Valuations 2 Flashcards
What are the 5 conventional methods of valuation
Comparative, investment, residual, profits/accounts and contractors method (DRC)
What are contemporary valuation techniques
Valuation methods where discounted cash flow techniques are used
What makes a property transaction comparable to the property being valued?
- Similarities such as physical characteristics, location, tenure, use and time-scale (transaction took place at similar time)
How many comparables are needed to produce a valuation?
We need all the available comparable evidence, so that there is enough to establish a trend
What is the longest time period that a transaction could be accepted as being a comparable?
- IE how old can a comparable be?
- The most recent comparables tend to hold the most weight
- It needs to be post March 2020 evidence due to covid
What is weighting of comparable evidence?
- Ranking comparables with the greatest similarities so that they have the most weight
- This is subjective depending on what the valuer thinks
Greatest weight attached to comparables with greatest similarities
What is the hierarchy of evidence?
- Ranking evidence by transaction type
- Most weight should be attached to:
○ open market lettings
○ lease renewals
○ Rent review
○ Independent expert determination
- Most weight should be attached to:
- Arbitrator award
What is extrapolation of comparable evidence?
- Calculating a value outside of known data (above or below known data)
- Considered statistically uncertain
EG in rising markets, take comparables and add on. In falling markets, take comparables and deduct.
What is the purpose of zoning?
- Used to compare retail units with different shapes / different frontage to depth ratios (can compare office space on sqft basis, but with retail space it is all about the frontage - need unit to be accessible to customers)
- IE the value lies in the frontage
What is the standard zone depth
- 6.10m (20ft)
Note (9.10m used on Oxford St as retail units are much larger)
How would you assess the market rent of the first floor of a retail unit?
- Zone X / 10
- Where a first floor is used, the Zone A / 10 calculation is using
If first floor is non-retail purposes (EG accomodation or storage) then it is sometimes acceptable to take a rate independent of X
- Where a first floor is used, the Zone A / 10 calculation is using
How would you assess the market rent of a ground floor unit with a return frontage?
- Corner unit (main street with good footfall, and side street with lower footfall)
- Whole unit would become Zone A if frontages have equal footfall
- Different valuers do different things - could add an uplift to the Zone or Zones where the return frontage exists (EG Value Zone A at £105 per sq ft rather than the usual £100 per sq ft)
If return frontage covered all of Zone A and half of Zone B, then could apply 5% uplift to Zone A rate and a 2.5% uplift to the Zone B rate
How would you assess the market rent of a ground floor with frontages on two roads (ie it is a through unit)
- Would zone back from both frontages
- EG might zone back from £200/sqft from one frontage, and zone back from £150/sqft from another frontage
Likely to use different Zone A rates as footfalls for each frontages are likely to be different
- EG might zone back from £200/sqft from one frontage, and zone back from £150/sqft from another frontage
How would you determine the market value of an investment property let on internal repairing terms?
- Use the investment method
- Would take rent, deduct the outgoings to get the net rent, which we would then capitalise
- IR terms means LL has to pay for external repairs, insurance and extra management (deduct these outgoings)
What factors make up the all risks yield? COMMON QUESTION
- Buildings physical characteristics
- Tenants covenant strength
- Market rent to see if property is under or over rented (EG 7% market yield, would increase if over rented or decrease if under rented)
- Other lease terms - likely to be some uncertainty in net rent (EG unexpired lease term)
Anticipated rental growth (links to location)
What is the market capitalisation rate?
- Another name for the all risks yield
It is the rate at which the market capitalises the income
How would you value a green-field site with planning permission for residential development?
Assuming there are no appropriate comparables, should use the residual method
How would you carry out a residual valuation?
Take market value of completed development, deduct development cost and developers profit, to get the land value
What costs did you deduct in your residual valuation?
- Demolition / sitE clean up fees
- Cost of construction (building cost)
- Fees for construction (architects, engineers etc)
- Finance costs
- Contigency to allow for fluctuations in these costs
- Agent and Legal fees on disposal
- Agent and Legal fees on acquisition
- Fees and stamp duty land tax on aquisition when you buy the site
(GIVE ANSWER IN THIS ORDER AS IT IS LOGICAL)
How did you calculate developers profit inn your residual valuation?
- Can take percentage of total costs (25% average), or a percentage of gross development value (15% average)
- The riskier the development, the greater the percentage
- All comes down to risk EG can’t guarantee you will sell the properties, and even if you do sell these properties, you may not sell for figure you wanted to sell for. However, if you had Amazon on the pre-let and a pension fund who wanted to buy the investment, then the first is very minimal!
- Would say ‘I used 15% because there was only a moderate risk’
ALTERNATIVELY COULD USE PERCENTAGE OF TOTAL COSTS
