Valuation - APC

Question 1

What were the changes implemented in the UK VPGA 11, Valuation of UK Resi Property? (Uk National Supplement 2024)

Answer 1

• It has been amended to have a broader focus on the provision of valuation advice for resi property and not limited to a focus on secured lending.
• The revised UK VPGA 11 will move to a more principles based approach.
• UK 12 & 13 have been merged into UK VPGA 11.

Question 2

What does VPGA stand for?

Answer 2

Valuation Practice Guidance Applications

Question 3

What is a supplement note?

Answer 3

Something that is supplementary to but does not replace. In this example the guidance note does not replace RICS Valuation Global Standards (Red Book)

Question 4

What are the three main areas of changes in the UK Supplement?

Answer 4

Financial Reporting
The Public Sector
Residential Valuations

Question 5

What are the new governance rules introduced?

Answer 5

Additional requirements in relation to the rotation of the valuer.

Question 6

What are the new rotation requirements?

Answer 6

• a maximum period of ten years before the rotation of a valuation firm; this might include multiple engagements
• a maximum single engagement period of five years
• a maximum period of five years before the rotation of an individual responsible valuer
• a minimum three-year break after rotating off an engagement
• a transition policy to allow that a smooth transition to the new arrangements has been incorporated, allowing two years before the new rules will be enforced.

Question 7

Do these relate to the asset or company itself?

Answer 7

Asset

Question 8

What is UK VPS 3.4?

Answer 8

a new mandatory requirement for valuers to ask about the involvement of independent parties in the client’s valuation instructions

Question 9

What are the new Public Sector rules introduced?

Answer 9

Updates to UK VPGA 4 Valuation of local authority assets for accounting purposes to make it more user-friendly and remove duplication of the previous edition.

Question 10

What are the new Residential Valuation rules introduced?

Answer 10

Uk VPGA 11 has been broadened to include valuation advice for residential property in general without an emphasis on just mortgages.

Question 11

What are the 5 methods of Valuation?

Answer 11

1) Comparables method
2) Investment method (DCF)
3) Profits method
4) Residual method
5) Depreciated Replacement Cost method

Question 12

What are the three valuation approaches?

Answer 12

1) Market approach
2) Income approach
3) Cost approach

Question 13

How would you go about conducting a comparable method of valuation?

Answer 13

• Find and collate comparables
• Confirm and verify the details to analyse headline rent
• Assemble comparables in a schedule
• Adjust based on hierarchy of evidence
• Analyse and form an opinion of market value
• Report on value and prepare note.

Question 14

Is there a guidance note on Comparable Evidence in RE Valuation?

Answer 14

Yes - RICS Guidance Note: Comparable Evidence in Real Estate Valuation, 2019

Question 15

What is the purpose of this guidance note?

Answer 15

• Outlines principles in use of comparable evidence
• Advice in situations where there is limited availability of evidence
• The valuer should use professional judgement to assess the relative importance of evidence on a case by case basis.

Question 16

What is the hierarchy of evidence?

Answer 16

Cat A: Direct comparables
Cat B: General Market Data
Cat C: Other Sources (e.g. interest rates of evidence from other assets or locations)

Question 17

When would you use the Investment method of Valuation?

Answer 17

When there is an income stream to value.
The rental income is capitalised to produce a capital value

Question 18

When would you use the Hardcore Investment method?

Answer 18

When investments are overrented - therefore the passing rent is higher than the market rent.
It is valued in perpetuity but typically at a higher yield

Question 19

What is the DCF method?

Answer 19

A growth explicit investment method of valuation that involves projecting estimated cash flows over an assumed investment holding period and exit value at the end of that period.
The cashflow is then discounted back to the present date at a discount rat (Internal Rate of Return) that reflects the perceived level of risk.

Question 20

When was the RICS DCF guidance note released?

Answer 20

November 2023

Question 21

What is the Net Present Value?

Answer 21

The sum of a discounted cash flow project
It can be used to determine if an investment gives a positive or negative return.

Question 22

What is the IRR?

Answer 22

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

Question 23

What is the IRR used for?

Answer 23

The IRR is used to assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions

Question 24

What is the profits method?

Answer 24

A valuation method used for valuations of trade related properties - pubs, petrol stations, care homes
Calculated by finding the EBITDA

Question 25

What is the residual method of valuation?

Answer 25

It calculates the site value by using a development appraisal to assess the viability of a development scheme.

Question 26

What makes up the Total Development Costs?

Answer 26

• Site Preparation costs such as remediation / demolition / site clearance
• Planning costs such as s.106 agreements / CIL charges / S.278 works
• Building costs
• Professional Fees
• Contingency
• Marketing costs
• FInance costs

Question 27

What does SONIA stand for?

Answer 27

Sterling Over Night Index Average

Question 28

What is an S-Curve payment profile?

Answer 28

The principle of the ‘S’ curve is that as the payment of construction costs adopts the profile of an ‘S’ shaped curve over the length of the development projects, the usual assumption is to halve the interest that would be borrowed for all of the construction period

Question 29

What is the purpose of the S-curve?

Answer 29

to reflect when monies tend to be drawn down.

Question 30

What is an Overage?

Answer 30

An arrangement made for the sharing of any extra receipts over and above the profits originally expected as agreed in the pre-agreed formula

Question 31

What are some of the limitations of the residual method?

Answer 31

Relies on accurate information and inputs
It does not consider timings of cash flows
Can be very sensitive

Question 32

When should the DRC method be used?

Answer 32

When direct evidence is limited or unavailable for specialised properties such as lighthouses, oil refineries, docks, schools

Question 33

What is the purpose of the DRC?

Answer 33

• Used for owner occupied properties
• For accounts purposed for specialised properties.
• It is not suitable to be used for Red Book compliant valuations.

Question 34

Is there a guidance note on the DRC method?

Answer 34

Yes, 2018

Question 35

What is the DCF Hub?

Answer 35

An online portal with practice information and basis of conclusion. As well as other relevant material from journals etc. so that members have a “one stop shop” for the purposes of the DCF application.

Question 36

Is RICS mandating the use of DCF?

Answer 36

No, the choice of valuation method is the valuers (per Red Book VPS 5)

Question 37

Are RICS suggesting explicit DCF models are better than implicit income capitalisation models?

Answer 37

It depends on the circumstances and ultimately the judgment of the valuer will decide. There are advantages/disadvantages to both.

Question 38

Does RICS require the use of one method only in valuation?

Answer 38

No, one conclusion but multiple methods and models can be considered.

Question 39

What is the basis of Global Red Book VPS 5?

Answer 39

It is the valuers responsibility to justify the basis of valuation and the assumptions used. No one valuation approach or method takes precedent ahead of the other one.

Question 40

What were the drivers for the new DCF practice information?

Answer 40

• The Old DCF is 13 years old
• Required a global perspective

Question 41

What is the definition of Investment Value per IVS?

Answer 41

• The value of the investment relative to the specific investor.

Question 42

What is the basis of content of the new practice information for DCF?

Answer 42

• More contextual information on the differences between market valuations and investment valuations.
• Provides a framework for the identification of inputs for an explicit DCF.
• Includes separate chapters on each different concept and basis of valuation and show how the approach to inputs may differ if undertaking a market valuation or an investment valuation.