionary property is valued using an initial and reversionary yield.

23
Q

define an Initial Yield?

A

simple income yield for current income and current price.

24
Q

define an reversionary Yield?

A

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

25
Q

define an Running Yield?

A

The yield at one moment in time.

26
Q

Discounted Cash Flow Technique

DCF

What is a DCF,

Overview of how it is calculated (high level)

A

growth explicit investment method of valuation

DCF valuations involves projecting estimated CF over an assumed investment holding period plus an exit value at the end of that period, usually arrived at on a conventional ARYY basis.

The CF is then discounted back to the present day at a discounted rate (also known as the desired rate of return) that reflects the perceived level of risk.

The approach separates out and explicitly identifies growth assumptions rather than incorporating them within an ARY

27
Q

Discounted Cash Flow Technique

DCF

examples of when it is used?

A

short leasehold interests and properties with income voids or complex tenures

phased development projects

some ‘alternative investments’

non standard investments (eg. 21 - year rent reviews)

over rented properties & social housing

28
Q

The RICS Guidance Note on Discounted Cash Flows for commercial property investments 2010 provides what?

A

a useful summary of the methodology for DCF

29
Q

DCF simple methodology to find the MV?

(5)

A
  1. estimate CF (income - expenditure)
  2. estimate exit value at the end of the holding period
  3. select the discount rate
  4. discount CF at discount rate
  5. Value is the sum of the completed discounted CF to provide the NPV
30
Q

DCF

what is the NPV and how is it calculated?

A

the sum of all the discounted CF of the project

a NPV can be used to determine whether an investment gives a positive return against the TRR (target rate of return)

when the NPV is positive the investment has exceeded the investors target rate of return.

When NPV is negative it has not reached the TRR

31
Q

What is the IRR

Internal Rate of Return

what is it used for?

A

the rate of return at which all FURTURE cashflows must be DISCOUNTED to produce a NPV of ZERO

used to assess the total rate of return from an investment opportunity making some assumptions regarding rental growth re-letting and exit assumptions

32
Q

Internal Rate of Return

How do you calculate the IRR, if you don’t have the relevant software?

(5)

A
  1. input current market value as negative CF
  2. input projected rents over holding period as a positive value
  3. input projected exit value at the end of the term assumed as a positive value
  4. discounted rate (IRR) is the rate chosen which provides a NPV of zero
  5. if NPV is ZERO the investment then the target rate of return is met
33
Q

When is the profits method of valuation used and give an example of asset types?

A

used for valuations of trade related properties

where the value of the property depends on the profit generated (trading potential) from the business not the physical condition or location.

pubs, petrol stations, hotels, guest houses, care homes healthcare properties

34
Q

what information is required to carry out the profits method?

A

accurate audited accounts
where possible, 3 years.

audited accounts are superior to management accounts.

use estimates/business plan if a new business.

adjust for maturity of business and any exceptional terms of expenditure.

35
Q

profits method,

methodology?

A

annual turnover (income received)

less costs/purchases
= gross profits

less reasonable working expenses
= unadjusted net profit

less operators remuneration
=adjusted net profit known as the Fair Maintainable Operating Profit (FMOP)

this can be expressed as the EBITDA

(earnings before interest, taxation, depreciation, amortisation)

Capitalised at appropriate yields (YPE) to achieve MV

Cross check with comparable sales evidence if possible.

36
Q
A

APC (12 decks)

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