Valuations Flashcards
What is the difference between an internal and an external valuer?
An internal valuer is someone employed by your company to value to assets of the company. For internal use only and no third party reliance.
An external valuer has no material links with the asset to be valued or the client.
What things should you do before commencing a valuation instruction?
- Check competence (SUK)
- Independence (COI check)
- TOE (extent and limitations of valuer’s inspection must be stated)
Name some statutory due diligence you do at the beginning of a valuation.
- Asbestos register
- Business rates
- Contamination
- EPC
- Legal title and tenure
- Planning history and compliance
- Listed building status
- Conservation areas?
- Equality Act 2010 compliance
- Flooding
What is the timeline of a valuation instruction?
- Receive instruction
- Check competence
- COI check
- Issue and sign TOE
- Gather information (lease, title etc)
- Undertake DD
- Inspect and measure
- Comparable evidence
- Undertake valuation
- Draft report
- Checked with supervisor
- Finalise and sign / to client
- Issue invoice
- File audit
What are the five methods of valuation?
- Profits
- Comparative
- Residual
- DRC (Contractors)
- Investment
What are the three approaches to valuation?
- Income approach - investment, residual and profits (converting current and future cashflows to capital value)
- Cost approach - DRC (reference to cost of asset either by purchase or construction)
- Market approach - Comparative (comparable evidence)
What is the hierarchy of evidence?
A tool used to determine the relative weight attached to different types of evidence
What are the types of hierarchy?
Cat A - direct comparables
Cat B - general market data that can provide guidance
Cat C - other sources (e.g. comps from other real estate types)
Leasing:
1. Open market lettings
2. Lease renewals
3. Rent reviews
4. Independent expert determinations
5. Arbitrator rewards
6. Court determinations under L&T Act 1954
7. Hearsay evidence
8. Sale & leasebacks
9. Surrender & renewals
10. Inter-company arrangements
When is the investment method used?
When there is an income stream to value.
What is the conventional investment method?
Rent received multiplied by the years purchase to calculate MV
What is the term and reversion method?
Used for reversionary investments (Market rent more than passing)
Term capitalised until next review
Reversion to market rent valued into perpetuity at reversionary yield
What is the layer/hardcore method?
Used when property is over rented
Bottom slide = market rent
Top slice = rent passing less MR until lease event
Higher yield applied to top slice to reflect risk
How is a yield calculated?
income / price x 100
What is a yield?
A measure of investment return, expressed as a percentage of capital invested
How is a YP calculated?
100 / yield
What is a YP?
The number of years required for its income to repay its purchase price
What type of risk factors might you consider in an investment?
- prospects for rental and capital growth
- Quality of location
- Covenant
- Lease terms
- Obsolescence
- Voids
- Security and regularity of income
- Liquidity
What is an All Risks Yield?
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
What is a True Yield?
Assumes rent is paid in ADVANCE (traditional val practice assumes rent paid in arrears)
What is a Nominal Yield?
Initial yield assuming rent in paid in ARREARS
What is a Gross Yield?
The yield is not adjusted for purchasers costs (e.g. auction)
What is a net yield?
The resulting yield adjusted for purchaser’s costs
What is an equivalent yield?
The average weighted yield when a reversionary property is valued using an initial and reversionary yield
What is an initial yield?
Simple income yield for current income and current price
What is an reversionary yield?
Market rent divided by current price on an investment let at a rent below the MRW
What is a running yield?
The yield at one moment in time
What is a DCF?
Growth explicit method of valuation
Model that seeks to determine the value of a property by examining its future net income or projected cash flow from the property and then discounting the cash flow to arrive an an estimated current value
When is a DCF used?
Short leasehold interests
Phased development projects
Properties with income voids or complex tenures
Over rented properties
What is the methodology for DCF?
- Estimate the cashflow for an agreed holding period
- Estimate the exit value
- Select the discount rate
- Discount the cashflow at this discount rate
- Value is the sum of the completed discounted cashflow to provide the NPV
What does NPV show?
Used to determine if an investment gives a positive return against a target rate of return
i.e. a positive NPV means the investment has exceeded the target ROR
a negative NPV means the investment has not achieved the target ROR
What is an IRR?
The rate of return at which all future cashflows must be discounted to produce an NPV of 0
Used to assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions
What is the profits method of valuation? And what must you have to do this?
Used for valuation of trade related property (e.g. hotel or pub) where the value of the property depends on the profitability of its business
Must have 3 years of audited accounts
If new business, estimated business plan
What is the methodology for profits method valuations?
Annual turnover - costs/purchasers = gross profit
Minus working expenses = unadjusted net profit
Minus operators renumeration = adjusted net profit known as Fair Maintainable Operating Profit
Capitalist at appropriate yield
How can a profits method valuation be expressed?
EBITDA
Earnings before interest, taxation, depreciation and amortisation
What is the residual method of valuation?
Valuation of a property holding to find the market value of the site based on market inputs
Form of development appraisal
What is GDV?
The market value of a completed development
What is included in TDC?
- Site preparation
- Planning costs
- Building costs
- Professional fees
- Contingency
- Marketing costs & fees
What is included in ‘site preparation’ as part of TDC?
Demolition, remediation works, site clearance, levelling
What is included in ‘planning costs’?
S106 payments: legal agreement for planning obligations (e.g. affordable housing) to gain planning permission. Site specific and scheme related.
CIL: used by LPAs to raise funds for infrastructure necessary to support development in the area. Based on increase in floor area
Where is ground rent deducted?
From the gross income to calculate net rent received
