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APC > Valuation > Flashcards

Valuation Flashcards

1
Q

What are the bases of valuation?

A
  • There are SIX bases of valuation, FOUR should be standard knowledge:
    o Market Value
    o Market Rent
    o Fair Value
    o Investment Value
    o Equitable Value
    o Liquidation Value
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2
Q

Define MV

A
  • Market Value – the estimated amount for which an asset/liability should exchange:
    o At the valuation date
    o Willing buyer and seller
    o In an arm’s length transaction
    o After proper marketing
    o Knowledgably, prudently and without compulsion
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3
Q

Define MR

A
  • Market Rent – the estimated amount for which an interest in a real property should be leased:
    o At the valuation date
    o Between a willing lesee and lessor
    o On appropriate lease terms
    o In an arm’s length transaction
    o After proper marketing
    o Knowledgably, prudently and without compulsion
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4
Q
  • Fair Value (IFRS 13):
A

the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date:
o Required if the IFRS have been adopted by the client
o It is adopted by the International Accounting Standards Board
o RICS view is that the definition is generally consistent with the definition of market value

owner occupied and internal purposes

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5
Q
  • Investment Value:
A

the value of an asset to a particular owner, or prospective owner for the individual investment or operational objectives
o May differ from market value
o This is sometimes used as a measurement of worth to reflect the value against the client’s own investment criteria

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6
Q

What is a yield?

A
  • Measure of return
  • Income/price*100
  • Benchmark used to compare different transactions
  • Lower the yield, the higher the capital value
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7
Q

What is an internal valuer?

A

Someone who undertakes a valuation for internal use only.

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8
Q

What is an external valuer?

A

Has no material links with the asset or client.

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9
Q

What checks do you undertake prior to commencing a valuation instruction?

A
  • Competence, do you have the correct skill levels
  • Independence, check for any conflicts
  • TOE, set out full confirmation of instructions to the client and receive written confirmation of instructions. These will confirm the competence of the valuer and the extent and limitations of the valuers inspection.
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10
Q

What statutory due diligence must valuers undertake?

A

This is required to check that there are no material matters which could impact upon the valuation:
- Asbestos register
- Business rates/CT
- Contamination
- High voltage power lines, masts etc.
- EPC rating
- Flooding

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11
Q

Talk me through a valuation?

A

Receive instruction from client
- Check competence
- Check for conflicts
- Issue TOE
- Receive signed TOE from client
- Gather information e.g. title document, planning info, plans
- Undertake due diligence
- Inspect and measure
- Research market- assemble, verify and analyse comparables
- Undertake valuation
- Draft report
- Have report and valuation considered by another surveyor
- Finalise and sign report
- Issue to the client
- Issue invoice
- Ensure file in good order for archiving

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12
Q

Is there any guidance on comparable evidence?

A

RICS Guidance Note – Comparable Evidence in Real Estate Valuation 2019

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13
Q

How is a years purchase calculated?

A

Dividing 100 by the yield.

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14
Q

What is a years purchase?

A

It is the number of years required for its income to repay its purchase price.

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15
Q

What is the major factor when determining a yield?

A

Risk, in relation to the following factors:
- Quality of location
- Quality of covenant
- Use of the property
- Lease terms
- Obsolescence
- Voids
- Security and regularity of income
- Liquidity
- Prospects for rental and capital growth

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16
Q

What is a DCF?

A

This is a growth explicit investment method of valuation. It involves projecting estimated cash flows over an assumed investment holding period, plus an exit value at the end of that period, usually arrived on an ARY basis. The cash flow is then discounted back to the present day at a discount rate (desired rate of return) that reflects the perceived level of risk.

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17
Q

When is DCF used?

A

It is used for valuations where the projected cash flows are explicitly estimated over a finite period such as for phased development projects.

  • used where the projected cash flows are estimated over a finite period of time such as:
    o short term leasehold interests
    o properties with income voids or complex tenures
    o phased development projects
    o non-standard investments
    o over-rented properties
18
Q

Is there any guidnace on DCF

A

RICS Guidance Note: Property Investment Valuation in the UK, Discounted Cash Flow for Commercial Property Investments 2010.

19
Q

What are the steps when undertaking a DCF?

A
  • Estimate the cash flow (income less expenditure)
  • Estimate the exit value at the end of the holding period
  • Select the discount rate
  • Discount cash flow at discount rate
  • Value is the sum of the completed DCF to provide NPV.
20
Q

What is NPV?

A

The sum of the DCF’s of the project. It can be used to determine if an investment gives a positive return against a target rate of return.

  • When NPV is positive – exceeded targer RoR
  • When negative – not achieved target RoR
21
Q

What is the IRR?

A

The rate of return at which all future cash flows must be discounted to produce an NPV of zero. It is used to assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions.

22
Q

What steps are involved in a Profits val?

A

Annual turnover - Costs/purchases = Gross profit
Less reasonable working expenses = Unadjusted net profit
Less operators remuneration = Adjusted net profit (FMOP)
Often expressed as EBITDA (earnings before interest, taxation, depreciation and amortisation).

Capitalise at an appropriate yield (YP) to achieve MV. Cross check this with comparable sales if possible.

23
Q

What should you check before carrying out any valuation?

A

Before undertaking any valuation you should check if there has been any previous involvement in the property and if any conflict of interest exists. You should also check that you understand what the client is looking for and that you have the necessary skills and knowledge to undertake the valuation.

24
Q

How would you adjust for a rent free period?

A

Straight Line Method
EG; NEW LET, 10YR TERM, 5 YR REVIEW, £100K PA WITH 1 YR RF - £100K*4/5 = £80K PA

25
Q

Talk me through the Residual method of valuation?

A
  • Method of determining the value of a site
  • A development appraisal is used to establish residual site value
  • Most common purpose for a specific valuation of a property holding to find market value
  • Based on valuation date, for a specific purpose – all inputs taken at the date of valuation
  • Gross Development Value- Gross Development Cost – Developers Profit = Land Value.
    development at valuation date
  • ARY is used
  • Developments costs – planning, build costs, professional costs, contingencies, finance, developer’s profit, LBTT, etc.
  • GDV- development costs = residual site value
  • RICS Guidance Note: Valuation of Development Property, 2019
26
Q

Talk me through the DRC method of valuation?

A
  • Depreciated Replacement Cost or Contractor’s method
  • Used when direct market evidence not available or limited for specialised properties such as oil refineries, lighthouses, schools etc.
  • Purpose:
    o For owner-occupied property
    o For accounts purposed
    o Rating valuations
  • TWO steps
    o Value of land in existing use (assume PP)
    o Add current cost of replacing the building plus fees etc. LESS a discount for deterioration/obsolescence/depreciation
  • NOT suitable for secured lending valuations
27
Q

What is the tax payable on commercial transactions?

A
  • Lands and Buildings Transactions Tax (LBTT) in Scotland is payable on both purchases and leasehold transactions
28
Q

What are the LBTT bands?

A
  • For purchases:
    o Up to £150,000 – 0%
    o £150,001-£250,000 – 1%
    o Over £250,000 – 5%
  • For Leases:
    o Up to £150,000 – 0%
    o £150,000 - £2m – 1%
    o Over £2 million – 2%
    o For lease premia – LBTT bands are the same as for purchases/conveyances
  • These thresholds remain unchanged for 2022/23
29
Q

WAULT

A
  • This is the WEIGTED AVERAGE UNEXPIRED TERM remaining to the first break or expiry of a lease across asset weighted by the contracted rent
  • It is a calculation often undertaken when valuing an asset or considering appropriate investment yield comparables for multi-occupied individual investments or portfolios
30
Q

Purchasers costs

A
  • It is unusual valuation practice to deduct the likely cost of purchase from the gross market value to provide a net market value of a property as a purchaser will have to pay these costs:

o SDLT – at the prevailing rate
o Agents fees – say 1% of the purchase price plus VAT
o Solicitors fees – say 0.5% of the purchase price plus VAT

31
Q

Hardcore Method

A
  • Used for over-rented investments (passing rent more than market rent)
    Income flow divided horizontally
  • Bottom slice = market rent
  • Top slice = difference between passing and market rent
  • Valued in perpetuity but at a higher yield due to the greater risk attached
  • Different yields used to depend on comparable investment evidence and relative risk
32
Q

Why do we have PII run of cover?

A

for a minimum of six years after they have ceased trading. This is also known as the run-off cover. The nature of services provided in property and related industries often involve long-term engagements which could result in claims emerging years later. These future claims are covered under the run-off arrangement. So, even if a firm or practitioner has stopped operating, they still could face litigation related to work done in the past. In addition, keeping run-off cover is generally seen as an ethical responsibility towards not just clients but also towards the professional’s obligations as a part of the regulated industry.

In the event that a claim is made against your firm after it has ceased trading, if there is no adequate PII run-off cover, directors and shareholders may be personally liable to meet the claim

33
Q

Merrett v Babb 2001

(PII Run Off cover Case law)

A

Mr Babb, junior surveyor had done a valuation.
Deemed to be personally liable for a professional negligence claim by the buyer Mr Merret.

Babb undertook a valuation report on a residential property which merrt purchased then later found it to have significant structural defects.

Original company no longer existed.

Court ruled Merrit could personally pursue Babb for the losses

34
Q

What is the PV of a pound

A

For property valuations, this is critical, especially during yield valuations, discounted cash flow valuations, and investment appraisals. This calculation has its roots in the time value of money concept, which suggests that money available now is worth more than the same amount in the future due to its potential earning capacity. The formula to calculate the present value (PV) of a future sum is PV = F / (1 + r) ^n where: F = Future payment (cash flow) r = discount rate (the risk adjusting interest rate per period) n = number of periods Take note that the rate used in the PV calculation often reflects the risk associated with the investment and it’s a key area where a surveyor’s judgement is required. For instance, an asset in a prime location with a secure tenant might call for a lower discount rate in comparison to an asset in a less desirable location or a riskier tenant.

35
Q

How do you calculate WAULT

A
  1. Determine the duration: For each lease in your portfolio, determine how much time is left until the lease expires. 2. Define the weight: This could be square footage of the property, the annual rental income it generates, etc. Calculate this for each lease. 3. Multiply: For each lease, multiply the remaining term by the weight you’ve defined. 4. Total: Sum up the results of the multiplication. 5. Divide: Then, divide the total by the sum of the weights of all the leases. For instance, suppose you have a property portfolio with two leases. Lease A has 5 years remaining and generates £20,000 a year in rent. Lease B has 10 years remaining and generates £30,000 a year in rent. Your WAULT would be: ((5 years * £20,000) + (10 years * £30,000)) / (£20,000 + £30,000) = 7.5 year
36
Q

What are the different types of yield?

A

· All Risks Yield – 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 the investment
· True Yield – assumes rent is paid in advance not in arrears
· Nominal Yield – initial yield assuming rent is paid in arrears
· Gross Yield – the yield is not adjusted for purchasers costs (e.g. an auction result)
· Net Yield – the resulting yield adjusted for purchasers costs
· Equivalent Yield – average weighted yield when a reversionary property is valued using an initial and reversionary yield
· Initial yield – simple income yield for current income and current price
· Reversionary yield – Market Rent divided by current price on an investment let at a rent below the Market Rent
· Running Yield – the yield at one moment in time

37
Q

All risks yield?

A

remunerative rate of interest used in the valuation of a fully let property, let at market rent, reflecting all the prospects and yields attached to the particular investment

38
Q

Talk me through the Comparison method of valuation?

A
  • SIX step methodology
    1. Search and select comparables
    2. Confirm/verify details and analyse headline rent as appropriate
    3. Assemble comparables in a schedule
    4. Adjust comparables using hierarchy of evidence
    5. Analyse comparable to form an opinion of value
    6. Report value and prepare file note
39
Q

What would you include in Terms of Engagement for a valuation?

A
  • Set out the parties involved
  • Fee basis
  • Basis of appointment
  • Surveyor’s position as internal or external valuer
  • Property address
  • Remuneration
  • Client’s obligations
  • Firm’s obligations
  • CHP
  • Details of PII cover
40
Q

What due diligence is required on a valuation instruction?

A
  • Asbestos register (pre-2000)
  • Business rates/council tax
  • Contamination
  • Equality act 2010 compliance
  • Environmental matters (power lines, sub stations)
  • Health and safety compliance
  • Fire safety
  • Highways (check adopted roads)
  • Legal title and tenure (deeds, wayleaves, restrictive covenants)
  • Planning history & compliance – listed building, conservation area, section 75 agreements
41
Q

What are prime yields in Edinburgh?

A

6% Industrial
6.5% Office
8% Retail

APC (20 decks)

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