Valuation Flashcards
What steps would you undertake prior to a valuation?
- Competence (are you competent (Skills, Understanding and Knowledge SUK)
- Independence (check for conflicts of interest)
- Terms of Engagement (set instruction out in writing, stating extent and limitations)
What due-diligence would you undertake prior to a valuation?
- Asbestos
- Business rates/Council tax
- Contamination
- Equality Act 2010
- Environmental matters
- EPC
- Flooding
- Fire Safety
- Health and Safety compliance
- Highways
- Legal title and tenure
- Public rights of way
- Planning
How would flooding, for example, impact a valuation?
Flooding presents risk. Risk negatively impacts valuations.
Run me through a timeline of a valuation you have undertaken
- Receive instruction
- Check competence
- Check independence (conflicts of interest)
- Issues Terms of Engagement
- Receive signed ToEs
- Gather information (read lease and further associated documents)
- Undertake DD
- Inspect and measure
- Research market and assemble comparables
- Undertake valuation
- Draft report
- Review and have signed off
- Finalise and sign report
- Issue invoice
What are the IVS 105 valuation methods?
- Income approach (converting cashflows into capital value i.e investment method)
- Cost approach (reference to cost of asset at purchase or construction)
- Market approach (using comparable evidence)
Talk me through how you would undertake a valuation using the comparative method?
- Search and select comparables
- Confirm and verify details. Analyse to give a NER.
- Assemble comps in schedule
- Adjust comps using HoE
- Analyse comps to form opinion of value
- Report on value
What is the hierarchy of evidence as per RICS Guidance Note ‘Comparable Evidence in Real Estate Valuation, 2019?
- Category A – direct comps of contemporary transactions
o Completed transactions of near-identical properties for which full info is available
o Completed transactions of similar properties where full info is available
o Similar real estate being marketed where offers have been made
o Asking prices - Category B – general market data that can provide guidance
o Information from published sources or commercial databases
o Indices
o Historic evidence
o Supply/demand data - Category C – other sources
o Transactional evidence from other real estate types and locations
o Interest rates, stock market movements which imply yield or value
When would you use the investment method?
- Used when there is an income stream to value (rent)
- Rental income is capitalised to produce a capital value
What is the conventional investment method?
- Rent received, or market rent x YP = market value
- Comp method used for rent & yield
If a property was under-rented, which method would you use?
- Term and reversion
- Term capitalised until next lease event at an initial yield
- Reversion to market rent valued in perpetuity at a reversionary yield
If a property was over-rented, which method would you use?
Layer / Hardcore method
- Used for over-rented investments
- Bottom slice = Market rent
- Top slice = passing rent – market rent until next lease event
- Higher yield used to reflect risk
What is a yield?
- A measure of investment return, expressed as a percentage of capital invested
- Calculated by: income / price x 100
What impacts yields?
- Risk impacts yields due to following factors:
o Prospects for rental and capital growth
o Quality of location and covenant
o Use of property
o Lease terms
o Voids
o Security of income
o Liquidity
Talk me through the profits method of valuation
- Used for valuations of trad related properties
- Used where value of property depends on the profitability of the business
- Used for:
o Pubs
o Petrol stations
o Hotels
o Leisure
o Healthcare - Requires accurate and audited accounts for 3 years (if possible)
- Adjust for maturity of business
Methodology
- Annual turnover (income received) – Costs/Purchases = Gross Profit
- Less reasonable working expenses = Unadjusted net profit
- Less operators renumeration = Adjusted net profit (FMOP)
- Then capitalised at an appropriate yield to deliver market value
- Expressed as EBITDA
What is the DRC / contractors method?
- Only used when direct market evidence is limited or unavailable for specialised properties:
- Used for:
o Lighthouses
o Oil refineries
o Docks
o Schools
Purpose: - Used for owner-occupied property
- For accounts purposes for specialised properties
- Also used for rating valuations of specialised properties
Simple methodology:
Value of land in its existing use + current cost of replacing the building (less a discounted for depreciation and obsolescence)
