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Valuation Flashcards

1
Q

What are the 5 methods of valuation?

A

Comparable
Profits
Residual
Investment
DRC

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2
Q

What is a yield?

A

The potential return on a property investment through rent.

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3
Q

What are the different types of yield?

A
  1. All risks yield
  2. True yield
  3. Nominal yield
  4. Gross yield
  5. Net yield
  6. Equivalent yield
  7. Initial yield
  8. Reversionary yield
  9. Running yield
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4
Q

What was the review undertaking in 2021 regarding growth explicit valuations?

A

The review was under taken by Peter Pierea Gray and was called the independent review of real estate investment valuations in which happened in December 2021.

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5
Q

What was the findings of the Peter Pier Gray report?

A

Gray made 13 wide ranging recommendations, the main of which were:
1. The revaluation of current valuers
2. The DCF method to be used as the main valuation method for investment assets
3. Developing a valuation compliance officer within firms
4. Developing a valuation quality assurance officer within firms
5. Continue to build on diversity and inclusion

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6
Q

What are the 5 valuation performance standards within the red book?

A

VPS 1 - TOE
VPS 2 - Inspection and measurement
VPS 3 - reporting
VPS 4 - basis of value
VPS 5 - valuation methodology

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7
Q

What do the valuation performance standards relate to in the International Valuation Standard?

A

Performance Standards 101 - 105

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8
Q

What is the structure of the Red Book

A

Part 1 - Introduction
Part 2 - Glossary
Part 3 - Professional Standards
Part 4 - Valuation Performance Standards
Part 5 - Valuation Practice Guidance Applications
Part 6 - International Valuation Standards

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9
Q

What is the structure of the UK national supplement?

A

Part 1 introduction
Part 2 UK professional and valuation standards
Part 3 UK valuation practice guidance - applications
Part 4 Summary of changes from the Red Book 2014

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10
Q

Name some of the VPGAs in the UK national supplement

A

VPGA 1 - financial reporting
VPGA 2 - loan security
VPGA 8 - valuation of real property interests
VPGA 10 - material uncertainty

UK VPGA 10 - commercial secured lending
UK VPGA 14 - registered social housing for loan security purposes
UK VPGA 15 - Valuation for capital gains tax, inheritance tax, SDLT and ATED

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11
Q

What is included in VPGA 1 of the red book?

A

Valuations for inclusion in financial accounts
- fair value will be adopted for all IFRS adopted accounts
- prescribed “performance standards”must be adhered to

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12
Q

What is included in VGPA 2?

A

This is for secured lending
It deals with conflicts of interest for secured lending valuations

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13
Q

What example of COI are given in VPGA 2

A
  1. Long standing professional relationship with the borrower or owner
  2. Introducing the transaction to the lender
  3. If there is a financial interest in the property or prospective borrower
  4. When the valuer is retained to act in the disposal or letting.
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14
Q

What other practice guidance do you use?

A

VPGA 10 - Matters that may give rise to material uncertainty
VPGA 8 - valuation of real property interest

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15
Q

What are the 5 purposes are listed in UK VPS 3 - Regulated purpose valuations

A
  1. Financial reporting
  2. Stock exchange listings
  3. Takeovers or mergers
  4. Collective investment schemes
  5. Unregulated property unit trusts
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16
Q

What is the definition of Market Value

A

The estimated amount an asset or liability should exchange at
on the date of valuation
between a willing selling and willing buyer during an arms length transaction
where proper marketing has been carried out and
all parties have acted knowledgeably, prudently and without compulsion.

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17
Q

What is the definition of market rent?

A

The estimated amount in which an interest in real estate should be leased at:
On the valuation date
Between a willing lessor and willing lessee
On appropriate lease terms
In an arms length transaction
After proper marketing
Where all parties have acted knowledgeably, prudently and without compulsion.

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18
Q

What is the definition of fair value?

A

The price that would be received to sell and asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.
- this basis of value is now required is the IFRS have been adopted by the client
- it is adopted by the international accounting standards board
- the RICS’s view is that this definition is generally considered consistent with Market Value

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19
Q

What is the definition of investment value?

A

The value of an asset to a particular owner, or prospective owner for individual invents or operational objectives.
- this may differ from market value
- this is sometimes used as a measure of worth to reflect the value against the clients own investment criteria.

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20
Q

In VPS4 what are the 6 basis of value?

A
  1. Market Value
  2. Market Rent
  3. Fair Value
  4. Investment Value
  5. Equitable Value - not used in the UK
  6. Liquidation Value - not used in the UK
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21
Q

What are the different levels of stamp duty?

A

Commercial:
£0-£150,00 - nil
£150,001 - £250,000 - 2%
£250,001 + - 5%

Residential
£0-£250,000 - nil
£250,001 - £925,000 - 5%
£925,001 - £1,500,000 - 10%
£1,500,000 + - 12%

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22
Q

What are the two Professional Standards in the Red Book?

A

PS1 - compliance with standards and practice statements where written valuations are produced
PS2 - Ethics, competency, objectivity and disclosures.

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23
Q

What is the structure of the UK national supplement?

A

Part 1: Introduction
Part 2: UK professional and valuation standards
Part 3: valuation practice guidance - applications
Part 4: summary of changes from
UK Red Book 2015

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24
Q

What is the structure of the Red Book?

A

Part 1: Introduction
Part 2: Glossary
Part 3: Professional Standards
Part 4: Valuation Performance Standards
Part 5: Valuation Practice Guidance - Applications
Part 6: International Valuation Standards

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25
Q

When was IVS published and effective from?

A

Published: July 2021
Effective from: January 2022

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26
Q

When was the Red Book effective from?

A

31st January 2022

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27
Q

What are the proposed updates to the UK national supplement?

A
  1. Regulatory update valuations in light of the review of investment valuations
  2. Other updates relating to financial reporting, public sector valuations and residential valuations.
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28
Q

What are the 3 valuation approaches?

A

The cost approach
The income approach and;
The market approach

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29
Q

What are the main factors that may have a material impact on value?

A

Location, age, tenure and type of accommodation.

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30
Q

What valuations are included as part of the Red Book?

A

All valuations except:
Advice provided for litigation or negotiation
If a valuer is performing a statutory function
When a valuation is provided for internal accounting purposes
And if a valuation is provided for agency or brokerage

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31
Q

How many VPGA’s are in the Red Book?

A

There are 10: the ones I follow in day to day valuation work are:
VPGA 1: financial accounting purposes
VPGA 2: secured lending
VPGA 8: Real Property Intereste
VPGA 10: Matters that may give rise to material valuation uncertainty

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32
Q

How would you use the term and reversion method of investment valuation?

A

I would capitalise the term (current rent) until the next lease event at an initial yield.

For the reversion I would capitalise the reversionary rent (market rent) in perpetuity at a reversionary yield.

The yield for the reversion would be higher due to the risk of an unknown occupier.

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33
Q

How would you use the hard core/ top slice method?

A

Bottom slice = market rent
Top Slice = current rent/ market rent until the next lease event
A higher yield applied to top slice due to risk.

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34
Q

What are the four basis of value?

A

Market value
Market rent
Fair Value
Investment Value

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35
Q

Define market value?

A

The estimated amount an asset of liability would exchange for
at the valuation date
between a willing buyer and a willing seller
during an arms length transaction
after proper marketing,
where all parties have acted knowledgeably, prudently and without compulsion.

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36
Q

Define market rent?

A

The estimated amount an interest in real property should be leased at on the valuation date between a willing lessor and willing leasee, on appropriate terms, during an arms length transaction after property marketing where all parties have acted knowledgeably prudently and without compulsion.

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37
Q

Define fair value?

A

The price that would be received to sell and asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

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38
Q

Define investment value?

A

A measure of worth, value of an asset to a particular owner.

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39
Q

What is an all risks yield?

A

The remunerative rate of interest used in the valuation of a fully let property at market rent, reflecting all risks attached to the property.

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40
Q

What is a true yield?

A

Assumes all rent is paid in advance, not in arrears.

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41
Q

What is a nominal yield?

A

Initial yield assuming rent is paid in arrears.

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42
Q

That is a gross yield?

A

Yield not adjusted for professional costs

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43
Q

What is a net yield?

A

Resulting yield adjusted for professional costs.

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44
Q

That is an equivalent yield?

A

The average weighted yield when a reversionary property is valued using an initial and reversionary yield.

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45
Q

Is an initial yield?

A

Simple income yield for current income and current price

46
Q

What is a reversionary yield?

A

Market rent divided by market price of an investment, let at a rent below market rent

47
Q

What is a running yield?

A

The yield at one moment in time

48
Q

What do you adhere to in the UK Red Book?

A

VPS 1 - Terms of engagement
VPS 2 - inspection, investigation and measurement
VPS 3 - reporting
VPS 4 - Basis of value
VPS 5 - approaches and methods

49
Q

When reporting market value of the office block in Portsmouth which method did you use?

A

I used the comparable method which I cross checked with a investment method recognising that it is best practice to avoid reliance on a single approach.

50
Q

What is the structure of the uk National supplement?

A

Part 1: introduction
Part 2: uk professional and valuation standards
Part 3: UK valuation practice guidance - applications
Part 4: summary of changes from the UK red book 2015

51
Q

What is the structure of the Red Book?

A

Part 1: introduction
Part 2: glossary
Part 3: professional standards
Part 4: valuation performance standards
Part 5: valuation practice guidance - applications
Part 6: International Valuation Standards

52
Q

What is the structure of IVS?

A

Part 1: introduction
Part 2: glossary
Part 3: international valuation standards framework
Part 4: general standards
Part 5: international standards 101-105
Part 6: asset standards

53
Q

What are the two performance standards?

A

PS1: compliance with standards and practice
PS2: ethics, competency, objectivity and disclosures

54
Q

What guidance relates to sustainability in the Red Book?

A

RICS professional standard: Sustainability and ESG in commercial property valuation

55
Q

How would you calculate a residual appraisal without Argus?

A

Using Microsoft excel by deducting all relevant developers costs from the Gross Development Value calculated through comparable evidence.

56
Q

How would you cash flow this?

A

By dividing the development costs by 2 and multiplying them by your finance rate and by the timescale of the development

57
Q

What would you divide your costs by 2?

A

Because this best represents the ‘S’ curve commonly used in practice to cash flow build costs.

58
Q

What is the profits method?

A

One of the 5 methods of valuation used for trade related properties where there is a monopoly position such as pubs, hotels and restaurants.

59
Q

Talk me through a profits method calculation:

A

You would understand the annual turnover of the business from 3 years with of accounts.
Less costs/ purchasss
= gross profit
Less working expenses
= unadjusted net profit
Less operators remuneration (staff payment)
= adjusted net profit
This can be expressed as ‘Fair Maintainable Operating Profit’ FMOP or as an EBITDA
You would then times your FMOP by an appropriate multiplier to calculated market value.

60
Q

What is an EBITDA?

A

Earnings Before Interest, Tax, depreciation and Amortisation

61
Q

What is the discounted cash flow (DCF) technique?

A

This is a grow explicit investment method of valuation.

62
Q

How would you calculate a DCF?

A
  1. Estimate the cash flow of an asset
  2. Estimate the exit value at the end of the holding period
  3. Select a discount rate
  4. Discount cash flow at discount rate
  5. Value is the sum of the completed discounted cash flow to provide an NPV
63
Q

What is an NPV?

A

Net present value - the sum of the discounted cash flows of the project and can be used to determine whether an investment gives a positive or negative return

64
Q

What is the current RICS guidance on DCF?

A

RICS guidance note Discounted cash flow for commercial property investments 2010

65
Q

What is are the pros and cons for DCF

A

Pros:
Growth explicit
Good at predicting long term value

Cons:
Best when valuing for one investor on their perceived value
Does not react to short term market fluctuation

66
Q

How would you value affordable housing?

A

I would refer the valuation to the affordable housing team in my business recognising that it is a niche area and beyond my competence.
I would however further my understanding of it by looking at the section 106 agreement to understand the tenure mix of affordable rent and shared ownership
I would also expect the values produced by the affordable housing team to be between 60% and 70% of market value and would attribute a lower yield to reflect a lower risk

67
Q

What is the Internal Rate of Return

A

The rate of return of which all further cash flows must be discounted to produce an NPV of zero

68
Q

What are due to be updated on the Red-book Global?

A

I am aware that the Red Book update has not finished consultation and is due to be updated. The two main purposes of the update is:
1. Regulated purpose valuations
2. Other updates include financial reporting, residential valuations and public sector valuations

69
Q

What sets out the three approaches?

A

IVS 105

70
Q

What are the three valuation approaches?

A

Income
Cost
Market

71
Q

Which valuation approach relates to which method of valuation?

A

Market - comparable
Cost - DRC
Income - investment, residual and profits

72
Q

How do you calculate a DRC valuation!

A
  1. Value of land in existing use
    Add current cost of replacement
  2. Deduct depreciation and deterioration costs
73
Q

What is a DFC used for?

A

To understand the value of an asset today based on its future cash flows

74
Q

Where would you look for guidance on tax valuations?

A

UK National Supplement
UK VPGA 15

75
Q

Where would you look for guidance for secured lending?

A

UK VPGA 10 or VPGA 2

76
Q

What does VPGA 2 include about secured lending?

A

Additional conflicts of interest checks to ensure that you make your client aware of any involvement with the property of the borrower within the last two years.

77
Q

Can you still undertake an instruction if you have valued the property within the last two years?

A

Yes as long as you disclose it to your client.

78
Q

What is the average annual rate of depreciation?

A

2.5%

79
Q

What is the definition of Gross Development Value?

A

The aggregate market value of the proposed development assessed on the special assumption that the development is completed on the valuation date in the prevailing conditions.

80
Q

Name 5 statutory valuations DD?

A

Check tax status of the property
Check evnuronmental status of the property
Check for contamination
Check flood map
Check EPC/ ESG credentials
Check listing register
Conservation map

81
Q

Can you send a draft to your client?

A

Yes as long as you out a draft watermark and caveat that it cannot be relied upon

82
Q

What is CIL?

A

Community infrastructure levy

83
Q

What is a S106?

A

This relates to section 106 of the town and country planning act and is a binding agreement between a LPA and a property owner as part of granting a planning permission.

84
Q

Did you consider Development Land Fareham to be suitable for secured lending?

A

Yes due to the nature of the property and due how the market perceived and asset of this - it was very rare in Hampshire to have a consented site of over 100 dwellings.

85
Q

As part of VPS 3 what needs to be included within a report?

A
  1. Identification and status of the valuer
  2. Client and other intended users
  3. Purpose of valuation
  4. Identification of asset being valued
  5. Basis of value
  6. Valuation date
  7. Extent of investigation
  8. Nature and source of information relied upon
  9. Assumptions and special assumptions
  10. Restricted use
  11. Instructions undertaken inline with IVS standards
  12. Valuation approaches and reasoning
  13. Valuation figures
  14. Date of report
  15. Comment on material uncertainty
  16. Statement setting out limitations on liability
86
Q

What would you not include in a non-red book valuation?

A

A non-red book valuation typically doesn’t even need to be in report format. You also have to caveat that it is a non red book report and therefore there can be no reliance on the numbers.

87
Q

What are the exceptions from the red book!

A

Negotiation and litigation
When you are performing a statutory functions
Internal account purposes
Agency and brokerage
Expert whiteness

88
Q

Who commissioned the review of valuations?

A

The RICS standards and regulation board in 2021

89
Q

What is the purpose of Valuation of development propertyv

A

It is a professional standard that sits along side IVS 410 Development Property. Valuation of development property defines GDV, sets out best practice to avoid reliance on a single approach and that when undertaking development valuations, a risk analysis is mandatory.

90
Q

What is the steps to the comparable method?

A

Select
Verify
Assemble comps spreadsheet
Adjust
Analyse
Report

91
Q

What is the guidance relating to financial reporting.

A

VPGA 1
Specifies that values must be reported as fair value at the measurement date and needs to be adopted for all IFRS accounts

92
Q

Why was the UK National Supplement brought out?

A

To augment the Global Red Book and used for valuation within the UK jurisdiction.
Typically contains guidance that is not mandatory.

93
Q

What the “The Red Book”

A

RICS Valuation - Global Standards

94
Q

What are the residential stamp duty bands?

A

£0-£250,000 : 0%
£250,000 - £925,000 : 5%
£925,000 - £1,500,000 : 10%
£1,500,000 + : 12%

95
Q

What are the commercial stamp duty bands?

A

£0 - £150,000 : 0%
£150,000 - £250,000 : 2%
£250,000 + : 5%

96
Q

What is hope value?

A

The value arising from any expectation that future circumstances affecting the property may change

97
Q

What is marriage value?

A

The value created by the merger of 2 or more interests.

98
Q

What is the second home SDLT rate?

A

3% above the standard rates

99
Q

Is a reinstatement value an opinion of value?

A

Technically no and therefore Red Book compliance is not required.

100
Q

How would you value a long leasehold?

A

Rent received less ground rent = net rental income
Capitalised at an appropriate yield for the remainder of the lease
Market Value of a Leasehold interest.

101
Q

When do you deduct purchasers costs?

A

After capitalisation

102
Q

When would you allow for a lease incentive?

A

Typically this is a void period so you would defer the rent before capitalisation.

103
Q

When valuing Residential house in Portchester you mentioned you used comps from further a field, what else could you have done to assist with accuracy or value?

A

Spoken to local agents in the area
Seek professional judgement from a more senior member of my team.
Verify data I have found with local agents.

104
Q

When valuing Development land in Fareham, you allowed for a 5% contingency, would this still be the case?

A

Yes, as I understand, build costs inflation has slowed down quite considerably over the last couple of months and therefore consider 5% to be appropriate. Should another hike in inflation and fuel costs happen, I would put this up to circa 10%

105
Q

What is a WAULT?

A

Weighted Average Unexpired Lease Term

106
Q

When is a WAULT used?

A

On a multi let property and is considered when looking at comparable evidence and when selecting an appropriate yield.

107
Q

How do you devalue a headline rent with a rent free period to produce a net effective rent?

A
  1. Straight line basis until next lease event.
  2. Straight line method assume time value of cash flow using a yield.
  3. Use DCF method.
108
Q

Is zoning a measurement method or valuation method?

A

Is it a valuation technique which is used to compare Zone A rent?

109
Q

What is ITZA?

A

In terms of zone A

110
Q

How do you zone a property?

A

Using the 6.1m rule
And halving back

111
Q

What is rights to light?

A

When there is 20 years of uninterrupted enjoyment of light. If a right is infringed an injunction can be put in place.

112
Q

What guidance is there for new build homes?

A

Valuation of individual new build homes 2019

Rics MK (16 decks)

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