Kate Taylor FRICS tackles financial modelling for APC candidates
Financial modelling is a core competency declared by candidates on the property finance and investment pathway and is also sometimes chosen as an optional plus competency by candidates working in the investment market on the commercial property pathway. This competency has grown over the past few years with increased use of sophisticated modelling techniques and explicit valuation methods. In the wake of the global financial crisis, explicit valuation approaches are more popular than ever, particularly with clients in the investment market, such as investment funds and large property developers.
Financial modelling is a scary and technical title but it could just as easily be called “advanced discounted cash flow”. The cash flow models are simply tables (usually spreadsheets or bespoke software) that show income and expenditure period by period. The models usually incorporate discounting to reflect the time value of money and compounding to explicitly reflect growth forecasts. The periods will match the income and expenditure and are often quarterly in advance.
Financial modelling is a flexible method of appraisal and can incorporate a very wide variety of scenarios. The hard part is not working out how to construct the model and what information to include but explaining it clearly to assessors. The key message with financial modelling is not to be scared of it but explain clearly the construction of the model.
Pitfall to avoid
A key pitfall with this competency is the danger of appearing to be an “Excel jockey”. These candidates can describe the mathematical principles of their model but forget to think like a valuer and justify their assumptions with reference to the market. The models look very technical but the financial information built into the cash flow comes from the same marketplace as traditional valuations and should be described in much the same way, with reference to weighting and analysis. Candidates should not let the big picture catch them out.
There is little financial modelling-specific RICS guidance, so candidates need to make sure they have thoroughly read the key RICS guidance note – Discounted Cash Flow for Commercial Property Investments.
It is also advisable to read the RICS guidance note – Financial Viability in Planning. This is because a key use of financial models is within development appraisal and this comprehensive guidance note scopes the inputs in such a model clearly.
The competency description also mentions IT, so a good knowledge of Excel and any bespoke packages used will be needed. It is important not to give a “computer says no” impression. The software is just the tool and the candidate needs to appear as more than just a button-presser.
An awareness of accounting is needed too, as concepts such as CAPEX (capital expenditure) are often included.
At level 2 all this knowledge about software and constructing models needs to be put into practice with reference to specific examples. Candidates should be careful with confidentiality and take advice from senior colleagues.
The assessors will probe the construction of the candidate’s models and the reasons for the design. A good understanding of the debt market will be required as there will often be a focus on the financial repayment model and debt structures. Small details can be helpful to show skill, like describing how to annotate a spreadsheet.
The timings of cash flows will be just as important as the income and expenditure and candidates should be able to describe their research. It is also essential to be able to show an understanding of the concept of opportunity cost and the client’s perspective.
The outcomes from the models will constitute the advice to client. This format can accommodate a variety of scenarios in a sensitivity analysis and assist with decision making. The models can be manipulated to illustrate options to clients and providing the advice to client can be in a variety of formats including PowerPoint presentations.
The assessors will be interested in the project details for context and veracity and not just the numbers. A good way to conclude an example is by describing the outcome of the advice to client, a deal done or a bullet dodged!
Two of the panel members assessing candidates in this competency will not be experts in it. There will be a specialist assessor but the pass or refer decision is made by both assessors, guided by the chairperson. Candidates should help themselves by making sure their responses initially focus on the key principles and allow assessors to drill down if they want more specific detail. In that way, all three members of the panel will be able to see the candidate’s competence in financial modelling.
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Questions will always be adapted to whether you are working in the public or private sector and could comprise:
- Tell me about the RICS guidance note, Discounted Cash Flow in Commercial Property Investments.
- What is the key principle behind discounted cash flow?
- What is the difference between senior debt and equity returns; how should they be shown in a financial model?
- How did you construct your model?
- Where did the costs come from?
- How did you calculate the forecasted growth?
- What were the variables you used to create the sensitivity analysis?
- What was the resulting conclusion from the model (net present value, IRR or something else)?
- How did you get the complexities of the sensitivity analysis across to the client?
- How did your advice add value to the client?
*Don’t assume that the questions given here will be asked at an APC assessment. Assessors will focus on and pose questions on the basis of the candidate’s declared competencies, pathway guide requirements, up-to-date developed knowledge base and the examples provided in their summary of experience, etc.
Supervisors and counsellors: how to help
Keep an eye out for the emergence of an Excel jockey and knock it on the head, if necessary, by making the candidate articulate the WHY as well as the HOW.
Try to ensure the candidate gets the opportunity to personally provide the advice to client resulting from financial modelling. Level 3 will be a challenge if they have not actually followed it through to advising the client.
APC Presentation This online masterclass discusses key elements of the APC final assessment interview. Hints and tips at www.delever.com
APC Final Assessment Competency Revision Workshop This preparation day covers everything a candidate needs to know for the APC plus other useful resources: www.delever.co.uk/facrw
APC mock interviews An opportunity for candidates to practise their APC final assessment interview, including presentation and specific competency-based questioning. It comprises a full hour interview like the real thing and immediate constructive feedback from two assessors, including hints and tips on best practice: www.delever.co.uk/mocks
Supervisor and counsellor APC training/recordings – formal CPD Guidance on how to appropriately manage and support candidates to get them through the APC. Free one-two hours of formal CPD: www.delever.com
APC Commercial Property Revision Guide Every forward-thinking APC candidate’s reference book for APC preparation: www.delever.co.uk/katetaylor
Timeline wallchart Free A2 pictorial view of the APC process that can be used to track progress: www.delever.com
APC Explained Masterclass This helps candidates to understand what needs to be done to achieve the APC, including a walk-through of the DeLever APC process timeline and myAPC Diary: www.delever.com
Trial myAPCDiary A subscription to this product can save candidates 60% of their day-to-day APC administration: www.apcdiary.com
RICS APC Guides These should be read at least once every three to four months and fully understood. Candidates from outside the UK also need to check their regional websites for any local APC requirements: www.rics.org
Kate Taylor FRICS is an APC chair and a DeLever APC consultant trainer. Follow Kate Taylor and Jon Lever on Twitter: @katetay73593006 and @deleverapc