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Harry Penman APC > Valuation L1 > Flashcards

Valuation L1 Flashcards

1
Q

Tell me what the 5 methods of valuation are.

A

Investment, Profits, Comparable, Residual, and DRC

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2
Q

How do you decide which valuation method to apply?

A

Based on the nature of the building, its use and occupier.

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3
Q

When and why would you use one of these methods?

A

I would use the investment method to value commercial retail property.

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4
Q

What is a year’s purchase multiplier?

A

A way of capitalizing annual income by using a multiplier equivalent a an investment yield return. The rationale is the number of years it would take to pay of the purchase value based on the annual income.

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5
Q

Give me an example of a good covenant and how this might impact a valuation.

A

Covenant represents the risk associated with the tenant compling with their lease covenants, but typically their ability to pay the rent. The best covenants therefore are companies with very strong histric business performance. Good examples would be McDonalds, or Tesco.

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6
Q

What is PI Insurance (PII) and why is it need?

A

Professional indemnity insurance provides insurance cover to protect clients against professionals that suffer loss as a result of professional negligence.

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7
Q

Tell me about the RICS requirements in relation to PII.

A

It is a pre-requisite to starting a regulated firm.
The requisite cover levels are determined by the firms previous years turn over:
£100k = £250k of cover
Up to £200k = £500k of cover
£200k+ = £1m minimum

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8
Q

How did the decision in Hart v Large affect PII?

A

There was a much broader allowance for damages, determined by the MV of the property sold with the damp defect compared to the MV of the property with no damages.

This is a departure from simply deducting remediation costs as damages.

The precedent means that surveyors could face larger damages liability for negligence.

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9
Q

What level of PII cover does your firm have?

A

£2,500,000 million

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10
Q

How would you distinguish limitations on liability in your valuations?

A

Set out in terms of engagement as well as again clearly in the report. Typically ours limit liability to 30% of the properties Market Value as determined by the report.

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11
Q

Where in your valuation report do you state any limitations on liability?

A

At the end of the report.

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12
Q

What relevance does Hart v Large have on your valuation practice?

A

Emphasises the need for thorough inspection.
Emphasises the need to provide reasonable advice about further investigation or in that case Professional Consultant’s Certificate (PCC) priort to purchase.
Increases the potential scope for damages to

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13
Q

What aspect of Hart v Large allowed the judge to award damages without applying the SAAMCO cap?

A
  • Large’s correct advice would have prompted the claimants to obtain
    the PCC and conduct further investigation.
  • This would have protected them from losses, making Large
    responsible for their damages.
  • Broader damages, including inconvenience and distress, stemmed
    from Large’s negligence.
  • These damages were not covered by SAAMCO.
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14
Q

What is the SAAMCO cap?

A

South Australia Asset Management Corporation v York Montague Ltd [1997]

Limits damages to the value of direct cost of negligent advice rather than other consequential damages.

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15
Q

Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?

A

No

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16
Q

Under the SAAMCO cap, is a valuer’s liability usually limited to the overvaluation on the valuation date?

A

Yes

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17
Q

What would you do if you received a notice of a PII claim from a client or their solicitor?

A

Do not admit fault or make any offers of compensation.

Inform the Senior Partner in the firm immediately.

Review the Notice carefully. Note the details of the claim, including the alleged negligent act, the date it occurred, and the claimed losses.

Gather all relevant documents. This includes your surveying reports, project files, emails, and any other communication with the client related to the project in question.

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18
Q

Is there a difference between being negligent when undertaking a survey/valuation and providing negligent advice?

A

Yes, in valuation your liability is much narrower usually confined to the difference between your value and the actual.

With advice (Purchase the property or not) your liability could extend to all foreseeable losses relating to the advice.

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19
Q

What is run off cover?

A

PII cover typically of 6 years to cover the period from when a surveyor or firm is no longer practicing and the end of their liability for negligence claims.

If pushed, defined by the Negligence Act 1980

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20
Q

What is the Red Book?

A

RICS Global Valuation Standards

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21
Q

What is Redbook Vlauation

A

A formal opinion of value which can be relied upon by the instructing party conducted in line with the standards set out in Global Valuation Standards.

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22
Q

Why does the Red Book exist?

A

To provide a high quality, consistent and professional way of conducting property valuations.

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23
Q

Tell me about a factor which may impact value.

A

Location.
In my day to day it relates typically to retail, and the importance of location on footfall, ability to trade, desirability, demand and price.

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24
Q

What is your duty of care as a surveyor when undertaking a valuation?

A

Duty of Skill and Care to the client.

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25
Q

Why is independence and objectivity important when valuing?

A

The nature of Market Value requires it. Open market, willing buyer in an armaments transaction.

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26
Q

Is there a separate UK National Supplement?

A

Yes

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27
Q

What is the UK valuation guidance called?

A

RICS Global Valuation Standard UK National Supplement

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28
Q

Why does the UK guidance exist?

A

To tailor the advice to the UK market rather than the broader standard which applies globally.

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29
Q

How should this be applied in relation to the Global Red Book?

A

Red Book is Bible, UK Supplement is the Sermon.

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30
Q

What was changed in the last update to the UK National Supplement?

A

A major change relates to UK VPS 3.3, which introduces a mandatory valuer rotation policy for regulated valuations.

UK VPGA 8 – substantial changes reflecting the Charities Act 2022

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31
Q

Explain one UK VPS or UK VPGA that relates to your work as a valuer.

A

VPS - Global valuation technical and performance standards
VPGA - Valuation practice guidance – applications

VPS 1 - Terms of Engagement
VPGA 8 - Valuation of Real Property Assets

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32
Q

When was the Red Book last updated?

A

2022

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33
Q

Does this differ from when IVS were last updated?

A

Yes IVS were updated in 2024

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34
Q

What changes were made?

A

Redbook 2022 - Lots of inclusions on Sustainability and ESG

IVS 2024 - more suited to practical application and broad userbase.

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35
Q

Which do you follow - the latest IVS or the Red Book Global?

A

Red Book as it’s in lock step with IVS they should be the same.

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36
Q

Which sections of the Red Book are mandatory and which are advisory?

A

VPS - mANDATORY
VPGA - offers guidance and best practice in valuing certain asset types.

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37
Q

What does PS1-2/VPS1-5/VPGAs relate to?

A

PS 1 & PS 2: (Always mandatory).
PS 1 Compliance with standards
PS 2 Ethics and competency

VPGA 1-5: Mandatory; exceptions require clear justification and explanation.
VPS 1 - Terms
VPS 2 - Inspection
VPS 3 - Reports
VPS 4 - Bases of Value
VPS 5 - Approaches

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38
Q

What type of advice does the Red Book cover?

A

Rules on the essential components of a valuation report and how they should be agreed and composed as well as guidance on how the individual valuation should be conducted.

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39
Q

If you provide preliminary advice / draft valuation report, what should you state in writing to your client?

A

Can provide report in draft. However, must make sure pre-liminary status of the report is conveyed to the client pending issue of final report.

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40
Q

What type of valuations might be relied upon by a third party?

A

Valuations for financial reporting, “Regulated Purpose Valuations”

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41
Q

Definition of Market Rent

A
  • estimated amount
  • interest in real property should be leased
  • valuation date
  • willing lessor and a willing lessee
  • appropriate lease terms
  • arm’s length transaction,
  • proper marketing
  • acted knowledgeably, prudently and without compulsion.’
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42
Q

Tell me what the definition of Market Value

A
  • estimated amount
  • asset or liability
  • should exchange on the valuation date
  • willing buyer and a willing seller
  • arm’s length transaction
  • proper marketing
  • knowledgeably, prudently and without compulsion.
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43
Q

Definition of investment value

A

‘the value of an asset to a particular owner or prospective owner for individual investment or operational objectives.’

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44
Q

Definition of Fair Value

A

‘The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.’

Typically for financial accounting based on the fundamental features of value rather than supply and demand.

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45
Q

What is the difference between an assumption and a special assumption?

A

A special assumption is not true at the time of writing the report.
An assumption could be true, also may not be made by a typical market participant. (The property is being sold with vacant possession when it isn’t).

An assumption could be true but is accepted as fact within the report once stated. Likely to be made by normal market participant. (The property has the appropriate planning permissions)

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46
Q

What sources of information would you consider when preparing a valuation report?

A

Client provided data
Market data
Index data
Environmental data
Planning and other statutory inquiries
Map data

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47
Q

If you have previously valued an asset, do you need to make any additional disclosures and what might they be?

A

Disclose this to the client and make sure that the new valuation does not give rise to a conflict, ie

Does completing this valuation require me to disclose information that is confidential to another client. If so the instruction should be declined.

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48
Q

If your firm is too small to have a rotation policy or valuation panel, what else can you do to ensure objectivity?

A

Having another member review the valuation.

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49
Q

When might a conflict of interest exist in relation to a valuation instruction?

A

If you have previously provided valuation advice to another client which relied on confidential and material information.

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50
Q

What must be included in your terms of engagement / valuation report?

Critical Question - Very common

A

Limits of liability
That the firm’s work is subject to monitoring
Confirmation that the firm is regulated and the CHP
Fee Calculation
Compliance with IVS
Restrictions on use
Format
Assumptions and special assumptions
Nature of sources of information relied on
Extent of inspection
Date of valuation
Bases of value
Purpose
Currency
Property/Asset
Identify any other users
Client
Status of the valuer

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51
Q

Where is this covered in the Red Book?

A

VPS1 (Valuation Performance Standard)

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52
Q

What is a restricted valuation service and can you provide one?

A

A valuation that would not benefit from the typical level of due diligence required of Redbook. Shortened timescales or drive by valuation.

Only to be conducted where it is suitable for the purpose.

Necessarily will need to include a number of assumptions to make the client clear about limitations.

Should be declined if uncertain.

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53
Q

How do you deal with limitations on inspection or analysis?

A

Clearly state it in the report, the advice provided outside the report, and the terms if know before hand.

In the report it should be in within the report as well as in general comments and possibly in material uncertainty.

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54
Q

Can you revalue a property without inspecting?

A

Only if you are satisfied that there has been no material change to the property and the client accepts and this is reflected in terms and the report.

Done with extreme caution.

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55
Q

What RICS guidance relates to the use of comparable evidence?

A

Comparable evidence in real estate valuation 1st edition, October 2019 (Guidance Note)

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56
Q

What is an internal valuer?

A

An RICS member working within an organisation to report on company assets.

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57
Q

Can an external valuer provide an internal purposes valuation?

A

Yes.

58
Q

What happens if market conditions change between the valuation date and report date?

A

Its irrelevant. Its only the market conditions on the valuation date that are relevant.

59
Q

Is special value from a special purchaser reflected in MV?

A

No.

It could be technically be covered in a report under MV on the special assumption of a special interest but this is not MV.

60
Q

Where does the definition of fair value come from?

A

International Financial Reporting Standards

61
Q

Does this differ from MV?

A

Yes it excludes the market forces.

Fair value states the companies assets accurately without the inflation that might arise as a result of disposal on the open market.

62
Q

When is fair value used?

A

For regulated valuations for financial reporting.

63
Q

What are the 3 approaches under VPS5?

A

Market
Cost
Income

64
Q

What is the Valuer Registration Scheme?

A

An essential part of registering a firm. Ensures that regulated firms register the valuers within the firm.

Its essentially a quality assurance scheme.

65
Q

Are there any instances where certain sections of the Red Book may not apply?

A

Yes in category rather than circumstance:

Agency and brokerage
Negotiation or litigation
Expert witness

66
Q

What are these and which sections don’t apply?

A

VPS 1-5

Practice Statements 1 and 2 always apply

67
Q

What is the basis of value under UK GAAP FRS 102?

A

Fair value

68
Q

What is a SORP?

A

Statement of Recommended Practice for charities preparing accounts.

69
Q

What updates have their been to the red book on Charities act valuations?

A

More valuers: Now charities can use valuers beyond just RICS surveyors (e.g., NAEA fellows).

Simpler reports: Valuation reports now focus on 5 key points, making them less time-consuming and expensive.

70
Q

When would you use EUV and what is the definition?

A

Existing Use Value (the value of the asset in current use or form).

Public sector financial statement
Operational properties

71
Q

What additional criteria apply to secured lending valuations?

A

Executive summary
That the property is suitable for secured lending.
SWOT Analysis
Whether property is sustainable over loan period

72
Q

What is a regulated purpose valuation?

A

A valuation normally for financial reporting for listed companies or public sector.

73
Q

What is a yield?

A

The value of income expressed as a percentage of capital value.

74
Q

What is a Net Initial Yield?

A

Income divided by purchase price after reasonable purchasers costs.

75
Q

What is a reversionary yield?

A

The yield applied to the reversionary income (Market Rent) as opposed to the term income (passing rent).

76
Q

What is an equated yield?

A

IRR

77
Q

What is an equivalent yield?

A

Weighted average between term and reversion.

78
Q

How would a yield reported from auction differ from a Net Initial Yield?

A

Auction yield would also factor in buyers premium in yield.

79
Q

What purchaser’s costs do you deduct from a valuation?

A

Stamp duty
Agents Fees
Legal Fees

80
Q

When do you deduct purchaser’s costs from a valuation?

A

Investment Valuation

81
Q

How would you value a property in uncertain market conditions - does the Red Book give any guidance?

A

VPGA 10
Include a statement on material uncertainty.
Document and explain uncertainty and method in detail
Could include sensitivity analysis
Avoid price bands OR qualfiying statements “in the region of”

82
Q

How could you value a long leasehold interest?

A

Capitalise the income using the appropritate yield over years purchase.

Rationale - what is the future income worth to me now, so you must consider discount rate (return) alongside number of years the income is secured. Eg YP 15 years at 5%

83
Q

How does a term and reversion differ to a DCF?

A

Implicit vs explicit growth rate.
DCF projects all income and is generally regarded as much more precise and accurate.

DCF comes back no Net present value of the income over the investment period and IRR equated yield

84
Q

What is the difference between a growth explicit and a growth implicit yield?

A

In essence, growth explicit yield explicitly factors in anticipated growth, while growth implicit yield does not normally all risk yield.

All risk yield in term and reversion vs equated yield in DCF

85
Q

Give examples of each of these types of yield.

A

All risk yield vs equated yield in DCF

86
Q

How would you value an under/over rented investment property?

A

Hard core and layer.

Hardcore and top slice is where there might be a secondary income that is less secure.

87
Q

When would you use a dual rate investment calculation?

A

For valuing a short lease.
Where the remunerative rate provides your annual return and;
the accumulative rate goes into a sinking fund to give you back your capital at the end.
The dual rate covers your desired remunerative rate as well as the secure rate on your accumulative rate.

88
Q

Where can you find yield evidence from?

A

Investment sale evidence from published sources either in index form or direct com parables in the market.

89
Q

What is the hierarchy of evidence?

A

The heirarchy of comparable evidence as determined by the RICS in Comparable Evidence in Real Estate Valuation

Category A - Direct comparable
Category B - Published data from indexes etc
Category C - Other information including hear say

90
Q

What would you do if comparable evidence was limited?

A

Look to other towns for comparable
Consider published data
Look at current market data
USE SKILL AND JUDGEMENT

91
Q

What is NPV?

A

Net Present Value - NPV measures the value of an investment project by calculating the present value of all expected cash flows (both inflows and outflows) discounted at a specified rate (often the cost of capital).

92
Q

What is IRR?

A

The Equated yield - In simple terms, it’s the annualized rate of return at which the NPV equals zero. A measure of profitability

93
Q

What is a hardcore and topslice?

A

A method of calculating property investment where income is split horizontally. Harcore relates to the reliable income where top slice relates to a more at risk portion of the investment.

Pine House great example. Coop ground floor but flakey tenants in top floor poor offices.

94
Q

What is a Discounted Cash Flow (DCF)?

A

A growth explicit way of investment valuation. Projects all future incomes and expenses associated with the property. to produce NPV and IRR

95
Q

What is a short-cut DCF?

A

I don’t use DCF in my day to day so I am not familiar with Short cut DCF

96
Q

When would you use a DCF?

A

For complex multilet properties or portfolios where a higher degree of accuracy is required.

97
Q

What are the advantages of a DCF?

A

Much more precise.
Would allow you to make better comparisons between asset classes.

98
Q

What are the disadvantages of DCF

A

Far greater number of variables and therefore room for varaince.

99
Q

What is a YP/PV/YP in perpetuity?

A

The number of years it would take for the combined income to equal the price paid expressed as a percentage.

PV is the value of all future income at the current day dicscounted at a set % rate.

YP Perp is the Present Value (PV) of the right to receive £x each year in perpetuity at a specified compounded interest,

100
Q

What is marriage value?

A

Or synergistic value. The appreciation in value through the combination of one or more property assets (over and above their values in isolation).

101
Q

When would you include an element of hope value in a valuation?

A

Where there is development potential.

102
Q

How would you value a ransom strip?

A

Not my area of specialism but:

Stokes vs Cambridge defines it as:

Is s one-third of the increase in value of the adjoining land attributable to acquisition of the ransom strip.

103
Q

Do RICS provide any guidance on RLVs or valuing development property?

A

RICS Proffessional Standard on Valuing Development Property 1ST Edition October 2019

104
Q

What is an RLV?

A

Residual land value - the amount the land is worth after deducting all reasonably expected costs from the gross development value.

105
Q

What is a development appraisal?

A

A residual apprach to determining the profitability of a development.

Although RICS are adapting their guidance to consider DA as a discounted cash flow that remains organic/live throughout the process of development and regularly updated.

106
Q

How do they differ?

A

Residual seeks to determine land value, DA seeks to determine profitability.

Land value may already be known in a DA.

107
Q

How else can you value development land?

A

Comparable method

108
Q

What is the basic process of undertaking a RLV?

A

Calculate GDV (Comparable Method)
Less
Buid Costs
Site Clearance
Porffessional Fees
Contingency
Planning
CIL or S106
Marketing fees
Agents fees
Cost of Money
Developers Profit

109
Q

What are the key things you need to consider when appraising / inspecting a development site?

A

Permissible Land Uses
Potential Land Uses
Density of Development
Topography and Site Development Factors
Building-Related Issues
Development Consent Issues
Adjacent Land Considerations
Accessibility and Developability
Environmental Issues

110
Q

Tell me about your due diligence when undertaking a RLV.

A

The big challenge with RLV is the number of inputs and therefore the degree of variance in the end value.

Typcically the biggest variables are GDV, Build Cost and uncertainty and cost associated with land without planning. Essential to be very careful on this specifics.

111
Q

What sources of information do you use when undertaking a RLV?

A

Comparable data
BCIS
Planning Portal
Local authority CIL and 106 contributions
hersay from local developers re profit and market challenges

112
Q

How can you assess development potential?

A

Consideration of Location in relation to:
Other developents
Green belt oraonb
Settlement boundary
Consideration to planning:
5 year supply
Planning policy on conversion and permitted development
In relation to economic factors:
Cost of development
Market demand

113
Q

NDV

A

Net Development Value is Gross Development Value less costs of disposal.

114
Q

When do you apply VAT when assessing development costs?

A

On referbishment/redevelopment costs if the property is not elected for VAT.

115
Q

Where can you source build costs from?

A

BCIS

116
Q

What are typical finance costs?

A

Quite variable but circa 10% but often with very big arrangement fees which can offset a much lower rate of borrowing.

117
Q

What would you apply finance costs to and on what basis?

A

A development or residual appraisal typically scaled to reflect the demand for finance over the lifecycle of the project.

118
Q

What is an S curve?

A

The typical graphical representation of borrowing over the lifecycle of a project where finance ramps up quickly and then diminishes as cash starts to come in from deposits and sales.

119
Q

What factors influence the decision to use an S curve when applying finance costs?

A

Type of development. You probably wouldnt use an S curve for the development of a very expensive London Town House because the income and cessation of borrowing comes in one large hit.

120
Q

Is there a quick rule of thumb which can be used when applying finance costs?

A

Total finance required divided by half the development timeline.

121
Q

What do holding costs typically include?

A

Interest
Any rates or council tax
Insurance
Securing the site

122
Q

How do you typically calculate developer’s profit?

A

I would use 20% of GDV based on feedback from local developers. This may be higher for riskier projects like listed buildings or where planning is uncertain.

123
Q

What are some typical inputs (and %/£) in a RLV?

A

Professional fees - 10-15%
CIL £80/m2
Profit - 20%
Build Costs £220/ft2
Finance - 10%

124
Q

What other criteria might be assessed in terms of performance measurement for a RLV?

A

Chances of obtaining planning.

125
Q

What are the advantages/disadvantages of a RLV?

A

Great where there is minimal comparable evidence and it takes into account site specific circumstances in a methodical way.
Poor because it relies on large number of variables

126
Q

What is CIL?

A

Community infrastructure levy, charged as a price per m2 on new residential floor space of 100m2 or more. Contributes to the additional burden on infrastructure that the development creates. Cha

127
Q

What is S106

A

Agreement signed as a conditionality of planning permission under s106 of the Town and Country Planning act 1990

Could be monetary or provision for specific infrastrucutre contributions to make the development acceptable.

128
Q

What is a Monte Carlo simulation?

A

It is a technique used to understand the impact of risk and uncertainty

129
Q

What is a sensitivity analysis?

A

A tool for assessing the impact of different input variabilites on the residual land value.

130
Q

How do you carry out a sensitivity analysis?

A

In excel by plotting the reasonable extent of variance on specific inputs to determine the impact on land value.

131
Q

What variables might you change and why?

A

GDV
Build costs
Finance Costs

132
Q

Tell me about your understanding of incorporating affordable housing into development appraisals

A

Depends on local plan. But is normally up to 50% allocation of affordable housing within a development of over 10 dwellings and they are to be sold at lease 20% discount to market value.

133
Q

How might onerous lease terms, e.g. restrictive user, break clause, impact upon capital or rental value?

A

Likely to restrict the market, lower competition and reduce rent. This will lower capital value both because the rent is lower but also because there are likely to be higher void costs.

134
Q

What liabilities may be created through valuation?

A

Client relies on the value and makes consequential decisions based on it that advice. If this is inaccurate as a result of negligence you could be sued for damages.

135
Q

What is a liability cap and when would one be used?

A

A restriction on liability usually a percentage of the stated market value to limit liability exposure. Within terms of engagement and at the end of the valuation report.

136
Q

Explain why the RICS are carrying out an Independent Valuation Review. Who is leading this?

A

Peter Pereira Gray
To futureproof the valuation of assets for investment purposes, as a result of market changes, impact of Covid-19 and structural shifts in occupier and investor demand.

137
Q

Explain what you understand by the term, margin of error.

A

The acceptable amount that a valuation could be inaccurate by.

138
Q

What caselaw relates to margins of error?

A

Singer and Friedlander v John D Wood & Co states that the margin of error can be 10% either side of a figure that can be said to be the right figure assuming they have acted properly.

139
Q

Explain your understanding of K/S Lincoln v CBRE Hotels (2010).

A

CBRE Incorperated rental increase projections into their report. The client was said to have relied on it because it was in the report.
Court found he made a much broader basis for his decision, and the loss was within the acceptable margin of error.

140
Q

What does heterogenous mean in terms of comparable evidence?

A

No two properties are alike.

141
Q
A

Harry Penman APC (34 decks)

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