Vals

Question 1

IVS 103 - valuation approaches

Answer 1

Income - convert current and future income into capital value (investment, residual, profits method)

Cost- reference to cost of the asset either by purchase or construction (Depreciated Replacement Cost method)

Market - using comparable evidence available (comparable method)

Question 2

Comparable method

Answer 2

Search for /select comparables, verify details, assemble in schedule, adjust, analyse to form opinion of value, report value

Question 3

RICS Comparable Evidence in Real Estate Valuation Professional Standard

Answer 3

2019

Outlines principles for using comparable evidence, advice for situations where there’s limited evidence , also sets out non- prescriptive hierarchy of evidence

Question 4

Hierarchy of Evidence

Answer 4

non-prescriptive hierarchy. Valuer should use judgement on case-by-case basis.

1. Direct Comps
2. General market data
3. Other sources

Question 5

Investment Method

Answer 5

Used when there is an income stream to value. Rental income capitalised to produce capital value.

Question 6

3 types of investment methods

Answer 6

Conventional method - rent or market rent multiplied by years purchase

Term and reversion - for reversionary investments. Term capitalised at initial yield until next lease event. Reversion to market rent valued into perp at reversionary yield.

Hardcore and Layer - over rented investments. Income split horizontally.
Bottom slice is market rent capitalised at initial yield.
Layer (top slice) is extra for the passing rent which is capitalised at higher yield until next lease event.

Question 7

What is a yield?

Answer 7

A measure of investment return, expressed as a percentage.

Question 8

Impict yield vs explicit

Answer 8

Implicit includes risk factor and prospect for growth.

Implicit includes assumptions and risks which are made explicit in DCF.

Question 9

What risks are considered when determining yield

Answer 9

Prospects for rental growth
Location quality
Covenant strength of tenant
Use of property
Lease terms
Voids - what is the risk

Question 10

What is the definition of a Return

Answer 10

Describes performance of a property

• measured retrospectively
• use DCF to find IRR

Question 11

Initial Yeild

Answer 11

Simple income yield for Current rent / current price

Question 12

Reversionary Yield

Answer 12

Market rent / current price on an investment let below market rent

Question 13

Equivalent yield

Answer 13

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

Question 14

Running yield

Answer 14

The yield at any one time

Question 15

Gross yeild

Answer 15

Not adjusted for purchasers costs

Question 16

Net yield

Answer 16

Yield adjusted for purchasers costs

Question 17

True yeild

Answer 17

Assumes rent is not paid in arrears

Question 18

Nominal yeild

Answer 18

Assumes rent is paid in arrears

Question 19

All risks yield

Answer 19

Remunerative risk of interest used in valuation of fully let property at market rent reflecting all risks and prospects attached to that investment

Question 20

DCF

Answer 20

Growth explicit method of valuation.

Examines future net income and then discounting the cash flow to get to the current value.

Separates our and explicitly identifies growth assumptions rather than incorporating them into an implicit yield

Question 21

When may a DCF be used

Answer 21

Properties with income voids or complex tenures

Phased development projects

Social housing

Question 22

NPV

Answer 22

Net present value

Can be used to determine if an investment gives a positive return against a target rate of return

Positive NPV means that investment exceeds investors rate of return

Question 23

IRR

Answer 23

Internal Rate of Return

Rate of return at which future cashflows must be discounted by to achieve an NPV of zero

Assess total return from an investment Opportunity making assumptions regarding rental growth, re-letting and exit assumptions

Question 24

Profits Method

Answer 24

Used for valuations of trade related property which depends upon the profitability of its business or its trading potential not the physical building e.g hotel, pub or leisure.

Question 25

Profits Method methodology

Answer 25

Need 3 years accounts , can use estimates if needed for new businesses. Annual turnover, less costs/purchases, less reasonable working expenses, less operators remuneration = adjusted net profit AKA Fair Maintainable Operating Profit. Fair Maintainable Operating Profit capitalised at years purchase multiplier to achieve market value

Question 26

Residual Method

Answer 26

Most commonly used for valuation of a property holding to find market value of the site based on inputs. GDV-TDC=residual site value

Question 27

Elements of finance and Calculation of finance

Answer 27

Bank of England base rate + premium OR rate at which developer can borrow money - site purchase (compound on straight line basis) - total construction costs (based on s-curve taking half the costs over length of build programme) - holding costs (compound on straight line basis)

Question 28

2 Types of development finance

Answer 28

Debt finance - money has been lended to you Equity funding - own money used

Question 29

Overage

Answer 29

Arrangement for sharing receipts of any extra receipts over and above originally expected profits in a pre-agreed formula AKA claw back

Question 30

Profit erosion period

Answer 30

The length of time that it will take for the development profit to be eroded by holding charges following completion.

Question 31

Limits of residual method

Answer 31

Important of accurate info Does not consider timing of cash flows Sensitive to minor adjustments Implicit assumptions not outlined like in a DCF

Question 32

RICS professional standard : Valuation of Development Property

Answer 32

2019. Supplements IVS in relation to valuing development property. Defines development property as ‘interests where redevelopment is required to achieve the highest and best use’ - typical basis is MV - assumptions and SA’s must be clear - use of residual and comparable method to cross reference - a DCF may be used for complex or lengthy development schemes - typically Val should report one single figure

Question 33

Depreciated Replacement Cost Method

Answer 33

Method of last resort when there is limited/no available market evidence for specialised property e.g oil refinery or dilapidated castle with protections. Owner-occupied property Only suitable for accounts purpose or ratings valuations

Question 34

Depreciated Replacement Cost Method Methodology

Answer 34

1. Value land in existing use 2. Add current cost of replacing building (BCIS) less a discount for depreciation or physical, functional or market obsolescence (judgement)

Question 35

What is the Red Book

Answer 35

Called the RICS valuation- global standards. Effective 31.01.25. Includes IVS Provides valuers with mandatory and best practice guidance when undertaking valuations.

Question 36

Structure of the Red Book

Answer 36

1. Intro 2. Glossary 3. Professional Standards (PS 1-2) 4. Valuation Performance and Technical Standards (VPS1-6) 5. Valuation Practice Guidance Applications (VGPA 1-11) 6. IVS

Question 37

Key changes for new Red Book

Answer 37

Alignment with new IVS New content on valuation modelling and methods in line with Indep Review of Real Estate Vals 2021 Updates material relating to ESG and use of AI in valuations.

Question 38

Fair Value

Answer 38

the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date RICS consider this to be generally consistent with Market Value

Question 39

Market Value

Answer 39

the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, and where the parties had each acted knowledgeably, prudently, and without compulsion

Question 40

Market rent

Answer 40

the estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee in an arm's length transaction, after proper marketing, where the parties acted knowledgeably, prudently, and without compulsion

Question 41

Investment value

Answer 41

the value of an asset to a specific owner or prospective owner, considering their individual investment or operational objectives. may also be known as "worth"

Question 42

Assumptions vs Special Assumptions

Answer 42

Assumption is where it is reasonable for the valuer to accept that something is true with need for specific investigation. Special Assumption is something that is not true at the valuation date which is taken to be fact. Must be agreed in writing with client at outset of valuation.

Question 43

Margin of error

Answer 43

Permissible range allowed by the courts in respect of valuation. Margin of error will vary according to complexity of the valuation. In line with case law.

Question 44

Hope Value

Answer 44

The value arising from any expectation that future circumstances impacting the property may change. E.g chance of gaining planning in the future.

Question 45

Marriage value

Answer 45

AKA Synergistic value Created by merger of separate interests. Before and After Valuation undertaken to assess level of marriage value created. Typically split 50:50 or a pro-rata basis.

Question 46

WAULT

Answer 46

Weighted Average Unexpired Lease Term To calculate Weighted Average Unexpired Lease Term (WAULT), multiply each tenant's annual rent by the years remaining on their lease, sum these products, and then divide the total by the sum of all tenants' annual rents

Question 48

Ransom strips

Answer 48

Piece of land which controls access to another piece of land. Stokes v Cambridge set out a third of value in uplift in dev value can be awarded to owner of ransom. However, each case needs to be considered on its own merits

Question 49

What needs to be included in valuation TOE?

Answer 49

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Question 50

Minimum reporting requirements for a valuation

Answer 50

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Question 51

Typical Val timeline?

Answer 51

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Question 52

Internal vs external valuer

Answer 52

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Question 53

Uk national supplement

Answer 53

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Question 54

Valuations for Charities

Answer 54

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Question 55

Building cost reinstatement valuations / estimations

Answer 55

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Question 56

Zoning

Answer 56

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Question 57

Analysis of rent free periods / headline rents

Answer 57

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