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Jenny APC > Valuation (L2) > Flashcards

Valuation (L2) Flashcards

1
Q

What are the five methods of valuation? (not in Red Book)

A
  • Residual
  • Comparative
  • Investment
  • Profits
  • Contractors
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2
Q

What does IVS 105 Valuation Approaches and Methods set out?
(Red Book!)

A

This document sets out the three valuation approaches which are:
1. Income approach (residual/profits)
2. Cost approach (DRC)
3. Market approach (Comparable method)

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3
Q

What is the income approach?

A

Converting current + future cash flows into a capital value (i.e. Investment, Residual + Profits methods)

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4
Q

What is the cost approach?

A

Reference to the cost of the asset whether by purchase or construction (i.e. DRC method)

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5
Q

What is the market approach?

A

Using comparable evidence available (i.e. Comparable Evidence)

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6
Q

What is the hierarchy of evidence?

A

The relative weight attached to different types of evidence
1. Cat A - (direct comps, near identical properties)
2. Cat B - (general market data that can provide guidance)
3. Cat C - (other sources of transactional evidence)

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7
Q

What is the six steps would you take when collecting comparable evidence?

A
  1. Search them
  2. Verify them
  3. Assemble them
  4. Adjust them
  5. Analyse them
  6. Report them
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8
Q

What is the RICS Professional Standard on Comparable Evidence?

A

RICS Professional Standard: Comparable Evidence in Real Estate Valuation 1st Edition, 2019.

(Reissued as a Professional Standard in April 23)

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9
Q

How to find relevant comparables?

A

Inspection
Visit/speak to local agents
Auction results
In house records/databases + websites
Market sentiment can be important where there is a lack of transactional evidence
The date of evidence is crucial, hence the focus on “contemporary” in the hierarchy above

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10
Q

When would you use term and reversion?

A

Used for reversionary investments
i.e. when under-rented
(Market Rent more than Passing Rent)

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11
Q

What is the Net Present Value?

A

Net Present Value

  • The sum of the discounted cash flows of the project
  • Can be used to determine if an investment gives a positive return against a target rate of return
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12
Q

How did you calculate the Net Present Value at 98 & 100 The Crescent?
(submission L2)

A

I used the term a reversion method.
CHECK

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13
Q

What is Freehold Vacant Possession Value?
(submission L2)

A
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14
Q

When would you use layer/ hardcore method?

A

Use for over rented investments
(Passing rent more than Market Rent)

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15
Q

What is the conventional investment method?

A

Market Value = rent received/market rent x years purchase (100/yield)
The conventional method assumes growth implicit valuation approach

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16
Q

THREE important first steps to first undertake

A
  1. Competence (SUK, Skills, Understanding, Knowledge – if not refer to RICS find a surveyor service on website)
  2. Independence (THINK FIRST and then check for any conflicts or personal interest
  3. Terms of Engagement
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17
Q

Describe the concept and usage of the contractor method

A
  • The contractor method is used for owner-occupied or specialised property that is rarely sold on the open market.
  • It is also known as the method of last resort and should not be used where there are market sales of comparable properties.
  • Is based upon the assumption that the market will pay no more for the existing property than the amount it would cost to buy an equivalent site, plus the cost of constructing an equivalent building.
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18
Q

Briefly describe the residual method of valuation

A

Establish GDV
Less build costs + less developers profit = Site Value

Build costs breakdown:
1) Building costs
2) Demolition costs
3) Site prep
4) Fees (surveyors, professional fees etc)
5) Marketing
6) CIL (Community Infrastructure Levy)
7) Contingencies
8) Finance

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19
Q

When is the profits method used?

A

The profits method is used for “specialist income-producing properties.” E.g.
- hotels
- golf courses
- petrol stations
- care homes
Principle = the value of the property depends on the profit generated from the business, not the physical building or location
AKA intangible goodwill

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20
Q

What is the methodology of the profits method of valuation?

A

Adjusted net profit (FMOP) which can be expressed as the EBITDA

Capitalised at the appropriate yield (years purchase multiplier) to achieve market value

Cross check with comparable sales evidence if possible

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21
Q

What is EBITDA?

A

Earnings Before Interest, Taxes, Depreciation, and Amortization

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22
Q

Provide a brief overview of the principles of the contractor method is practice

A

The basic steps involved include assessing the cost to replace the land and the building – with a modern equivalent, including all associated costs – before making appropriate deductions for depreciation and obsolescence.

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23
Q

Describe the concept and usage of the contractor method

A

The contractor method is used for owner-occupied or specialised property that is rarely sold on the open market.
It is also known as the method of last resort and should not be used where there are market sales of comparable properties.
Is based upon the assumption that the market will pay no more for the existing property than the amount it would cost to buy an equivalent site, plus the cost of constructing an equivalent building.

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24
Q

What published resource would you use to inform the correct way to use the comparable method?

A

RICS Professional Statement: Comparable evidence in real estate valuation 1st edition, October 2019

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25
Q

Name 7 characteristics of a good schedule of comparables, according to RICS: Comparable Evidence in Real Estate 2019

A
  1. Comprehensive – there should be several comparables rather than a single transaction or event
  2. Very similar or, if possible, identical to the item being valued
  3. Recent, i.e. representative of the market on the date of valuation
  4. The result of an arm’s-length transaction in the market
  5. Verifiable
  6. Consistent with local market practice and
  7. The result of underlying demand, i.e. comparable transactions have taken place with enough potential bidders to create an active market
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26
Q

What are the two Professional Standards (PS) set-out within the Red Book?

A
  1. PS 1 - Compliance with standards where a written valuation is provided
    Looks at application - when a valuation needs to be Red Book Global compliant & the exemptions
  2. PS 2 - Ethics, competency, objectivity and disclosures
    Compliance with the Rules of Conduct
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27
Q

How does the UK National Supplement to the Red Book differ from the Global standards?

A

The UK national supplement sets out specific requirements, together with supporting guidance for members on the application of the Global Standards in the UK. Effectively, this includes other authoritative requirements specific to UK jurisdiction and subject to UK laws. This includes valuations for things like CGT (Capital Gains Tax) or ATED (Annual Tax on Enveloped Dwellings).

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28
Q

What are the 5 exemptions from the Red Book?

A
  1. Providing agency or brokerage advice for an acquisition or disposal
  2. Acting as an expert witness
  3. Performing statutory functions
  4. Providing a valuation purely for internal purposes, without liability and without communication to a third party
  5. Providing valuation advice in the course of negotiations or litigation where the valuer is acting as an advocate
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29
Q

What are the 3 limitations to the comparable method?

A

Anomalies
Reliant on data
Require up to date data

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30
Q

What is an internal valuer?

A

Employed by company to value the assets of the company/enterprise
Valuation for internal use only
No third party reliance

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31
Q

What is an external valuer?

A

Has no material links with the asset to be valued or the client

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32
Q

Why are statutory due diligence checks done for valuations?

A

To check that there are no material matters which could impact upon the valuation.

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33
Q

What are some examples of statutory checks?

A
  1. EPC rating
  2. Legal title + tenure
  3. Planning history + compliance
  4. Council Tax
  5. Flooding
34
Q

What is IRR?

A

Internal Rate of Return

The rate of return at which all future of cashflows must be discounted to produce a NPV of zero

35
Q

What is the structure of the Red Book?

A

Part 1 - Introduction

Part 2 - Glossary

Part 3 - Professional Standards (PS)

Part 4 - Valuation Technical and Performance Standards (VPS)

Part 5 - Valuation Practice Guidance Applications (VPGA)

Part 6 - The International Valuation Standards (IVS)

36
Q

What is the latest RICS Red Book?

A

RICS Valuation - Global Standards 2021 (“Red Book Global”) effective from 31st January 2022

37
Q

What were the changes to the Red Book from the previous edition?

A
  1. The need for compliance with RBG + adequate ToR to reflect this - ToR must be clear + unambiguous
  2. Valuation for financial reporting purchases - reference to IFRS 13 + 16
  3. Reference to the use of the Profits Method for certain trade-related property valuations
  4. Sustainability and ESG factors
  5. Definitions and scope of valuations contained within the International Valuation Standards (IVS)
38
Q

What must be included in the terms of engagement (18 things)?

A

A. Identification and status of the valuer
B. Identification of the Client
C. Identification of any other intended users
D. The asset to be valued - if a portfolio then lotting of assets should be considered
E. Currency
F. Purpose of the valuation
G. Basis of value
H. Valuation date
I. Extent of investigation
J. Nature and source of the information to be relied upon
K. Assumptions and special assumptions to be made
L. Format of the report
M. Restrictions for use, distribution and publication
N. Confirmation of Red Book/IVS compliance
O. Fee basis
P. CHP to be made available
Q. Statement that the valuation may be subject to compliance by the RICS
R. Limitation on liability agreed

39
Q

What is PS 1?

A

Compliance with standards where a written valuation is provided

40
Q

What is PS and is it mandatory?

A

Professional Standards and they are mandatory WORLDWIDE

41
Q

What is PS 2?

A

Ethics, Competency, Objectivity and Disclosures

42
Q

What does PS2 outline?

A
  1. Professional and Ethical Standards (RICS Rules of Conduct)
  2. Independence, objectivity and the identification and management of conflicts of interest ( Apply Professional Skepticism)
  3. Terms of Engagement (check competence and comply with minimum TOE)
43
Q

What is VPS 1?

A

Terms of Engagement (IVS 101 Scope of Work)

44
Q

What does the Red Book say on TOE?

A

Provides a list of minimum matters which must be confirmed in writing to the client as a minimum PRIOR to commencing a Red Book Global valuation

45
Q

What is an Assumption?

A

These are made where it is reasonable for the valuer to accept that something is true without the need for specific investigation

46
Q

What is a special assumption?

A

An assumption that is taken to be true and accepted as fact, even though it is not true.

47
Q

Please can you give me an example of a special assumption?

A

Assuming planning consent has been granted for a particular use.

48
Q

Does a client have to agree to a Special Assumption?

A

Yes - this must be agreed in writing prior to the commencement of the instruction CHECK IS THIS FOR ASSUMPTIONS TOO

49
Q

What is VPS 2?

A

Inspections, Investigations and Records

50
Q

What does VPS 2 say with regards to inspections?

A

Valuers must take the steps to verify the necessary information being relied upon for a valuation to ensure the information is professionally adequate for its purpose.

51
Q

Under VPS 2 - What is a desktop valuation known as?

A

Restricted Information (desk top) valuations (no inspection undertaken)

52
Q

Why would a bank client request a valuation with a restricted marketing period?

A

Banks need to know what the value of property would be if their client defaults. This would result in a quick sale hence the restricted marketing period.

53
Q

What factors should be considered by the valuer when they are instructed to undertake a valuation of restricted information or without physical inspection?

A
  1. Restriction must be agreed in writing in the TOE
  2. Valuation implications of the restriction confirmed in writing before the value is reported
  3. Check the restriction is reasonable with regards to the purpose of the valuation
  4. The restriction must be referred to in the report
54
Q

What is a Restricted Information (desk top) valuations (no inspection undertaken)?

A

When a valuer is instructed to undertake a valuation on the basis of restricted information or without a physical inspection.

55
Q

When can a Revaulation (Without re-inspection) occur? VPS 2

A

A revaluation without re-inspection of the property previously valued must not be undertaken unless the valuer is satisfied that there have been no material changes to the property or nature of its location since the last inspection.

This must be confirmed in the TOE and in the valuation report.

56
Q

What does VPS 2 say on records?

A

Proper records must be held of the inspections and investigation and of other key inputs in an appropriate business format

Note the importance given to ESG and Sustainability

57
Q

What are the minimum requirements under VPS 3?

A

A. Identification and status of the valuer
B. Client and any other intended users
C. Purpose of valuation
D. Identification of the asset to be valued
E. Basis of value
F. Valuation date
G. Extent of investigation
H. Nature and source of the information to be relied upon
I. Assumptions and special assumptions to be made
J. Restrictions for use, distribution and publication
K. Instruction undertaken in accordance with IVS standards
L. Valuation approach and reasoning
M. Valuation figure(s)
N. Date of valuation report
O. Comments on market uncertainty
P. Statement setting out any limitations on liability that have been agreed

58
Q

What is VPS 3?

A

Valuation Reports (IVS 103 Reporting)

59
Q

What advice does PS2 3.12 -3.15 say on preliminary (draft) valuation advice?

A

In providing a client with preliminary advice or a draft report/valuation in advance of completion

The member must state that:

  • The opinion is provisional + subject to completion of the final report
  • The advice is provided for client’s internal purposes only
  • Any draft is on no account to be published or disclosed
  • If any matters of fundamental importance are not reflected, their omission must be declared
60
Q

What is VPS 4?

A

Bases of Value

The valuer must determine the basis of value that is appropriate for every valuation to be reported

61
Q

What are the six definitions of value under VPS 4?

A
  1. Market Value
  2. Market Rent
  3. Fair Value (IFRS 13)
  4. Investment Value
  5. Equitable Value (IVS 104)
  6. Liquidation Value
62
Q

What is the definition of Market Value?

A

The price an asset should expect to fetch if sold on the open market at the valuation date.

The estimated amount which an asset or liability should exchange:

  • On the valuation date
  • Between a willing buyer and a willing seller
  • In an arms length transaction
  • After proper marketing
  • Where the parties had acted knowledgeably, prudently and without compulsion
63
Q

What is the definition of Market Rent?

A

The estimated amount which an interest in real property should be leased:

  • On the valuation date
  • Between a willing buyer and a willing seller
  • In an arms length transaction
  • After proper marketing
  • Where the parties had acted knowledgeably, prudently and without compulsion
64
Q

What is Investment Value?

A

The value of an asset to a particular owner or prospective owner for individual investment or operational objectives

  • This may differ from Market Value
  • This is sometimes used as a measure of worth to reflect the value against the clients own investment criteria
65
Q

What is VPS 5?

A

Valuation Approaches and Methods

66
Q

What does VPS 5 outline?

A
  • Valuers are responsible for choosing and justifying their valuation approach and use of model
  • In some cases, more than one approach may be appropriate
67
Q

What is a VPGA?

A

Valuation Practice Guidance Application

68
Q

What is the latest UK national supplement?

A

RICS Valuation - Global Standards (UK National Supplement, 2018)

69
Q

What is the UK National Supplement?

A
  1. Effective from 14th January 2019
  2. Sets out clarification that the national supplement augments the Red Book Global requirements for valuations in the UK and is not substitute for it
  3. Provides specific requirements for members on the application of the Global Standards to valuations undertaken subject to UK jurisdiction
  4. It contains 18 Valuation Practice Guidance Applications (UK VPGAs) - regrouping many to become more user friendly
  5. Most of the advice is not mandatory but is for advisory guidance
70
Q

What changes were there to the Profits Method in the new Red Book?

A

A non exhaustive list of properties including self-storage, flexible workspace and purpose built student housing

71
Q

What is Hope Value?
(submission L3)

A

The value arising from any expectation that future circumstances affect the property may change

72
Q

Please can you give me two examples of when hope value would arise?
(submission L3)

A
  1. Future prospect of securing planning permission for the development of land where no planning permissions currently exist
    ​
  2. The realization of marriage value arising from the merger of two interests in land
73
Q

What is Marriage Value?

A

Created by a merger of interest - can be physical or tenurial

74
Q

How would Marriage value be calculated?

A

Undertake a before and after valuation and calculate the level of marriage value created

Typical negotiated outcome is to split the marriage value created 50:50 or divide it pro-rata to the value of the individual interest

75
Q

What is Stamp Duty Land Tax?

A

It is the tax payable by the purchaser in respect of the transfer of land and buildings (a progressive / incremental tax)

76
Q

What are the SDLT bands for residential property?
(submission)

A

£0 - £250,000 = Nil
£250,001 - £925,000 = 5%
£925,001 - £1,500,000 = 10%
Over £1,500,00 = 12%

77
Q

What relief can first time buyers claim on SDLT?

A

They can claim relief with a nil rate up to £425,000
5% - on the portion from £425,001 to £625,000.
There is no relief if the price is over £625,000

78
Q

What are Building cost reinstatement valuations /estimations?

A

For building insurance purposes

The cost of the reinstatement of the building without a profit

79
Q

What costs do purchasers have to pay?

A
  1. Stamp Duty Land Tax
  2. Agent’s fee - say 1% of the purchase price + VAT
  3. Solicitor’s fees - say 0.5% of the purchase price + VAT
80
Q

What is Party Wall?

A

A wall is a ‘party wall’ if it stands astride the boundary of land belonging to two or more different land owners.

81
Q

What does BCIS stand for?

A

Building Cost Information Service

Jenny APC (19 decks)

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