1
Q
What are the three steps required before undertaking a valuation?
A
- Competence check
- Conflict check
- Terms of engagement
2
Q
What are the 5 methods of valuation?
A
- Comparable
- Investment
- Profit
- Depreciated replacement cost method
- Residual
3
Q
What are the guidance notes on using comparable information?
A
Comparable evidence in Real Estate 2019
4
Q
What are the three categories of evidence outline in Comparable evidence in Real Estate 2019?
A
- CAT A - Direct comparable
- CAT B - General market data
- CAT C - Other sources
5
Q
What is the hierarchy of Direct comparable?
A
- Contemporary, completed transactions of near identical property with available information
- Contemporary, completed transactions of similar properties with information available
- Contemporary, completed transactions of similar properties with limited information
- Similar Real Estate being marketed and under offer
6
Q
What is the hierarchy of General market data?
A
- Published sources / commercial databases
- Other direct evidence (indices)
- Historic evidence
- Demand / supply
7
Q
What is the hierarchy of Other sources?
A
- Transactional evidence from other real estate
- Interest rates / stock market
8
Q
What is the Layer / Hardcore method of valuation?
A
- Used for over / under-rented properties
- Over rented
- Rent sliced horizontally
- Market rent valued into perp at market yield
- Froth valued until the relevant lease date (break/review/expiry)
- Higher yield to reflect risk - Under rented
- Rent sliced horizontally
- Passing rent valued into perp
- Market rent valued into perp deferred for number of years until it can be actioned
9
Q
What is the Term and Reversion method of valuation
A
- Used for valuing reversionary lease
- Rent sliced vertically
- Passing rent valued up to significant lease date at an initial yield
- Market rent value into perp at a reversionary yield deferred for a void period
10
Q
What is the difference between term and reversion
A
Term defined the current income generated by the existing tenant
Reversion defines the expected estimated rental value on lease expiry
11
Q
How would you value a 10 year lease with a break at 5
A
- Capatalise term certain up to the break date. Have consideration for any inducements offered.
- Assume break is exercised and factor in any break penalty.
- Once break is exercised, factor in a void period for re-letting and any inducement. Capatlise the ERV into perp at an appropriate yield
12
Q
What is headline rent
A
- Headline rent is rent paid under the lease, after the end of any rent free period or any period of reduced rent.
13
Q
What is the Net Effective Rent
A
Rent payable after all incentives. Often used in lease negotiations to identify appropriate level of rent
14
Q
What is a yield?
A
- Investment return expressed as a % of the cap invested
- Income / Cap Invested * 100
15
Q
What is Years purchase and how do you calculate?
A
- Shows how many year it would take to return the capital invested
- Divide 100 by yield
16
Q
What factors do you consider when determining a yield?
A
- Prospect of rental or capital growth
- Quality of location
- Quality of covenant
- Use of property
- Lease terms
- Security and regularity of income
- Liquidity
17
Q
What is an all risks yield?
A
Yield which encompasses all the prospects and risk attached to a particular investment
18
Q
What is a True yield?
A
Assumes rent is paid in advance
19
Q
What is a Nominal Yield
A
Paid annually in arrears
20
Q
What is a Gross Yield
A
Producing income as a % of the Net Purchase Price
21
Q
What is a Net Yield
A
Producing income as a % of the Gross Purchase Price
22
Q
What is a Equivalent Yield
A
Average time weighted yield. Reversionary property is valued using a weighted average of initial and reversionary yield
23
Q
What is a Initial Yield?
A
Passing rent as a % of the current price
24
Q
What is a Reversionary Yield?
A
Market rent as a % of the current price
25
What is a Running Yield?
Yield at one moment in time
26
When would you use the profits method of valuation
1. Valuing a trade related property
2. Value is directly linked to the business
3. Pubs / Hotels / Petrol Stations
27
What do you require to conduct the profit method of valuation?
3 Years audited accounts
28
How would you use the profit method of valuation to value a new business?
1. Estimates
2. Forecasts
3. Business plan
29
What is the methodology for the profits method of valuation?
1. EBITDA
2. Capitalised at a appropriate yield
30
How should you verify a value obtained using the profits method of valuation?
Cross check with comparable sales evidence
31
When would you use the depreciated replacement cost method of valuation?
1. Direct market evidence is limited
2. Lighthouses, oil refineries, schools etc..
32
What is the purpose of the depreciated replacement cost method of valuation?
1. Used for owner-occupied properties
2. For accounts purposes for specialist properties
3. For rating valuations of specialist properties
33
What are the two steps of the depreciated replacement cost method of valuation?
1. Value land in it's existing use
2. Add current cost of replacing the building plus fees. Then discount for depreciation / obsolesce / deterioration
34
How do you estimate the amount to depreciate the property by when using the depreciated replacement cost method?
1. Physical Obsolescence - Wear and tear
2. Functional Obsolescence - No longer fit for purpose
3. Economic Obsolescence - Market is no longer there
35
Is Depreciated replacement cost method Redbook compliant?
1. Not suitable for Secure lending valuations
2. Can only be used to determine market value for accounting purposes
36
When reporting value carried out by depreciated replacement cost, what should the valuer state with regards to alternative use?
1. If higher, the valuer must state the market value for any readily identifiable alternative use.
2. If appropriate, they must state that the market value must be materially lower on cessation of the business
37
What guidance notes does the RICS produce with regards to depreciated replacement cost method?
RICS Depreciated replacement cost method of valuation for financial reporting, 2018
38
What is the latest version of Redbook?
Redbook Global 2022
39
What is the purpose of Redbook?
The RICS Red Book contains mandatory rules and best practice guidance for members who undertake
asset valuations.
40
What are the key sections of Redbook?
1. Introduction.
2. Mandatory Valuation Standards.
3. Advisory Valuations Standards.
4. Valuation for Financial Reporting.
5. Valuation of Charity Assets.
6. Valuation for commercial secured lending purposes.
7. Valuation for compulsory purchase and statutory compensation.
41
What are the contents of Redbook?
1. Introduction
2. Glossary
3. Professional Standards (PS)
4. Valuation technical and performance standards (VPS)
5. Valuation applications (VPGA)
6. The International Valuation Standard (IVS)
42
Why are valuation required
- Loan Security
- Internal Company Purposes
- Tax Purposes
- Property Fund Pricing
- Legal disputes and conveyancing
43
What are some basic assumptions in valuation
- Title
- Planning
- Repair
- Services
44
What is the difference between Market Rent and ERV
Market rent assumes the property is vacant and ERV assumes the building is occupied and is dependent on lease terms
45
What factors effect yield
Macro
State of economy
General level of interest rates
Micro
Type of property
Tenant covenants and security of income
Tenure
Property location
46
What is Part V
- Planning and Development Act 2000
- Social and affordable housing requirements for developers
- Amendments made in Urban Regeneration and Housing Act 2015
- Aim to increase social housing requirements and make it more transparent
- 9 or more housing units or where the development is on more than .1 hectre
- Capped at 10 Percent
47
Where do you get your build costs
- AECOM
- Linesight
- Previous bill of quantities
48
What's the TOE for valuations (No Redbook)
- Identify the client
- Purpose of valuation
- Subject of valuation
- Interest to be valued
- Type of property and it's current use
- Bases of valuation
- Valuers status and disclose any previous involvement
- List of assumptions
- Extent of valuers investigations
- Nature and source of information to be relied upon
- State limits and exclusions of liability
- Confirm whether valuation will be compliant with Redbook
- Basis of fee calculation
- Complaints handling
49
What is a special assumption
A supposition which is taken as true when it is in fact not true
Value property with vacant possession when in fact it is occupied
50
What steps would you take when carrying out a valuation (AMV / Market Value
* Obtain details of the property.
* Undertake a conflict of interest check.
* Obtain a signed letter of instruction.
* Confirm the purpose of the valuation.
* Undertake information gathering including confirmation of the purchase price.
* Identify ratings, planning & environmental information.
* Carry out the inspection & measurement of the property.
* Research market values.
* Compile the valuation report.
* Check valuation internally including sign off with any relevant signatories.
* Report to the client and address any queries.
* Submit an invoice.
51
What details would you expect to see covered in a Banks Letter Of
Instruction on a valuation for secured lending?
* Borrower.
* Property.
* Purpose.
* Conflicts.
* Details of loan.
* Who the report is to be addressed to.
* Special Assumptions.
* Details on where to get information and how to get access to the property.
* What the report should contain for example areas, condition, tenancies & lease, environmental
conditions, the market, relevant risks, valuation amount and any fees that are applicable.
52
What is Market Value
The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
53
What is Market Rent
The estimated amount for which a property, or space within a property should lease (let) on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction and after proper marketing wherein the parties had acted knowledgably, prudently and without compulsion.
54
What is investment value
Investment value is the value of an asset to the owner or a prospective owner for individual investment or operational objectives.
55
What is Fair Value
The Red Book definition of Fair Value is derived from the International Financial Reporting Standards. It is defined as “The price that would be received for the sale of an asset or price paid for the transfer of a liability in an orderly transaction between market participants at the measurement date.”
56
What is Hope Value
Hope value is the term used to describe the market value of land based on the expectation of getting planning permission for development on it. This differs from the existing use value which is what the land or property is worth in its current form.
57
What is Marriage Value
The extra value that arises from the merger of two physical or legal interests.
58
What is Special Value
An extraordinary element of value over and above market value.
59
What is the IVSC
The International Valuation Standards Committee.
* It’s principle interest is to publish valuation standards and procedural guides for valuation of assets for
financial statements.
* The IVSC recognises two specific International Valuation Standards:
o IVS1 – Market Value basis of Valuation.
o IVS2 – Valuation bases other than Market Value.
* The IVSC also recognises two applications:
o IVA1 – Valuations for Financial Reporting.
o IVA2 – Valuation for Lending Purposes.
60
What is the difference between specialist properties and specialised properties?
* Specialist – Trading properties such as hotels, cinemas, pubs where the property is designed to perform a specific purpose.
* Specialised – These include chemical plants, places of worship. These types of properties are very rarely sold on the market except being exchanged within the industry or business they are a part of.
61
What is an equated yield
* The equated yield is the yield on a property investment which takes into account growth in future
income.
* This is not applicable to reversionary situations, where the increase in income on reversion is to the
market value as estimated at the present time
62
What is Goodwill
* Goodwill is an intangible asset when property or real estate is being sold or purchased.
* Goodwill is a value within the transaction that is higher than the sum of the net fair value.
* For example the Goodwill portion of the transaction maybe included due to special features of the asset being exchanged which may be associated with brand name, local customer base and excellent
reputation.
* The Goodwill element will create a special value over and above the value of the land or building being exchanged.
63
What are the different types of Goodwill?
* Purchased Goodwill:
o Purchased goodwill is created when an asset is exchanged for an amount above the fair market value.
o It is accounted for on a company’s balance sheet and is shown as an asset.
o This is the only kind of goodwill that can be recognised on a companies accounts.
* Inherent Goodwill:
o Inherent Goodwill is created over time as a non measurable asset held by a property or company.
o This can be derived from factors such as favourable location, excellent reputation, solid local customer base, good brand image and brand name.
o Inherent Goodwill is not recorded on a companies balance sheet as an asset and is only realised +financially at the time the property or company in consideration is sold or exchanged.
64
What is the difference between a residual valuation and a development appraisal?
* A Development Appraisal does not form part of a Red Book valuation standard whereas a Residual valuation is.
* Development Appraisals are based on worth where one or more valuations are coupled with professional advice, analysis and opinion.
* Development Appraisals takes into account time (phasing) whereas Residual valuation methods do not.
* Development Appraisals use client & agent input whereas Residual valuations must use market lead inputs.
* Development Appraisals are used to determine whether profit levels are obtained at an acceptable level whereas Residual methods are used to determine market value.
65
When would you use a DCF method of valuation
* Where there are no comparable market transactions, the explicit DCF model provides a rational framework for the estimation of Market Value.
* It can also be applied if there is expected short term market volatility present within the transaction for example if a tenant within a rental property is due to terminate their lease.
* It can also be used if multiple investments are being compared side by side to support with long term investment decisions.
* The estimated cash flows are projected over an assumed investment period in addition to an exit value at the end of the investment period.
* The cash flow is then discounted back to the present day value at a discounted rate (also known as the desired rate of return) that reflects the perceived level of risk.
* A discount rate is applied to reflect market and property-specific risks.
* To arrive at the estimated revenue cash flow specific leasing patterns including rent reviews, lease renewals or re-lettings on lease expiry, void costs need to be considered.
* The exit valuation needs to reflect the rental growth and unexpired terms of the leases at the exit date.
* The assumptions and forecasts forming part of the calculation need to be set out clearly
66
How would you value a property which has no comparable
* The discounted cashflow method can be used where no comparable market transactions exist.
* The estimated cash flows are projected over an assumed investment period in addition to an exit value at the end of investment period.
* The cash flow is then discounted back to the present day value at a discounted rate (also known as desired rate of return) that reflects the perceived level of risk.
* The assumptions and forecasts forming part of the calculation need to be set out clearly.
67
What factor effects yield
* Covenant.
* Location.
* Specification.
* Rent levels.
* Growth potential.
* Asset management & development value.
68
What are deleterious materials and how do they effect value?
* Deleterious materials are considered as prohibited and have an effect on the structural integrity performance and longevity of a property.
* They can result in non-compliance with building regulations and decrease a properties value.
69
How would structural defects be reflected in your valuation report?
* Draw clients attention to them.
* Advise them to have structural survey done.
* Can't comment on area outside of ones expertise
* Seek and obtain cost input to remediate and include within report.
70
Are you allowed to know the purchase price when valuing?
* The valuer must request this and also verify it.
* If your valuation differs you must state why.
* This must be based on market evidence and bona fide.
71
You are found to be negligent in your valuation, what can your client
do?
* The complainant can demonstrate the losses and pursue the valuer or valuing company through the courts for the losses incurred.
* Merrett vs. Babb case proved that valuers and not firms can be pursued.
* This highlights the importance of having PII and run off cover in place.
72
How would you rentalise the reception of an office building?
* 50% if single tenant.
* Not at all if multi-let.
73
What items are contained within your terms of engagement but not referenced within your Valuation report?
* Reference of the professional Fees for undertaking the valuation.
74
What is in your Valuation Report and not in your Terms Of Engagement?
* Opinion of value.
* Valuation approach.
75
Why did the report include an ‘opinion’ and not an actual valuation?
* Case law built up historically has found that providing valuations are in accordance with the RICS Red Book a value based on opinion cannot be wrong.
* Providing that the valuation is found to be within reasonable tolerances the surveyor cannot be considered wrong in their opinion.
* If the valuation was provided based on an actual value this would not necessarily be accurate and may leave surveyors open to be pursued through court action.
76
What are RICS Professional Standards
o Professional Standard 1 (PS 1) Comply with standards when a written valuation is provided
o Professional Standard 2 (PS 2) Competency, ethics, objectivity & disclosers
77
What are valuation technical and performance standards
o VPS 1 Terms of Engagements (Scope of work)
o VPS 2 Inspections, investigations and records
o VPS 3 Valuation Report
o VPS 4 Basis of valuation, assumptions and special assumptions
o VPS 5 Valuation approach and methods
78
What are minimum requirements of TOE Redbook
o Identification and status of the valuer
o Identification of the client(s)
o Identification of any other intended users
o Identification of the asset(s) or liability(ies) being valued
o Valuation (financial) currency
o Purpose of the valuation
o Basis(es) of value adopted
o Valuation date
o Nature and extent of the valuer’s work – including investigations – and any limitations thereon
o Nature and source(s) of information upon which the valuer will rely
o All assumptions and special assumptions to be made
o Format of the report
o Restrictions on use, distribution and publication of the report
o Confirmation that the valuation will be undertaken in accordance with the IVS
o The basis on which the fee will be calculated
o Where the firm is registered for regulation by RICS, reference to the firm’s complaints handling procedure, with a copy available on request
o A statement that compliance with these standards may be subject to monitoring
under RICS’ conduct and disciplinary regulations
o A statement setting out any limitations on liability that have been agreed.
79
What is the difference between a development appraisal and a residual valuation?
Development appraisal: establish the viability/profitability of a proposed development using a client’s inputs
Residual valuation: establish the market value of a site using market inputs
80
What is the methodology for calculating residual site value?
Gross development value (GDV) - Total development costs (TDC) = Gross site value
Gross site value - purchasers’ costs = Residual site vale
81
What costs would you allow for as part of total development costs?
Site preparation
Planning costs
Building costs
Professional fees + VAT
Contingency
Marketing costs & fees
Finance costs
Developers profit
82
What would be included in your estimate for site preparation costs and how would you estimate them?
Demolition, remediation works, landfill tax, site clearance, levelling and fencing
Obtain a contractor’s estimate for these works
83
What would be included in your estimate for planning costs?
Planning application and building regulation fees
Costs of planning consultants
84
How would you estimate the building costs?
- AECOM
- Linesight
- Client Info
- Building Surveyor estimate
85
What would be included in your estimate for professional fees and how would you estimate them?
Architects, M&E consultants, project managers, structural engineers, quantity surveyors
Typically 10-15% (plus VAT) of total construction costs
Can vary them depending on the complexity of the project e.g. lower architects fees required for an industrial warehouse than a high-rise residential building
86
What would you typically estimate for contingency costs?
5-10% of total construction costs (depending on the level of risk and likely movements in building costs)
87
What would be included in your estimate for marketing costs and fees and how would you estimate them?
Marketing budget (use evidence/quotes):
* Cost of an EPC
* Sales fee: 1-2% GDV
* Letting fee: 10-15% of initial annual rent
* National House Building Council (NHBC) warranty for residential schemes
88
How would you estimate the interest rate?
LIBOR + premium
Bank of Ireland Base rate + premium
Rate at which the client can borrow money
89
What THREE elements does the developer need to borrow money to finance? What basis would they be represented?
Site purchase + purchaser’s costs: compound interest (straight-line basis)
Total construction costs + fees: based on an s-curve taking hold of the costs over the length of the build program
Holding over costs to cover voids until the disposal of the scheme: compound interest (straight-line basis)
90
What holding over costs need to be accounted for after the development is completed, until the disposal of the scheme?
Empty rates, service charges and interest charges
91
What capital stack does the development appraisal process assume?
100% debt finance
92
Explain the concept of the s-curve and why it is applicable.
Assumes that total constructions costs + fees are paid over half the time period
Reflects when monies tend to be drawn down - lower levels of expenditure at the beginning and end of projects
93
What would you typically estimate for developers profit?
15-20% of total construction costs or GDV (GDV more frequently used as a base for residential use)
Consented sites will typically have a profit on cost of 15-20%. Non-consented sites will have 20-25%, depending on how it complies to local policies and whether they’d had a positive pre-application
94
What will influence the level of profit required by a developer?
Depends on the level of risk
If scheme is low-risk (or pre-let / sold) a lower return may be required
Current riskier market conditions means the percentage of profit required has risen
95
How should you verify the output of a development appraisal?
Cross check site value with comparable site sales if possible
96
When conducting a residual site valuation, what date should the inputs be taken from?
Taken at the date of valuation
97
What are the two main methods of development finance?
Debt finance: lending money from a bank or other funding institution
Equity finance: selling shares in a company, JV partnership, own money used, forward purchase from an investor or occupier
98
What is a typical loan to value (LTV) ratio?
60%
99
What are the typical components of a capital stack for development financing?
Senior debt: takes precedence over other sources of funding. If the borrower defaults, the lender can take ownership of the property
Mezzanine finance: will sit below the senior debt in terms of priority. Typically has a higher rate of return than senior debt but lower than equity
Equity: riskiest and most profitable portion of the capital stack. Riskiest as the other tranches of capital will be repaid before the equity holders
100
When would you use mezzanine financing?
Funding for additional monies required over the normal LTV lending
101
What are swaps and how are they used?
Form of derivative hedging for interest rates. Swap rate will be the market rate for a fixed rate, fixed term loan
102
What is overage?
Arrangement for the sharing of any extra receipts received over and above the profits originally expected, as dictated by a pre-agreed formula
Usually shared between vendor/landowner and developer in a pre-arrangement apportionment
103
What is the profit erosion period?
Length of time it takes for the development profit to be completely eroded, due to empty rates, service charges and interest costs, following the completion of the scheme
104
What are the limitations of the residual valuation methodology?
Dependent on accurate information and inputs
Does not consider timing of cash inflows
Very sensitive to minor adjustments
Implicit assumptions hidden and not explicit
Assumes 100% debt finance
105
What variables would you typically conduct a sensitivity analysis on?
GDV
Build costs
Finance rate
106
What are the THREE forms of sensitivity analysis?
Simple sensitivity analysis - of key variables e.g. yield, GDV, build costs and finance rate
Scenario analysis - changing scenarios for the development content/timing/costs such as phasing the scheme or modifying the design
Monte carlo simulation - using probability theory with software such as Crystal ball
107
What guidance did the RICS release on valuing development property?
RICS Valuation of development property, 2019
108
How is development property defined in RICS Valuation of development property, 2019?
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
109
According to RICS Valuation of development property, 2019, what should Market Value for a development property assume?
Optimum development i.e. the development which yields the highest value, taking into account the perspective economic and planning conditions
110
What does RICS Valuation of development property, 2019 state about the use of multiple valuation approaches?
Best practice avoids reliance on a single approach or method of assessing the value of development property
Output should always be cross-checked using another method (market comparison approach, residual method)
111
What method does the RICS Valuation of development property state should be used for complex and/or lengthy development schemes?
Discounted cash flow (DCF) technique. Simple residual method can be used in other cases
112
What does RICS Valuation of development property, 2019 recommend should be done to account for risk in the valuation process?
Risk analysis should be used to show changes to the inputs which might affect the valuation
Risk and return levels and assumptions should be explicitly stated in the valuation report
113
How should you value land that is in the course of development according to RICS Valuation of development property, 2019?
* Value of the land + costs expended at the valuation date
and/or
* Completed development value - costs remaining to be expended at the valuation date
114
How should the output of the valuation be reported according to RICS Valuation of development property, 2019?
Reported as a single figure, except where there is potential for significant variation (e.g. if there is uncertainty around the valuation the different options identified should be report)
115
Why is profit on cost a more reliable method of measuring developers profit than profit on GDV?
GDV is subject to more variation
116
If you were to conduct a residual valuation now, how would you approach it differently in light of the current circumstances?
Increase your contingency to reflect uncertainties in material costs
Increase the timescales to reflect that it would take longer for you to get on site.
Increase finance costs as cost of debt has increased
117
What is GDV?
Gross development value (GDV) is the estimated contract price or Market Value of the completed development. States gross as it is prior to any marketing fees being deducted
118
What do developers consider the greatest risk when undertaking a development?
Planning permission
119
How would you account for planning risk in a valuation
- Higher discount rate
- Higher contingency
- Sensitivity analysis
- Higher developers profit
APC 2024
flashcards
Decks in class (17)
# Cards
-
Ethics, Rules of Conduct, Professionalism Lvl 357
-
Inspection Lvl352
-
Measurement Lvl 375
-
Valuation Lvl2119
-
Property Management Lvl366
-
Landlord and Tenant Lvl399
-
Leasing and Letting Lvl330
-
Property Information Systems Lvl 238
-
Investment Management Lvl 249
-
Accounting Principles Lvl 133
-
Business Planning Lvl 17
-
Client Care Lvl 215
-
Communication and Negotiation Lvl 210
-
Sustainability11
-
Conflict Avoidance11
-
Case Study Questions25
-
Important Questions22
