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Valuation Flashcards

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1
Q

What does a value need to ensure prior to commencement of an instruction?

A

Competence, independence and terms of engagement

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2
Q

Purposes of a valuation

A

Loan security
Acquisition or disposal
Accounts
Internal

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3
Q

Five methods of valuation

A

Comparable, investment, residual, profits, DRC

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4
Q

Hierarchy of evidence categories

From what RICS document?

A

RICS comparable evidence in real estate valuations guidance notes 2019

Direct comparables/ General market data/ other sources

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5
Q

Hierarchy of evidence used in market practice

A
  1. Open market letting
  2. Lease renewals
  3. Rent review
  4. Third party determinations
  5. Sale and leasebacks
  6. Inter company transactions
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6
Q

Disadvantage of lease renewals and rent reviews over open market lettings

A

Include an element of goodwill

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7
Q

Time value of money

A

Money received now is worth more than the same amount in the future

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8
Q

Yield

A

Measurement of risk on return from investments

Rate of return that a purchaser is seeking in relation to a particular interest

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9
Q

High yield…

A

High risk/low growth/low YP/low capital value

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10
Q

Low yield…

A

Low risk/high growth/high YP/high capital value

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11
Q

YP

A

Years purchase

The number of years it will take for the income to repay the purchase price

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12
Q

Risk factors included in a yield

A 
Prospects for rental and capital growth
Quality of location and covenants
Use of property
Lease terms
Voids
Security and regularity of income
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13
Q

Investment valuation approaches

A

YP Perp
Term and reversion
Hardcore/ topslice

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14
Q

All risks yield

A

Yield reflecting all prospects and risks attached to the property

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15
Q

True equivalent yield

A

Yield assuming rent is paid quarterly in advance (not traditional valuation practice)

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16
Q

Nominal equivalent yield

A

Yield assuming rent is paid annually in arrears (usual valuation assumption, therefore refer to this more often)

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17
Q

Gross yield

A

Yields not adjusted for purchasers costs

Eg Auction comps on EI Group

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18
Q

Net yield

A

Yield adjusted for purchasers cost

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19
Q

Equivalent yield

A

Average weighted yield between net initial and reversionary

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20
Q

Initial yield

A

Yield applied to current income

NI/CV x 100

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21
Q

Reversionary yield

A

Yield applied to market rent

MR/CV x 100

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22
Q

Running yield

A

Yield at moment in time

Based on current income

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23
Q

Triple net yield

A

Yield after deducting empty rates, service charge shortfall and insurance shortfall costs that the landlord would have to pay

Based on true net income that landlord receives

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24
Q

Equated yield

A

Used in DCF

Yield takes into account growth in future income and accounts for growth explicitly

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25
When would you adopt void costs?
When there is 5 years or less to lease expiry
26
RPI
Measurement of inflation published by ONS Favoured by Landlords as benefit from bigger uplift and occurs more often
27
CPI
Measurement of changes to prices of goods and services
28
Types of Rent Reviews
Upwards only Index linked (RPI/ CPI) - cap and collared Fixed/ stepped rent Turnover
29
Types of leases
FRI Effective FRI IRI
30
FRI
Tenant responsible for all repairs to property
31
Effective FRI
Landlord responsible for external repairs but can claim expense from Tenant, so effectively FRI
32
IRI
Tenant responsible for internal repairs only | Landlord responsible for external repairs
33
Types of voids
Marketing | Rent free
34
Purchasers Costs
Agents fees Legal fees Stamp duty
35
Why is there a yield gap between primary and secondary yields?
``` Reflects heightened risk due to: Obsolescence Longer voids Lower rental growth prospects Lower quality covenant/ location ```
36
DCF
Discounted cash flow More complex and detailed version of investment valuation
37
IRR
Internal rate of return Rate at which all future cashflows must be discounted to produce a NPV of 0 Used to assess the total return from an investment
38
Profits method
Used for trade related properties where there is a monopoly situation Value is dependent on profitability of the business trading within the property as opposed to the physical bricks and mortar
39
Examples of properties valued using Profits
Pub Hotel Petrol station Leisure and healthcare
40
DRC
Depreciated Replacement Cost Used for specialist properties where there is limited market evidence
41
When should the DRC method be used?
METHOD OF LAST RESORT Shouldn’t be used for Secured Lending vals
42
Example of properties valued using DRC
School/College Lighthouses Docks Sewerage works
43
How calculate DRC?
1. Value land as existing 2. Add cost to build modern equivalent 3. Deduct a discount for depreciation, age, and obsolescence
44
How do you calculate obsolescence?
Valuers judgement
45
Types of obsolescence
Physical Functional Economic
46
How do you assess the covenant strength?
Obtain creditsafe and analyse 3 years of audited accounts Turnover/ pre-tax profit/ shareholders funds
47
What if financial information is dated?
Look on companies house Conduct general research on web for articles about company eg info about new shareholders/ information about potential CVAs
48
What is an AWULT and how is it calculated?
Used for multi let properties to determine the average remaining term waited dependent on the amount of rent payable Total Annual Rent x No. Years remaining Add up all units Divide total by total annual headline rent received
49
Ransom strip legislation
Stokes v Cambridge 1961 | 1/3 of development site value awarded to owner of ransom strip
50
Stamp duty land tax for non-residential/ mixed use
£0-£150,000= 0% £150,000-£250,000= 2% Over £250,000= 5%
51
Stamp duty land tax for residential
``` £0-£125,000= 0% £125,000-£250,000= 2% £250,000-£925,000= 5% £925,000-£1,500,000= 10% Over £1,500,000= 12% ``` 0% SDLT UP TO £500,000 UNTIL JUNE 2021 DUE TO COVID RELIEF
52
Buy to Let SDLT
3% above residential rates
53
Institutional lease
Lease of a high/good standard, acceptable for an institution
54
Asset management opportunities
1. Undertake refurbishment works 2. Improve unexpired term through proactive re-gears and lease renewal initiatives 3. Remove landscaping to open up circulation areas 4. Improve rental tone at review/renewal 5. Improve signage/branding 6. Regear the head lease (if long leasehold and below 60 years)
55
What is net effective rent?
Rent following deduction of rent free period
56
Why didn’t you use the net effective rents?
Difficult to obtain and only reliable if got all info Headline rents are more readily available and demonstrate what actually agreed
57
RICS Sustainability doc
RICS Sustainability and Commercial Property Valuation Guidance Note
58
Marriage Value
Additional element of value created by the combination of two or more assets, where the combined value is more than the sum of separate values
59
Turnover rent
Rent calculated by reference to turnover generated at the premises Turnover rent typical in retail sector and usually combined with a fixed base rent that tenant is required to pay irrespective of turnover
60
Why do you include purchasers costs within an investment valuation?
Allows comparison of property against other assets and liabilities within a portfolio Allows investor to see not return on income to compare with other net returns within portfolio
61
Why do you exclude purchasers costs from an owner occupier valuation?
Purchasers costs are usually additional costs that the purchaser incurs when buying property therefore does not reflect in offer
62
What would you do if there is a lack of retail comps due to Covid?
1. Explain volatility of the market and advice should review valuation regularly 2. Speak with agents 3. Extend radius and adjust
63
New planning use classes
Class E – commercial business and service Class F – local community and learning Class A/ B1 / D - revoked
64
Aim of new planning use classes
Provides flexibility in not needing planning consent to change use if within same use class
65
When do the planning use class changes come into effect?
1 September 2020
66
Why do you use ITZA comps for retail?
Provides consistency as widely used valuation approach for retail Enables identification of the rent based on the particular layout and configuration of the unit, and assesses the prime Zone A area of the unit

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