Valuation

Question 1

What is an internal valuer?

Answer 1

• Employed by a company to value their assets • Valuation for internal use only • No third-party reliance

Question 2

What is an external valuer?

Answer 2

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

Question 3

What are the THREE steps you should undertake prior to commencing a valuation?

Answer 3

CCT: 1. Competence - check you have the correct level of skills, understanding and knowledge 2. Conflict of Interest - check you are able to act independently on the instruction 3. Terms of engagement - issue to the client and receive written confirmation

Question 4

Why do you undertake statutory due diligence for valuations?

Answer 4

Confirm that there are no material matters which could impact on the valuation

Question 5

What types of statutory due diligence checks would you undertake when valuing a property?

Answer 5

1. Asbestos register 2. Business rates / Council tax 3. Contamination 4. Equality Act Compliance 5. Environmental matters (high voltage power lines, electricity sub-stations, telecoms masts etc.) 6. EPC rating if available 7. Flooding 8. Fire safety compliance 9. Health and safety compliance 10. Highways (check roads adopted with the local highways agency) 11. Legal title and tenure (check boundaries, ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves) 12. Public rights of way (from an OS sheet) 13. Planning history and compliance (check any onerous planning conditions, whether the property is in a conservation area / listed and subject to a s. 106 agreement or CIL)

Question 6

What are the FIVE main methods of valuation?

Answer 6

1. Comparable method 2. Investment method 3. Profits method 4. Residual method 5. Depreciated replacement cost method

Question 7

What are the THREE valuation approaches set out in IVS 105 (Red Book) (MIC)?

Answer 7

1. Market approach - (comparable)
2. Income approach - converting income/cash into a capital value (investment, residual and profit)
3. Cost approach - (DRC)

Question 8

What are the SIX steps used when collecting comparable evidence?

Answer 8

1. Search and select comparables (agent’s boards, online databases) 2. Confirm / verify information with a party directly involved in the transaction 3. Assemble comparables in a schedule 4. Interpret comparables using hierachy of evidence 5. Analyse comaprables to form an opinion of value 6. Report value and prepare file note

Question 9

What guidance did the RICS recently release on using comparable evidence?

Answer 9

RICS Comparable evidence in real estate valuation, 2019

Question 10

What are the THREE categories of evidence outlined in RICS Comparable evidence in real estate valuation, 2019?

Answer 10

Category A: direct comparables Category B: general market data Category C: other sources

Question 11

What is the hierarchy of direct comparable evidence outlined in the RICS Comparable evidence in real estate valuation, 2019?

Answer 11

• Contemporary, completed transactions of near-identical properties for which full and accurate information is available (may include the subject property) • Contemporary, completed transactions of other, similar real estate assets for which full and accurate information is available • Contemporary, completed transactions of similar real estate for which full data may not be available • Similar real estate being marketed where offers have been made but a binding contract has not been completed • Asking prices (with careful analysis)

Question 12

What is the hierarchy of general market data outlined in the RICS Comparable evidence in real estate valuation, 2019?

Answer 12

• Information from published sources or commercial databases • Other direct evidence (e.g. indices) • Historic evidence • Demand/supply data for rent, owner-occupation or investment

Question 13

What is the hierarchy of other sources outlined in the RICS Comparable evidence in real estate valuation, 2019?

Answer 13

• Transactional evidence from other real estate type and locations • Other background data (e.g. interest rates, stock market movement and returns which can given an indication for real estate yields)

Question 14

When would you use the investment method of valuation?

Answer 14

Used when there is an income stream to value

Question 15

How does the conventional investment method work?

Answer 15

• Rent received (or Market Rent) x Years Purchase = Market Value • Assumes growth implicit valuation approach

Question 16

When would you use a Term and Reversion method? How does it work?

Answer 16

• Used for reversionary investments i.e. where Market Rent is more than passing rent • Term capitalised until next rent review / lease expiry at an initial yield • Reversion to Market Rent valued into perpetuity at reversionary yield

Question 17

When would you use the Layer / Hardcore method? How does it work?

Answer 17

• Used for over-rented investment i.e. where passing rent is more than Market Rent • Income flow divided horizontally • Bottom slice = Market Rent • Top slice = passing rent - Market rent until the next lease event • Higher yield applied to the top slice to reflect additional risk • Different yields used depending on comparable investment evidence and relative risk

Question 18

What is a yield?

Answer 18

• Measure of investment return, expressed as a percentage of capital invested • Calculated as income divided by price x 100

Question 19

How would you calculate Years Purchase? What does this show?

Answer 19

• Divide 100 by the yield • Number of years required for the income to repay the purchase price

Question 20

What factors would you considering when determining a yield?

Answer 20

• Prospects for rental and capital growth • Quality of location and covenant • Use of the property • Lease terms • Obsolescence - what is the likely future rate? • Voids - what is the risk? • Security and regularity of income • Liquidity - ease of sale

Question 21

What is an All Risks yield?

Answer 21

Yield which encompasses all the prospects and risks attached to a particular investment

Question 22

What is a True yield?

Answer 22

Assumed rent is paid in advance (traditional valuation practice assumes rent is paid in arrears)

Question 23

What is a Nominal yield?

Answer 23

Initial yield assuming rent is paid in arrears

Question 24

What is a Gross yield?

Answer 24

Yield based on the net purchase price (i.e. not adjusted for purchasers’ costs)

Question 25

What is a Net yield?

Answer 25

Yield based on the gross purchase price (i.e adjusted for purchasers’ costs)

Question 26

What is an Equivalent yield?

Answer 26

Average time weighted yield reversionary property is valued using an initial and reversionary yield

Question 27

What is an Initial yield?

Answer 27

Simple income yield for current income and current price

Question 28

What is a Reversionary yield?

Answer 28

Market Rent divided by current price on an investment that is under rented

Question 29

What is a Running yield?

Answer 29

Yield at one moment in time

Question 30

When would you use the profits method of valuation?

Answer 30

Used for the valuation of trade related property where the value of the property is directly linked to the profit generated by the business (where there is a ‘monopoly’ position) e.g. pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure, healthcare properties and care homes

Question 31

What do you require to conduct the profits method of valuation?

Answer 31

Accurate and audited accounts for 3 years

Question 32

How would you use the profits method of valuation to value a new business?

Answer 32

Use estimates / business plan

Question 33

What is the methodology for the profits method of valuation?

Answer 33

EBITDA (earnings before interest, taxation, depreciation and amortisation) is capitalised at an appropriate yield

Question 34

How should you verify a value obtained using the profits method of valuation?

Answer 34

Cross check with comparable sales evidence if possible

Question 35

When would you use the depreciated replacement cost method of valuation?

Answer 35

Where direct market evidence is limited or not available for specialised properties e.g. sewage works, lighthouses, oil refineries, docks, schools, submarine base etc.

Question 36

What is the purpose of the depreciated replacement cost method of valuation?

Answer 36

• Used for owner-occupied properties • For accounts purposes for specialist properties • For rating valuations of specialist properties

Question 37

What are the TWO steps of the depreciated replacement cost method of valuation?

Answer 37

1. Value land in its existing use (assume planning permission exists) 2. Add current cost of replacing the building plus fees (used BCIS). Then make a discount for depreciation and obsolesce / deterioration

Question 38

How do you estimate the amount to depreciate the property by when using the depreciated replacement cost method of valuation?

Answer 38

1. Physical obsolescence - result of deterioration / wear and tear over the years 2. Functional obsolescence - where the design or specification of the asset no longer fulfils the function for what it was originally designed 3. Economic obsolescence - due to changing market conditions for the use of the asset

Question 39

Are valuations using the depreciated replacement cost method of valuation Red Book Global compliant?

Answer 39

• Not suitable to be used for valuations for secured lending purposes • Can only be used for the calculation of Market Value for specialised properties for valuations for financial statements

Question 40

When reporting a valuation carried out using the depreciated replacement cost method, what must the valuer state with regards to alternative use?

Answer 40

• If higher, the valuer must state the Market Value for any readily identifiable alternative use • If appropriate, they must state that the Market Value must be materially lower on cessation of the business

Question 41

What guidance has the RICS produced on the depreciated replacement cost method of valuation?

Answer 41

RICS Depreciated replacement cost method of valuation for financial reporting, 2018

Question 42

When did the new RICS Valuation - Global Standards become effective as of?

Answer 42

31st January 2020

Question 43

What has changed with regards to the naming convention of the RICS Valuation - Global Standards?

Answer 43

• Date has been dropped form the title • Now referred to as the “Red Book Global” (as opposed to the “Red Book”)

Question 44

Why was a new version of the RICS Valuation - Global Standards (“Red Book Global”) released?

Answer 44

To reflect updates to the International Valuation Standards

Question 45

What are the SIX parts of the RICS Valuation - Global Standards (“Red Book Global”)?

Answer 45

1. Introduction 2. Glossary 3. Professional Standards (PS) 4. Valuation technical and performance standards (VPS) 5. Valuation applications (VPGA) 6. The International Valuation Standard (IVS)

Question 46

What are the material changes that have been included in the Red Book Global?

Answer 46

• PS1: “Written” means any valuation conveyed by paper, any electronic or digital means or in the form of recorded media. This could include the output of valuation software e.g. an AVM • PS2: Reinforces that valuers must apply independence and objectivity to their work and “professional scepticism” when reviewing information and data • VPS3: Valuation reports must clearly state the valuation approach and relevant reasoning which led to their findings. Where appropriate, sustainability and environmental matters should form an integral part of the valuation approach • VPS5: Reinforcement of the obligation to ensure that the valuation model is appropriate for the basis of value, that this is recorded and the model’s assumptions are understood (as per new IVS 105) • IVS410: requirement for valuers of development property to apply a minimum of two method of valuation

Question 47

What does PS1 of the Red Book Global cover?

Answer 47

Requirements on when a valuation has to be Red Book Global Complaint

Question 48

What are the FIVE exceptions, where a valuation does not have to be Red Book Global compliant?

Answer 48

1. Advice is provided in preparation for, or during the course of negotiations or litigation 2. Statutory function except for the provision of a valuation for inclusion in a statutory return to a tax authority 3. Internal purposes, without liability and not communicated to any third party 4. Agency and brokerage work in anticipation of receiving instructions to dispose of or acquire and asset (except where a purchase port is required which includes a valuation) 5. Expert witness

Question 49

What does PS2 of the Global Red Book cover?

Answer 49

Ethics, competency, objectivity and disclosures

Question 50

What does PS2 of the Global Red Book state with regards to Professional and Ethical Standards?

Answer 50

All members undertaking valuations must act in accordance with the RICS Global Professional and Ethical Standards, 2015 and be bound by the RICS Rules of Conduct, 2007 (as amended)

Question 51

What does PS2 of the Global Red Book state with regards to independence, objectivity and the identification and management of conflicts of interest?

Answer 51

• Valuers and firms must act objectively and independently • Should apply “professional skepticism” when reviewing information and data before relying on it • Identify and manage conflicts of interest

Question 52

What does PS2 of the Global Red Book state with regards to Terms of Engagement?

Answer 52

• Members must understand the client’s requirements and comply with the minimum terms of engagement • Members must be able to demonstrate professional competence

Question 53

What is the hierarchy of evidence for establishing Market Rent?

Answer 53

1. Open market lettings 2. Lease renewals 3. Rent reviews 4. Third party determinations 5. Sale and leasebacks 6. Inter-company transactions

Question 54

What does VPS 1 of the Red Book Global cover?

Answer 54

Terms of engagement (minimum matters that must be confirmed in writing to the client prior to commencing a valuation)

Question 55

According to VPS 1, what matters must be confirmed in writing to client prior to the commencement of valuation?

Answer 55

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 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 the Red Book Global / IVS compliance o. Fee basis p. Complaints handling procedure to be made available q. Statement that the valuation may be subject to compliance by the RICS r. Limitation on liability agreed

Question 56

What is an Assumption, as defined in the Red Book Global?

Answer 56

Supposition taken to be true and accepted as fact without the need for specific investigation

Question 57

What is a Special Assumption, as defined in the Red Book Global?

Answer 57

Supposition taken to be true and accepted as fact, even though it is not true

Question 58

What does VPS 2 of the Red Book Global cover?

Answer 58

Inspections, Investigations and Records

Question 59

According to VPS 2, what does it state with regards to the necessity to inspect properties?

Answer 59

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

Question 60

If a valuer undertakes a desktop valuation, is it still Red Book Global compliant?

Answer 60

Yes, as long as it does not meet any of the criteria outlined in the PS 1

Question 61

When a valuer conducts a valuation on the basis of restricted information or without a physical inspection, what FOUR factors should they do (RRIN)?

Answer 61

1. Nature of the restriction must be agreed in writing in the Terms of Engagement
2. Possible valuation implications of the restriction confirmed in writing before the value is reported
3. Valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
4. The restriction must be referred to in the report

Question 62

According to VPS 2, is it permitted for a valuer to conduct a revaluation without re-inspecting the property?

Answer 62

Must not be undertaken unless the valuer is satisfied that there has been no material changes to the property or nature of its location since its last inspection (this must be confirmed in the Terms of Engagement and in the valuation report)

Question 63

What does VPS 2 state with regards to the holding of records?

Answer 63

A proper record must be kept of inspections and investigations, and of other key inputs in an appropriate business format

Question 64

What does VPS 3 of the Red Book Global cover?

Answer 64

Valuation report minimum requirements

Question 65

According to VPS 3, what are the minimum requirements to be stated within a valuation report?

Answer 65

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 & source of information relied upon i. Assumptions and special assumption j. Restrictions on 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. Comment on market uncertainty p. Statement setting out any limitations on liability that have been agreed

Question 66

According to VPS 3, is preliminary valuation advice able to be given?

Answer 66

Can be given but must be marked as a draft, for internal purposes only, which cannot be relied upon and on no account, can it be published or disclosed

Question 67

According to VPS 3, can a draft report be provided to a client?

Answer 67

• Yes, although the valuer is not to be influenced by the client in any way with respect to the final valuation figure stated in the report • A draft report provided to a client must state that it is a draft and it is subject to the completion of the final report • Any changes made to a preliminary valuation must be noted on file and reasons provided

Question 68

What does VPS 4 of the Red Book Global cover?

Answer 68

Basis of Value, Assumptions and Special Assumptions

Question 69

What is the definition of Market Value according to VPS 4 of the Red Book Global (OBIAW)?

Answer 69

The estimated amount for which an asset or liability should exchange • On the valuation date • Between a willing buyer and a willing seller • In an arm’s length transaction • After proper marketing • Where the parties had each acted knowledgeably, prudently and without compulsion

Question 70

What is the definition of Market Rent according to VPS 4 of the Red Book Global (OBOIAW)?

Answer 70

The estimated amount for which an interest in real property should be lease • On the valuation date • Between a willing lessor and willing lessee • On appropriate lease terms • In an arm’s length transaction • After proper marketing • Where the parties had each acted knowledgeably, prudently and without compulsion

Question 71

What is the definition of Fair Value (IFRS 13) according to VPS 4 of the Red Book Global (TIBA)?

Answer 71

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

Question 72

When would you be required to report Fair Value?

Answer 72

Used when undertaking valuations for inclusion in financial statements, if the International Financial Reporting Standards have been adopted by the client

Question 73

What is the difference between Fair Value and Market Value?

Answer 73

• RICS view that Fair Value is generally consistent with the definition of Market Value • Fair value relates to the actual worth of an asset and would be the mutually beneficial value between the buyer and the seller • Market value is the price which the asset will exchange between parties in the market and is influenced by market forces

Question 74

What is the definition of Investment Value according to VPS 4 of the Red Book Global (TFO)?

Answer 74

The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives i.e. the measure of worth to reflect the value against the client’s own investment criteria

Question 75

What is the definition of Equitable Value (IVS 104) according to VPS 4 of the Red Book Global?

Answer 75

• The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties • Not used in the UK

Question 76

What is the definition of Liquidation Value according to VPS 4 of the Red Book Global?

Answer 76

• Used for a group of assets sold on a piecemeal basis considering the cost of getting the assets into a saleable condition • Not used in the UK

Question 77

What does VPS 5 of the Red Book Global cover?

Answer 77

Valuation Approaches and Methods (IVS 105)

Question 78

What does VPS 5 of the Global Red Book state with regards to Valuation Approaches and Methods?

Answer 78

• Valuers are responsible for choosing and justifying their valuation approach and use of model • More than one valuation approach may be appropriate in some cases

Question 79

What do the VPGAs in the Red Book Global cover?

Answer 79

Valuation Applications (Valuation Practice Guidance Applications)

Question 80

What does VPGA 1 of the Red Book Global cover?

Answer 80

Valuation for inclusion in financial accounts

Question 81

According to VPGA 1, what must you do when valuing for inclusion in financial accounts?

Answer 81

Where the entity has adopted IFRS, the basis of value will be Fair Value

Question 82

What does VPGA 2 of the Red Book Global cover?

Answer 82

Valuations for secured lending

Question 83

What does VPGA 2 state with regards to dealing with conflicts of interest for secured lending valuations (SIR)?

Answer 83

• Any previous, current or anticipated involvement with the prospective borrower or the property to be valued must be disclosed to the lender • “Previous involvement” is defined as normally being within the past two years but under certain circumstances it can be longer • If the valuer or the client considers that any involvement creates a conflict that cannot be avoided, then the instruction should be declined

Question 84

What examples does VPGA 2 give of involvement that may result in a conflict of interest?

Answer 84

• Having a longstanding professional relationship with the prospective borrower or owner • When the valuer will gain a fee from introducing the transaction to the lender • If there is a financial interest in the property holding or prospective borrower • When the valuer is retained to act in the disposal or letting of the completed development on the subject property

Question 85

According to VPGA 2, whose responsibility is to decide whether or not to proceed with an instruction? What should they have regard to?

Answer 85

• Valuer’s responsibility to decide whether or not to accept the instruction • Should have regard to RICS Rules of Conduct

Question 86

According to VPGA 2, if it is agreed that any potential conflict can be avoided by introducing arrangements, what must be done?

Answer 86

The arrangements must be recorded in writing and included in the terms of engagement and valuation report

Question 87

According to VPGA 2, as well as the minimum requirements of a valuation report, what additional information must the report include?

Answer 87

• Disclosure of any conflict of interest identified in the terms of engagement, or that has been subsequently discovered, including the arrangement that have been made. Alternatively a statement that the valuer is not involved • Valuation methodology adopted, supported where appropriate or requested, with the calculation • Where a recent transaction on the property has occurred or been provisionally agreed, the extent to which that information has been accepted as Market Value • Where the enquiry does not reveal any information, the valuer will make a statement to that effect in the report • Comment on any environmental considerations • Comment on the suitability of the property for mortgage purposes • Any circumstances the valuer is aware of that could affect the price • Any other factor that potentially conflicts with the definition of Market Value or its underlying assumptions

Question 88

According to VPGA 2, what must you do if your valuation for secured lending purposes is subject to a Special Assumption?

Answer 88

Must be a comment on any material difference between the reported value with and without that special assumption

Question 89

According to VPGA 2, how should you take account of sustainability factors?

Answer 89

Comment on the maintainability of the income over the life of the loan in a broader sustainability context (e.g. environmental risks, matters of design, accessibility)

Question 90

According to VPGA 2, what should you comment on in relation to the end of the occupational lease?

Answer 90

Any potential for redevelopment or refurbishment

Question 91

What does VPGA 8 of the Red Book Global cover?

Answer 91

• Valuation of real property interests • Covers inspections and investigations, with particular emphasis on environmental constraints and sustainability issues

Question 92

What does VPGA 10 of the Red Book Global cover?

Answer 92

Matters that may give rise to material valuation uncertainty

Question 93

What does VPGA 10 state that valuation reports must not be?

Answer 93

Misleading

Question 94

According to VPGA 10, what should a valuer do/not do when it comes to material uncertainty?

Answer 94

• Valuer should clearly draw attention to, and comment on, any issues resulting in material uncertainty in the valuation on the specified date relating to the risk surrounding the valuation of the asset • A standard caveat should not be used

Question 95

What does part 6 of the RICS Valuation - Global Standards (“Red Book Global”) cover?

Answer 95

• International Valuation Standards, 2020 • “General Standards” addressing matters such as terms of engagement, approaches to, bases and methods of valuation as well as reporting • “Asset Standards” which provide requirements relating to specific types of asset, such as real property and development property

Question 96

What is the relationship between the Red Book Global and the RICS Valuation - Global Standards (UK National Supplement, 2018)?

Answer 96

• The UK National Supplement augments the Red Book Global requirements for valuations in the UK and is not a substitute for it • Provides requirements for members on the application of the RICS Valuation - Global Standards in the UK jurisdiction

Question 97

What were the key changes introduced in the UK National Supplement, 2018?

Answer 97

• More user friendly with clear advice on what is and is not mandatory • New UK VPGAs have been included for the valuation of central government assets, local authority assets and registered social housing providers’ assets • For financial reporting valuations, there is greater differentiation between UK GAAP and IFRS requirements • New section on valuation for commercial lending (UK VGPA 10)

Question 98

What are the FOUR parts of the UK National Supplement, 2018?

Answer 98

1. Introduction 2. UK Professional and Valuation Standards (Mandatory) 3. UK Valuation Practice Guidance Applications (Advisory) 4. Summary of changes from Red Book UK, 2014 (revised 2015)

Question 99

What does UK VPS 3 of the UK National Supplement cover?

Answer 99

Regulated purpose valuations

Question 100

According to UK VPS 3, what are regulated purpose valuations?

Answer 100

Valuations relied on by third parties who have not commission the valuation and are subject to valuation monitoring

Question 101

According to UK VPS 3, what are the FIVE regulated purpose valuations (FCUTS)?

Answer 101

1. Financial statements (company accounts)
2. Collective investment schemes
3. Unregulated property unit trusts
4. Takeovers and mergers
5. Stock Exchange listings

Question 102

According to UK VPS 3, are valuations for secured lending purposes considered a regulated purpose valuation?

Answer 102

No

Question 103

According to UK VPS 3, how does the RICS monitor regulated purpose valuations?

Answer 103

• Inspections by RICS professional regulation team • Members must declare the length of time the valuer has acted for the client for regulated valuation purposes and the extent and duration of the firm’s relationship with the client • Whether in the last financial year, the percentage of the fee income from the client is more or less than 5% of the total fee income • Whether this has changed since the end of the last financial year or will likely change

Question 104

According to UK VPS 3, what does the RICS recommend with regards to valuer selection for regulated purpose valuations?

Answer 104

• Should be a policy in place on the rotation of valuers when the asset is regularly valued • RICS recommends a 7-year maximum rotation policy

Question 105

According to VPS 3, when is a valuer unable to act on behalf of a client in relation to regulated purpose valuations?

Answer 105

Where the property was acquired by the client within the last 12 months and the valuer’s firm received an introductory fee or negotiated the purchase on behalf of the client

Question 106

Why are building cost reinstatement valuations/estimations required?

Answer 106

Building insurance purposes

Question 107

What do building cost reinstatement valuations/estimation show? What would they be based on?

Answer 107

• Cost of the reinstatement of the building without a profit • Use of RICS Building Cost Information Service (BCIS) adopting GIA for commercial properties and GEA for residential • Add VAT, demolition costs, professional fees, planning and building regulation fees and inflation allowance if applicable

Question 108

Why does a replacement cost figure provided for insurance purposes, whether separately or within a valuation report, not have to be Red Book Global compliant?

Answer 108

It is not a “written opinion of value”

Question 109

What is hope value?

Answer 109

The value arising form any expectation that future circumstances affecting the property may change

Question 110

Provide some examples of where hope value may arise.

Answer 110

• Future prospect of securing planning permission for the development of land, where no planning permission exists at the present time • The realisation of marriage value arising from the merger of two interests in land

Question 111

What must charities do when seeking to buy or sell property?

Answer 111

Obtain a Section 119 of the Charities Act 2011 valuation

Question 112

What must a valuer do when conducting a valuation on behalf of a charity?

Answer 112

• Follow guidance contained in UK VPGA 8 • Comment whether the purchase or sale is in the charity’s best interest • State whether the terms agreed are the best that can be reasonably obtained • Basis of valuation must be Market Value or Market Rent • Valuer must follow Section 119 of the Charities Act 2011

Question 113

What are the typical purchasers costs deducted from the gross market value?

Answer 113

• Stamp Duty Land Tax: at prevailing rate • Agent’s fees: 1% of purchase price (+ VAT) • Legal fees: 0.5% of purchase price (+ VAT)

Question 114

What is marriage value? How do you calculate the level of marriage value?

Answer 114

• Created by the merger of interest - can be physical or tenurial • Undertake a before and after valuation and calculate the level of marriage value created

Question 115

How is marriage value typically split between parties?

Answer 115

Typically split the marriage value create 50:50 or on a pro-rata basis using the value of the individual interests

Question 116

How would you value a long leasehold interest?

Answer 116

Deduct ground rent from the gross rent to calculate the net rent received. Then can either: • Capitalise at a yield for the remaining length of the lease • Use a dual rate to adjust the valuation to set up a sinking fund, so it is comparable to freehold investments • Discounted cash flow (DCF) • Capitalise into perpetuity at an adjusted yield to reflect the additional element of risk for the wasting asset

Question 117

What is the significance of rent received and rent receivable when calculating the value of a leasehold interest?

Answer 117

• Ground rent can be calculated on a geared basis, using the rent from the leasehold interest • Rent “received” will be where ground rent is payable on rent actually received by the leaseholder • Rent “receivable” will be where the ground rent payable is based on the potential return as opposed to the actual return i.e. the tenant takes on the risk of voids

Question 118

What is a premium in relation to a transaction?

Answer 118

A capital payment made by one party to another

Question 119

In what instances do premiums commonly arise?

Answer 119

• Key money paid by an in-going tenant of a retail property to secure a prime shop • Sum of money to represent fixtures and fittings within a building, paid by an in-going tenant • Sum of money paid by an in-going tenant for a leasehold interest, to represent the positive difference between the passing rent and the market rent of the property. This is the profit rent • In the event that there is a negative difference, a reverse premium may be paid by the out-going tenant to the new tenant • The sum of money paid by a landlord to a tenant for the surrender of a leasehold interest and the granting of a new lease

Question 120

What is the WAULT?

Answer 120

Weighted average unexpired lease term remaining to the first break or expiry of a lease Weighted by the contracted rent

Question 121

What is a ransom strip?

Answer 121

Piece of land which controls the access to another piece of land

Question 122

What is the generally accepted valuation for ransom strips?

Answer 122

• 15-50% of the development value unlocked by the inclusion of the ransom strip within the proposed development scheme • In some cases a fixed sum has been awarded • Upper Tribunal (Lands Chamber) assesses each case on its own facts

Question 123

What is the rate of stamp duty for the transfer of non-residential and mixed-use property?

Answer 123

Up to £150,000: Zero £150,001 - £250,000: 2% + £250,000: 5%

Question 124

What is ATED? What does it aim to stop?

Answer 124

Annual Tax on Enveloped Dwellings (ATED) Aims to stop on-shore and offshore individuals using companies to avoid SDLT for residential property. Current threshold is £500,000

Question 125

How is SDLT calculated on the granting of new leases and premiums payable?

Answer 125

The total across the term is NPV’d at RPI (as a discount rate)

NPV up to £150,000 = 0%
NPV over £150,000 = 1%
NPV over £5,00,000 = 2%

Question 126

How are break clauses accounted for in SDLT calculations for the transfer or leasehold properties?

Answer 126

They are excluded from the calculations

Question 127

Explain the principle of Zoning?

Answer 127

• Used for retail properties to create a unit of comparison for different sized buildings • Rationale – the rental value of the property reduces away from the street i.e. the area at the front of the shop is most valuable to a retailer as it will generate most sales • Zone A closest to the window is most valuable with the value deceasing with distance from the frontage. • Halving back principle with 6.1m (20 ft) zones

Question 128

On which retail pitches are 30ft zones used?

Answer 128

Some London retail streets (e.g. Oxford Street, Regent Street and Bond Street) and certain prime shopping streets in Scotland

Question 129

How are basement and first floor areas usually treated in retail properties?

Answer 129

A/10 depending upon the comparable evidence

Question 130

What types of unit will allowances typically be made for when zoning?

Answer 130

Those with split levels, excessive front to depth ratio and hard frontages (e.g. banks) depending on the comparable evidence

Question 131

How are return frontages typically dealt with?

Answer 131

• 2.5-10% uplift depending on the comparable evidence and footfall • Use mirror zoning i.e. zone from both frontages

Question 132

What is natural zoning?

Answer 132

When the property zones reflect physical changes in the building such as steps

Question 133

What is masking?

Answer 133

The valuation of ‘hidden’ / obscured areas

Question 134

How does the Red Book Global define a Special Purchaser?

Answer 134

A particular buyer for who a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market

Question 135

How does the Red Book Global define Special Value?

Answer 135

An amount that reflects particular attributes of an asset that are only of value to a special purchaser

Question 136

Provide examples of when a Special Purchaser would arise?

Answer 136

• Tenant purchasing the freehold interest • Association with the property e.g. owning an adjacent property

Question 137

How does Market Value reflect Special Value?

Answer 137

Ignores any price distortions caused by Special Value

Question 138

What is a net effective rent?

Answer 138

This is the rent that would be agreed between the parties for a letting of the premises on the relevant terms and conditions, but without incentives forming part of the transaction Calculated as post fit-out, pre-incentive i.e. the difference between an allowance for tenant fit-out (usually 3 months) and the rent free period

Question 139

What are the THREE approaches used for calculating net effective rent?

Answer 139

1. Straight line method 2. Straight line method assuming time value of cash flow using a yield 3. Use of DCF

Question 140

What is a party wall?

Answer 140

Stands astride the boundary of land belonging to two or more different land owners

Question 141

What is included in the Party Wall Act 1996?

Answer 141

• Provides a framework for resolving disputes relating to party walls, boundary walls and excavations near neighbouring buildings • Provides a building owner who wishes to carry out various sorts of work to an existing party wall with additional rights • Must inform all adjoining owners of your intentions to undertake works on the party wall

Question 142

What is a right of light? When does it arise?

Answer 142

• Arises after twenty years uninterrupted enjoyment of light without the consent of a third party by way of an easement with a prescriptive right • If a right to light infringed, an injunction can be granted or damages awarded

Question 143

What schemed did the RICS introduce in October 2011 for the regulatory monitoring of all valuers carrying out Red Book valuations?

Answer 143

RICS Valuer Registration Scheme (VRS)

Question 144

What are the THREE aims of the RICS Valuer Registration Scheme (VRS)?

Answer 144

1. Improve the quality of valuation and ensure the highest possible professional standards 2. To meet the RICS requirement to self-regulate effectively 3. To protect and raise the status of the valuation profession as the leading expertise in valuation

Question 145

What should clients be able to expect from a RICS valuation following the introduction of the RICS Valuer Registration Scheme (VRS)?

Answer 145

• Openness and transparency • RICS protection and international valuation standards • Expertise and clear reporting • World class regulations

Question 146

Which newly qualified members are eligible to apply for the RICS Valuer Registration Scheme (VRS)?

Answer 146

• Those who have completed the APC valuation competency to Level 3 qualify for registration • There is an alternative route post qualification to be a Registered Valuer for candidates who have taken Valuation to only Level 2. This includes undertaking more valuation experience (up to 100 days) and a case study submission

Question 147

Who is registration mandatory for under the RICS Valuer Registration Scheme (VRS)?

Answer 147

• Those undertaking valuation work in compliance with the Red Book Global • Registration is not mandatory for work excluded from the Red Book Global

Question 148

What information must be provided under the RICS Valuer Registration Scheme (VRS)?

Answer 148

• Type of valuations • Purpose of valuations • Number of valuations • Firm’s total fee income from Red Book Global valuations in the last year • What data sources used • Quality assurance audit procedures in place • History of any negligence claims and notifications

Question 149

How do the RICS monitor those signed up to the Valuer Registration Scheme (VRS)?

Answer 149

• Publishes a register of registered valuers • Monitor valuers through the submissions of their firms annual return • Risk based reviews, ranging from desktop investigations to site based Regulatory Review Visits (RRVs), dependent on the risk identified • Head of Regulation has the power to remove a valuer from the scheme

Question 150

What are the different types of ground rent?

Answer 150

• Fixed • Geared (rent received/receivable)

Question 151

What would a lender be concerned about with regards to the valuation of an over rented property?

Answer 151

The quantum of the over-rent i.e. how much the rent would decrease by at the next break option or lease expiry

Question 152

What is the generally acceptable upper limit for ground rent when it is calculated on a rent received or receivable basis?

Answer 152

10-15% of the passing rent or market rent

Question 153

What are the issues associated with the layer / hardcore method of valuation, and how could you improve these issues?

Answer 153

• Subjective yield selection - based on received tenant covenant strength and length of the over rent. Has to be done intuitively • Double-counting - as the ARY applied to the bottom layer will be growth implicit, the size of the over rent will reduce over time • Unrealistic split of income - risk of non-receipt is attached to the whole income • You can actually work out at what time the over renting will cease by finding breakthrough through integrating a rental growth rate. Otherwise you are assuming the overage will last until lease end.

Question 154

Are you qualified to comment on covenant strength?

Answer 154

No, I am able to comment on how the market would likely perceive the tenant covenant

Question 155

When making a discount to the rent for masking in a property, how much discount would you generally apply?

Answer 155

Would generally discount at the rate between the zone the floorspace is in and the rate of the zone behind i.e. if in the second zone, would discount at A/3 or if in the third zone, would discount at A/6

Question 156

Can you undertake valuation work on behalf of a lender that you are already instructed by on other loan security work? In what instances might you be conflicted due to a relationship with the lender?

Answer 156

Yes, it is permitted to undertake multiple loan security valuations on behalf of the same lender. You may, however, be conflicted if your firm had open litigation with that lender or were involved in their corporate restructuring, for example.

Question 157

What is a material uncertainty clause?

Answer 157

• Used when the degree of uncertainty falls outside any parameters that might normally be accepted • Does not mean to suggest that the valuation cannot be relied upon • Less certainty can be attached to the valuation that would otherwise be the case

Question 158

What is a return, and how could you find the IRR?

Answer 158

Used to describe the performance of a property, measured retrospectively. Use a DCF calculation to find the internal rate of return.

Question 159

What type of accounts are more preferable for conducting a profits method valuation?

Answer 159

Audited accounts are superior to management accounts

Question 160

What is the basic principle of the profits method of valuation, and what do you adjust for?

Answer 160

• Basic principle is that the value of the property depends on the profit generated from the business, not the physical building or location o Adjust for maturity of business and any unacceptable or exceptional item of expenditure

Question 161

What is the simple profits method methodology?

Answer 161

1. Calculate the EBITDA (annual turnover LESS costs/purchases) = GROSS profit.
2. Less reasonable working expenses = Unadjusted net profit
3. Less operator’s remuneration (deduct costs and expenses to get an FMOP for a reasonably efficient operator). Adjusted net profit known as the Fair Maintainable Operating Profit (FMOP).
4. FMOP x YP (from benchmarks) = Capital Value

Question 162

What valuation cross-check is advised for profits method valuation?

Answer 162

Cross-check with comparables sales evidence if possible

Question 163

What is a surrender/renewal valuation, and how do you value a premium for a surrender and renewal?

Answer 163

• When the landlord/tenant wants a surrender of the existing lease and agreed to grant a new lease- usually longer or on different lease terms simultaneously. • Calculation of a premium to reflect the change in the value of the leasehold interest • Need to value the before and after leasehold interests

Question 164

What yield do you use with the Term and Reversion method, and what consequence does that have?

Answer 164

• ARY: this means this method is growth implicit i.e. everything is expressed through the ARY (therefore you don’t ever put costs in T&R) • The all-risks yield is an (annual) IRR of a non-growth cashflow. Rental growth, obsolescence and the resale price are reflected implicitly.

Question 165

In what 2 circumstances would you typically use the hardcore/layer method, and what yield is used?

Answer 165

• Valuations for institutional investment market (e.g. prime offices), and also useful when reversion is close in time. Uses equivalent yield i.e. same yield applied.

Question 166

When would you use the hardcore/topslice method, and what yield is typically used?

Answer 166

• Hardcore/topslice: overrented, usually used with a net initial yield and risk premium.

Question 167

In a hardcore/topslice, what 3 factors are taken into account for the top slice yield applied, what type of yield is typically used, and when might the yields be the same?

Answer 167

The % uplift from the market rent rate is a function of: o The amount of overrenting o The time period until reversion to the MR o The quality of the tenants covenant • Different yields used depending on comparable investment evidence and relative risk (usually Net Initial Yield) If the tenant is a first class covenant there could be no additional risk attached to the receipt of the term rent (therefore capitalise at same %)

Question 168

How does the equivalent yield differ from the equated yield?

Answer 168

Equivalent yield is not inflated for growth. Thus the calculation of the equivalent yield differs from the equated yield in this respect.

Question 169

How can you find the equivalent yield (2 ways)?

Answer 169

○ The Equivalent yield can be found by: ■ a) Calculating a positive Net Present Value ■ b) Calculating a negative Net Present Value ■ c) Using linear interpolation ○ The Equivalent yield can be calculated by Parry’s IRR with NO projected rental growth

Question 170

What does the Red Book say about how you should adjust and document comparable evidence analysis?

Answer 170

IVS 105 states that comparables must be adjusted on a qualitative and quantitative basis
- Also states the valuer should document the reasons for the adjustments and how they were quantified

Question 171

What is a years purchase?

Answer 171

The number of years it takes for a property’s income to repay its purchase price.

Question 172

How do you calculate Years Purchase from a yield and vice versa?

Answer 172

Years Purchase = 100/yield
Yield = 100/years purchase

Question 173

What is a conventional/initial yield method?

Answer 173

• It is used for properties let at market rent, on long leases.
• Current rent (market rent) is capitalised into perpetuity

Question 174

What is the EBITDA and how do you calculate it?

Answer 174

• Earnings before interest, taxation, depreciation and amortisation.
• Annual turnover less costs, working expenses and operators remuneration.

Question 175

What is amortisation?

Answer 175

Similar to depreciation but for non-tangible asset - e.g. a business’ copyright, or their franchise agreements.

Question 176

What are the Red Book UK Professional and Valuation Standards - mandatory?

Answer 176

UK VPS 1: Terms of engagement (scope of work) and reporting: Red Book compliance
UK VPS 2: Terms of engagement (scope of work): supplementary provisions in Scotland.
UK VPS 3: Regulated purpose valuations: supplementary requirements

Question 177

What is SDLT for residential?

Answer 177

Up to £125,000 = 0%
£125,001 - £250,000 = 2%
£250,001 - £925,000 = 5%
£925,001 - £1,500,000 = 10%
Over £1,500,000 = 12%

Question 178

Whats the difference between market value and fair value?

Answer 178

Market value is in an arms length transaction after proper marketing.

Question 179

What UK VPGA is commercial secured lending valuations?

Answer 179

UKVPGA 7 – Valuation for commercial secured lending purposes

Question 180

What is the PV of £1 formula?

Answer 180

PV of £1 = 1
÷
(1+i)n
‘i’ is the yield that the valuer thinks is appropriate.
‘n’ is the term in years (to next rent review)

Question 181

What is the Years Purchase?

Answer 181

The relationship between the income and the capital value.
The number of years it will take for the annual income to add up to the capital value, when taking into account the time value of money (i.e. that it’s decreasing). i.e. the right to receive £10,000pa for 4 years won’t = £40,000 payment today.

Question 182

What is the Years Purchase formula?

Answer 182

Work out the PV of £1 first.
YP =
(1-PV of £1)
÷
i

‘i’ is the yield that the valuer thinks is appropriate.

Question 183

What is the Years Purchase into perpetuity formula?

Answer 183

Used for valuing the reversionary rent into perpetuity.
100 ÷ i
Will need to work out the PV of £1 in X number of years when the reversion begins and multiple by the above YP.

Question 184

How would you value a football stadium?

Answer 184

A: depends on the purpose. Could use Profits if selling or DRC for financial reporting. Montlake vs LSH Case – valuation of wasps training ground. Valued on DRC and not residual. Developer eventually bought and turned into resi so LSH sued.

Question 185

What inputs do you need to work out your eq yield?

Answer 185

Average of Initial yield and reversionary yield. Time period before reversion commences.

Question 186

What do you look for in covenant?

Answer 186

Company turnover

Question 187

What is meant by proper marketing?

Answer 187

1) Reasonable time period.
2) Appropriate method of disposal
3) Appropriate marketing technique

Question 188

What is a yield?

Answer 188

Outward looking measure of investment return.

Question 189

What effect does inflation have on interest rates?

Answer 189

Interest rates increase with inflation to discourage spending and inflation then decreases.

Question 190

The Red Book talks about Disclosure – what does this refer to?

Answer 190

Disclosure of competence and skill, disclosure of any personal interest or any conflict.

Question 191

What is the definition between the two Fair Value definitions?

Answer 191

The IVS definition can include special value

1. (IFRS) “the price that would be received to sell and asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date”
2. (IVS) “the estimated price for the transfer of an asset or liability between identified, knowledgeable and willing parties that reflects the respective interests of those parties.

Question 192

Are there circumstance where a net initial yield could be a negative figure?

Answer 192

I have not come across this in practice but it is possible where there is no passing rent and there are landlord’s costs such as service charge or rates.

Question 193

Describe how departure from the Red Book mandatory requirements may be possible.

Answer 193

Can depart from the Red Book if there are time or inspection constraint reasons. The departure must be agreed in terms of engagement giving reasons for the departure. The report would also need to state increased uncertainty.

Question 194

What are the possible consequences if a Valuer does not comply with VPGA’s?

Answer 194

: They are intended to embody best practice. It could be a major factor in any professional negligence claim. Should only depart from guidance notes for good reason.

Question 195

How would you respond to a request to value a property from a pavement assessment only?

Answer 195

Need enough information to adequately understand the property (floorplans, lease, trading information)

Question 196

Describe 3 assumptions that are usually made in producing a valuation?

Answer 196

Title – assumed good and clean title can be shown. Condition – assumed no material defect. Services – assumed in good working order. Free from contamination.

Question 197

What is an arm’s length transaction?

Answer 197

A transaction between unconnected parties – with no business or family connection

Question 198

How many comparables are needed to produce a similar valuation?

Answer 198

As many as possible, all of them.

Question 199

What is the longest time period before a val date a transaction could be accepted as being comparable?

Answer 199

Depends in the market and market conditions.

Question 200

What do you understand the expression Weighting of Comparable Evidence to be?

Answer 200

We attach weight to it by determining its compatibility to the subject property. Surveyors will have different opinion of evidence weighting.

Question 201

What do you understand by the expression Hierarchy of Evidence?

Answer 201

The nature of the transaction and the amount of weight attached to it. All things being equal, we attach the most rent to open market.

Question 202

What is Interpolation of comparable evidence?

Answer 202

Working between 2 known points. A range of values we know it falls within. Considered statistically safe

Question 203

What is Extrapolation of comparable evidence?

Answer 203

Working outside of known data. Making subjective adjustments. Considered to have additional risk.

Question 204

How would you value a shop unit for rent review with frontages on 2 roads e.g. it is a through unit.

Answer 204

Zone back from both frontages with the respective area In Terms Of Zone A.

Question 205

How would you determine the Market Value of an investment property let on Internal Repairing Terms?

Answer 205

I would Net the rent down, making allowances for the insurance and repairs. I would then determine if the net rent IS the market rent. If so, I would capitalise the Market Rent at an All Risks Yield (found by analysis of the market transactions) to reach Market Value.

Question 206

What is compounding?

Answer 206

When you add interest to the capital and interest on interest accrued. Growth relates to Compound – Amount of £1

Question 207

What is the name in Parry’s table that calculates to which a single sum invested will accumulated to at compound interest?

Answer 207

Amount of £1

Question 208

What is discounting?

Answer 208

Calculating the Present Value of a future sum of money

Question 209

What is the name of the table in Parry’s that Discounts a Single Sum?

Answer 209

PV of £1

Question 210

What is the other name for the YP Single Rate Table?

Answer 210

PV of £1 per Annum

Question 211

Why is the YP Single Rate table also known as the Present Value of £1 per Annum?

Answer 211

Because it gives you the Present Value of a Static income flow for a given number of years.

Question 212

What do you understand by the expression Investment Qualities?

Answer 212

The risk and difficulties associated with an investment.

Question 213

What are the 3 principle investment opportunities?

Answer 213

Gilts, Equities and Property.

Question 214

What is a Bond investment?

Answer 214

Where you have fixed capital and fixed return.

Question 215

What is the major attraction of property over the other 2 major investment opportunities?

Answer 215

By proactive positive management you can improve its performance

Question 216

What are the major disadvantages of property over the other 2 major investment opportunities?

Answer 216

Liquidity – takes time to get in and time to get out of property. Management costs. Transfer (acquisition) costs. Surveyor fees.

Question 217

What is the Yield Gap?

Answer 217

The margin above gilts that property investors will require (in a non-inflationary market)

Question 218

What is the Reverse Yield Gap?

Answer 218

Where inflation pushes gilts upwards.

Question 219

Quantify purchaser’s costs in percentage terms?

Answer 219

For a property over £500,000: Stamp Duty 4%, Agents Fees 1%, Legal Fees 0.5%, Non-recoverable VAT 0.3%.

Question 220

How is Rental and Capital Growth accounted for in a conventional investment valuation?

Answer 220

It is implicit in the cap rate. Built into the rate. The higher the yield, the lower the growth opportunity

Question 221

What techniques can be used to value an under-rented reversionary investment?

Answer 221

Either the term & reversion or the hardcore method.

Question 222

What is the Renumerative Rate?

Answer 222

One part of the YP Dual Rate

Question 223

What is the Accumulative Rate?

Answer 223

One part of the YP Dual Rate – the Sinking Fund Part

Question 224

What do you understand Top Slice Income to be?

Answer 224

The additional rent you expect to receive at reversion when the property is under-rented or the Overage/Froth when a property is over-rented.

Question 225

Is it correct to value property investments where rent is received Quarterly in Advance on the basis that rent is received annually in Arrears?

Answer 225

Yes, as we are analysing nominal Yields and capitalising on the same basis. We are providing same answer

Question 226

What effect does rent received quarterly in advance have on the yield?

Answer 226

It pushes it up.

Question 227

What is the difference between conventional investment valuation techniques and DCF techniques?

Answer 227

In conventional, rent & capital growth is not made explicit, it is implicit within the calculation. In DCF growth is made explicit. We discount at the investors true target of return - appropriate for low yield investments.

Question 228

When are DCF techniques essential?

Answer 228

In a period of high rental growth and inflation. Therefore, we would need to make the growth explicit (as the all risks yield can mask too much).

Question 229

What do you understand by the expression yield construction?

Answer 229

We can build up a yield from quilt edged securities then add on property risks to create a yield.

Question 230

What do you understand by the expression Risk Premium?

Answer 230

The Yield amount over and above Gilts to compensate for the additional complexities and difficulties

Question 231

Why do property investors require a Risk Premium?

Answer 231

As investing in Property is more risky than investing in Gilts.

Question 232

What is the definition of an existing use valuation and when is it undertaken?

Answer 232

EUV is used for owner-occupied properties for local authorities and for central Government.

Question 233

Can you discuss a draft valuation report with your client?

Answer 233

Yes I can verbally provide informal advice but would not provide written advice as this could be a valuation.

Question 234

How do you analyse a rent free period or capital contribution when determining a net equivalent rent?

Answer 234

I would consider the rent incorporating the rent free period to result in a net equivalent rent for the term.

Question 235

What is a tangible asset?

Answer 235

A fixed property you can see, touch and feel

Question 236

What is an intangible asset?

Answer 236

Something you cannot see, touch or feel such as goodwill

Question 237

What would the process be for valuing goodwill?

Answer 237

Goodwill is apportioned from the business and property from the profitability of the property and business.

Question 238

Provide an example of how you have used financial models to provide detailed reasoned advice to a client on the performance of investment and/or development scenarios?

Answer 238

Although I have not had the opportunity to use a DCF method, we do use financial modelling as a method to project and model costs. Where we use spreadsheets to calculate a financial model, I would place a caveat into the report addressing potential human error. Also to avoid this we ensure all valuation models are cross-checked by a suitably qualified surveyor.

Question 239

What are the shortcomings/limitations of financial modelling?

Answer 239

The build-up of a cash flow with money in and money out which is then discounted back to Present Value. The limitations is the availability of data to project the financial model where a market is not transparent.

Question 240

When was the COVID Valuation practice alert last updated?

What does it advise re. inspections?

And what 4 things does RICS highlight you should consider re. having the full and credible facts available?

Answer 240

• Ordinarily, inspections and investigations should always be carried out, however, the RICS recognises that dispensing with an inspection in the current circumstances is not voluntary and therefore valuation work undertaken in these circumstances without an inspection will still be fully compliant with the RB requirements. This means a desktop is:
  
  • not a departure from the RB as long as
  • you are sure the valuation can be completed on a restricted basis.
• In order for an external or desktop valuation to be RB compliant a valuer must have full and credible facts available. RICS highlights several factors that you must also consider:
  
  • obvious restrictions remain i.e. cannot advise on presence of invasive species etc.
  • there must be sufficient comparable evidence, even if it is more limited currently
  • you must consider whether any rental information provided has/may be affected by COVID
  • you should reflect upon structural and behavioural effects on markets either caused/heightened by COVID-19.

Question 241

Does PII cover desktop valuations, and what do insurers expect to see?

Answer 241

• PII covers desktop valuations, but insurers will expect to see some risk management control and a well-considered valuation file note as to how the value was arrived at and the factors influencing the valuation.

Question 242

Is the COVID material uncertainty clause obligatory, and what wording does RICS currently provide?

Answer 242

• In some circumstances the material uncertainty clause may not be necessary - no longer ‘an unprecedented set of circumstances on which to base a judgement’ VPGA 10, as long as further ‘waves’ have not changed this situation.
• If there is material uncertainty, you could use the wording output from the RICS Material Valuation Uncertainty Leaders Forum (UK), which provides a general explanatory note of current market conditions and includes either:
  
  • ‘However, now there is enough data/markets functioning (no val uncertainty)’,
  • or ‘still uncertain…’.

Question 243

Example: hardcore/topslice - £30,000 for 8 years remaining (10%), £10,000 overrented (7%). Show the calculation

Answer 243

See attached image.

Question 244

Example: hardcore/topslice - £35,000 for 3 years (8%), £15,000 overrented (11%). Show the calculation (THIS DIFFERS TO MARKS)

Answer 244

See attached image.

Question 245

Example: hardcore/layer - £40,000 for 2 years, £10,000 underrented, 7.305% equivalent(?) yield

Answer 245

See attached image.

Question 246

Example: term/reversion - £40,000 for 2 years @ 6%, £50,000 MR, ARY(?) of 7%.

Answer 246

See attached image.

Question 247

What are the 3 common circumstances (VPGA 10, RB) RICS put forward where material uncertainty could arise?

Answer 247

• Asset has very particular characteristics that present challenges forming opinion of value, regardless of approach/method used (typically a very unusual or unique property)
• Where information available to valuer is limited/restricted, either by client or valuation circumstances, and the matter cannot be sufficiently addressed by adopting one or more reasonable assumptions.
• Market disruptions: unforeseen financial, macro-economic, legal, political or even natural events. Inconsistent, or an absence of empirical data, or value being faced with an unprecedented set of circumstances on which to base a judgement.

Question 248

How does RICS advise material uncertainty is expressed in a report?

Answer 248

• Be related to both commentary on general risk of future market movements/inherent risk involved in forecasting cash flows, and risk surrounding the valuation of the specific asset.
• Expressed in qualitative terms, indicating the valuer’s confidence in the valuation opinion offered by use of a suitable form of words (this is only realistic, as the uncertainty itself arises from a lack of data)
• In most cases it is either inappropriate/impractical to reflect uncertainty quantatively, and could appear contradictory. If a mathematical measure is included, it is essential that the method/model is adequately explained, with any limitations appropriately highlighted.
• In some limited circumstances a sensitivity anaylsis may be judged appropriate in order to illustrate the effect that clearly stated changes to specified variables could have on the reported valuation, which should be accompanied by suitable explanatory comment. Be mindful the inherent risk that quantification of any sort can convey a misleading impression of precision.
• Unless specifically requested, the expression of values within a stated range is not good practice and would not normally be regarded as an acceptable form of disclosure (or ‘in the region of’). Where different values may arise under different circumstances it is preferable to provide them on stated special assumptions.