VAL EXAM

define & example of:

Property market cycle

refers to the fluctuations in property value that occur over time due to economic conditions

an example is the 2020-2022 national boom, fuelled by record-low interest rates and pandemic driven desires for larger homes, national property values skyrocketed. However, the growth period was halted in early 2022 as the RBA began a cycle of harsh interest rate increases to combat inflation, reducing borrowing capacity, subsequently causing property price decline.

define:

Gross Rent / potential Gross Income

the total income expected to be derived from a property at full occupancy

“the total income attributable to a real property at full occupancy” API 2007

define & example of:

1. Lease Renewal and 2. Option Term

1. an agreement to continue a lease beyond it’s initial expiration date.

2. a pre-negotiated clause giving the tenant the right to extend the lease for a specified period of time

in property valuation, these determine the WALE which directly impacts a property’s risk profile, marketability and value, as a longer WALE signifies a secured, predictable income.

define:

Net Rent

the actual or anticipated net income remaining once all outgoings are deducted from the gross rent

define & example of:

Mortgage

a legal agreement where a lenders provides funds to a borrower for purchasing real estate, with the purchased property serving as collateral for the loan

for example, you purchase a property for $50,000 and require a $40,000 loan, but the bank determines the property’s market value at only $45,000, the Loan-to-value ratio will increase and subsequently the bank won’t loan you the full amount you require

define:

Face Rent

the rent nominated on the lease

define & example of:

Economic Life of a Building

the economic life of a building is the duration in which it remains useful, valuable and able to generate income before obsolescence. It’s crucial for determining depreciation and future value assessments

an example is a CBD office, built in the 1990s which generates strong income for the first 20 years. By 2026 though, it suffers functional obsolescence as modern tenants require modern, top of the range facilities, tech and layouts.

define:

Effective Rent

the actual net income after deducted the value of incentives / without any incentives

Define this type of obsolescence/deterioration?

the loss of property value due to wear and tear, age, or structural damage (e.g. peeling wall paint or rotted supporting beam)

physical deterioration

Define this type of obsolescence/deterioration?

A loss in value because a property’s design, layout, or amenities are outdated. It fails to meet modern consumer preferences or building standards (e.g. a house with a closed floor plan)

functional obsolescence

Define this type of obsolescence/deterioration?

A loss of value caused by factors entirely outside the property lines, such as changes in the surrounding neighbourhood, zoning laws, or the local economy (e.g. a loud highway being built nearby or a factory polluting the local air)

economic obsolescence

fill-in the blank:

“____ occurs when an improvement has a value less than the cost to replace it or to reproduce it.” (Whipple, 2006, p.469)

depreciation

define & example of:

Capital Expenditure

capital expenditure refers to the funds a business/property owner/developer spends to acquire, upgrade or extend the useful life of an asset

For example, in real estate capital expenditure is often significant one-time investments that increase the property’s value, such as replacing a worn-out roof.

define:

Economic Rent

the rent needed to make a new development financially viable

define & example of:

Active Real Estate Market

a market with high demand, low inventory and strong/fast transaction rates

e.g. A CBD located luxury hotel, as it’s typically located in a high-demand area, attracting frequent transactions making it part of an active real estate market

define:

Vacancy Rate

the ratio of vacant space and lettable space

Why is valuation a professional service?

• have practical experience and achieved formal valuer registration

• act independently, with integrity, diligence, skill & professionalism

• act on clients lawful instructions and within legal frameworks

• charge a fee for services provided

• provide an estimate of value at a specified valuation date

• use sound reasoning, technique & logic to minimise human error/bias

Define the value type:

the value of a property/asset to a particular, current and ongoing user/use

existing use value

define the value type:

the estimated value for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”

market value

How is market value derived?

= value of land + improvements + extras

define the value type:

the value of a tenant’s right to use and occupy property for a fixed period

leasehold value

determine the following process:

a dynamic process through with a specific real estate asset’s final selling price is determined

price formation process

1. market baseline determined

2. asking price established

3. buyers evaluations and offers provided

4. final transaction

The valuation of a property in a specific market needs to…?

simulate the price formation process that may possibly/would occur within the specific property market

define:

Easement

a legal right that allows someone else (like a neighbour, a utility company, or the local council) to use a specific portion of your property for a particular purpose, without owning it - typically pertains to access or support rights

e.g. rights to support of building, rights to light and air, rights to discharge water, rights of way

what is the significance of an anticipated sale price for a property that has not yet closed?

an anticipated sale price is significant as it indicates a buyers interest and can serve as a comparable for future valuations, even if the sale is still pending.

Political influence on property include all of the following but also not…?

• Tax burdens

• Special assessments

• Zoning, building and housing codes

NOT!: Changes in property use

what aspects of sales evidence are and aren’t of importance to a valuer when establishing sales evidence comparability?

ARE

• physical characteristics

• amenity and public services

• financing terms

AREN’T

• the sales evidence’s previous valuation

Why do residential valuers specialise by location such as local market?

• location specific factors and information cost

• local knowledge and cost of learning

• judgement quality being experienced based

what is the primary reason for which residential valuers specialise in local markets?

REASON

• residential valuers focus on local markets due to location specific factors and the cost of acquiring local information and knowledge, which enhances their valuation accuracy

NOT THE REASON

• historical property values without local context

• standardised valuation methods across regions

• global market trends and economic forecasts

define:

Leasing Incentive

financial or non-financial concessions offered by a landlord to attract or retain tenants, such as rent-free or rent-reduced periods or fit-out contributions. It’s important that a valuer if aware of any incentives to determine the effective rent

define:

Effective Gross Income

“the anticipated income from all operations of real property, adjusted for vacancy and credit losses” API 2007

define:

Net Operating Income

“the actual or anticipated net income remaining after deducting all operating expenses from effective gross income, but before deducting mortgage debt service” API 2007

define:

Lease

a contract that sets out the rights and obligations of lessor and lessee in respect to the rental of a real property

define:

Outgoings

the periodic expenses necessary for operating and maintaining a property’s income production

e.g. land tax, council rates, insurance

recoverable vs non-recoverable outgoings - defined by T&Cs of lease contract

define & example of:

Units of Comparison

specific metrics and units of value derived from market transactions that are used as a basis of common denomination when comparing property values or rental incomes from dissimilar properties.

They are essential to the direct comparison approach, allowing for properties, that for example, differ in land size, to be compared by the $ per sqm instead of total land size.

define & example of:

Native title

The legal recognition that Indigenous peoples have traditional rights and interests in lands and waters stemming from their traditional laws and customs. The existence of potential claim of this can restrict how land can be developed, transferred and utilised. Valuers must identify these factors as a substantial risk discount and possible affect on the site’s ‘highest and best use’.

For example, a large undeveloped land parcel being valued for mining use could have it’s development proposal frozen due to existence of this.

Define & example of:

Adjustment grid method

a systematic matrix tool where a subject property is valued alongside comparable sales evidence, applying $ or % adjustments to the comparable sales to account for differences, bringing objective & transparent math to the comparison process.

For example, a valuer will adjust a comparable property’s sale price if it features an inferior garage to the subject property

define:

Market Price

represents the actual price a property successfully sells for under current conditions, heavily influenced by buyer demand, local supply, and broader economic factors.

a historical fact vs market value which is an estimation of what it should sell for

Does it matter if a valuer’s valuation is different from the property’s market price?

only if the valuer was negligent or incompetent in undertaking the task

Who is and isn’t considered a stakeholder in an investment property valuation process?

is

• architect/designer

• investor

• tenant

• lender

• agents/valuers

isn’t

• craftsperson

• trade

define & example of:

Planning efficiency

planning efficiency focuses on maximising the ratio of usable (lettable) area to total area. Circulation space (corridor, lobby, stairwell) is a non-income producing space, t/f circulation space must be minimised (lessened) for improve layout efficiency

define & example of:

Turnover Rent

refers to a common retail rental arrangement where the tenant pays in addition to a base rate, an additional amount based on a percentage of the tenant’s sales, unlike fixed lease terms which require a set rent regardless of business performance.

it’s significant for valuers to assess the performance, stability and growth potential of the tenant’s business rather than just the real estate market trends or physical space.

For example, a supermarket anchor tenant in a shopping tenant will often be party to turnover rent

Why?

• shares financial risk

• incentivises landlords to drive foot traffic

• accommodates unproven market viability

• lowers barrier of entry for new/small stores, as they aren’t tied to fixed rent

define & example of:

Trespass

an unlawful intrusion or entry onto someone else’s property without their permission or legal authority.

continuous or unresolved ‘__” such as ongoing structural encroachment can form liabilities, title defects and diminish property utility, potentially resulting in value discount.

define & example of:

Property Sub-markets

distinct segments within the broader real estate market, defined by specific geographic locations, property types, price ranges and buyer demographics.

Accurate valuation requires pinpointing the exact sub-market a property belongs to, as supply & demand, yields, & vacancy rates can differ drastically between submarkets

e.g. the buyers of the residential sub-market are much more varied than that of the industrial sub-market

• industrial

• residential

• commercial

• vacant land

define & example of:

Weighted Average Lease Expiry (WALE)

a metric used to measure the average time remaining before all lease terms in a multi-tenanted property finish, weighted by either the rental contribution of each tenant or total area occupied

WALE is a critical measure of income security and vacancy risk of a property.

For example, a long WALE of 7 years indicates a stable, low-risk cash flow, prompting a valuer to apply a lower/sharper capitalisation rate

• used heavily in DCF and income cap approaches

define & example of:

Terminal Yield

the exit capitalisation rate used to estimate the resale/sale value of a property at the end of the holding period

the terminal yield directly derives the terminal value, which often accounts for a majority of a property’s total valuation in a DCF model

what are the affects of functional problems in existing buildings on Land value?

none, buildings can be removed or altered to provide better value. land value is considered permanent and indestructible, unaffected by building value

what can affect the market value of real estate assets?

• population and employment levels

• availability of mortgage finance

• increase in purchasing power of population

Who determines a property’s sale price?

Negotiated between the buyer and seller

define:
Perfect Market / Perfect Competition

a theoretical market structure w/ the following characteristics:

• homogenous products

• perfect information

• zero transaction costs

• no barriers to entry

• price takers

define:
Highest and Best Use

core valuation principle that establishes a property’s true market value as based on it’s ultimate potential, rather than it’s current use

a use that is:

1. legally permissible

2. physically possible

3. financially feasible

4. maximally productive

What figure should you choose if multiple different approaches to property valuation provide multiple, drastically different value opinions?

the figure that best represents the market conditions at the valuation date, given the available data.

define & example of:

Covenant

a legally binding agreement registered on a property title that dictates how the land can be used or maintained.

bind all current and future owners until formally removed

e.g. restrictive , positive

define:

Most Probable Use

HBU as dictated by market reality and planning controls