Valuation Flashcards
(32 cards)
Name the five methods of Valuation?
1) Comparable Method
2 )Investment Method
3) Profits Method
4) Residual Method
5) Contractors Method (Depreciated Replacement Cost)
What are the three valuation approaches?
Income approach- converting current and future cash flows into a capital value (investment, residual and profit)
Cost approach- reference to the cost of the asset (DRC)
Market approach- Using comparable evidence available (comparable method)
Describe the Comparable Methodology of Valuation?
The comparable method is utilizing market evidence to formulate an opinion of value and has six steps 1) Search and select comparables 2) Confirm/verify details and analyse headline rent to give a net effective rent as appropriate 3) Assemble comparables in schedule 4) Adjust comparables using the hierarchy of evidence 5) Analyse comparables to form opinion of value 6) Report value and prepare file note
Describe the Investment method of Valuation?
The investment method is predominantly used when there is an income stream to value, where the rental income is capitalized to produce a capital value. The conventional method is rent received or market rent multiplied by the Years Purchased which equates to the market value. There is a focus on comparables to establish a rent or yield.
The term and reversion method is used for reversionary investments (where market rent is more than passing rent). The term is capitalized until next review/lease expiry at an initial yield, the reversion to market rent is valued in perpetuity at a reversionary yield.
The Layer/Hardcore method is used for over rented investments, where the passing rent is more than the market rent. The income flow is divided horizontally with the bottom slice representing market rent and the top slice being rent passing less market rent until next lease event. A higher yield is applied to the top slice to represent additional risk with different yields used depending on comparable evidence.
Define Net Initial Yield?
NIY is the current annual rent, net of costs, expressed as a percentage of capital value, after adding notional purchasers costs.
Explain what you know about the Discounted Cash Flow approach?
DCF valuation involves projecting estimated cash flows over an assumed investment holding period, plus an exit value at the end of that period, usually arrived at on a conventional all risks yield basis. The cash flow is then discounted back to present day at a discount rate that reflects the perceived level of risk.
Simple Methodology:
1) Estimate the cash flow (income less expenditure)
2) Estimate the exit value
3) Select the discount rate
4) Discount cash flow at discount rate
5) Value is the sum of the completed discounted cash flow to provide the NPV.
Define the market value
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and willing seller in an arm’s length transaction, after proper marketing and where each party had acted knowledgeably, prudently and without compulsion.
Define market rent
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 term in an arm’s length transaction, after proper marketing and where each party had acted knowledgeably, prudently and without compulsion.
Define Fair value
The price that would be received to sell an asset, or transfer a liability in an orderly transaction between market participants at the measurement date (this definition is derived from the International Financial Reporting Standards).
Define Investment Value
The value of an asset to the owner or a prospective owner for individual investment or operational objectives
Five aspects of due diligence?
Planning History, Flood Map, EPC, Business Rates, Legal Title and Tenure
16 steps of a valuation process?
1) Receive instruction from the client
2) Check my competence
3) Check independence i.e complete a COI check
4) Issue terms of engagement to the client in line with VPS 1
5) Receive signed terms back from the client
6) Gather information
7) Complete Due Diligence to ensure there are no variables that could adversely impact value
8) Inspect and measure
9) Research market and gather and verify comparables
10) Undertake valuation
11) Draft report
12) Have valuation and report considered by another surveyor for checking purposes
13) Finalise and sign report
14) Report to client
15) Issue invoice
16) Ensure file is in good condition for auditing purposes
What are the purposes of a valuation?
Accounts purposes, internal purposes, loan security, agency/brokerage purposes
Structure of the redbook?
Intro
glossary
ps - professional standards
vps - valuation technical and performance standrds
vpga - valaution practive guidence applications
ivs - international valuation standards
what are the professional standards
PS1 Compliance with standards and practice statements where a written valuation is provided - provides 5 exemptions for red book
PS2 Ethics, competency, objectivity and disclosures (rules of conduct regarding valuation, ToE
What are the Valuation technical and performance standards VPS
VPS1 - TOE
VPS2 - inspections
VPS3 - Valuation reports - sets out minimum standards
VPS4 - bases of values, assumptions and special assumption (four bases of value) - MV, MR, IV, FV
VPS 5 - approach to valuation
VPGA?
VPGA1 and 2?
1
financial statements
FV adopted for all IFRS accounts
2
Secured lending
additional provisions for COI these are: longstanding relationship with borrower, financial interest in the property, valuer retained to act in the disposal or letting of completed development, valuer gains fee from introducing transaction to the lender
what is the national supplement
The national supplement was published in November 2018, effective from January 2019. It Is not a substitute for the red book, the advice is not mandatory but is for advisory guidance. Key changes include more user friendly advice in regard to what is and is not mandatory. New section on valuation for commercial lending. Its structure is as follow
talk me through rics hierarchy of evidence
Category A- Direct comparables of contemporary- Completed transactions of near identical properties for which full and accurate information is available, this may include data from the subject property itself. Can include properties still available taking their asking price but only after careful analysis.
Category B- General market data that can provide guidance- Information from published sources or commercial databases, its relative importance will depend on relevance, authority and verifiability. Other indirect evidence, historic evidence and demand/supply data for rent, owner occupation or investment.
Category C- Other sources- Transactional evidence from other real estate types and locations and other background data e.g. interest rates, stock market movements and returns
talk me through DRC
The current cost of replacing an asset with its modern equivalent asset less deductions for physical deterioration and all relevant forms of obsolescence and optimisation. Add back land value.
Most recent red book?
Jan 2022
New one in q1 2024
Canopies in valuation
Depends on the quality, good quality canopies maybe rentalised, however reported separately on GIA basis
How do you analyse lease agreements to produce a net effective rent
First consider a notional fit out period
deduct this from term
Normal purchase cost assumption
5% stamp duty
1% agency fees
0.5% legal fees
