Professional Standards P.S.
The parameters for compliance with the Red Book,
a) IVS;
b) RICS regulatory requirements;
c) Rules of Conduct
They comprise:
PS 1 – Compliance with standards where a written valuation is provided
(α) IVS, (β) International ethics standards (γ) International property measurement standards
PS 2 – Ethics, competency, objectivity and disclosures
E-C-O-D
Global Professional and Ethical Standards
I-H-T-R-R
1) Act with integrity
2) Always provide a high standard of service
3) Act in a way that promotes trust in the profession
4) Treat others with respect
5) Take responsibility.
RICS Rules of Conduct
P-A-C-T-T
1) Proportionality
2) Accountability
3) Consistency
4) Targeting
5) Transparency
What is a conflict of interest?
a situation in which the duty to act in the interests of a client in a professional assignment conflict
(a) with a duty owed to another client or party (a ‘Party Conflict’)
(b) with the interests of that same RICS member who is involved (an ‘Own Interest Conflict’)
(c) a ‘Confidential Information Conflict’.
When should you decline an instruction?
- If you are not competent – knowledge and experience
- Personal interest in transaction
- Irresolvable conflict of interest
- Refer them to the RICS ‘Seek a Surveyor’ scheme.
Why do you want to be a surveyor? Why do you want to be a member of the RICS? What are the benefits of being a member of the RICS?
1-S Status 2-R Recognition 3-M Market advantage 4-N Knowledge 5-N Network
IPMS1
residential buildings externally
The sum of the areas of each floor level of a building measured to the outer perimeter of external construction features, which may be reported on a component basis for each floor of a building
IPMS 2 – office
Office building internally
The sum of the areas of each floor level of an office building measured to the internal dominant face
IPMS 2 - Residential
whole residential buildings internally
The sum of the areas of each floor level of a residential building measured to the internal dominant face,
IPMS 3 – Office
exclusive basis to an occupier
The floor area available on an exclusive basis to an occupier, but excluding standard facilities and shared circulation areas, and calculated on an occupier-by- occupier or floor-by-floor basis for each building.
IPMS 3A:
exclusive basis to an occupier
Residential
an external measurement of the area in exclusive occupation – equates somewhat to GEA (gross external area)
IPMS 3B:
exclusive basis to an occupier
Residential
an internal measurement including internal walls, etc. – equates somewhat to GIA (gross internal area)
IPMS 3C
exclusive basis to an occupier
Residential
an internal measurement excluding internal walls, etc. – equates somewhat to EFA.
Bases of Value
1) MV Market value
2) MR Market rent
3) IV Investment value
4) FV Equitable value (Fair value)
5) SV Synergistic value
6) LV Liquidation value
Market Value
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 and where the parties had each acted knowledgeably, prudently and without compulsion
Investment Value - Worth
‘the value of an asset to a particular owner or prospective owner for individual investment or operational objectives.’
Fair Value – Equitable value
‘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’ (IFRS 13)
Fair Value Vs Market Value
The fair value is used in reports where, the purpose of the valuation is financial reporting.
The end result may show some distinct variance from market value. This is because the IVS definition of fair value includes the phrase “that reflects the respective interests of those parties”. This means that one is not looking at the market as a whole, but at the specific circumstances of the two parties to the hypothetical transaction. So, in some cases the IVS-defined fair value can have a higher value than market value,
Market Value Breakdown
(a) “the estimated amount” the most probable price reasonably obtainable on the valuation date
(b) “an asset or liability should exchange” refers to the fact that the value of an asset or liability is an estimated amount rather than a predetermined amount or actual sale price. It is the price in a transaction that meets all the elements of the Market Value definition at the valuation date,
(c) “on the valuation date” requires that the value is time specific as of a given date.
(d) “between a willing buyer” refers to one who is motivated, but not compelled to buy.
(e) “and a willing seller” is neither an overeager nor a forced seller prepared to sell at any price, nor one prepared to hold out for a price not considered reasonable in the current market.
(f) “in an arm’s length transaction” is one between parties who do not have special relationship,
(g) “after proper marketing” means that the asset would be exposed to the market in the most appropriate manner. The only criterion is that there must have been sufficient time to allow the asset to be brought to the attention of an adequate number of market participants. The exposure period occurs prior to the valuation date,
(h) “where the parties had each acted knowledgeably, prudently” presumes that both the willing buyer and the willing seller are reasonably informed about the nature and characteristics of the asset, its actual and potential uses, and the state of the market as of the valuation date.
(i) “and without compulsion” establishes that each party is motivated to undertake the transaction, but neither is forced or unduly coerced to complete it.
Valuation approaches
- Market Approach: An approach based on comparing the subject asset with identical or similar assets for which price information is available, within an appropriate time horizon
- Income Approach: An approach based on capitalization of future cash flows, to produce a single current capital value
- Cost Approach: An approach based on the economic principle that a purchaser will pay no more for an asset than the cost to obtain one of equal utility whether by purchase or construction.
Premise of Value – Highest and Best Use
is the use that would produce the highest value for an asset, regardless of the actual current use.
The highest and best use may be its current when it is being used optimally.
The highest and best use must be
a) physically possible,
b) financially feasible,
c) legally allowed
d) and result in the highest value.
e) If different from the current use, the costs to convert an asset to its highest and best use would impact the value.
bases of value require the consideration of highest and best use. These bases of value include Market Value and Fair Value
What are the minimum requirements for reports?
1) Identification and status of the valuer
2) Identification of the client(s) AND of any other intended users
3) Purpose of the valuation
4) Identification of the asset(s) or liability(ies) valued
5) Basis(es) of value adopted
6) Valuation date
7) Nature and source(s) of the information relied upon
8) Assumptions and special assumptions
9) Restrictions on use, distribution and publication of the report
10) Confirmation that the valuation has been undertaken in accordance with the IVS
11) A statement setting out any limitations on liability that have been agreed.
Report only:
12) Date of report
13) Valuation approach and reasoning
14) Amount of the valuation or valuations
15) Commentary on any material uncertainty in relation to the valuation where it is essential to ensure clarity on the part of the valuation user
16) Extent of investigation
What are the differences from the terms of engagement?
1) Identification and status of the valuer
2) Identification of the client(s) AND of any other intended users
3) Purpose of the valuation
4) Identification of the asset(s) or liability(ies) being valued
5) Basis(es) of value adopted
6) Valuation date
7) Nature and source(s) of the information relied upon
8) Assumptions and special assumptions
9) Restrictions on use, distribution and publication of the report
10) Confirmation that the valuation will be undertaken in accordance with the IVS
11) A statement setting out any limitations on liability that have been agreed.
terms of engagement only:
12) Where the firm is registered for regulation by RICS, reference to the firm’s complaints handling procedure, with a copy available on request
13) A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations
14) Valuation (financial) currency
15) Format of the report
16) The basis on which the fee will be calculated
- Customer procedure
a. Conflict of interest search
b. Announce we have a complains handling procedures
c. Regulated under RICS
d. TOE
- What is an assumption?
‘A supposition taken to be true. It involves
a) facts,
b) conditions or situations affecting the subject of,
c) or approach to, a valuation that,
d) by agreement, do not need to be verified by the valuer as part of the valuation process.
e) Typically, an assumption is made where specific investigation by the valuer is not required in order to prove that something is true.
- What is the difference of a special assumption and give an example?
A special assumption is made by the valuer where an assumption either
a) assumes facts that differ from those existing at the valuation date or
b) that would not be made by a typical market participant in a transaction on that valuation date.
- YP formula
Number of years = n Interest rate = i Amount of €1 (A) = (1 + i)^n Present Value of €1 (PV) = 1/A Years Purchase (YP) = (1 – PV)/i Annuity €1 will purchase = 1/YP The annual sinking fund (ASF) i/(A-i)
- Implicitly ARY
a) The all risk yield is adapted to reflect differences between comparables and the subject property.
b) It has to reflect a multitude of factors
1) from return on capital,
2) security of income,
3) ease and cost of selling,
4) management costs,
5) depreciation
6) and rental growth.
- Explicit us
The discounted cash flow technique (DCF) has evolved due to the need to make valuation more “transparent”. It makes explicit assumptions on future rental growth, holding period, depreciation, refurbishment, redevelopment, costs of management and transfer, taxation and financing arrangements.
- Rent control law
1) The property was erected before the 31/12/1999 and is in a ‘Rent Control Area’, therefore it’s regulated under the ‘Rent Control Law ’
2) The contract expired and the tenant is still in possession of the shop, therefore according to the law is considered statutory and is protected by the law in regards to a) tenure and b) the rent amount.
3) Τhe rent was last adjusted at least two years ago, the tenant or owner are eligible to apply for rent adjustment.
4) The tenant can apply to the ‘Rent control court’, for rent adjustment in the basis of ‘Fair Rent’ according to the Rent Control Law.
5) A ‘Fair Rent’ is the ‘Market Rent’ less statutory disregards and discounted to remove any element of scarcity. It is calculated taking into account a) the average rent in the ‘locality ’ and b) the average rent of non-assured tenancies (which are considered to represent the ‘Market Rent’).
6) The ‘RCL’ specifies that all the property characteristics should be taken into account such as age, character, size, location, state of repair and amenities and the comparable rentals should be adjusted as such.
7) 90% of the average rent in the locality and the market rent (80% for refugees)
8) Compensations:
• 18 market rents – not current rents
• Good-will: has to be proven.
- Repossession is ordered in the following cases
1) When rent is delayed beyond 20 days
2) when the tenant uses the facility for illegal purposes
3) when the tenant has caused serious damages to the premises
4) when the tenant has sub-rented the premises without permission
5) when the tenant has a profit disproportionate to the rent he pays, due to sublease,
6) where residence is necessary for owner-occupation the owner, the spouse, the child or the children dependent parents,
7) when a shop is necessary for the owner, his or her spouse or child,
8) when required by the owner for demolition, reconstruction, conversion, execution of works in a listed building,
9) to carry out a development plan,
10) compulsory acquisition
11) the premises are necessary for purposes of public interest,
12) the renter has given a notice of discharge and the owner sold or rented the premises,
13) the owner is the Republic of Cyprus and the premises are rented to an employee, who in subsequently ceased to meet the relevant criteria.
- Compulsory purchase
Date of valuation: Date of publication
Procedure:
1) Publication
2) sent written notice to owner
3) 30 days after publication the owner can appeal
4) 14 months after publication a written proposal must be offered
5) The owner can accept – accept and reserve right for appeal (75days)- do nothing (the court will verify decision)
Rules of compensation:
1) Compensate in terms of market value
2) Disregard additional value from use of property for reasons of the acquiring authority
3) No allowance due to compulsory purchase
4) Disregard any illegal use
Assessment compensation
1) Land loss
2) Business loss
3) Re-installment
4) Severance (where part of the land taken)
5) Injurious affection
6) Increase in value is deducted
7) Interest is paid from the date of publication.
- IRR
Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a project or investment.
- Net present value (NPV)
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.
- Discount rate
rate of return that takes into account the time value of money.
Or Required annualized rate of return to make the investment worthwhile.
Real estate investors price assets based on risk adjusted returns, Higher risk>higher rate of return
Range of discount rates in real estate is 7-20%
- Explain the concept of discounting
Money is worth more to you now than in the future
The ‘present value’ represents the value today of a future stream of income.
Most property investors will be mainly interested in what happens to their investment over a long period. Because of the time and cost involved, few people buy property with the intention of re-selling straight away. However, investors want to know the value of their investment for the future now.
- Discounted Cash flows
1) Growth explicit.
2) Cash flows daily, weekly, monthly, quarterly, yearly etc.
3) Net cash flow calculated by deducting outgoings from income.
4) Discounts cash flows from future back to present.
5) May use PV of £1, YP Single Rate & YP in perp.
6) Provides estimate of worth of an investment to a particular investor.
7) Represents maximum price that an investor should bid for a particular investment to achieve their target rate.
8) Time value of money taken into consideration.
- Which method would you say is better comparable or residual and why?
The residual method
1) can be easily manipulated due to the large number of assumptions and variables.
2) Small changes in any of the inputs can cumulatively lead to a large change in the land value.
3) Some of these inputs can be assessed with reasonable objectivity, but others present great difficulty. For example, the profit margin, or return required, varies dependent upon whether the client is a developer, a contractor, an owner occupier, an investor or a lender, as well as with the passage of time and the risks associated with the development.
How can this be fixed?
1) The use of reference books, websites, indexes that are considered guides
2) Sensitivity analysis.
3) Comparative evidence adjustment
4) All assumptions must be stated
The comparative method is considered the corner stone of valuation methods:
Advantages
1) in a stable market the method is reliable.
2) Impacts the other four methods
3) Simple to use
Disadvantages:
1) No two properties are identical
2) we need a substantial number of transactions
3) the properties need to be valued on the same basis
4) transactions must be recent or adjusted.
- Calculating the residual
Value of the completed development less costs of carrying out the development equals the amount of money available to pay for the land
The sale price of the completed development (Gross Development Value) less the cost of the development (Development costs) less profit equals the residue (for purchasing the land)
Gross development value-Total development cost-developers profit=site value
VPS
VPS 1 – Terms of engagement (scope of work)
VPS 2 – Inspections, investigations and records
VPS 3 – Valuation reports
VPS 4 – Bases of value, assumptions and special assumptions
VPS 5 – Valuation approaches and methods
