Valuation - General

Question 1

What are the 3 approaches to valuation ?

Answer 1

1. Income - (Investment, Profits)
2. Market Approach (market evidence)
3. Cost approach (Depreciated Replacement Cost)

Question 2

What is the traditional/conventional method ?

Answer 2

Rent received or market rent multiplied by yield.

Question 3

What is the Layer/Hardcore method used for ? and what is it ?

Answer 3

• Over rented properties.
• The income flow is divided horizontally
• Bottom slice being market rent
• Top slice being rent passing minus market rent (until rent review/expiry)
• A higher yield is applied to top slice to reflect additional risk

Question 4

How do you calculate the yield of a property ?

Answer 4

Income % price
x 100

Question 5

What are the risk factors involved in determining a yield ?

Answer 5

• Prospects of rental/ capital growth
• Location
• Covenant
• Lease terms
• Voids

Question 6

What does DCF involved ?

Answer 6

A DCF valuation involves

• projecting estimated cash flows over an assumed holding period, plus an exit value at the end of the holding period.
• The cash flow is then discounted at a discount rate (rate of return) that reflects the perceived level of risk.
• The approach explicitly identifies growth assumptions

Question 7

What are the various stages used in a DCF ?

Answer 7

1. Estimate cash flow
2. Estimate Exit Value
3. Select the Discount Rate
4. Discount Cash flow
5. Value in the sum of a completed DCF to provide Net Present Value

Question 8

What is Net Present Value (NPV)?

Answer 8

• The sum of the discounted cash flow for a project.
• When positive - the investment has exceeded investors target rate of return
• When negative - the investment has not achieved the investors rate of return.

Question 9

What are the elements of finance , a developer would need to borrow money for?

Answer 9

• Site purchase
• Construction costs
• holding costs

Question 10

How are professional costs calculated for a development appraisal ?

Answer 10

10 - 15% of total construction costs.

Question 11

What is the contingency based on?

Answer 11

5 - 10% of total construction costs.

Question 12

What is an S curve?

Answer 12

Reflects the payment of construction costs, shaped over the length of the development.

Question 13

How do you calculate developers profit ?

Answer 13

It done as percentage of Gross development value/ or total construction costs.

It’s usually 15 % to 20% depending upon risk.

Question 14

Give me some examples of development costs?

Answer 14

• Site preparation (clearance/demolition)
• Planning costs (Section 75’s)
• Build costs
• Professional fees (10 - 15% of total construction costs)
• Contingency
• Marketing costs and fee’s

Question 15

What are the LBTT levels ?

Answer 15

Up to £150,000 = 0%
£150,001 to £250,000 1%
Above £250,00 = 5%

Question 16

What are the basis of value?

Answer 16

1. Market Value
2. Market Rent
3. Investment Value
4. Fair Value
5. Equitable Value
6. Liquidation Value

Question 17

Define market value ?

Answer 17

• The estimated amount for which an asset or liability should exchange on the valuation date
• between a willing buyer and a willing seller
• in an arm’s length transaction, after proper marketing and - where the parties had each acted knowledgeably, prudently and without compulsion.

Question 18

Define fair value?

Answer 18

The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.

Question 19

Is a Depreciated replacement cost Red Book compliant ?

Answer 19

NO

Question 20

When is the Red Book not mandatory?

Answer 20

1. Agency reports
2. Statutory
3. Expert witness
4. Internal purposes.

Question 21

What does PS2 cover?

Answer 21

Ethics
Objectivity
Conflcits

Question 22

What are assumptions ?

Answer 22

Assumptions are made where it is reasonable for the valuer to accept something as true, without the need for investigation.

Question 23

What is a special assumption ?

Answer 23

Is a supposition that is taken to be true and accepted as fact, even though it isn’t a fact.

Question 24

Define investment value ?

Answer 24

The value of an asset to a particular owner based on individual investment or operational value.

Question 25

What part of the red book provide information on valuation for secured lending ?

Answer 25

VPGA 2

Question 26

What does VPGA 1 cover?

Answer 26

Valuation for financial accounts

Question 27

What financing standards need to be considered ?

Answer 27

International Financial Reporting Standards

Question 28

What examples of conflicts of interest are there for secured lending ?

Answer 28

- If the valuer has provided advice to the borrower - If the valuer has a long standing business relationship with the borrower -

Question 29

What is the STAMP duty for commercial property ?

Answer 29

0 - £150,000 = 0% £150,001 - £250,000 = 1% £250,0001 + = 5%

Question 30

What are the 3 main aims of the RICS Valuer Registration Scheme ? (PIM)

Answer 30

1. Improve the quality of valuation 2. Meet RICS requirements to self regulate 3. Protect and raise status of valuation proffesion

Question 31

What are the most common bases of value ?

Answer 31

1. Market Value - amount it would transact 2. Market Rent 3. Investment Value 4. Equitable value 5. Synergistic value 6. Liquidation value.