Valuation Flashcards

Question

Define Market Value.

Answer 1

Must include the words: willing buyer, willing seller, proper marketing and arms-length transaction.

Answer 2

Exposure to the market in the most reasonable manner (appropriate type and length, advertising to the appropriate target market) Method of sale.

Answer 3

The parties do not have any relationship

Answer 4

Where the combined value of two or more assets together is greater than the sum of the separate values. e.g. site A is £100k and site B is £100k  If you merge the sites, the synergistic value is £250k (more than £200k)

Answer 5

An additional element of value created by the combination of 2 or more assets or interests where the combined value is more than the sum of separate values. (The additional £50k in the example above - the extra value - often common to split this value between seller and purchaser).

Answer 6

An amount that reflects particular attributes of an asset that are only of value to a special purchaser.

Answer 7

A buyer for whom the asset has special value because of advantages arising from its ownership that would not be available to other buyers in the marker – they may be willing to pay more than market value.

Answer 8

Market rent is not suitable for rent reviews - where the actual definitions and assumptions have to be used.

Answer 9

When valuing for accounting/financial reporting i.e. company accounts (no different to market value, just used when valuing for inclusion in company accounts)

Answer 10

Disclosures where the public has an interest or upon which 3rd parties may rely (valuation of which 3rd parties may rely, i.e. for take overs and merges)

Answer 11

A valuation for financial statements (basis of value is Fair Value)

Answer 12

For valuation of operational property - owner occupied properties owed by local and centralised government.

Answer 13

The depreciated replacement cost (DRC) method is used to value owner occupied specialised properties (one that wouldn’t sell with vacant possession only). - i.e. a football stadium without a team.

Answer 14

Existing use value is market value, disregarding any alternative use (i.e. assuming it will only be used for the existing use for the foreseeable future). Market value is the highest and best use of an asset.

Answer 15

Comparative Investment Residual Profits/Accounts Contractors/ Depreciated Replacement cost

Answer 16

The most reliable method of valuation, primary method and should be used where possible. Candidates need to be able to collate, analyse and adjust comparable evidence to reflect differences with their subject property.   Essentially, the comparable method can be used where there is a good body of recent, reliable comparable rental, yield or sales evidence.

Answer 17

Market rent (net of outgoings) X Years purchased= Market Value Used to value shops, offices, industrial and warehouse properties that are: Let as investment Owner occupied Vacant Where the majority of comparables are: Rents Investment transactions

Answer 18

Value of completed development Less Development costs Less developers profit = LAND VALUE Used to value land and properties with development, redevelopment and refurbishment potential – when not possible to value by comparison.

Answer 19

It is a residual which can be expressed as: Turnover (Net of Vat) Less Costs of generating the Turnover = Net Operating Profit which is capitalised. Basis principles of valuation: Value by direct comparison if possible, or use the investment method OR resort to another method which for leisure properties is the PROFITS METHOD. (Cinemas, golf courses, hotels- where nature of business adds to its value)

Answer 20

Gross replacement cost Cost of modern building £…….. LESS Depreciation (£)……. Net Replacement Cost £………. PLUS site value £……….. = VALUE AS EXISTING The method of Last Resort.   Used to value specialised properties or non-specialised properties where there is no direct/inconclusive comparable evidence.

Answer 21

When there is an unusual property (in design or location) e.g. very nice office building in middle of an undesirable estate When there is market volatility e.g. mid-covid pandemic where there is high level of uncertainty / disrupted market Where we have not carried out usual inspections e.g. not inspected interior of the property and not got the lease to hand

Answer 22

Physical characteristics Location Use Tenure (& lease terms if appropriate) Timescale

Answer 23

Where Discounted Cash Flow is used

Answer 24

A number are needed to value by comparison as the price in any transaction may be distorted i.e. the property not being subject to proper marketing. As much comparable evidence as possible can help establish trends.

Answer 25

Non-transactional evidence Transactional evidence

Answer 26

The time it takes to become out-of-date will depend on market conditions. Most recent comparables tend to hold the most weight.

Answer 27

After gathering comparable evidence a valuer must weight and rank each piece, some may be disregarded. This is subjective depending on what the valuer thinks.   Attach the greatest weight to those transactions which are most similar to the subject property

Answer 28

Ranking evidence by transaction type Open market lettings Lease renewals Rent reviews Independent expert determination Arbitrators awards.

Answer 29

Calculating or plotting on a graph, a value that lies between two extreme points. This is considered permissible.

Answer 30

Calculating or plotting on a graph, a value outside of two extreme points. This is considered dangerous.

Answer 31

Rental value of shops are based on NIA it is usually established using zoning. Zoning is not a measurement technique but a valuation technique. Used to compare retail units with different shapes / different frontage to depth ratios

Answer 32

Typically, 6.1m (20ft) but differs in prime retail such as oxford street (9.1m). The zones are halved back: Zone A being X Zone B being X/2 Zone C being X/4- *//* Remainder being X/8 X/10 – usually used for 1st floors, basements etc. Where a first floor is used for retail purposes, the Zone A/10   If first floor is non-retail purposes ( e.g. storage) then it is sometimes acceptable to take a rate independent of X 

Answer 33

Apply a percentage uplift for the depth of the return (say 5%) depending on pedestrian flow All of a unit becomes Zone A if both frontages have equal pedestrian flow, could make a reduction for excessive Zone A A percentage reduction for lack of internal space for shelving and window displays

Answer 34

In halving back from both frontages at the same or different zone A rates (different zone A rates are more likely as there is likely to be different footfall on each road).

Answer 35

let on internal repairing (IR) terms and the outgoings that need to be deducted are ➢ external repairs ➢ insurance ➢ management Take rent and deduct for outgoings external repairs, insurance and management to give us the net rent which we would then capitalise.

Answer 36

The yield is called the market capitalisation rate because it is the rate at which the market capitalises income The yield is also known as the all risks yield as it considers all the risks of the investment The construction, quality of tenant's covenant, amount of rent, unexpired lease term, anticipated rental growth (location), other lease terms

Answer 37

Buildings physical characteristics   Tenants covenant strength  Market rent to see if property is under or over rented Other lease terms - likely to be some uncertainty in net rent Anticipated rental growth (links to location) 

Answer 38

Another name for the all risks yield   It is the rate at which the market capitalises the income 

Answer 39

The Residual Method - use comparable if possible

Answer 40

(GDV) – (Development costs+ developers profit) = Land value

Answer 41

Demolition/site prep Cost of construction (Building cost) Construction fees (architects, engineers etc.) Cost of finance Contingency to allow for fluctuations in these costs Agent and legal fees (in disposing the development) Acquisition costs - Fees and stamp duty land tax on acquisition when you buy the site  (GIVE ANSWER IN THIS ORDER AS IT IS LOGICAL) 

Answer 42

Developers profit can be calculated by either a percentage of total cost (22-25%) or a percentage of Gross Development Value (15-17%) *Depends upon risk The riskier the development, the greater the percentage Would say 'I used 15% because there was only a moderate risk'

Answer 43

Stamp duty land tax  Acquisition agents fees  Legal fees  VAT on the agent and legal fees  1.8%= 1% lettings fees 0.5% for sols fees + 20% VAT= 1.8%

Answer 44

0% on the first £150K 2% on the next £100K 5% above £250K For purchases above £250K the SDLT can be calculated from the Gross Acquisition Price net of agent and legal fees.

Answer 45

A strip of land that provides access to another piece of land. Access to the other piece of land can only be made by crossing the ransom strip.

Answer 46

The value attributable the ransom Strip

Answer 47

Would be valued at a percentage of the uplift in value resulting from the owner of the land having access over the ransom strip (Don't mention 1/3 here unless asked - it is case specific, and 1/3 is just typical).

Answer 48

Compulsory purchase case in 1961 A case in which agricultural land was valued as an industrial piece of land as it provided access to an industrial site It was held that the value of the ransom strip was 1/3 of the uplift in the value of the development land   Since then, 1/3 of the uplift in value for the ransom strip has been accepted as an industry standard (there is a 1/3 - 2/3 split)

Answer 49

Accounts method

Answer 50

Leisure properties: Arcade, casinos, Cinema, hotels, golf courses, theatres

Answer 51

When we can't separate the property from its use - Used to value properties that’s Use/ Nature of business use adds to its value.

Answer 52

Unit prices per seat (e.g. cinemas) Per Bedroom (e.g. hotels)

Answer 53

As a last resort, when no other method can be used.

Answer 54

Depreciated replacement cost method

Answer 55

Insure the building so that if it were to be damaged by fire/storm etc - need to know the cost to demolish it, rebuild it in accordance with current regulations, plus professional fees. Demolition Shoring up and weather protection of adjoining buildings Re-building in accordance with current building regulations Professional fees

Answer 56

Contractors’ method

Answer 57

It tells us the PV of £1 to be received each year, for a given number of years  YP tells us present value of annual series of incomes - the further we go into the future, the lower the sum becomes in today's terms   £1 in the future is not worth £1 today - PV of £1 p.a. - discounting each year when it is per annum 

Answer 58

Three main sources are:   Gilts (UK Government Bonds)  Equities (Shares in Companies)   Property  

Answer 59

A bond investment has a fixed return for a fixed period at the end of which the capital is repaid

Answer 60

With proactive management you can improve performance (e.g. refurbish units, regear leases). With a gilt or a company you have shares in - you can't improve it's performance easily.

Answer 61

Property investment has a higher level of risk and difficulties than investing in gilts etc. therefore an investor will require a higher yield to compensate. Low liquidity - You can buy/share equities and guilts almost instantly, but with property it takes a long time to get into it   Requires active management (easiest to let FRI)  High transfer costs (agent fees)  Not divisible  

Answer 62

Takes into account all the risks of the investment  

Answer 63

Market capitalisation rate 

Answer 64

The rent expressed as a percentage of the purchase price 

Answer 65

Is rent expressed as the percentage of the gross acquisition price (i.e. purchase price plus purchasers costs)

Answer 66

Stamp Duty Land Tax  Agents Fees   Legal Fees  Non-recoverable VAT on Fees 

Answer 67

STAMP DUTY: 0% on the first £150K 2% on the next £100K 5% above £250K For purchases above £250K the SDLT can be calculated from the Gross Acquisition Price net of agent and legal fees. Agents Fees - 1%  Legal Fees - 0.5%  VAT on Fees - 20% (of the 1.5% which is 0.3%)  Total for fees (inc VAT) is 1.8% 

Answer 68

You would construct a yield Look at gilts, as they are a risk-free investment, and then add a risk premium Take into account market risks and property risks Deduct growth (note: no growth if in recession)

Answer 69

It's included in the all risks yield The greater the growth opportunity, the lower the yield

Answer 70

A reversionary freehold is an investment that is let at a rent other than Market rent (under-rented or over-rented).   There are two approaches to value a reversionary investment. Term and reversion Hardcore/ layer method

Answer 71

We capitalise the passing rent until review or reversion (to market rent)  (Do this, by multiplying the passing rent by the YP for the number of years to the reversion)  We take the market rent to be received at review/reversion and then capitalise that into perpetuity (gives value at that moment in time)  Capitalisation = multiplying by the YP  We then defer it further, at a PV of £1, for the period of the term  The reversion gets capitalised at market rented rate, but the term gets capitalised at a lower rate due to the lower risk (if over-rented, then term would have higher yield and reversion would have lower yield)  Also known as block-income approach (value each block of income) 

Answer 72

We capitalise the rent passing into perpetuity  We then take the additional rent that we expect to receive at review/reversion and we capitalise that into perpetuity   This gives top-slice value at that moment in time  We need to defer it for the period of the term  The bottom slice is capitalised below market rented rate due to reduced risk, and the top slice is capitalised above this rate to reflect the increased risk  There is risk at review that you won't receive the additional rent (it could be argued that the rent review etc. is not agreed yet so the investment as a whole must have a higher risk attached to it than a market-rented investment).

Answer 73

Can use either:  Term and reversion  Hardcore or layer  Both blocks and slices would be capitalised at an above market rented rate  Use block income (another name for term and reversion) or core income techniques  Need to capitalise market rent into perpetuity and then capitalise the top-slice income (the over-rented portion) up to review/reversion 

Answer 74

the net income (or passing rent) at the date of purchase expressed as a percentage of the Purchase Price 

Answer 75

the Market Rent expressed as a percentage of the Market Value (or Purchase Price) 

Answer 76

Present income expressed as a percentage of market value

Answer 77

the weighted average of the Initial Yield / Running Yield and the Reversionary Yield  Weighted average = takes into account the importance, rather than treating each item equally   The weighted average is always closer to the reversionary yield than to the initial yield   It can also be described as the internal rate of return from an investment disregarding any rental or capital growth

Answer 78

It is the overall rate of return, taking into account the growth  It is the true investment yield   It is the discount rate at which the DCF equals the purchase price of the investment 

Answer 79

It is the yield, when taking into account that rent is received quarterly in advance (rather than the nominal yield which is generated when rent is received annually in arrears)  (does not affect valuation) 

Answer 80

3 examples:  Additional rent expected at review/reversion when under rented  Overage/froth  Leasehold profit rent  

Answer 81

Capitalised above the market rented rates to reflect the increased risk   (i.e. at a higher rate than bottom slice income)   The risk is on receiving the extra proportion of rent (not the rent that we are already receiving)

Answer 82

Only has value if there is a profit rent and an unexpired lease term of more than one year  Answer: I would capitalise the profit rent (the market rent less the rent paid) If you get asked, can then say, would capitalise via the YP single rate, the YP dual rate, or the YP dual rate tax adjusted. 

Answer 83

Accumulative rate   Remunerative rate   Which is the sinking fund rate?  Accumulative rate 

Answer 84

It increases it (becomes the true equivalent yield rather than the nominal yield)  

Answer 85

In conventional investment valuations, growth is implicit in the capitalisation rate (i.e. we do not calculate future rental and capital growth so investor may accept low yield as they are expecting growth)  In a DCF, we make the growth explicit - we calculate what future values are going to be (i.e. we build in the growth and calculate what the future rent/future market value would be)  IN DCF we discount with growth at the invested target rate of return Note: RICS' publication of new global practice information on using explicit discounted cash flow (DCF) valuations for investment property (NOV 2023)

Answer 86

We compound it using (1+i)^n or Parry's Amount of £1 Table  (Compound interest is when interest is added to invested cash, and interest is also added to any interest previously paid.)

Answer 87

UK Government Stock (Gilts) form the basis of yields   Start with risk free rate and add on market risks and property risks  Take risk free rate and add the risk premium  

Answer 88

The yield from UK Gilts 

Answer 89

The return over and above Government Stock, that the investor will require  The yield an investor would require that is over the yield from gilts  

Answer 90

Because there is more risk and more difficulty investing in property than there is investing in gilts (Government Stock/Government Bonds)  

Answer 91

How we ensure a building sells, or for a distressed sale

Answer 92

Target is 2% - current inflation rate is 4%

Answer 93

Gross External Area (GEA)/ IPMS 1 Gross Internal Area (GIA)/ IPMS 2 Net Internal Area (NIA)/ IPMS 3 Industrial and warehouse rents usually based on GIA Shop rent usually based NIA Office rents should now be based on IPMS 3 (however, not suitable in all circumstances) For retail property rent is often expressed ITZA.

Answer 94

40 Kilonewton per M2

Answer 95

By discounting the future cash amount/ property value at the appropriate discount rate

Answer 96

Triangulation  

Answer 97

Term and Reversion/Block Income   Capitalise passing rent until reversion – at lower yield as safe   Capitalise reversionary rent into perpetuity, deferred by multiplying by PV £1 for period of term – at higher yield as not yet agreed  Hardcore / Layer  Top slice income = additional rent we expect to receive at review/reversion when under rented  Capitalise passing rent into perpetuity  Capitalise top slice/marginal income into perpetuity, deferred for duration of term

Answer 98

Establish competence, conflict of interest and agree terms of engagement

Answer 99

Inspect, note limitations, purpose of valuation, basis of value and assumptions/special assumptions  

Answer 100

letting boards, speaking with agents, EGI, CoStar Focus, own/office records, Land Registry 

Answer 101

The yield would increase to reflect greater risk 

Valuation Flashcards

(129 cards)