Valuation Flashcards
(105 cards)
1
Q
What are the 5 methods of valuation?
A
1) Investment
2) Residual
3) Comparable
4) Depreciative Replacement Cost
5) Profits
2
Q
What is market value/rent?
A
Market value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had acted knowledgably, prudently and without compulsion.
Market rent is 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 on appropriate lease terms in an arm’s length transaction after proper marketing when the parties had acted knowledgably, prudently and without compulsion.
3
Q
What is the current title of the Red Book?
A
RICS Valuation – Global Standards 2017
4
Q
What are some of the changes made in the most recent Red Book?
A
The incorporation of IVS 2017 Global Standards
5
Q
What are some of the changes outline by IVS 2017?
A
Bases of value – Comments upon equitable value (formerly fair value) and synergistic value etc.
6
Q
Explain Capital Gains Tax?
A
A tax on the profit made when an asset is sold which has increased in value. This does not include the property classed as your main dwelling.
7
Q
Does the condition of a roof make a difference on the valuation?
A
The condition of all factors are in a property are taken in to account for a valuation. It would only make a major difference if the condition was found to be in a poor state of repair.
8
Q
Would add value to a property as it had PV panels?
A
There is no evidence to suggest they attract any premium for valuation purposes. Can often be a burden as buyer may be required to take on outstanding debt. Most lenders advise not to add value for PV panels.
9
Q
Are you aware of projected market value often requested for repossession properties?
A
Yes, it is based on assumptions which are agreed in the terms of engagement and can included recommended good practice for sales to be achieved within 90 days or another specific set time limit.
10
Q
A client asks you to value a hotel , what advice would you give?
A
I would advise them that it would require the Profits method of valuation and this was not an area of my expertise. I would provide them with the details of our leisure department who do specialise in such valuations.
11
Q
What difference is there in terms of valuing traditional housing and non-traditional housing?
A
In Edinburgh there tends to be sufficient comparable evidence and differences in values tend to be as a result of specification, size and location. If the form of construction was deemed unmortgageable then this would have an adverse effect on value.
12
Q
Do you have experience of valuing in a rapidly rising or falling market?
A
No personal experience, however I have carried out retrospective valuations from 2007. Ensure comparable evidence is as close to date of value as possible, discuss with colleagues.
13
Q
What would you do if a client challenged your valuation with other sales evidence?
A
I would corroborate and analyse this evidence and take these in to account in my valuation if found to be recent and relevant.
14
Q
According to RICS, how are incentives dealt with in valuing new build property?
A
They do not add value to a property but facilitate the sales transaction. They should be accounted for when analysing comparable evidence. Establish if the incentives are property related (higher spec fixtures and fittings etc.) or non-property related (cash, LBTT payment etc.) The valuer should exercise professional judgement.
15
Q
What else can be included when valuing a property?
A
New build premium
16
Q
When was the Red Book last updated?
A
Effective from 1st July 2017
17
Q
What sections of the Red Book are mandatory?
A
Professional Standards (PS1 + PS2), Valuation Technical and Performance Standards (VPS1- 5)
18
Q
What does PS1 and PS2 relate to?
A
Ethics and compliance
19
Q
What does VPS 1 – 5 relate to?
A
VPS1 – Terms of engagement
VPS2 – Inspections
VPS3 – Valuation Report
VPS4 – Bases of Value
VPS5 – Valuation Approaches
20
Q
What are the bases of value?
A
- Market Value
- Market Rent
- Equitable Value
- Investment Value
- Synergistic Value
- Liquidation Value
21
Q
Give an example of some points contained within the terms of engagement?
A
- Fee
- Surveyors details and qualifications
- Firm’s details
- Clients name
- Type of valuation
- Basis of valuation
- Scope of inspection
- Inspection date/time
22
Q
Are you aware of any case law relating to valuation?
A
Stokes v Cambridge Corpration (1961)
Assessing ransom strip value – The court held that a proper price to be attributed to the ransom strip was one-third of the increase in value of the subject land attributable to acquisition of the ransom strip.
Titan v Colliers (2015)
Valuation fell within a 15% margin of error and was not negligent
23
Q
What is necessary in a valuation report?
A
The minimum requirements are found in VPS3 of the red book and are-:
1) Identification and status of the seller
2) Identification of the client and any other intended users
3) Purpose of the valuation
4) Identification of the asset to be valued
5) Basis of value
6) Valuation date
7) Extent of investigations
8) Nature and source of information relied upon
9) Assumptions and special assumptions
10) Consent, or any restrictions to publication
11) Confirmation the valuation has been undertaken in accordance with Red Book/IVS standards
12) Valuation approach and reasoning
13) Valuation figure(s)
14) Date of valuation report
24
Q
Talk me through a residual valuation you were involved in?
A
Vacant site in Midlothian.
Private sale – potential developer wanted a valuation of site.
To be converted in to a 5-bedroom detached houses with integral garages.
Profit of 17.5% was required.
An estimated build cost of £330,000 (Including 5% contingency) was used (figures obtained from a similar project the developer had recently completed and looked over by our building surveying department.)
Estimated end value of £625,000 based on £250/sq.ft obtained from comparable evidence.
5% Contingency (of construction costs).
10% Professional fees (of construction costs).
Marketing fees of 2% of GDV.
Finance costs of 7% based on loan agreement that developer had agreed in principal.
Build time of 12 months.
Total cost of development = £440,000
Profit = £110,000
Site value = £625,000 - £440,000 - £110,000 = £75,000
25
Talk me through a reinstatement valuation you were recently involved with?
Two storey 1930’s detached house with a single detached garage.
Inspected the property taking a note of materials used in/form of construction.
Measured the property.
Discussed with Building Surveying department who estimated an applicable rate of £2000/sqm and £15,000 for the single garage.
This equated to £235,000
26
Talk me through the valuation of the retail unit you were involved in?
Small Class 1 retail unit in south Edinburgh.
Inspected the property with the commercial partner.
The reduced floor area was calculated at 242 sq.ft.
Current rent is £10,000 per annum which is line with market rent (£41/sq.ft)
4 Years left on lease.
The current rent was capitalised with a yield of 6%, and again with the reversion in perpetuity taking in to account a 3 month marketing period and 3 months rent free.
LBTT, Agents fees and Legal fees were deducted and this equated to a capital value of £160,000.
27
What is the reduction factor for the first floor area ITZA?
Typically 15%
28
Talk me through an investment valuation you were involved in?
Instructed by an investment fund to value a block of new build flats.
20 Units in total (16 x 2 bed flats, 4 x 1 bed flats)
The Market aggregate value was £3m, based on comparable evidence.
The Market aggregate rent was £160,800 per annum.
The subjects would be let to a social housing provider on ten year lease and rents would be based on the local authority housing allowance. This equated to £92,000 Net per annum.
Net initial yield of 5.5% for year 1.
Years 2-10 and perpetuity a yield of £6.25% was used, obtained from comparable evidence.
6 month end period void.
Less expenses for legal fees, agent fees and LBTT this equated to £2m (Rounded)
29
When would you use a retention?
* When the defect would have a material effect on the valuation i.e. 1% of valuation or a structural issue or over £2000.
* In line with specific lenders guidance e.g. Santander if the issue makes the property unmortgageble in current state of repair.
30
How does a retention work?
The lender will not pay the remaining amount until the works that resulted in the retention have been completed. For example, if a house has been valued at £120,000 but a retention of £10,000 is in place for structural repairs then the lender will only lend up to £110,000 and then release the £10,000 once the works are complete.
31
If there was no recent comparable sales evidence how would you value a subject?
* A land value.
* Recent listings e.g. first second hand sale on a new build site.
32
What are the various steps to a valuation report?
1. Receive Instruction.
2. Confirm Terms of Engagement.
3. Undertake a conflict of interest check.
4. Log the instruction on to the database.
5. Identify the location of the valuation.
6. Establish the tone of value.
7. Establish the type of property.
8. Ensure you have the competence to carry out the valuation.
9. Undertake the inspection.
10. Complete site notes.
11. Research current sales.
12. Nalyse comparable data.
13. Produce report.
14. Produce invoice.
15. Ensure file is correctly stored.
33
Where would you find the conditions of engagement in the red book?
VPS1 Minimum Terms of Engagement
34
What are the minimum terms of engagement?
1. Name and status of the valuer and disclosure of any previous involvement.
2. Name of client and any other intended users.
3. Purpose of the valuation.
4. Identification of the asset to be valued.
5. Basis of value.
6. Valuation date.
7. Extent of investigations.
8. Nature and source of the information relid upon.
9. Assumptions and special assumptions.
10. Restrictions for use, distribution and publication.
11. Confirmation of Red Book/IVS compliance.
12. Description of the report.
13. Fee basis.
14. Complaints handling procedure to be made available.
15. Statement that the valuation may be investigated by the RICS for monitoring regulations to comply with their conduct and disciplinary regulations.
35
What is the definition of Investment Value?
The value of an asset to the owner, or prospective owner, for individual investment or operational objectives.
36
What are the 3 valuation approaches detailed in VPS 5?
1. Market approach – “Comparable”
2. Income approach – “Investment, Profits
3. Cost approach –“Depreciated Replacement Cost, Residual”
37
How is a yield calculated?
(Annual Rent/Purchase Price or value) x 100
38
What are the various yield definitions?
Yield – The annual rate of return on an investment expressed as a percentage. It relates to both risk and reward in an investment.
All Risks Yield - Implies that the investor had considered all the risks and potential reward in arriving at a purchase price which is then reflected in the yield.
Equated Yield – Describes the yield on a property investment, which takes in to account growth in future income.
Indicative Yield – Estimates the annual dividend yield; it is only a forecast and can go up or down. Initial yield is the annualised rent of a property as a percentage of the property value.
Prime Yield – Describes the remunerative rate of interest appropriate at the date of valuation if the property is to be let at its full market rental value. Considered as a benchmark to compare against other properties.
Reversionary Yield – Is the anticipated yield to which the initial yield will rise and fall.
39
What other methods have you been involved with, excluding comparable?
Investment valuation and residual valuation.
40
How do you deal with having no suitable comparables for the past 6 months?
* Use older comparables taking price growth in to account.
* Widen the search parameters e.g. nearby districts of a similar style, larger/smaller houses.
41
How would you value an office?
The investment method.
42
How would you value a school?
Depreciated Replacement Cost
43
How would you value a hotel?
Profits method.
44
How would you value a school for lending purposes?
Alternative use e.g. converted to residential.
45
Talk me through a hypothetical profit valuation?
Establish the Gross Profit by deducting cost of sales from turnover.
Establish the Net Profit by deducting working expenses from the Gross Profit.
Deduct the interest on the tenant’s capital and Annual Sinking Fund for contents to get the Net Operating Profit.
Capitalise using a suitable YP to obtain market value.
46
Talk me through a hypothetical Depreciated Replacement Cost valuation?
Victorian primary school measuring 30,000 sq.ft.
A modern equivalent would likely be in region of 25,000 sq.ft.
Build cost of £4,375,000 (25,000sq.ft x £175/sq.ft)
Fees £437,500 (10%)
Finance £336,875 (7% for 2 years)
Gross Replacement Cost of £5,149,375
Depreciated by 80% (High rate due to age and functionality issues like classroom size etc.) = £4,119,500
Net replacement cost = £5,149,375 - £4,119,500 = £1,029,875
The property sits on a 1.5 acre site where land is valued at £500,000 per acre = £750,000
Finance on land at 7% for 2 years = £108,675
Cost of land = £750,000 + £108,675 = £858,675
Total depreciated replacement cost + cost of land = £1,029,875 + £858,675 = £1,88,550
Round to £1,850,000
47
How does size affect value?
It affects value differently depending on the size of a property. A larger 4 bed house will have a different value to a smaller 2 bed house on the same street etc. It allows for comparison between differing properties (£/sqm). Inverse quantum – As a rule of thumb, the smaller the property the higher the £/sqm.
48
Explain the Term and Reversion valuation method?
IT is used to value under rented properties. The All Risks Yield and Market Rent are obtained from comparable evidence. The current rent is capitalised used ARY until the end of lease/break clause. The reversionary period is then capitalised using ARY-1 in perpetuity.
49
How would you value an over rented property?
Using the Layer/Hardcore method. The current rent is capitalised using ARY in perpetuity. The Hardcore layer is then capitalised using ARY+1 until the break clause/end of lease. Value is the bottom layer + the top/hardcore layer.
50
Can you give me examples of where you would look for comparable evidence?
MoveMachine, RightMove plus, Propvals
51
How do you check the reliability of comparables?
I cross reference them with land registry
52
What do you understand the main drivers that have an impact on value?
* Location
* Size
* Specification
* Quality of schooling
* Type i.e. Stone Built
* Plot aspect
* Other facilities i.e. garage, cellar etc.
53
What scenarios are valuations generally used for?
* Sale or letting of a property
* Insurance purposes
* Taxation purposes
* Re-mortgage of a property
54
Why do you need to have independence and be objective in carrying out valuations?
To abide by the 5 global standards, there is a reputation to uphold, people trust our valuations are uninfluenced.
55
How do you ensure that the public understands the level of service you are providing them?
* Terms of engagement
* Speaking with them directly
56
What additional factors may need to be considered when looking at comparable evidence?
* Was the transaction on the open market and at arm’s length?
* What were market conditions like at the time?
* Does it have a garage/conservatory/extension?
* Is it a larger garden?
* Etc.
57
Where would you look for this information?
* Previous sales particulars
* Mapping software
* House price indices
* Etc.
58
Can you talk me through a time when you have had to create an adjusted comparable?
Yes, as previously discussed during my case study, I had to make price growth adjustments as some of the comparable evidence was older than 6 months. There have also been occasions where the subject property has a garage but the comparable evidence does not. I looked at how much garages were selling for in the area and also the percentage differences between houses with garages and houses without on older comparables. Through looking at both of these factors the garage attracted a premium of approximately £20,000.
59
Can you tell me about a time where you have carried out a valuation from initial instruction to completion of the report?
Yes, I recently received an instruction from a local estate agent to carry out a home report for a 1990’s end-terraced house in the west end of Edinburgh. I took the instruction, informed the agent of the fee and had the admin team issue the terms of engagement. I also organised the access arrangements. Before the inspection I carried out a desktop study and established that the property had sold 3 years ago and I was able to obtain the particulars from this sale. I then carried out the inspection under supervision from Fergus. It was a ‘clean’ home report with no defects noted at the time of inspection; however, an extension had been created to the rear so this was mention in the “additional matters for solicitors” section of the single survey. The client was satisfied there were no errors and the report was finalised. 3 weeks later I received a transcript request from Clydesdale. I completed the transcript and also advised of the alterations. A parcel then arrived from the purchaser’s solicitor requesting confirmation that the alteration documents corresponded with what was observed during the inspection. I issued a letter stating that they did and the property was sold within the following fortnight.
60
What is the residual method and how is this applied?
The main aim of the residual method of valuation is to establish how much a purchaser should pay for a development site.
The gross development value is established first of all and there after all the costs associated with undertaking the development are then deducted.
This leaves a surplus amount remaining which is also known as the residual value.
This represents how much the developer can afford to pay for the development site or property.The gross development value forms a key part of the calculation and this is the aggregate market value of the development based on the special assumption that the development is complete at the date of valuation.
The costs considered and deducted from GDV will include – site preparation, construction, sales and marketing, contingency, financing fees and developers profit.
61
What is the depreciated replacement cost method of valuation and how does it work?
The depreciated replacement cost method provides an indication of value based on the current equivalent.
This involves calculating the replacement cost of the asset with its modern equivalent including deductions for physical deterioration and all other relevant forms of obsolescence.
This method is known as the method of last resort and used when it is impractical to use all other valuation methods.
The cost approach is used to value unusual properties where there is no active market such as mosques, wharfs or refineries.
Under the cost approach the capital value is determined by calculating the cost of building the equivalent asset and the purchase land value.
The replacement build cost should be calculated using new and cost effective building materials and techniques.
The total value of the new property is then adjusted for deteriation using evidential information and recent transaction values to calculate the land purchase cost.
62
When is the Profit Method used and how is this undertaken?
The profits method is derived from trade related properties where the value is derived from the business and its trading potential.
This trading potential is the profit that a reasonably efficient operator would expect to realise from occupying the property.
Examples of when the profits method would be used would include for hotels, schools, cinemas and theatres.
The common characteristics of these properties is where the property has been designed for a specific use and the value is linked to what the owner can generate from the property.
The value therefore reflects the trading potential of the property and it includes the property interest, business and locational good will and fixtures and fittings all reflected as a single figure.
The income and expenditure forecast is based on historical and comparable information.
This forecast represents the fair maintainable turnover and fair maintainable operating profit that a reasonably efficient operator would hope to achieve.
This is therefore considered a reasonably accurate forecast of the properties trading potential.
The actual performance is compared with similar trade properties to determine whether the fair maintainable turnover is realistic based on current market conditions.
As a final step the fair maintainable operating profit is capitalised at the appropriate rate of return to reflect the risks and rewards of the property to determine its trading potential. Evidence of accurate comparable market data should be analysed and applied.
63
What is the comparable method of valuation and how does this work?
The comparable method primarily uses sales data of properties that have recently been sold focussing on assets that have a similar size, location, condition, features and specifications.
The comparable method is underpinned by comparable evidence which is identified, analysed and applied to the real estate that is to be valued and is therefore fundamental to producing a sound valuation that can stand scrutiny from the client and market.
The valuer will compile a schedule of evidence that will contain details about the property such as building age, quality, location, tenure, size, transaction date of sale, price per sqft – all of which can be used for the purposes of comparison with other similar properties.
The comparables gathered should be comprehensive that is to say there should be several comparables rather than being singular, they should be recent and therefore representative of the current market conditions, very similar and consistent with local market practise.
64
What are the different purposes of valuation?
Valuation for Financial Reporting
Valuation for Commercial Secured Lending Purposes
Valuation for Residential Mortgage Purposes
Valuation for Capital Gains Tax, Inheritance Tax and Stam Duty Land Tax.
Valuation for Compulsory Purchase and Statutory Compensation.
65
What is the Red book?
The RICS Red Book contains mandatory rules and best practice guidance for members who undertake asset valuations.
International standards 31st Jan 2020 edition
Red book uk 2015
Key sections –
- Introduction
- Mandatory valuation standards
- Advisory valuations standards
- Valuation for financial reporting
- Valuation of Charity assets
- Valuation for commercial secured lending purposes
- Valuation for compulsory purchase and statutory compensation.
66
What steps would you take following your valuation instruction?
Get details of property
Conflict check
Letter of instruction signed
Purpose of valuation
Information gathering – include purchase price
Rating, planning, environmental
Inspection & measurement
Research market
Valuation
Write report
Check valuation
Report to the client
Invoice
67
What points would you expect to see covered in a Banks Letter of instruction on a valuation for secured lending?
Borrower
Property
Purpose
Conflicts
Details of loan
Who the report is to be addressed to.
Special assumptions
Details on where to get information/how to access.
What the report should contain – description, areas, condition, tenancies & lease, environmental conditions, the market, relevant risks, valuation amount, any fees that are applicable.
68
9- What are the different methods of valuation?
Comparable
Income method
Profits
Residual
DRC ( depreciated replacement cost)
69
What is meant by the term Market Value?
The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
70
What is the definition of market rent?
The estimated amount for which a property, or space within a property should lease (let) on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arms length transaction and after proper marketing wherein the parties had acted knowledgably, prudently and without compulsion.
71
What is Hope Value?
Hope value is the term used to describe the market value of land based on the expectation of getting planning permission for development on it. This differs from the existing use value which is what the land or property is worth in its current form.
72
What is Marriage Value?
The extra value that arises from the merger of two physical or legal interests.
73
Definition of Special Value?
An extraordinary element of value over and above market value.
74
What does TEGOVA stand for?
The European Group Of Valuers Association
Unites 70,000 national valuers associations from 38 countries
The organisation seeks to make valuation compatible across the EU
Aims –
- A common European valuation report for residential property
- New guidance notes and information papers on subjects of real interest to practising valuers
- A comprehensive approach to valuation methodology including detailed exposition of key concepts such as income approach and depreciated replacement cost.
75
What is the IVSC?
The international valuation standards committee
Principle interest is to publish valuation standards and procedural guides for valuation of assets for financial statements.
Harmonise standards
2 specific international valuation standards –
- IVS 1 – Market value basis of valuation
- IVS 2 – Valuation bases other than market value
2 applications of international valuation standards committee –
- IVA 1 – Valuations for financial reporting
- IVA 2 – Valuation for lending purposes
76
What is IAS?
International Accounting Standards IAS-
- IAS 16 – Property, plant and equipment. Carried at cost or Fair value. Use market evidence or DRC if no evidence available.
- IAS 17 – Leases. Operating leases – on the profit and loss a/c and finance leases on the balance sheet.
- IAS 40 – Investment property. Valued at ‘Fair Value’. Leases classified as Investment property treated as Finance leases and so on the balance sheet.
77
What is the difference between specialist properties and specialised properties?
Specialist – Trading properties such as hotels, cinemas, pubs where the property is designed to perform a specific purpose.
Specialized – These include chemical plants, places of worship. These types of properties are very rarely sold on the market except being exchanged within the industry or business they are part of.
78
What is the difference between market rent and estimated rental Value?
Market rent - assumes Vacant possession and is the amount of rent anticipated for the use of the property, in comparison with similar properties in the same area.
Estimated rent – takes into account further considerations about the property assuming the building is occupied. For example there will be due consideration of the specific lease terms.
79
When would you use Term & Reversion vs Hardcore?
These valuation approaches are utilised when the terms of the lease and incoming rental income are expected to change in the near future.
Term & Reversion approach –
- The term and reversion method is used when the property has an existing lease in place that is due to expire.
- The existing lease terms are considered separate from the expected new lease terms within the valuation approach.
- In this instance the property is said to have reversionary potential taking into account the new lease terms.
- In other words the existing term is valued separately from the reversion (new lease terms)
Hardcore / layer approach –
- The layer or hardcore valuation method is used as an alternative to the term and reversion approach.
- It considers the current market rent being received and applies this on a perpetual basis.
- The difference between the current rent being received and expected market rent at the time of the lease renewal is also considered on a perpetual basis.
- The 2 separate values are then added within the calculation.
80
21- Definition of Equivalent Yield?
The equivalent yield is a weighted average of the net yield from current rental income and all future reversionary income.
For example if a 5% yield is applied on the hardcore rental income currently being received and a 6% yield is applied on future reversion income the uniform equivalent yield would be weighted to consider both of the individual percentages being applied at 5.5%.
This approach is often simpler for valuers as they can apply a yield to the entire income stream rather than having to value hardcore and reversionary income separately.
81
Definition of Equated Yield?
The equated yield is the yield on a property investment which takes into account growth in future income.
This is not applicable to reversionary situations, where the increase in income on reversion is to the market value as estimated at the present time.
82
What is goodwill?
Goodwill is an intangible asset when a property or real estate is being sold or purchased
Goodwill is a value within the transaction that is higher than the sum of the net fair value
For example the goodwill portion of the transaction maybe included due to special features of the asset being exchanged which may be associated with brand name, local customer base, excellent reputation etc.
The goodwill element will create a special value over and above the value of the land or building being exchanged.
83
Different types of Goodwill?
Purchased goodwill –
- Purchased goodwill is created when an asset is exchanged for an amount above the fair market value.
- It is accounted for on a company’s balance sheet and is shown as an asset
- This is the only kind of goodwill that can be recognised on a companies accounts.
Inherent Goodwill –
- Inherent goodwill is created over time as a non measurable asset held by a property or company.
- This can be derived from factors such as favourable location, excellent reputation, solid local customer base, good brand image / brand name.
- Inherent goodwill is not recorded on a companies balance sheet as an asset and is only realised financially at the time the property or company in consideration is sold or exchanged.
84
What is the difference between a residual valuation and development appraisal?
A development appraisal does not form part of a red book valuation standard whereas a residual valuation is.
Development appraisals are based on worth where one or more valuations are coupled with professional advice, analysis and opinion.
Development appraisal takes into account time (phasing) whereas residual valuation methods do not.
Development appraisals use client & agent input whereas residual valuations must use market lead inputs.
Development appraisals are used to determine whether profit levels are obtained at an acceptable level whereas residual methods are used to determine market value.
85
When would you use the Discounted Cashflow Valuation Method?
Where there are no comparable market transactions, the explicit DCF model provides a rational framework for the estimation of market value.
It can also be applied if there is expected short term market volatility present within the transaction for example if a tenant within a rental property is due to terminate their lease.
It can also be used if multiple investments are being compared side by side to support with long term investment decisions.
The estimated cash flows are projected over an assumed investment period in addition to an exit value at the end of investment period.
The cash flow is then discounted back to the present day value at a discounted rate ( also known as desired rate of return ) that reflects the perceived level of risk.
A discount rate is applied to reflect market and property specific risks.
To arrive at the estimated revenue cash flow specific leasing patterns including rent reviews, lease renewals or reletting on lease expiry, void costs need to be considered.
The exit valuation needs to reflect the rental growth and unexpired terms of the leases at the exit date.
The assumptions and forecasts forming part of the calculation need to be set out clearly.
86
How would you value a property where there are no comparables?
The discounted cashflow method can be used where no comparable market transactions exist.
The estimated cash flows are projected over an assumed investment period in addition to an exit value at the end of investment period.
The cash flow is then discounted back to the present day value at a discounted rate (also known as desired rate of return) that reflects the perceived level of risk.
The assumptions and forecasts forming part of the calculation need to be set out clearly.
87
What factors effect yields?
Covenant
Location
Specification
Rent levels
Growth potential
Asset management & development value
88
What is face rent & effective rent?
Face rent is a rent figure that excludes any incentives such as rent free periods or rent reductions or fit out contributions.
Effective rent takes into consideration any incentives provided to the tenant such as to you as the tenant.
89
Define all risks yield?
All risks yield (ARY) presents the rental revenue of a property as an annual percentage of the property cost.
All risks yield is calculated by dividing the annual rental income by the properties value and multiplying this by 100 to give the percentage all risk yield.
90
What are deleterious materials and how do they effect value?
Deleterious materials are considered as prohibited and have an effect on the structural integrity performance and longevity of a property.
They can result in non compliance with building regulations and decrease a properties value.
91
What are the main components of a valuation report?
Date of valuation
Extent of inspection and who
Opinion of value in words and figures
Allowance for VAT
Third party references
Clauses prohibiting publication
Date of report
Statement that the valuer is qualified.
92
How would structural defects be reflected in your valuation report?
Draw clients attention to them
Advise them to have structural survey done
Cant comment on area outside of ones expertise
Seek and obtain cost input to remediate and include within report
93
What is the difference between independent and external valuer?
Independent is for specific requirements prescribed by law or regulation
External – has no material links with client company.
94
Are you allowed to know the purchase price when valuing?
The valuer must request this and also verify it
If your valuation differs state why
This must be based on market evidence and bone fide
If unknown or based on marketing campaign this must be clarified within report.
95
If a property has an onerous notional term, what discount would you apply to the ERV?
1-2% pa.
96
You are found to be negligent in your valuation, what can your client do?
The complainant can demonstrate the losses and pursue the valuer or valuing company through the courts for the losses incurred
Merrett vs Babb case proved that valuers and not firms can be pursued
This highlights the importance of having PII and run off cover in place.
97
What would you caveat in a valuation report?
Publication
Confidentiality
Deleterious material
Planning
Taxation
Info supplied
Environmental Matters
98
What can effect the value in a lease?
User
Rent & review pattern
Alienation
AGA
Alterations
99
How would you rentalise the reception of an office building?
50% if single tenant
Not at all if multi let
100
What items are contained within your terms of engagement but not referenced within valuation report?
Reference of the professional fees for undertaking the valuation
101
What is in your valuation report and not in your terms of engagement?
Opinion of value
Valuation approach
102
Give examples of conflicts of interest?
Acting for buyer and seller of a property in the same transaction
Acting for two or more parties competing for an opportunity of valuing for the lender where advice is also being provided to the borrower
Valuing a property previously valued for another client
Undertaking a valuation for third party consumption where the valuers firm has other fee earning relationships with client of valuing both parties interests in a leasehold transaction.
103
What is meant by the term passing rent?
The annual rental income currently generated by a property as recorded on the balance sheet date
The passing rent generated by the property on the balance sheet date may be more or less than the estimated rental value.
Passing rent excludes any rental income when a rent free period is in effect and is based on actual income received.
104
Why did the report include an ‘opinion’ and not actual valuation?
Case law built up historically has found that providing valuations are in accordance with the RICS Red Book a Value based on opinion cannot be wrong.
Providing that the valuation is found to be within reasonable tolerances the surveyor cannot be considered wrong in their opinion.
If the valuation was provided based on an actual value this would not necessarily be accurate and may leave surveyors open to be pursued through court action.
105
