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APC > Valuation > Flashcards

Valuation Flashcards

1
Q

What should be considered before undertaking a valuation instruction?

A
  1. Competence (& SUK)
  2. Independence (conflicts)
  3. Terms of Engagement
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2
Q

Why is due diligence important?

A

To check no material matters that could impact upon valuation.

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3
Q

What due diligence can be checked?

A
  1. Asbestos
  2. Business rates/ council tax
  3. Contamination
  4. Equality Act 2010 compliance
  5. Environmental (high voltage power lines, substations, telecoms masts)
  6. EPC rating
  7. Flooding
  8. Fire safety
  9. Health and safety compliance
  10. Highways (e.g. adopted)
  11. Legal title and tenure (boundaries, ownership, deeds of covenant, easements, rights of way, restrictive covenants, way-leaves)
  12. Public rights of way
  13. Planning history and compliance (conservation area, restrictive planning covenants)
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4
Q

5 methods of valuation?

A
  1. Profits
  2. Residual
  3. Investment
  4. Contractors/DRC
  5. Comparable
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5
Q

3 approaches for valuation?

A
  1. Income
  2. Cost
  3. Market
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6
Q

What is the RICS document on comparable evidence?

A

RICS Professional Standard - Comparable Evidence in Real Estate Valuation 2019 (reissued Apr 23)

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7
Q

What is the hierarchy of comparable evidence?

A
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8
Q

What are the 6 steps for the comparable method of valuation?

A
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9
Q

What is the investment method of valuation?

A
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10
Q

What is the term and reversion method (investment)?

A
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11
Q

What is the layer/hardcore method (investment)?

A
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12
Q

What is an all risks yield?

A

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 that investment

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13
Q

What is a true yield?

A

Assumes rent is paid in advance, not in arrears (traditional valuation practice assumes rent is paid in arrears)

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14
Q

What is a nominal yield?

A

Initial yield assuming rent paid in arrears

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15
Q

What is a gross yield?

A

Yield not adjusted for purchasers costs (e.g. auction result)

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16
Q

What is a net yield?

A

Yield adjusted for purchaser’s costs

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17
Q

What is an equivalent yield?

A

Average weighted yield when a reversionary property is valued using an initial and reversionary yield

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18
Q

Can you break down purchasers costs please

A

1% agents fees
0.5% legals
0.3% VAT
Banded stamp duty

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19
Q

What is an initial yield?

A

Simple income yield for current income and current price

20
Q

What is a reversionary yield?

A

Market Rent (MR) divided by current price on an investment let at a rent below the MR

Aka - anticipated rate of return to which the initial yield will either rise or fall once the rent reaches the estimated rental value

21
Q

What is a running yield?

A

The yield at one moment in time

22
Q

What is a special assumption (Red Book)?

A
23
Q

What is an assumption (Red Book)?

A
24
Q

How would you undertake the profits method in theory?

A

Use turnover, take profit margin (e.g. 20-25% and capitalise by appropriate multiplier to get a market rent.

25
Q

How would you depreciate a 50 year old property versus a 10 year old property using DRC method?

A

Potentially a higher percentage of obsolescence over the time period. E.g. 75% for the 50 year old property, versus 25% physical obsolescence for the 25 year old property.

26
Q

What are the 3 forms of obsolescence?

A
27
Q

How did you calculate site coverage?

A

Work out how many acres.
How many sf for the building?
1 acre of land = 20k sf
If 2 acre site and 20sf 1 acre excess land.

28
Q

What’s an alternative way to calculate site coverage?

A
  • Apply a multiplier to the rent.
  • Rentalise the 20k property with 40% site coverage.
  • Apply a multiplier of 1.5 – 2x on top to reach value
  • Example: £100k per annum and 40% site cover. Multiplier of 2 would give rent of £200k per annum.
29
Q

How would you apply Capex for improving an EPC?

A

Sustainability team + Building surveyors

30
Q

What is a residual valuation?

A

Used to establish the value of a proposed development

31
Q

What are some types of contamination?

A

Oil
Radiological
Chemical

32
Q

What does BREEAM stand for?

A

Building Research Establishment Environmental Assessment Method

33
Q

What are purchaser’s costs made up of?

A

1% agents fees
0.5% legals
0.3% VAT
Banded stamp duty

34
Q

What are the stamp duty bands?

A

No stamp duty under £150k.
£150k - £250k = 2%
Above £250k = 5%

35
Q

What are the categories of comparable evidence in the RICS Practice statement?

A

Category A - Direct comparables
Category B - General Market Data
Category C - Other Sources

36
Q

What is a DCF?

A

Arrives at a value by examining a property’s future net income or projected cash flow from the investment and then discounting that cash flow to arrive at an estimated current value of the investment

37
Q

What is considered in an example DCF?

A

The key inputs you would need to establish in this scenario are the current market rent, expected rental growth (% p.a.), rent review period, holding period, discount rate and all risks yield (for the last line of the cashflow into perpetuity).

38
Q

How to calculate the net effective rent?

A

Essentially, “net-effective rent” is the total gross rent for the entire term of a lease divided by every month period, including free months or other promotions.

39
Q

What is the definition of IV?

A

Investment value is the valuation of property that is applicable to a specific investor as opposed to MV that is applicable to the wider market

40
Q

What is the RICS Guidance Note - Discounted Cash Flow Valuations, 2023

A

Clarifies difference between IV and MV

41
Q

What exemptions are there from the Red Book?

A

There are no exemptions from compliance with PS 1-2 when providing valuation advice.

However, there are 5 specific circumstances where VPS 1-5 may be unsuitable or inappropriate to comply with:
1. Providing AGENCY or brokerage advice for an acquisition or disposal
2. Acting as an expert witness
3. Performing statutory functions
4. Providing a valuation purely for internal purposes, without liability and without communication to a third party
5. Providing valuation advice in the course of negotiations or litigation where the valuer is acting as an advocate

42
Q

How to calculate net effective rent?

A

Net effective rent – multiply annual rent by term certain. Deduct rent free and capital. Divide by term certain, then by floor area

43
Q

What is a residual valuation?

A

Residual – land value (GDV – development costs – profit = land value)

44
Q

What is a DCF?

A

Consider cost of purchasing building/demise
Assess refurbishment costs
Consider void periods and cost of void – business rates, s/c costs, marketing
Consider rental levels and growth rates
Consider exit yield – use in-house sector yields
Look at IRR – does it beat your hurdle rate (7.4% GLF)
Compare NPV to other investments

45
Q
A
46
Q
A

APC (7 decks)

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