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Valuation > Level 1 > Flashcards

Level 1 Flashcards

1
Q

Market Value?

A

The estimated amount for which an asset or a liability should exchange:
On the valuation date
Between a willing buyer and a willing seller
In an arms length transaction
After proper marketing
Where each party has acted knowledgeably, prudently and without compulsion

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2
Q

Fair value?

A 
The price that would be received to:
Sell an asset
Or paid to transfer a liability 
In an orderly transaction 
Between market participants 
On the measurement date
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3
Q

Market rent?

A

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 arms length transaction
After proper marketing
Where each party has acted knowledgable, prudently and without compulsion

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4
Q

Investment value?

A

The value of an asset:
To an owner or prospective owner
For individual investment or operational objectives

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5
Q

Equitable value (IVS 104)?

A

The estimated price for the transfer of an asset or liability, between identified, knowledgable and willing parties, which reflects the respective interests of each party

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6
Q

Liquidation Value?

A

The value of a group of assets sold in a piecemeal basis taking into account the costs of getting the assets into a saleable condition

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7
Q

What are the different purposes of valuation?

A
  1. Purchase and Sale/ Leasing and Letting
  2. Loan Security
  3. Accounts
  4. Tax (Ratings, CGT, Inheritance Tax)
  5. CPO
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8
Q

What are the different bases of value?

A
  1. Market Rent
  2. Market Value
  3. Fair Value
  4. Investment Value (“worth”)
  5. Equitable Value (not used in UK)
  6. Liquidation Value (not used in UK)
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9
Q

What are the 5 methods of valuation?

A
  1. Comparable
  2. Investment
  3. Residual
  4. Profits
  5. Depreciated Replacement Cost (DRC)
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10
Q

What are the different approaches to the investment method?

A
  1. Term and Reversion
  2. Hardcore and Layer
  3. Hardcore and Topslice
  4. Discounted Cash flow
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11
Q

What are the first steps before starting a valuation instruction?

A
  1. Check competence
  2. Check for COI
  3. Agree ToE
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12
Q

What is the hierarchy of evidence?

A
  1. OML
  2. LR
  3. RR
  4. Independent Expert Determination
  5. Arbitrator’s Award
  6. Sale and Leasebacks
  7. Inter-company Transactions
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13
Q

In the new RICS GN ‘Comparable Evidence in Real Estate Valuation’ (2019) what is the guidance regarding hierarchy of evidence?

A
  1. Direct Transactional Evidence
  2. General Market Data
  3. Other Sources
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14
Q

What is the timeline of a valuation instruction?

A
  1. Take instructions, check competence, COI, and agree ToE
  2. Desk-top review
  3. Inspect/measure
  4. Collect comps
  5. Analyse comps and value
  6. Peer review
  7. Complete report and issue to client
  8. Maintain records
  9. Request feedback
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15
Q

What are some key considerations when determining a property’s perceived risks?

A
  1. Property risk
  2. Covenant risk
  3. Unexpired Term
  4. Investor demand
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16
Q

What are the key factors that affect value?

A
  • covenant strength
  • unexpired term
  • over/under rented
  • age
  • location
  • accommodation spec/layout/split floor potential
  • state of repair
  • alternative use potential
  • investor demand
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17
Q

What is the income approach to valuation?

A

Considering a property’s future income stream and capitalising this at an appropriate rate to yield a capital value

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18
Q

What is the term and reversion approach to investment valuation?

A

Analysing the property’s income stream by separating it vertically, having regard to the current rent during a specified term, and the total rental income after a reversion to market rent after rent review/renewal and applying different capitalisation rates to the two income streams to reflect the perceived risk attached to each

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19
Q

When is the investment method used?

A

When valuing properties held as investments, where there is an income stream

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20
Q

What type of valuation method is the investment method, in terms of how it treats risk and growth?

A

Term/Reversion and Hardcore approaches are growth implicit, reflecting risk and income growth implicit through the appropriate yield.

Discounted cashflow is growth explicit, factoring in the expected yearly growth

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21
Q

What is the difference between the hardcore and layer, and hardcore and top slice method?

A

Hardcore and Layer:
Used where the current rent < market rent, where the reversion is in the near future, using an EY.
Used to value assets being valued for the institutional investment market.
The income is split horizontally to reflect the ‘hardcore’ rent on the bottom (which is consistent into perpetuity), and the ‘layer’ reflects the reversionary portion of the income that is paid after RR/LR/.

Hardcore and Top Slice:
Used when valuing over-rented properties, usually using an NIY (i.e. market yield used for hardcore).
The income is split horizontally to reflect the ‘hardcore’ rent on the bottom, and the ‘top slice’ is the portion of over-rent, payable only until RR, LR, LEX.

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22
Q

What is the maths behind the Term and Reversion technique?

A
  • Split the income flows vertically to represent the full rent being paid until the next lease event (term), and then the full rent after the lease event (reversion) (assumed to be market rent).

[TERM]
1. Capitalise the term using YP formula x rent, over the no. of years of the term, using a keener yield to reflect less risk
[REVERSION]
2. Capitalise the reversion into perpetuity (using YP in perp), at a softer yield to reflect risk, and defer this back using PV
3. Add the two together, stand back and look!

e.g.
[(YP at a keener yield, for the no. of years of the term) x Rent]
+
PV (at a riskier yield to reflect risk) x [YP perp x Rent]

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23
Q

What is the maths behind the Hardcore and Layer technique?

A
  • Split the income flows horizontally to reflect the rent being paid indefinitely (hardcore), and the additional portion of the rent that the rent steps up to after reversion (layer)

[HARDCORE]
1. Capitalise the hardcore rent into perpetuity using YP perp at a keener yield.
[LAYER]
2. Capitalise the reversionary portion of the rent (layer) into perpetuity (YP in perp) at a softer yield to reflect risk, and defer this back using PV.
3. Add together and stand back and look!

e.g.
[YP in perp at keener yield x rent] + [PV x (YP in perp at softer yield x rent)]

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24
Q

What is the maths behind the Hardcore and Topslice technique?

A
  • Split the income flows horizontally to reflect the rent being paid indefinitely (hardcore), and the portion of overrent currently being paid until the next lease event (top slice)

[HARDCORE]
1. Capitalise the hardcore rent into perpetuity using YP in perp at a keener yield
[TOP SLICE]
2. Capitalise the over rent (top slice) until the next lease event at a softer yield to reflect risk of default.
3. Add together and stand back

e.g.
[YP in perp x rent] + [YP for no. of yrs until next lease event x rent]

25
Q

What is the formula for YP?

A

1 - (1 + i)^ -n / i

26
Q

What is the formula for PV?

A

(1 + i)^ -n

27
Q

What is the formula for into perpetuity?

A

1 / i

28
Q

What is the formula for YP into perp?

A

1 / i x Rent

29
Q

What is a Year’s Purchase?

A

The number of years required for a property’s income to yield its purchase price

30
Q

What is the definition of Present Value?

A

The current value of a future sum of money/stream of cashflows, given a specified rate of return

31
Q

What is a Nominal Yield?

A

Initial yield assuming rent is paid annually in arrears

32
Q

What is a Gross Initial Yield?

A

The initial yield (rent/price) not yet adjusted for purchaser’s costs

33
Q

What is a Net Initial Yield?

A

The resulting yield after having deducted purchaser’s costs (rent / price)

34
Q

What is an Equivalent Yield?

A

The average weighted yield between the term and reversion (i.e. average between NIY and RY)

35
Q

What is an Initial Yield?

A

Simple income yield for current income and current price

36
Q

What is a Reversionary Yield?

A

Market Rent / Price of a reversionary investment property

37
Q

What is a Running Yield?

A

The yield at one particular moment in time

38
Q

What is a Discounted Cash Flow?

A

A projection of estimated cashflows over a specific period, explicitly factoring in any anticipated risk or growth, and then discounting this cashflow back to the present day at a target rate of return that reflects the level of risk.
Used for specialised properties with limited comparable evidence e.g. Data Centres, or for ratings or short leaseholds

39
Q

When is a DCF used?

A

Typically used where the purpose of the valuation is to estimate the value of the property to a particular investor (‘investment value’).

40
Q

Can a DCF be used to provide Market Value?

A

Only where the valuer can prove that all inputs and assumptions are market-facing

41
Q

How are DCFs used in corporate real estate?

A

In corporate Real Estate DCFs are used for decision-making, as to whether or not an investor should buy an asset. This decision is based on the differences between the Market Value and the Investment Value (using DCF).
Where the property’s Investment Value is considered to exceed MV, it is a worthwhile investment to the investor.

42
Q

Is Investment Value the same as Market Value?

A

It will almost always differ because everyone has different income requirements/expectations/attitudes towards risk etc.

43
Q

What is an Equated Yield?

A

The growth-explicit discount rate or internal rate of return which is used to capitalise the projected cashflows to determine the present value which is equal to the capital outlay (where NPV=0).

44
Q

What is the Target Rate of Return?

A

It is the capitalisation rate that reflects an investor’s overall target return on investment (typically either prescribed, or derived from market comps).

45
Q

What is the TRR made up of?

A
  • risk-free rate
  • generic property market risk
  • risks for that particular property
46
Q

Over what period are DCFs typically projected and why?

A

Typically 5-15 years. Otherwise, the discounting into the future makes the sum negligible and the overall risk analysis becomes too unreliable.

47
Q

What are the main outcomes of a DCF?

A
  1. Establishing NPV

2. Establishing IRR

48
Q

What is an Exit Yield?

A

The cap rate used to capitalise the final year’s net income stream to determine the exit value at the end of the holding period. This cap rate reflects anticipated market conditions and anticipated condition of the investment.

49
Q

What is the Net Present Value?

A

The sum of the discounted cash flows of the project. Used to determine whether an investment gives a positive return against the target rate.
Where NPV > 0, TRR has been met.

50
Q

What is the Internal Rate of Return?

A

The rate of return at which all future cashflows must be discounted to produce an NPV of zero.

51
Q

What is the Profits Method?

A

Method used to value trade-related properties based on their income-producing ability.

52
Q

What type of properties do you value using the Profits Method?

A
  • pubs
  • clubs
  • bars
  • restaurants
  • health centres
  • nursing homes
  • golf ranges
  • leisure centre
  • hotels
  • petrol stations
  • car showrooms
  • nurseries
    etc.
53
Q

How do you undertake the profits method of valuation?

A
  1. Get 3 years accounts
  2. Determine Fair Maintainable Trade (FMT)
  3. Deduct costs/expenses to calculate Fair Maintainable Operating Profit for a reasonably efficient operator (FMOP)
  4. FMOP x YP = Capital Value
54
Q

Under the Profits Method, how do you determine the Fair Maintainable Operating Profit?

A 
Annual turnover
- 
Costs/Purchases
= GROSS PROFIT
- 
Reasonable Working Expenses
= UNADJUSTED NET PROFIT
-
Operator's Remuneration 
=ADJUSTED NET PROFIT (FMOP/EBITDA)
55
Q

How do you determine the rental value under the Profits Method?

A

FMOP = divisible balance

FMOP split 50/50 between LL and T

56
Q

What is the Depreciate Replacement Cost method of valuation?

A

It is a method based on the concept of substitution and that an investor would not pay more for an asset that the price at which they could purchase an identical/similar equivalent.

57
Q

How do you value a property using the DRC method?

A
  1. Determine cost of replacing the building with a ‘modern equivalent’
    • depreciation for physical/functional obsolescence
    • Land value
58
Q

When would you use the DRC method to value?

A

For the valuation of:

  • owner-occupied buildings
  • specialised assets (accounts/rating valuations)
59
Q

What is the difference between the basis of value under UK GAAP and IFRS?

A

Accountants and chartered surveyors consider that Fair Value as defined by both IFRS 13 and FRS 102 are the same, the terminology used under FRS 102 is slightly closer to the IVS definition of fair value (equitable value) which required the respective interests of the parties to the transaction, to be reflected (closer to definition of investment value), whereas fair value under IFRS 13 is a market-based measurement, looking to the best and highest use determined by market participants (With focus on the exit price to sell an asset, as compared with Market Value which looks at the price an investor would pay to buy that asset)

Valuation (3 decks)

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