Valuation Flashcards
(113 cards)
1
Q
Which section of the RED BOOK covers basis of value?
A
VPS 4
2
Q
Name the basis of values?
A
- Market Value
- Market Rent
- Investment Value (or worth)
- Equitable Value (fair value)
- Synergistic Value
- Liquidation Value
3
Q
Name the three approaches to valuation?
A
- Market Approach
- Income Approach
- Cost Approach
MIC(drop)
4
Q
What is a basis of value?
A
A statement of the fundamental measurement assumptions of a valuation.
5
Q
What is an assumption?
A
A supposition taken to be true.
It is, by agreement, something that does not need to be verified by the valuer.
6
Q
What are the 5 methods of valuation?
A
- Comparable
- Investment
- Residual
- Receipts and Expenditure (R&E)
- Depreciated Replacement Cost (DRC)
7
Q
Name of the Red Book?
A
RICS Valuation - Global Standards
Effective from 31 Jan 2022
8
Q
What is the purpose of the RED BOOK?
A
*Consistency
*High level of service
*Trust in the industry
9
Q
What are the 6 steps of the comparable method’?
A
- Look at the subject property
- Search for comparables
- Adjust and analyse comparables
- Weigh comparables
- Value subject property
- Stand back and look
10
Q
3 steps prior to undertaking any valuation?
A
- Competence - skills, understanding and knowledge (SUK)
- Conflicts of Interest - 3 types
- Terms of Engagement - full instructions to client
11
Q
RED BOOK structure
A
Professional Standards (PS) - Mandatory
Valuation Technical and Performance Standards (VPS) - Mandatory
Valuation Practice Guidance Applications (VPGA) - Advisory
12
Q
RED book definition of market value?
A
VPS 4 (IVS 104)
the estimated amount for which an asset or liability should exchange on the valuation date
…between a willing buyer and a willing seller in an arms length transaction
…after proper marketing
…and where the parties had each acted knowledgeable, prudently and without compulsion.
13
Q
What is synergistic value?
A
The result of a combination of two or more assets or interests where the combined value is more than the sum of the separate values.
Found in International Valuation Standards in Part 6 of RICS RED Book.
14
Q
What is liquidation value?
A
Liquidation value is the amount that would be realised when an asset or a group of assets are sold on a piecemeal (bit-by-bit) basis.
Found in International Valuation Standards in Part 6 of RICS RED Book.
15
Q
What is market rent?
A
The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
Found in RED Book glossary.
16
Q
What is equitable value?
A
The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties.
Found in RED Book glossary.
17
Q
What is fair value?
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.’
Derived from International Financial Reporting Standards (IFRS 13)
18
Q
Methodology of Residual Method
A
Calculate GDV
Less total development COSTS
Less development PROFIT
= Site value
19
Q
What are the two approaches to development land?
A
Direct comparison and assessment of a completed development scheme (residual)
20
Q
What do you do before undertaking any valuation?
A
- Check if professionally competent
- No conflicts of interest/personal interest
- Confirm terms of engagement through writing
21
Q
When is the investment method used?
A
When there is an income producing property.
22
Q
Basic overview of investment method?
A
Rental income is capitalised to produce a capital value. Implied growth rate is derived from market capitalisation rate (yield).
23
Q
The 4 groups that asset valuation clients fall into?
A
- Central Government, Scotland & Wales Governments - IFRS accounting basis
- Local Government - IFRS
- NHS - IFRS
- Academy schools - UK GAAP accounting basis
24
Q
What is IFRS?
A
International Financial Reporting Standards
25
What is 'special value'?
An amount that reflects particualr attributes of an asset that are only of value to a *special purchaser*.
26
What is 'marriage value'?
An additional element of value created by the combination of two or more interests or values.
*Sometimes referred to as synergistic value.*
27
What is an assumption?
**VPS 4**, para 8
Matters that, by agreement, are reasonable to accept as fact in the context of a valuation assignment without specific investigation or verification.
28
Where would you find valuation assumptions
VPS 4 points to VPGA 8
(Valuation of real property interests, p2. investigations an assumptions)
29
What are the assumptions in VPGA 8
1. Title
2. Condition of buildings
3. Services
4. Planning
5. Environmental matters - natural contraints
6. Environmental matters - Contamination/hazardous substances
7. Sustainability
30
What is a special assumption?
**VPS 4**, para 9
An assumption that either assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date.
31
Definition of market rent
**VPS 4**, para 5
*'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 arms length transaction...
after proper marketing...
and where the parties had each acted knowledgably , prudently with without compulsion*
32
When is market rent used?
Used to indicate amount for which a vacant property may be let, or
for which a let property may be re-let when existing lease ends.
33
Difference between market appraisal and Red Book valuation
Market appraisals are general estimates of a property's market value.
Red Book valuations is conducted by a RICS Registered Valuer who has the professional expertise to provide an accurate, evidence based market valuation based on a properties condition and local knowledge
34
What is a Red Book valuation
It is a valuation carried out in accordance with the guidance laid out in the RICS Valuation - Global Edition, and Global Standards UK Supplement.
35
What is valuer registration for?
Valuer Registration is a risk monitoring and quality assurance program which checks compliance with the RICS Red Book.
36
What does the Red Book do?
* incorporates the International Valuation Standards
* recognised globally as one of the most rigourous sets of standards for valuation
* details mandatory practices for RICS members undertaken valuation services
37
Why is Valuer Registration beneficial?
* Ensures members always meet the highest valuation standards
* Offers protection and confidence to member and clients
* Gives competative advantage in the market as standards are recognised is most parts of the world.
* Increasing demand from major lendors and investors globally for valuations undertaken by RICS Registered Valuers.
38
RICS DCF definition
a valuation model that seeks to determine the value of real estate investment property by examining its future net income or projected cash flow from the investment then discounting that cash flow to arrive at an estimated current value of invesment.
39
What is capitalisation?
When deciding on how much to bid in the open market for a right to recieve a flow of income, the investor will convert the flow of income into a capital sum.
40
What is decapitalisation?
Investment valuation of gaining the rental income from a capitalised sum.
*Used in analysis of yields*
41
What is one of the key objectives of an investment?
To provide an income.
42
What is market value?
The price what will be agreed between a willing seller and a willing buyer based on market assumptions.
43
What is worth?
A particular party's assessment of a property's value based on their own assumptions of an asset. AKA Investment Value (not market value).
44
In valuation, what is the interest rate?
The yield
44
What 4 formulae are required in the investment valuation?
1. The Present VAlue (PV) of £1
2. Amount of £1
3. Years Purchase (YP)/PV of £1 pa
4. YP in perpetuity
45
The value of money - Risk...
money is worth less in the future than it is today because there is a risk that you might not get it.
46
The value of money - Return...
money is worth less in the future than it is today because of the oppotunity cost. It cannot be invested elsewhere and produce an income if you do not yet have it.
47
The value of money - Inflation...
money is worth less in the future than today because it will be able to buy fewer goods and services as a result of inflation.
48
Purpose of YP in perpetuity?
Capitalise reversionary income or a fixed income.
49
Purpose of Present Value of £1?
Discount future income
50
Purpose of Amount of £1?
Estimate rental growth in a DCF.
51
Purpose of Years Purchase in perpetuity deferred fo 5 years?
Value the term income or an income that is certain for a number of years.
52
Purpose of Years Purchase dual-rate adjusted for tax?
Value a leasehold interest.
53
What are yields used for?
To capitalise rents in valuation and decapitalise capital values in analysis.
54
What is an All Risk Yield (ARY)?
Generic term meaning yield growth is implicit. Takes account of risks, returns and expectations of growth.
55
When is a yield not an ARY?
When the rental growth is explicit.
56
Name some all risk yields?
* Net Initial Yield
* Gross Initial Yield
* Equivalent Yield
* True Equivalent Yield
* Reversionary Yield
57
What is comparable evidence?
an item of information used during the valuation process as evidence to support the valuation of another, similar item’.
58
What are the 5 stages of the contractors approach?
1. (ERC) Estimated cost of construction
2. (ARC) Deduction from cost to arrive at effective capital value.
3. Land value
4. Appropriate decapitalisation rate
5. Stand back and look
59
What makes a good comparable?
* Comprehensive
* Very similar or identical
* Recent
* Result of arms length transaction
* Verifiable
* Consistent with local market practice
* Result of underlying demand
60
What are the 3 categories of comparable evidence?
1. Direct transactional evidence
2. General market data
3. Other sources
61
What challenges to valuers face with comparable evidence?
* Limited or infrequent transactions
* Lack of up-to-date evidence
* Evidence created by special purchasers
* Lack of similar or identical evidence due to complex nature of real estate
* Lack of market transparency
62
What must TOE address according to VPS 1 (para 3.1)?
**a.** Identification & status of the **valuer**
**b.** Identification of the **client(s)**
**c.** Identification of any other ****intended users
**d.** Identification of the **asset(s)** or liability(ies) being valued
**e.** Valuation (financial) **currency**
**f.** **Purpose** of the valuation
**g.** **Basis(es)** of value adopted
**h.** Valuation **date**
**i.** **Nature and extent** of valuers work
**j.** Nature and source(s) of **information** upon which the valuer will rely
**k.** All **assumptions** and **special assumptions** to be made
**l.** **Format** of the report
**m.** **Restrictions** of use, distribution and publication of the report
**n.** Confirmation that the valuation will be undertaken in accordance with the **IVS**
**o.** The basis on which the **fee** will be calculated
**p. **Where the firm is registered for regulation by RICS. reference to the firms **complaints** handling procedure, with a copy available on request
**q. **A statement that compliance with these standards may be subject to **monitoring** under RICS' conduct and disaplinary regulations
**r.** A statement setting out any **limitations on liability** that have been agreed.
63
DCF professional standard - what does it relate to?
* Discusses the use of DCF method under the Income approach within VPS 5 to value investment property.
* Discusses differences between VPS4 Market Value and Investment Value.
* S.4 and S.5 on how to use DCF to assess MV and IV.
64
What does a DCF do?
A DCF converts a series of future cash flows to a single current value, i.e. They are discounted back to the valuation date.
65
Market Value v Investment Value...
* MV is value to market as a whole, IV is value to specific investor or owner.
* MV is being what you need to pay, IV is what you should pay (or what it is worth).
66
Two methods to value invesment property?
* **Traditional (Implicit)** - using comparable evidence to inform rental value and market yield are built implicitly into the choice of all risks yield, arriving at capital value.
* **Explicit** - use cashflow and explicit assumptions around variety of inputs, such as rental growth, to arrive at capital value.
67
DCF methodology
1. Estimate cash flow (income less expenditure)
2. Estimate the exit value at the end of the holding period
3. Select discount rate
4. Discount cash flow at discount rate (reflects percieved level or risk)
5. Value is sum of completed discount cash flows to provide Net Present Value (NPV)
68
What is Net Present Value?
The sum of discounted cash flows. Where NPV is zero, the discount rate is also the internal rate of return (IRR)
69
What is internal rate of return?
* Rate of return where all future cashflows much be discounted to produce a NPV of zero.
* Used to assess total return from an investment making assumptions on growth, re-letting and exit value.
* If NPV >0, target rate of return is met.
70
What is a true yield?
Assumes rent is paid in advance and not in arrears?
71
What is a nominal yield?
Initial yield assuming rent is paid in arrears.
72
What is a gross yield?
Yield is not adjusted for purchasers costs.
73
What is an initial yield?
Simple income yield for current income and current price.
73
What is an equivalent yield?
* Weighted average of the intial and reversionary yields from a term and reversion valuation.
* It is the actual yield over time.
74
How do you arrive at an equivavlent yield?
1. Calculation through linear interpolation
2. Use of similar triangles
3. Software
75
What is a running yield?
A yield at one moment in time.
76
What are the 2 forms of investment valuation?
1. Implicit form (traditional method)
2. Explicit form (DCF)
77
What is the traditional method of investment valuation?
‘Traditional’ implicit valuations use comparable evidence to inform rental value (at current levels) and a market yield (where risks and rewards, such as rental growth) are built implicitly into the choice of all risks yield), arriving at capital value.
78
When would you use a term and reversion investment valuation?
* Used for reversionary investments where passing rent is below market rent.
* Term is capitalised until the next lease event.
* Reversion to market rent in perpetuity at a reversionary yield.
79
When would you use a layer/hardcore investment valuation?
* When the passing rent is above market rent (over-rented).
* Income flow is divided horizontally with bottom slice being market rent, and top slice being passing rent less market rent until next lease event.
* Higher yield applied to top slice (as riskier).
80
What is a rack rent?
The full OMV rent for a property.
81
What is an equated yield?
The internal rate of return of an investment given explicit growth assumptions.
82
What is a valuation?
An opinion on the value of an asset or liability on a stated basis, at a specified date.
83
What is a yield?
Yields are a masure of investment return. They show the income expressed as a percentage of capital invested: (income/price) x100
Yields are growth implicit.
84
How do you choose which investment method to use?
Depends on several factors including:
* Establish if over-under-or rack rented.
* The reversion in terms of time and rental value.
* Company preferences and software.
85
Is rack-rented or reversionary property more risky?
Reversionary always carries more risk than rack-rented because a greater proportion of the value is reliant on future market rental values which are not certain.
86
When is the contractors method used?
It is a method used where direct market evidence is limited or unavailable for specialised properties (i.e. sewage works, lighthouses, schools).
The method has 3 purposes:
1. used for owner occupied property
2. used for accounts purposes for specialised properties
3. used for rating valuations of specialist properties
87
What is the profit method of valuation?
Valuation method used where value of property depends on the profit generated from the business, not physical building or location.
Must have accurate and audited accounts for 3 years if possible, or estimates if needed for a new business.
88
When would you use the Profit method of valuation?
For valuations of specialist trading properties or entities, where there is a ‘monopoly’ position
Where the value of the property depends upon the businesses trading potential
i.e. pubs, petrol stations, hotels, care homes, cinemas, golf courses
89
How would you carry out a DCF?
* estimate the cashflow (income less expenditure)
* estimate the exit value at the end of the holding period
* select a discount rate
* discount the cashflow using the discount rate to give an NPV (which is the Market Value)
90
What is the Net Present Value (NPV)?
* The sum of the discounted cash flows of a project
* Used to determine if an investment gives a positive return against a target rate of return
* Positive NPV – investment has exceeded investor’s target rate of return
* Negative NPV – investment has not achieved investor’s target rate of return
91
Tell us about the DCF method
Usually used for worth calculations for a specific investor.
They have a target rate of return.
A growth explicit investment method of valuation.
Project the assumed cashflows over the assumed holding period to exit, enter an exit value, then discount the cashflow back to today at an investor’s target rate of return.
92
For what valuations is DCF method typically used?
Used for a number of valuations where the projected cash flows are explicitly estimated over a finite period e.g.
Short leasehold interests
Properties with income voids
Phased development projects
Non-standard investments (say with 21 year rent reviews)
Over-rented properties
93
Why do we discount in a DCF?
To reflect the time value of money. The discount rate will always reflect the investor’s perception of risk. Also known as the capitalisation rate.
94
What risk factor may affect the DCFs discount rate?
Must be careful not to double count risk in discount and factored as an explicit factor.
Exercising lease breaks
Illiquidity on sale
Failure to meet market rental expectations
Location
Legislative changes
Void risks/failure to re-let
Tenancy default (covenant risk)
95
What is the PV of £1 formula?
PV of £1 = 1
÷
(1+i)n
‘i’ is the yield that the valuer thinks is appropriate.
‘n’ is the term in years (to next rent review)
96
What is the Years Purchase?
The relationship between the income and the capital value.
The number of years it will take for the annual income to add up to the capital value, when taking into account the time value of money (i.e. that it’s decreasing). i.e. the right to receive £10,000pa for 4 years won’t = £40,000 payment today.
97
What is the Years Purchase formula?
Work out the PV of £1 first.
YP =
(1-PV of £1)
÷
i
‘i’ is the yield that the valuer thinks is appropriate.
98
What is the Years Purchase into perpetuity formula?
Used for valuing the reversionary rent into perpetuity.
100 ÷ i
Will need to work out the PV of £1 in X number of years when the reversion begins and multiple by the above YP.
99
Tell us about the hardcore and top slice method
It is used for OVER RENTED investments.
Income flow is divided horizontally. The hardcore (MR) is valued into perpetuity at a net initial yield.
The top slice (PR-MR) is capitalised to next lease event at a net initial yield with a risk adjustment.
There is a yield differential; top slice at an inflated yield to reflect higher risk of over-renting.
Different yield type can be used based on market comparable evidence.
NO PV of £1 needed as both layers of income are being received NOW.
100
What is the All Risks Yield (ARY) and what does it reflect?
The remunerative rate of interest used in valuation of fully let property let at Market Rent reflecting all the prospects and risks attached to particular investment.
It is an implicit method of valuing, as risk and rental growth is wrapped up in the yield.
Prospects/Risks include: obsolescence, voids, etc.
Can be used to value reversionary properties – just apply same ARY to the term and reversion.
101
Tell us about the hardcore and layer method
It is used for REVERSIONARY (under-rented) properties. Typically used by the institutional investment market, and used when the reversion is close in time.
Income flow is divided horizontally. Both the hardcore (PR) and layer (MR-PR) are valued into perpetuity, but the layer (top slice) is deferred to the next lease event.
Based on view that hardcore rent is secure so that reviewed rent will not fall below historic rent but risk is attached to top slice rent on reversion as less secure.
An Equivalent Yield is applied to both the hardcore and layer if used in term and reversion method.
102
Tell us about the hardcore and top slice method
It is used for OVER RENTED investments.
Income flow is divided horizontally. The hardcore (MR) is valued into perpetuity at a net initial yield.
The top slice (PR-MR) is capitalised to next lease event at a net initial yield with a risk adjustment.
There is a yield differential; top slice at an inflated yield to reflect higher risk of over-renting.
Different yield type can be used based on market comparable evidence.
NO PV of £1 needed as both layers of income are being received NOW.
103
What is a reversionary investment?
Where the propety is let at less than full market rent but where there is a rent review or reletting to full market rental.
104
Current decap rates?
**England: **
2.6% - Hospitals, educational, defence (HED)
4.4% - all other heredits
**Wales: **
1.9% - hospitals, educational, defence, & public conveniences (P-HED)
3.4% - all other heredits
105
Current rates multiplier?
**England:**
Standard (£51k+) = 54.6p
Small (<£51k) = 49.9
**Wales: **
0.562
106
107
Rental method overview
Used to value properties where there is a lot of information available about lease terms and rents paid.
108
Profits method overview
Used when there is not much information about rents paid. The RV is based on the rent a tenant would be willing to pay to achieve a certain amount of trade.
109
Contractors basis overview
Used for properties that are never rented out so there is no evidence about rents paid. The RV is based on cost of constructing a like for like building.
110
Profits methodology
* **Turnover (FMT)**
* Less cost of sales = **gross profit**
* Less running costs = **net profit**
* Less interest on capital invested, stock and consumables
* Less renumeration to operator
* = **Adjusted net profit**
* Capitalise adjusted net profit at appropriate yield (**capital valuation**) or apportion net profit between rent and profit (**rental valuation**).
111
Profits valuation procedure
1. Estimate fair maintainable turnover (FMT)
2. Assume reasonably efficient operator (REO)
3. Assess potential annual gross profit
4. Determine fair maintainable operating profit (FMOP)
5. Deduct expenses
6. Determine net profit
7. Capitalise at appropriate yield
8. Capital value of property
