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RICS APC S2 2025 > Valuation L3 > Flashcards

Valuation L3 Flashcards

(62 cards)

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1
Q

What are the 5 methods of valuation?

A

Contractors
Investment
Comparable
Profits
Residual

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2
Q

When is the investment method used?

A

For an income producing property for example if the property is tenanted

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3
Q

Not all data breaches require notification. The ICO only requires notification of breaches that are likely to result in a risk to the rights and freedoms of data subjects.

A
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4
Q

Which of these are traditional investment methods?
Term and reversion
DCF
hardcore and top slice

A

Hard-core and topslice
And term and reversion

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5
Q

Do term and reversion and hard core and top slice methods use gross implicit or gross explicit or both yields?

A

Growth implicit

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6
Q

When would you use a term and reversion valuation?

A

Under-rented investments

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7
Q

When would you use a hardcore and top slice valuation?

A

Over-rented investments

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8
Q

What is a reversionary freehold?

A

An investment where the rent passing is below open market rental value

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9
Q

What are some key issues when using a hardcore top slice evaluation for an over-rented investment?

A

Arbitrary division of income,
Double counting,
subjective adjustments,
top slice is highly geared
hard to build in complex circumstances or voids

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10
Q

When would you use either eternal reversion or hardcore approach?

A

When the terms of the lease or incoming rental income are expected to change in the near future

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11
Q

Why is there a high yield on the top slice in hardcore layer approach?

A

The rent is too high and the occupier could default, a high yield reflects this risk

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12
Q

What is a yield?

A

The annual return on an investment Expressed as a percentage of capital value, also reflects risk of investment

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13
Q

What is a running yield?

A

The yield at 1 moment in time

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14
Q

What is an equivalent yield?

A

The internal rate of return which is applied to the projected income flow

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15
Q

What is the net internal 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 plus any purchases costs

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16
Q

What is the reversionary yield?

A

Market rent divided by current price on an investment let at a rent below the market rent

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17
Q

What are some example costs that could be deducted from yield?

A

Stamp duty, agent fees, legal costs

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18
Q

How could you value a leasehold property?

A

Dual-rate
DCF
Single rate

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19
Q

What impacts yield/risk?

A

Location
Covenant strength

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20
Q

What can affect value in a lease?

A

Occupier,
Rent reviews and rent pattern
Alienation
Alterations
Breaks
Incentives
Contracted out of the lease

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21
Q

What factors are key to consider when reviewing investment comparable and selecting your yield?

A

Times of the lease,
convenant strength,
Location

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22
Q

How do you assess the covenant strength of a tenant?

A

Dun and Bradstreet ratings
Experience Ratings
Review their accounts

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23
Q

When might she choose to use DCF?

A

Lack of comparable evidence,

To assess investment value to assist in buy or sell decisions between alternative investments

For financial modeling

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24
Q

What is the residual method and how is it applied?

A

The residual method is used to establish how much a purchaser should pay for a development site.

  1. GDV (Gross Development Value) established.
  2. Costs associated with development are deducted
  3. Surplus left is called residual value
  4. Cross check with land comparable
  5. The residual Value represents how much the developer can afford to pay for the development site
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25
What is the depreciated replacement cost (DRC) method of valuation and how does this work?
DRC provides an indication of value based on the buyer paying no more or no less than the cost to obtain the asset-based on the current market equivalent. used when there's limited or no market evidence for an asset, e.g. Wharf or refinery. 1. Calculate the replacement cost of the asset using modern cost effective building materials and techniques. 2. Deduct for deterioration and obsolescence 3. Consider the purchase land value of an equivalent parcel of land. 4. This gives a capital value 5. 4. Referred to as the method of last resort.
26
What is the profit method and explain how you would work this out
The profits method is used for trade related properties, For example theaters and pubs. Consider the profit that a reasonably efficient operator could obtain from occupying the property. This forms the gross annual income. Then less costs Then apply multiplier to net income to give value. The value reflects the trading potential of the property which includes the value of the property and all fixtures and fittings
27
28
Define initial yield
Simple income yield for current income and current price
29
Define all risks yield
Yield of a fully let property reflecting all prospects and risks attached to the particular investment
30
Define true yield
Assumes rent is paid in advance not in areas, takes into account the time value of money and inflation, and for bonds, it factors in the price paid, interest payments, and the bond's value at maturity. A more precise calculation of return on an investment.
31
Define nominal yield
The initial yield assuming rent is paid in arrears.
32
What is gross yield?
The yield not adjusted for purchasers costs. E.g. auction amount.
33
Define equivalent yield
The average weighted yield when a reversionary property is valued using an initial and reversionary yield.
34
What is category c evidence from comparable evidence in real estate professional standard 2023
refers to other sources such as transactional evidence from other estate types and locations or background data like interest rates which might give an indication of real estate yields
35
What is the time value of money
The idea that money now is more valuable than the same sum in the future, due to investment and earning potential.
36
What does it mean if the net present value is positive in a DCF valuation?
It has exceeded to be investors target rate of return
37
When does functional obsolescence occur?
Whether design or specification of the asset no longer fulfills the function of what it was originally designed to do.
38
When does physical obsolescence occur?
The result of deterioration or wear and tear over the years.
39
When does economic obsolescence happen?
Due to changing market conditions for the use of the asset.
40
What is the running yield?
The yield at 1 moment in time?
41
What are category B comparable transaction sources according to the comparable evidence in real estate professional standard 2023?
General market data that can provide guidance for example indirect evidence such as house indecisives historic evidence and information from commercial databases.
42
What are 3 evaluation approaches?
Income, cost and market
43
What is the income valuation approach?
Converting current and future cash flows into capital value using either the profits or investment method evaluation
44
What is the cost approach?
The cost of an asset whether by purchase or constructure often uses depreciated replacement cost (DRC)
45
What is the market valuation approach?
Comparable evidence to value, e.g. the comparable method.
46
What are 3 steps for undertaking a valuation?
Competence - Do I have the right skills to undertake the valuation? independence - Check for conflict of interest and terms of engagement - Set out following instructions to client and receive written confirmation
47
What is a statutory due diligence valuation used for and what might they check for
It's required to check no material matters affect and impact the valuation. Might check the asbestos register, public rights of way, EPC and MEES compliance environmental matters such as contamination or flooding, legal title and tenure, planning history and compliance
48
What is category a evidence within the comparable evidence professional statement 2023 according to RICS?
Direct comparable. Completed transactions of similar property/land with full details.
49
What risks do yields reflect?
Security and regularity of income, liquidity, voids, use of property, Lease terms prospects for rental and capital growth obsolescence Quality of location
50
Talk me through the steps of a DRC valuation
1. Value the land in it's existing use (assume planning permission exists) 2. Add current cost of replacing the building plus fees. 3. less a discount for depreciation and obsolescence Gives a capital value
51
Talk me through the Residual method of valuation
1. Calculate Gross development value e.g. market value of completed development 2. Less total development costs EG site prep and planning building costs professional fees and financing 3. Deduct the total development costs from GDV to establish site value 4. Cross check Site value against value of comparable sites if possible
52
Talk me through the methodology of the Profit's method of valuation
1. Annual turnover 2. less costs and purchases = gross profit 3. Less reasonable working expenses = unadjusted net profit 4. Less operators remuneration = Adjusted net profit. Referred to as Fair Maintainable Operating Profit 5. Capitalized at appropriate all risks yield to achieve market value. 6. Cross check with comparable sales if possible
53
When do we use a depreciated replacement cost valuation method
Use for owner-occupied properties for accounting valuations and rating valuations this method should only be used where direct market evidence is limited or unavailable often for specialized properties such as docks schools and oil refineries
54
When do you use the residual method of valuation
To find the market value of a development site based on market inputs.
55
When would you use the prophet's method of valuation
Used to value trade related properties where the value of the property is related to its trading profitability and potential. examples include pubs, hotels and Petrol stations.
56
When would you use the discounted cash flow method of valuation
Growth explicit valuation used for phase development opportunities or over rented properties and social housing
57
When would you use the investment method of valuation
Used when limited comparable evidence is available and the property produces an income
58
What is meant by the cost approach method of valuation and give examples
The cost approach in valuation estimates a property's worth by calculating the cost to replace or rebuild it, considering land value, construction costs, and depreciation. e.g. DRC.
59
Explain term and reversion valuation
Used when market rent is more than the passing rent so under-rented properties. 1. Capitalize the term rent: The current rental income is capitalized using an appropriate yield (reflects the investor's expected return on the investment) to determine its value. This represents the value of the rental income stream until the lease expires. 2. Calculate the reversion value: The future rental income is also capitalized, but this calculation is for the period after the lease ends. This represents the potential value of the property once it's no longer bound by the existing lease. 3. Discount the reversion to present value: The reversion value is discounted back to its present value, taking into account the time until the lease expires. This means that future value is adjusted to account for the fact that money in the future is worth less than money today. 4. Sum the values: The present value of the term and the present value of the reversion are added together to get the total value of the property investment.
60
Explain the layer/hardcore method of valuation
Used for over rented properties 1. Identify Market Rent: Determine the current market rent for the property. 2. Split the Income: Divide the current rent into the hardcore (market rent) and the top slice (difference between current and market rent). 3. Value the Hardcore: Capitalize the market rent (hardcore) into perpetuity using a lower yield (initial yield). 4. Value the Top Slice: Capitalize the over-rented portion (top slice) using a higher yield (all risk yield) and then discount it to the present value at the start of the reversion. 5. Combine Valuations: Add the values of the hardcore and the top slice to arrive at the total property value.
61
What is meant by term in term and reversion?
This refers to the current rental income generated by the property under its existing lease. It's the income you'll receive during the remaining lease period.
62
What is meant by reversion in term and reversion?
This refers to the potential future market rent at the end of the lease term. It represents the value of the property when it reverts to full market rent, often after the lease expires.

RICS APC S2 2025 (17 decks)

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