Valuation

Question 1

What are the 5 methods of valuation

Answer 1

-Comparative Method
-Investment Method
-Profits Method
-Residual Method
-Contractors Method (Depreciated Replacement Cost)

Question 2

what are the IVS 105 Valuation Approaches and Methods?

Answer 2

-Income Approach
-Cost Approach
-Market Approach

Question 3

What is the income approach?

Answer 3

This converts current and future cash flows into a capital value
-Investment
-Profits
-Residual

Question 4

What is the cost approach?

Answer 4

Refers to the cost of the asset, either by purchase or construction
-Depreciated Replacement Costs

Question 5

What is the market approach?

Answer 5

Using comparable evidence available
-Comparative method

Question 6

What are the six steps in a comparative method of valuation?

Answer 6

-Search and select comparable
-Verify details
-calculate the appropriate net effective rent
-Assemble comparables in schedule
-Adjust comparables using hierarchy of evidence
-Analyse comparables to determine the value
-Prepare Report

Question 7

What is the relevant RICS documents regarding the comparable method?

Answer 7

-The RICS Professional Standard: Comparable Evidence in Real Estate Valuation, 2019
Sets out:
-Principles involved
-What to do in the instance of limited availability of evidence
-what the hierachy of evidence is

Question 8

What are some examples of cat a comparables?

Answer 8

-completed transactions of near identical properties
-completed transaction of other similar real estate assets (where full info is available)
-completed transaction (partial data available but reliable data can be obtained)

Question 9

What are some examples of Cat B evidence? (general market data)

Answer 9

-Info on published sources or commercial databases (costar, rightmove plus)
-Historic Evidence
-Demand/Supply for rent/investment

Question 10

What are some examples of cat c sources?

Answer 10

-Transactions from other real estate types / locations
-interest rate, stock movement for real estate yields

Question 11

How do you identify relevant comps?

Answer 11

-Inspection and look for agents boards
-Speak to agents
-Market sentiment when there is a lack of comparables

Question 12

What is the Investment method of valuation?

Answer 12

-The rental income determines the capital value

Question 13

When do you use the investment approach?

Answer 13

when there is an income stream to determine value

Question 14

What is the conventional investment method?

Answer 14

-Calculate the rent received or market rent by the number of years purchase
-for this it is important to consider comparables for yield?

Question 15

What is the term and reversion method?

Answer 15

This is used when the property is being under-rented (passing rent < market rent)
-Term is capitalised until next lease event using the initial yield
-Reversion to market rent valued at a reversionary yield

Question 16

What is the Layer / Hardcore method?

Answer 16

Use this when the property is overrented (passing rent > market rent)
-Bottom slice is market rent
-Top slice is passing rent - market rent until lease event

Question 17

What is a yield?

Answer 17

A yield is a measure of investment return
- its shown as a % of capital investment
-(Income/Price)x100

Question 18

What risks do you need to consider when determining a yield?

Answer 18

-Quality of location/convenant
-Potential market growth and capital growth
-Lease terms

Question 19

When do you use a profits method of valuation?

Answer 19

-Used to value the property on the profitability of a business (pubs, petrol station, hotels)
Or
-Trade related properties where there is a monopoly

Question 20

What do you have to consider for a profits method?

Answer 20

-Must need accurate and audited accounts (3 years ideally)
-If the business is new, use business plan or estimates
-Exceptional items of spending
-Maturity of business

Question 21

How do you calculate the profits method of valuation?

Answer 21

TBC

Question 22

What is the methodology for the residual method of valuation?

Answer 22

-Calculate the market rent of the completed development using todays assumptions
-Use comparable method to determine rents and yields
-Use an all risk yield
-Allow for tenant incentives
-deduct purchasers costs

Question 23

When would you use the residual method of valuation?

Answer 23

For specific valuations of a property to find the market value based on market inputs

Question 24

What is an all risks yield?

Answer 24

the yield of a fully let property at market rent taking into consideration all potential risks attached to the investment

Question 25

When would you use the Depreciated Replacement Cost method (contractor method)?

Answer 25

When direct market evidence is unavailable or limited for specialist properties -schools -docks -lighthouse Owner occupied buildings

Question 26

How would you calculate the depreciated replacement cost?

Answer 26

1. Identify the value of the land in its exiting use 2. Add (current cost of replacing the building + (fees

Question 27

What is the structure of the RICS Valuation - Global Standards 2024 (red book)

Answer 27

Structure: Part 1: Introduction Part 2: Glossary Part 3: Professional Standards Part 4: Valuation Technical and Performance Standards (VPS) Part 5: Valuation practice guidance application Part 6: International Valuation Standards

Question 28

What does Part 3 'Professional Standards' state?

Answer 28

1) Outlines when a valuation has to be red book compliant -Providing agency services -Acting as an expert witness -Preparing for negotiation 2) How a valuer should act ethically and independent

Question 29

What does part 4 Valuation technical and performance (VPS) set out?

Answer 29

1) Terms of engagement 2) Basis of valuation (appropriate and consistent for purpose of valuation) 3) Definitions of Value

Question 30

What is market value?

Answer 30

The estimate amount at which an asset or liability should be exchanged in an arms length transaction Assumptions -On the valuation date -Between willing buyer and seller -After proper marketing

Question 31

What is market rent?

Answer 31

The estimated amount at which a property should be leased Assumptions: -On the valuation date -Between willing lessor and lessee -After proper marketing

Question 32

What is Fair Value

Answer 32

In line with RICS view on Market value -IFRS13 definition is the price an asset or transfer liability between market participants at measurement date'

Question 33

What is investment value?

Answer 33

The value of an asset to owner/prospective owner for individual investment or operational objectives Notes: -Reflect Value against clients -Client may have their own investment criteria