Valuation Flashcards
(136 cards)
1
Q
What are the 5 methods of valuation?
A
- Comparable
- Investment
- Profits
- Residual
- Depreciated Replacement Costs (Contractors)
2
Q
What 3 things should you consider before undertaking a valuation?
A
- Competence
- Independence (no COI)
3.Terms of engagement
3
Q
What is an internal valuer?
A
- employed by the company to value the internal assets of a company
- Internal use of valuation only
- No third party reliance
4
Q
What is set out in TOE?
A
- Full written instruction - Confirm competence
- Limitations
- Fee
- Extra costs
- Complaints handling procedure (available)
5
Q
Why are statutory due diligence checks important?
A
To ensure no material matters have an impact on a valuation
6
Q
Can you name some statutory due diligence checks?
A
- Asbestos register
- Contamination
- EPC
- Flooding
- Environmental matters (substation)
- Highways (adopted)
- Business Rates
- Legal / tenure (boundaries, covenanr, easement)
- public ROW
7
Q
What is an external valuer?
A
No material links with the asset to be valued or the client
8
Q
What is the timeline of a Valuation?
A
- Receive instruction
- Check competence and no COI
- TOEs (receive signature)
- Gather info on site (TS, title docs)
- Undertake DD (no matters adversely impact valuation)
- Inspect and measure
- Research and market analysis
- Undertake Val
- Draft report
- Check with senior surveyor and obtain sign off
- Issue invoice
- File / save valuation
9
Q
What is the IVS?
A
International Valuation Standards 2022
- Standards for undertaking valuation assignments
- promote transparency and consistency in valuation practice
*RICS Redbook Global updated to reflect this
10
Q
What is IVS 105?
A
The international valuation standards section 105 sets out the valuation approach and methods.
11
Q
What are the valuation approach’s IVS 105?
A
- Market approach
- Income approach
- Cost approach
MIC
12
Q
What is the income approach?
A
Converting current and future cashflows into capital value
i.e.
- Investment method
- Residual method
- Profits method
13
Q
What is the cost approach?
A
- Reference to cost of an asset whether by purchase or construction
i.e.
Depreciated Replacement Costs
14
Q
What is the market approach?
A
Using comparable evidence.
i.e. Comparable method
15
Q
What are the steps of the comparative method?
A
6 steps:
1. Search and collect comparable evidence (i.e. Co-star)
- Confirm and verify information (CPA)
- Assemble evidence into a schedule using a hierarchy of evidence
- Determine HR and adjust to reflect differences with subject property and identify MR
- Report value
16
Q
What is the RICS Professional Standard on the Comparable Method?
A
RICS Professional Standard Comparable Evidence in Real Estate Valuation 2023
** Previously a GN (2019)
17
Q
What is the purpose of the RICS Professional Standard Comparable Evidence in Real Estate Valuation 2023?
A
- outlines principles in the use of comparable evidence
- advises on the hierarchy of evidence
(professional judgment case by case basis) - advice dealing with lack of comparable evidence
18
Q
What is the Hierarchy of comparable evidence?
A
Cat A - Direct comparable (completed transactions same or similar building with full accurate information)
Cat B - General market data (commercial database / historic evidence)
Cat C - other sources (evidence from other locations / types)
19
Q
How do you find comparable evidence?
A
- Speak to agents
- Inspection (marketing boards)
-In house records - Databases (Costar)
20
Q
What are limitations / challenges of the comparable method?
A
-limited transaction
- lack of up-to-date evidence
- lack of similar evidence
21
Q
What is the investment method?
A
The investment method is used where there is an income stream to value, i.e. the property is tenanted.
The rental income is capitalised to produce a capital value.
22
Q
What is a yield?
A
The annual return on an investment expressed as a percentage of capital value.
23
Q
What are the methods for determining an investment value?
A
- Term and Reversion (under-rented - MR greater than PR)
- Hard core layer (overrented - PR more than MR)
- Discounted Cash Flow (DCF) - cashflow is explicitly modelled incorporating a wide range of valuer-inputted assumptions.
24
Q
Explain how you would undertake an investment valuation (Term and Reversion).
A
An example would be MS where I undertook an investment valuation to determine capital value
- desktop study of the parade gathering information (tenancy schedule)
- no access to the building, used measurements provided by the investment agent
- Undertook market research using Costar collecting rental and sales evidence
Identified yield and MR (greater than the passing).
Term and reversion approach capitalising the term to the next lease event and the MR valued in perpetuity at a reversionary yield.
Provided to my supervisor before being sent to my client
25
What is the hard core layer method?
Used for over rented property
- 2 layers of income
- bottom layer is more secure and is received into perpetuity
- top layer is the riskier element as it compares the difference between the passing rent and market rent
- Top layer is also valued into perpetuity but at a higher yield to reflect the greater risk
26
How does a Term and Reversion differ from a Hard Core Layer?
T+R - Under rented
HCL - Overrented
- We still assume that all rental cash flows are received into perpetuity when were looking at hardcore/layer method
- Do not use of YP Single Rate
- We separate the rental income on a horizontal basis
(Still traditional valuation but only value to the first reversion only
Still use an All Risks Yield)
27
What is the calculation of a yield?
Income divided by purchase price x 100
28
What is years purchase and how do you calculate this?
It is the number of years required for it's income to repay purchase price.
Calculated by dividing 100 by the yield.
29
What would you consider to be a risk when determining a yield?
- Prospects of rental growth
- Location
- Covenant strength
- Lease terms
- Current / Risk of void
30
What is a return?
This is the term used to describe the performance of a property
31
What is a prime yield vs a secondary yield?
Prime - low yielding investment (more secure)
Secondary - High yield, reflecting uncertain income
32
What is an all risks yield?
Shows the rental value of an investment as an annual percentage of the property cost.
Reflects the risks and uncertainty attached to a property investment
Based on comparable evidence
(i.e. divide the annual rental income by property value X by 100)
33
What is the purpose of an ARY?
To provide an indication of the likely risks apparent in a particular investment
34
What is a reversionary yield?
Reflects the return once the rent has increased to Market Rent
Calculation: Market rent divided by purchase price x 100
35
Can you explain a DCF?
- projecting estimated cashflows over an assumed investment holding period plus an exit value
- cash is discounted back to the present day at a discounted rate that reflects the level of risk
36
When would you use a DCF?
- Short leasehold interest and properties with income voids
- phased development projects
- Non-standard investment (i.e. 21 year rent review)
37
Is there any RICS notes or guidance on DCF?
Yes, RICS Guidance note, discounted cash flow for commercial property investments 2010
38
What is the methodology for DCF?
1. Estimate cash flow (income less expenditure)
2. Estimate exit value at end of holding period
3. Select discount rate
4. Discount cash flow at discount rate
5. Value is the sum of the completed discounted cashflow to provide NPV
39
What is the NPV?
Net Present Value
- Sum of discounted cash flows of a project
- Used to determine if an investment gives a positive return over a target rate of return
(if NPV is positive - Investment exceeded investors target rate
if NPV is negative - it has not achieved the investors target rate of return)
40
What is IRR?
Internal Rate of Return
-Used to assess the total return from an investment opportunity, making assumptions on rental growth, re-letting and exit assumptions
41
Why might a valuation need to be carried out?
Valuations may be carried out for the following purposes:
- Loan security
- Accounts
- Tax (CGT/IHT)
42
What is the Red Book?
The Red Book is a set of global standards which set out procedural rules and guidance for written valuations.
43
What is the purpose of the Red Book?
Consistency
Objectivity
Transparency
44
What is the definition of Market Value?
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller
In an arms length transaction, after proper marketing
Where parties acted knowledgeably, prudently and without compulsion.
45
What is the definition of Market Rent?
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 market terms, in an arms length transaction, after proper marketing
Where parties acted knowledgeably, prudently and without compulsion
46
What is 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. IFRS 13
used for accounts purposes
IVS advises FV is generally consistent with MV.
47
What is marriage value?
An additional element of value created by the combination of two or more
assets or interests where the combined value is more than the sum of the
separate values.
48
What is a special assumption?
An assumption that either assumes facts that differ from the actual facts
existing at the valuation date or that would not be made by a typical
market participant in a transaction on the valuation date.
(e.g. assuming a land or property has obtained planning consent)
49
What is a special purchaser?
A particular buyer for whom a particular asset has a special value because
of advantages arising from its ownership that would not be available to
other buyers in a market.
50
What is a initial yield?
Immediate return to an investor from the current rent received
Calculation: Passing Rent divided by PP X 100
51
What is an equivalent yield?
Average of the initial yield and reversionary yield
(constant rate of return through the life of an investment - also known as IRR which could be achieved assuming no change in MR)
52
How do you analyse yields (comps)?
- Potential for rental growth (RR)
- Location
-Tenant Covenant
- Lease terms (length, any breaks, likelihood of T exit)
53
What is rack rent / rack rented proeprty?
- Current rental income reflects the market rent
(calculation: MR divided by Yield = MV)
54
Why would you come across a rack rented property?
- Property recently let
- Recently been a RR to MR
- MR not changed
55
What is under rented property?
The current passing rent is below the market rent
56
What is over rented property?
The passing rent is above the market rent
57
What is a term and reversion?
Considers 2 blocks of income
1. term which is the passing rent received until the next lease event (RR, Lease Exp)
2. reversion is the future black of income received after the term at a higher rent
58
What are the 3 types of yield application?
1. Traditional - Term secure (yield adjusted down by 0.5/1%)
2. Equivalent - No distinction between term and reversion income (same yield for both)
3. Modern - Term is fixed income + less secure than reversion as inflation prone, valued at high yield to reflect growth.
59
How do you build risk into a valuation?
Increase the yield
60
What costs are associated with VP in respect of a valuation?
- Agency fees at 10%
- Utilities 1%
- Business Rates payable (after RF period)
61
What do you consider (yield) when undertaking an investment valuation?
- will the T exercise BO?
- will they leave on expiry?
- Market rent and RR (i.e. potential for growth)
62
What is a running yield?
Yield at one moment in time
(the annual income on an investment divided by its current market value)
63
What is a DCF?
Discounted cash flow is a growth explicit method of investment valuation
- Involves projecting estimated cash flows over an assumed investment holding period plus an exit value at the end of the lease.
- Usually arrived at on an ARY basis
- Cash discounted back to the present day at a discount rate that reflects the perceived level of risk
64
When would you use a DCF?
Where the projected cashflow are estimated over a certain period:
- phased development projects
- Non standard investments (21 year RR)
-Properties with income voids / complex tenures
65
What is the RICS GN on DCF?
Discounted cashflow for commercial property investments
66
What is the DCF methodology?
1. Estimate cashflow (income less expenditure)
2. Estimate exit value at end of holding period
3. Select discount rate
4. Discount cash flow at discount rate
5. Value is the sum of completed discount cashflow to provide NPV
67
What is NPV?
Net Present Value
-Sum of discounted cash flows of a project
- Used to determine if an investment gives a positive return against a target rate of return
** positive NPV - exceeded investors target return
** Negative NPV - not achieved investors targeted rate of return.
68
What is the Profits Method of valuation?
-Used where the value of the property depends upon the profitability of a business and trading potential i.e. pubs, petrol stations, hotels.
(trade related property)
Value depends on profit generated from the business not the property / location.
69
What is the methodology of the profits method?
Simple answer annual turnover - working expenses = FMOP
Apply and all risks yield to capitalise
**cross check with comparable sales evidence
—-full break down below—-
Annual turnover (income received)
- less costs / purchases
= Gross profit
- less reasonable working expenses
= unadjusted net profit
less operators costs (wages / services)
= adjusted net profit known as fair maintainable operating profit
70
What information do you need / what is considered when undertaking a profits method valuation?
- Must have accurate and audited accounts for 3 years
- Use estimates / BP if new business
- adjust for maturity of business and any unacceptable items of expenditure.
71
What is the residual method of valuation?
The residual land value is derived from the value of the completed development (GDV)
- minus the development costs,
- developer's profit
72
What is a development appraisal?
A tool to financially assess the viability of a development scheme
Can be used to:
- Establish residual site value
- Assess profitability of proposed scheme
73
What is the calculation for a Land value using the residual method?
GDV - TDC - Developers profit = Land Value
(GDV - Gross Development Value
TDC - Total Development costs)
74
What is GDV?
Gross Development Costs
Value of a complete building / project
75
What is the methodology for a Residual Valuations?
1. Determine the GDV
*Use plans to determine size / use comparable to determine a MR and (less management costs) and a ARY
2. Capitalised to obtain MV
3. Total development costs deducted from valuation (demolition, build costs, marketing + letting, contingency costs, planning)
4. Developers profit i.e. 15% GDV
5. GDV - TDC - Profit = Land Value
6. Cross check valuation of comparable sites.
76
What are the 3 elements of finance associated with
- Site purchase
- Construction costs and associated costs
- Holding costs until disposal
77
What is the developers profit?
- % of GDV or total construction costs (15-20% depending on risk)
78
What are the methods of development finance?
2 main methods
- Debt finance
Lending money from a bank or institution
- Equity finance
Selling shares in a company or JV partnership or own money used
79
What is a joint venture?
When 2 or more parties join to develop
80
What is a forward sale?
Where a completed scheme is pre-sold to either a developer or occupier.
81
What is an overage?
Arrangement made for sharing any extra receipts over and above the profits expected as agreed in a prearranged formula
(e.g. shared between land owner and developer)
82
What is a profit erosion period?
The length of time it will take for a development to be eroded by holding charges following the completion of the scheme (i.e. interest or loss making)
83
What are the limitations of the residual valuation and finance modelling?
- Importance of accurate inputs / information
- Residual val doesn't consider timing of cashflow
- Very sensitive to minor adjustments
84
What is sensitivity analysis (residual val)?
- Required for key valuables such as GDV, build costs and finance rate to show range of values
85
What are the 3 forms of sensitivity analysis (residual val)?
1. Simple (key variables - yield, build costs)
2. scenario (change development timing / modifying design)
3. Monte carlo simulation (probability software)
86
Is there any guidance on the residual valuation / DA?
RICS Professional Standard - Valuation of development property 2023 (prev GN)
87
What are the key takeaways of RICS PS on Valuation of Development property?
- Assumptions / special assumptions clear reported in valuation report
- Best practice to avoid a single method approach to value development property (i.e. comparison method and vice versa)
- Best practice requires risk analysis (changes to inputs)
88
What is the DRC method?
Depreciated Replacement Costs Method (DRC) is only used when direct market evidence is limited or unavailable for specialised property (i.e.. schools, lighthouses, docks)
- Used for owner occupied property
- For accounts purposes for specialised property
- Rating valuations of specialist property
89
What is the methodology of DRC method?
Cost of replacing an asset with its modern equivalent
Less costs for physical deterioration, obsolescence
***Should use comparable if available
(Use build costs to determine)
90
How do you estimate a level of depreciation for function / economic obselcence?
1. physical - wear and tear over years
2. function - design / spec no longer fulfils function
3. Economic - due to changing market conditions for use of asset
91
Is DRC suitable for red book?
No, this method of valuation is not suitable for RICS Red Book Global Compliance valuations for secured lending purposes.
92
When reporting a DRC what must a valuer also report?
- State the MV for any readily identifiable alternative use if higher
- If appropriate, a statement that the MV on cessation of the business would be materially lower.
93
Is there any guidance from the RICS on DRC?
Yes, RICS Guidance note - Depreciated Replacement Cost method of valuation for financial reporting 2018
(provides range of advice)
94
What is the structure of the RICS Global Standards 2021 (effective from 2022)?
Part 1 - Introduction
Part 2 - Glossary
Part 3 - Professional Standards
Part 4 - Valuation technical and performance standards
Part 5 - Valuation application
Part 6 - International Standards
95
what is the aim of the change in red book global since 2020?
Aim of the update is to:
- reflect the changes in international valuation standards 2022
- clarify certain sections of the existing red book global
96
What are the key changes to the red book global since 2020?
- emphasises the need to agree clear, unambiguous terms of engagement (under ps1 section 5)
- Terms quasi, partial or non-red book should not be used in TOE or reporting instead the exception should be stated and explained.
- More detail / commentary on sustainability, ESG matters in VPGA 8 valuation of real property interests
97
What does ESG stand for?
Environmental, social and governance
98
Professional standard 1 in the red book is about?
Compliance
99
Professional standard 2 in the red book is about?
Ethics, competency, objectivity and disclosures
100
Are there any exceptions for valuers to value without the need to be red book compliant?
ALIES
- Agency marketing appraisal (unless purchase report is required which includes a valuation)
- Litigation (advice provided in advance negotiation or litigation)
- Internal purposes only
- Expert witness valuation (giving evidence)
- Statutory basis
101
what is professional scepticism?
- Attitude which includes a questioning mind
- critically analysing evidence relied upon
- alert to misleading info
102
What are the min requirements for TOEs? Can you name a few?
18
- Identification and status of valuer
- Identification of client
- Identification of any other users
- Asset to be valued
- Currency
- Purpose of Valuation
- Basis of value
- valuation date
- extent of investigation
- compliants handling procedure available
- fee basis
- confirmation of compliance with RICS Red book global
- Limitations agreed
- any other costs etc.
103
Can you name the VPS mandatory requirements for IVS compliant valuations?
VPS 1 - TOE
VPS 2 - Inspection, investigation, record
VPS 3 - Valuation reports
VPS 4 - Basis of value, assumptions/special assumptions,
VPS 5 - Valuation approaches and methods
104
What are VPS 1, 4 and 5?
Technical standards
105
What are VPS 2 and 3?
Performance and delivery
106
What are assumptions?
where it is reasonable for a valuer to accept that something is true without the need for specific investigation
107
What are special assumptions?
An assumption which is taken to be true and accepted as fact even though it is not true
**must be agreed in writing with the client at commencement of instruction
(e.g. assuming planning consent has been granted or vacant at DOV)
108
What does the red book day about Inspection?
Valuers must take reasonable steps to verify necessary information being relied upon for a valuation to ensure it is adequate for it's purpose.
109
When a valuer is undertaking a Red Book Global Val with restricted information or without physical inspection, what must they do?
4 considerations
1. Nature of restriction agreed in writing in TOEs
2. Possible implications of the restriction confirmed in writing before value is reported
3. Valuer should consider whether restriction is reasonable with regard to purpose of valuation.
4. Restriction referred to in the report
110
What should a valuer do when revaluing a property without a re-inspection?
- Not to undertake the valuation unless satisfied there have been no material changes to the property or it's nature since the last reinspection
- Must be confirmed in TOE and Val report
111
What does the Red Book say about Records?
Proper records must be held of the inspections and investigators and of other key inputs in an appropriate business format.
112
What are the main requirements for a Redbook compliant valuation report?
Under VPS3 - 16 requirements
- identification and status of valuer
- Client and other intended users
- purpose of valuation
- Identification of asset to be valued
- Bases of val
- Date of val
- Extent of investigation
- Assumptions / special Assumptions
- Instruction in accordance with IVS Standards
- Approach and reasoning
- Valuation figure
- Comment on market uncertainty
- statement setting out limitations.
113
Can preliminary advice be given?
Yes but must be marked as a draft for internal purposes only, cannot be relied upon, published or disclosed.
- draft can be discussed but the valuer must NOT be influenced by the client in respect of the final figure.
- Any changes must be reported on file with reasoning
- any additional info from client in relation to draft report must be saved on file.
114
What are the Bases of valuation?
set out in VPS4 there are 6 bases of value
- Market Value
- Market Rent
- Fair Value
- Investment Value
- Equitable Value
- Liquidation Value
115
What is Market Rent?
The estimated amount of which an interest in real property should be leased
- on the valuation date
- between a willing lessor and a willing leesee
- on appropriate lease terms
- in an arms length transaction
- after proper marketing
- where the parties have acted knowledgably, prudently and without compulsion
116
What is Market Value?
The estimated amount of which an asset or liability should exchange
- on the valuation date
- between a willing buyer and a willing seller
- in an arms length transaction
- after proper marketing
- where the parties had each acted knowledgeably, prudently without compulsion.
117
What is 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
Generally consistent with MV (RICS)
(required if the business has adopted International finance reporting standards by client)
118
What is investment value?
Value of an asset to a particular owner or prospective owner for individual or operational objectives
(may differ from MV, sometimes used as a measure of worth to reflect the value against clients own investment criteria)
119
What is equitable value?
Estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interest of those parties
- Not used in UK
120
What is Liquidation Value?
- Can be used for a group of assets sold on a piece meal basis considering the cost, of getting the asset into a suitable condition
- Not used in UK
121
What is the RICS Global standard (UK National Supplement) 2018?
- Published 2018 effective Jan 2019
Although RICS are working on an update
(aim to publish this in 2023)
- Augments the redbook global for valuations in the UK, is not a substitute
- Provides specific requirements for members on the application of RICS valuation (subject to UK jurisdiction)
- Most advice is not mandatory but provides guidance
122
Is the RICS Global standard (UK National Supplement) 2018 mandatory?
Parts are mandatory as follows:
-UK PS1 (Compliance within UK Jurisdiction)
- UK VPSs (1,2 and 3)
123
What are the contents of RICS Global standard (UK National Supplement) 2018?
Part 1 - Introduction
Part 2 - UK professional standards (mandatory)
Part 3 - UK Practice guidance applications (advisory)
Part 4 - Summary of changes from Redbook 2014 (revised 2015)
124
What is margin of error?
Permissible range allowed by courts
Case law identifies:
Singer and Friedlander LTF vs J Wood (1977) - margin of error can be varied (simple - narrower, complex - wider)
Dunfermline Building Society Vs CBRE 2017-
dismissed claim as court determined MV within marginal error of 15%
125
What is hope value?
- Value arising from any expectation that future circumstance affecting the property may change.
e.g. Future prospect of securing planning where non exists at the time
126
What is marriage value?
- Created by merger of interests (can be physical or tenurial)
- Undertake a val before and after and calculate the level of marriage value created.
- Typical negotiated outcome is 50/50 split or pro-rata to the value of individual interests
127
What is a special buyer as defined in the red book?
- A particular buyer for whom a particular asset has a special value because of advantages arising from its ownership that would not be available to other buyers in the market
128
What is a special value?
An amount that reflects particular attributes to an asset that are only of value to a special purchaser.
(e.g. adjoining property or T purchasing freehold of the property)
129
What is VPGA?
Valuation Practical Guidance Applications
130
What are the mandatory parts of the RICS Valuation Red Book Global?
PS1 - Compliance
PS2 - Ethics
VPS1 - ToE
VPS2 - Inspection
VPS3 - Valuation Report
VPS4 - Bases of Valuation, assumption, special assumption
VPS5 - Valuation approach and method
131
Under VPS5 what are the valuation approaches and methods?
10 VPGA some include:
VPGA 1 - Valuation for inclusion in financial statements
VPGA 2 - Valuation for loan security
VPGA 8 - Valuation for real property interests
VPGA 10 - Matters that may give rise to material valuation
uncertainty
132
Are VPGA mandatory?
No but they include links and cross-references to important material in the International Valuation
Standards and Global Red Book
133
What is the purpose of VPGA?
Key issues that need to be taken into account and also focus in greater detail on the
practical application of the standards
134
What is a loan security valuation?
A loan security valuation is conducted to establish whether the value of the loan requested from the lender will be secure.
135
What are the changes to the IVPS?
- Because the IVS (international Valuation standards) are updated on a rolling program every 2 years new IVS 2022.
- Red book needed minor updates to stay aligned with IVS 2022
- To increase focus on sustainability and ESG.
136
How do you determine the net effective rent?
Rent expected to receive after deducting expenses
Straight line approach
Annual rent x years payable (term without incentive) / term of lease
