Valuation (Methods) Flashcards

Question

What is a True Yield?

Answer 1

Assumes rent is paid in advance

Answer 2

Assumes rent is paid in arrears

Answer 3

Yield not adjusted for purchasers costs

Answer 4

Yield adjusted for purchasers costs

Answer 5

Simple income yield for current income and current price

Answer 6

Market rent divided by current price if property let below MR

Answer 7

The yield at one moment in time

Answer 8

* Growth explicit investment method of valuation * Is a form of income approach valuation * DCF Valuation is a valuation model that seeks to determine the value of a property by examining its future net income or projected cash flow from the property and then discount the case flow to arrive at an estimated current value * The approach separates out and explicitly identifies growth assumptions rather than incorporating them within an ARY

Answer 9

* Short leasehold interests * Phased development projects * Some Alternative investments * Non-standard investments (21 year rent reviews) * Over-rented properties and social housing

Answer 10

1. Estimate cash flow (income less expenditure) for an agreed holding period) 2. Estimate the exit value at end of holding period 3. Select discount rate 4. Discount cash flow at discount rate 5. Value is sum of completed DCF to provide the NPV

Answer 11

* Can determine if an investment gives a positive return against a target rate of return * When NPV is positive, the investment has exceeded the investors target rate of return * When NPV is negative, it has not achieved the investors TRR

Answer 12

* The rate of return at which all future cashflows must be discounted to produce an NPV of 0 * IRR is used to assess the total rate of return from investment opportunities making some assumptions regarding rental growth, re-letting and exit assumptions

Answer 13

Use internal software, or: o Input current MV as a negative cash flow o Input projected rents over holding period as positive value o Input projected exit value at the end of term assumed as a positive value o IRR is rate chose which provided NPV of 0 o If NPV is more than 0, the target rate of return is met

Answer 14

* Used for valuation of trade related property * Used when value of the property depends on the profitability of its business * Used for pubs, petrol stations, hotels, guest houses. * Value of the property depends on the profit generated for the business * Must have accurate and audited accounts if possible for the last 3 years * Use estimates/ business plan if new business

Answer 15

RICS Practice Information: Discounted cash flow valuations, November 2023

Answer 16

1. Annual Turnover (income received) a. Less costs/ purchase = Gross Profit b. Less reasonable working expenses = unadjusted net profit c. Less operator’s remuneration = Adjusted net profit (Fair Maintainable Operating Profit (FMOP)) * Can be expressed as EBITDA 2. Capitalised FMOP/ EBITDA at appropriate yield (YP multiplier) 3. Cross check with comps

Answer 17

Earnings before interest, taxation, depreciation and amortisation

Answer 18

* Where direct market evidence is limited or unavailable for specialist properties * Specialised sewage works, lighthouses, oil refineries etc

Answer 19

* Used for owner occupied properties * For accounts purposed for specialised properties * Also used for rating valuations of specialist properties

Answer 20

1. Value of land in its existing use 2. Add cost of replacing building a. + fees b. Less discount for depreciation and obsolescence/ deterioration

Answer 21

Physical Obsolescence – result of deterioration/ wear and tear over time Functional Obsolescence – design or specification no longer fulfils function for physical design Economic obsolescence – due to changing market conditions for use of the asset

Answer 22

DRC is not suitable for secured lending Can be used for calculations of MV for specialist properties only for valuations for Financial Statements

Answer 23

DRC used in private sector – should be accompanied by statement that it is adequately profitable DRC used in public sector – should be accompanied by statement that it is subject to the prospect and viability of the continued use and occupation. Valuer must state the market value for any readily identifiable alternative use, if higher or appropriate, a statement that the market value on cessation of the business would be materially lower

Answer 24

RICS Professional Standard: Depreciated Replacement Cost Method of Valuation for Financial report, 2018

Answer 25

* Most common purpose is for a specific valuation of a property holding to find the MC of the site based on Market inputs * At one moment in times, at the valuation date, for a particular purpose * This is a form of development appraisal * Can be based on a simple residential valuation of the DCF approach * All inputs are always taken at the date of valuation.

Answer 26

Market Value of completed development – total development costs – profit = land value

Answer 27

* MV of completed development at date of valuation * Valued at current date assuming present values and market conditions * Comparable method to establish rents and yields * All risk yield used * Allowance for rent-free period or tenants incentives used * Purchasers costs usually deducted for commercial properties

Answer 28

Site Preparation o Demolition, remediate works, landfill tax, site clearance etc. Planning Costs o CIL, S106, S.278 (Highway works), cost of planning applications, costs of planning consultant Construction costs Professional Fess – 10-15% + VAT o Architect, M&E Consultants, Project Managers Contingency – 5-10% of construction costs (Dependent on levels of risk) Marketing costs and Fees o EPC o NHBC warranty o Sales fee -1% of GDV, 10% of letting fee o Legal Fee 0.5% of GDV, 5% letting fee Finance Costs

Answer 29

* Bank of England Rate + Premium * Current SONIA Rate (Sterling Overnight Index Average) * Rate at which the developer can borrow money

Answer 30

* Site Purchase * Total Construction cost * Holding costs to cover voids

Answer 31

* Profit on Cost or Profit of GDV * If scheme low risk (pre-let or pre-sold) – lower return ma be required

Answer 32

Debt Finance – Lending money from a bank Equity Finance – selling shares in a company or JV partnership or own money used

Answer 33

* 60% loan to value * In difficult markets, could be 60% loan to cost

Answer 34

Senior debt o First level of borrowing, takes precedent over other forms of debt Mezzanine funding o Additional funding on top of senior – required for money over normal LTV ration Swaps o Form of derivative hedging rate for interest rates o Sway rate is the market interest rate for fixed rate, fixed term basis Joint Venture – 2 or more parties join to develop Forward Sales – scheme pre-sold

Answer 35

* Arrangement made for sharing any extra receipts received over and above the profits originally expected * Can be shared between vendor/ landowner and developer * Also known as clawback

Answer 36

Professional fees

Answer 37

The length of time it will take for development profit to be eroded by holding charges/ finance following completion of the scheme

Answer 38

* Importance of accurate information and inputs * Residual valuation foes not consider timing of cashflows * Very sensitive to minor adjustments * Implicit assumptions are hidden * Always cross-check with comparable site sales

Answer 39

1. Simple Sensitivity Analysis – On GDV/ Costs etc 2. Scenario Analysis – change scenarios, phasing 3. Monte Carlo simulation – using probability theory

Answer 40

RICS Professional Standard: Valuation of Development Property, 2019

Answer 41

* Comparable approach should be cross checked in line with residual value * For complex/ development – DCF should also be used. * Advice may also include to include: o Construction of building o Previously undeveloped land o Redevelopment of previous development land o Improvement or alteration of existing buildings or structure o Land allocation for development is statutory plan o Land allocated for a higher value use or higher density in statutory plan

Answer 42

The value arising from any expectation that future circumstances may change * Two examples are o Future prospect of securing planning permission for development plan o Realisation of marriage value from merger to two interests in land

Answer 43

* Created by a merger of interests – can be physical or tenurial * Undertaken before and after valuation and calculate the level of marriage value created * Typical negotiation outcome is to split the marriage value created 50/50 or divide it pro-rata to the value * Can also be known as synergistic value

Answer 44

* £0 to £150,000 – 0% * £150,001 to £250,000 – 2% * £250,001 + - 5%

Answer 45

* £0 to £125,000 – 0% * £125,001 to £250,000 – 2% * £250,001 to £925,000 - 5% * £925,001 to £1,500,000 – 10% * £1,500,001 + - 12%

Answer 46

* £0 to £300,000 – 0% * £300,001 to £500,000 – 5%

Answer 47

Annual Tax on Enveloped Dwellings o Aims to stop on-shore and off-shore individual using companies to avoid SDLT for resi properties o Current threshold is £500,000 o Revaluation is required every 5 years

Answer 48

* When landlord/ tenant surrenders a lease and agrees to grant a new lease with different lease terms * Calculation of a premium to reflect change in value of leasehold interest * Need to value before & after leasehold interest

Answer 49

Charities Act 2022 – following the Charities Act 2011 o Valuation report must be done to dispose of an asset (in accordance with Section 119) o Report must confirm that the Charity has obtained best terms for sale

Answer 50

“A particular buyer for whom a particular asset has special value because of advantage arising from its ownership that would not be available to other buyers in the market” o Special value is an amount that reflects particular attributes of an asset that are only available to a special purchaser o Could be physical, functional or economic o Special value may be generated when the transaction is not at arms length transaction o E.g. tenant buying their freehold interest

Answer 51

* For building insurance purchase * Cost of reinstatement of building without a profit * Use BCIS – for construction costs * Add VAT, demolition, professional fees, planning & building regulation fees

Answer 52

* Ground rent is deducted from gross income to calculate net rent received * Capitalised at a yield for length of lease to create MV * DCF can also be used

Answer 53

Capital payment made by one party to another

Answer 54

Key money paid by an in-going tenant of a retail unit to secure a prime shop Sum to money to represent fixture and fittings within a building, paid by an in-going tenant Paid by an incoming tenant for a leasehold interest to represent the positive difference between passing rent and market rent, Can be reverse premium to a paid nu the out-going tenant to the new tenant Paid by the landlord to a tenant for the surrender of a leasehold interest and grant of new lease

Answer 55

* SDLT * Agent Fee * Legal Fee * VAT on agent and legal fees

Answer 56

Weighted Average Unexpired Lease Term – remaining to first break or expiry of a lease Used to calculate investment yield for multi-occupied buildings

Answer 57

Devaluing headline rent with rent free

Answer 58

* Straight line methods * Time weighted method * Use a DCF

Answer 59

* Stokes v Cambridge (1961) – determined 1/3rd uplift in development site value * Upper Tribunal suggests – ransom strip could be 15% to 50%

Answer 60

* It’s a valuation technique, not a method of valuation * Use to compare retail properties * 6.1m (20ft) zones – half back aera each zone * 9.14m (30ft) zones in prime London * Basement/ First Floor – usual held a A/10 – depending on comparable evidence * Return frontage – normally 10% uplift * Natural zoning – when property zones reflect physical changes e.g. steps

Answer 61

* Boundary wall between two or more different landowners * Party Wall Act 1996 – provides framework to resolve disputes in relation to party walls * There are specialist Chartered Surveyors who specialises in party wall disputes

Answer 62

RICS Professional Standard: Rights of Light, 2024 Rights of light arises after 20 years of uninterrupted enjoyment of light without the consent of a third party by way of an easement

Answer 63

Summarises regulatory requirements and industry recommendations for commissioning and providing the regular valuations of real estate held by investment vehicles such as collective investment schemes * Includes advice such as: o Outline of the regulations that apply to the valuations include in the report issues by investment vehicles o Summary of best practice procedures set by industry bodies for commissioning valuers and valuations o Summary of specific rules and professional standards that RICS-regulated firms and member must follow in accepting and undertaking o Expect behaviours of all parties involved in the valuations process

Answer 64

* Improve quality of valuation and ensure highest professional standards * To meet RICS requirements to self-regulate effectively * Protect and raise the status of the valuation professional as the leasing expertise in valuation

Answer 65

* Openness and transparency * RICS protection and International Valuation Standards * Expertise and clear reporting * World Class Regulation

Answer 66

Details on: o Type of valuations o Purpose of valuation o Number of valuations o Firm’s total fee income from Red Book Global valuations in the last year o What data sources used o Quality assurance audit procedure o History of any negligence claims

Answer 67

* FRI Lease: Tenant directly responsible for all repairs and insurance * Effective FRI Lease: Landlord handles certain obligations but passes the costs back to tenants through service charge

Answer 68

When you assume something the known not to be true, but is reasonable, viable and pre-agreed

Valuation (Methods) Flashcards

(92 cards)