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APC > Valuation > Flashcards

Valuation Flashcards

1
Q

What are the 5 methods of valuaiton?

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

What is the comparable method?

A

Use of comparable evidence to establish opinion of value - adjustments are made reflecting differences in characteristics and analysis of the local market whilst applying professional scepticism.

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3
Q

What is the residual method?

A

It is used to value land with development potential.

Technicwue requires assessment of GDV, from which development costs (including build costs, professional fees, contingency, finance, marketing, legal and purchasers costs) and profit are deducted to arrive at a residual land value.

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4
Q

What is the investment method?

A

Used to value commercial premises on the basis of a flow of rental income.

Techniques used depend on whether the unit is under-rented or over-rented.

Term and revision for under rented.

Layer/hardcore is used for over-rented.

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5
Q

How would you value an under-rented property?

A

Use the comparable method to determine the market rent of the property.

Once established that it is under-rented, I applied the term and reversion method i.e.

I applied a capitalisation yield (all risks yield) to the term on the passing rent for the remainder of the term/until break clause, and then applied to the market rent in perpetuity.

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6
Q

What is the profits method?

A

It is used to value operational assets where profitability of the business is a key component of value.

e.g. care home, restaurant, hotel, pub.

Calculated by deducting operating costs from the annual turnover to work out the FMOP (Fair Maintainable Operating Profit), which is then capitalised at an appropriate yield to achieve Market Value.

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7
Q

What is the Depreciated Replacement Cost method?

A

Used to value sets which rarely transact on the open market, therefore very limited comparable evidence.

i.e. lighthouse, oil refinery.

Calculated by establishing the existing use value of the land, adding on the cost of replacing the building and fees, minus a discount for depreciation/obsolesce.

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8
Q

What are the different methods of completing an Investment Valuation?

A

Conventional Investment Method = let at MR or under-rented.

Term and Reversion = under-rented

Layer/Hardcore = over-rented

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9
Q

If the yield is increased in an investment valuation, what happens to the capital value?

A

If the yield increases, the capital value decreases.

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10
Q

What is a yield?

A

A measure of investment return, expressed as a percentage of capital value invested.

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11
Q

How do you calculate a yield?

A

Income/Price x 100

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12
Q

How do you calculate years purchased?

A

100 / yield

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13
Q

What is years purchased?

A

The number of years required for its income to repay its purchase price.

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14
Q

What is the major factor in determining a yield?

A

Risk! e.g.

  • prospects for rental and capitla growth
  • quality of location
  • quality of covenant strength
  • lease terms
  • voids
  • liquidity (how quickly it can sell)
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15
Q

What is an all risks yield?

A

It is 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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16
Q

What is a gross yield?

A

The yield not adjusted for purchasers costs?

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17
Q

What is a net yield?

A

The yield adjusted for purchasers costs?

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18
Q

What is an initial yield?

A

Simple income yield for current income and current price.

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19
Q

What is a reversionary yield?

A

MR divided by the current price on an investment let at a rent below the MR.

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20
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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21
Q

Define Gross Development Value?

A

The aggregate market value of the proposed development, assessed on the special assumption that the development is complete on the date of valuation in the market conditions prevailing on that date.

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22
Q

What is an arm’s length transaction?

A

Where the seller and purchaser don’t know each other, there’s no personal interest and no special purchasers.

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23
Q

Define synergistic/marriage value?

A

Synergistic Value is the result of a combination of two or more assets or interests where the combined value is more than the sum of the separate values

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24
Q

Define existing use value?

A

What the property is worth in its current form. Usually used for internal financial statement purposes. Disregard potential alternative uses.

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25
Q

Is there any guidance note on the Comparable Method? What does it say?

A

Comparable Evidence in Real Estate Valuations, 2019 (effective 2019).

  • Provides guidance on the sources of comparable evidence, how to record and how to analyse.
  • Provides information on the hierarchy of evidence.
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26
Q

What is the hierarchy of comparable evidence?

A

Category A (Direct Comparables)

  • completed transactions of similar properties with full details
  • completed transactions of similar properties with enough data present
  • asking prices

Category B (General Market Data)

  • historic evidence
  • indices
Category C (Other Sources) 
- evidence from other location and types
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27
Q

Outline the new guidance note on Valuing Development Property?

A

Valuation of Development Property, 2019 (effective 2020)

  • The purpose of the guidance note is to supplement International Valuation Standard (IVS) 410 ‘Development Property’.
  • Confirms best practise when valuing development property that both the residual and comparable methods should be used together. The residual method should be cross-checked with comparable evidence.
  • Confirms best practice requires risk analysis to be used so that changes to inputs which might affect the valuation of development property can be assessed and various scenarios modelled.
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28
Q

What is on the front cover of the Comparable Evidence in Real Estate Valuations, 2019?

A

RICS Logo
Title
Date
A staircase on the outside of a building

29
Q

What is on the front cover of Valuation of Development Property, 2019?

A

RICS Logo
Title Document
Date of Document
CGI image of a development.

30
Q

What makes a good comparable?

A

Similar to the asset being valued in terms of size, location, condition, specification, type etc.

Hierarchy of evidence - recently transacted and verifiable

31
Q

How do you collect comparables?

A

I use online databases such as Rightmove and the Land Registry sold prices.

I look to then verify this information with local agents.

I gain an understanding of the local market through research online, conversations with colleagues and local agents.

32
Q

How do you analyse comparables?

A

Professional Scepticism

Look at them on a sales rate psf basis and on a sales price basis.

33
Q

What is your company’s valuation sign off procedure?

A

All valuations requite a director sign off.

Development valuations also require a third signature from a director, as they are increased risk.

34
Q

What could you use zoning for?

A

Comparing rents on retail shops and for valuing retail shops.

35
Q

Why is zoning adopted?

A

Because the front of the shop, where the passing trade is, is considered to be more valuable.

36
Q

How do the zones relate to each other?

A

The zones halve back - so the next zone is worth half the value.

37
Q

Where is Material Uncertainty referenced in the Red Book?

A

VPGA 10 - matters that may give rise to material uncertainty.

VPS 3 - Valuation reports.

38
Q

How might COVID-19 uncertainty impact on your valuations?

A
  • Restrictions on investigations/inspections
  • Reduce the amount of available comparable.
  • Change timings within a residual appraisal.
  • Require usage of material uncertainty clause.
39
Q

What is a restricted 90-day sales period?

A

Where the transaction is pushed through within 3 months.

Would typically make a discount in order to push it through.

40
Q

Is material uncertainty a basis of valuation?

A

No, material uncertainty is a clause.

41
Q

What is the recent RICS advice document on valuation of clad buildings?

A

RICS Guidance Note - Valuation of Properties in a Multi-Storey, Multi-Occupancy Residential Buildings with Cladding, 2021

The paper discusses the use of EWS1 forms in the use of valuations of multi-storey residential properties such as blocks of flats, student accommodation, dormitories, care homes.

42
Q

When does a statutory valuation need to be Red Book compliant?

A

If it is intended to be include in a statutory return to a tax authority.

43
Q

What is the margin of error for valuation reports?

A

There is a permissible range allowed by courts as found in numerous cases.

This ranges from 5 - 15% depending on the nature of the valuation, whether it is straightforward or more complex.

44
Q

What is hope value?

A

The value arising from any expectation that the future circumstances affecting the property may change. i.e.

  • The prospect of achieving planning permission in the future
  • The realisation of marriage value
45
Q

What do charities need when wanting to purchase/sell property?

A

Section 119 of the Charities Act 2011 valuation.

Valuer must follow the Act’s requirements - must comment on whether it is in the charity’s best interest.

VPGA 8 - Valuation of Real Property Interests sets out advice.

46
Q

How would you value a long leasehold interest?

A

Rent received - ground rent = net income

Net income is capitalised at an appropriate yield for the remaining length of the lease.

47
Q

Has there been any RICS guidance on how to value long leasehold interests?

A

RICS Guidance Note: Valuation of Residential Leasehold Premises, 2021

Focuses specifically on the valuation of leasehold interests expressed for secured lending purposes.

48
Q

What matters could effect the value of long leasehold interests?

A
  1. Remaining lease term
  2. Ground rents and rent review provisions
  3. Service charge/maintenance
  4. Fire safety legislation
  5. Repair works cost
  6. Restrictive covenants
  7. Planning Use
49
Q

How do you compare comparable evidence of long leasehold interests?

A

Use hierarchy of comparable evidence still.

Calculate the leasehold relativity, using the graph from the Valuation of Residential Premises, 2021.

50
Q

What is a special purchaser?

A

Is someone who a particular asset will have a special value to them due to the advantages arising from its ownership, that would not be available to other buyers.

i.e. tenant purchasing their freehold interest.

51
Q

Are you aware of any upcoming changes to valuation of real estate investment?

A

RICS is undertaking an independent review into the way commercial property is valued and whether new guidance is needed.

Main considerations:

  1. Valuation methodology
  2. Property risk analysis, including the ‘forward look’
  3. Maintaining independence and objectivity
  4. Measuring market confidence in RICS valuer performance.

Consultation ran until March 2021, recommendations expected by Q4 2021.

52
Q

Give me some examples of statutory due diligence for a valuation?

A

Business Rates, Environmental matters, EPC, Flooding, Fire Safety, Highways, Legal title, planning history

53
Q

Give me the rough outline of a valuation instruction?

A

Receive instruction
Check competence and independence

T o E signed and returned
Gather info/due diligence/market research
Inspect/measure
Undertake valuation
Draft report (Peer review)
Finalise and sign report
Report to client
issue invoice
File in good order and archive

54
Q

What is a building cost reinstatement valuation?

A

For building insurance
BCIS and GIA
Not a written opinion of value so no Red Book

55
Q

What are the four main areas being considered under the RICS independent review of real estate investment valuations?

A

Review by Peter Pereira Gray
Valuation methodology
Property risk analysis
Maintaining independence and objectivity
Measuring market confidence in RICS valuer performance
Recommendations by Q4 2021

56
Q

What is the difference between a headline and net effective rent?

A

Net effective rent is a devalued headline rent as it takes into account rent free periods

57
Q

When did the RICS first issue guidance relating to COVID-19 global valuation practice?

A

March 2020 with various updates after

58
Q

When would a DCF valuation be used?

A

Used where the projected cash flows are explicitly estimated for a long period

Includes phased development projects.

59
Q

Describe the process of using a DCF?

A
  1. Estimate cash flow (Income less expenditure)
  2. Estimate Exit Value at the end of the holding period
  3. Select discount rate
  4. Discount cash flow
  5. Provides NPV - sum of discounted cash flow
60
Q

Define Net Present Value?

A

Sum of discounted cash flows of a project.

Determines if investment meets target rate of return.

\+ = exceeded rate of return 
- = not achieved rate of return
61
Q

What is IRR?

A

The rate of return at which all future cashflows must be discounted to produce an NPV of zero.

It assesses the total returns from an investment opportunity making some assumptions on rental growth, re-letting and exit assumptions

62
Q

When is the most recent version of the RICS COVID-19 valuation practice from and what are some of the things it says?

A

Restrictions on ability to inspect must be made clear
All affected TOE must confirm this
Also applies to valuation assumptions

63
Q

What does the RICS Publication - Beyond COVID 19 valuation approaches and evidence during the COVID-19 health crisis (June 2020) say?

A

Sets out information regarding lack of evidence and material uncertainty
Document reminds valuers of the importance of RICS Guidance note ‘Comparable evidence in re valuation 2019’

64
Q

What did the November 2020 COVID-19 practice alert state?

A

States that some markets might have experienced lower levels of transactional activity and liquidity during the pandemic, but this update states that transactional volumes and other evidence is broadly returning to normal, so not subject to material uncertainty
States wording to use if it is uncertain due to lack of evidence

65
Q

What does the updated COVID-19 guidance state as at July 2021?

A

Main update is on inspection, investigation and valuation information

Any restrictions must be agreed in TOE and made clear in reporting

If you can’t value on restricted basis, the instruction should be declined

66
Q

What is the key RICS publication that has been brought out to set out information on lack of evidence and material uncertainty in COVID-19?

A

RICS Publication - Beyond COVID-19 valuation approaches and evidence during the COVID-19 health crisis (June 2020)

67
Q

Is there anything COVID-19 related that you are currently including in your reports?

A

A note prepared by the RICS which states that there has been enough evidence to produce an opinion of value.

Therefore, the report is not reported as subject to ‘material uncertainty’.

68
Q

How does IVS 5 - valuation approaches and methods define obsolecence?

A

Physical
Functional - specification being outdated
Economic

69
Q

What is a tax valuation?

A

4 instances where you will need a valuation for capital gains tax:

  1. If it was a gift (MV @ gift date)
  2. If the property was sold less than MV to help the buyer (MV @ date of sale)
  3. IHT (date of death)
  4. Property owned before April 1982 (MV @ 31st March 1982)

APC (21 decks)

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