RICS APC > Valuation > Flashcards

Valuation Flashcards

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1
Q

What does a valuer need to ensure prior to commencement of an instruction?

A
  • Competence
  • Independence
  • Terms of engagement
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2
Q

Purposes of a valuation?

A
  • Loan security
  • Acquisition or disposal
  • Accounts
  • Internal
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3
Q

Five methods of valuation?

A
  1. Comparable
  2. Investment
  3. Profits
  4. DRC
  5. Residual
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4
Q

What are the hierarchy of evidence categories?

A
  • Category A: Direct comparables
  • Category B: General market data
  • Category C: Other sources

(From RICS comparable evidence in real estate valuations guidance notes 2019)

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5
Q

What is the hierarchy of evidence used in market practice?

A
  1. Open market letting
  2. Lease renewals
  3. Rent review
  4. Third party determination
  5. Sale and leasebacks
  6. Inter-company transactions
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6
Q

Disadvantages of lease renewals and rent reviews over open market lettings?

A

Include an element of goodwill

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7
Q

What is time value of money?

A

Money received now is worth more than the same amount in the future.

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8
Q

What is a yield?

A
  • Measurement of risk on return from investments.
  • Rate of return that a purchaser is seeking in relation to a particular interest.
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9
Q

What does a high yield mean?

A
  • High risk
  • Low growth
  • Low YP
  • Low capital value
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10
Q

What does a low yield mean?

A
  • Low risk
  • High growth
  • High YP
  • High capital value
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11
Q

What is YP?

A

Years Purchase

The number of years it will take for the income to repay the purchase price

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12
Q

What are the risk factors included in a yield?

A
  • Prospects for rental and capital growth
  • Quality of location and covenants
  • Use of property
  • Lease terms
  • Voids
  • Security and regularity of income
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13
Q

Investment valuation approaches?

A
  1. YP Perp
  2. Term and reversion
  3. Hardcore/ topslice
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14
Q

What is All Risks Yield?

A

Yield reflecting all prospects and risks attached to the property.

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15
Q

What is True Equivalent Yield?

A

Yield assuming rent is paid quarterly in advance (not traditional valuation practice).

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16
Q

What is nominal equivalent yield?

A

Yield assuming rent is paid annually in arrears (usual valuation assumption, therefore refer to this more often).

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17
Q

What is Gross Yield?

A

Yields not adjusted for purchasers costs

E.g. Auction comps on EI Group

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18
Q

What is Net Yield?

A

Yield adjusted for purchasers cost

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19
Q

What is Equivalent Yield?

A

Average weighted yield between net initial and reversionary

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20
Q

What is Initial Yield?

A

Yield applied to current income

NI/CV x 100

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21
Q

What is Reversionary Yield?

A

Yield applied to Market Rent.

MR/CV x 100

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22
Q

What is Running Yield?

A

Yield at moment in time

Based on current income

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23
Q

What is Triple Net Yield?

A

Yield after deducting empty rates, service charge shortfall and insurance shortfall costs that the landlord would have to pay.

Based on true net income that landlord receives.

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24
Q

What is the equated yield?

A

Used in DCF.

Yield takes into account growth in future income and accounts for growth explicity.

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25
When would you adopt void costs?
When there is 5 years or less to lease expiry.
26
What is RPI?
Retail Price Index. Measurement of inflation published by ONS. Favoured by Landlords as benefit from bigger uplift and occurs more often.
27
What is CPI?
Consumer Price Index. Measurement of changes to prices of goods and services.
28
What are the types of Rent Reviews?
- Upwards only - Index linked (RPI/ CPI) - cap and collared - Fixed/ stepped rent - Turnover
29
What are the types of leases?
- FRI - Effective FRI - IRI
30
What is FRI?
Full repairing and insuring. Tenant responsible for all repairs to property.
31
What is Effective FRI?
Landlord responsible for external repairs but can claim expense from Tenant, so effectively FRI.
32
What is IRI?
Internal Repairing Insuring Tenant responsible for internal repairs only. Landlord responsible for external repairs.
33
Types of voids?
- Marketing - Rent free
34
What are purchasers costs?
Agents fees Legal fees Stamp duty
35
What is DCF?
Discounted cash flow More complex and detailed version of investment valuation
36
What is IRR?
Internal rate of return Rate at which all future cashflows must be discounted to produce a NPV of 0 Used to assess the total return from an investment
37
What is Profits Method?
Used for trade related properties where there is a monopoly situation. Value is dependent on profitability of the business trading within the property as opposed to the physical bricks and mortar.
38
Examples of properties valued using the Profits Method?
- Pub - Hotel - Petrol station - Leisure and healthcare
39
What is DRC?
Depreciated Replacement Cost Used for specialist properties where there is limited market evidence
40
When is the DRC method used?
Method of last resort. Shouldn't be used for Secured Lending vals.
41
Example of properties valued using DRC?
- School/ College - Lighthouses - Docks - Sewerage works
42
How to calculate DRC?
1. Value land as existing 2. Add cost to build modern equivalent 3. Deduct a discount for depreciation, age and obsolescence
43
How do you calculate obsolescence?
Valuers judgement
44
Types of obsolescence?
- Physical - Functional - Economic
45
How do you assess the covenant strength?
- Obtain Creditsafe and analyse 3 years of audited accounts - Turnover/ pre-tax profit/ shareholders funds
46
What if financial information is dated?
- Look on Companies House - Conduct general research on web for articles about company e.g. info about new shareholders/ information about potential CVAs
47
What is an AWULT?
Average Weighted Unexpired Lease Term Used for multi let properties to determine the average remaining term weighted dependent on the amount of rent payable
48
How is AWULT calculated?
Total Annual Rent x No. Years remaining for each tenant Add up all units Divide total by total annual headline rent received
49
Stamp duty land tax for non-residential/ mixed use properties?
£0 - £150,000 = 0% £150,001 - £250,000 = 2% Over £250,001 = 5%
50
Stamp duty land tax for residential properties?
Effective from 23 September 2022 £0 - £250,000 = 0% £250,001 - £925,000 = 5% £925,001 - £1,500,000 = 10% Over £1,500,000 = 12% First-time buyers: £0-£425,000 = 0% £425,001 - £625,000 = 5%
51
What is Buy to Let SDLT?
3% above residential rates
52
What are examples of asset management opportunities?
1. Undertake refurbishment works 2. Improve unexpired term through proactive re-gears and lease renewal initiatives 3. Remove landscaping to open up circulation areas 4. Improve rental tone at review/renewal 5. Improve signage/branding 6. Regear the head lease (if long leasehold and below 60 years)
53
What is net effective rent?
Rent following deduction of rent free period
54
What is marriage value?
Additional element of value created by the combination of two or more assets, where the combined value is more than the sum of separate values.
55
What is turnover rent?
Rent calculated by reference to turnover generated at the premises. Turnover rent typical in retail sector and usually combined with a fixed base rent that tenant is required to pay irrespective of turnover.
56
Why do you include purchasers costs within an investment valuation?
- Allows comparison of property against other assets liabilities within a portfolio. - Allows investor to see net return on income to compare with other net returns within portfolio.
57
Why do you exclude purchasers costs from an owner occupier valuation?
Purchasers costs are usually additional costs that the purchaser incurs when buying property therefore does not reflect in offer.
58
What are the new planning use classes?
1. Class E - commercial business and service 2. Class F - local community and learning 3. Class A/ B1/ D - revoked
59
What is the aim of new planning use classes?
Provides flexibility in not needing planning consent to change use if within same use class.
60
When did the planning use class changes come into effect?
1 September 2020
61
Why do you use ITZA comps for retail?
- Provides consistency as widely used valuation approach for retail. - Enables identification of the rent based on the particular layout and configuration of the unit, and assesses the prime Zone A area of the unit.
62
IVS
International Valuation Standards
63
VPS
Valuation Technical and Performance Standards
64
VPGA
Valuation Practice Guidance Application
65
How is the Red Book structured?
2 main parts: 1) Mandatory Part (PS1&2 plus VPS 1-5) 2) Technical Guidance Part (VPGA 1-10)
66
What are empty rates?
Proportion of business rates that is payable when the property is vacant.
67
What is the current UBR?
51.2p (standard) 49.9p (small business less £51,000 RV)
68
Empty rates relief
3 months - office and retail 6 months - industrial
69
Buildings exempt from business rates
- Agricultural land and buildings including fish farms - Buildings used for training or welfare of disabled people - Buildings registered for public religious worship or church halls
70
IVS 105 Valuation Approaches and Methods
1. Income Approach - Investment, Residual, Profits 2. Cost Approach - DRC 3. Market Approach - Comparable
71
How to calculate MV using the Profits Method?
Annual Turnover - Costs/ Purchases = Gross Profit Gross Profit - Working Expenses = Unadjusted Net Profit Unadjusted Net Profit - Operator's Remuneration = Adjusted Net Profit (EBITDA) This is capitalised at appropriate yield (YP multiplier) to achieve MV.
72
Japanese Knotweed advice in valuation reports
Even if didn't notice its presence, always protect yourself within valuation reports by stating that it cannot be fully discounted without an ecological survey.
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