Valuations Flashcards
What is an internal valuer
- Employed by company to value their assets
- For internal purposes only
- No 3rd party reliance
What is an external valuer?
Has no material link with the asset to be valued or the client
What is a yield and how is it calculated?
A measure of investment return expressed a % of capital invested
Income divided by price multiplied by 100
What is YP and how is it calculated?
100 divided by yield
This is the number of years required for an investments income to repay its purchase price
Talk me through the timeline of a valuation instruction
Receive instructions from client
Competence
Independence
ToE
Gather and review info (statutory DD, lease plans etc)
Check that there are no matters that can affect value
Inspect and measure
Research market and assemble comps
Undertake valuation
Compile report
Check
Send to client
Bill
What makes a good comp?
An accurate assessment of the market. A good comp is: similar property, with full and accurate info available, completed and recent transaction.
What is the hierarchy of evidence, can you please talk about it?
Outlines the relative weight attached to different types of evidence, 3 categories:
Category A- direct comparables, competed transactions, similar properties, full and accurate info, such as recent OMLs, LRs or RRs.
Category B- general market data used for guidance only, such as information from commercial databases or historic evidence
Category C- other sources. Transactional evidence from other real estate types and locations, background data such as interest rates and stock market movements.
3 factors that affect value?
Location, spec, tenant lease terms
What are the two most important things that impact the capitalisation rate of a yield?
Income Profile and Location
Valuation uncertainty – how has covid impacted valuation?
I didn’t undertake any formal valuation work during the height of the pandemic, however I am aware that CBRE introduced a policy of ensuring that COVID-19 disclaimers and caveats went into all ToEs to reflect the unpredictability if the market.
When and how would you undertake a profits method valuation?
Used where the value of the property depends on the profitability of the business and its trading potential, eg: pubs, petrol stations, hotels
Annual turnover – costs = gross profit
Gross profit – reasonable working expenses = net profit
Unadjusted net profit – operators renumeration = fair maintainable operating profit (FMOP)
FMOP capitalised using appropriate yield (YP) to achieve market rent
When and how would you undertake a DRC valuation?
Used for owner-occupied properties, or for specialised property types
Two steps:
Value the land it its existing use (assume it has PP)
Add cost of replacing the building plus fees less a discount for deterioration (get from BCIS)
How would you undertake the comparative method of valuation?
Search and select comps
Confirm/ verify details and calculate net effective rent
Assemble comps into a schedule
Adjust using hierarchy of evidence
Analyse comps to form opinion of value
Report value
When and how would you undertake a conventional method investment valuation?
Used when there is an income stream to value (investment method generally)
Rental income used to produce a capital value
Rent received or market rent multiplied by YP = market value
Importance of good rent a yield comps
When and how would you undertake a term and reversion investment valuation?
Used for reversionary (under-rented) investments
Term capitalised until next review or LEX at an initial yield
Reversion to market rent valued in perpetuity at a reversionary yield
When and how would you undertake a layer/hardcore investment valuation?
Used for over-rented investments
Income flow divided horizontally
Bottom slice= market rent
Top slice= rent passing less market rent until next lease event
Higher yield applied to top slice to reflect additional risk
When would you undertake a DCF investment valuation?
Short leaseholds
Phased development projects
Non-standard investments
When and how would you undertake a residual method valuation?
Used to assess the financial viability of a development scheme
GDV (=total cap val of completed scheme)
Minus costs (build costs pro fess etc) and developers profit = NDV
NDV – purchasers’ costs = value
Why is there a difference between prime and secondary yields?
The difference between prime and secondary yields reflects the differing degrees of risks for each properties including likelihood of voids, quality of location and prospects for rental and capital growth.
What is an Equivalent Yield?
Time weighted average yield between an initial yield and a reversionary yield
What is an All-Risks Yield?
A yield used for a fully let property, let at market rent reflecting all the prospects and risks attached.
What is a Gross Yield?
A yield not adjusted for purchasers’ costs
What is a Net Yield?
A yield which is adjusted for purchasers’ costs
What is a Reversionary Yield?
MR / current price on an under-rented investment
What is a Running Yield?
A yield at one moment in time
What is an Initial Yield?
Simple income yield for current income and current price
What is a True Yield?
A yield which assumes rent is paid in advance, not in arrears
What is a Nominal Yield?
Initial yield assuming rent is paid in arrears
What was included in your terms of engagement?
Identity and status of valuer
Identity of client
The asset being valued
Valuation date
Fee basis
CHP
What are the exemptions of a red book valuation?
5 exemptions:
Advice is provided for negotiations or litigation
Valuation is for statutory function
Valuation is provided to client for internal purposes, not to be relied on by anyone else
Valuation is undertaken for as part of valuation/ brokerage work
Valuation is provided in advance of giving evidence as an expert witness
What is the structure of the red book?
Part 1- intro
Part 2- glossary of terms
Part 3- professional standards (PS1- where a RB val is not required, PS2- Ethics etc PS3- ToE)
Part 4- valuation performance standards (VPS1 ToE inclusions, VPS2 inspections, investigations and records, VPS3 valuation report inclusions, VPS4 bases of value, VPS5 valuation approaches and methods)
Part 5- valuation applications (VPGAs 1-10)
Part 6- international valuation standards
What are some of the minimum requirements needed in a valuation report?
Identity and status of valuer
Identity of client and any other intended users
Basis of value
The asset being valued
Valuation date
Please can you tell me what is in VPS2?
Outlines expectations of valuers with regard to inspections and how to deal with potential restrictions and revaluations without reinspection.
- Inspections and investigations should be carried out to the extent necessary to provide a valuation adequate for its purpose
- Members must have regard to IPMS
- Desktop valuations must make clear the restrictions and inspections
- Revaluations without inspection are only appropriate where the valuer is satisfied that property has not materially changed => typical CBRE is inspect every 3 years
- Must take reasonable steps to verify information
- Records must be clear accurate and not misleading
- Audit trail must be maintained with legible notes
What does VPGA8 say in relation inspections?
Covers inspections and investigations, having particular regard for sustainability and ESG issues
What is the definition of fair value (IFRS13)?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
What is the definition of market value?
The estimated amount for which an asset or liability should exchange on the valuation date, between a willing buyer and a willing, in an arms-length transaction, after proper marketing, where the parties had each acted knowledgeably, prudently and without compulsion.
What is the difference between fair value and market value?
Requirement to report fair value if valuation is for IFRS purposes, however is generally consistent with market value
What is an assumption?
Assumptions are made where it is reasonable for the valuer to accept that something is true without the need for specific investigation
What is a special assumption?
A special assumption is a supposition that is taken to be true and accepted as fact even though it is not true
It must be agreed with the client in ToE. Eg: assuming PP has been granted when it hasn’t.
What is the purpose of The Red Book?
To provide consistency as to valuation practices and definitions for members globally, inc guidance on valuation methods, ToE and the contents of valuation reports.
Why are terms of engagement important when undertaking valuation work?
They provide clear guidelines as to the scope and nature of the instruction and help to ensure that no issues arise regarding unclear instructions in the course of the work.
Tell me about VPS1
About ToE
- Define and agreed at outset – easily understood
- Convey clear understanding of val requirements
- Kept on file
Tell me about VPS3
with regards to valuation reports
Valuation must:
- Clearly and accurately set out conclusions of the valuation in a manner which is neither ambiguous or misleading
- Draw attention to issues affecting degree of certainty
should cover
1. vauer
2. client and users
3. purspose
4. assets
5. basis
6. valuation date
7. extent of investigation
8. nature and sources of information
9. assumptions and special assumptions
10. restriction on use/distribution/publication
11. confirm in accordance with IVS
12. Approach and reasonsing
13. amount of valuation
14. date of report
15. commentary on uncertainty
16. limitation on liability
due diligence for VPS3
asbestos, business rates, council tax, contamination, equality act, environmental issues, epc rating, flooding, fire safety, health and safety, highway, public rights of way, planning, title and tenure
VPS 4
basis of value, assumptions and special value
VPS2
inspections, investigations and records
VPS5
valuation approaches and methods
VPGA 8
valuation of real property interests
what is the purposes of the red book
when is a red book valuation required
what is the definition of market value
