Valuation Flashcards

Question

What is a Yield?

Answer 1

A yield is a measure of investment return, expressed as a percentage of capital invested. Formula is Income / (Price x 100).

Answer 2

The remunerative rate of interest used in the valuation of fully-let property, let at market rent, reflecting all the prospects and risks attached to the particular investment.

Answer 3

Assumes rent is paid in advance, most traditional valuation assumes that rent is paid in arrears.

Answer 4

Initial yield assuming rent is paid in arrears

Answer 5

Yield is not adjusted for purchaser’s costs (such as an auction result)

Answer 6

The resulting yield adjusted for purchaser’s costs

Answer 7

Average weighted yield when a reversionary property is valued using an initial and reversionary yield.

Answer 8

Simple income yield for current income and current price.

Answer 9

Market Rent (MR) divided by current price on an investment let at a rent below the MR.

Answer 10

The yield at one moment in time.

Answer 11

the current annualised rent, net of costs, expressed as a percentage of capital value, after adding notional purchaser's cost

Answer 12

- Growth explicit investment method of valuation - Projects estimated cash flows over an assumed investment holding period - with an exit value at the end of this period - The cash flow is then discounted back to the present day at a discount rate (known as desired rate of return) to reflect the perceived level of risk. - Approach separates out and explicitly identifies growth assumptions rather than incorporating them within an ARY. - A method that sets out inflows and outflows

Answer 13

An explicit discounted cash flow model uses predicted input changes, such as growth, rather than existing values.

Answer 14

A method for estimating the value of an asset by discounting its future cash flows. It's based on the idea that money is worth more today than it will be in the future.

Answer 15

DCF considers the time value of money, which is the idea that money is worth more today than it will be in the future DCF can help identify the most important factors that drive an investment's valuation

Answer 16

RICS Guidance Note on ‘Discounted Cash Flows for Commercial Property Investments’ (2010)

Answer 17

1. Estimate the cash flow 2. Estimate the exit value at the end of the holding period 3. Select a discount rate 4. Discount cash flow at discount rate 5. Value is the sum of the completed discounted cash flow to provide the NPV

Answer 18

* Net Present Value is the sum of all the discounted cash flows of the project. * Can be used to determine if an investment gives a positive return against a target rate of return. o NPV positive = investment has exceeded investor’s target rate of return o NPV negative = it has not achieved the investor’s target rate of return

Answer 19

“The rate at which all future cash flows must be discounted to produce an NPV of 0”. IRR used to assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions.

Answer 20

1. Input current MV as a negative cash flow 2. Input projected rents over holding period as a positive value 3. Input projected exit value at end of term assumed as positive value 4. Discount Rate (IRR) is the rate chose which provides a NPV of 0 5. If NPV is more than zero, then target rate of return is met.

Answer 21

* valuations of trade related property * Used where the value of the property depends upon profitability of its business and its trading potential.

Answer 22

value of the property depends on the profit generated from the business, not the physical building or location.

Answer 23

pubs, petrol stations, hotels leisure, healthcare properties

Answer 24

3 years (Audited accounts are superior to management accounts)

Answer 25

Use estimates/business plan for new business

Answer 26

Annual turnover (income received) LESS costs/purchases = Gross Profit LESS reasonable working expenses = Unadjusted Net Profit LESS operator’s remuneration = Adjusted net profit known as the Fair Maintainable Operating Profit (FMOP) Capitalised at appropriate yield (datamultiplier) to achieve Market Value Cross Check with comparable sales evidence

Answer 27

Earnings before interest, taxation, depreciation and amortisation.

Answer 28

To simplify: 1. Annual Turnover 2. Capitalised 3. Cross check

Answer 29

Revenues - expenses = Operating profits Operating profit - undistributed operating expenses = GOP GOP - other expenses (mgt, insurance, tax etc) = EDITDA / NOI

Answer 30

- Tool to financially assess viability of development scheme. - Used to assess viability/suitability/profitability of proposed scheme and its sensitivity to changing inputs or assessing viability of different uses, rents, yields, S106, CIL etc. - Can be used to establish residual site value or can assume site value. - Can be based on client inputs.

Answer 31

- Analysis to consider whether the level of required planning obligations is viable. - Assessing whether a development is viable based on the level of profit achieved - Assessing the best and highest use for a property

Answer 32

- Valuation to appraise the value of development site/land to find market value. - It is based on market inputs. - It is ONE moment in time, at the valuation date, for a particular purpose. - Inputs are taken at valuation date. - Can be simple residual valuation or DCF method.

Answer 33

Site preparation planning costs Building costs Professional fees Contingency Marketing fees Finance

Answer 34

Demolition, remediation works, site clearance

Answer 35

o Town and Country Planning Act 1990 – S106 payments o CIL o Affordable Housing – local planning policy will set out affordable requirements via social, intermediate and key worker housing. o S278 – highways o Planning application fees o Cost of specialist reports (e.g. Environmental Assessment)

Answer 36

Sources of build costs: Client information In house cost consultancy team estimates RICS Building Cost Information Service (BCIS) usually based on GIA, Spons Architects’ and Builders’ Price Book.

Answer 37

o 10-15% + VAT of construction cost o This includes architects, M&E, Project managers, structural engineers. o CDM (Construction: Design and Management) Principal Designer

Answer 38

blended rate (cost of debt + risk) (5%-7%)

Answer 39

Legal agreement between local authority and developer for planning obligations (e.g. affordable housing, local training) to gain planning consent. It is site-specific, and is a figure that can be negotiated.

Answer 40

Look at past schemes that have been developed, and look on planning website to see the S106 figure agreed as a benchmark/comparable analysis.

Answer 41

Community Infrastructure Levy charged by Local Planning Authorities for new development area (on the uplift on GIA). It is not necessarily site specific, and can be used on local infrastructure such as schools and healthcare. Generally, paid 60 days after commencement of development. (for 1st installment). CIL is excluded for existing floorspace, charities, social housing.

Answer 42

Multiplying the NEW floorspace that a development will be creating by the relevant CIL rate set out in the Local Authority CIL Charging Schedule.

Answer 43

Allowance for risks of unforeseen costs. It is for additional costs/future needs that may arise.

Answer 44

£80,000 - £200,000 per bed

Answer 45

1. Relies on accurate inputs 2. It does not consider timing of cash flows 3. Sensitive to minor changes 4. Implicit assumptions hidden and not explicit (unlike DCF).

Answer 46

- Conflict of interest check - Terms of Engagement - Investigation – site inspection, market research, public data - Understand client requirements (profit they want to achieve, cost of finance, timings) - If you are developer, what are you targeting? How much do you want to make?

Answer 47

- CAA – civil aviation authority.

Answer 48

* SONIA rate (Sterling Overnight Index Average) * Bank of England base rate plus premium * Rate at which developer can borrow the money.

Answer 49

The amount by which, on completion or partial completion of a development, the estimated income of a development exceeds the total outlay.

Answer 50

- Market Value - Sometimes Marriage/Hope Value for special assumption/assumption - Any assumptions/special assumptions must be clearly stated.

Answer 51

RICS Professional Statement on ‘Valuation of Development Property’ – 1st ed (2019) It supplements the International Valuation Standards (IVS) 410 on ‘Development Property’

Answer 52

Interests where redevelopment is required to achieve the highest and best use, or where improvements are either being contemplated or are in progress at the valuation date.

Answer 53

DCF over basic residual model.

Answer 54

RICS Professional Standard ‘Financial viability in planning: conduct and reporting’ (1st edn, 2019).

Answer 55

This is a revision of the RICS Professional Guidance, Financial Viability in Planning 2012. Accounts for the updated NPPF and PPG in 2018. The Professional Statement is informed by NPPF and PPG (Planning Practice Guidance). It concerns Financial Viability Assessments and what must be included to support the statutory planning process.

Answer 56

- When there is limited or unavailable direct market evidence for specialist properties. - Examples include lighthouses, oil refineries, submarine base and docks.

Answer 57

- Used for owner occupied property - For accounts purposes for specialised properties. - Also used for rating valuations of specialist properties

Answer 58

Two steps: 1. Value of the land in its existing use (assume planning permission exists) 2. Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence/deterioration. (Use BCIS then judge level of obsolescence).

Answer 59

- This method of valuation is NOT suitable to be Red Book compliant valuations for secured lending. - It can be used for calculation of Market Value for specialised properties only for valuations for financial statements.

Answer 60

- They must state the value for any readily identifiable alternative use if it is higher than the current use if appropriate, or if appropriate a statement that the market value would be lower on cessation of the business use.

Answer 61

RICS Guidance note on Depreciated Replacement Cost Method of Valuation for Financial Reporting 2018

Answer 62

* Terms of reference must be clear and unambiguous over whether a valuation is red book compliant or not (PS1 and VPS 1). * Valuation for financial reporting (VPGA 1) – reference IFRS 13 or IFRS 16, to provide Fair Value. * Profits method (VPGA 4) – reference to use of profits method for certain trade-related property valuations, with non-exhaustive list of properties including self-storage and flexi-workspace. * Sustainability and ESG brought to the forefront:

Answer 63

Professional Standard. These are MANDATORY.

Answer 64

1. PS1 – Compliance with standards and practice statements where a written valuation is provided. 2. PS2 – Ethics, Competency, Objectivity, Disclosures.

Answer 65

It states when a valuation must be Red Book Compliant.

Answer 66

1. When providing an Agency or Brokerage Service in anticipation of receiving instruction to dispose of, or acquire 2. When valuation advice is provided in anticipation of giving evidence as an Expert Witness 3. Performing a Statutory Function 4. Providing Valuation to a Client for Internal Purposes - no liability 5. When expressly provided in preparation for or during the course of negotiations or litigation

Answer 67

1. Compliance with RICS Global Rules of Conduct 2. Act objectively and independently – not influenced by situation that could threaten objectivity. 3. Must act with professional scepticism – review data before relying on it. 4. Reiterates rules surrounding conflicts of interest. 5. Comply with minimum Terms of Engagement (VPS 1) and understand client’s requirements. Must demonstrate professional competence.

Answer 68

Rules Objectively Scepticism Conflicts Terms of engagement

Answer 69

It refers to a policy of rotating the valuing firm or valuing member, in order to maintain objectivity. The RICS recommends that this is done, as it is good business. The time period of rotation will depend on frequency of valuation, control/review procedure in place such as ‘valuation panels’, and good business practice. It is not mandatory, but considered good practice to rotate valuers at intervals not exceeding 7 years.

Answer 70

Sustainability A holistic approach to long-term value creation that considers the environment, society, and economy. It aims to reduce negative environmental impacts and ensure that business practices don't harm future generations. ESG A framework that measures a company's performance in three areas: environmental, social, and governance. It's used by investors and other stakeholders to assess a company's impact and risk. It is MANDATORY.

Answer 71

1. VPS1 – Terms of Engagement 2. VPS2 – Inspections, Investigations and Records 3. VPS3 – Valuation Reports 4. VPS4 – Bases of Value, Assumptions and Special Assumptions 5. VPS5 – Valuation Approaches and Methods

Answer 72

Terms of Engagement (IVS 101 Scope of Work)

Answer 73

These minimum matters must be confirmed in writing to the client PRIOR to commencing Red Book Valuation.

Answer 74

a. Identification and status of the valuer b. Identification of the client(s) c. Identification of any other intended users d. Identification of the asset(s) or liability(ies) being valued – if portfolio then lotting of assets should be considered. e. Currency f. Purpose of the valuation g. Basis(es) of value adopted. h. Valuation date i. Extent of investigations j. Nature and source(s) of information upon which the valuer will rely k. All assumptions and special assumptions to be made l. Format of the report m. Restrictions on use, distribution and publication of the report n. Confirmation that the valuation will be undertaken in accordance with the IVS/Red Book Compliance. o. Fee Basis p. Complaints Handling Procedure to be made available. q. Statement that the valuation may be subject to compliance by RICS. r. Limitation on liability agreed.

Answer 75

An assumption is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation. E.g. assumed condition of property.

Answer 76

A special assumption is a supposition that is taken to be true and accepted as fact even though it is not true. E.g. planning consent/vacant possession. Assumptions and special assumptions must be agreed in writing at commencement of the instruction.

Answer 77

The valuer must take reasonable steps to verify the information relied on for a valuation to ensure the information is professionally adequate for its purpose.

Answer 78

Yes, these can be considered a Red Book compliant valuation (unless for reasons set out in PS1). However, when valuer is instructed to undertake valuation with restricted information or without physical inspection, valuer must consider these 4 factors: 1. Agree the nature of the restriction in writing in the Terms of Engagement. 2. Possible valuation implications of the restriction confirmed in writing before the value is reported. 3. Valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation. 4. Restriction must be referred to in the report.

Answer 79

In accordance with VPS2 of the Red Book, it is not advised to revalue without re-inspection. HOWEVER, you can re-value a property without re-inspection providing you as the valuer are satisfied there has been no material change to the property or nature of its location that will impact the property’s value. This should be stated in the Terms of Engagement.

Answer 80

1. Identification and Status of valuer 2. Client and any other intended users 3. Purpose of valuation 4. Identification of assets to be valued 5. Basis of value 6. Valuation Date 7. Extent of investigation 8. Nature and source of information relied upon 9. Assumptions and Special assumptions 10. Restrictions on use, distribution and publication 11. Instruction undertaken in accordance with IVS standards 12. Valuation approach and rationale 13. Valuation figure(s) 14. Date of valuation report 15. Comment on market uncertainty 16. Statement setting out limitations on liability that have been agreed.

Answer 81

Yes according to VPS3 of the Red Book, a valuer must sign a valuation report and make clear that they are objectively able to value the property. The RICS does not allow a firm to sign a valuation, it is signed off by an individual.

Answer 82

- Mark the report draft - It is for internal purposes only – it cannot be relied upon, and it cannot be published/disclosed. - Any changes to the preliminary valuation must be noted on file and reasons provided. - Any additional information supplied by the client as a result of discussing the draft report must be stated in the report.

Answer 83

Bases of Value, Assumptions and Special Assumptions

Answer 84

1. Market Value 2. Market Rent 3. Fair Value 4. Investment Value (or worth) 5. Equitable Value 6. Liquidation Value

Answer 85

Valuation Approaches and Methods (IVS 105).

Answer 86

Valuers are responsible for choosing and justifying their valuation approach. In some cases, more than one approach might be appropriate. It outlines market, income and cost approach.

Answer 87

Valuation Practice Guidance Applications – VPGAs

Answer 88

10 VPGAs (18 VPGAs in National Supplement)

Answer 89

VPGA 1 – Valuation for inclusion in financial accounts VPGA 2 – Valuation for Secured Lending

Answer 90

Valuation for inclusion in financial accounts. Note Fair Value is adopted for IFRS accounts. ‘Performance standards’ must be adhered to.

Answer 91

Valuation for Secured Lending.

Answer 92

Any previous involvement with prospective borrower/property to be disclosed to the lender. Previous involvement usually mean within past 2 years. If previous involvement creates a conflict that cannot be avoided, the instruction should be declined. It is valuer’s responsibility to decide whether to accept/decline instruction.

Answer 93

* Having a longstanding professional relationship with prospective borrower/owner. * When the valuer will gain a fee from introducing the transaction to the lender. * If there is a financial interest in the property holding, or prospective borrower. * When the valuer is retained to act in the disposal or letting of the completed development on the subject property.

Answer 94

These should be recorded in the Terms of Engagement and in the Valuation Report.

Answer 95

- Disclosure of Involvement identified in ToE. If valuer has no involvement, statement to that effect is to be made. - Valuation Methodology Adopted - If there is a Recent transaction of the Property - the extent to which that information has been accepted as evidence of value. - Comment on the suitability for Secured Lending Purposes - Potential and demand for alternative uses, or any foreseeable changes in current mode of occupation. - Disrepair or deleterious or harmful materials - Environmental or economic designation - Environmental issues – flood risk, historic contamination. - Past, current and future trends – volatility in the market - Current marketability of the interest and whether this is likely to be sustainable over the life of the loan. - Details of comparable transactions relied upon. - Sustainability and ESG factors – impact market influence

Answer 96

Difference between reported market value with AND without special assumption.

Answer 97

Special assumptions that may arise: - Planning consent - All necessary licences and consents are in place - Property changed in a defined way (e.g. removal of equipment) - Property is vacant.

Answer 98

- Published 2018, but effective 2019. - It ‘augments’ the Red Book Global requirements. - It contains 18 VPGAs to become more user-friendly. - For UK jurisdiction - Advice is not mandatory, but guidance.

Answer 99

1. Introduction 2. UK Professional and Valuation Standards – mandatory – 3 VPS o UK VPS 1 – ToE Red Book Compliance o UK VPS 2 – ToE Supplementary provisions in Scotland o UK VPS 3 – Regulated purpose valuations – supplementary requirements 3. UK Valuation Practice Guidance Applications – advisory o 18 VPGAs 4. Summary of changes from Red Book UK 2014 (revised 2015).

Answer 100

1. VPGA 1 – Valuation for financial reporting 10. VPGA 10 – Valuation for commercial secured lending purposes 11. VPGA 11 – Valuation for residential mortgage purposes

Answer 101

VPS3 of the UK National Supplement covers Regulated Purpose Valuations. These are valuations that are relied upon by third parties who did not commission the valuation and they are subject to valuation monitoring. These may include valuation for 5 purposes: * Financial Reporting (company accounts) * Stock Exchange Listings * Takeovers and Mergers * Collective Investment Schemes * Unregulated Property Unit Trusts

Answer 102

No these are not regulated purpose valuations as they are not relied upon by a third party, or in public interest.

Answer 103

- RICS commissioned Independent Review of Real Estate Investment Valuations - Undertaken by Peter Gray - Review made 13 recommendations to increase trust in profession and ensure quality in valuation for clients

Answer 104

o Separation of valuation from advisory activities in respect of use of data o Developing time-specific mandatory rotation process for valuers o Developing Valuation Compliance Officer role for firms. o Independent review of real estate investment valuations o Review of post-qualification requirements for valuers o Ensure diverse and inclusive valuation profession

Answer 105

Issued a RIC Global Professional Standard ‘Sustainability and ESG in commercial property valuation and strategic advice’ (2021) Provides terms and factors relating to terms of engagement, inspection, reporting and valuation purposes. It also touches on relevant sustainability characteristics, considerations and risk which should be analysed when viewing comparable evidence.

Answer 106

The value arising from any expectation that future circumstances affecting the property may change. E.g. planning permission achieved where no planning permission exists at present time, or marriage value from merging two sites.

Answer 107

- Created by a merger of interests – can be physical or tenurial - Typical negotiated outcome is to split marriage value created 50:50, or divide it pro-rata to value of individual interest.

Answer 108

£0 - £150,000------------------- 0% £150,001 - £250,000 --------- 2% Over £250,000------------------ 5%

Answer 109

£0 - £250,000 -------------------0% £250,0001 - £925,000 ---------5% £925,001 - £1,500,000 --------10% Over £1,500,000----------------12%

Answer 110

It is a tax payable by the purchaser on a land or property transaction in England and N Ireland.

Answer 111

Charged in incremental basis at different rates depending on portion of the purchase price that falls into each rate band.

Answer 112

- Scotland – Land and Building Transaction Tax (LBTT) - Wales – Land Transaction Tax (LTT)

Answer 113

It is calculated by taking the NPV of the lease, and applying the following bands: NPV Up to £150,000--------- 0% NPV of £150,001 - £5,000,000--------- 1% NPV over £5,000,000--------- 2% NPV is the total rent payable over the term of the lease, reduce by an annualised discount rate. Break clauses are excluded from the valuation.

Answer 114

May be generated when the transaction is not at arm’s length and there is a special purchaser for the property because the special purchaser has advantages arising from its ownership that would not be available to other buyers in a market. E.g. tenant purchasing freehold interest.

Answer 115

* For building insurance purposes * Cost to reinstate building without a profit * Use BCIS (adopt GIA for commercial, GEA or resi) * Add VAT, demolition costs, professional fees, planning and building reg fees, inflation allowance. * It is NOT a ‘written opinion of value’ – therefore Red Book Compliance is not required.

Answer 116

SDLT – prevailing rate Agent Fees – 1% of purchase price plus VAT Solicitor Fees – 0.5% of purchase price plus VAT

Answer 117

Devaluation of headline rent, taking into account rent-free periods.

Answer 118

Rent that is payable after any incentive (such as rent-free period) has expired.

Answer 119

- Used for COMPARISON of retail properties to create a unit of comparison for different size buildings. - The rental value of the property REDUCES away from the street.

Answer 120

West end office: 4.00% City of London office: 4.75% Prime industrial: 5.25% Prime High Street retail: 6.75% Good secondary: 9.00% Secondary: 12% Resi Zone 2 prime: 4.15% Zone 3-6 secondary: 4.5%

Answer 121

Liability is a state of being responsible for something, such as a debt, financial obligation, or legal risk.

Answer 122

PS - Professional standard VPS - Valuation Professional standards

Answer 123

- Singer & Friedlander v J.D.Wood (1977) demonstrated that it will be narrower for a relatively straightforward valuation case and wider for more complex case. - K/S Lincoln v CBRE (2010) – regarding valuation of hotels, judge said appropriate margin for error: o +/- 5% for standard residential property o +/- 10% for one-off commercial property o +/- 15% if exceptional features of the property - Dunfermline Building Society v CBRE (2017) assumed an acceptable error margin of 15%.

Valuation Flashcards

(149 cards)