Valuation Flashcards
(32 cards)
What is the RICS Red Book?
RICS Valuation Global Standards - January 2025
Recognised as the most rigorous standards for valuation globally
2025 Changes include:
- Alignment to International Valuation Standards 2024
- New content on modelling methods
- Changes in areas of technology, AI and Sustainability
What are the 5 Methods of Valuation?
- Comparable Method
- residual Method
- Investment Method
- Profits Method
- Depreciated Replacement Cost (DRC) / Contractors Method
What is the Comparable Method?
Can be used when there is a good body of recent comparable evidence.
Collecting good comparables is set out in: Comparable Evidence in Real Estate Valuation 2019 - RICS Professional Standard
Methodology:
1. Search and select comparables
2. Confirm / verify details
3. Assemble comparables in a schedule
4. Adjust comparables using the hierarchy of evidence
5. Analyse comparables to form opinion on value
6. Report value and prepare file note
What is the Residual Method?
The residual method is used to calculate the development potential of the land
Residual Land Value = GDV - (Total Development Cost + Profit)
GDV = Total Development Cost + Profit
Use Residual and comparable method and apply it to the VOA Apportionment Formula for acquisition claims
If the residual value is negative, use comparable evidence
What is the Investment Method?
The investment method is used when there is an income stream to value.
Conventional: Rent Received x Years Purchase = Market Value
Term and Reversion: Reversionary Investments when the market rent is more than the rent passing.
Layer / Hardcore Method: Used for over rented investments, when the rent passing is more than the market rent:
- Bottom slice is market rent
- Top slice is rent passing
What is the Profits Method?
The profits method is used to value specific properties (hotels / golf courses) held for investment income.
Not a good method to use for assets of variable rents
What is the Depreciated Replacement Cost Method?
Depreciated Replacement Cost (DRC) / Contractors Method / Method of Last Resort
Used when market evidence is limited for specialist properties (schools / hospitals/ prisons).
Not good for investment properties where income is generated.
Value of the land (assuming planning permission) + Cost of replacing the building - Depreciation / Obsolescence
How do you find relevant comparables?
Speak to local agents / recent activity / deals.
Ideally speak to inhouse agents or records using CBRE database.
Websites such as Egi radius and Costar.
What are the Negatives to the Comparable Method?
Sometimes evidence can be unreliable, inaccurate or just a lack of activity in the area
What does a negative Residual Value mean?
The total development costs are more than the value of the land
What is involved in a Residual Calculation?
Current Rent Passing
Maximum Achieveable Rent
Currrent Yield (all risks yield)
Maximum Achievable Yield
Construction Cost (calculated in the rebuild)
Developer’s Profit
Preliminaries
Professional Fees
Finance Costs
Construction Period
What is Depreciation?
A reduction in the value of an asset over time due to wear and tear.
What is Obsolsccence?
Physical Obsolescence: result of deterioration / wear and tear over years
Functional Obsolescence: Design / specification no longer fulfills function.
Economic Obsolescence: Changing market conditions for the use of the asset.
What is the Hierarchy of Evidence?
Weighted to different types of evidence for the Comparable Method
Category A - Direct Comparables: competed transaction, close to area, accurate information available.
Category B - General Market Data: published sources, indirect evidence, historic evidence.
Category C - Other Services: other asset types / locations.
What is the VOA Apportionment Formula?
Purchase Price x (Replacement Cost of PMAs / Replacement Cost of PMAs + Replacement Cost of the Building + Land Value)
Use Cost Model / BCIS / SPON’s to calculate rebuild costs - Rebase using TPI’s
Use Residual / Comparable valuation methods for land value (capped services to boundary, assumed planning permission, no buildings).
Apply to the formula
What is NPV?
Net Present Value
Sum of the Discounted Cashflow (DCF)
Used to determine if an investment will give a positive return
What does a Positive NPV Show?
The invetment will exceed the investors target rate of return
What does a Negative NPV Show?
The investment does not meet the investors target rate of return
What is IRR?
Internal Rate of Return
Rate of return of future cashflows must be discounted to produce an NPV of 0.
Used to assess total return from investment based on assumptions of market growth.
What is a Yield?
The potential return on property investment through rent
How do you calculate a Yield?
(Rental Income / Capital Value) x 100
Shown as a percentage
What is an All Risks Yield?
Valuation of a fully let property at market rent reflecting all the prospects and risks of the investment.
What is True Yield?
Assume rent is paid in advance not in arrears
(traditional valuations assume rent is paid in arrears)
What is an Initial Yield?
Simple income yield for income and current price.
