Valuation Flashcards
What is an internal valuer?
- Employed by a company to value the assets of the company
- Valuation for internal use only
- No 3rd party reliance
What is an external valuer?
Has no material links with the asset to be valued or the client
What are the first steps you need to take before undertaking a valuation?
CIT
- Check competence - do you have the skills, understanding and knowledge to undertake the work? If not, refer the client to Find A Surveyor on the RICS website
- Independence - Think first and then check for any conflicts or personal interests
- Ensure Terms of Engagement are issued and signed
Why is statutory due diligence done?
To check there are no material matters which could impact upon the valuation
What would you check for when doing statutory due diligence?
- Asbestos register
- EPC rating
- Legal title and tenure
- Planning history
- Contamination
- Environmental matters
What is the timeline of a valuation instruction?
- Receive instructions from the client
- Check competence
- Check conflicts
- Issue TOE
- Receive signed TOE
- Gather info from borrower - t/s, leases, title docs etc
- Undertake DD - check no matters that could adversely impact value
- Inspect and measure
- Research market and put together and analyse comparables
- Undertake valuation
- Draft report
- Have valuation and report checked by other surveyor
- Finalise and sign report
- Report to client
- Issue invoice
- Ensure valuation file in good order for archiving
What are the 5 methods of valuation?
- Comparative method
- Investment method
- Profits method
- Residual method
- Contractors method (DRC)
What does IVS 105 detail?
Valuation Approaches and Methods
What are the valuation approaches?
- Income approach
- Cost approach
- Market approach
What is the income approach and what valuation methods fall under this approach?
Converting current and future cash flows into a capital value
Investment, residual and profits methods
What is the cost approach and what valuation methods fall under this approach?
Reference to the cost of the asset whether by purchase or construction
Contractors method
What is the market approach and what valuation methods fall under this approach?
Using comparable evidence available
Comparable method
When would you use the comparable method?
Used in residential valuations and when establishing MR and capitalisation rate in the investment method.
What guidance would you refer to when using the comparable method?
RICS Guidance note on Comparable Evidence in Real Estate Valuation
Talk me through how you would conduct the comparable method
- Search and select comparables
- Confirm/verify details and analyse headline rent to give a net effective rent
- Assemble comps in schedule
- Adjust comps using hierarchy of evidence
- Analyse comps to form opinion of value
- Report value and prepare file note
What is the hierarchy of evidence?
A tool to help weight comparable evidence
Category A – direct comparables
- All types of relevant transactional comparable evidence
o Open market lettings
o Lease renewals and rent reviews
o Third party determinations
o Sales and leasebacks
o Inter-company transfers
Category B – general market data
- Data that can provide guidance rather than a direct indication of value
Category C – other sources
- Wide range of data that might provide broad indications of value
- Other real estate assets & other background data
How do you find relevant comparables?
- Inspection of an area to find recent market activity by seeking agent boards
- Internal and external databases
- Speak to local agents
What is the investment method of valuation?
The investment method of valuation is used when there is an income stream to value. The rent is capitalised at an appropriate all risks yield, which implies a growth rate.
What is the conventional investment method?
Rent received/market rent multiplied by the years purchase
What is the term and reversion method?
Used when a property is reversionary (market rent is more than the passing rent).
The term is capitalised until the next lease event at a yield sought from comparable evidence.
The reversion is capitalised by an ARY into perpetuity at a reversionary yield
What is the layer and hardcore method?
Used when a property is over rented and under rented
Under rented:
The income flow is divided horizontally, and a higher yield is placed on the top slice to reflect the higher risk of rents increasing to MR (this isn’t guaranteed)
The bottom slice reflects the passing rent and is valued at a lower cap rate into perp.
Over rented:
The income flow is divided horizontally, and a higher yield is placed on the top slice to reflect the higher risk of tenant default.
The bottom slice reflects the passing rent and is valued at an ARY in to perpetuity
What is the net initial yield?
A calculation of the net current rent divided by the value
What is the reversionary yield?
A calculation of the gross rental value divided by the value (reverts to the market)
What is the equivalent yield?
A calculation of the time weighted average of the income stream
What risk factors would you consider when determining a yield?
- Prospects for rental & capital growth
- Quality of location & covenant
- Use of the property
- Lease terms
- Obsolescence
- Voids
- Security and regularity of income
- Liquidity - ease of sale
What is the discounted cash flow technique?
Growth explicit investment method of valuation
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 ARY basis. The cash flow is then discounted back to the present day at a discount rate that reflects the perceived level of risk
What are DCFs used for?
- Over-rented properties
- Some ‘Alternative’ investments
- Phased development projects
What is the method of a DCF? How do you find the MV?
- Estimate the cash flow (income minus expenditure)
- Estimate the exit value at the end of the holding period
- Select the discount rate
- Discount cash flow at the discount rate
- Value is the sum of the completed discounted cash flow to provide the NPV
What is the NPV?
Net present value
It is the sum of the discounted cash flows of the project
What can an NPV be used for?
To determine if an investment gives a positive return against a target rate of return
What happens when the NPV is positive?
The investment has exceeded the investor’s target rate of return
What happens when the NPV is negative?
It has not achieved the investor’s rate of return
What is the internal rate of return (IRR)?
The rate of return at which all future cashflows must be discounted to produce a NPV of zero
What is the IRR used for?
Used to assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions
When do you use the profits method?
It’s used for the valuations of trade related property
- Pubs, petrol stations, hotels, care homes, nurseries etc
What is the basic principle of the profits method?
The value of the property depends on the profit generated from the business, not the physical building or location
What must you have to conduct the profits method?
Accurate and audited accounts for 3 years. Audited accounts are superior to management accounts
What is the methodology for the profits method?
Annual turnover (income received)
Less costs/purchases
= Gross profit
Less reasonable working expenses
= Unadjusted net profit
Less operator’s remuneration
= Adjusted net profit., This is the EDITDA
This is capitalised at an appropriate yield (YP) to achieve MV
You cross check with comparable sales evidence is possible.
What is the EBITDA
Earnings before interest taxation depreciation and amortisation
What is a development appraisal?
A tool to financially assess the viability of a development scheme.
It establishes the value/viability/profitably of a scheme based upon the client’s inputs.
It can assume a site value or calculate a site value
How would you do a development appraisal?
To calculate the developer’s profit (where we know the cost of land already)
Gross Development Value
less total development costs INCLUDING land
= Developer’s profit