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Valuation Flashcards

1
Q

What are the five methods of valuation?

A

Comparable
Investment
Profits
Depreciated replacement cost
Residual

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2
Q

What is the latest edition of the Red Book called?

A

RICS Valuation - Global Standards, Effective from 31 January 2022

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3
Q

What is PS 1?

A

Compliance with standards where a written valuation is provided

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4
Q

What is PS 2?

A

Ethics, competency, objectivity and disclosures

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5
Q

What is VPS 1?

A

Terms of engagement (scope of work)

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6
Q

What is VPS 2?

A

Inspections, investigations and records

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7
Q

What is VPS 3?

A

Valuation Reports

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8
Q

What is VPS 4?

A

Bases of value, assumptions and special assumptions

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9
Q

What is VPS 5?

A

Valuation approaches and methods

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10
Q

What is the IVS?

A

International Valuation Standards

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11
Q

Tell me about how you would value a building using the profits method of valuation.

A

When using the profits method it is always useful to bear in mind the following simple calculations:

Gross Profit = Gross Earnings – Purchases

Net Profit = Gross Profit – Working Expenses

From a property rental perspective, if you want to determine the annual rent that could be achieved, as a very rough guide you would normally divide the net profit in half to establish a near accurate figure.

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12
Q

Tell me about how you would value a building using the contractors method of valuation.

A

Property Value = Cost of Site + Construction Cost of Buildings

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13
Q

Tell me about how you would value a building using the investment method of valuation.

A

assess rental values (market rent) and a market-based yield. A yield can be simply defined as the annual return on investment expressed as a percentage of capital value.
for example a term and reversion for under-rented income streams and a hardcore and topslice for over-rented income streams
alternative approach is to use a growth-explicit discounted cash flow (DCF), where the cashflow is explicitly modelled incorporating a wide range of valuer-inputted assumptions.

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14
Q

Tell me about how you would value a building using the comparable method of valuation.

A

I would use the comparable method to value a building by comparing the transactions in the property market of similar properties in a similar location within a time period.

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15
Q

Tell me about how you would value a building using the residual method of valuation.

A

The Residual Method of Valuation is based on the principle that the value of a property with development potential is equal to it after development, minus the costs and a profit for the developer.

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16
Q

How do you decide which valuation method to apply?

A
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17
Q

When and why would you use one of these methods?

A
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18
Q

What is a year’s purchase multiplier?

A

Year’s purchase (Y.P.) value is calculated by assuming a suitable rate of interest prevailing in the market.

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19
Q

Give me an example of a good covenant and how this might impact a valuation.

A
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20
Q

What is PI Insurance (PII)?

A

Professional indemnity (PI) insurance is a commercial policy designed to protect business owners, freelancers and the self-employed if clients claim a service is inadequate.

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21
Q

Why do surveyors need PII?

A

his cover gives you protection in the event that you are accused of providing incorrect or faulty advice which causes financial loss to your client.

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22
Q

Tell me about the RICS requirements in relation to PII.

A

The PII must cover any claims firms may face, and if undertaking cross-border insurance distribution activities, this must include cover for activities into, or from, territories outside of the UK. The cover requirement applies when the policy is taken out, renewed or extended.

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23
Q

How did the decision in Hart v Large affect PII?

A
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24
Q

What level of PII cover does your firm have?

A
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25
Q

How would you distinguish limitations on liability in your valuations?

A
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26
Q

Where in your valuation report do you state any limitations on liability?

A
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27
Q

What relevance does Hart v Large have on your valuation practice?

A
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28
Q

What aspect of Hart v Large allowed the judge to award damages without applying the SAAMCO cap?

A
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29
Q

What is the SAAMCO cap?

A

If negligent, the valuer is liable for the amount by which the property was overvalued, but not the full loss of the lender on a failed transaction which may arise from a drop in the property market

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30
Q

Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?

A

Losses attributable to other factors, such as a fall in the property market, would not be the responsibility of the valuer and should be excluded.

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31
Q

Under the SAAMCO cap, is a valuer’s liability usually limited to the overvaluation on the valuation date?

A

a lender, having demonstrated he had suffered loss as a result of the transaction , could recover damages limited to or “capped at” the amount of the overvaluation

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32
Q

What would you do if you received a notice of a PII claim from a client or their solicitor?

A

You must notify your insurer as soon as you become aware of a claim against your firm or circumstances that could lead to a claim.

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33
Q

Is there a difference between being negligent when undertaking a survey/valuation and providing negligent advice?

A
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34
Q

What is run off cover?

A

Run-off cover is insurance for claims made against a firm after it has stopped doing business.

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35
Q

What is the Red Book?

A

The Red Book is issued by RICS as part of our commitment to promote and support high standards in valuation delivery worldwide. The publication details mandatory practices for RICS members undertaking valuation services. It also offers a useful reference resource for valuation users and other stakeholders.

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36
Q

Why does the Red Book exist?

A

he publication details mandatory practices for RICS members undertaking valuation services. It also offers a useful reference resource for valuation users and other stakeholders.

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37
Q

Tell me about a factor which may impact value.

A

Factors that impact value are age, location, size

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38
Q

What is your duty of care as a surveyor when undertaking a valuation?

A
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39
Q

To whom do you owe this duty of care?

A

Valuers owe a duty of care towards their clients, both in contract and in tort (for negligence). They may also owe a duty of care towards third parties, in certain circumstances.

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40
Q

Why is independence and objectivity important when valuing?

A
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41
Q

Is there a separate UK Red Book?

A

There is not a seperate UK Red Book as the Red book is global satndards, however there is the RICS Valuation - Global Standards
2017: UK national supplement

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42
Q

What is the UK valuation guidance called?

A

RICS Valuation - Global Standards
2017: UK national supplement

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43
Q

Why does the UK guidance exist?

A

This UK national supplement sets out specific requirements, together with
supporting guidance, for members on the application of the RICS Valuation
– Global Standards 2017 (the Global Standards) to valuations undertaken
subject to UK jurisdiction.
It places fresh emphasis on the fact that the content is supplemental to that
in the Red Book Global Edition, and not in substitution for it. This removes the
need for an overall Introduction reproducing that in the Global Edition.

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44
Q

When was the Red Book last updated?

A

The new edition of Red Book Global Standards, RICS Valuation – Global Standards, is effective from 31 January 2022

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45
Q

Does this differ from when IVS were last updated?

A

The latest IVS becomes effective from 31st January 2022.

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46
Q

What changes were made?

A

The current IVS Framework becomes IVS 100 and there are two new standards proposed, IVS 104 Data and Inputs and IVS 105 Valuation Models. Another change is to move much of the explanatory detail from the main body of each standard into Appendices, with the aim of making the key principles easier to identify and follow.

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47
Q

Which do you follow - the latest IVS or the Red Book Global?

A

The Rating Manual is primarily provided as practice guidance for Valuation Officers.

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48
Q

Which sections of the Red Book are mandatory and which are advisory?

A

Professional Statements - PS 1-2 - these are mandatory for all members providing written valuations

Valuation Technical and Performance Standards - VPS 1-5 - these are mandatory unless otherwise stated

Valuation Practice Guidance Applications - VPGA 1-10 - these are advisory and provide guidance on best practice.

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49
Q

What does PS1-2/VPS1-5/VPGAs relate to?

A

PS1

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50
Q

What type of advice does the Red Book cover?

A
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51
Q

If you provide preliminary advice / draft valuation report, what should you state in writing to your client?

A
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52
Q

What type of valuations might be relied upon by a third party?

A
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53
Q

Tell me what the definition of MR/MV/investment value/fair value?

A

Market rent is the amount a landlord might reasonably expect to receive, and a tenant might reasonably expect to pay, for a tenancy.

Market Value means the most probable price which a property. should bring in a competitive and open market under all conditions

Investment value is the amount of money an investor would pay for a property. It refers to an asset’s specific value based on certain parameters. It is an individual’s measurement of the asset’s property value.

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.

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54
Q

What is the difference between an assumption and a special assumption?

A

An assumption is defined as something that is reasonable for the valuer to accept without the need for specific investigation or verification – for example, an assumption about tenure, property condition or services.

In contrast, a special assumption is where the valuer bases their work on factors that do not apply at the valuation date, or that would not be considered by a typical market participant at that time. For example, they may make a valuation based on a plot having planning consent when none has been granted, or they could value a development site based on the works being completed.

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55
Q

What sources of information would you consider when preparing a valuation report?

A
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56
Q

If you have previously valued an asset, do you need to make any additional disclosures and what might they be?

A

I have not.

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57
Q

If your firm is too small to have a rotation policy or valuation panel, what else can you do to ensure objectivity?

A
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58
Q

When might a conflict of interest exist in relation to a valuation instruction?

A
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59
Q

What must be included in your terms of engagement / valuation report?

A

VPS 1 (Terms of Engagement - scope of work) sets out what you need to include in your Terms of Engagement:

Identification and status of the valuer

Identification of the client(s)

Identification of other intended users

Identification of the asset(s)/liability(ies) being valued

Currency

Purpose

Basis of value (see VPS 4)

Valuation date

Nature and extent of investigations and limitations

Nature and source of information relied upon

Assumptions and special assumptions

Format of the report

Restrictions on use, distribution and publication

Confirmation of compliance with IVS

Fee basis

Reference to Complaints Handling Procedure

Statement relating to monitoring by RICS

Any limitations on liability agreed

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60
Q

Where is this covered in the Red Book?

A

VPS 1 (Terms of Engagement)

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61
Q

What is a restricted valuation service, and can you provide one?

A
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62
Q

How do you deal with limitations on inspection or analysis?

A

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.

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63
Q

Can you revalue a property without inspecting?

A

Yes you can revalue a property without inspecting, granted you have already inspected and confirmed that no changes have been made since the last inspection. However, this should be set out in the terms of engagement that the valuation is based on the previous details.

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64
Q

What RICS guidance relates to the use of comparable evidence?

A

Comparable evidence in real estate valuation
1st edition, October 2019

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65
Q

What is an internal valuer?

A

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

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66
Q

Can an external valuer provide an internal purposes valuation?

A
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67
Q

What happens if market conditions change between the valuation date and report date?

A

It is therefore possible for an external
valuer to provide an ‘internal purposes’ valuation, though where that is done, the need for the
terms of engagement and written advice to be absolutely clear about non-disclosure to third
parties, and about the exclusion of liability, becomes even more crucial.

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68
Q

Is special value from a special purchaser reflected in MV?

A

special value, where the price offered by prospective
buyers generally in the market would reflect an expectation of a change in the circumstances of
the asset in the future, the impact of that expectation is reflected in market value. Examples of
where the expectation of additional value being created or obtained in the future may have an
impact on the market value include:
* the prospect of development where there is no current permission for that development and
* the prospect of marriage value arising from merger with another property or asset, or
interests within the same property or asset, at a future date

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69
Q

Where does the definition of fair value come from?

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.’ (This definition derives from International Financial
Reporting Standards IFRS 13.)

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70
Q

Does this differ from MV?

A

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.

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71
Q

When is fair value used?

A

Where the entity has adopted IFRS the basis of value will be fair value (see also VPS 4 section 7) and IFRS 13 Fair Value Measurement will apply

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72
Q

What are the 3 approaches under VPS5?

A

Rental value, market value and reinstatement valaue

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73
Q

What is the Valuer Registration Scheme?

A

The Valuer Registration scheme is our 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.

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74
Q

Are there any instances where certain sections of the Red Book may not apply?

A
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75
Q

What are these and which sections don’t apply?

A
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76
Q

What is the basis of value under UK GAAP FRS 102?

A

FRS 102 is the concept of ‘Fair Value’. Fair value is the amount for which an asset, liability or equity instrument could be exchanged or settled between knowledgeable, willing parties in an arm’s length transaction.

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77
Q

What is a SORP?

A
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78
Q

When would you use EUV?

A
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79
Q

What is the definition of EUV?

A

‘existing use value’ (EUV) describes what property or land is worth in its current form. In other words, the price that it can be sold for on the open market, assuming it will only be used for the existing use for the foreseeable future.

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80
Q

What additional criteria apply to secured lending valuations?

A

VPGA 2 - Valuation of interests for secures lending

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81
Q

What information should you specifically request for a secured lending valuation?

A

This takes into account such factors as the property’s location, condition, quality, whether there is any demand/supply in the area for your specific property and what the current market conditions are in the area and if there are any outstanding planning permissions in place that could affect its future value

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82
Q

What is a regulated purpose valuation?

A

A set of valuation purposes defined by RICS upon
which third parties rely. The purposes are fully
detailed at UK VPS 3.

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83
Q

What additional disclosures must be made for a regulated purpose valuation?

A

in relation to the firm’s preceding financial year the proportion of the total fees,
if any, payable by the client to the total fee income of the valuer’s firm expressed
as either less than 5% or, if more than 5%, an indication of the proportion within
a range of 5 percentage points and
b where, since the end of the last financial year, it is anticipated that there will be a
material increase in the proportion of the fees payable, or likely to be payable, by
the client, the valuer must include a further statement to that effect, in addition
to (a).

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84
Q

What is the basis of value for a statutory valuation?

A

market value

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85
Q

What might a statutory valuation relate to?

A

Inheritance Tax, Estate Duty, Capital Gains Tax and Income Tax.

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86
Q

What is the definition of the statutory basis of valuation?

A

For taxation purposes there is a statutory definition: ‘The price which the property might reasonably be expected to fetch if sold in the open market at that time [

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87
Q

Is this the same for all statutory valuations?

A
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88
Q

What is a yield?

A

yield is the potential returns on property investment through rent.

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89
Q

What is a Net Initial Yield?

A

Net initial yield (NIY) is the current annualised rent, net of costs, expressed as a percentage of capital value, after adding notional purchaser’s costs.

90
Q

What is a reversionary yield?

A

Reversionary Yield is the anticipated yield, which the initial yield will rise to once the rent reaches the ERV and when the property is fully let. It is calculated by dividing the ERV by the valuation.

91
Q

What is an equated yield?

A

The equated yield is the yield on a property investment which takes into account growth in future income.

92
Q

What is an equivalent yield?

A

Equivalent Yield (true and nominal) is a weighted average of the Net Initial Yield and Reversionary Yield and represents the return a property will produce based upon the timing of the income received.

93
Q

How would a yield reported from auction differ from a Net Initial Yield?

A
94
Q

What purchaser’s costs do you deduct from a valuation?

A

Agents fees at 1%, Legal Fees at 0.5% Stamp Duty at 4% and irrecoverable Vat on Stamp Duty at 20% of 4%

95
Q

When do you deduct purchaser’s costs from a valuation?

A

At teh end of an investment valuation to calculate market value

96
Q

How would you value a property in uncertain market conditions - does the Red Book give any guidance?

A

RICS Material Valuation Uncertainty Leaders Forum (UK)

97
Q

How could you value a long leasehold interest?

A

Term and reversion

98
Q

How does a term and reversion differ to a DCF?

A
99
Q

What is the difference between a growth explicit and a growth implicit yield?

A

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.

100
Q

Give examples of each of these types of yield.

A
101
Q

How would you value an under/over rented investment property?

A
102
Q

When would you use a dual rate investment calculation?

A

Dual-Rate Method is a method of allocating costs in which two cost functions are used. Typically, the two functions are a fixed-cost function and a variable-cost function.

103
Q

Where can you find yield evidence from?

A
104
Q

What is the hierarchy of evidence?

A

Certain types of evidence usually take precedence over others and the list below
provides an indication of relative importance. It is not prescriptive and will vary according
to market conditions and local practice. The valuer should use professional judgement
to assess the relative importance of evidence on a case-by-case basis.

105
Q

What would you do if comparable evidence was limited?

A

The valuer has to look further afield and across a wider range of indicators when
transactional evidence of directly comparable real estate is lacking. In such
circumstances, it may be necessary to consider more indirect evidence: for example,
local or national economic data that can indicate trends to give guidance towards, rather
than direct evidence of, value.

106
Q

What is NPV?

A

Net present value is used to determine whether or not an investment, project, or business will be profitable down the line.

107
Q

What is IRR?

A

The internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments. IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.

108
Q

What is a term and reversion?

A

In a term and reversion valuation, the income is divided into a fixed income to review (the term) and an income from review to perpetuity (the reversion). The latter income is taken to be the current open market rent, and is capitalised as if it were from a fully let property.

109
Q

What is a hardcore and topslice?

A

The hardcore (MR) is valued into perpetuity at a net initial yield. The top slice (PR-MR) is capitalised to next lease event at a net initial yield with a risk adjustment. There is a yield differential; top slice at an inflated yield to reflect higher risk of over-renting.

110
Q

What is a Discounted Cash Flow (DCF)?

A

Discounted cash flow (DCF) valuation is a type of financial model that determines whether an investment is worthwhile based on future cash flows. A DCF model is based on the idea that a company’s value is determined by how well the company can generate cash flows for its investors in the future.

111
Q

What is a short-cut DCF?

A

The short-cut DCF valuation model is structured to accommodate the projection of reversionary cash flows over the period to the next revision of market rent from the valuation date.

112
Q

When would you use a DCF?

A

DCF is more suitable for detailed and comprehensive valuations, or for capturing the unique value drivers and risks of a specific company or asset.

113
Q

What are the advantages of a DCF?

A

DCF has several advantages over multiples. First, DCF is based on the intrinsic value of the company or asset, rather than on the market price or the performance of peers. Second, DCF allows for more flexibility and customization, as it can incorporate different scenarios, assumptions, and sensitivities.

114
Q

What are the disadvantages of a DCF?

A

The main Cons of a DCF model are:
Requires a large number of assumptions.
Prone to errors.
Prone to overcomplexity.
Very sensitive to changes in assumptions.
A high level of detail may result in overconfidence.
Looks at company valuation in isolation.
Doesn’t look at relative valuations of competitors.

115
Q

What is a YP/PV/YP in perpetuity?

A

YP - The amount yielded by the annual income of property; used in expressing the value of a thing in the number of years required for its income to yield its purchase price

PV - The Present Value (PV) is an estimation of how much a future cash flow (or stream of cash flows) is worth right now. All future cash flows must be discounted to the present using an appropriate rate that reflects the expected rate of return (and risk profile) because of the “time value of money.”

Years’ Purchase (In Perpetuity) is based on the assumptions that: (i) income is received annually in arrear, and. (ii) income is received quarterly in advance.

116
Q

What is marriage value?

A

Marriage value is the increase in the value of the property following the completion of the lease extension, reflecting the additional market value of the longer lease.

117
Q

When would you include an element of hope value in a valuation?

A

The element of value of land over and above the existing use value ie reflects the prospect of potential development/alternative use.

118
Q

Can you include hope value in a secured lending / mortgage valuation?

A
119
Q

How would you value a ransom strip?

A

Stokes v Cambridge Corp (1961) is widely quoted as having established the principle that a ransom strip was worth a third of the increase in value of the benefitting land

120
Q

How does market value differ to investment value/fair value?

A
121
Q

What is a dual capitalisation rate and when would you use one?

A
122
Q

Is the profits/DRC method used for specialised or specialist property?

A

The profits method is used in the absence of rental evidence, and where there is a sufficient element of legal or factual monopoly, provided that the valuer feels the occupier’s accounts provide a reasonable guide. A modified profits test is applied to public houses, theatres and cinemas.

The depreciated replacement cost (DRC) method is used for owner-occupied or specialised property that is rarely sold on the open market.

123
Q

What type of properties would you use the profits method for?

A

public houses, theatres and cinemas.

124
Q

What type of properties would you use the DRC method for?

A

owner occupied

125
Q

When would you use the profits method?

A

in the absence of rental evidence, and where there is a sufficient element of legal or factual monopoly,

126
Q

What is intangible goodwill?

A

Goodwill is an intangible asset that accounts for the excess purchase price of another company. Items included in goodwill are proprietary or intellectual property and brand recognition, which are not easily quantifiable.

127
Q

What is turnover / gross profit / net profit?

A

Turnover is the total sales made by a business in a certain period.
Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services.
Net profit is the amount of money your business earns after deducting all operating, interest, and tax expenses over a given period of time.

128
Q

What are the steps to providing a profits valuation?

A

he profits method firstly takes into account the gross operating income of the business. The working expenses are then deducted to create the net cashflow. The net cashflow over a period of time is then converted into present value by selecting an appropriate risk yield for the business.

129
Q

What is Fair Maintainable Turnover?

A

specifies its use and defines it as “the level of trade that a ‘reasonably efficient operator’ would expect to achieve on the assumption that the property is in good repair and suitably equipped“.

130
Q

What is a Reasonably Efficient Operator?

A

Reasonably efficient operator
This is a concept where the valuer assumes that the market participants are competent (but not exceptional) operators, acting in an efficient manner, of a business conducted on the premises.

131
Q

Does the assessment of the REO include personal goodwill and trading potential?

A

No

132
Q

What is personal goodwill?

A

Personal goodwill is an asset that is owned by an individual, not the business itself. It is generated from the personal expertise or business relationships of an individual employee or shareholder.

133
Q

What is trading potential?

A

trade potential is explained as the maximum possible value of trade that could hypothetically be attained using the most open trade policies, trading institutions and trading practices observed.

134
Q

How do you calculate the tenant’s proportion of rent in a profits valuation?

A
135
Q

What is EBITDA?

A

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA measures the company’s overall financial performance. It is often used as an alternative to other metrics, including earnings, revenue, and income

136
Q

What is Fair Maintainable Operating Profit?

A
137
Q

How do you calculate the divisible balance?

A

business’s gross profits and thereafter deducts all working expenses excluding any rental payments made; this gives the divisible balance,

138
Q

What accounts information would you want to review for a profits valuation?

A

The first stage in the profits method valuation process is to obtain the financial accounts for the business for the last 3 to 4 years as a minimum,

139
Q

Do RICS provide any guidance on RLVs or valuing development property?

A
140
Q

What is an RLV?

A

A residual land value is used to estimate land values for hypothetical schemes in selected cities and regions. The residual land values are not market prices and do not capture the option value associated with real sites, but they give an indication of value for immediate development before planning obligations.

141
Q

What is a development appraisal?

A

A development appraisal is a valuation which assesses a property with or without planning permission to establish the likely value of a future use or the value as a cleared site for redevelopment.

142
Q

How do they differ?

A

RLV is hypothetical and development appraisals are based on real land

143
Q

How else can you value development land?

A
144
Q

What is the basic process of undertaking a RLV/development appraisal?

A

calculates the value of the land by taking the developed value and subtracting the price of developing it

145
Q

What does a development appraisal show?

A

Property development appraisal is a financial model that allows developers to calculate the commercial viability of a site. And they do it by comparing the expected project costs against the expected income.

146
Q

What are the key things you need to consider when appraising / inspecting a development site?

A
147
Q

What else should you consider?

A

Local amenities attractive to the market, such as; location, ease of parking , public transportation. The scale of potential tenants’ or purchasers’ requirements. Site and local features that may be attractive to future tenants or purchasers

148
Q

Tell me about your due diligence when undertaking a development appraisal.

A
149
Q

What sources of information do you use when undertaking a development appraisal?

A

BCIS

150
Q

How can you assess development potential?

A
151
Q

What is GDV/NDV?

A

Gross Development Value (or GDV) is the forecast revenue or sale that is anticipated from the completed development scheme.

The net development value is the estimated amount of money that a property development expects to make once all costs ([land value] (/glossary/benchmark-land-value), development, marketing etc) and [sales] (/glossary/gross-development-value) have been taken into consideration.

152
Q

How do you calculate GDV?

A

It is calculated based on the market conditions prevailing at the date of the valuation, and may be based on an analysis of recent property transactions for similar properties in the area of the development.

153
Q

What do development costs include?

A

Build costs and planning costs

154
Q

When do you apply VAT when assessing development costs?

A

in purchasers costs

155
Q

Where can you source build costs from?

A

BCIS

156
Q

What are typical finance costs?

A

tax, SDLT, CIL

157
Q

What would you apply finance costs to and on what basis?

A
158
Q

What is an S curve?

A

An S-curve is a mathematical graph that shows the progress of a project over time

159
Q

What factors influence the decision to use an S curve when applying finance costs?

A

actors used to determine S-curve parameters can change depending on the project’s nature, cost, number of workers required, and work hours.

160
Q

Is there a quick rule of thumb which can be used when applying finance costs?

A
161
Q

What do holding costs typically include?

A
162
Q

How do you typically calculate developer’s profit?

A

Profit = GDV – (Construction + Fees + Land)

163
Q

What are some typical inputs (and %/£) in a RLV?

A
164
Q

What other criteria might be assessed in terms of performance measurement for a RLV?

A
165
Q

What are the advantages/disadvantages of a RLV?

A

One of the main benefits of the residual method is that it allows you to assess the feasibility and profitability of a project before investing in the land.

ne of the main challenges of using the residual method is that it relies on a lot of assumptions and estimates that may not be accurate or realistic. For instance, the GDV may change due to market fluctuations, competition, or consumer preferences.

166
Q

What is included in the development programme?

A
167
Q

What is CIL?

A

The Community Infrastructure Levy (the ‘levy’) is a charge which can be levied by local authorities on new development in their area. It is an important tool for local authorities to use to help them deliver the infrastructure needed to support development in their area.

168
Q

What is S106?

A

Section 106 agreements are legal agreements between a planning authority and a developer, or undertakings offered unilaterally by a developer, that ensure that certain extra works related to a development are undertaken.

169
Q

What are the differences between CIL and S106?

A

CIL and S106 planning obligations are separate infrastructure funding sources. S106 agreements address site-specific mitigation required to make a new development acceptable in planning terms. Whilst CIL addresses the broader impacts of the development.

170
Q

What is CIL charged on?

A

Community Infrastructure Levy (CIL) may be payable for developments which involve the creation of new dwellings. It may also be payable for developments with an internal floor area of 100 square metres or more.

171
Q

What is a Monte Carlo simulation?

A

Monte Carlo methods are used in corporate finance and mathematical finance to value and analyze (complex) instruments, portfolios and investments by simulating the various sources of uncertainty affecting their value, and then determining the distribution of their value over the range of resultant outcomes.

172
Q

What is a sensitivity analysis?

A

Sensitivity analysis is a financial model that determines how target variables are affected based on changes in other variables known as input variables. It is a way to predict the outcome of a decision given a certain range of variables.

173
Q

How do you carry out a sensitivity analysis?

A

The first step in conducting a sensitivity analysis is to select the input variables that you want to vary and the range of values that you want to test. Ideally, you should choose inputs that are uncertain, relevant, and independent.

174
Q

What variables might you change and why?

A
175
Q

What factors affect sensitivity of a development appraisal?

A
176
Q

Tell me about your understanding of incorporating affordable housing into development appraisals.

A
177
Q

Tell me about software you have used to provide a RLV.

A

Have not provided a RLV

178
Q

What RICS guidance relates to the valuation of development property?

A

Valuation of development property
Global
1st edition, October 2019
Effective from 1 February 2020

179
Q

Give me a limitation of this software.

A
180
Q

What is viability?

A

For development to actually take place on the ground, the value (revenue) generated from the development must exceed the costs of undertaking the development

181
Q

When would a cost approach be used?

A

The cost approach can be used to appraise all types of improved property. It is the most reliable approach for valuing unique properties. The cost approach provides a value indication that is the sum of the estimated land value, plus the depreciated cost of the building and other improvements.

182
Q

What type of buildings would a cost approach be used for?

A

The cost approach is required and sometimes is the only way to determine the value of exclusive-use buildings, such as libraries, schools or churches. These resources generate little income and are not often marketed, which invalidates the income and comparable approaches.

183
Q

What is the supposition that a DRC is based upon?

A
184
Q

What are the 3 components of the cost approach?

A

What are the 3 components of the cost approach?

185
Q

How do you assess the value of the land?

A

Valuing land for potential development requires considering various factors such as location, zoning regulations, infrastructure, market demand, and potential returns on investment. The location plays a crucial role in determining the value of land.

186
Q

How do you assess Gross Replacement Cost?

A

The GCRC is calculated by estimating the cost of replacing an existing permanent structure (including any improvements) with a structure made from the same materials and built to the same dimensions.

187
Q

What costs would you consider within GRC?

A

Build costs, labour costs

188
Q

What would you do if the building could be replaced with a modern equivalent?

A
189
Q

How would you deal with depreciation/obsolescence?

A
190
Q

What types of obsolescence are there?

A
191
Q

What are the three ways to deal with depreciation?

A

Physical obsolescence: if the cost of repairing,
reconditioning or refurbishing the actual asset to
render it useable has exceeded the cost of a modern
equivalent, the asset would have no value.
* Functional obsolescence: the introduction of new
technology may render obsolete a relatively new asset
with an otherwise long anticipated life, with the result
that there would be no demand for it other than any
value for salvage or an alternative use.
* Economic obsolescence: if demand for the product
or service provided by the asset has collapsed and is
not expected to recover, there would be no demand
for the asset other than for

192
Q

Is the cost approach a market valuation?

A

In the cost approach, the property’s value is equal to the cost of land, plus total costs of construction, less depreciation. It yields the most accurate market value for when a property is new than through alternative methods.

193
Q

How might onerous lease terms, e.g. restrictive user, break clause, impact upon capital or rental value?

A

An upcoming break clause does not provide a long term certain, meaning any investment value obtained will be less.

194
Q

What liabilities may be created through valuation?

A
195
Q

What is a liability cap and when would one be used?

A

A liability cap is a contractual agreement that a client can only claim damages up to the amount
agreed, even if the law would otherwise award a greater sum in damages.

196
Q

Explain why the RICS are carrying out an Independent Valuation Review.

A
197
Q

Who is leading this?

A
198
Q

Explain what you understand by the term, margin of error.

A

margin of error means the degree of uncertainty that your survey results might have. The larger the margin of error is, the more likely it is to be further away from the “true figures” for the whole population.

199
Q

What caselaw relates to margins of error?

A

Singer and Friedlander v John D Wood & Co [1977] 243 EG 212 states that the margin of error can be 10% either side of a figure that can be said to be the right figure that a competent careful and experienced valuer arrives at after making all the necessary enquiries and paying property regard to the state of the market.

200
Q

Explain your understanding of K/S Lincoln v CBRE Hotels (2010).

A

The claimant ‘C’ intended to invest in several hotels in the UK and sought valuations from the defendant property valuer ‘D’. D produced a valuation but as part of its reasoning included details of what it considered to be the projected investment yield. On the basis of the report C made the investment. C alleged that both aspects of the report were inaccurate and that as a result it had invested in assets worth substantially less than it thought. D argued that it owed no duty of care with respect to the rental yield predictions as they merely formed part of the reasoning in reaching the valuations and that the valuation overall was a reasonable one.

The court held that the valuers owed the usual duty of care in respect of the valuation but also in respect of the projected yield. It would be artificial to find that the valuer owed a duty of care in respect of the core aspects of the valuation but not with respect to other statements volunteered in the report and intended to be relied upon.

201
Q

Explain the precent set in Hyde and another v Nygate and another (2021) in relation to the valuation of high-profile development sites.

A
202
Q

How can a NIY of zero be achieved?

A
203
Q

In a scenario where rents are static and the capital value increases, would you expect yields to increase or decrease?

A

In a buoyant property market property yields are likely to drop. This happens because the overall capital value of property increases with market demand whilst the annual rent is likely to remain static (at least until a rent review is completed) at a lower percentage of the total capital value.

204
Q

What does heterogenous mean in terms of comparable evidence?

A
205
Q

What does the term ‘tone of value’ mean to you?

A

Tone of value is the typical value applied to comparable properties based on their location and size.

206
Q

Tell me why terms of engagement are important.

A

Good terms of engagement can help to avoid later misunderstandings with your client. They ensure that both the client and firm are clear about: the scope and nature of the service being commissioned and. the framework within which it has been agreed to be carried out.

207
Q

What checks do you undertake before accepting a valuation instruction?

A
208
Q

How do you ensure you know who your client is when undertaking a valuation instruction?

A
209
Q

Are there any additional requirements when undertaking a valuation in which the public has an interest, or third parties may rely?

A
210
Q

Are there any additional requirements for loan security valuations?

A
211
Q

Talk me through an example of when you have agreed terms of engagement with a client.

A
212
Q

What are the key elements included within terms of engagement?

A
213
Q

What does the Red Book say about terms of engagement?

A

Red Book requires that much of the agreement set out in the terms of engagement is repeated in the report and the valuer will see that many of the headings in terms of engagement are repeated in the report.

214
Q

What does the Red Book say about inspections?

A
215
Q

What does the Red Book say about reporting requirements?

A

Upon issuing a Red Book valuation, the valuer’s qualification and the minimum report content is guaranteed, adhering to accepted and consistent standards which provides public confidence

216
Q

What are the differences between a desktop and a full valuation report?

A

Full valuation provides with a more detailed report of the property as all the features of the land are closely looked at by the appraiser however, desktop valuation provides with a comprehensive report based on the expert’s opinion about the land after looking at the available sources.

217
Q

Tell me about how you ensure that information relied upon in your valuation is appropriate and reliable?

A
218
Q

How did you calculate the headline rent at Surrey?

A

The headline rent was calculated using Parrys tables. Witht he rent stepped over 5 years, i applied the PV of £ to the first year. And calculated the value in perpetuity. Doing so for all five years. Applied n interest rate of 6% as per the market standards to derive at my headline rent.

219
Q

How would you make the same calculation for the net effective rent?

A
220
Q

Why did you apply a discount rate at Surrey instead of looking for appropriately dated comparable evidence?

A

The property was a nursery and there was b=very little comparable evidence in the area. I also had the subject property rent which starts as the firts properoition for lotus and delta v culverwell. I found that adjusting for the difference in value to the valuation date was an appropriate measure to value the rental value at avd.

221
Q

What adjustments did you make to arrive at an FMT for your turnover valuation and why?

A
222
Q

If you had needed a capital valuation, what evidence sources might you have used?

A

Technical Competencies (7 decks)

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