Valuation Flashcards
1
Q
Tell me what the 5 methods of valuation are.
A
Comparable method
Investment method
DRC
Profit method
Residual land valuation
2
Q
Tell me about how you would value a building using the profits/DRC/investment/comparable/residual method of valuation.
A
Comparable method - comparing to similar assets that recently transacted in the market, adjust to reflect the differences
Investment method - capitalize NOI at appropriate yield
Residual - property with a development potential, highest value use, GDV (value of a finished scheme), deduct costs to build, development profit and finance costs
Profits - specialist properties, such as hotels, golf courses, petrol stations, hospitals etc. The profits method involves establishing fair maintainable operating profit (FMOP) capable of being generated by a reasonably efficient operator (REO). This is based upon assessment and analysis of fair maintainable turnover (FMT), requiring sound knowledge of accounting principles and market norms for the specific industry sector. the FMOP is capitalised at an appropriate rate of return reflecting the risk and rewards of the property and its trading potential.
DRC - used for specialised property that is rarely sold on the open market. It is also known as the method of last resort and should not be used where there are market sales of comparable properties. It could, of course, be used as a check valuation against another method.
Reinstatement cost + contingency/professional costs - depreciation + land price = DRC
3
Q
How do you decide which valuation method to apply?
A
The nature of the property
Income producing (Investment), vacant (Comparable), specialist (profit), specialized (DRC) , under construction/development potential (RLV)
4
Q
What is a years purchase multiplier?
A
the number of years’ worth of income that an investor is willing to pay for an asset.
inverse of the yield
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)
1/i
5
Q
What is PI Insurance (PII)?
A
Professional Indemnity Insurance (PII) - type of insurance policy that provides financial protection to professionals from legal claims made against them by clients or third parties alleging negligence, errors, or omissions in their professional work.
6
Q
Tell me about the RICS requirements in relation to PII.
A
RICS requires its members to have adequate PII coverage that meets its minimum requirements, which are based on the type of work they do, their annual fee income, and the geographical areas in which they operate.
7
Q
What level of PII cover does your firm have?
A
USD 10,000,000
8
Q
How would you distinguish limitations on liability in your valuations?
A
Standard cap
If providing valuation for IPO - unlimited cap
9
Q
Where in your valuation report do you state any limitations on liability?
A
Legal certificate - beginning of report
10
Q
What would you do if you received a notice of a PII claim from a client or their solicitor?
A
work with the legal team, review the claim, gather evidence, maintain communication, take actions
11
Q
What is run off cover?
A
Run-off cover is a type of insurance policy that provides coverage for claims made against a professional or business after they have ceased trading or stopped providing a particular service. Essentially, it provides coverage for “historical” liabilities
12
Q
What is the Red Book?
A
Global Professional Standards that define procedural rules and guidance for carrying out Valuations.
Effective 31 January 2022
Made up of 2 PS (professional standards), 5 VPS (valuation performance standards) and 10 VPGAs (valuation practice guidance applications). IVS 2022 are included in full at the end.
13
Q
Why does the Red Book exist?
A
COT.
Consistency, objectivity, transparency
- Consistency in approach
- Credible and consistent valuation opinions
- Independence, objectivity, transparency
- Clarity regarding TOEs
- Clarity regarding Basis of Value
- Clarity in reporting relevant matter in the report
Reduce the risk of negligence claims - “Framework for best practice”
14
Q
Tell me about a factor which may impact value.
A
Nature, quality, size, location, market conditions
15
Q
What is your duty of care as a surveyor when undertaking a valuation?
A
the surveyor’s duty of care is to provide an impartial, honest, and reliable valuation that meets the needs of their clients while also complying with professional standards and regulations.
16
Q
To whom do you owe this duty of care?
A
Client, if reliance extended third party, and act in the public’s interest
17
Q
Why is independence and objectivity important when valuing?
A
Provide fair, accurate and reliable valuation, not influenced
18
Q
When was the Red Book last updated? What changes were made?
A
Effective 31 January 2022
IVS are updated on a rolling program every 2 years - new IVS 2022. The 2020 edition of the Red Book needed minor updates to remain aligned with the IVS 2022 and to increase sustainability and ESG focus.
Sustainability and ESG are the driver behind most of the updates in substance, style and tone. The term is defined in the new glossary
19
Q
Does this differ from when IVS were last updated?
A
No, IVS is effective from 31 January 2022
20
Q
Which sections of the Red Book are mandatory and which are advisory?
A
Professional Standards - mandatory
Valuation technical and performance standards – mandatory
RICS global valuation practice guidance – applications (VPGAs) – advisory
21
Q
What does PS1-2/VPS1-5/VPGAs relate to?
A
Professional Standards 1 - Compliance
Professional Standards 2 - Ethics and conflicts
Valuation Practice Statement 1 - TOE
VPS 2 - Inspections
VPS 3 - Reporting
VPS 4 - Bases of valuation
VPS 5 - Valuation approach
VPGA 1 – Valuation for inclusion in financial statements
VPGA 2 – Valuation of interests for secured lending
VPGA 4 – Valuation of individual trade related properties (Profits valuations)
VPGA 8 – Valuation of real property interests (inspection)
VPGA 10 – Matters that may give rise to material valuation uncertainty.
22
Q
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
A
PS 2 - 3.12
the opinion is provisional and subject to completion of the final report
the advice is provided for the client’s internal purposes only and
any draft is on no account to be published or disclosed.
If any matters of fundamental importance are not reflected, their omission must be
declared.
23
Q
What type of valuations might be relied upon by a third party?
A
secured lending
24
Q
Tell me what the definition of MR/MV/investment value/fair value?
A
MR - The estimated amount for which an interest in real property should
be leased on the valuation date between a willing lessor and 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
MV - 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 - The value of an asset to the owner or a prospective owner for individual investment or operational objectives
Fair 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
25
What is the difference between an assumption and a special assumption?
A special assumption is made by the valuer where an assumption either assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant in a transaction on that valuation date.
An assumption is made where it is reasonable for the valuer to accept something is true without the need for specific investigation or verification. Any such assumption must be reasonable and relevant, having regard to the purpose for which the valuation is required.
26
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
Yes disclose previous involvement with the asset to ensure transparency and expose any potential conflict of interest
27
If your firm is too small to have a rotation policy or valuation panel, what else can you do to ensure objectivity?
Arrange to be periodically reviewed by other members at intervals not greater than seven years
28
What must be included in your terms of engagement / valuation report?
ToE - VPS 1
1. Identification and status of the valuer
2. Identification of the client(s)
3. Identification of any other intended users
4. Identification of the assets (or liabilities) being values
5. Valuation (financial) currency
6. Purpose of the valuation
7. Basis of value adopted
8. Valuation date
9. Nature and extent of the valuer's work - including investigations - and any limitation thereon
10. Nature and source of information upon which the valuer will rely
11. All assumptions and special assumptions
12. Format of the report
13. Restrictions on use, distribution and publication of the report
14. Confirmation that the valuation will be undertaken in accordance with IVS
15. The basis on which the fee will be calculated
16. Where the firm is registered for regulation by RICS, reference to the firm's complaints handling procedure, with confirmation that a copy will be made available on request
17. A statement that compliance with these standards may be subject to monitoring under RICS' conduct and disciplinary regulations
18. A statement setting out any limitation on liability that have been agreed
Valuation Report - VPS 3
1. Identification and status of the valuer
2. Identification of the client and any other intended users
3. Purpose of the valuation
4. Identification of the asset/liability being valued
5. Basis of value adopted
6. Valuation date
7. Extent of investigation
8. Nature and sources of information relied upon
9. Assumptions and special assumptions
10. Restrictions on use, distribution and publication of the report
11. Confirmation that the assignment has been undertaken in accordance with the IVS
12. Valuation approach and reasoning
13. Amount of the valuation/valuations
14. Date of the valuation report
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. A statement setting out any limitation on liability that have been agreed
29
Where is this covered in the Red Book?
Under Valuation Practical Statements 1 and 4
30
What is a restricted valuation service and can you provide one?
A client may require a restricted service; for example, a short timescale for reporting may
make it impossible to establish facts that would normally be verified by inspection, or by making normal enquiries; or the request may be for a valuation based on the output of an automated valuation model (AVM)
Desktop or drive by valuation.
The valuer should consider if the restriction is reasonable, with regard to the purpose
for which the valuation is required. The valuer may consider accepting the instruction subject to certain conditions, for example that the valuation is not to be published or disclosed to third parties.
31
How do you deal with limitations on inspection or analysis?
Any limitations or restrictions on the inspection, inquiry and/or analysis for the purpose of the valuation assignment must be identified and recorded in the terms of engagement.
If relevant information is not available because the conditions of the assignment
restrict the investigation, then if the assignment is accepted, these restrictions and any necessary assumptions or special assumptions made as a result of the restriction must be
identified and recorded in the terms of engagement.
32
Can you revalue a property without inspecting?
A revaluation without a re-inspection of an interest in real property previously valued by
the valuer or firm must not be undertaken unless the valuer is satisfied that there have been no material changes to the physical attributes of the property, or the nature of its location, since the last assignment.
33
What RICS guidance relates to the use of comparable evidence?
(Comparable Evidence in Real Estate Valuation 2019) published in October 2019.
34
What is an internal valuer?
A valuer who is in the employ of either the enterprise that owns the assets, or the accounting firm responsible for preparing the enterprise’s financial records and/or reports. An internal valuer is generally capable of
meeting the requirements of independence and professional objectivity in accordance with PS 2 section 3, but may not always be able to satisfy additional criteria for independence specific to certain types of
assignment, for example under PS 2 paragraph 3.4.
35
Is special value from a special purchaser reflected in MV?
It is not reflected in the Market Value
36
Where does the definition of fair value come from?
IFRS 13 (International Financial Reporting Standards)
37
Does this differ from MV?
The objective of a fair value measurement is to estimate the price at which an orderly
transaction to sell the asset or to transfer the liability would take place between market
participants at the measurement date under current market conditions.
Indeed the references in IFRS 13 to market
participants and a sale make it clear that for most practical purposes the concept of fair value is consistent with that of market value, and so there would ordinarily be no difference between them in terms of the valuation figure reported.
38
When is fair value used?
For financial reporting purposes
(Inclusion in financial statements)
39
What are the 3 approaches under VPS5?
Market Approach (comparable method)
Income Approach (investment method, profits method)
Cost Approach (residual method, DRC)
40
What is the Valuer Registration Scheme?
quality assurance mechanism that monitors all registered RICS members who carry out valuations within the scope of RICS Valuation Standards “Red Book” in order to ensure consistent standards.
41
Are there any instances where certain sections of the Red Book may not apply?
It does not apply to estimated replacement cost figures for insurance purposes.
42
What additional criteria apply to secured lending valuations?
The additional criteria are deemed to include a stipulation that the valuer has had no previous, current or anticipated involvement with the borrower, or prospective borrower, the asset to be valued or any other party connected with a transaction for which the lending is required.
If the valuer and the client agree that any potential conflict can be avoided by introducing arrangements for managing the instruction, those arrangements are to be recorded in writing, included in the terms of engagement and referred to in the report.
43
What information should you specifically request for a secured lending valuation?
The valuer should enquire if there has been a recent transaction or a provisionally agreed
price on any of the properties to be valued. If such information is revealed, further enquiries should be made, for example, the extent to which the property was marketed, the effect of any incentives, the price realised or agreed and whether it was the best price obtainable.
The valuer should request details of the terms of the loan being
regarded by the lender
44
What is a yield?
return earned on an investment expressed as a percentage of the investment's value
45
What is a Net Initial Yield?
return on an investment as at the date of purchase - NOI as at current year divided by purchase price
46
What is a reversionary yield?
expected potential yield of an investment taking into account the future differences in rental income that may be occurred over time due to factors such as rental escalations, rent reviews, and lease renewals
47
What is an equated yield?
Discount rate selected by an investor, often
based on a risk-free base rate plus risk
premium but may be derived from comparison with other investments. It is to
be distinguished from the internal rate of
return which is ultimately achieved from
the investment.
48
What is an equivalent yield?
Single weighted average yield that can be used to capitalise both the term and reversionary incomes. It is the internal rate of return of a growth implicit cash-flow, meaning that any future growth in the income stream is allowed for in the choice of the yield.
49
What purchaser’s costs do you deduct from a valuation?
Dubai
Municipality Cost: 2.00% of value
Acquisition Agent Fees: 1.00% of value
Acquisition Legal Fees: 0.25% of value
Abu Dhabi
Municipality Cost: 1.00% of value
Acquisition Agent Fees: 1.00% of value
Acquisition Legal Fees: 0.25% of value
50
How would you value a property in uncertain market conditions - does the Red Book give any guidance?
VPGA 10 - Matters that may
give rise to material valuation
uncertainty
It would not normally be acceptable for a valuation report to have a standard caveat
to deal with material valuation uncertainty.
e.g.,
"We draw your attention to a combination of global inflationary pressures (leading to higher interest rates) and recent failures/stress in banking systems which have significantly increased the potential for constrained credit markets, negative capital value movements and enhanced volatility in property markets over the short-to-medium term.
Experience has shown that consumer and investor behaviour can quickly change during periods of such heightened volatility. Lending or investment decisions should reflect this heightened level of volatility and the potential for deteriorating market conditions.
It is important to note that the conclusions set out in this report are valid as at the valuation date only. Where appropriate, we recommend that the valuation is closely monitored, as we continue to track how markets respond to evolving events.'
51
How could you value a long leasehold interest?
Investment Method
Analyse the terms of the lease, remaining term, rent and obligations on the leaseholder
Select the appropriate yield to capitalise the income during the remaining term, arrive at the value
52
How does a term and reversion differ to a DCF?
Term and Reversion method includes selecting yields to capitalise the contracted income and income on reversion; both yields are growth implicit.
DCF - is growth explicit method where income is grown at appropriate growth rate, then the terminal value is estimated at the end of the holding period and all the net cash flow is discounted at the discount rate to arrive at NPV which is the value
53
What is the difference between a growth explicit and a growth implicit yield?
Implicit models reflect any expectation in the growth of market rents or capital value in the yield. Explicit models on the other hand allow for any growth expectation in the cash flow and discount this at a required rate of return, which is usually higher.
54
How would you value an under/over rented investment property?
Under rented property - term and reversion
over rented - hardcore method
55
What is the hierarchy of evidence?
The relative weight attached to different types of evidence
Open market lettings
Lease renewals
Rent reviews
Sale and leasebacks
Asking rents
56
What would you do if comparable evidence was limited?
A lack of robust evidence should not prevent a valuation being provided, this is where the skills and experience of the valuer become even more important.
Valuers can also look further afield and at a wider range of evidence or indicators where direct comparables are limited.
Uncertainty generated by a lack of comparable evidence is a common feature of the real
estate market. Such uncertainty is inevitable, and the valuer should not be afraid to report it – indeed Red Book Global Standards states that ‘valuers should not treat … a statement expressing less confidence in a valuation than usual as an admission of weakness … it is … a matter entirely proper for disclosure’. If a client understands that unusual market conditions result in an uncertain
valuation it may enable them to make a better-informed business decision.
Where no comparable evidence is present, use Cost Approach.
57
What is NPV?
NPV stands for Net Present Value. It is a financial calculation used to determine the present value of cash inflows and outflows from a project, taking into account the time value of money
58
What is IRR?
The rate at which a
cash-flow (including the purchase price)
must be discounted to give an NPV of 0.
59
What is a term and reversion?
It is used for REVERSIONARY (under-rented) investments. Income flow is divided vertically. Term (passing rent) is capitalised until next lease event (review/expiry) at an INITIAL yield;
Reversion to Market Rent valued in perpetuity at a reversionary yield;
There is a yield differential; term at a keener yield to reflect lower risk.
60
What is a hardcore and topslice?
61
What is the hardcore and layer method?
Typically used by the institutional investment market, and used when the reversion is close in time.
Income flow is divided horizontally. Both the hardcore (PR) and layer (MR-PR) are valued into perpetuity, but the layer is deferred to the next lease event.
An Equivalent Yield is applied to both the hardcore and layer.
Argus Val Cap uses this method.
62
When would you use a DCF?
DCF is a well-established method for determining value for both market value and investment value (or worth) definitions. It requires the estimated future cash flows to be determined at various levels of detail but generally includes estimates of future change in both values and costs, and estimates of the most likely outcomes of anticipated events over a specified time horizon.
I would use DCF for more complex assets, assets that require a longer time to stabilise, assets where the projected cash flows are explicitly estimated over a finite period (short leasehold interests, income voids, phased development projects)
63
What are the advantages of a DCF?
More explicit model enables the valuer to be more analytical concerning the different locational, physical, leasing and tenant characteristics of the assets.
64
What are the disadvantages of a DCF?
The increased number of input variables within DCF
65
What is a YP/PV/YP in perpetuity?
YP - 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 = 1/i
PV- Present Value = 1÷(1+i)n
66
What is marriage value?
Marriage value, also called synergistic value, is an additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values"
67
How does market value differ to investment value/fair value?
Market value refers to the price that a property would fetch in an open and competitive market, assuming a willing buyer and a willing seller, both acting prudently and with full knowledge of the property's attributes and any relevant market conditions.
Investment value, on the other hand, refers to the value of a property to a particular investor or buyer, based on their specific investment objectives, assumptions, and risk tolerance. Investment value may be different from market value, as it takes into account factors such as the investor's holding period, financing costs, and management expenses.
In contrast to market value, this basis of value does not envisage a hypothetical transaction but is a measure of the value of the benefits of ownership to the current owner or to a prospective owner, recognising that these may differ from those of a typical market participant. It is often used to measure performance of an asset against an
owner's own investment criteria.
Fair value is same as Market Value in terms of value reported
68
What type of properties would you use the profits method for?
Trade related properties; hotels, pubs and bars, restaurants, nightclubs, fuel stations, care homes, casinos, cinemas and theatres, and various other forms of leisure property. The essential characteristic of this type of property is that it has been designed or adapted for a specific use, and the resulting lack of flexibility usually means that the value of the property interest is intrinsically linked to the returns that an owner can generate from that use. The value therefore
reflects the trading potential of the property.
69
What type of properties would you use the DRC method for?
DRC is used where there is no active market for the asset being valued – that is, where there is no useful or relevant evidence of recent sales transactions due to the specialised nature of the asset – and it is impractical to produce a reliable valuation using other methods.
Specialised use:
Industrial facilities and plants
Hospitals and medical facilities
Specialized manufacturing facilities
Research and development facilities
Historical buildings and landmarks
Specialized infrastructure assets such as bridges, tunnels, and highways
Large-scale power generation facilities
70
What are the steps to providing a profits valuation?
Certain properties are bought and sold on the basis of their trading potential and in such circumstances, it can be appropriate to use a profits method of valuation. Examples (whilst not an exhaustive list) include hotels, pubs and bars, restaurants, nightclubs, petrol stations, care homes, casinos, cinemas and theatres, and various other forms of leisure property. The essential characteristic of these types of property is that they have been designed or adapted for a specific use. In many instances, there is also some form of licence, certificate or statutory consent registered against the premises that distinguish it from more mainstream commercial property. The value of the property interest is intrinsically linked to the returns that an owner can generate from that use and thus the value reflects the trading potential of the property.
The profits method of valuation involves the following steps:
An assessment of the fair maintainable trade (FMT) and fair maintainable operating profit (FMOP) that could be achieved at the property. This is ascertained by making reference to recent trading information for the business (ideally profit and loss accounts for the last 3 years). The valuer’s assessment of FMT and FMOP may be above or below the recent trading history of the property. It reflects a range of factors (such as the location, design and character, level of adaptation and trading history of the property within the market conditions prevailing) that are inherent to the property asset.
When assessing future trading potential, the valuer should exclude any turnover and costs that are attributable solely to the personal circumstances, or skill, expertise, reputation and/or brand name of the existing operator (i.e. personal goodwill). However, the valuer should reflect additional trading potential.
To assess the market value of the property the FMOP is capitalised at an appropriate rate of return reflecting the risk and rewards of the property and its trading potential. Evidence of relevant comparable market transactions should be analysed and applied.
71
What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
EBITDA is calculated by taking a company's revenue and subtracting its operating expenses, excluding interest, taxes, depreciation, and amortization. This provides a measure of a company's earnings from its core operations, without the effects of non-operating factors such as financing or accounting practices.
72
What accounts information would you want to review for a profits valuation?
Profits and Loss Statements for the last 3 years
73
Do RICS provide any guidance on RLVs or valuing development property?
RICS professional standards and guidance, global
Valuation of development
property
1st edition, October 2019
74
What is an RLV?
Residual Land Valuation - values the land
GDV - all costs to develop including developer's profit = residual land value
75
What is a development appraisal?
Development appraisal calculates the viability of the development as a form of developer's profit on cost or on GDV
76
How do they differ?
A development appraisal will typically give the profitability of a proposed development and a residual valuation will give the value of the land.
Residual Valuation is a specific calculation to establish the residual value of a development site, by estimating the GDV of a proposed scheme, deducting the total proposed development costs to arrive at a MV of the development site.
Development Appraisal
Is a calculation to establish the viability of a proposed development. It can establish likely profit to be generated by the proposed development
77
What is the basic process of undertaking a RLV/development appraisal?
GDV – input costs - fixed land cost = profit metric
GDV - input costs - profit metric = land
78
What does a development appraisal show?
Viability of the project
79
What sources of information do you use when undertaking a development appraisal?
(a) Completed property value,
(b) Construction costs,
(c) Consultants fees,
(d) Marketing costs,
(e) Timetable,
(f) Finance costs,
(g) Development profit,
(h) Discount rate.
80
What is GDV/NDV?
The GDV is the value of a development once construction has been completed, or the total sum of the sales values for the finished developement.
Net Development Value, which is the expected profit from a property development project after all the costs of development have been deducted from the GDV.
81
How do you calculate GDV?
Comparable Method - sales prices of the units , absorption period, payment plan
Investment Method - capitalised income from BTO assets
82
What do development costs include?
Build costs – these can be based on client figures, cost databases or input from a building or quantity surveyor. They will differ based on the use, specification, construction and location
Professional fees – these are typically 10-20% of the build cost, relating to fees for professionals such as an architect, quantity surveyor, structural engineer
Marketing, letting and disposal costs
Contingency – typically 3-10% of build cost depending on the level of risk and market conditions
Finance costs – based on client figures or market rates. Candidates need to be aware of the use of an S curve to reflect the pattern of construction costs
Other site specific costs, such as demolition, site preparation or specialist surveys
Fixed land cost
83
Where can you source build costs from?
in-house
AECOM
Turner & Townsend
Previous assignments
84
What are typical finance costs?
In UAE 6-8%
85
What would you apply finance costs to and on what basis?
Debt/Equity ratio (on costs)
finance costs on debt only
86
When do you need most of your costs for a development? What is an S -Curve?
Typically developers do not need access to all the capital at once due to the S Curve nature of costs within a development scheme, that allow for costs to start at a low level, and rise through the construction process.
The interest on the finance will normally be on a rolled up, compound interest basis, that will provide for the full amount of financing needed throughout the development.
As not all of the money will not need to be drawn down on at once the interest rate payable will start low and will increase with the more borrowing. During site preliminaries there aren’t many outgoing costs and therefore your borrowing will be low. As time progresses into the construction phase your costs will increase particularly when the frame of your building is being put up etc. This may mean that the increase in borrowing is quite steep. Once your development is near complete and it is just the marketing your costs of finance will the tail off until you have sold your development and paid off your loan.
You would typically look at it that you would only need to pay full interest for half of the proposed development, as interest payments will be very low and the start and then will be high in the second half. It in theory evens itself out!
87
How do you typically calculate developer’s profit?
% on GDV or costs
88
What are the advantages/disadvantages of a RLV?
extremely sensitive to minor adjustments
High quality of information for the inputs is essential
89
How do you carry out a sensitivity analysis?
Development Appraisals are sensitive to many factors, particularly to the variables that are put into the appraisal, such as construction costs, finance costs, discount rate, sales prices/rental income
A sensitivity analysis will show you how the outcome changes when the inputs are varied slightly
90
What variables might you change and why?
Construction costs, sales prices, absorption period, finance rates, discount rate
91
What RICS guidance relates to the valuation of development property?
RICS professional standards and guidance, global
Valuation of development
property
1st edition, October 2019
92
What is viability?
Assessing whether a development is viable or not based on the level of profit achieved
93
When would a cost approach be used?
. It may be used as the primary approach when there is either no evidence
of transaction prices for similar property or no identifiable actual or notional
income stream that would accrue to the owner of the relevant interest.
In some cases, even when evidence of market transaction prices or an
identifiable income stream is available, the cost approach may be used as a
secondary or corroborating approach.
94
What type of buildings would a cost approach be used for?
Specialized assets (government buildings, hospitals, schools)
95
What is the supposition that a DRC is based upon?
The replacement cost method assumes that a participant would pay no more
for the asset than the cost that would be incurred to replace the asset with a
substitute of comparable utility or functionality
96
What are the 3 components of the cost approach?
Direct (labour, materials) /indirect costs (professional, overheads, finance) +
Value of the land -
97
How do you assess the value of the land?
Comparable method
98
How do you assess Gross Replacement Cost?
Obtain costs in-house, records from previous assignments
AECOM
Turner & Townsend reports
99
How would you deal with depreciation/obsolescence?
(a) calculate all of the costs that would be incurred by a typical participant
seeking to create or obtain an asset providing equivalent utility,
(b) determine whether there is any deprecation related to physical, functional
and external obsolescence associated with the subject asset, and
(c) deduct total deprecation from the total costs to arrive at a value for the
subject asset.
100
What types of obsolescence are there?
Functional obsolescence.
Economic obsolescence.
Physical obsolescence.
101
Is the cost approach a market valuation?
It may be used as the primary approach when there is either no evidence
of transaction prices for similar property or no identifiable actual or notional
income stream that would accrue to the owner of the relevant interest.
In some cases, even when evidence of market transaction prices or an
identifiable income stream is available, the cost approach may be used as a
secondary or corroborating approach.
102
What is a liability cap and when would one be used?
A liability cap is a legal provision that limits the amount of damages that a party can be held liable for in the event of a legal claim or lawsuit. In other words, it sets a maximum amount of financial responsibility that a party can have in case they are found liable for damages or losses caused to another party.
Liability caps are often used in contracts or agreements.
103
Explain why the RICS are carrying out an Independent Valuation Review. Who is leading this?
Responding to feedback and rapidly changing market dynamics, the RICS Standards and Regulation Board (SRB) commissioned the Valuation Review in the public interest to futureproof practices in the valuation of real estate assets for investment purposes. In the Summer of 2020, the RICS Standards and Regulation Board appointed Peter J. Pereira Gray supported by an Expert Advisory Group to lead an independent review into real estate investment valuations and to provide evidence-backed recommendations.
104
What does heterogenous mean in terms of comparable evidence?
Comparable evidence is not similar in nature, difficult to draw clear conclusions or make direct comparisons
105
What checks do you undertake before accepting a valuation instruction?
Conflict of interest checks
Anti Money Laundering checks
KYC checks
106
Are there any additional requirements for loan security valuations?
comment on the suitability of the property as security for mortgage purposes, bearing in
mind the length and terms of the loan being contemplated. Where the terms are not known,
the comment should be restricted to the general marketability of the property
107
What are the key elements included within terms of engagement?
ToE - VPS 1
1. Identification and status of the valuer
2. Identification of the client(s)
3. Identification of any other intended users
4. Identification of the assets (or liabilities) being values
5. Valuation (financial) currency
6. Purpose of the valuation
7. Basis of value adopted
8. Valuation date
9. Nature and extent of the valuer's work - including investigations - and any limitation thereon
10. Nature and source of information upon which the valuer will rely
11. All assumptions and special assumptions
12. Format of the report
13. Restrictions on use, distribution and publication of the report
14. Confirmation that the valuation will be undertaken in accordance with IVS
15. The basis on which the fee will be calculated
16. Where the firm is registered for regulation by RICS, reference to the firm's complaints handling procedure, with confirmation that a copy will be made available on request
17. A statement that compliance with these standards may be subject to monitoring under RICS' conduct and disciplinary regulations
18. A statement setting out any limitation on liability that have been agreed
108
What does the Red Book say about terms of engagement?
VPS 1- Terms of engagement
(scope of work) mandatory
In brief, the terms of engagement should convey a clear understanding of the valuation
requirements and process and should be couched in terms that can be read and understood by
someone with no prior knowledge of the subject asset, nor of the valuation process.
109
What does the Red Book say about inspections?
VPS 2 Inspections, investigations
and records (mandatory)
Inspections and investigations must always be carried out to the extent necessary to
produce a valuation that is professionally adequate for its purpose. The valuer must take reasonable steps to verify the information relied on in the preparation of the valuation and, if not already agreed, clarify with the client any necessary assumptions that will be
relied on.
Any limitations or restrictions on the inspection, inquiry and analysis for the
purpose of the valuation assignment must be identified and recorded in the terms of
engagement and also in the report.
* If the relevant information is not available because the conditions of the assignment
restrict the investigation, then if the assignment is accepted, these restrictions and
any necessary assumptions or special assumptions made as a result of the restriction must be identified and recorded in the terms of engagement
and in the report.
110
What does the Red Book say about reporting requirements?
VPS 3- Valuation Report (mandatory)
General principles
The report must:
* clearly and accurately set out the conclusions of the valuation in a manner that is neither ambiguous nor misleading, and which does not create a false impression.
If appropriate, the valuer should draw attention to, and comment on, any issues
affecting the degree of certainty, or uncertainty, of the valuation under item (o) below.
* deal with all the matters agreed between the client and the valuer in the terms of
engagement (scope of work)
111
Have you turned down an instruction because of a conflict? What happened?
Firm provided a valuation to the owner of a residential apartment for internal decision purposes in relation to pricing the unit.
Later received a request to provide a valuation for the same unit from a different client.
The original owner had a debt to pay to the other and wished to use the apartment as the means for settlement; the other client disagreed on the amount of settlement and instructed us to provide a Market Value of the unit.
When disclosing the details of the conflict and previous involvement, I have not received an informed consent from the owner to undertake the assignment, hence we declined the instruction.
112
How did you approach the valuation of the development land that you mention?
Selected comps - verified the info
Analysed the comps (location, size, date)
Made adjustments to reflect better location and limited supply of land in that area, but high demand
Was provided with the proposed development - adopted RLV method to cross check the value
113
What special guidance did you refer to for your secured lending valuation?
VPGA 2
114
What weight did you give to non-completed transactions and why?
Hierarchy of evidence, not actual transactions, prices could be negotiated
115
What factors did you consider when advising on whether the property was suitable for loan security?
The condition of the property, the investment appetite for such asset
116
How did you adjust the comparable evidence?
Reviewed the transactions, which were available for single use office units only
Obtained current listings, verified via calling the agents and asking if the offers were received. Discussed what the typical negotiation discount could be achieved on the property. Adjusted the average rate (mean)
117
On the school valuation, what was the impact of the negative covenant?
More security to the landlord to receive the rent with lower risk of defaulting by the tenant. As the ability to pay the rent in due course could be impacted from the school's borrowings.
118
Given that there is no market for this asset class, did you consider using a DRC approach? If not, why not?
The DRC has been performed to cross check the value derived via Investment Method
119
Why did you use term and reversion on school valuation?
To capture a higher a risk of the Market Rent, as the rent on reversion is higher than the passing rent, risk of default.
120
How did you value leasehold staff accommodation?
Analysed the revenue received from each bed, applied Market Rent, deducted operational expenses
Reviewed the contract for the ground lease which stated that the land was leased for 50 years, the remaining term was 35 years expiring in 2060. Also received an addendum to the contract which stated the extension of the contract by 20 years at a rent equating to 4% of the annual rent. Analysed that on per sq ft basis and compared to the ground rents available in the market. Adopted that on reversion
Reflected the leasehold nature in the yield
