Flashcards in Valuation Deck (157)
What is an internal valuer?
• Employed by a company to value their assets
• Valuation for internal use only
• No third-party reliance
What is an external valuer?
Has no material links with the asset to be valued or the client
What are the THREE steps you should undertake prior to commencing a valuation?
1. Competence - check you have the correct level of skills, understanding and knowledge
2. Conflict of Interest - check you are able to act independently on the instruction
3. Terms of engagement - issue to the client and receive written confirmation
Why do you undertake statutory due diligence for valuations?
Confirm that there are no material matters which could impact on the valuation
What types of statutory due diligence checks would you undertake when valuing a property?
1. Asbestos register
2. Business rates / Council tax
4. Equality Act Compliance
5. Environmental matters (high voltage power lines, electricity sub-stations, telecoms masts etc.)
6. EPC rating if available
8. Fire safety compliance
9. Health and safety compliance
10. Highways (check roads adopted with the local highways agency)
11. Legal title and tenure (check boundaries, ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves)
12. Public rights of way (from an OS sheet)
13. Planning history and compliance (check any onerous planning conditions, whether the property is in a conservation area / listed and subject to a s. 106 agreement or CIL)
What are the FIVE main methods of valuation?
1. Comparable method
2. Investment method
3. Profits method
4. Residual method
5. Depreciated replacement cost method
What are the THREE valuation approaches set out in IVS 105?
1. Income approach - converting current and future cash flows into a capital value
2. Cost approach - reference to the cost of the asset whether by purchase or construction
3. Market approach - using available comparable evidence
What are the SIX steps used when collecting comparable evidence?
1. Search and select comparables (agent's boards, online databases)
2. Confirm / verify information with a party directly involved in the transaction
3. Assemble comparables in a schedule
4. Interpret comparables using hierachy of evidence
5. Analyse comaprables to form an opinion of value
6. Report value and prepare file note
What guidance did the RICS recently release on using comparable evidence?
RICS Comparable evidence in real estate valuation, 2019
What are the THREE categories of evidence outlined in RICS Comparable evidence in real estate valuation, 2019?
Category A: direct comparables
Category B: general market data
Category C: other sources
What is the hierarchy of general market data outlined in the RICS Comparable evidence in real estate valuation, 2019?
• Information from published sources or commercial databases
• Other direct evidence (e.g. indices)
• Historic evidence
• Demand/supply data for rent, owner-occupation or investment
What is the hierarchy of other sources outlined in the RICS Comparable evidence in real estate valuation, 2019?
• Transactional evidence from other real estate type and locations
• Other background data (e.g. interest rates, stock market movement and returns which can given an indication for real estate yields)
When would you use the investment method of valuation?
Used when there is an income stream to value
How does the conventional investment method work?
• Rent received (or Market Rent) x Years Purchase = Market Value
• Assumes growth implicit valuation approach
When would you use a Term and Reversion method? How does it work?
• Used for reversionary investments i.e. where Market Rent is more than passing rent
• Term capitalised until next rent review / lease expiry at an initial yield
• Reversion to Market Rent valued into perpetuity at reversionary yield
When would you use the Layer / Hardcore method? How does it work?
• Used for over-rented investment i.e. where passing rent is more than Market Rent
• Income flow divided horizontally
• Bottom slice = Market Rent
• Top slice = passing rent - Market rent until the next lease event
• Higher yield applied to the top slice to reflect additional risk
• Different yields used depending on comparable investment evidence and relative risk
What is a yield?
• Measure of investment return, expressed as a percentage of capital invested
• Calculated as income divided by price x 100
How would you calculate Years Purchase? What does this show?
• Divide 100 by the yield
• Number of years required for the income to repay the purchase price
What factors would you considering when determining a yield?
• Prospects for rental and capital growth
• Quality of location and covenant
• Use of the property
• Lease terms
• Security and regularity of income
What is an All Risks yield?
Yield which encompasses all the prospects and risks attached to a particular investment
What is a True yield?
Assumed rent is paid in advance (traditional valuation practice assumes rent is paid in arrears)
What is a Nominal yield?
Initial yield assuming rent is paid in arrears
What is a Gross yield?
Yield based on the net purchase price (i.e. not adjusted for purchasers' costs)
What is a Net yield?
Yield based on the gross purchase price (i.e adjusted for purchasers' costs)
What is an Equivalent yield?
Average time weighted yield reversionary property is valued using an initial and reversionary yield
What is an Initial yield?
Simple income yield for current income and current price
What is a Reversionary yield?
Market Rent divided by current price on an investment that is under rented
What is a Running yield?
Yield at one moment in time
When would you use the profits method of valuation?
Used for the valuation of trade related property where the value of the property is directly linked to the profit generated by the business e.g. pubs, petrol stations, hotels, guest houses, children's nurseries, leisure, healthcare properties and care homes