Valuation Flashcards
1
Q
What is the full name of the Red Book?
A
RICS Valuation - Global Standards
2
Q
When did the most recent version of the Red Book come into effective?
A
31st January 2022
3
Q
What is the full name of the UK Supplement?
A
RICS Valuation - Global Standards 2017 UK National Supplement
4
Q
When did the UK Supplement become effective?
A
14th January 2019
5
Q
Can you give the reasons for the Red Book update?
A
- To reflect the changes in the International Valuation Standards (IVS) published by the International Valuation Standards Council (IVSC)
- Progress in international standards for ethics and measurement
- Sustainability and ESG factors
6
Q
What is the purpose of the Red Book?
A
- Consistency, objectivity and transparency
- To assure users that a valuation provided anywhere in the world is in accordance with the highest professional standards
- The standards set out procedural rules and guidance which:
a) impose mandatory obligations regarding competence, objectivity and transparency
b) establish a framework for uniformity and best practice
c) expressly comply with the RICS Rules of Conduct
7
Q
What is the purpose of the UK national supplement?
A
It sets out specific requirements and guidance for valuations in the UK. (the content is supplemental to the Red Book Global Edition, and is not in substitution)
8
Q
What are the five areas of exception where valuation is provided?
A
- Agency or brokerage work in anticipation of disposal or acquisition instructions
- The valuation advice is provided in anticipation of giving evidence as an expert witness
- Performing statutory functions
- Purely for internal purposes
- Preparation for or during negotiations or litigation
9
Q
Once agreed with the client, what must a departure be clearly stated within?
A
- the Terms of Engagement
- the Report
- any published reference to the Report
10
Q
Members undertaking valuations must act within accordance with what?
A
RICS Rules of Conduct
11
Q
Name the three things relating to PS 2 - Ethics, competency, objectivity and disclosures.
A
- Professional and Ethical Standards
- Independence, objectivity and the identification and management of conflicts of interest
- Terms of Engagement
12
Q
What is the definition of an internal valuer?
A
- Employed by company to value the assets of the company
- Valuation for internal use only
- No third-party reliance
13
Q
What is the definition of an external valuer?
A
- Has no material links with the asset to be valued or the client
14
Q
What is considered a ‘responsible valuer’?
A
Must be prepared by or under the supervision of an appropriately qualified and named valuer who accepts responsibility
15
Q
Can you list what must be included in the Terms of Engagement?
A
a) Identification and status of the valuer
b) Identification of the client(s)
c) Identification of any other intended users
d) Identification of the asset(s) or liability(ies) being values
e) Valuation currency
f) Purpose of valuation
g) Basis of value adopted
h) Valuation date
i) Nature and extent of the valuer’s work - including investigations - and any limitation thereon
j) Nature and sources(s) of information upon which the valuer will rely
k) All assumptions and special assumptions to be made
l) Format of the report
m) Restrictions for use, distribution and publication
n) Confirmation of Red Book Global/IVs compliance
o) Fee basis
p) Complaints handing procedure to be made available
q) Statement that the valuation may be subject to compliance by the RICS
r) Limitation on liability agreed
16
Q
What must be taken into consideration when performing a valuation on the basis of restricted information or without a physical inspection?
A
- The nature of the restriction must be agreed in writing in the Terms of Engagement
- The possible valuation implications of the restriction confirmed in wiring before the value is reported
- The valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
- The restriction must be referred to in the Report
17
Q
What is VPS 2?
A
Inspections, Investigations and Records
18
Q
What is VPS 1?
A
Terms of Engagement
19
Q
What is VPS 3?
A
Valuation Reports
20
Q
What is VPS 4?
A
Bases of Value, Assumptions and Special Assumptions
21
Q
What must the valuation report include?
A
- Clearly and accurately set out the conclusions of the valuation
- If appropriate, the valuer should draw attention to and comment on any issues affecting the degree of certainty of the valuation
- Deal with all matters agreed between the client and the valuer in the Terms of Engagement
22
Q
What are the minimum requirements to be stated within a valuation report?
A
a) Identification and status of the valuer
b) Identification of client and other intended users
c) Purpose of the valuation
d) Identification of the asset
e) Basis of value
f) Valuation date
g) Extent of investigation
h) Nature and source of information relied upon
i) All assumptions and special assumptions
j) Restrictions on use, distribution and publication of the report
k) Instruction undertake in accordance with IVS standards
l) Valuation approach and reasoning
m) Valuation figures
n) Date of valuation report
o) Comment on market uncertainty
p) Statement setting out any limitation on liability that have been agreed
23
Q
Name the four bases of value.
A
- Market Value
- Market Rent
- Investment Value
- Fair Value
24
Q
Define Market Value.
A
The estimated amount for which an asset or liability should exchange:
a) On the valuation date
b) Between a willing buyer and willing seller
c) In an arms length transaction
d) After proper marketing
e) Where the parties had each acted knowledgeable, prudently and without compulsion
25
Market value is...?
The highest and best use of an asset, ignoring price distortions caused by special value and marriage value
26
Define Special Value.
An amount that reflects particular attributes of an asset that are only of value to a special purchaser
27
Define Special Purchaser.
A particular buyer for whom a particular asset has a special value because of advantages arising from its ownership that would not be available to other buyers in a market
28
Define Synergistic Value.
Is the result of a combination of two more more assets or interests where the combined value is more than the sum of the separate values
29
Define Marriage Value.
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
30
What constitutes an 'arms length transaction'?
The parties do not have any relationship
31
What do you understand by 'proper marketing'?
Exposure to the market in most appropriate manner for an appropriate period of time
32
Define Market Rent.
The estimated amount for which an interest in real property should be leased:
a) On the valuation date
b) Between a willing lessor and lessee
c) On appropriate lease terms
d) In an arms length transaction
e) After proper marketing
f) When the parties had each acted knowledgeable, prudently and without compulsion
33
What is Market Rent used to indicate?
The amount for which a vacant property may be let or a property may be re-let when the lease terminates
34
Define Investment Value.
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives
35
Define 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
36
The definition of Fair Value is adopted by who?
International Accounting Standards Board (IASB)
37
What are the three further Valuation Bases in the UK National Supplement?
1. Existing Use Value (EUV)
2. Existing Use Value for Social Housing (EUV-SH)
3. Projected Market Value (PMV)
38
What is VPS 5?
Valuation Approaches and Methods
39
Under VPS 5, what are valuer's responsible for?
Choosing and justifying their valuation approach and use of model
40
Overall valuation approach is usually classified into one of which three main categories?
1. the market approach (comparable method)
2. the income approach (investment method)
3. the cost approach (contractors method / DRC)
41
What is an Assumption?
It is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation or verification
42
What is a Special Assumption?
A special assumption is a supposition that is taken to be true and accepted as fact, even though it is not true
43
Give examples of Special Assumptions.
1. Planning consent has or will be granted
2. Proposed development has been completed in accordance with a defined plan and specification
3. The property has been changed in defined way
4. The property is vacant (when occupied at the valuation date)
5. The property is let on defined terms (when vacant at the valuation date)
6. That synergistic value is created where one or more parties has a special interest
44
Give examples of Special Assumptions where a property has been damaged.
1. The property has been reinstated
2. Valuing as a cleared site with development permission for the existing use
3. Refurbishment or redevelopment for a different use
45
Define Regulated Purpose Valuations.
Disclosures where the public has an interest or upon which third parties may rely
46
What are the five purposes for Regulated Purpose Valuations?
1. Financial reporting (company accounts)
2. Stock Exchange listings/inclusion in prospectuses and circulars
3. Takeovers and mergers
4. Collective investment schemes
5. Unregulated property unit trusts
47
Give examples of where a valuer should not undertake a Regulated Purpose Valuation.
1. One more more of the properties have been acquired within the last 12 months; and
2. The valuer or firm has received an introductory fee or negotiated the purchase.
48
Regulated Purpose Valuation Reports must state what?
a) the proportion of the total fees paid by the client to the firm if less than 5%; or within a range on 5% if more than 5%
b) a statement where it is anticipated that there will be a material increase in the proportion of the fees payable by the client to the firm
49
What are the two financial frameworks in the UK and Republic of Ireland?
1. Interantional Financial Repoerting Standards
2. UK and Ireland Generally Accepted Accounting Practice (UK GAAP)
50
Give an example of where Fair Value is used .
Valuing company accounts
51
When could the depreciated replacement cost (DRC) method be used in valuation?
For specialised properties
52
Define Specialised Property
A property that is rarely, if ever, sold in the market, except through a sale of the business or entity of which it is part, due to the uniqueness arising from its specialised nature and design, its configuration, size location and otherwise
53
Define Depreciated Replacement Cost
The current cost of replacing an asset with its modern equivalent asset, less deductions for physical deterioration and all relevant forms of obsolescence and optimisation
54
Name the three common circumstances in which material uncertainty may arise.
1. The asset or liability may have characteristics that make it difficult to value
2. Limited or restricted information
3. Disrupted markets
55
What are the five methods of conventional valuation?
1. Comparison
2. Investment
3. Residual
4. Profits / Accounts
5. Contractor's / Depreciated Replacement Cost
56
What is a hierarchy of evidence?
The relative weight attached to different types of evidence
57
A transaction is considered to be directly comparable with the subject property if there are which similarities?
1. Physical characteristics
2. Location
3. Use
4. Tenure (and lease terms if appropriate)
5. Time scale
58
What are the three important steps to first undertake when instructed on a valuation?
1. Competence
2. Independence
3. Terms of Engagement
59
Give examples of types of comparable evidence.
1. Non-transactional evidence
2. Transactional evidence
60
Give examples of sources of comparable evidence
1. Own / office records
2. For sale / to let boards
3. Agents / Valuer's
4. Land Registry
5. Various free web-sites for residentail transactions
6. Estates Gazette Interactive (EGI)
7. Focus / Co-Star
61
What are the Valuation: Principles into Practice, 6th Edition (2008), suggestions for the hierarchy of evidence?
a) open market lettings
b) lease renewals
c) rent reviews
d) independent expert's determination
e) arbitrator's awards
62
The adjustments made to comparable evidence to value a property may be referred to as what?
1. Interpolation
2. Extrapolation
63
What is interpolation?
Calculating or plotting on a graph a value that lies between two extreme points
64
What is extrapolation?
Calculating or plotting on a graph a value that lies outside two extreme points
65
How are zones calculated?
Zone A being X
Zone B being X/2
Zone C being X/4
Remainder being X/8
66
What does ITZA stand for?
In terms of Zone A
67
What zones size is most common?
6.10 metres (20ft)
68
What would be considered the norm for zoning on Oxford Street?
9.14 metres (30ft)
69
Why is zoning used?
For the comparison of retail properties to create a unit of comparison for different sized buildings
70
What value would you place when zoning basement or first floor areas?
X/10 approximately
71
What is the full title and effective date of the comparable evidence Professional Standard?
Comparable Evidence in Real Estate Valuation, 1st Edition (2019)
Effective date 9th October 2019
72
When was Comparable Evidence in Real Estate Valuation, 1st Edition (2019) reissued from a Professional Statement to a Professional Standard?
April 2023
73
What is the Investment Method used to value?
Shops, offices, industrial and warehouse properties
74
For which tyre of properties would you use the Investment Method?
1. Let as investments
2. Owner occupied
3. Vacant
75
What is the simplest form of The Investment Valuation calculation?
Market Rent x Year Purchase = Market Value
76
What outgoings need to be deducted for IRI secondary and tertiary properties for the Investment Method?
1. Repairs
2. Insurance
3. Management
77
Multi-tenanted buildings such a multi-storey offices and shopping centres have what type of rental income?
Net income
78
How do you calculate the Years Purchase in perpetuity?
100/Yield
79
Rent comparibles in the Investment Methods should be analysed to determine what?
1. Market Rent
2. the YP and market capitalisation rate / all risks yield
80
What could impact the all risk yield of a property?
1. The construction
2. The quality of the tenant's covenant
3. The amount of rent
4. The unexpired lease term
5. The other lease terms
6. Anticipated rental growth
81
Define all risk yield
The remunerative rate of interest in the valuation of fully let property let at market rent reflecting all the prospects and risks attached to the particular investment
82
Define true yield
Assumes rent is paid in advance
83
Nominal yield
Initial yield assuming rent is paid in arrears
84
Gross yield
The yield not adjusted for purchasers cost
85
Net yield
The resulting yield adjusted for purchasers cost
86
Equivalent yield
Average weighted yield when a reversionary property is valued using an initial and reversionary yield
87
Initial yield
Simple income yield for current income and current prices
88
Reversionary yield
Market rent divided by current price on an investment let at a rent below the market rent
89
Running yield
The yield at one moment in time
90
When is the Residual Method of valuation used?
When valuing land and properties with development, redevelopment and refurbishment potential
91
Residual Valuation can be expressed as what equation?
Value of completed development - development costs - developers profit = Land Value
92
What is a development appraisal?
A calculation to establish the value of a proposed development based upon client inputs
Provides guidance as to the viability of the proposed development
93
How is Market Rent calculated in a Residual valuation?
NIA / IPMS 3 multiplied by the market rent per sq ft
94
How do you calculate Letting Fee in a Residual valuation?
10% of Market Rent
95
How do you calculate the Sales Fees in a Residual valuation?
1.5% of Sale Price
96
How are Building Costs calculated in a Residual valuation?
GIA floor area / IPMS 2 multiplied by cost per square metre
97
What is included in the Fees on Building in a Residual valuation?
Architects, Quantity Surveyors and Site Engineers as a percentage of building cost
98
What is a typical contingency for a Residual valuation?
An allowance for any charges that may occur in the building costs and interest
New developments / redevelopments - 1% to 5%
Refurbishments / conversions - 5% to 10% as there is more risk
99
How can Developers Profits be calculated in a Residual valuation?
As a percentage of total costs (22% to 25%) or a percentage of gross development value (15% to 17%)
100
How do you calculated Agents and Letting Fees in a Residual valuation?
1% - agent fees
0.5% - legal fees
0.3% - VAT (20% of legal fees)
101
What are the Stamp Duty Land Tax bands?
0% on first £150,000
2% on next £100,000
5% above £250,000
102
What is a ransom strip?
A strip of land that gives access to development land
103
How is a ransom strip value calculated?
One-third of the increase in value of the development land resulting from the access
104
Give examples on what type of properties the Profits / Accounts Method is used.
Amusements arcades
Amusement and theme parks
Bingo clubs
Bowling centres
Caravan and chalet parks
Casino
Cinemas
Gold courses
Health treatment centres
Hotels and motels
Ice rinks and roller rinks
Marinas and moorings
Public house
Squash and tennis clubs
Theatres
105
When should the Contractors Method be used?
Only where direct market evidence is limited or unavailable for specialised properties.
106
What is the equation for compounding interest?
(1 + n)^2
107
What is nominal and effective rates of interest?
When interest is paid over a period of less than a year.
The effective rate is the annual percentage rate (APR)
108
How do you calculate Present Value?
Discounting the future cash amount or property value at the appropriate discount rate
109
What is discounting?
Is is the calculation of the amount of cash that need to be invested today to provide the future amount over the time period at the applicable rate of interest
110
What is the equation to calculate present value of £1?
(1 + i)^-n
111
How is the Years Purchase single rate otherwise know?
Present Value of £1 per annum
112
Define investment.
A placements of capital in expectation of deriving income or profit from its use.
113
What are the three main investments?
Gilts (UK Governments Bonds)
Equities (Shares in companies)
Property
114
What is the calculation for the Investment Method?
Market Rent x YP = Market Value
115
How is the Years Purchase into perpetuity calculated?
100/Yield
116
What is the Yield more accurately described as?
Market Capitalisation Rate, the rate at which the market capitalises the income
117
That does the all risk yield take into account?
1. The construction
2. The quality of the tenants covenant
3. The amount of rent
4. The unexpired lease term
5. The other lease terms
6. Anticipated rental growth (location)
118
What is Gross Yield?
The rent expressed as a percentage of the purchase price
119
What is Net Yield?
The rent expressed as a percentage of the purchase price plus purchaser costs
120
What is the current Stamp Duty Land Tax for commercial property?
0% on the first £150,000
2% on the next £100,000
5% on anything over £250,000
121
What are the two approaches used to value a Reversionary investment?
1. Term and reversion
2. Hardcore and layer
122
What is initial yield?
The net income at the date of purchase expressed as a percentage of the purchase price
123
What is running yield?
The present income from a property expressed as a percentage of the Market Value
124
What is a reversionary yield?
The market rent expressed as a percentage of the purchase price or market value
125
What is an equivalent yield?
The weighted average of the initial yield / running yield and the reversionary yield
The internal rate of return from and investment disregarding any rental or capital growth
126
Define investment value.
The value of an asset to the owner or a prospective owner for individual investment or operation objectives.
127
What does the RICS Guidance Note, Discounted Cash Flow for Commercail Property Investment (2010) state?
Discount rate should adequately compensate an investor for the risk take.
An adequate return from a property investment can be calculated by taking a Risk-Free Rate and adding a Risk Premium
128
Give examples of market risks.
1. Illiquidity of sale
2. Lack of rental growth
3. Yield shift
4. Locational, economic, physical and functional depreciation through structual change
5. Legislative change
129
Give examples of specific risks.
1. Covenant risk
2. Void risk
3. Costs of ownership and management
4. Differing lease structures
130
What is the equated yield?
The discount rate at which the DCF equals the purchase price of the investment
131
How can Equated Yield be calculated?
1. Parry's Internal Rate of Return table
2. Linear interpolation
3. Using Goal Seek
132
When is a DCF useful?
To value multi-let properties with frequently changing rental income
