Valuations Flashcards
Define an Internal Valuer
- Employed by company to value the assets of the company
- Valuation for internal use only
- No 3rd party reliance
Define an External Valuer
- Has no material links with the asset to be valued or the client
Before accepting any new valuation instruction you must CIT down!
C - competence - are you competent to undertake the work?
(If not, refer to the RICS find a surveyor service)
I - independence - think first and then check for any conflicts or personal interests - WHO and WHY?
T - terms of engagement - set out in writing your full confirmation of instructions to the client prior to starting work
Confirm the competence of the valuer
Confirm the extent and limitations of the valuers inspection WHICH MUST be stated
Statutory Due Diligence for Valuation
(think valos)
- Asbestos Register
- Business Rates
- Equality At 2010 compliance
- Environmental matters
- EPC rating
- Flooding
- Fire safety
- Health & Safety
- Highways
- Legal title and tenure
- Public rights of way
- Planning and compliance i.e. CIL, s106 or rights of light
Timeline of a valuation instruction
- Receive an instruction from the client
- Check competence (SUK)
- Check independence so that there are no conflicts
- Issue ToE
- Receive signed ToE
- Gather info - leases, titles etc
- Complete DD
- Inspect and Measure
- Research market and assemble, verify and analyse comps
- Undertake valuation
- Draft report
- Have valuation vetted
- Finalise and sign
- Report to client
- Issue invoice
- Ensure valuation file in a good order for archiving
5 Methods of Valuation
- Comparative Method
- Investment Method
- Profits Method
- Residual Method
- Depreciated Replacement Cost
IVS 105 Valuation Approaches and Methods -3 valuation approaches
- Income approach - converting current and future cash flows into a capital value
- Cost approach - reference to the cost of the asset whether by purchase or construction
- Market approach - using comparable evidence available
COMPARATIVE method of valuation - methodology
- Search and select comparables
- Confirm/verify details and analyse headline rent to get a NET effective
3 Assemble comparables in a schedule - Adjust comparables using the hierarchy of evidence
- Analyse comparables to for opinion of value
- Report value and prepare file note
COMPARATIVE method of valuation - RICS Professional Standard
Comparable Evidence in Real Estate (2019)
- This document outlines the principles of comparables evidence. It provides advice in dealing with situations where there is limited availability of evidence and sets out non-prescriptive hierarchy of evidence, noting that
“the valuer should use professional judgment to assess the relative importance of evidence on a case-by-case basis”
What are the 3 components of hierarchy of evidence?
CAT A - Direct Comparables of Contemporary
CAT B - General Market Data that Provides Guidance
Cat C - Other Sources
Hierarchy of Evidence - Cat A
- completed transactions of near-identical properties for which full and accurate information is available
- completed transactions of other, similar real estate assets for which full and accurate information is available
- similar real estate being marketed where offers may have been made but a binding contract has not been completed
- asking prices (only with careful consideration)
Hierarchy of Evidence - Cat B
- information from published sources of commercial databases, its importance will depend on relevance, authority and verifiability
- other indirect evidence
- historic evidence
- demand/supply data for rent, investment or owner-occupation
Hierarchy of Evidence - Cat C
- transactional evidence from other real estate types and locations
- other background data (e.g. interest rates, stock market movements and returns which can give an indication for real estate yields)
How to find relevant comparables
- INSPECTION
- AGENTS
- AUCTION
- IN-HOUSE DATABASES
*NB care must be taken for auctions as there may be a special purchaser or insolvency sale
- Market sentiment is important when there is a lack of evidence
- The date of the evidence is crucial - FOCUS on “CONTEMPORARY”
INVESTMENT METHOD OF VALUATION
- Used when there is an income stream to value
- Rental income is capitalised to produce a capital value
- Conventional method assumes IMPLICIT GROWTH
- Implied growth rate is derived rom the yield
IVS 105
- Income Approach
- Cost Approach
- Market Approach
Define term and reversion
Used for under-rented properties or reversionary investments
Term capitalised until rent review then perp at a new yield
Define Hardcore
Hardcore or layer and top slice is used for over-rented properties
Income flow horizontally split
Bottom slice = market rent
Top slice = rent passing - market rent
Higher yield applied to the top slice to reflect the increased risk
Different yields used due to risk of higher income
What is a yield?
A measure of investment return expressed as a % of capital invested
How is a yield calculated?
Income divided by price x 100
What is years purchase?
The number of years required for the income to repay its purchase price
Dividing 100 by the yield
Risk factors that impact a yield
> Rental and Capital Growth
Location and covenant
Use
Lease terms
Obsolescence
Voids
Security of Income
Liquidity (ease of sale)
What is a return?
Term used to describe the performance of a property
Measured retrospectively
What is a secondary yield?
Difference between prime and non prime assets
All risks yield
The remunerative rate of interest used in the valuation of fully let property, let at the market rent reflecting all the prospects and risks attached to the particular investment
True Yield
Assumes rent is paid in advance NOT in arrears (traditional valuation practice assumes rent is paid in arrears)
Gross Yield
The yield not adjusted for purchasers’ costs i.e auction result
Net Yield
The resulting yield adjusted for purchasers costs
Nominal Yield
Initial yield assuming rent is paid in arrears
Equivalent yield
AVERAGE WEIGHTED yield when a reversionary property is valued using an initial and reversionary yield
Initial yield
Simple income yield for current income and current price
Reversionary Yield
Market Rent (MR) divided by current price on an investment at a rent below the MR
Running Yield
The yield at one moment in time
DCF
Growth explicit investment method of vals
Form of income approach
DCF valuation seeks to determine the value of a property by examining the future net income or projected cash flow from the property and then discounting then cash flow to arrive at an estimated current value of the property
DCF methodology
- Estimate the cash flow for an agreed holding period
- Estimate the exit value at the end of the hold
- Select the discount rate
- Discount cash flow at discount rate
- Value is the sum of the completed discounted cash flow to provide the NPV
What is an Internal Rate of Return?
IRR is an assessment of the total return from an investment with regard to assumptions on rental growth, re-letting and exit
IRR is a rate of return at which the future cashflows must be discounted to produce an NPV of 0
POSITIVE NPV
Investment has exceeded the target rate of return
NEGATIVE NPV
Investment has not achieved the target rate of return
How do you Calculate the IRR?
- Input the current market value as a negative cash flow
- Input projected rents over holding period as a positive value
- Input projected exit value at the end of
