Valuation - Methods

Question 1

Name the 5 conventional Methods of Valuation.

Answer 1

Comparable
Investment
Residual
Profits/Accounts
Depreciated Replacement Cost/Contractors

Question 2

Name three situations that can adversely affect the certainty of valuations ?

Answer 2

When there is an unusual property (in design or location) e.g. very nice office building in middle of an undesirable estate

When there is market volatility e.g. mid-covid pandemic where there is high level of uncertainty / disrupted market

Where we have not carried out usual inspections e.g. not inspected interior of the property and not got the lease to hand

Question 3

Comparable with the subject property if there are similarities in terms of:

Answer 3

Physical characteristics

Location

Use

Tenure (& lease terms if appropriate)

Timescale

Question 4

What are contemporary valuation techniques?

Answer 4

Discounted Cash Flow - rose to prominence in 80s

Question 5

How many comparables are needed to produce a valuation?

Answer 5

• As many as possible
• Enough to provide sufficient information to help establish trends
• Some prices distorted i.e when the property hasn’t been subject to proper marketing

Question 6

Types of comparable evidence.

Answer 6

• Non-transactional evidence - market reports
• Transactional evidence

Question 7

What is the longest time period before a valuation date that a transaction could be accepted as being comparable?

Answer 7

This is dependent on number of comparables available but essentially the time it takes for a transaction to become out of date depending on market conditions

Any comparables post lockdown – 2021 onwards

Question 8

What do you understand by the expression weighting of comparable evidence?

Answer 8

Attaching the greatest weight to those transactions that are most similar to the subject property, for example more recent transactions and those similar in condition.

Question 9

What is Hierarchy of Evidence?

Answer 9

Ranking evidence by transaction type

Open market lettings

Lease renewals

Rent reviews

Independent expert determination

Arbitrators awards.

Question 10

What is interpolation of comparable evidence

Answer 10

Calculating or plotting on a graph, a value that lies between two extreme points. This is considered permissible.

Question 11

What is extrapolation of comparable evidence?

Answer 11

Calculating or plotting on a graph, a value outside of two extreme points. This is considered dangerous.

You have a graph with a top value and a bottom value, and your value falls outside of these two points. Say you have a high street shop, and 4 different business have had to move out, and each time the rent reviews have stayed static as they are upward-only but market value has gone down.

Therefore, you’d need to extrapolate your comparable evidence, as you would need to work outside the known data. This is considered statistically dangerous.

Question 12

What is Zoning?

Answer 12

• Zoning is used to establish the rental value of shops.
• It is a comparable technique that allows us to calculate the rental value of units that may have the same size but different to depth frontages

Question 13

What is a standard Zone depth?

Answer 13

Typically, 6.1m (20ft) but differs in prime retail such as oxford street (9.1m).

The zones are halved back:

Zone A being X

Zone B being X/2

Zone C being X/4

Remainder being X/8

X/10 – usually used for 1st floors, basements etc.

Question 14

How would you assess the market rent of a ground floor unit with a return frontage?

Answer 14

A percentage uplift for the depth of return (usually 5%) depending on pedestrian flow
All of the unit becomes Zone A if all frontages have the same pedestrian flow, (could have reduction for excessive Zone A)
A % reduction is made for lack of internal space for shelving and displays racks

Question 15

How would assess the market rent of a ground floor with frontages on two roads (through Unit)?

Answer 15

In halving back from both frontages at the same or different zone A rates (different zone A rates are more likely as there is likely to be different footfall on each road).

Question 16

How would you determine market value of an investment property let on internal repairing terms?

Answer 16

-Assuming it is let at market rent or if not use comparable method to determine to market rent
-You have to discount landlords’ liabilities (insurance and external repairs and additional mgmt fees) as known as landlord outgoings
-Use investment method to capitalise into perpetuity all the all-risk yields, determine market value

Question 17

What is yield?

Answer 17

Rate of return

Question 18

What factors make up the all risks yield?

Answer 18

Buildings physical characteristics  

Tenants covenant strength 

Market rent to see if property is under or over rented

Other lease terms - likely to be some uncertainty in net rent

Anticipated rental growth (links to location) 

Question 19

What is the market capitalisation rate? 

Answer 19

• Same as all risks yield
• Point at which market capitalises the income

Question 20

How would you value a green field site with planning permission for a residential development?

Answer 20

Value by direct capital comparison if I could and had enough comparable evidence but if not I would use residual

Question 21

Describe how you have carried out (or would carry out) a Residual Valuation.

Answer 21

Gross Development Value – (developers costs + developers profits) = Land Value

Question 22

What costs did you deduct in your residual valuation?

Answer 22

1. Demolition/site prep
2. Cost of construction (Building cost)
3. Professional fees (architects, engineers etc.)
4. Cost of finance
5. Contingency to allow for fluctuations in these costs
6. Agent and legal fees (in disposing the development)
7. Acquisition costs - Fees and stamp duty land tax on acquisition when you buy the site 

Question 23

How did you calculate developers profit in you Residual Valuation?

Answer 23

Developers profit can be calculated by either a percentage of total cost (22-25%) or a percentage of Gross Development Value (15-17%) *Depends upon risk

The riskier the development, the greater the percentage

Would say ‘I used 15% because there was only a moderate risk’

Question 24

What are the usual acquisition costs of a development site?

Answer 24

Stamp duty land tax 

Acquisition agents fees 

Legal fees 

VAT on the agent and legal fees 

1.8%= 1% lettings fees 0.5% for sols fees + 20% VAT= 1.8%

Question 25

What are the stamp duty rates?

Answer 25

0% on the first £150K 2% on the next £100K 5% above £250K For purchases above £250K the SDLT can be calculated from the Gross Acquisition Price net of agent and legal fees.

Question 26

What is a ransom strip?

Answer 26

A strip of land that provides access to another piece of land. Access to the other piece of land can only be made by crossing the ransom strip.

Question 27

What is Ransom Value?

Answer 27

The value attributable the ransom Strip.

Question 28

How would you value a ransom strip?

Answer 28

Would be valued at a percentage of the uplift in value resulting from the owner of the land having access over the ransom strip (Don't mention 1/3 here unless asked - it is case specific, and 1/3 is just typical).

Question 29

What does Stokes v Cambridge mean to you?

Answer 29

Compulsory purchase case in 1961 A case in which agricultural land was valued as an industrial piece of land as it provided access to an industrial site It was held that the value of the ransom strip was 1/3 of the uplift in the value of the development land   Since then, 1/3 of the uplift in value for the ransom strip has been accepted as an industry stanard (there is a 1/3 - 2/3 split) 

Question 30

What is the profits Method also known as?

Answer 30

Accounts method

Question 31

Name 3 property types that would be valued by the profits method?

Answer 31

Leisure properties: Arcade, casinos, Cinema, hotels, golf courses, theatres

Question 32

Why are certain properties valued by the profits method?

Answer 32

When we can't separate the property from its use - Used to value properties that’s Use/ Nature of business use adds to its value

Question 33

What valuation checks can be carried out on a valuation produced by the profits method?

Answer 33

Unit prices per seat (e.g. cinemas) Per Bedroom (e.g. hotels)

Question 34

When is the contractors’ method used in practice?

Answer 34

Last resort, when no comparables, properties that do not usually change hands. Also, for company accounts, CPSEs and ratings.

Question 35

What is another name for the contractors’ method?

Answer 35

DRC

Question 36

Explain what is included in a Reinstatement/ Replacement Cost for insurance purposes?

Answer 36

- Ensure the building so that if it were to be damaged by fire/storm etc - need to know the cost to demolish it, rebuild it in accordance with current regulations, plus professional fees. - Demolition - Shoring up and weather protection of adjoining buildings - Re-building in accordance with current building regulations - Professional fees

Question 37

How would you value a property for which there are no comparables?

Answer 37

DRC/Contractors

Question 38

Explain the basic approach to the Profits Method.

Answer 38

The profits method calculates a business profit as a result of its trade at the subject property. It then uses profit to determine value Turnover (net of VAT) less costs of generating turnover (wages, purchases, utilities etc) = Net Operating Profit (which is then capitalised).

Question 39

14. Explain the basic approach to the Depreciated Replacement Cost Method.

Answer 39

Cost of modern building less depreciation = net deprecation cost + site value = Current value For example, you would get a football stadium, work out the cost to rebuild it now, and then take away the depreciation it has had since it was first built, to give you the DRC. The depreciated replacement cost method 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 equivalent.