Valuation Flashcards
(133 cards)
1
Q
What document guides valuation?
A
RICS Valuation – Global Standards, January 2022.
2
Q
What are the 3 steps to consider before a valuation?
A
Competence – Do I have the skills, understanding and knowledge?
Independence – Think first and check for conflicts of interest, either professional, personal or information conflicts
Terms of Engagement – Set out full instructions to client, receive written confirmation and confirm status of valuer and extent and limitations of the valuation and inspections.
3
Q
What are the factors of statutory due diligence for inspections?
A
Asbestos Register
Environmental Matters
EPC
Fire Safety and Health and Safety
Legal Title and Tenure
Public Rights of Way
Planning history and Compliance.
4
Q
What purposes are there for a valuation?
A
Loan Security
Rating
Accounts
Landlord and Tenant Functions
Tax
Corporate Real Estate Advice
5
Q
What sections are there in the red book?
A
The Red Book is split into 3 main sections, the Professional Standards, Valuation Technical and Performance Standards and Valuation Practice Guidance Applications.
6
Q
Are they all mandatory?
A
The Professional Standards and Valuation Technical and Performance Standards are mandatory, the Valuation Practice Guidance Applications are advisory only, and mainly applied within specific circumstances.
7
Q
What is PS 1 & 2, what do they cover?
A
PS 1 covers compliance and discusses the compliance standards for written valuations.
PS 2 covers ethics, competency, objectivity and disclosure.
8
Q
What are the headings for VPS 1-5?
A
Terms of Engagement
Inspections, Investigations and Records
Valuation Reports
Bases of Value, Assumptions and Special Assumptions
Valuation Approaches and Methods
9
Q
How many VPGA’s are there?
A
There are 10 VPGA’s
10
Q
What were the updates in the 2022 version?
A
Emphasising the need to agree clear and unambiguous terms of engagement, even when valuations are undertaken for excepted purposes.
The terms quasi, partial or non-red book should not be used in terms of engagement or reporting.
Detailed commentary on the importance of sustainability and ESG, and its impact upon valuation practice.
11
Q
What is the purpose of the red book?
A
The purpose of the red book is consistency, objectivity and transparency. It is a set of global standards which set out rules and guidance for written valuations.
12
Q
What is the Red Book NOT?
A
The red book is not a valuation manual, does not instruct members on how to value, prescribe a particular format for reports nor override statutory or judicial standards.
13
Q
What exceptions are there to the red book? What does A L I E S stand for?
A
Agency, Litigation (or negotiation), Internal (purposes), Expert (witness) and Statutory.
14
Q
How many minimum headings for the Terms of Engagement?
A
There are 18 minimum headings.
15
Q
Name some of the headings for the Terms of Engagement?
A
Status of Valuer, The Client, Other users, Identification of asset, Currency, Basis of value, Valuation Date, Extent of work, Source of information, Assumptions, Format, Restrictions of Use, IVS confirmation, fee basis, complaints, compliance statement and limitations/liabilities.
16
Q
How many minimum report headings in VPS 3?
A
There are 16 minimum headings.
17
Q
Name some of the headings for a valuation report?
A
Status of valuer, client, purpose, asset identification, basis of value, valuation date, extent of investigation, source of information, assumptions, restrictions on use, IVS confirmation, valuation approach and reasoning, valuation figure, date of report, market commentary, limitations/liabilities.
18
Q
How does market value in the Red Book differ from statutory market value?
A
The statutory definition is open to interpretation by the Upper Tribunal, can be affected by case law and legislation – also takes into account special purchaser.
19
Q
What is the definition of Market Value, where do you find this?
A
‘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.’ – IVS 104, Para 30.1.
20
Q
What is the definition of Market Rent, where do you find this?
A
‘the estimated amount for which an interest in real property should be leased on the
valuation date between a willing lessor and a willing lessee on appropriate lease terms
in an arm’s length transaction, after proper marketing and where the parties had each
acted knowledgeably, prudently and without compulsion.’ – IVS 104, Para 40.1.
21
Q
What is the definition of investment value, where do you find this?
A
‘the value of an asset to a particular owner or prospective owner for individual
investment or operational objectives.’ – IVS 104, Para 60.1
22
Q
What is the definition of fair value, where do you find this?
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.’ – IFRS 13 (International Financial Reporting Standards)
23
Q
When is fair value used?
A
Financial Reporting Purposes.
24
Q
What is an assumption?
A
Made where reasonable for the valuer to accept that something is true, without the need for specific investigation or verification.
25
What is a special assumption?
Made by a valuer where an assumption either assumes facts that differ from those existing at the valuation date or that would not typically be made at market. (anticipated change to the property, special purchaser).
26
What is the market approach? When used?
Comparing the subject asset with identical or similar assets, for which price information is available, such as market transactions. Comparable Method.
27
What is the income approach? When used?
Capitalisation or conversion of present and predicted income. Investment or Profit.
28
What is the cost approach? When used?
Indication of value using economic principle that a buyer will pay no more than the cost to obtain an asset of equal utility, either by purchase or construction. Residual or Cost.
29
What document relates to sustainability?
RICS Sustainability and ESG in Commercial Property Valuation and Strategic Advice, 3rd Edition, December 2021.
30
What is the definition of sustainability?
The consideration of matters such as (but not restricted to) environment and climate change, health and wellbeing, and personal and corporate responsibility that can or do impact on the valuation of an asset. In broad terms, it is a desire to carry out activities without depleting resources or having harmful impacts.
31
What does ESG stand for?
Environmental, Social and Governance.
32
What is the definition of ESG?
The criteria that together establish the framework for assessing the impact of the sustainability and ethical practices of a company on its financial performance and operations. ESG comprises three pillars: environmental, social and governance, all of which collectively contribute to effective performance, with positive benefits for the wider markets, society and world as a whole.
33
What is an EPC?
An Energy Performance Certificate (EPC) is a legally valid document which provides an energy efficiency rating (displayed on an A-G scale) in relation to a property’s running costs. This rating will take into account the potential energy performance of the property itself (the fabric) and its services (heating, lighting, hot water etc).
34
What is BREEAM?
Voluntary tool for rating new and refurbished buildings, to assess its procurement, design, construction and operation against a range of performance benchmarks.
35
What is SAAMCO?
A damages cap derived from the South Australia Asset Management Corp v York Montague Ltd 1996. Restricts the damages for which property valuer can be held liable, to the difference between the valuers figure and the figure decided by the court, does not reflect any client losses.
36
What is the Independent Review? Who authored it?
Independent Review of Real Estate Investment Valuations, Peter J Pereira Gray, December 2021.
37
What was the purpose of the Independent Review? How many Recommendations?
Commissioned by the RICS and Standards and Regulations Board in order to review and establish the strength of investment valuations, particularly in high-risk markets. Peter J Pereira Gray offered 13 recommendations in which the RICS accepted. An example recommendation is the incorporating of DCF as a principal model in preparing property investment valuations.
38
What are the 5 methods of valuation?
Comparable
Investment
Profits
Residual
Cost (DRC)
39
What is a yield?
A yield is a percentage based on the rate of return of an investment.
40
What is an All-Risks Yield?
Yield of fully let property reflecting all prospects and risks attached to a particular investment.
41
What is an Initial Yield?
Simple income yield for current income and current price.
42
What is a Gross Initial Yield?
Yield not adjusted for purchasers costs.
43
What is a Net Initial Yield?
Yield adjusted for purchasers costs.
44
What is an Equivalent Yield?
Average weighted yield when a reversionary property is valued using an initial and reversionary yield.
45
What is an Equated Yield?
Discount rate in a DCF valuation and the internal rate of return with growth, not an ARY.
46
What is a True Equivalent Yield?
Takes into account quarterly income rather than annual, reflecting time value of money calculation.
47
What is a Reversionary Yield?
Reflects risk, return and expectations of growth at future rent review or renewal.
48
What is a True Yield?
Assumes rent is paid in advance not in arrears.
49
What is a Running Yield?
Yield at one moment in time.
50
What is a Nominal Yield?
Initial yield assuming rent is paid in arrears.
51
What steps are in the comparable method?
Search and Select Comparables.
Verify Comparables.
Assemble comparables into a schedule.
Adjust comparables using hierarchy of evidence.
Analyse comparables to form an opinion of value.
Report value.
52
What document relates to comparable evidence?
RICS Comparable Evidence in Real Estate Valuation, Guidance Note, 1st Edition, October 2019.
53
What are the 3 categories of comparable evidence?
Category A – Direct Comparables (recent, near identical transactions).
Category B – General Market Data (historic evidence, indices, market reports)
Category C – Other Sources (interest rates, stock market, real estate of other types and location).
54
What are the main techniques for investment method?
Term and Reversion, Hardcore & Layer and Discounted Cash Flow.
55
What is Term & Reversion?
Used for reversionary investments, where market is higher than passing rent. Term capitalised until next lease event, reversion to market rent in perp at a reversionary yield.
56
What is Hardcore & Layer?
Used for overrented properties, income flow divided horizontally with bottom slice market and top slice passing, higher yield applied to top slice due to higher risk.
57
What is DCF?
Growth explicit method, involving projected estimated cash flows over a period with an exit value. (Phased development, complicated tenures of leaseholds with income voids, nonstandard investments, social housing).
58
What is YP in Perp?
Years Purchase in Perpetuity, calculation of the Present Value of the right to receive £1 in perpetuity, at a specified compound interest.
59
What is Present Value?
Calculation of the amount receivable at the expiration of a specified number of years at a specified interest rate.
60
Why do we use a yield?
We use a yield to calculate the capital value, its derived from comparable sales evidence of similar transactions, adjusted for risk based on covenant strength, specific factors of each property.
61
What is Net Present Value?
Sum of discounted cash flows, NPV can determine if project can give a positive return against a target rate of return. If NPV positive, investor exceeds target. If NPV negative, investor not exceeded target.
62
What is the Internal Rate of Return?
Rate of return at which all future cash flows must be discounted to produce an NPV of zero. Used to assess total return from an investment, making assumption on growth, re-letting and exit value. If NPV is more than zero, then target rate is met.
63
What is the Profits method?
Used for valuation of trade related properties, value of property relates to its trading profitability and potential.
64
What are the steps of the Profits method?
Annual turnover
Less costs/purchases = gross profit.
Less reasonable working expensive = unadjusted net profit.
Less operators remuneration = adjusted net profit, known as Fair Maintainable Operating Profit (FMOP).
Capitalised at appropriate all risk yield to achieve market value.
Cross check with comparable sales if possible.
65
What is the Residual method?
Purpose is to find the market value of a development site based on market inputs, can be used to form a development appraisal.
66
What are the steps of the Residual method?
Calculate Gross Development Value (GDV) – market value of completed development.
Less Total Development Costs (TDC)
Site prep
Planning costs
Building costs
Professional fees (10%-15%)
Contingency (5%-10%)
Marketing (1%-2% of GDV)
Finance cost (assume 100% at 7% or S curve)
Profit (15%-20%)
Dedect TDC from GDV to establish site value.
Cross check site value with comparable site sales.
67
What documents relate to development valuation?
RICS Valuation of Development Property, Guidance Note, 1st Edition, October 2019.
68
What is the difference between residual value and a development appraisal?
Residual calculates the land value whereas development appraisal calculates the potential profit.
69
What planning obligations are there?
S106 and Community Infrastructure Levy.
70
What is a sensitivity analysis?
Considers what if scenarios by adjusting certain inputs.
71
What is the DRC method?
Used for owner-occupied properties, for accounting and rating valuations. Cost of replacing an asset with its modern equivalent less deductions for physical, functional and economic obsolescence. Mainly used for properties such as schools, docks, oil refineries.
72
What steps are in a DRC valuation?
Value the Land in its existing use (assume planning permission exists)
Add current costs of replacing building plus fees less discount for depreciation and obsolescence.
73
What is physical obsolescence?
Result of deterioration or wear and tear over the years.
74
What is functional obsolescence?
Where design of specification of the asset no longer fulfils the function of original design.
75
What is economic obsolescence?
Due to changing market conditions for the use of the asset.
76
What is the hierarchy of comparable evidence?
New Letting
Lease Renewal
Rent Review
Independent Expert
Opinion
Arbitration/Court
Asking Rents
77
What rental adjustment techniques are there?
Straight Line – add actual income, divide by the lease length
Time Value of Money – defer rent by rent-free period at a market ARY.
DCF – growth explicit.
78
What happened at Grenfell Tower?
Cladding containing Aluminum Composite Materials, highlighted the dangers of this material. Flats over 18m high with this cladding have become un-mortgageable.
79
What acts were established following Grenfell Tower?
Fire Safety Act 2021
Building Safety Act 2022
80
What sections of IVS relate to valuation methods?
IVS 105
81
When did the red book begin?
1976
82
What does VPGA 10 relate to?
Matters that may give rise to material valuation uncertainty?
83
When did the RICS begin?
1868.
84
What is the Red Book UK Supplement?
Designed to cover specific statutory and regulatory requirements in UK jurisdiction, such as VPGA 15 Valuation of CGT, IHT, SDLT & ATED.
85
What is the margin of error? Case law?
Leading Case Law of Singer & Friedlander Ltd v J.D.Wood (1977) was held that a margin of error can vary depending on the complexity of the valuation specifics. Principle of Margin or Error reinforced in K/S Lincoln and Others v CB Richard Ellis (2010) and then further in Dunfermline Building Society v CBRE (2017) in which an acceptable margin of error was around 15%.
86
What is Hope Value?
The value arising from any expectation that future circumstances affecting the property may change, such as due to planning permission secured or realisation of marriage value from merge of two interests of land.
87
What is Marriage Value?
Created by the merger of interests, either physical or tenurial.
88
What is a special value/special buyer?
Red Book describes a special value as ‘an amount that reflects particular attributes of an asset that are only of value to a special buyer’
89
How did the RICS address COVID-19?
RICS Valuation Practice Alert 2020 stated that due to authorities requirements by jurisdictional authority to not carry out inspections or where occupants do not allow inspections, the valuations can still be compliant with the Red Book Global Standards, must be specified in the Terms of Engagement.
Include clause on market uncertainty where relevant.
90
What is the Valuer Registration Scheme? 3 Main Aims?
Any valuer on scheme is entitled to use RICS Registered Valuer, members only eligible if completed APC and Valuation to Level 3. Annual Fee must be paid.
Improve Quality of valuation and ensure highest professional standards.
Meet RICS’ requirements to self-regulate effectively.
Protect and raise status of the valuation profession.
91
What is Professional Scepticism?
PS2 S1 P1.5 – An attitude that includes a questioning mind, critically assessing evidence relied upon and being alert to causes of misleading information.
92
What are the factors of a draft report?
Must be stamped as Draft, advice only for internal purposes, not allowed to be disclosed and must be agreed prior to the report.
93
What is the timeline of an instruction? (16 steps)
Receive Instruction
Check Competence and Independence
Terms of Engagement – signed.
Gather Information, Due Diligence, Market.
Inspection and Measurement
Undertake Valuation
Draft Report
Finalise and Send Report
Issue Invoice
File in good order for archiving.
94
What are the non-domestic SDLT rates?
For over £150,000 for non-residential property
2% until £250,000
5% over £250,000
95
What are the domestic SDLT rates?
0% < £250,000
5% > £925,000
10% > £1.5m
12% 1.5m >
First buyer 0% to £425,000.
96
What is EUV?
Similar to Market Value with the added assumption that a buyer is granted vacant possession of all parts of the asset required by the business and disregards potential alternative uses and any other characteristics that would case its market value to differ.
97
Can you revalue a property without reinspection?
VPS 2 States that Inspections and Investigations must always be carried out to produce a valuation adequate for its purpose, to not inspect introduces unacceptable degree of risk in the valuation advice to be provided.
98
What is a premium?
A premium is a capital payment made by one party to another.
99
What is synergistic value?
Marriage Value
100
How do you calculate the years purchase in perp?
1 / i
101
What is risk? How is this reflected?
In the yield.
102
What is overage?
Arrangement of sharing any receipts received over and above the profits originally expected as agreed in a pre-agreed formula. Can be shared between vendor/landowner and developer, also known as claw-back
103
What are the limitations of a residual method?
Relies heavily on various objective inputs, does not generally consider cash flow, sensitive to minor adjustments, assumptions not explicit – requires cross check with comparable site.
104
What are the 3 forms of sensitivity analysis?
Simple sensitivity analysis of key variables, such as yield, GDV, build costs and finance rates
Scenario Analysis – change scenarios for development content, timing, costs, phasing of the design.
Monte Carlo simulation, probability theory, using software such as ‘Crystal Ball’.
105
What is WAULT and how is it calculated?
Weighted Average Unexpired Lease Term – total unexpired lease length by the number on tenancies.
106
What is zoning?
Valuation Technique, not method. Used for retail purposes, the rental value of the property reduces further from the front. Halving back principle of 6.1m zones, sometimes 9.14m.
107
How do we value ransom strips?
Piece of land which controls the access to another piece of land. UT suggest value of ransom strips could be in order to 15% to 50% of the development value, unlocked by the inclusion of the ransom strip in the development scheme. Key case is Stokes v Cambridge (1961) when one third of the uplift in development site value was awarded to owner of ransom strip.
108
What is a party wall?
Stands astride boundary of land belonging to two or more different land owners. Part Wall Act 1996 provides this framework for resolving disputes.
109
What constitutes a written valuation?
PS 1 – Written valuation encompasses all forms communication other than purely oral.
110
What does the red book say about oral valuations?
PS 1 – Where valuation advice is provided wholly orally, the principles set out in this volume should still be observed to the fullest extent possible. Does not mean that it is without liability.
111
What does the red book say about the used of AVM?
PS 1 – Provision of an automated valuation model (AVM) or one based on a modelling tool is regarded as the provision of a written valuation for the purpose of these standards.
VPS 5 – More advanced the method, the greater the degree of vigilance needed to ensure no internal inconsistency, for example assumptions.
112
What does it say about quasi-red book valuations?
PS 1 – Para 5.7 – Valuations are either red book compliant or not, the terms quasi, partial or non-red book must not be used in ToE or Reports.
113
What is the difference between valuation approach and a valuation method?
Approach used to mean the overall manner of which the valuation task is to be undertaken, Method is used to refer to particular procedure or technique to assess or calculate the result.
114
What is meant by ‘material uncertainty’?
VPGA 10 – Where the degree of uncertainty in a valuation falls outside any parameters that might normally be expected and accepted.
VPS 3 – Where material uncertainty occurs, this must be explicitly signalled to the client, not included in market commentary but in its own clause.
115
What is meant by ‘inherent uncertainty’?
General Market Risk, that may not be entirely unusual or unexpected.
116
What is ESG?
Environmental, Social and Governance matters – a framework for assessing the impact of sustainability and ethical practices of a company on its financial performance and operations.
117
What are the natural environmental constraints?
Flooding, heat wildfires, severe storms.
118
What are the non-natural environmental constraints?
Matters of design, configuration, accessibility, legislation, management and fiscal considerations.
119
Are any non-red book bases of value permissible?
Yes but the basis required and its origin (statutory or regulatory) must be captured in the Terms of Engagement and Report. Examples include: Tenanted Market Value, Current Value, Current Market Rents, Statutory Market Value.
120
What is a basis of value often coupled with?
Usually coupled with appropriate assumptions and special assumptions, describing the status or condition of asset.
121
What do we mean by projected value?
VPS 4 – Any projected value will rely wholly on special assumptions which must be realistic and clearly set out in the report.
122
What steps are necessary if providing projected value?
VPS 3 - Must be agreed with the client prior, must have its own valuation heading and must not be referred to as market value.
123
At a lease rent review, what basis of value do you use? Where do you find this basis?
Market Rent – VPS 4, Para 5.
124
What is the difference between EUV and Market Value for Existing Use? When should you use each one?
Market Value for existing use is the same as EUV but with special assumption that restricts market value to the existing use, ignoring alternative uses – used for non-financial reporting services.
125
What is EUV(sh) basis of value? When do you use it?
UK VPGA 7 - Used for social housing, only to be use for financial statements of registered social housing providers.
126
Is a Terms of Engagement necessary for a case where an SLA exists?
The SLA should be checked to ensure the extent covers VPS 1 minimum terms of engagement.
127
What if market has changed after the valuation date, but before the report date?
Must be drawn to attention in the report.
128
What is the purpose of VPGA’s?
Set out key issues and embody best practice for specific purposes or particular property types.
129
Which VPGA’s may apply to any valuation, rather than to specific property types and purposes?
VPGA 8 & VPGA 10
130
What is the structure of the UK National Supplement?
PS 1 &2, VPS 1-3, VPGA’s 1-18.
131
What does the red book say about valuing development property for secured lending?
The valuer must apply a minimum of 2 appropriate and recognised methods to valuing development property for each valuation project.
132
What is Informed Consent?
Informed Consent may be sought only where satisfied that a proceeding despite conflict of interest is in the interest of all those who are or may be affected and is not prohibited by law.
133
What does RICS compliance check for?
Use of Templates, Confirmation of Valuers qualification, confirm conflicts of interest checks, inspection notes of good quality, quality of reports.
