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Valuation Flashcards

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1
Q

What are the three valuation approaches in VPS5?

A

Markets approach (I.E. comparable)
Income approach (I.E. investment/profit)
Cost approach (I.E. residual/ DRC)

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2
Q

What is the red book?

A

Set of global standards which sets out procedural rules and guidance for written valuations.
Not a valuation manual.

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3
Q

What are the Redbook 2022 updates?

A

Focus on sustainability and ESG
Language is clearer and more robust throughout

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4
Q

What is the purpose of the Redbook?

A

To provide consistency, objectivity and transparency.
COT

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5
Q

What is the definition of market rent?

A

Estimated amount of interest in real estate on the valuation date
Between a willing Lessor and Lessee on appropriate, lease terms, in an arms length transaction
Proper marketing undertaken, where each party has acted prudently without compulsion

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6
Q

What is fair value?

A

The price that will be received to sell an asset, or paid to transfer a liability, in all the transaction between market participants at the valuation date

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7
Q

When is fair value used?

A

Accounts purposes
Assets that do not transact in the market frequently

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8
Q

What is an asset? What is a liability?

A

Asset = Something that adds value
Liability = something that decreases in value (debt, wages, loans, etc.)

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9
Q

Four Main investment methods?

A

Term and reversion
Hard-core and Layer
Hard-core and top slice
Discounted cash flow

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10
Q

Four disposal techniques of purchase and sale?

A

Informal tender
Formal tender
Auction
Private treaty

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11
Q

What is a special assumption in valuation?

A

An assumption made/ taken to be true, involves facts, conditions, or situations affecting the subject for the purpose of the valuation

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12
Q

What is depreciated Replacement cost method?

A

The cost of replacing an asset with a modern equivalent less deductions for physical deterioration

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13
Q

Exceptions to Redbook valuations?

A

ALIES
Agency
Litigation
Internal purpose.
Expert witness.
Statutory

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14
Q

Mandatory sections of the red book?

A

Professional standard 1 - compliance.
Professional standard 2 - ethics.
VPS 1 - terms of engagement
VPS 2 - inspections
VPS 3 - reporting
VPS 4 - basis of valuation
VPS 5 - valuation approach

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15
Q

What are the contents of the Redbook?

A

Professional standards - 2
Valuation practice statements - 5
Valuation practice global applications - 10

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16
Q

Principles of comparable evidence

A

Comprehensive evidence
Similar or identical property
Recent and representative of the market
Arms length, open market transactions
Verifiable

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17
Q

Different purposes valuations may be required?

A

Taxation
Loan security
Accounts purposes
Rating
Corporate advice

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18
Q

What is term and reversion?

A

Used in under rented property
Capitalise the passing rent for remaining term
Capitalise the reversion into perpetuity using higher yield
Add together

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19
Q

What is hard-core and Layer?

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A

Use for investment valuations - under rented properties
Reversion is close in time
Capitalise term into perpetuity using equivalent yield
Capitalise reversionary top slice at equivalent yield, deferred until reversion
Add together

20
Q

The hierarchy comparable evidence

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A

New letting
Lease renewal.
Rent review
Independent experts?
Opinion/hearsay.
Arbitration
Asking/quoting rents

21
Q

What is internal rate of return?

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A

Anticipating the future, income and expense feature are used to assess whether or not to proceed with the project
Higher internal rate of return is better/more viable.
Must exceed the cost of capital.

22
Q

Define all risks yield?

Study These Flashcards
A

Comparable info
Based on market assumptions - Risk, Return, Growth, demand

23
Q

Define gross yield

Study These Flashcards
A

Investment income divided by price

24
Q

Define net initial yield

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A

Add purchases cost to price, then divide the income by the purchase price

25
Define equivalent yield
Weighted average between term and reversion
26
Define equated yield
Internal rate of return with explicit growth
27
Define nominal yield
Initial yield, assuming in arrears payment
28
Why are Terms of Engagement important?
Enhance client understanding of service Show fees and scope of work Assurance that work will be carried out by RICS professionals
29
What is included in terms of engagement for a valuation?
Identification and status of valuer Identification of client Identification of other intended users Identification of property Valuation currency Purpose Basis Dates of valuation Scope of works Source of information valuer, relied upon Assumptions/special assumptions Format of report Restrictions on use Confirmation of valuation is in accordance with international valuation standards How fee is calculated Reference to complaints handling procedure Compliance statement Statement of any limitation
30
Four main investment method techniques
Term and reversion Hard-core and layer Hard-core and top slice Discounted cash flow
31
Challenges values have?
Limited/infrequent transactions Lack of up-to-date evidence Evidence created by special purchaser - skewed data Lack of similar evidence Lack of market transparency
32
Calculate net effective rent?
Gross annual rent x lease length Less rent free incentive as value Divide value by lease length Net annual rent Divide net annual rent by square-foot = net rent. PSF
33
Two types of development calculations, and what are they used for?
Development appraisal - viability Residual valuation - site land value
34
Different types or methods of valuation?
Comparable method Investment method Profit method Residual method Depreciated replacement cost method 
35
How do you carry out an investment valuation?
If income is rack rented/market rent, multiply by all risks yield If not, then term and reversion method is used
36
When do you not need a Redbook valuation?
ALIES Agency purpose Litigation or negotiation Internal purposes Expert witness valuation Statutory basis
37
How do you carry out an over rented valuation?
Hard-core and top slice method Bottom slice is market rent Top slice is over-rented I.E. passing rent, less market rent Higher yield applies to top slice to reflect additional risk Add together
38
Comparable evidence hierarchy?
Category A - direct transactional evidence/open markets evidence Category B - general market data; guidance, not direct indication of value Category C - other sources, property, types, and locations
39
What is the hierarchy of evidence?
Open market lettings Rent, reviews and lease renewals Independent experts Arbitration Courts determinations under the landlords and tenants act 1954 Hearsay evidence Sales and lease back Inter company arrangement
40
What does VPS stand for within the Red Book?
Valuation Practice Statement- Mandatory 5 VPS - 1. TOEs/Scope, 2. Inspections, 3. Valuation Reports, 4. Basis of value 5. Assumptions, Valuation Method
41
What does VPGA stand for?
Valuation Practice Global Advice 10 headings/statements 1. Financial statements 2. Secure lending 3. Businesses and business interests 4. Individual trade related property 5. Plant and equipments 6. Intangible assets 7. Personal property inc. Art and antiques 8. Realty property interests 9. Identification of portfolios 10. Matters of material valuation uncertainty
42
Talk me though a development appraisals?
GDV - costs = Profit Client provided info on development scheme planned. Client confirms costs of land or you assume value of land Client provided costs for construction (BCIS or market knowledge - £135-£150psf atm) Assume professional fees of 7% (industry acceptable of 6-8%) Client confirms finance costs Client confirmed profit was 15% GDV (c.20% atm) 10 months planning, 3 months lead, 12 months build, 6 month void S-curve finance - less costs at start, more costs as development underway. Tails off towards end as Costs reduce and income starts.
43
Sensitivity check for developments?
Could be costs - build, professional, etc Could be finance interest increase Could be return - rents or capital values reduced Variance of 5-10% usually acceptable each side as a sensitivity
44
What are the 5 Valuation Practice Statements?
VPS 1 - Terms of Engagement VPS 2 - Inspection VPS 3 - Reporting VPS 4 - Basis of Valuation VPS 5 - Valuation Approach
45
Name a some of the 10 Valuation Practice Global Applications
VPGA 3 - Reporting VPGA 4 - Profits Valuation VPGA 5 - Valuation Approach VPGA 8 - Valuation of Real Property Interests VPGA 10 - Material Valuation Uncertainty
46
Process of valuation
Identify Property Identify Purpose of valuation Confirm Basis of valuation Terms Method of valuations Valuation Technique Advice reported to client

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