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Valuation Flashcards

(86 cards)

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1
Q

What is a Development Appraisal

A

RCIS define as a ‘financial appraisal of developement’

i.e the profitability of the proposed development

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2
Q

What can a development appraisal be used for?

A
  • Analysis of a scheme to consider whether the level of required planning obligations is viable
  • Assessing whether a development is viable or not based on the level of profit achieved
  • Assessing the best and highest use for a property or to compare different schemes or proposals
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3
Q

What is the residual method of valuation

A

The process of valuing land based on its development value

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4
Q

What is the difference between a development appraisal and a residual land valuation

A

A development appraisal will typically give the profitability or viability of a proposed development (i.e to work out developers profit) whereas a residual valuation will give the value of the land

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5
Q

What type of yield did you apply to the yield at Unit 24 Bourne Industrial?

A

An all risks yield

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6
Q

What is an all risks yield and what is included?

A
  • Remunerative rate of interest used in the valuation of fully let property, let at market rent, reflecting all prospects and risks attached to the property
  • a growth implicit yield used in an investment valuation that reflects all of the risks and rewards of the subject property.

The construction (age, design, specification)
The quality of the tenants covenant
The amount of rent
the unexpired lease term
The other lease terms
Anticipated rental growth (location)

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7
Q

What is an all risks yield and what is included?

A
  • Remunerative rate of interest used in the valuation of fully let property, let at market rent, reflecting all prospects and risks attached to the property
  • a growth implicit yield used in an investment valuation that reflects all of the risks and rewards of the subject property.

The construction (age, design, specification)
The quality of the tenants covenant
The amount of rent
the unexpired lease term
The other lease terms
Anticipated rental growth (location)

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8
Q

Is Market value in a residual valuation gross or net of purchasers costs?

A

Net

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9
Q

What is the basic form of the profits method?

A
  • Annual turnover less operating costs to give the unadjusted net profit.
  • Then subtract tenant renumeration/share to give the adjusted net profits.
  • Capitalise adjusted net profit at appropriate yield.
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10
Q

When is the profits method used?

A

Used on trade related property when you cannot value through comparable or investment and profitability determines the value

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11
Q

What is terms of engagement

A

Set out basic facts of your valuation instruction so that there is no confusion about what you have been asked to do

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12
Q

What affects value in a valuation?

A
  • Contamination,
  • non-native invasive species,
  • structural damage,
  • natural flooding risk,
  • restrictive covenants,
  • asbestos,
  • deleterious materials,
  • location,
  • age/specification of building,
  • planning permission,
  • state of economy,
  • presence of radon,
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13
Q

What was the purpose of the valuation at Unit 24 Bourne

A

Internal purposes as instructed by Client

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14
Q

Basic method of DRC

A

Value site using comparable evidence
+ how much it would cost to reinstate the property
+ fees (professional, finance, planning)
Less depreciation for obsolescence

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15
Q

What is depreciated replacement cost?

A

The current cost of replacing an asset with its modern equivalent asset less deductions for physical deterioration and all relevant forms of obsolescence and optimization

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16
Q

When is DRC used?

A

When direct Market evidence is limited or unavailable for specialized properties

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17
Q

When did the RICS 2022 Redbook take effect?

A

31st January 2022

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18
Q

What were the key changes in the RICS Red Book?

A
  • Emphasising the need to agree clear and unambiguous terms of engagement, even when valuations are undertaken for excepted purposes (i.e., VPS 1-5 do not apply) under PS 1 Section 5.
  • more detailed commentary on sustainability/resilience and environmental, social and governance (ESG) matters in VPGA 8 Valuation of Real Property Interests.
  • Various amendments are made to the VPGAs, in particular VPGA 4 Individual Trade Related Properties and the reference to IVS 230 Inventory.
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19
Q

What must terms of engagement include?

A
  • Identification and status of valuer
  • Identification of client
  • Identification of any user
  • The asset
  • Currrency
  • Purpose of valuation
  • Basis of value
  • Valuation date
  • Any limitations
  • Docs relied on
  • Assumptions and special assumptions
  • Format
  • Restrictions of use
  • Confirmation in line with IVS
  • Fee
  • Firm RICS Registered
  • Monitoring by RICS
  • Limitations of liability.
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20
Q

Can you talk me through your valuation of Plat 8A Prospect House?

A

Used comparable evidence to obtain market rent and ARY. Capitalised the MR into perp to get the GDV. Less disposal costs, developers costs and developers profit.

  • PV of £1 to acertain current value
  • Less purchasers costs to give land value
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21
Q

What is the net Development Value?

A

Gross development value minus disposal costs.
GDV is £7,500,000 so NDV is £25,000 less

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22
Q

What is the definition of market rent?

A

The estimated amount for which an interest in real property should be. leased on the valuation date between a willing lessor and willing lessee. on appropriate lease terms in an arm’s length transaction, after proper.

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23
Q

Was your lease at unit 24 inside or outside the 1954 act? How did this affect your valuation?

A

It was inside but all my comparables were so no difference

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24
Q

If we were to consider that this property (unit 24) was vacant what would this be?

A
  • Subtract vacant holding costs
  • Use a higher yield
  • Do a term an reversion where the term is valued at £0 rent for however long the vacant period is
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25
What was your best comparable for Unit 24 Bourne?
Unit 30 Bourne Industrial Estate Same size, rent, condition etc
26
Tell me about RICS guidance on comparable evidence
RICS Comparable Evidence in Real Estate Valuation, 1st Edition, 2019 (guidance note)
27
What does RICS comparable evidence guidance do?
- Outline the principles of the use of comparable evidence - Encourage consistency in the use of comparable evidence - Address issues of availability in comparable evidence - Consider sources of comparable evidence Outlines/discusses Hierarchy of Evidence
28
What is discounted cash flow valuation?
A method of valuation explicitly setting out the inflows and outflows of an investment / development - Produces NPV and IRR
29
RICS guidance on residual valuation?
RICS Valuation of Development property, 1st Edition, 2019 (guidance note)
30
What does RICS guidance on residual valuation do?
Framework for best practice in development / land valuations
31
Can you deviate from PS1 and PS2?
No only from VPS 1-5
32
What are the SDLT bands?
0% on first 150k 2% on next 100k 5% above 250k
33
What is VPS 1-5
VPS 1 – terms of Engagement VPS 2 Inspection, investigations and records VPS 3 Valuation reports VPS 4 Bases of value, assumptions and special assumptions VPS 5 Valuation approaches and methods
34
Define bases of value
Statement of fundamental measurement assumptions used in a valuation
35
Give examples of VPGA
VPGA 5 Valuation of plant and equipment VPGA 6 Valuation of intangible assets VPGA 3 Valuation of business and business interests VPGA 1 Valuation for inclusion in financial statements
36
Why was the 2022 Red Book Introduced
To promote and support high standards and ensure transparency and consistency Establish a frame work for best practice
37
What changed in the RICS valuation 2022 Red Book?
Updated commentary on requirements for ToE when applying exceptions to VPS1-5 Updated commentary on sustainability and ESG Improves and clarifies text generally
38
What is in a valuation report?
Identification of valuer Identification of client Identification of property Bases of value Valuation method Purpose of valuation Assumptions Special Assumptions Extent of investigation and limitations of inspection Statement that limitations have been agreed Restrictions on use and publication of report Confirmation that valuation undertaken in accordance with IVS Date of valuation Valuation amount
39
What 2 rates make up the YP dual rate?
Renumerative rate Accumulative rate
40
How would you value a leasehold interest?
Capitalise profit rent at YP dual rate or YP dual rate tax adjusted, or single rate
41
How would you value a long leasehold interest?
Rent received less ground rent = net rental income Capitlise net rental income for remaining term =MV of leasehold interest
42
What is DCF
Method of valuation that projects estimated cash flows over an assumed holding period
43
What is the benefit of using DCF?
Very detailed Doesn’t require comparable Used on complex multi-let properties
44
What is the Red Book Called?
RICS Valuation Global Standards – Effective 31st January 2022 RICS Valuation Professional Standards UK Edition January 2014
45
Have you completed a red book valuation?
No, i've only valued for internal purposes
46
Which Section of the Red Book are mandatory?
PS 1-2 VPS 1-5
47
What is the purpose of the red book?
* Provides consistency, objectivity and transparency * Assures valuation undertaken in accordance with highest professional standards * Sets out rules and guidance which establish framework.
48
What are the 5 methods of valuation?
Investment Depreciated Replacement Cost Profits Comparable Residual
49
Talk me through your valuation at Unit 24, Bourne Industrial Park and the term and reversion method you used?
50
What Yield was used? What was the market rent?
51
Talk me through how a residual valuation works?
52
What makes up a valuation report?
* Client * Valuer * Property * Basis of value * Extent of investigation * Assumption/special assumption * Comparables/reasoning * Valuation figure * Date * Liability * Commentary on any uncertainity
53
How does being contracted out of the Landlord and Tenant act affect value?
Capital value will dcrease
54
How would you adjust a valuation if a tenant had a capped service charge?
Valuation would decrease as Landlord has additional costs to cover the excess from the cap
55
How do you calculate yield?
Through comparable evidence or Puchase price/ Rent = YP, - 100/YP = Yield or Rent/Purchase price x 100 = yield
56
How do you calculate YP?
100/yield
57
What is the difference between DCF and conventional methods?
Growth is explicit in DCF
58
What is a special purchaser?
Purchaser to whom property has special value as they gian an advantage from owning it (an advantage that a usual market participant would not have)
59
Give an example of a special purchaser?
Owner of neighbouring property
60
What are the 5 conventional methods of valuation?
Comparable Investment Profit Residual DRC
61
Name me 3 property types of the profits method
Pub Casino Cinema
62
RICS red book purpose is to establish a framework of best practice, what do you mean by that?
Improve transparency in global transparency to follow structure Competent to undertake No conflicts of interest Agree terms of engagement Inspect, measure and retain notes Carry out investigation Assemble and analyse comaprables Have analysis and valuation with rationale Valuation Report
63
Talk me through a red book valuation from start to finish
Competent to undertake No conflicts of interest Agree terms of engagement Inspect, measure and retain notes Carry out investigation Assemble and analyse comaprables Have analysis and valuation with rationale Valuation Report
64
Talk me through the contents of your valuation file
Conflicts of interest checks Terms of engagement template Inspection notes Complaints handling procedure Comparables information Method of valuations Report template
65
Other than market rent and market value, what bases of value are you also aware of?
Investment value Fair value
66
When is fair value used as a basis?
For valuation in financial reporting
67
Can you give me an example of financial reporting
IFRS 13 FRS 102 (UK GAAP) IFRS 16
68
What are on company accounts?
Cover page Contents page Directors renumeration Income statement Balance sheet Notes from accountant
69
What is the hierarchy of evidence?
Open market letting Lease renewal Rent review Independent expert determination Arbitrator awards
70
What is the relevance of the hierarchy of evidence?
The ranking / weighting applied to comparable evidence based on its transaction
71
Why would you attach more weight to an independent experts determination than an arbitrators award
Independent expert can make own investigations whereas arbitrator must rely on evidence provided to them
72
Who’s evidence does an Arbitrator rely on?
Parties involved in a dispute
73
The capitalization rate used, what is this also known as?
Yield or All risks yield in this case
74
What’s included in the ARY? What factors?
Age, specification, design, construction of building Amount of rent Unexpired lease term Tenant covenant strength Other lease terms Anticipated rental growth (location)
75
Did you use a gross yield or a net yield?
Net yield
76
What is a net yield?
Yield adjusted for purchasers costs (rent expressed as a % of purchase price plus the purchasers costs)
77
What is a gross yield?
Yield adjusted for purchasers costs (rent expressed as a % of purchase price plus the purchasers costs)
78
How is net yield adjusted?
Purchasers costs added to purchase price and taken as a % of rental value
79
A gross yield is % of what?
Purchase price not adjusted for purchase costs
80
A net yield is a % of what?
Purchase price adjusted for purchase costs (added)
81
Are purchases costs added or deducted to achieve a net yield?
Added
82
What purchasers costs must a purchaser incur in a typical purchase in England?
Agents fee Legal Fee VAT on fees SDLT
83
Talk me through the skeleton outline of a residual approach
GDV less disposal costs, development costs, developers profit and purchasers costs to give land value
84
How did you calculate developers profit?
15% of GDV
85
Why 15% developers profit?
Based on the market and risk
86
If you haven’t taken Developers profit as a % of GDV, what else could you have done?
A higher % of total development costs, say 20%

APC Mock Qs (13 decks)

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