Valuations & Loan Security Valuations Questions and Answers

Valuations & Loan Security Valuations Questions and Answers How does an equivalent yield differ from a net initial yield? Both single metrics, albeit net intitial yield does not account for rental fluctuations or void periods. In a discounted cash flow, what is the discount rate applied? The IRR. In targeted - set specific by a investor. If using DCF to detemine DCF output, the NPV will calcualte to £0, providing the appropriate IRR. How is the Equivalent Yield impacted by Capex within the DCF? Present Value of future cash flows is adversly impacted due to increase capital expenditure. Given that EY is calculated via arriving at a NPV of £0 and the PV of the cash flow is lower this means that the EY will be lower. Imagine two properties with identical rental income, but one requires significant CAPEX for maintenance. The property with the higher CAPEX will have lower cash flows, a lower present value, and therefore a lower equivalent yield, even though the rental income is the same. What is the Net Present Value (in DCF)? The present value of all cash flows received from an investment, including all inflows and outflows and including any initial outflow, where each receipt/payment is discounted to its present value at the discount rate. What does PS 1 of red book relate to? Compliance with standards and practice statements where written valuation is provided. What does PS 2 of red book realte to? Ethics Competency Objective Disclosure. What do VPS 1 to VPS 6 relate to? VPS 1 - TOE VPS 2 - Bases of value, assumptions and special assumptions VPS 3 - Approaches and Methods VPS 4 - Inspection, investigations and records VPS 5 - Models VPS 6 - Reporting What is recorded in TOE minimally for Valuation 1. Valuer and stuatus 2. Clinets 3. Other intended uses 4. Assets 5. Purpose 6. Basis 7. Currency 8. Valuation date 9. Values work and limitations 10. Natuer of sources to be relied upon 11. Assumptions and special assumptions 12. Format of report 13. Restrictions for use 14. Confirmation taken in accordance with Red Book 15. Bases of fee. 16. CHP 17. Liability and cap 18. Statement valuation subject to monitoring and compliance 19. Consideration of ESG - NEW What is Fair Value Identified in IFRS 13 The price would be recieved to sell an asset or paid to transfer liabiity in orderly transaction between market pariticpants at measurement date. What is minimum requirement in valuation report? (HINT 17) 1. Valuer (including status) 2. Client and intended users 3. Purpose 4. Asset 5. Bases of value 6. Valuation date 7. Extent of investigation / limitation 8. Nature and sources of information 9. Assumptions and special assumptions 10. restrictions on use. 11. instruction undertaken in accordance with Red Book / IVS 12. Valuation approah and reasoning 13. Valuation figures 14. Date of valuation report 15. Comment on market valuation uncertainty in relation to valuation 16. limitations on liability agreed 17. ESG factors. What additional information included in valuation for secured lending? 1. Involvement of any invovlement in TOE or arrangement if agreed with client for managing COI. Alternatively that no COI. 2. Valuation methodology adopted. 3. Where recent transaction on property occurred - how this information has been accepted as Market Value. 4. Environmental 5. Suitability for seucred lending. 6. Factors that could influence Market Value 7. what else enquiries undertaken. 8. difference between MV with and without MV subject to SA. What are the important UK Valuation Practice Guidance Applications in the UK supplement to the Red Book? VPGA 1 - Financial Reporting VPGA 8 - Charity assets VPGA 10 - Secured lending purposes VPGA 11 - Residential VPGA 14 - Registeered social housing for loan security purposes. VPGA 15 - Valuation for CGT, Inheritatance, SDLT and ATED. What does VPS 3 in UK Supplement relate to? Valuations for REGULATED PURPOSES. Some Regulated purposes: Financial Reporting Inclusion of proposectuses and circulars to be issued by UK companies (Used to communicate to shareholders) Takeovers / Mergers Authorised collective investment schemes (scheme when investors can pool assets) - Regulated by FCA Unauthorised collective investment schemes. Result of PPG review - Need to rotate the valuers!!! Also need to ask valuers about involvement of parties And record drafts What are the rotation guidelines under VPS 3 for regulated purpose valuations? 1. Max period of 10 years before valuing for different firm (can include multiple engagements) 2. Maximum single engagement of 5 years 3. Maximum period of.5 years before rotiation of individual valuer 4. Maximum 3 year break What are some of the recommendaitons from PPG review? 13 in totoal Rotation of valuers and firms Incorproate DCF Audit trails Valuation Assurance Committee (now set up) What is hope value? Value arising from expectation of future circumstances affecting the property change. What is marriage value? Additional value from the merger of two interests. Additional value above the conjunction of the values of two individual interests respectively. What is ATED Annual Tax on Enveloped Dwellings Provision to stop on-shore and off-shore indiviudals using companies to avoid paying SDLT on residential property. £500,000 threshold - revals every 5 years. What is a special purchaser? Particular purchaser for whom the asset has partticular special value because of advantages from its ownership not available to other buyers on the market. What is special value? Amount that reflects particular attributes of an asset only available to special purchaser. What do you need to become a Registered Valuer? Level 3 competency Nature of valuations including types and purposes Highest valuation figure requested - same reported to PII Firms fee from red book vals Data sources quality assurance and audit procedures History of any negligence. RICS monitor through risk based reviews from desktops and site based regulatory reviews - dependent on risk. How do you calculate WAULT? For each occupier - Rent x remaining lease term. Sum for all tenants and then divide by total rent. Example: £100,000 x 10 years = £1,000,000 £100,000 x 5 years = £500,000 £1.5 million / £200,000 = 7.5 years; How to calculate Net Effecitve Rent? Total Rent less incentives (rent free or capital) divided by term. Can then adjust to discount back to PV.