Valuation L3 Flashcards
(59 cards)
What are the five methods of valuation?
Comparable, Investment, Profits, Cost (Depreciated Cost Method), Residual
Explain what the comparable method is and when you would use it?
Comparable Method - Using recent open market sales evidence that are directly comparable with the subject to place a value.
Comparable Method can be used for residential properties/farms/bare land.
Explain what the Investment method is and when you would use it?
Valuer would assess current passing rent and then future rent levels until the end of the term. Total rent is capitalised and adjusted to today’s value using a yield. The yield is the risk posed to the landlord. This method is generally calculated using a discounted cash flow.
This method is used for income generating assets such as renewable assets.
What is a yield?
A risk yield adjustment is often made by valuers or investors when determining a property’s value or expected return. If the property is considered higher risk, the investor may require a higher yield to justify taking on the risks associated with the investment.
What factors affect yield?
Market conditions
Location
Tenant Covenant Strength
Lease Terms
Explain what the residual method is and when you would use it?
Calculate the gross development value (This is the projected value of the property after development is complete and sold) - development costs & development profit.
This method is often used to value development sites and properties suitable for redevelopment.
Explain what the Depreciated Replacement Cost (DRC) method is and when you would use it?
This method estimates the cost of replacement of a building with a new equivalent minus depreciation for age, wear, and tear. The depreciation rate will depend what age the building is.
This method is used for specialist units such as poultry units.
Explain what the profits method is and when you would use it?
Profits method - Involves estimating the future profits that the business is likely to generate from the property, and then applying a capitalisation rate (yield) to convert those future profits into a capital value.
This method is generally used for businesses such as hotels, pubs, restaurants.
Talk me through how you valued the wind turbines?
I used the investment method of valuation using discounted cash flows. In short an assessment of present value having regard to projected future revenue and expenditure.
When valuing the wind turbines what discount rate did you apply?
Between 5-6% based on analysing recent transactions.
How does an increased discount rate affect your value?
Reduces overall value as a higher discount rate applied.
What allowances did you make- What inflation rate did you base this on?
2.5% in line with government projections
What key terms are you looking for in a lease to carry out your investment method valuation?
Term
Rental
Rent review
Break Clauses
You mentioned that you carried out a relinquishment valuation - How did you apply a term and reversion method when there is no end date to the tenancy?
Calculate how many years the tenant has left to live based on their age and using life tables.
On what basis did you value the tenants improvements?
Value to an incoming tenant.
How did you value the improvements?
Looking at the date the improvement was made and comparing to the new cost and depreciating back.
How would you have dealt with ‘gold plating’ to the improvements? For example if the imps were beyond the standard they needed to be?
Reduce the value to be more proportionate with the improvement that was required. Incoming tenant standard.
What’s the difference between PV and YP
Present value is the current worth of future cash flows, discounted at a chosen rate.
Years Purchase is a multiplier used to convert an income stream (e.g., rent) into a capital value.
For the bank portfolio - how did you obtain your comparable evidence of ‘per milking cow’ basis you used to value the steading?
Looking at comparable dairy farm sales (Adjusting for condition/set up) by removing land and properties to ensure you were just looking at the steading for per milking cow basis. The number of cows milked is calculated by assessing the capacity of the holding as well as available land.
How else did you provide advice to the bank during this valuation?
Environmental assessment/ SWOT analysis/ suitability for security.
Who pays for a bank valuation for secured lending?
The borrower pays the bank.
What do you understand by the term - loan to value?
The amount of lending you can be provided with in comparison to the value of your holding. Generally banks may led up to 60% Loan to Value.
Why is it important to disclose in a Valuation Report whether you have been given an estimation of value?
RICS Red Book standards require valuers to remain independent and avoid bias. If a client has suggested a value, it must be disclosed to ensure transparency.
If an estimation is provided by the client, there is a risk of unconscious bias influencing the valuation.
Full disclosure helps protect the valuer against any accusations of misconduct or conflicts of interest.
Why would a lender be interested in the valuers view as to whether the asset was “suitable as security”?
Advice in relation to full assessment of the holding is important.
