Valuation

Question 1

what are the approaches to valuation? and which document outlines these?

Answer 1

International Valuation Standard 105: 1) income approach 2)Cost Approach 3)Market Approach

Question 2

5 methods of valuation?

Answer 2

1. Comparative 2. Investment 3.Profits 4.Residual 5.DRC

Question 3

name of RICS Valuation standard

Answer 3

RICS Valuation - Global Standards (2022)

Question 4

RICS document on comparables

Answer 4

RICS Professional Standard: Comparable Evidence in Real Estate Valuation (2019)

Question 5

what does the standard for comparable evidence outline?

Answer 5

principles in the use of comparable evidence. Valuer should use professional judgement to assess the relative importance of evidence on a case by case basis.

Question 6

Categories of the Hierarchy of Evidence

Answer 6

A) Direct comps B)general market data C)Other Sources e.g transactions from other RE assets.

Question 7

what is Category B evidence?

Answer 7

info from published sources / commercial databases. Historic evidence. other indirect evidence

Question 8

Category A evidence

Answer 8

completed transactions of near identical properties where information is available. Completed transactions of other similar RE assets where info is available.

Question 9

what are the investment methods of valuation?

Answer 9

conventional. Term & reversion. Hard core.

Question 10

conventional method of valuation equation

Answer 10

Net income x Multiplier = Market Value (NPV)

Question 11

Difference between DCF and investment method

Answer 11

Implicit assumptions in conventional investment. DCF explicitly states assumptions.

Question 12

Term and reversion method

Answer 12

Underrented properties. Higher yield applied to top slice. depends on comps and risk.

Question 13

yield calculation

Answer 13

rent passing/price x 100

Question 14

years purchase calculation

Answer 14

100 / yield. this means the years it takes to repay its purchase price.

Question 15

Explain the DCF technique?

Answer 15

growth explict version of the investment method. Future net income is discounted to obtain the NPV.

Question 16

How can NPV determine an investors TRR?

Answer 16

NPV - Positive it means they have exceeded TRR. If negative they haven’t exceeded it.

Question 17

what is an IRR?

Answer 17

rate of return at which all future cashflows must be discounted to produce a NPV of 0.

Question 18

name of the guidance on DCF valuation

Answer 18

RICS Practice Information: Discounted cash flow valuations, Nov 2023

Question 19

name of guidance in relation to development property

Answer 19

RICS Professional Standard: Valuation of development property, 2019

Question 20

Prime distrubution yields

Answer 20

5.00% - Stable sentiment

Question 21

what are Greater London Estates yields?

Answer 21

5.00% - positive sentiment

Question 22

Secondary South East Towns office yields?

Answer 22

11.50% + - negative sentiment

Question 23

Industrial South East Estates yields?

Answer 23

5.25% - positive sentiment

Question 24

ARY definition?

Answer 24

remunerative rate of interest used in the valuation of a fully let property let at MR, reflecting all the risks

Question 25

True Yield

Answer 25

yield when rent is paid in advance not arrears

Question 26

Nominal Yield

Answer 26

Initial yield assuming rent paid in arrears.

Question 27

Net Yield

Answer 27

yield adjusted for purchaser's costs

Question 28

Equivalent

Answer 28

weighted average between NIY and RY (term and reversion)

Question 29

Reversionary yield

Answer 29

market rent / current price x 100

Question 30

Simple methodology for a DCF?

Answer 30

1. Estimate cash flow (income less expenditure) 2. Estimate exit value at end of holding period 3. select discount rate 4. value is the sum of completed DCF to provude NPV

Question 31

Which part of the RBG details the DCF method?

Answer 31

VPS 5

Question 32

when might you adopt the DCF method instead of conventional investment method?

Answer 32

when there is lack of comparable evidence, unique assets

Question 33

what are the assumptions you need to make in a DCF valuation?

Answer 33

current market rent expected rental growth rent review period holding period discount rent ARY Last line into perpetuity

Question 34

what is the RICS guidance on DCF?

Answer 34

RICS Practice Information: Discounted Cash Flow valuations, Nov 2023

Question 35

detail the profits method of valuation?

Answer 35

trade related property: pubs hotels. Annual turnover - less costs/purchases = Gross profit Less working expenses = Unadjusted net profit Less remuneration = FMOP then capitalise this at yield (years purchase) = MV.

Question 36

Residual valuation purpose

Answer 36

to find the market value of the site based on market inputs at the valuation date. special assumption that development is complete as at the date of valuation

Question 37

Residual method of valuation?

Answer 37

1. Establish GDV (Comparable method to establish rent and yields) 2. ARY used 3. Assumption on marketing void, RF 4. Take away total development costs (site prep, building costs, professional fees, contingency) 5. finance costs 6. developer's profit % of GDV.

Question 38

types of dev finance

Answer 38

debt or equity

Question 39

typical LTV ration for dev finance?

Answer 39

60%

Question 40

DRC method ?

Answer 40

value land in existing use. Add current cost of replacing the building plus fees less a discount for depreciation.