Flashcards in The principles of the various methodologies needed to provide both capital and rental valuation advice Deck (84)
What steps do we take to assess leasehold value?
1) Establish the profit rent = difference (+ve or -ve) between MR and PR of property (if MR = PR, then profit rent = 0)
2) Capitalise the profit rent at yield for length of lease
3) Calculate YP Dual Rate and times this by the profit rent to give CAPITAL VALUE
What is the Length of Capitalisation for the profit rent in leasehold valuation?
Consider when are the lease events (i.e. review, break or expiry)
What Yield Considerations are there when assessing leasehold value?
Trying to find comparable yields for leaseholds
Factors which might affect yield choice eg. lease covenants, lease duration, rent-free periods
Why is a leasehold interest less attractive than a freehold investment?
Because freeholder's consent = required for any alterations to property / disposal by assignment /sub-letting
Leaseholder needs to meet all repairing and insuring obligations
In light of leasehold being less attractive than freehold, what might you do to the freehold yield?
Conventionally an addition of 0.5-1% is made to the freehold yield
What is the investment formula called to capitalise a profit rent?
YP Dual Rate
How might certain lease clauses effect a leasehold valuation?
Assignment provisions - if no right to assign then legally tenant has no right to sell interest. Value of their leasehold interest = 0 / no market value
Rent review clause - frequency and how long will PR last?
Repairing liability - if near lease expiry and material disrepairs = materially impact on valuation
Service charges - are there any caps = good? If SC = excessive, then may have negative effect on valuation.
What methods of CAPITAL valuation are available?
o Comparable method
o Investment method
o Profit method
o Residual method
o Contractors method (depreciated replacement cost)
What are the THREE different valuation approaches? Which method relates to which approach?
1. INCOME approach - converting future cash flows into capital value (i.e. Investment, Residual and Profits methods)
2. COST approach - refers to cost of the asset (i.e. DRC method)
3. MARKET approach - using comparable evidence (i.e. Comparable method)
What are the steps in a comparable valuation method?
o Search and select comparables
o Verify details of headline rent, to give net effective rent
o Assemble comparables in schedule
o Adjust comparables using hierarchy of evidence (relative weight)
o Analyse comparables to form opinion of value
o Report value and prepare file note
What are the THREE categories of comparable evidence in a comparable valuation method?
1. Category A – direct comparables;
- Recent transactions of near-identical / similar properties and where full info available
2. Category B – general market data;
- Information from published sources / commercial databases / indices
3. Category C – other sources;
- Evidence from other real estate types / data (e.g. interest rates, stock market returns = indication for real estate yields)
How do we find market comparables for a comparable valuation method?
Need to understand importance of up to date market evidence and timing when finding comparables
How to find relevant comparables;
- Inspection of area to see agents’ boards
- Visit / speak to local agents
- Asking prices
- Historical evidence
- Auction results (beware these are prices gross of costs)
- In house records / databases and websites, such as Zoopla (resi) / CoStar (comm)
What are important elements to consider for a comparable valuation method?
1. Age and condition
2. Specification and layout
3. Efficiency and adaptability
5. Limitations on use
6. Location Size
7. Transaction Date
What is the relevant RICS GN on the comparable valuation method and what does it outline?
RICS GN on Comparable Evidence in Property Valuation 2019
Outlines process of identifying comparable evidence, analysing it and using it
It encourages the consistency in its use worldwide and gives guidance for challenging markets.
When might the investment valuation method be used?
Used when there is an income stream / rental income to produce capital value
What type of method is the investment valuation method and how is it used?
Conventional method and is growth implicit valuation approach
An implied growth rate is derived from the market cap rate (yield)
Name THREE different types of investment valuation methods
o Layer / hardcore
o Term and reversion
What is the basic calculation behind the conventional investment method?
PR / MR x YP = market value
When is the term and reversion investment valuation method used?
Used for reversionary investments (market rent > passing rent)
Term capitalised until next review / lease expiry
Reversion to market rent valued in perpetuity at an all risks yield (ARY)
When is the layer and harcore investment valuation method used?
Used for over-rented investments (passing rent > market rent)
What is the profit valuation method used for?
Valuations of specialist trading properties where there is a ‘monopoly’ position
Used for pubs, petrol stations, hotels, guest houses, children's nurseries and care home
Used where value of property depends upon profitability of business and NOT physical building / location
What is the profit valuation methodology?
Annual turnover – costs / purchases = Gross profit
Gross profit - working expenses = Unadjusted net profit
Unadjusted net profit - tenant's remuneration / share (the divisible balance between the landlord and tenant) = Adjusted net profit
Capitalised at appropriate yield to achieve capital value
What is the relevant RICS guidance note for the profit valuation method?
Valuation Practice Guidance Note 4: Valuation of individual trade related properties
Pubs and hotels have a separate guidance note
What is the purpose of the residual valuation method?
To find value of land (residual valuation)
To calculate profitability of proposed scheme (development appraisal)
Growth implicit form of valuation
What is the difference between residual valuation and a development appraisal?
- Specific valuation of land value
- One moment in time on valuation date
- For particular purpose
- Calculations to establish viability / profitability of proposed development
- Assumes a site value
- Does not provide a market value
- Provides guidance as to the viability of the proposed development
How do you determine the site value using the residual valuation method?
Less Development Cost
= Site Value
What is the methodology of a development appraisal?
Less Development Cost
Less Site Value
What two methods can the residual method be based upon?
o Simple residual valuation
Can both residual and DCF be used as a Red Book valuation?
Yes - the Red Book can be used as the guidance and exemptions relate to PURPOSE of valuation not methodology