Flashcards in Valuation COPY Deck (143)
What are the two commonly used financial reporting standards used in the UK?
IFRS (International Financial Reporting Standards); principles-based
UKGAAP (Generally Accepted Accounting Practice in the UK); rules-based
Why would you undertake research on flooding risks?
This may detrimentally impact on the marketability and valuation of the property as it may be difficult to or expensive to obtain insurance – use Environment Agency website to check the flooding risk
What is a valuation?
An opinion of the value of an asset or liability on a stated basis, at a specified date
What is the role of a valuer?
Red Book (Global): to assess value in the light of evidence normally obtained through analysis of comparable transactions.
What is the definition of an internal and external valuer?
Set out in RICS Valuation – Professional Standards 2018 (Red Book)
Internal Valuer – A valuer who is employed by: either the company that owns the assets, or the accounting firm responsible for preparing the company’s financial records. Valuation if for internal use only with no third-party reliance. Generally capable of meeting the requirements of independence and professional objectivity in PS 2, but may not always be able to satisfy additional criteria for independence specific to certain types of assignment.
External Valuer – has no material links with the client, agent or asset to be valued.
What makes up the Purchaser’s Costs?
Blended rate 4.99% (max.) SDLT
1% Agent fees +VAT
0.5% Legal fees +VAT
What is a yield?
Yield are a measure of investment return. They show the income expressed as a percentage of capital invested.
(Income / price) x 100
Yields are growth implicit
Explicit and Implicit Growth – What is the difference?
It refers to how the prospect of future rental growth, beyond the Estimated Rental Value at the valuation date, is considered in the valuation.
Implicit* means the prospect for rental growth is factored into the yield, therefore if there is anticipation rents will improve over the coming years from the existing ERV today, an investor will pay a keener (smaller) yield in anticipation of a larger yield becoming receivable in the near future.
Explicit means the prospect for rental growth is factored into the expected rental cashflow, by “growing the rent” manually from the current ERV to predicted future levels using informed assumptions. In other words the rent is grown “explicitly” from its ERV today.
*In Investment Valuation, unless requested otherwise, we use factual information as at the valuation date. Our valuations are therefore growth Implicit**
Before commencing a valuation instruction, what three steps must you first undertake?
Competence – do you have correct levels of skills, understanding and knowledge? (SUK). If not, refer to RICS Find a Surveyor tool
Independence – check for any conflicts or personal interests
Terms of Engagement – set out in writing full confirmation of instructions prior to starting work
confirm competence of valuer
the extent and limitations of valuer’s inspections must be stated
What statutory due diligence are you required to carry out when undertaking a valuation, and why?
To check that there are no material matters which could impact the valuation.
Asbestos register, business rates/council tax, contamination, Equality Act compliance, environmental matters (high voltage power lines, electricity sub-stations, telecom masts etc), flooding, H&S compliance, fire safety compliance, highways (check roads adopted), legal title and tenure (check boundaries, ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves), public rights of way (from an OS sheet), planning history and compliance (check any onerous planning conditions, conservation area, listed, whether subject to s.106/CIL)
What would be the timeline of a valuation instruction?
1. Receive instructions from client
2. Competence (Skill, Understanding, Knowledge)
3. Independence f
4. Terms of engagement to the client (CIT)
5. Receive terms of engagement signed by client
6. Gather information – leases, title documents, planning information, OS plans etc.
7. Undertake due diligence – check information for any adverse material matters
8. Inspect and measure
9. Research market and assemble, verify and analyse comparables
10. Undertake valuation
11. Draft report
12. Have valuation and report considered by another surveyor for checking purposes
13. Finalise and sign report
14. Report to client
15. Issue invoice
16. Ensure valuation file in good order for archiving
What are the five main methods of valuation?
1. Comparative method
2. Investment method
3. Residual method
4. Profit method
5. Depreciated Replacement Cost method (Contractors)
What are the widely accepted valuation approaches under the IVS 105?
Income approach – converting current/future cash flows into a capital value (i.e. Investment, Residual, Profits method)
Cost approach – reference to the cost of constructing the asset (i.e. Contractors/DRC method)
Market approach – using comparable evidence (i.e. Comparable method)
What is the methodology of the Comparable method of valuation?
1. Identify comparables
2. Verify details, analyse headline rent to give net effective rent
3. Assemble comparables in a schedule; matrix with weighting
4. Adjust comparables
5. Analyse comparables to form an opinion of value, stand back and look
6. Report value
What RICS guidance would you have regard to when using the comparable method?
New Guidance Note (Comparable Evidence in Real Estate Valuation 2019) published in October 2019.
1. principles of the use of comparable evidence
2. encourage consistency
3. issues of availability of comparable evidence
4. potential sources
RICS Information Paper on Comparable Evidence in Property Valuation 2012 (ARCHIVED in 2018, but still useful)
How do you find relevant comparables?
Inspection of an area to find agent’s boards
Visit/speak to local agents
Auction results (beware that these are gross prices, and may also be special purchaser/insolvency sale)
In house records
Databases and websites, such as EGi, CoStar, Rightmove, Lonres
How would you analyse rent free periods and headline rents?
The process of devaluing a headline rent with a rent-free period to equal a net effective rent
3 months fit out is typically deduct from rent-free period as its market standard
1. Straight line method (either until lease expiry or next rent review/lease event)
2. Use of DCF
What is the headline rent?
The rent payable under lease terms after all incentives have expired, such as a rent-free period.
It is an artificially inflated value. Does not represent the true market rental value, however helps to sustain the capital value of the property particularly as rent reviews are upwards only.
Tenant agrees to this as they benefit from a relief period via the incentives.
What is price?
Actual observable price in the open market.
What is value?
An estimate of the price that would be achieved if a property were sold in the market.
What is worth?
A specific investor’s perception of the sum he would be prepared to pay (or accept).
What is net effective rent? How is it calculated?
The headline rent minus any incentives, to lease expiry or next lease event.
Rent x (Term – Rent Free)
What is the hierarchy of rental evidence?
The relative weight attached to different types of evidence
1. Open market lettings
2. Lease renewals
3. Rent reviews
4. Third party determinations (independent expert)
5. Sale and leasebacks
6. Asking rents
What is the investment method of valuation?
Used when there is an income stream to value. The income is capitalised using a yield to produce a capital value
Conventional method assumes growth implicit approach – implied growth rate is derived from the market capitalisation rate (yield).
How do you choose which investment method approach you will use?
Depends on several factors, including:
- Establish if over- under- or rack-rented
- Company preferences and software
- The reversion in terms of time and rental value
What are the different types of methodologies you would use with the investment method?
Term and Reversion
Hardcore and layer method
Hardcore and top slice method
Tell us about the conventional method
Rent received or Market Rent x YP = Market Value (rent/yield comparables important)
Growth is implicit in the yield.
Tell us about the term and reversion method
It is used for REVERSIONARY (under-rented) investments
Income flow is divided vertically.
Term (passing rent) is capitalised until next lease event (review/expiry) at an INITIAL yield
Reversion to Market Rent valued in perpetuity at a reversionary yield
There is a yield differential; term at a keener yield to reflect lower risk.
Tell us about the hardcore and layer method
It is used for REVERSIONARY (under-rented) properties. Typically used by the institutional investment market, and used when the reversion is close in time.
Income flow is divided horizontally. Both the hardcore (PR) and layer (MR-PR) are valued into perpetuity, but the layer is deferred to the next lease event.
An Equivalent Yield is applied to both the hardcore and layer.
Argus Val Cap uses this method.