Valuation Flashcards
(69 cards)
1
Q
1) What is an internal valuer?
A
Employed by company to value assets of company. For internal use only. No 3rd party reliance.
2
Q
2) What is an external valuer?
A
No material links with asset to be valued or the client.
3
Q
3) You receive a request to undertake a valuation, what are the first steps you take?
A
- Check competence
- Check independence – check for conflicts
- Terms of Engagement in writing
- Receive written confirmation of instruction
4
Q
4) What is the statutory due diligence which needs to be undertaken for valuation instruction?
A
Required to check no material matters which could impact valuation:
- Asbestos register (Control of Asbestos Regulations 2012)
- Contamination (Environmental Protection Act 1990)
- Business rates
- Equality Act compliance (Equality Act 2010)
- Environmental matters
- EPC rating (Minimum Energy Efficiency Standards 2015)
- Flooding
- Fire safety compliance
- Health & Safety (Health and Safety at Work Act 1974)
- Legal title and tenure
- Public rights of way
- Planning history and compliance (Town and Country Planning Act 1990)
5
Q
5) What is the timeline of a valuation instruction?
A
1) Receive written instructions from client
2) Check competence
3) Check for conflicts / independence
4) Issue HoTs
5) Receive HoTs signed by client
6) Undertake site inspection and measurement
7) Perform necessary DD – including statutory DD checks
8) Gather lease information, building information
9) Research market and assemble comps
10) Analyse comps
11) Undertake valuation
12) Draft report
13) Have valuation and report considered by another registered valuer for sense checking
14) Finalise and sign report
15) Issue report to client
16) Issue invoice
17) Ensure file in good order for archiving and keep for min 6 years
6
Q
6) What is the Red Book?
A
- ‘Red Book’ valuations are those which are undertaken under the mandatory regulations and standards set out in the RICS Valuation Global Standards 2017
- Covers ethical standards, duty of care, qualifications of the valuer and the contents of a valuation report
- Ensures clients that they will receive a properly researched valuation by a qualified and independent valuer working to set of established and consistent standards
7
Q
7) What is the format / structure of the Red Book?
A
- Part 1 – Introduction
- Part 2 – Glossary
- Part 3 – Professional Standards
- Part 4 – Valuation technical and performance standards (VPS)
- Part 5 – Valuation applications (VPGA)
- Part 6 – International Valuation Standards
8
Q
8) What are the five methods of valuation?
A
- Comparable method
- Investment method
- Profits method
- Residual method
- Depreciated replacement costs (contractors method)
9
Q
9) How does the International Valuation Standards refer to valuation approaches and methods?
A
3 valuation approaches:
o Income approach (investment, residual and profit methods)
o Cost approach (contractors / depreciated replacement costs method)
o Market approach (comparable method)
10
Q
10) Tell me how you would value something using the comparable method?
A
- Research the relevant market for the subject property in terms of asset class and location to source comparable transactions
- Verify these comparables, which will often involve analysing the headline rent to calculate the net effective rent
- Assemble comparables in a schedule
- Adjust the comparables using hierarchy of evidence
- Analyse comparables to form opinion of value
- Report value and prepare file not
11
Q
11) Has the RICS published anything recently in relation to comparable evidence?
A
New guidance note Oct 2019 – Comparable Evidence in Real Estate Valuation. Provides guidance on matters such as sources of comparable evidence, how to record comparable evidence, analysis of comparable evidence and dealing with shortages of evidence.
12
Q
12) What is the hierarchy of evidence?
A
Open market lettings
Lease renewals
Rent reviews
3rd party determinations
Sale & leasebacks
Inter-company transactions
13
Q
13) What is the issue with using auction results as comparables?
A
Gross prices, have not yet accounted for purchaser’s costs. May also involve a special purchaser / insolvency sale.
14
Q
14) Tell me how you would value something using the profits method?
A
Profits method is used for trade related properties such as pubs, petrol stations, hotels, leisure and healthcare properties. Used where value of property depends on profitability of the business operating out of it. Does not depend on physical building or location. Must have accurate and audited accounts of 3 years if possible. New business – use business plan / forecasts.
Simple methodology:
Annual turnover – costs / purchases = gross profit
Gross profit – reasonable working expenses = unadjusted net profit
Unadjusted net profit – operator’s remuneration = adjusted net profit
Adjusted net profit also known as Fair Maintainable Operating Profit (FMOP)
This can be expresses as the EBITDA (earnings before interest, taxation, depreciation and amortisation
Capitalise the FMOP / EBITDA at appropriate yield to achieve market value
15
Q
15) Tell me how you would value something using the investment method?
A
- Used when there is a rental income stream to value
- Rental income is capitalised to produce a capital value
- Conventional method assume growth implicit valuation approach
- An implied growth rate derived from market capitalisation rate (yield)
16
Q
16) What are the different investment method techniques?
A
- The conventional method = rent received or market rent x years purchase = market value
- Term and reversion
- Hardcore and layer
- Hardcore and top slice
- Discounted cash flow
17
Q
17) How would you value something using term and reversion method?
A
- Used when the current rent of a property is less than the likely future rent of the property, i.e. the rent passing is lower than the market rent meaning the property is under rented
- Method:
o Current term capitalised until next review / lease expiry at an initial yield. Get initial yield by looking at investment sale comps, divide annual income by price and x100.
o Reversion to market rent valued in perpetuity at reversionary yield
o Add together - Reversionary yield always softer as accounts for added risk of possibly not receiving that income
- Deduct purchaser’s costs after if required
18
Q
18) How would you value something using hardcore and layer technique?
A
- Used when property being valued for institutional investment market, for example prime offices
- Also used when reversion close in time
- Used with an equivalent yield
- Method:
o Capitalise term into perpetuity at equivalent yield
o Capitalise the reversion to market rent ‘top slice’ at equivalent yield deferred until time of reversion
o Add together
19
Q
19) How would you value something using hardcore and top slice method?
A
- Used for over-rented investments, i.e. passing rent higher than Market Rent
- Income flow divided horizontally
- Bottom slice = market rent
- Top slice = Rent passing – market rent until next lease event
- Higher yield applied to top slice to reflect additional risk
- Usually used with net initial yield
- Method:
o Establish market rent by comp analysis
o Establish passing rent by reviewing lease
o Establish market yield using comps and risk analysis
o Capitalise market rent into perpetuity using market yield
o Capitalise top slice until next review (if rent can go down – CHECK LEASE) or expiry using market yield softened to reflect risk
o No PV £1 needed as both parts of income being received right now
o Add together
20
Q
20) What do we mean by Present Value of £1?
A
It is the concept that an amount of money today, for example £1, is worth more to us than the same amount in the future. In other words, money received in the future is not worth as much as an equal amount received today.
21
Q
21) What do we mean by Years Purchase?
A
- A figure which can be calculated and used in expressing the value of an asset in the number of years required for its income to yield its purchase price
- Years Purchase calculated by dividing 100 by yield. This will produce number of years required for its income to repay purchase price
22
Q
22) What is a yield?
A
- A measure of investment return, expressed as a percentage of capital invested
- An initial yield is calculated by income / price x 100
- Demand for property is one of the key drivers of yield. When demand high, cost of buying investment property increases. The more you pay, the less yield you get.
23
Q
23) How do you determine what yield to use? What is the most important thing when considering a yield to adopt?
A
- Consider choice of yield adopted by looking at comparable evidence
- Why are different yields used for all major use classes?
o Consider risk, occupancy rates, economic factors, occupier demand - Risk is the major factor when determining a yield, in relation to following factors:
o Prospects for rental and capital growth
o Quality of location and covenant
o Use of property
o Lease terms
o Obsolescence
o Voids
o Security and regularity of income
o Liquidity
24
Q
24) What is return?
A
- Term used to describe performance of property
- Measured retrospectively
- Use DCF calculation to find Internal Rate of Return (IRR)
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25) How is capital value calculated?
(Annual income / yield) x 100
26
26) What are some of the different types of yield?
- All Risks Yield
o Remunerative rate of interest used in valuation of fully let property let at market rent reflecting all prospects and risks attached to the particular investment
- True yield
o Assumes rent is paid in advance not in arrears (trad. Valuation practice assumes rent paid in arrears)
- Nominal yield
o Initial yield assuming rent paid in arrears
- Gross yield
o The yield not yet adjusted for purchaser’s costs (such as an auction result)
- Net yield
o The resulting yield adjusted for purchaser’s cost
- Equivalent yield
o Average weighted yield when reversionary property is valued using initial and reversionary yield
- Initial yield
o Simple income yield for current income and current price
- Net initial yield
o Current income divided price adjusted for purchaser’s costs
- Reversionary yield
o Market Rent divided by current price on investment let at rent below the MR
- Running yield
o The yield at any one moment in time
27
27) How would you value something using the Discounted Cash Flow technique?
- Growth explicit investment method of valuation
- DCF valuation method involves projecting estimated cash flows over assumed investment holding period, plus an exit value at the end of that period.
- Usually arrived at on conventional ARY basis
- Cash flow then discounted back to present day at a discount rate (also known as desired rate of return) that reflects perceived level of risk
- Used for number of valuations where projected cash flows are explicitly estimated over finite period such as for:
o Short leasehold interests and properties with income voids and complex tenures
o Phased development projects
o Non-standard investments (say with 21 year rent reviews)
o Over-rented properties and social housing
- RICS guidance note on discounted cash flow for commercial property investments, 2010
- Methodology:
o Estimate cash flow (income – expenditure = net income, display in table)
o Estimate exit value at end of holding period (say 10 years)
o Select discount rate
o Discount cash flow at discount rate
o Value is sum of completed DCF to provide the Net Present Value (NPV)
28
28) What is the Net Present Value?
- Sum of discounted cash flows of project
- NPV can be used to determine if an investment gives positive return against a target rate of return
- When the NPV is positive (more than 0) then the investment has exceeded the investor’s target rate of return
- When the NPV is negative, it has not achieved the investor’s target rate of return
29
29) What is an Internal Rate of Return?
- IRR
- Rate of return at which all future cash flows must be discounted to produce NPV of 0
- IRR used to assess total return from investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions
- If valuer does not have software to calculate IRR, then linear interpolation can be used
- To calculate IRR:
1) Input current market value as a negative cash flow
2) Input projected rents over holding period as positive value
3) Input projected exit value at end of term assumed as a positive value
4) Discount rate (IRR) is the rate chosen which provides an NPV of zero
30
30) What is the difference between a residual site valuation and a development appraisal?
- A residual site valuation determines value of the land
- Development appraisal, whilst it can assume a site value or be used to establish a residual site value, is primarily used to financially assess the viability of a proposed development scheme and its sensitivity to changing various inputs
31
31) What is the purpose of a residual valuation?
- Most common purpose is for specific valuation of property holding to find market value of site based on market inputs
- At one moment in time at the valuation date for particular purpose
- Can be based upon simple residual valuation or DCF method
- All inputs always taken at date of valuation
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32) What is the methodology for a residual site valuation?
Gross Development Value (cap value of completed scheme, all risks yield used to calculate)
- Total development costs
o Site preparation (demolition, remediation, landfill tax, services, site clearance)
o Planning costs (Section 106, CIL, Section 278 payments, application fees, surveys)
o Build costs (Client info, spons, BCIS, Quantity Surveyor)
o Professional fees (10% - 15% + VAT of total construction costs, architects usually most. Lower % appropriate for larger project)
o Contingency (5% - 10% of total construction costs depending on level of risk/complexity)
o Marketing costs + fees (1.5% of GDV)
o Cost of finance (choice of interest rate – LIBOR, Bank of England base rate, rate at which client can borrow)
o Developer’s profit (15% - 20% of GDV)
o Purchaser’s costs (6.8%)
= Site value
Remember VAT paid on all professional fees
33
33) How can a development be funded?
Two main methods:
- Debt finance – lending money from bank or other funding institution
- Equity finance – selling shares in company or joint venture or own money used. Forward funding – scheme pre-sold to investor or occupier
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34) What are the limitations of the residual valuation methodology?
- Importance of accurate info & inputs
- Does not consider timing of cash flows
- Very sensitive to minor adjustments
- Implicit assumptions hidden and not explicit
35
35) What is sensitivity analysis?
- The study of how the uncertainty in the output of a model can be divided and allocated to different sources of uncertainty in its inputs
- Required for key variables such as GDV, build costs and finance rate to show range of values
- Three types of sensitivity analysis
o Simple sensitivity analysis of key variables
o Scenario analysis – change scenarios for the dev. content / timing such as phasing scheme
o Monte Carlo simulation – using probability theory – using software such as crystal ball
36
36) Where can you find RICS guidance on valuation of development property?
- International Valuation Standard 410 ‘Development Property’ provides detailed overview of the valuation of development property
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37) How would you value something using the Depreciated Replacement Cost (DRC) Method of Valuation?
- Also known as contractor’s method
- Should only be used where direct market evidence is limited or unavailable for specialised properties
- Specialised properties could include sewage works, light houses, oil refineries, docks, schools etc.
- Purpose:
o Used for owner-occupier property
o For accounts purposes for specialised properties
o Used for rating valuations of specialised properties
- Two-step method:
1) Value of land in its existing use (assume planning permission exists)
2) Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence / deterioration
(Use BCIS and then judge level of obsolescence)
- Have to estimate depreciation appropriate for physical, functional and economic obsolescence:
o Physical obsolescence – result of deterioration / wear and tear over the years
o Functional obsolescence – where design or specification of asset no longer fulfils the function for what it was originally designed
o Economic obsolescence – due to changing market conditions for use of asset
38
38) Should the DRC method always be Red Book compliant?
- This method not suitable for Red Book compliant valuations for secured lending purposes
- Can be used for calculation of market value for specialised properties only for valuations for financial statements
- DRC valuation undertaken in private sector should be accompanied by statement that it is subject to adequate profitability of business
- DRC valuation undertaken in public sector should be accompanied by statement that it is subject to the prospect and viability of the continued occupation and use
- When reporting DRC valuation, valuer must state the market value for any readily identifiable alternative use, if higher or if appropriate, a statement that the market value on cessation of the business would be materially lower
39
39) What is a building cost reinstatement valuation technique?
- The cost of the reinstatement of the building without a profit
- For building insurance purposes
- Use of RICS BCIS adopting a GIA floor area for commercial properties
- Remember to add VAT, demolition costs, professional fees, planning and building regulation fees and inflation allowance if applicable
- A replacement cost figure which is provided for insurance purposes, whether separately or within valuation report is not a ‘written opinion of value’ so Red Book compliance not required
40
40) What is Hope Value?
- The value arising from any expectation that future circumstances affecting the property may change
- Two typical examples of hope value being created are as follows:
o Future prospect of securing planning permission for development land, where no planning permission exists at present time
o The realisation of marriage value arising from merger of two interests in land
41
41) What is different in relation to the valuation of charities?
- Charity Commission requires trustees of a charity to obtain a Section 119 of the Charities Act 2011 valuation when charity seeking to buy or sell property
- Valuer must follow Act’s requirements
- Valuer must comment as to whether purchase or sale is in charity’s best interests
- Report must state whether term agreed are best that can be reasonably obtained for the charity
- UK VGPA 8 sets out advice in respect of valuation advice to charities
- Basis of valuation to be Market Value or Market Rent
42
42) What are purchaser’s costs?
- It is usual valuation practice to deduct likely costs of purchase from gross market value to provide a net market value of a property as a purchaser will have to pay these costs
- These costs are usually assumed to be as follows:
o Stamp Duty Land Tax – must file a return to HMRC within 14 days
Up to £150,000 – 0%
£150,001 - £250,000 – 2%
Over £250,000 – 5%
o Agent’s fess – 1% of purchase price + VAT
o Solicitor’s fees – 0.5% of purchase price + VAT
43
43) What is marriage value?
- Created by merger of interests – can be physical or tenurial
- Undertake a before and after valuation and calculate the level of marriage value created
- Typical negotiated outcome is to split the marriage value created 50:50 or divide it pro-rata to the value of the interests
44
44) How do you value long leasehold interests?
- Ground rent is deducted from gross income to calculate net rent received
- This is capitalised at yield for length of lease to create a market value
- As LH interest can be viewed as wasting asset, dual rate tables adjust a LH valuation to be on same basis as FH by using sinking fund
- However in practice leaseholders do not use sinking funds so current valuation practice often uses single rate yield, duly discounted to reflect an additional element of risk for wasting asset
- DCF calculation can also be used
45
45) What is a premium?
- Capital payment made by one party to another
- Payment of premium can arise in many instances such as:
o Key money paid by incoming tenant of retail premises to secure prime shop
o Sum of money to represent fixtures and fittings within building
o Sum of money paid by landlord to tenant for the surrender of a leasehold interest and grant of new lease
46
46) What is weighted average unexpired lease term?
- The weighted average unexpired lease term remaining to the first break or expiry of a lease across the asset weighted by the contracted rent
- Calculation often undertaken when valuing an asset or considering appropriate investment yield comparables for multi-occupied individual investment or portfolios
47
47) Can you talk us through zoning?
- Valuation technique not method
- Used for comparison of retail properties to create unit of comparison for different sized buildings
- Rationale – rental value of property reduces away from street
- Halving back principle with 6.1m zones
- Larger zones (30 ft) used in some London retail streets such as oxford street
- Basements and first floor areas usually treated as A/10 depending on comp evidence
- Treatment of return frontages – add usually 10% uplift
- Natural zoning = property zones reflect physical changes such as steps
- Remember HUT
o Halving back
o Zone A rate is UNIT of comparison
o Valuation technique not method
48
48) What is a special purchaser?
- Red book definition – “a particular buyer for whom a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in the market”
- Special purchaser creates special value
- Special value can arise either from special purchaser or because transaction not arm’s length
49
49) What is important to remember about calculating NER in valuation?
Normally 3 month fitting out period deducted from rent free period before devaluation to get NER
50
50) What would you do if an occupier was involved in party wall dispute?
- Party wall stands astride the boundary of land belonging to 2 or more land owners
- Refer to specialist
- Party Wall Act 1996 provides framework for resolving disputes
51
51) What do you need to consider about Rights of Light?
- RICS Guidance note on rights of light
- Right to light of a building arises after 20 years uninterrupted enjoyment of lights without consent of 3rd party by way on an easement with prescriptive right
- If right to light infringed, injunction can be granted or damages awarded
52
52) What is the Valuer Registration Scheme?
- RICS scheme for regulatory monitoring scheme for all valuers carrying out Red Book vals from Oct 2011
- 3 aims:
o Improve quality and standards
o Meet RICS’ requirement to self-regulate efficiently
o Protect and raise status of valuation profession
- Any valuer registered on scheme entitled to use ‘RICS registered valuer’
- Will be introduced globally on phased basis
- Must complete APC val competency to Level 3
- Alternative route post qualification
- Annual fee needs to be paid to RICS
- Not mandatory for val work excluded from red book
- Info required for registration:
o Type of vals
o Purpose of vals
o Number of vals
o Firms total fee income from red book vals in last year
o Data sources used
o Quality assurance audit procedures in place
o History of any negligence claims
- RICS publishes register of registered valuers
- RICS monitor valuer through submission of their firm’s annual return
- Head of Regulation has power to remove valuer from scheme
53
How can 'price' be defined?
Actual observable exchange price in the open market
54
What current status does the RICS Valuation - Professional Standards 2014 have?
RICS Professional Statement
55
How do you calculate the reversionary yield of an investment property?
Market rent / price
56
If a property is overrented, the current rent paid by the tenant is:
In excess of the market rent
57
What is the definition of market value?
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 arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
58
What is the definition of Nominal Yield?
Initial yield assuming rent is paid in arrears
59
What is the definition of All risk 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 particular investment
60
What is the definition of True Yield?
Assumes rent is paid in advance not in arrears
61
What is the definition of Yield?
the annual return on an investment expressed as a percentage of the capital value. (Value of the property/rental return. I.e £100,000 property which rents for £10,000 a month has a yield of 10%).
62
What is the formula for Yield?
(Income/price)*100
63
Why did you use the investment method for the pub in Chelsea?
The investment method is best used when a property provides an income.
64
When would you use the Layer/Hardcore method?
When an investment property is being over rented.
65
When would you use the Term and Reversion method?
When an investment property is under rented.
66
When would you use the discounted cash flow method of valuation?
When a property is being valued for the purpose of obtaining future cash flow, and wish to separate the value of the building and the excess return.
67
When would you use a profits method of valuation?
When valuing a trade related property i. e. pubs, hotels, etc.. The value of the property does not rely on the building, only on the profit generated by the building.
68
What is required for a profit valuation?
Accurate and audited accounts of 3 years.
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