Valuation Flashcards
(100 cards)
1
Q
What is the first step in the valuation instruction process?
A
Receive instructions from client
2
Q
What must be checked after receiving instructions from the client?
A
Check competence (SUK)
3
Q
What is the third step in the valuation instruction process?
A
Check independence and no conflicts of interest
4
Q
What document is issued to the client after checking independence?
A
Terms of engagement
5
Q
What is required from the client before proceeding with the valuation?
A
Receive terms of engagement signed by the client
6
Q
What types of information need to be gathered during the valuation process?
A
Leases, title documents, planning info
7
Q
What is the purpose of undertaking due diligence?
A
To check there are no matters which could adversely impact upon value
8
Q
What is done during the inspection step of the valuation process?
A
Inspect and measure
9
Q
What is researched and assembled before undertaking a valuation?
A
Market comparables
10
Q
What is the final step of the valuation instruction process?
A
Ensure valuation file in good order for archiving
11
Q
List the five main methods of valuation.
A
- Comparative method
- Investment method
- Profits method
- Residual method
- Contractors method (Depreciated replacement cost)
12
Q
What are the three valuation approaches outlined in IVS 105?
A
- Income approach
- Cost approach
- Market approach
13
Q
What is the income approach in valuation?
A
Converting current and future cash flows into a capital value
14
Q
What does the cost approach reference?
A
The cost of the asset whether by purchase or construction
15
Q
What is the market approach based on?
A
Using comparable evidence
16
Q
What are the six steps in the comparative method?
A
- Search and collect comparables
- Confirm details, analyse headline rent
- Assemble comparables in schedule
- Adjust comparables using the hierarchy of evidence
- Analyse comparables to form opinion of value
- Report value and prepare file note
17
Q
What is the first category in the hierarchy of evidence?
A
Category A – direct comparables
18
Q
What type of evidence is found in Category B of the hierarchy?
A
General market data
19
Q
What does Category C in the hierarchy of evidence include?
A
Transactional evidence from other real estate types and locations
20
Q
How can one find relevant comparables?
A
Inspect an area, look for marketing boards, speak to agents, use in-house databases
21
Q
True or False: The date of the evidence is not crucial in finding relevant comparables.
A
False
22
Q
What is the investment method of valuation used for?
A
To value income streams, specifically rental income capitalised to produce a capital value.
Assumes growth implicit valuation approach.
23
Q
What does the conventional investment method calculate?
A
Market value by multiplying rent received by the years purchase.
Importance of comparables for rent and yield.
24
Q
What is the purpose of the term and reversion method?
A
Used for reversionary investment where market rent is more than passing rent (under-rented).
25
How is the term capitalised in the term and reversion method?
Until the next review/lease expiry at an initial yield.
26
How is reversionary Market Rent valued in the term and reversion method?
Valued in perpetuity at a reversionary yield.
27
What investments is the layer/hardcore method used for?
Over rented investments.
28
In the layer/hardcore method, how is the income flow divided?
Horizontally.
29
What does the bottom slice represent in the layer/hardcore method?
Market rent.
30
What does the top slice represent in the layer/hardcore method?
Rest passing less market rent until the next lease event.
31
What is applied to the top slice in the layer/hardcore method?
A higher yield to reflect additional risk.
32
What factors influence the different yields used in the layer/hardcore method?
Comparable investment evidence and risk.
33
What is the measure of investment return expressed as?
Percentage of capital invested
## Footnote
It indicates the efficiency of the investment.
34
How is yield calculated?
Income divided by price x100
## Footnote
This formula helps to determine the profitability of an investment.
35
What is a years purchase, and how is it calculated?
Calculated by dividing 100 by the yield
## Footnote
It represents the number of years required for income to repay its purchase price.
36
What major factor determines yield?
Risk
## Footnote
It relates to various aspects such as rental prospects and quality of location.
37
What factors are related to the risk when determining yield?
["Prospects for rental and capital growth", "Quality of location and covenant", "Use of the property", "Lease terms", "Voids", "Security and regularity of income"]
38
What does a return describe in property performance?
Performance of a property measured retrospectively
## Footnote
It reflects how well the property has performed over time.
39
What calculation is used to find the internal rate of return?
DCF calculation
## Footnote
DCF stands for Discounted Cash Flow.
40
What is the importance of understanding the yield gap?
Reflects risks between prime and secondary yields
## Footnote
It helps in evaluating investment opportunities.
41
What does 'all risks yield' refer to?
Rate of interest used in the valuation of fully let property at market rent
## Footnote
It reflects all prospects and risks attached to the investment.
42
What is the assumption made in 'true yield'?
Rent is paid in advance
## Footnote
Traditional valuation practice assumes rent is paid in arrears.
43
Define nominal yield.
Initial yield assuming rent is paid in arrears
## Footnote
It provides a baseline for evaluating rental income.
44
What does gross yield represent?
Yield not adjusted for purchasers costs
## Footnote
It reflects the raw yield before any deductions.
45
What is net yield?
Yield adjusted for purchasers costs
## Footnote
It gives a more accurate representation of the actual income received.
46
What does equivalent yield mean?
Average yield of a reversionary property using initial and reversionary yield
## Footnote
It helps in assessing properties with varying income streams.
47
Define initial yield.
Simple income yield for current income and current price
## Footnote
It is a straightforward measure of yield based on the current situation.
48
What is reversionary yield?
Market Rent (MR) divided by current price on an investment let at a rent below MR
## Footnote
It indicates potential future income increases.
49
What does running yield represent?
Yield at one moment in time
## Footnote
It provides a snapshot of yield performance at a specific point.
50
What is the Discounted Cash Flow Technique (DCF)?
Growth explicit investment method of valuation
## Footnote
It focuses on future cash flows to determine current value.
51
What is the process for DCF valuation?
["Estimate cash flow for an agreed holding period", "Estimate exit value at the end of the period", "Select the discount rate", "Discount cash flow at discount rate", "Value is the sum of completed discounted cash flow to provide the NPV"]
52
What does net present value (NPV) signify?
Sum of the discounted cash flows of the project
## Footnote
It is used to determine if an investment meets the target rate of return.
53
When is an investment considered to have exceeded the target rate of return?
When NPV is positive
## Footnote
It indicates profitability relative to expectations.
54
What is the internal rate of return (IRR)?
Rate of return at which all future cashflows must be discounted to produce an NPV of zero
## Footnote
It assesses the total return from an investment opportunity.
55
How is IRR calculated?
["Input current market value as a negative cash flow", "Input projected rents as a positive value", "Input projected exit value as a positive value", "Discount rate is the rate chosen for NPV of zero", "If NPV is more than zero, target rate of return is met"]
56
What topics are covered in the RICS Practice Information: Discounted cash flow valuations?
["Explicit DCF valuation versus implicit method", "Context for applying explicit DCF methods", "Differences between inputs for market value and investment value"]
57
What is the primary purpose of the profits method of valuation?
To value trade-related properties where there is a monopoly position and the property's value depends on the business profitability
## Footnote
This method is often used for pubs, hotels, nurseries, leisure and healthcare properties, and care homes.
58
What is the basic principle of the profits method of valuation?
The value of the property depends on the profit generated, not the physical building.
59
What type of accounts must be available for the profits method of valuation?
Accurate and audited accounts for at least 3 years.
60
What is the formula for calculating gross profit in the simple methodology?
Annual turnover (income received) - costs/purchases.
61
What is the formula for calculating unadjusted net profit?
Gross profit - reasonable working expenses.
62
What does adjusted net profit refer to in the profits method of valuation?
Adjusted net profit is known as the Fair Maintainable Operating Profit (FMOP).
63
How can adjusted net profit be expressed?
As EBITDA (earnings before interest, taxation, depreciation, and amortisation).
64
What is the purpose of a development appraisal?
To financially assess the viability of a development scheme.
65
What can development appraisals help establish?
Residual site value and profitability of a proposed scheme.
66
What is the common purpose of residual site valuation?
To find the market value of a property holding based on market inputs.
67
What does the gross development value (GDV) represent?
Market value of the completed proposed development at the date of valuation.
68
What are total development costs (TDC) comprised of?
* Site preparation costs
* Planning costs
* Building costs
* Professional fees
* Contingency
* Marketing costs & fees
69
What are some examples of planning costs?
* Section 106 payments
* Community Infrastructure Levy (CIL)
* Planning application fees
* Building regulation fees.
70
What should be included in the calculation of finance for development?
* Site purchase
* Total construction and associated costs
* Holding costs.
71
What is the typical developer's profit percentage?
Around 15%-20% depending on risk.
72
What are the two main methods of funding for development finance?
* Debt finance
* Equity finance.
73
What does overage refer to in development finance?
An arrangement for sharing any extra receipts over original expected profits.
74
What is the VAT applicable to in development finance?
Payable on all professional fees.
75
What is the profit erosion period?
The length of time it takes for development profit to be eroded due to holding charges.
76
What is a limitation of the residual valuation methodology?
It does not consider the timing of cash flows.
77
What is sensitivity analysis used for in development finance?
To show the range of values for key variables such as GDV, build costs, and finance rate.
78
What are the three forms of sensitivity analysis?
* Simple sensitivity analysis
* Scenario analysis
* Monte Carlo simulation.
79
What is the formula for calculating Fair Maintainable Operating Profit (FMOP)
Annual turnover - costs/purchases (= gross profit)
Gross profit - reasonable working expenses (=unadjusted net profit)
Unadjusted net profit - operators remuneration (=adjusted net profit known as the Fair Maintainable Operating Profit (FMOP)
80
What is adjusted net profit known as?
Fair Maintainable Operating Profit (FMOP)
81
What is the purpose of the RICS Professional Standard: Valuation of development property 2019?
To supplement International Valuation Standard (IVS) 410 Development Property which provides a detailed overview of valuing development property.
## Footnote
This standard guides valuers in assessing development properties effectively.
82
How is development property defined?
Interests where redevelopment is required to achieve the highest and best use or improvements are being contemplated/in progress at the valuation date.
## Footnote
This definition is critical for understanding what constitutes development property.
83
What types of projects might the advice from RICS Professional Standard: Valuation of development property 2019 be appropriate for?
* Construction of buildings
* Undeveloped land being provided with infrastructure
* Redevelopment of land
* Improvement or alteration of existing buildings
## Footnote
These categories encompass a range of development activities.
84
What must be clearly identified in the valuation report?
Assumptions must be clearly identified in the valuation report.
## Footnote
Transparency in assumptions is essential for accurate valuations.
85
What is the common basis of value when valuing development property?
Market Value
## Footnote
Market Value is a standard reference point for appraisers.
86
What should valuations undertaken by market comparison approach be cross-checked with?
Residual method
## Footnote
This cross-checking ensures the reliability of the valuation.
87
What valuation technique may be required for complex or lengthy schemes?
Discounted Cash Flow (DCF) technique
## Footnote
DCF is useful for analyzing future cash flows in complex projects.
88
What should best practice in valuation require?
Risk analysis to assess different scenarios
## Footnote
Assessing different scenarios helps in understanding potential risks.
89
How can a valuer determine the value of land during development?
By determining the value of the land plus costs expended at the valuation date, and/or the completed development minus the costs remaining to be expended at the valuation date.
## Footnote
This approach provides a comprehensive valuation perspective.
90
How should valuation be reported?
As a single figure, except where there is potential for significant variation, which should also be reported.
## Footnote
This reporting standard promotes clarity in valuation results.
91
What is the DRC method of valuation also known as?
Contractors method
## Footnote
This name reflects its practical application in construction-related valuations.
92
When should the DRC method be used?
Where direct market evidence is limited or unavailable for specialised properties.
## Footnote
This method is particularly useful for unique properties with few comparables.
93
What types of properties is the DRC method commonly used for?
* Sewage works
* Lighthouses
* Oil refineries
* Docks
* Schools
* Submarine bases
## Footnote
These examples illustrate the range of specialised properties.
94
What are the two steps in the simple methodology of DRC valuation?
* Value of land in its existing use
* Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence/deterioration
## Footnote
These steps help in calculating the DRC effectively.
95
What types of obsolescence must be estimated in DRC valuation?
* Physical obsolescence
* Functional obsolescence
* Economic obsolescence
## Footnote
Understanding these types of obsolescence is critical for accurate valuation.
96
Is the DRC method suitable for Red Book compliant valuations for secured lending?
False
## Footnote
The DRC method has specific limitations regarding secured lending.
97
What must a DRC valuation undertaken in the private sector include?
A statement that it is subject to profitability of the business.
## Footnote
This ensures the valuation reflects the business's financial context.
98
What must a DRC valuation in the public sector include?
A statement that it is subject to the prospect and viability of the continued occupation and use.
## Footnote
This highlights the importance of future use in public sector valuations.
99
What must be stated when reporting a DRC valuation?
The market value for any readily identifiable alternative use and a statement that the market value would be lower upon cessation of the business.
## Footnote
This ensures full disclosure of potential market shifts.
100
What does the RICS Guidance Note: Depreciated replacement cost method of valuation for financial reporting 2018 provide?
A range of advice on the DRC method of valuation.
## Footnote
This guidance note is essential for understanding the application of the DRC method in financial contexts.
