Valuation

Question 1

What are the five methods of valuation?

Answer 1

Comparable
Residual
Investment
Profit
Cost (Depreciated Replace Cost method)

Question 2

What is a yield?

Answer 2

A yield can be simply defined as the annual return on investment expressed as a percentage of capital value.

Question 3

What is the RICS red book?

Answer 3

The RICS Red Book Global Standards sets out the mandatory standards valuers must adhere to when undertaking an external valuation that must be carried out in accordance with PS 1 and 2 and VPS 1-5 of the Red Book.

The Red Book seeks to uphold the highest standards and provide consistency across valuations.

Question 4

What is the difference between an in-house appraisal and a red book valuation?

Answer 4

An-inhouse appraisal is used for the internal purposes of a firm or individual. A red book valuation however is used for external purposes such as lending or funding purposes.

Question 5

To comply with red book requirements, what is required in the terms of engagement of a commission?

Answer 5

Identification and status of the valuer
Client details
Other intended uses of the valuation
Detail of the asset or liability being valued
Currency
Purpose of the valuation
Basis of value adopted
Valuation date
Nature and extent of the valuer’s work
All assumptions and special assumptions to be made
Format of the report
Restrictions on use, distribution and publication of the report
Confirmation that the valuation will be undertaken in accordance with the international valuation standards
Basis of how the fee will be calculated
Reference to the firms CHP with a copy available on request

Question 6

Are you aware of an RICS professional standard relating to sustainability and valuation?

Answer 6

RICS Professional Standard - Sustainability and ESG in commercial property valuation and strategic advice (2022)

Question 7

How do you decide which valuation method to apply?

Answer 7

Comparable - typically used to assess the market rent and market value of properties.

Investment - when there is an income stream to value

Residual - used for land or property with development potential. Output is market value of the land

Profits - also for income generating assets but for more specialist uses (hotels, golf course, petrol, care homes)

Depreciated Replacement Cost - used for specialised property that is rarely sold on the open market. Lack of comparable properties to use.

Question 8

5 methods - When and why would you use one of these methods?

Answer 8

Comparable - to value floorspace (residential, commercial etc) and when there are many comparable transactions to draw evidence from. Use hierarchy of evidence. Cat A (direct like for like) Cat B (General market data (indices/historic evidence) Cat C (Other comps from other property type and locations)

Residual - for market value of land. Estimate GDV using comparable method, and make cost assumptions (BCIS/QS) and deduct developer fees and profit to obtain market value of the land

Income - Used when there is an income stream to value. Assess rental values and a market-based yield. Yield used needs to account for terms (rack rented or under rented until reversion. If growth explicit valuation is needed, an use DCF which reflects risk free rate plus a property risk premium.

Profits method - income method also used for income producing properties, however these are for more specialist types. Need to establish Fair Maintainable Operating Profit (FMOP) by a reasonably efficient operator(REO). This is based on assessment and analysis of Fair Maintainable Turnover (FMT). A market based profit multiplier is then used to convert FMT into a capital value.

DRC Method - The DRC method is based upon the assumption that the market will pay no more for the existing property than the amount it would cost to buy an equivalent site, plus the cost of constructing an equivalent building - used when there is no comparable date (oil refineries and airports. DRC. The basic steps involved include assessing the cost to replace the land and the building – with a modern equivalent, including all associated costs – before making appropriate deductions for depreciation and obsolescence.

Question 9

What is a years purchase multiplier?

Answer 9

A YP multiplier is calculated by dividing 100 by the Yield of the property - demonstrates the number of years required for the income received to repay the purchase price

Question 10

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

Answer 10

Long tenancy term from a large multi-national covenant with strong financials - could apply a sharper yield to the valuation to reflect certainty of trade and income

Question 11

What is PI Insurance (PII)?

Answer 11

Professional Indemnity Insurance - covers you against negligence claims made when a duty of care has been breached

Question 12

Why do surveyors need PII?

Answer 12

Need to meet the RICS requirements for PII

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

Question 13

How did the decision in Hart v Large affect PII?

Answer 13

The High Court held that Mr Large was negligent because his inspection and report failed to identify the significant issues relating to damp. Mr Large also failed to advise, both within his report and during subsequent correspondence, to advise that Mr & Mrs Hart obtained a Professional Consultant’s Certificate (PCC) prior to purchase.

Question 14

What level of PII cover does your firm have?

Answer 14

-

Question 15

How would you distinguish limitations on liability in your valuations?

Answer 15

Surveyors should ensure that the terms of engagement that apply to their valuation reports include, where possible, a financial cap on liability

Clearly setting out in the retainer letter what the surveyor has agreed to do and what they have not agreed to do will help the surveyor to confine their liability to errors made in carrying out those specific tasks which they have agreed form part of their retainer.

Check

Question 16

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

Answer 16

Red Book Global Standards requires valuers to include a statement in their terms of engagement and within the valuation report, setting out any limitations on liability that have been agreed

Question 17

What is the SAAMCO cap?

Answer 17

The key concept behind the SAAMCO cap is that the liability of a professional advisor is limited to the specific loss that can be attributed directly to their professional negligence, rather than the entire loss suffered by the client. In other words, the professional advisor is only liable for the losses that were caused by their incorrect advice or negligence, and not for any losses that would have occurred even without their negligence.

Question 18

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

Answer 18

No

Question 19

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

Answer 19

Yes - The valuer’s liability typically doesn’t cover losses occurring after the valuation date, unrelated to their negligence, such as market-driven declines in property value.

Question 20

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

Answer 20

Notify your insurer

Gather documentation and evidence relevant to the claim

Consult legal counsel

Communicate with the client

Operate with insurers investigation

Question 21

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

Answer 21

Survey/valuation negligence - occurs in the process of the valuation/survey itself. Negligence will arise linked to accuracy and thoroughness of the work performed

Advice - negligence pertains to errors or omissions in the advice provided to the client based on the survey or valuation results. Liability is associated with the quality and accuracy of the guidance given to the client.

Question 22

Why does the Red Book exist?

Answer 22

Set of global valuation standards created to achieve high standards of integrity, clarity and objectivity in ensuring valuation best practice.

To ensure consistency, objectivity and transparency in valuation.

Question 23

Tell me about a factor which may impact value.

Answer 23

Site condition. Contamination/ topography?

Question 24

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

Answer 24

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.

In a claim (for breach of contract or negligence), the Court will ask whether the ‘valuation given was one that no reasonable valuer in the actual valuer’s position could have given’ (RICS).

A claim for breach of contract can only be brought by a party to the contract, i.e. the client. However, if the valuer expressly accepts a duty of care (or is assumed to have done so) then they may also be liable to third parties (who were not party to the valuation contract or Terms of Engagement).

Question 25

To whom do you owe this duty of care in valuation?

Answer 25

My client. And potentially third parties should the valuer expressly accept a duty of care (or is assumed to have done so)

Question 26

Why is independence and objectivity important when valuing?

Answer 26

Need to provide valuations that are accurate and credible. Independence and objectivity are at risk when there is a conflict of interest. This may result in an incorrect valuation that could breach a duty of care to the client who may act off of a wrong valuation

Question 27

Is there a separate UK Red Book?

Answer 27

No - UK National Supplement

Question 28

What is the UK valuation guidance called?

Answer 28

RICS Valuation UK National Supplement (2019)- Updating to 2023.

Question 29

Why does the UK guidance exist?

Answer 29

The Red Book Global Standards - gives advice for members and firms across the globe. The UK National Supplement is required to ensure advice is tailored to our jurisdiction

Question 30

When was the Red Book last updated?

Answer 30

31 January 2022. Effective

Question 31

When was IVS last updated

Answer 31

January 2022

Question 32

What changes were made to IVS?

Answer 32

New Chapter IVS 230 Inventory - intangible assets standard

Question 33

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

Answer 33

The Red Book - as the RB adopts and applies standards set out within IVS

Question 34

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

Answer 34

PS 1 & 2 - Mandatory VPS 1-5 - Mandatory except when its for negotiations, internal purposes, agency work VPGAs - Advisory

Question 35

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

Answer 35

PS1 - Compliance with standards where a written valuation is provided PS2 - Ethics, competency, objectivity and disclosures VPS 1 - Terms of engagement VPS 2- Inspections, investigations and records VPS 3- Valuation Reports VPS 4- Bases of Value, assumptions and special assumptions VPS 5- Valuation approaches and methods Valuation Practice Guidance Applications - VPGA 1-10 - these are advisory and provide guidance on best practice. They typically relate to valuations for specific purposes or of specific asset types, e.g. financial statements, secured lending, trade related property and portfolios VGA 1 - Valuation for inclusion in financial statements VPA 10 - Matters that may give rise to material valuation uncertainty

Question 36

What type of advice does the Red Book cover?

Answer 36

The Red Book applies to written valuations,

Question 37

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

Answer 37

- the opinion is provisional and subject to completion of the final report - the advice is provided for the client’s internal purposes only and - any draft is on no account to be published or disclosed. - If any matters of fundamental importance are not reflected, their omission must be declared.

Question 38

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

Answer 38

Generally - Only those where the valuer has permitted third party reliance in the terms of the contract However Certain types of valuation may be relied on by parties. This includes valuations for: * a published financial statement * a stock exchange, or similar body * publication, prospectus or circular * investment schemes (in the Americas, where applicable: investment programs), which may take a number of forms in individual jurisdictions * takeovers or mergers.

Question 39

Tell me what the definition of MR?

Answer 39

‘the estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion

Question 40

Tell me what the definition of Market value?

Answer 40

The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and seller in an arm’s length transaction, after proper marketing and where the parties have each acted knowledgably, prudently and without compulsion

Question 41

Tell me what the definition of investment value?

Answer 41

The value of an asset to the owner or a prospective owner given individual investment objectives

Question 42

Tell me what the definition of fair value?

Answer 42

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. FV may include a special purchaser which is excluded from MV. Definition from the IFRS

Question 43

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

Answer 43

Assumption - An assumption is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation. To be agreed Special assumption - Assumed facts that differ from those existing at date of valuation. (when a site has planning when it doesn’t)

Question 44

What would you include in a valuation report?

Answer 44

Valuer informer Client details Purpose of the valuation Property details Basis of value adopted Valuation Date Extent of valuation Nature of sources of information relied upon Assumptions and Special assumpiotns Restrictions of valuation use Confirmation of accordance with IVS Valuation Approach Amount of the valuation Commentary on any uncertainty

Question 45

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

Answer 45

Local agents Molior, Landinsight, Rightmove CoStar Land registry EPC register Planning portal

Question 46

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

Answer 46

PS 2 - Where you've previously valued an asset. The following disclosures must be made in the ToE, in the report and any published reference to the report: - the relationship with the client and previous involvement - rotation policy - time as signatory (how long you've been involved acting as signatory) - proportion of fees (proportion of total fees paid by the client during the precedent year)

Question 47

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

Answer 47

An arrangement to comply with the standards of the principle should be adopted: e.g. arrangement 1for the valuation to be periodically reviewed at intervals not greater than 7 years 0 would assist in showing the member is taking steps to maintain objectivity.

Question 48

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

Answer 48

When the valuation is of a property adjacent to where you live, or someone you have a relationship with owns the propert

Question 49

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

Answer 49

Valuer details Client Details Purpose of the report Identification of use of the report Identification of the asset Valuation currency Scope of the report (extent of investigation) Limitation of liability Fee Assumptions / Special Assumptions Valuation date Basis of value adopted Sources of information upon which the valuer may rely Format Restrictions on use Confirmation of accordance with IVS Reference to CHP

Question 50

Where is this covered in the Red Book? (ToE)

Answer 50

VPS 1

Question 51

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

Answer 51

E.g. short time scales might make it impossible to undertaken a site inspection. Such restrictions need to be identified and recorded in the ToE. The valuer should consider if the restriction is reasonable, with regard to the purpose for which the valuation is required. If the valuer considers that it is not possible to provide a valuation, even on a restricted basis, the instruction should be declined. Be clear that restrictions and any resulting assumptions and the subsequent impact on valuation will be referred to in the report

Question 52

How do you deal with limitations on inspection or analysis?

Answer 52

Agree limitations/restrictions in ToE and consider whether to accept or decline instruction, taking into account the purpose of the valuation/how it will be used, and the significance/impact of the restriction

Question 53

Can you revalue a property without inspecting?

Answer 53

Red Book - VPS 2 Inspections No - unless the valuer is satisfied that there are no material changes to the property and the area it is situated within. ToE - must state that this assumption has been made

Question 54

What RICS guidance relates to the use of comparable evidence?

Answer 54

RICS Guidance Note Comparable Evidence in Real Estate Valuation Published 2019 Re-Published 2023

Question 55

What is an internal valuer?

Answer 55

In-house (employee) employed by the enterprise

Question 56

Can an external valuer provide an internal purposes valuation?

Answer 56

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.

Question 57

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

Answer 57

Checking

Question 58

What is a Special Purchaser?

Answer 58

One to whom the property being valued has a particular attraction which it does not have for the market in general.

Question 59

Is special value from a special purchaser reflected in MV?

Answer 59

Excluded from MV, but included in FV

Question 60

Where does the definition of fair value come from?

Answer 60

Definition from the IFRS

Question 61

Does this differ from MV?

Answer 61

The concept is consistent with each other, however FV may include special purchaser

Question 62

When is fair value used?

Answer 62

Fair value is used in financial reporting when reporting the value of assets, liabilities, or other financial instruments. Fair value is used to determine the value of investment properties, such as commercial buildings or rental properties, which are typically carried at fair value in the financial statements.

Question 63

What are the 3 approaches under VPS5?

Answer 63

1. Incomes – investment 2. Cost – RLV, DRC 3. Market approach - comparable Approach - overall manner in which a valuation is taken

Question 64

What is the Valuer Registration Scheme?

Answer 64

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.

Question 65

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

Answer 65

However, there are 5 specific circumstances where VPS 1-5 may be unsuitable or inappropriate to comply with: Providing agency or brokerage advice for an acquisition or disposal Acting as an expert witness Performing statutory functions Providing a valuation purely for internal purposes, without liability and without communication to a third party Providing valuation advice in the course of negotiations or litigation where the valuer is acting as an advocate

Question 66

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

Answer 66

Fair Value

Question 67

What is a SORP?

Answer 67

Statement of Recommended Practice - sector-driven recommendations on financial reporting, auditing practices and actuarial practices for specialised industries,

Question 68

When would you use EUV?

Answer 68

Existing use value (EUV) is to be used only for valuing property that is owner occupied by an entity for inclusion in financial statements.

Question 69

What is the definition of EUV?

Answer 69

Same as MV - but with "the buyer is granted vacant possession" The value of an existing property in its current use or condition. It represents the value of the property as it stands, assuming it continues to be used for its current purpose, without any changes or improvements.

Question 70

What additional criteria apply to secured lending valuations?

Answer 70

Checking

Question 71

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

Answer 71

Checking

Question 72

What is a regulated purpose valuation?

Answer 72

UK VPS 3 Regulated purpose valuations. Valuations for: - Financial reporting - use in takeovers and mergers - collective investment schemes - Unregulated property unit trusts

Question 73

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

Answer 73

Proportion of total fees paid to the client in the last year Where it is anticipated that there will be a material increase in the proportion of the fees payable

Question 74

What is the basis of value for a statutory valuation?

Answer 74

Check

Question 75

What might a statutory valuation relate to?

Answer 75

Statutory valuations are usually required for the purposes of taxation or in cases of compulsory purchase (eminent domain acquisition), and therefore they must be undertaken in accordance with the relevant statutes.

Question 76

What is the definition of the statutory basis of valuation?

Answer 76

check

Question 77

What is a statutory valuation

Answer 77

Statutory valuation is on a basis defined in law, and/or is required for a specific legal purpose.

Question 78

What is the definition of the statutory basis of valuation? Is this the same for all statutory valuations?

Answer 78

check

Question 79

What is a yield

Answer 79

A yield can be simply defined as the annual return on investment expressed as a percentage of capital value.

Question 80

What is a Net Initial Yield?

Answer 80

A yield adjusted for purchasers costs

Question 81

What is a reversionary yield?

Answer 81

Net reversionary yield (NRY) is the anticipated yield to which the initial yield will rise (or fall) once the rent reaches the estimated rental value. Market rent divided by current price price on an investment at a rent below the market rent

Question 82

What is an equated yield?

Answer 82

The equated yield is the yield on a property investment which takes into account growth in future income. (This is not applicable to reversionary situations, where the increase in income on reversion is to the market value as estimated at the present time.)

Question 83

What is an equivalent yield?

Answer 83

Average weighted yield when a reversionary property is valued using an initial and reversionary yield

Question 84

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

Answer 84

Auction Yield won't account for purchasers costs (legal fees and surveyor fees)

Question 85

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

Answer 85

stamp duty land tax, agent and legal fees.

Question 86

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

Answer 86

Purchaser's costs are typically deducted from the valuation when calculating the Market Value

Question 87

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

Answer 87

check

Question 88

How could you value a long leasehold interest?

Answer 88

Where remaining lease terms are longer than 100 years, very little impact on value is assumed compared to a long lease or a freehold property

Question 89

How does a term and reversion differ to a DCF?

Answer 89

DCF values the property based on the present value of all future cash flows. DCF involves projecting future cash flows for each period, applying a discount rate to each cash flow to bring it to its present value, and summing up all the present values to arrive at the property's current value. The discount rate used in DCF reflects the risk associated with the investment. T&R is a simplified valuation approach that divides the property's cash flows into two components: the income generated during a specific holding period (the "term") and the reversionary value at the end of that period.

Question 90

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

Answer 90

Check

Question 91

Give examples of each of these types of yield.

Answer 91

check

Question 92

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

Answer 92

Investment method - Term and reversion method when under rented Layer/hardcore method when over rented

Question 93

Where can you find yield evidence from?

Answer 93

Comparable method of valuation CoStar Speaking to agents Recently transacted evidence

Question 94

What is the hierarchy of evidence?

Answer 94

Use hierarchy of evidence. Cat A (direct like for like) Cat B (General market data (indices/historic evidence) Cat C (Other comps from other property type and locations) Helps to appropriately apply evidence when using the comparable method of valuation

Question 95

What would you do if comparable evidence was limited?

Answer 95

Valuers can also look further afield and at a wider range of evidence or indicators where direct comparables are limited. In the case of uncertainty, the Red Book states that ‘valuers should not treat … a statement expressing less confidence in a valuation than usual as an admission of weakness … it is … a matter entirely proper for disclosure’. Valuers should, therefore, ensure clients understand that unusual market conditions may lead to uncertain valuations, but that this will help them to make better informed business decisions.

Question 96

What is NPV?

Answer 96

Net Present Value The sum of the discounted cash flows of a project Used to determine if an investment gives a positive return against a target rate of return

Question 97

What is IRR?

Answer 97

Internal Rate of Return The rate of return at which all future cashflows must be discounted to produce a NPV of Zero Used to assess the total return for an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions.

Question 98

What is a term and reversion?

Answer 98

Used for reversionary investment (market rent more than passing rent) (under rented) Term capitalised until next review/lease expiry at an initial yield Reversion to market rent valued in perpetuity at a reversionary yield

Question 99

What is a hardcore and topslice?

Answer 99

Used for over rented investments (passing rent more than market rent) Income flow divided horizontally Bottom slide - market rent Top slice - Rent passing less Market Rent until the next lease event High yield applied to top slice to reflect additional risk

Question 100

What is a Discounted Cash Flow (DCF)?

Answer 100

Growth explicit investment method of valuation DCF involves projecting estimated cash flows over an assumed investment holding period plus an exit value at the end of that period

Question 101

What is a short-cut DCF?

Answer 101

Simplified version of the DCF. Goes into less detail. Instead of projecting cash flows for many years, short-cut DCF often uses a single-year cash flow estimate or a more simplified approach. It may also use a rough approximation of the discount rate, such as the company's cost of capital or a generic discount rate for similar investments.

Question 102

When would you use a DCF?

Answer 102

Short leasehold interests Phased development projects Non-standard investment (with 21 year rent reviews) Over-rented properties and social housing

Question 103

What are the advantages of a DCF?

Answer 103

Extremely detailed incorporates the time value of money Doesn't require comparables Calculates IRR Sensitivity analysis

Question 104

What are the disadvantages of a DCF?

Answer 104

Requires significant data Sensitive to the projections it relies on

Question 105

What is a YP/PV/YP in perpetuity?

Answer 105

check

Question 106

What is marriage value?

Answer 106

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.

Question 107

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

Question 108

What's hope value?

Answer 108

Hope value is the value based on the expectation that land will get permission for development in the future, meaning that it is likely to be worth more

Question 109

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

Answer 109

Check

Question 110

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

Answer 110

Fair Value - can include special purchaser value Investment value - accounts for internal objectives of a firm

Question 111

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

Answer 111

Profits - specialist DRC - specialised

Question 112

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

Answer 112

Profits - Valuations of trade related property linked to profitability (Hotels, golf courses)

Question 113

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

Answer 113

Specialised properties for which there is no comparable evidence (oil refineries, airports)

Question 114

When would you use the profits method?

Answer 114

Used - where the value of the property depends on the profitability of its business and trading potential Used for trade related property where there is a 'monopoly' position

Question 115

What is intangible goodwill?

Answer 115

the intangible value that a company possesses beyond its physical assets and liabilities.

Question 116

What is turnover / gross profit / net profit?

Answer 116

turnover - total revenue Gross profit - revenue less cost of producing the product Net profit - revenue less cost of all business expenses

Question 117

What are the steps to providing a profits valuation?

Answer 117

Annual turnover (income) Less costs/purchases = gross profit Less reasonable working expenses =net profit Less operators remuneration = adjusted net profit known as the Fair Maintainable Operating Profit (FMOP) This can be expressed as the EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) Capitalised at an appropriate yield (years purchase multiplier to achieve market value) Cross check with comparable sales evidence if possible

Question 118

What is Fair Maintainable Turnover?

Answer 118

This is the annual level of trade (excluding VAT ) expected to achieve if operated in a reasonably efficient way.

Question 119

What is a Reasonably Efficient Operator

Answer 119

Checking

Question 120

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

Answer 120

excludes personal goodwill does include trading potential

Question 121

What is EBITDA?

Answer 121

(Earnings Before Interest, Taxation, Depreciation and Amortisation

Question 122

What is Fair Maintainable Operating Profit?

Answer 122

The level of profit that a 'reasonably efficient operator' would expect to achieve on the assumption that the property is in good repair and suitably equipped

Question 123

How do you calculate the divisible balance?

Answer 123

The divisible balance is the amount to be shared between the tenant and the landlord (as rent, or RV). The tenant's share is the amount the tenant would require to commercially run the business, bearing in mind capital expenditure, profit and risk. The amount left over is the landlord's share, or RV.

Question 124

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

Answer 124

The financial accounts for the business for the last 3 to 4 years as a minimum, and these then need to be carefully examined.

Question 125

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

Answer 125

RICS Valuation of Development Property (February 2020)

Question 126

What is an RLV?

Answer 126

Residual Land Valuation

Question 127

What do holding costs typically include?

Answer 127

Rent received Service charge void periods business rates any other operating costs

Question 128

How do you typically calculate developer’s profit?

Answer 128

GDV less construction cost less developer fees less land value = profit

Question 129

What are the advantages/disadvantages of a RLV?

Answer 129

Advantage] By comparing the residual land value with the asking price or the market value of the land, you can determine whether the project is worth pursuing or not Flexible and easy to do sensitivity analysis Disadvantage assumptions at a point of time. We are long terms and therefore cannot predict

Question 130

What is included in the development programme?

Answer 130

acquisition planning construction hand over sales

Question 131

What RICS guidance relates to the valuation of development property?

Answer 131

RICS Valuation of Development Property (February 2020)

Question 132

When would a cost approach be used?

Answer 132

Specialised property (airport, oil refinery) When no other comps are available.

Question 133

What is the supposition that a DRC is based upon?

Answer 133

The DRC method is based upon the assumption that the market will pay no more for the existing property than the amount it would cost to buy an equivalent site, plus the cost of constructing an equivalent building

Question 134

What are the 3 components of the cost approach?

Answer 134

The cost approach considers the cost of land, plus costs of construction, less depreciation.

Question 135

How do you assess the value of the land?

Answer 135

Check

Question 136

How do you assess Gross Replacement Cost?

Answer 136

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.

Question 137

How would you deal with depreciation/obsolescence in DRC?

Answer 137

Check

Question 138

What types of obsolescence are there?

Answer 138

a. physical deterioration b. functional obsolescence and c. economic obsolescence.

Question 139

Is the cost approach a market valuation?

Answer 139

Can be used for the Market Valuation of Specialised properties only for valuations for financial statements

Question 140

What liabilities may be created through valuation?

Answer 140

For example, if a property is overvalued, it may lead to financial losses for the buyer or investor when the property's actual value is lower. Conversely, undervaluation can lead to missed opportunities with profit Can create risk for lenders if underwriting valuation is wrong

Question 141

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

Answer 141

a liability cap refers to a contractual provision that sets a limit on the maximum financial liability that a chartered surveyor may incur as a result of their professional services

Question 142

Explain why the RICS are carrying out an Independent Valuation Review

Answer 142

The Valuation Review was commissioned to future-proof practices in the valuation of real estate assets for investment purposes, as a result of feedback and rapidly changing market dynamics.

Question 143

Who is leading this? (RICS Independent Valuation Review)

Answer 143

Peter Grey

Question 144

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

Answer 144

The margin of error is the possible degree of error while conducting a survey

Question 145

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

Answer 145

where a valuer has used the wrong methodology (or perhaps no methodology at all) but luckily arrives at the right valuation or one that falls within an acceptable margin of error, the valuer will not have been negligent

Question 146

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

Question 147

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

Answer 147

They soften

Question 148

What does heterogenous mean in terms of comparable evidence?

Answer 148

"heterogeneous" refers to a situation where the properties or assets being compared have significant differences or variations in their characteristics, making them not entirely alike or similar