Bits of Valuation Theory

Flashcards by , created almost 6 years ago

Valuation and Investment (Calculations) Flashcards on Bits of Valuation Theory, created by amywinzer9 on 07/25/2013.

Created by amywinzer9 almost 6 years ago
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Question Answer
Name some differences between the property market and other investment markets... 1. Different sectors (residential, commercial etc) 2. Different interests (f-hold, l-hold, leases) 3. Different characteristics (b'rooms, space, sizes, location, garden etc etc) 4. Property is a tangible asset 5. Can be slower to sell then other investment types (immobility) 6. Range of operators (investors, developers,
What are some merits of the property market for investing in? 1. Security 2. Capital Growth along with rental income which also grows 3. It's a slow moving and non-volatile market 4. You can use property as collateral to raise money 5. Kudos comes with owning property
What causes change in rental value? 1. Supply and demand - may change due to development or planning permission given in locality 2. Economy in general 3. Occupier confidence e.g. rental value may be reduced if tenants are nervous about the owner selling or something 4. Geographical factors (e.g. improving/worsening access for example)
What can cause changes in yields? 1. Investor appetite - if the market is bad lots of investors may still want to buy as they can sell when market is improved however rents will be low due to market so yield is low. 2. availability/cost of finance 3. Local reasons e.g. if a big supermarket is being built nearby yields may be pushed up whilst the workers rent properties in the local area.
what can cause changes in land value? 1. market 2. availability of finance/cost of finance 3. taxation changes e.g. if stamp duty was changed may cause property to be worth more/less especially around the barrier marks.
Name 6 reasons why we have valuations: 1. To help with disputes/divorces etc 2. For tax reasons 3. to put a property on the sale/rental market 4. for rates/council tax reasons 5. for insurance reasons 6. for mortgages
Name some necessary things for the comparative method of valuation... Examples must be physically similar. '' '' of a similar legal interest '' '' in a similar area There must be several recent transactions. It must be a relatively stable market. This is used for selling valuations, rent reviews, choosing an initial rent.
Name the five investment methods: 1. Comparative 2. Investment (Term and reversion OR DCF) 3. Residual valuation 4. Profits method 5. Cost-based
What will the 'amount of £1' end up as? Always greater than 1 - it is the value of an annual investment of £1 at the end of the investment period.
What will the 'PV (Present Value) of £1 end up as? Always less than £1 - if you had £1 now it is what that £1 is technically worth after that period of years/time.
Investment Method: Traditional Approach! Rent: £245,000. All risks yield: 7% How do you do the valuation? Rent £245,000 x YP Perp @ 7% 14.286 _______ £3,500,070 say value of £3,500,000
Investment method: Term and Reversion. Property just let @ £245,000pa on FRI terms for 25 years. Market rent nearby is £255,000 on similar terms. A similar property has been sold nearby at a yield of 7%. How would you do a valuation? Term: Rental Income £245,000 YP for 5 yrs @ 6.5% 4.1557 (this is adjusted from 7% to be an ARY) ________ Reversion Rental Income £255,000 YPperp def. for 5 yrs @ 7%=10.18552 This 10.18552 is YP @ 7% multiplied by PV of £1 in 5 years at 7% ________ Once you have done the two multiplications (rounded off by the lines) just add these two figures together to get the capital value.
Name the two criticisms for the traditional approach of the investment method: 1. You only use current rental figures to calculate the capital value. 2. Particular investment characteristics are ONLY reflected in the all risks yield chosen. (This can vary a lot and is not very transparent.)
Why is the DCF approach of the investment method better? 1. It assesses timing of cash flows and present value of cash flows in the future. 2. There is a specific allowance for rental growth 3. Can use investors required rate of return within calculations.
How do you get an exit value for the end of a DCF valuation? Multiply rental value x YP Perp for Xyears at yield%, then multiply that by PV @ yield% figure.
What are the 6 headings in the DCF table? 1. Years/time period 2. Rent p.a 3. Rental growth @ whatever% 4. YP @ whatever% 5. PV of £1 @ whatever% 6. NPV. % rate for PV and YP = the percentage rate for these is the percentage cost of capital or percentage target rate of return.
When looking up the PV for a DCF table what amount of years should you use? For example if the time period is 6-10 years. You should use the year when the last rent review was done. For example for 6-10 it is likely to be 5 years.
How do you do an IRR valuation? You do a DCF table. If it gives you a positive figure you then do another DCF table with a higher yield (which should give you a lower NPV, hopefully negative). You then do the calculation between these two figures to give you an exact IRR. (Michelle will send me calculation formula for the last bit).
What effect should different yields have when doing DCF/IRR? A lower yield will give a higher NPV. A higher yield will give a lower NPV (more likely to be negative.)
Do leaseholds or freeholds have higher yields and why? Leaseholds have a higher yield because they are a depreciating asset and there is nothing to sell at the end.
If no exact sinking fund and tax rate are given what figures should you use? Sinking Fund - 3% Tax - 30%
How do you value a head leasehold? Find the profit rent (aka the rent you are paid minus the rent you pay). You then YP for however many years @ the yield. (It may also have a sf of 3% and tax rate of 30%).