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APC Interview > Valuation > Flashcards

Valuation Flashcards

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1
Q

What is Market Rent?

A

The estimated amount that a interest in a real property should be leased on the valuation date.

Between a willing lessee and willing lessor on appropriate lease terms.

In an arms length transaction after proper marketing.

Both parties have acted knowledgably, prudently and without compulsion.

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2
Q

What is Market Value?

A

The amount at which an asset or liability should exchange on the valuation date.

Between a willing seller and willing buyer.

In an arms length transaction after proper marketing.

Both parties have acted knowledgably, prudently and without compulsion.

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3
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.

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4
Q

What is Investment Value?

A

The value of an asset to the owner or a prospective owner for individual investment or operational objectives.

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5
Q

What is a cap rate?

A

The yield used to capitalise a rental income or value to determine the capital value.

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6
Q

What is an Exit Yield?

A

The capitalisation rate used to capitalise the rental income or value at the terminal date of the DCF valuation.

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7
Q

What is an Initial Yield?

A

The current income level obtained from the asset at the date of valuation expressed as an annual percentage return of the capital value.

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8
Q

What is a Net Initial Yield?

A

The current income level

Expressed as an annual percentage return of the capital value

Plus any purchaser’s costs.

When a property is rack rented.

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9
Q

What is a Reversionary Yield?

A

Anticipated yield once the property’s rent reaches its market rent.

When a property is under rented.

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10
Q

What is an Equivalent Yield?

A

Averaged weighted yield when a reversionary property is valued on an initial and reversionary yield.

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11
Q

What are the five methods of valuation?

A

Comparable Method
Investment Method
Residual Method
DRC
Profits Method

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12
Q

When would you use the comparable method?

A

To find market rent - e.g. during rent review or lease renewal.

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13
Q

When would you use the investment method?

A

When there is an income stream to value.

The income is capitalised through to produce a capital value.

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14
Q

When would you use the profits method?

A

For trade related properties - e.g. pubs, hotels.

When the value of the property is dependent on the profit of the operations.

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15
Q

When would you use the residual method?

A

To find the market value of a site.

GDV - BC & DP = Residual Land Value.

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16
Q

When would you use the DRC?

A

Last resort method - for specialised properties that are not normally traded in the open market.

Owner-occupied

E.g. lighthouses.

Cost of modern building - less depreciation + land value = Value.

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17
Q

What is a DCF?

A

Growth explicit investment method of valuation.

Seeks to determine a property value by examining projected cash flow and then discounting the cashflow to establish current value.

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18
Q

Can you explain the key changes brought by the RICS Valuation – Global Standards (2024), effective from 31st January 2025?

A

Simplify guidance
Incorporate changes from RICS valuation review.
Reflect changes to latest version of IVS

Help valuers provide best standard of service
Revised order of VPS’s to align with IVS

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19
Q

What are the significant points in the RICS Valuation – Global Standards: UK national supplement (2023), effective from 1st May 2024?

A

Rotation policy:
5 years for single ‘responsible valuer’.
10 years for a firm.
3 year min before re-engagement.

Preventing client’s influence in valuation:
must keep note of discussions with client on draft valuations - e.g. information provided by client, how the information was used to change/not change valuation, reasons why the valuation changed/didn’t change.

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20
Q

What is the structure of the Red Book?

A

Introduction
Glossary
Professional standards (PS1 and PS2)
(VPS’s) Valuation technical and performance standards
(VPGs) Valuation practice guidance applications
(IVS) International valuation standards

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21
Q

Which part of the red book is mandatory?

A

PS and VPS (Parts 3 and 4)

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22
Q

Which part of the red book is advisory?

A

Part 5

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23
Q

What is PS1?

A

Compliance standards and practice statements where a written valuation is provided.

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24
Q

What is PS2?

A

Ethics, competency, objectivity and disclosures.

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25
What does PS2 mean for members?
Comply with RICS RofC Act objectively and independently. Competence
26
What is VPS 1?
TofE
27
What is VPS 2?
Bases of value, assumptions & special assumptions
28
What is VPS 3?
Valuation approach and methods
29
What is VPS 4?
Inspections, investigations and records
30
What is VPS 5?
Valuation models
31
What is VPS 6?
Valuation reports
32
What should be included in TofE for a valuation?
Valuer - status & identity Client Any other users Asset Currency Purpose Basis Valuation date Extent of investigation Nature & source of info Assumptions & special assumptions Format Restriction for use Confirmation of Red Book compliance Fee basis CHP Limitation on liability Statement that valuation may be subject to RICS compliance
33
What should be included in a valuation report?
Valuer, client, other intended users. Asset Purpose Basis Valuation date Extent of investigation Nature & source of info Assumptions & special assumptions Restrictions on use and distribution Instruction under taken in accordance with IVS Approach and reasoning Figure
34
How do you use the hardcore method?
Income flow divided horizontally. Bottom slice = MR capitalised into perp Top slice = PR less MR capitalised until review/reversion Higher yield applied to top slice
35
How do you use the term and reversion method?
Term is capitalised until review/next lease event at an initial yield. Reversion to market rent valued into perp at reversionary yield (higher to reflect risk/uncertainty). Reversion discounted using PV of £1 to bring back to today's value.
36
What DD should be undertaken prior to a valuation?
Asbestos Business Rates Contamination Equality Act Environmental EPC Flooding Fire Safety H&S Highways Legals Planning
37
What is the Hierarchy of Evidence?
Relative weight attached to different types of evidence - direct, general market data, other sources.
38
When does the Red Book not apply to a valuation?
**A**gency **N**egotiations/litigations **E**xpert Witness **I**nternal **S**tat functions
39
What are the Stamp Duty levels for commerical?
Up to £150k - 0% £150k - £250k - 2% £250k + - 5%
40
Why would you complete a loan security valuation?
New finance/refinance When a property is used as collateral for a loan.
41
What is the IRR?
Internal Rate of Return Used to assess total return from an investment making assumptions on rental growth, re-letting & exit.
42
How would you calculate the IRR?
Input current market value as a negative. Input projected rents as positive. Input projected exit value as positive. IRR is the rate chosen to provide NPV of 0.
43
What is NPV?
Net Present Value Over 0 - TRR met Under 0 - TRR not met.
44
How do you value using the Profits Method?
Annual turnover - Cost/purchases - Reasonable working expenses - Operators remuneration = Fair Maintainable Operation Profit (adjusted net profit) FMOP is then capitalised using an appropriate yield.
45
What would you include in total development costs?
Site prep Planning costs Building Costs Pro fees - 10-15% Contingency - 5-10% Marketing fees Calculation of finance - base rate + premium
46
What is an assumption?
Where it is reasonable for a valuer to accept something to be true without the need for a specific investigation.
47
What is a special assumption?
A supposition that is taken to be true/accepted as fact, even though it is not true.
48
What is an internal valuer?
Employed by a company to value assets - internal use only and no third party reliance.
49
What is an external valuer?
No material links with the asset to be valued or the client.
50
What is the process for a valuation instruction?
Receive instruction SUK CIT ToE Gather information - leases etc Undertake DD Inspect and measure Research market and find comps Undertake valuation Draft report Report reviewed Finalise and sign off Report to client Issue invoice Ensure valuation file in good order.
51
What are the three valuation approaches?
Income, Cost & Market
52
RICS guidance for comparative method of valuation?
RICS Pro Standard - Comparable Evidence in Real Estate Valuation 2019
53
Steps of comparative method of valuation?
Assemble comps Adjust comps using HofE Analyse comps to form opinion
54
Where would you find relevant comps?
Inspect area - agent's boards Speak to agents Auction results Inhouse records Databases - e.g. CoStar
55
What does Years Purchase show?
Years required for the income to repay the purchase price.
56
What are factors to consider when determining a yield?
RISK Covenant Location Rental and capital growth prospects Lease terms Voids
57
What is an all risks yield?
Growth implicit yield used in an investment valuation that reflects all of the risks and rewards of the subject property.
58
What is a true yield?
Assumes rent is paid in advance not in arrears
59
What is a nominal yield?
Initial yield assuming rent is paid in arrears
60
What is a gross yield?
Yield not adjusted for purchasers' costs
61
What is a running yield?
Yield at one moment in time
62
Simple method of a DCF?
Estimate cash flow for an agreed holding period Estimate exit value Select discount rate Discount cash flow Value is sum of the completed DCF to provide the NPV.
63
What is the usual developers profit?
15-20% of GDV
64
What are two types of development finance?
Debt - from the bank Equity - selling shares in a company, JV, own money
65
What is overage?
Arrangement made for sharing extra receipts received above the originally expected profit.
66
Development appraisal method?
GDV - total development cost - site value = profit
67
Difference between residual appraisal vs development?
DV - viability/profitability of a scheme. RV - establishes site value using market assumptions
68
What is GDV?
Market value of a proposed development at a date of valuation.
69
Prime and secondary yields for industrial?
5.25% - 5.5% (Prime) 6.0% - 7.25% (Secondary)
70
How would you value using the DRC method?
Cost of modern building Less depreciation Plus site value = Value as existing
71
Is the DRC method suitable for secured lending purposes?
No
72
Can a revaluation without re-inspection take place?
Only if the valuer is satisfied there have been no material changes to the property or nature of location since its last inspection.
73
What is marriage value?
Additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values.
74
What is WAULT?
Weighted Unexpired Lease Term - term remaining (break or expiry) weighted by the contracted rent.
75
How to work out NER?
Devalue headline by spreading rent free period over the term certain - normally 3 month fit out is deducted from the RF before devaluation.
76
Zoning back principle?
Valuation technique for retail properties - halving back principle. 6.1m / 20ft zones Sometimes 30ft zones are used in prime London/Scottish retail units.

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