APC REVISION > Valuation (L2) > Flashcards

Valuation (L2) Flashcards

(54 cards)

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1
Q

Can you please outline the process you would take for a valuation instruction

A
  1. Competence
  2. Conflicts
  3. ToE
  4. Relevant docs & stat DD
  5. Inspect & Measure
  6. Gather comps / research
  7. Report
  8. File
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2
Q

What are the five methods of valuation?

A
  1. Comparative
  2. Investment
  3. Residual
  4. Profits
  5. Contractors (DRC)
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3
Q

What are the 3 IVS 105 valuation approaches?

A
  1. Market (Comparative)
  2. Income (Investment, Profits, Residual) - converting cash flows to a cap. val.
  3. Costs (DRC)
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4
Q

What process would you take when undertaking a comparative valuation?

A
  1. Gather and verify comparables into a schedule
  2. Adjust comparables using hierarchy of evidence
  3. Analyse to form opinion of value
  4. Report & file
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5
Q

What are the scales of hierarchy for comparable evidence in valuation?

A
  1. CAT A - similar transactions of nearby property
  2. CAT B - General market data/historic evidence
  3. CAT C - Background material (interest rates/stocks market)
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6
Q

What is the conventional investment method?

A

When the market rent is multiplied by the years purchase.

OR (in other words)

MR / yield = MV

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7
Q

When would you use a term and reversion calculation?

A

To determine the market value of an under-rented property.

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8
Q

How do you calculate the market value using term and reversion?

A

Capitalise the term to the next lease event at the initial yield.

Value the reversion after the lease event at a reversionary yield and market rent into perpetuity.

MV = value of the term + reversion

Reversionary Yield = ERV / Current MV

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9
Q

What is the hardcore/layer method and when would it be used?

A

Investment valuation method used for calculating the market value of over-rented properties.

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10
Q

How do you calculate MV using the hardcore/layer method?

A
  1. Value the bottom slice (market rent) into perpetuity at an initial yield.
  2. Value the top slice (over-rent) at a higher yield to reflect the risk and capitalise until LEX.
  3. Add the two values together
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11
Q

What is a yield?

A

A measure of investment return expressed as a percentage of the capital invested.

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12
Q

What impacts risk/yield?

A
  • rent/capital growth expectations
  • location
  • covenant
  • lease terms and tenure
  • liquidity
  • void risk
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13
Q

What is an all risks yield?

A

A rate of interest used for fully let property at market rent which reflects all the risks of a transaction.

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14
Q

What is a true yield?

A

Assumes rent is paid in advance

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15
Q

What is a nominal yield?

A

Initial yield (assumes rent in arrears)

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16
Q

What is a gross yield

A

Yield without taking into account purchasers costs

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17
Q

What is a net yield?

A

Yield adjusted for purchasing costs

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18
Q

What is an equivalent yield?

A

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

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19
Q

What is an initial yield?

A

Simply a yield reflecting the current income and current price

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20
Q

What is a reversionary yield?

A

= MR / MV when an investment is below market rent which reflects

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21
Q

What is a running yield?

A

Yield at a moment in time

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22
Q

What is a DCF?

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A

Estimates the value of an investment by calculating expected cash flows over a hold period and discounting it back to the present using a discounted rate

23
Q

Is growth implicit or explicit in a DCF?

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A

Explicit (accounted for)

24
Q

What is a DCF normally used for?

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A

More complex assets or developments

25
What is NPV
Sum of discounted cashflows
26
What is IRR?
A measure used to assess the total return of an investment. It is when all future cashflows = NPV 0
27
What is the profits method and when might it be used?
A method of valuation used when a property is valued on its profitability and trading potential. E.g. petrol stations, golf courses.
28
How do you work out value using the profits method?
Annual Turnover - Costs/Expenses/Operator’s Remuneration = EBITDA EBITDA capitalised by yield = MV
29
What is the residual method of valuation?
A type of development appraisal used to analyse the profitability of a development.
30
When would residual method of valuation be used?
For the conversion of unused upper floors of a retail block (Gford example)
31
What is the method for calculating residual value?
GDV - (TDC + Developers profit) Capitalise with an all risks yield
32
What are some of the cost inputs for a residual valuation?
1: Site Prep 2: Planning (s.106/CIL/planning fees/consultant fees) 3: Build cost (materials/labour - use RICS BCIS) 4: Professional fees (architect/designer/M&E/project managers) 5: Contingency (5-10%) 6: Marketing 7: Finance (interest/opp. cost) 8: Developers profit (15-20%)
33
What is the contractor’s method/DRC?
It is the method of last resort used in valuation, typically used for unique properties where there is limited comparable evidence. It is calculated as: Value of land + value of calculating equivalent development (-depreciation)
34
What are the most recent changes to the Red Book?
- Mandatory ESG reporting - AI - Audit trail - New content on models, methods, risk assessment - A revised order to VPS to align with IVS - New VPGA 11 (relationship with auditors)
35
What is the margin of error acceptable in valuation?
Depends on the circumstances but K/S Lincoln & others v. CBRE (2010) mentions: - 10% variation for one-off commercial property - 15% variation for more unique property
36
What is hope value?
Value arising from expected future changes. E.g. planning granted
37
What is marriage value?
The value arising from a merger of interests
38
What are the thresholds for SDLT?
£0 - £150,000 = 0 £150,001 - £250,000 =2% £250,001 + = 5%
39
What else can SDLT be applied to other than purchasing a property?
New leases Total rent over the term (ignoring breaks)
40
How do you value a long leasehold?
(Rent received - ground rent) / yield Adjust yield for wasting asset
41
What is included in purchasers costs?
- SDLT - Legal fees ~ 0.5% - Agents fees ~ 1%
42
What is WAULT?
Weighted Average Unexpired Lease Term
43
What RICS document should you refer to when analysing comparable evidence ?
RICS Comparable Evidence in Real Estate (2019)
44
What requirements should a Red Book compliant valuation include?
VPS 1 - ToE VPS 2 - Basis of value / assumptions VPS 3 - Valuation approaches / methods VPS 6 - Valuation Reports
45
You mentioned that you listened to a podcast on ESG and valuation. What did you learn from this?
1)ESG is now increasingly a key part of valuation and focuses on more closely by investors, lenders, valuers. 2) Greater ESG credentials boosting value 3) Need for further training for valuers on how ESG impacts value 4) The potential to have stranded assets and how to handle these assets
46
Other than property specific factors, what else can impact value?
1) Economic factors - e.g. interest rates 2) Market conditions - e.g. supply/demand
47
What is market rent?
The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s-length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion
48
What is an open market letting?
Where the terms and rent are agreed between a willing landlord and a willing tenant, acting at arm’s length, after appropriate marketing, and where neither party is under compulsion and both have acted knowledgeably and prudently
49
In your Wallington example, you adjusted the rent to reflect the frontage of the property. How did you come to this conclusion?
I applied a deduction on the rent of 5% to reflect the hard frontage. This was in line with recent, nearby evidence of similar properties.
50
What yield did you apply to your Guildford investment sale?
7.75%
51
How did you value the different units in the Guildford block?
Valued each unit individually and then added the values together. In my opinion, this was more accurate than valuing using a blended yield across the block. They had different tenant profiles and lease structures so the yields applied were slightly different.
52
What yield type did you apply to the units in the Guildford block and why?
NIY - this was the same as the comparable evidence used and the properties were rack rented.
53
What are the thresholds for SDLT?
£0-150k = 0% £150,001 - £250k = 2% £250,001+ = 5%
54
What is a ransom strip?
Land which controls access to another
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