Valuation Flashcards
(236 cards)
1
Q
When is the profits method used and how is this undertaken?
A
- The profits method is derived from trade related properties where the value is derived from the business and its trading potential
- This trading potential is the profit that a reasonably efficient operator would expect to realise from occupying the property
- Examples include hotels, schools, cinemas and theatres
- The common characteristics of these properties is where the property has been designed for a specific use and the value is linked to what the owner can generate from the property
- The value therefore reflects the trading potential of the property and it includes the property interest, business and locational good will and fixtures and fittings all reflected as a single figure
- The income and expenditure forecast is based on historical and comparable information
- The forecast represents the fair maintainable turnover and fair maintainable operating profit that a reasonably efficient operator would hope to achieve, which is a reasonably accurate forecast of the properties trading potential
- The actual performance is compared with similar trade properties to determine whether the fair maintainable turnover is realistic based on current market conditions
- The fair maintainable operating profit is capitalised at an appropriate rate of return to reflect the risks and rewards of the property to determine its trading potential. Evidence of accurate comparable market data should be analysed and applied
2
Q
What is the depreciated replacement cost method of valuation and how does this work?
A
- It provides an indication of value based on the buyer paying no more or no less than the cost to obtain the asset based on the current equivalent
- This involves calculating the replacement cost of the asset with its modern equivalent including deductions for physical deterioration and all other relevant forms of obsolescence
- Method of last resort
- Used to value unusual properties where there is no active market e.g. mosques, schools or refineries
- The capital value is determined by calculating the cost of the building equivalent asset and the purchase land value
- The replacement build cost should be calculated using new and cost-effective building materials and techniques
- The total value of the new property is then adjusted for deterioration using evidential information and recent transaction values to calculate the land purchase cost
3
Q
What is the comparable method of valuation and how does this work?
A
- It primarily uses sales data of properties that have recently sold focussing on assets that have a similar size, location, condition, features and specification
- It is underpinned by comparable evidence which is identified, analysed and applied to the real estate that is to be valued and is therefore fundamental to producing a sound valuation that can stand scrutiny from the client and market
- The valuer will compile a schedule of evidence that will contain details about the property such as age, quality, location, tenure, size, transaction price, date of sale, price per sq ft etc. all f which can be used for the purposes of comparison with other similar properties
- The comparables gathered should be comprehensive that is to say there should be several comparables rather than this being singular, they should be recent and representative of the current market conditions, very similar and consistent with local market practice
- See RICS Comparable Evidence in Real Estate Valuation 1st edn 2019
4
Q
What is the investment method?
A
- It is when there is an income stream to value and you reflect the level of risk in the yield
- Traditional approach is growth implicit in the choice of yield whereas DCF (discounted cash flow) is growth explicit and the cashflow is explicitly modelled incorporating valuer assumptions
- If DCF is based on client data then it represents investment value, if based on market data then it is the market value.
5
Q
What is the Red Book?
A
The RICS Red Book contains mandatory rules and best practice guidance for members who undertaken asset valuations. It includes:
- International Valuation Standards
- Red Book UK - Issued since 2015
Key Sections of the Red Book include:
- Introduction
- Mandatory Valuation Standards
- Advisory Valuation Standards
- Valuation for Financial Reporting
- Valuation for Charity Assets
- Valuation for commercial secured lending purposes
- Valuation for compulsory purchase and statutory compensation
6
Q
What steps would you take following your valuation instruction?
A
- Obtain details of the property
- Undertake a conflict of interest check
- Obtain a signed letter of instruction
- Confirm the purpose of the valuation
- Undertake information gathering including confirmation of the purchase price
- Identify ratings, planning & environmental information
- Carry out the inspection and measurement of the property
- Research market values
- Compile the valuation report
- Check valuation internally including sign off with any relevant signatories
- Report to the client and address any queries
- Submit an invoice
7
Q
What are the 5 different methods of valuation?
A
- Comparable
- Income method
- Profits
- Residual
- DRC (depreciated replacement cost)
8
Q
What does market value mean?
A
The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
9
Q
What does market rent mean?
A
The estimated amount for which a property, or space within a property should lease, on the date of valuation between a willing lessor and willing lessee on appropriate lease terms in an arm’s length transaction and after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion.
10
Q
What is hope value?
A
- It is the term used to describe the market value of land based on the expectation of getting planning permission for development on it
- This differs from the existing use value which is what the land/property is worth in its current form
11
Q
What is marriage value?
A
The extra value that arises from the merger of two physical or legal interests
12
Q
What is special value?
A
An extraordinary element of value over and above the market value
13
Q
What is the IVSC?
A
The International Valuation Standards Council
- It’s principle interest is to publish valuation standards and procedural guides for valuation of assets for financial statements
- The IVSC recognises the following International Valuation Standards:
– IVS1 - Market Value Basis of Valuation
– IVS2 - Valuation Bases other than Market Value
– ISV3 - Valuation Reporting - The IVSC also recognises two applications:
– IVA1 - Valuations for Financial Reporting
– IVA2 - Valuation for Lending Purposes
14
Q
What is the difference between specialist properties and specialised properties?
A
Specialist = Trading properties such as hotels, cinemas, pubs where the property is designed to perform a specific purpose
Specialised = These include chemical plants and places of worship. These types of properties are very rarely sold on the open market except being exchanged within the industry or business they are a part of
15
Q
What is the difference between Market Rent and Estimated Rental Value?
A
Market Rent = assumes vacant possession and is the amount of rent anticipated for the use of the property, in comparison with similar properties in the same area
Estimated Rental Value = takes into account further considerations about the property assuming the building is occupied e.g. there will be due consideration of the specific lease terms
16
Q
When would you use Term & Reversion vs Hardcore?
A
These valuation approaches are utilised when the terms of the lease and incoming rental income are expected to change in the near future
17
Q
What is the Term and Reversion approach?
A
- Used when the property has an existing lease in place that is due to expire
- The existing lease terms are considered separate from the expected new lease terms within the valuation approach
- In this instance the property is said to have reversionary potential taking into account the new lease terms
- In other words, the existing term is valued separately from the reversion (new lease terms)
18
Q
What is the Hardcore/Layer approach?
A
- The layer or hardcore valuation method is used as an alternative to the term and reversion approach
- It considers the current market rent being received and applies this on a perpetual basis
- The difference between the current rent being received and expected market rent at the time of the lease renewal is also considered on a perpetual basis
- The two separate values are then added within the calculation
19
Q
What is the definition of Equivalent Yield?
A
- It is a weighted average of the net yield from current rental income and all future reversionary income
- For example, if a 5% yield is applied on the hardcore rental income currently being received and a 6% yield is applied on future reversion income, the uniform equivalent yield would be weighted to consider both of the individual percentages being applied at 5.5%
- This approach is often simpler for valuers as they can apply a yield to the entire income stream rather than having to value hardcore and reversionary income separately
20
Q
What is the definition of Equated Yield?
A
- It 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
21
Q
What is Goodwill?
A
- An intangible asset when property or real estate is being sold or purchased
- It is a value within the transaction that is higher than the sum of the net fair value
- For example, the Goodwill portion of the transaction may be included due to special features of the asset being exchanged which may be associated with brand name, local customer base and excellent reputation
- The Goodwill element will create a special value over and above the value of the land or building being exchanged
22
Q
What are the different types of Goodwill?
A
Purchased Goodwill
- Created when an asset is exchanged for an amount above the fair market value
- It is accounted for on a company’s balance sheet and is shown as an asset
- This is the only kind of goodwill that can be recognised on a company’s accounts
Inherent Goodwill
- Created over time as a non-measurable asset held by a property or company
- This can be derived from factors such as favourable location, excellent reputation, solid local customer base, good brand image and brand name
- Inherent Goodwill is not recorded on a company’s balance sheet as an asset and is only realised financially at the time the property or company in consideration is sold or exchanged
23
Q
What is the difference between a residual valuation and a development appraisal?
A
- A development appraisal does not form part of a Red Book valuation standard whereas a residual valuation does
- Development appraisals are based on worth where one or more valuations are coupled with professional advice, analysis and opinion
- Development appraisals takes into account time (phasing) whereas residual valuation methods do not
- Development appraisals use client and agent input whereas residual valuations must use market lead inputs
- Development appraisals are used to determine whether profit levels are obtained at an acceptable level whereas residual methods are used to determine market value.
24
Q
When would you use the Discounted Cash Flow valuation method?
A
- Where there are no comparable market transactions, the explicit DCF model provides a rational framework for the estimation of market value
- It can also be applied if there is expected short term market volatility present within the transaction for example if a tenant within a rental property is due to terminate their lease
- It can also be used if multiple investments are being compared side by side to support with long term investment decisions
- The estimated cash flows are projected over an assumed investment period in addition to an exit value at the end of the investment period
- The cash flow is then discounted back to the present day value at a discounted rate (also known as the desired rate of return) that reflects the perceived level of risk
- A discount rate is applied to reflect market and property-specific risks
- To arrive at the estimated revenue cash flow specific leasing patterns including rent reviews, lease renewals or re-lettings on lease expiry, void costs need to be considered
- The exist valuation needs to reflect the rental growth and unexpired terms of the leases at the exit date
- The assumptions and forecasts forming part of the calculation need to be set out clearly
25
How would you value a property where there are no comparables?
- DCF can be used where no comparable market transactions exist
- The estimated cash flows are projected over an assumed investment period in addition to an exit value at the end of the investment period
- The cash flow is then discounted back to the present day value at a discounted rate (also known as the desired rate of return) that reflects the perceived level of risk
- The assumptions and forecasts forming part of the calculation need to be set out clearly
26
What factors affect yields?
- Covenant
- Location
- Specification
- Rent levels
- Growth potential
- Asset management and development value
27
What are Face Rent and Effective Rent?
Face rent = A rent figure that excludes any incentives such as rent-free periods or rent reductions or fit-out contributions
Effective rent = Takes into consideration any incentives provided to the tenant such as to you as the tenant
28
What is the All Risks Yield (ARY)?
- The ARY presents the rental revenue of a property as an annual percentage of the property cost
- The ARY is calculated by dividing the annual rental income by the property's value and multiplying this by 100 to give the percentage ARY
29
What are deleterious materials and how do they affect value?
- Deleterious materials are considered as prohibited and have an affect on the structural integrity performance and longevity of a property
- They can result in non-compliance with building regulations and decrease a property's value
30
What are the main components of a valuation report?
- Tenure
- Date of valuation
- Extent of inspection and who inspected
- Opinion of value in words and figures
- Allowance for VAT
- 3rd party references
- Clause prohibiting publication
- External or independent valuer
- Date of report
- Statement that the valuer is qualified
31
How would structural defects be reflected in your valuation report?
- Draw client's attention to them
- Advise them to have a structural survey done
- Can't comment on area outside of one's expertise
- Seek and obtain cost input to remediate and include within report
32
Are you allowed to know the purchase price when valuing?
- The valuer must request this and also verify it
- If your valuation differs you must state why
- This must be based on market evidence and bona fide
33
If you are found to be negligent in your valuation, what can your client do?
- The complainant can demonstrate the losses and pursue the valuer or valuing company through the courts for the losses incurred
- Merrett vs Bob case proved that valuers and not firms can be pursued
- This highlights the importance of having PII and run off cover in place
34
How would you rentalise the reception of an office building?
- 50% if single tenant
- Not at all if multi-let
35
What would you caveat in a valuation report?
- Publication
- Confidentiality
- Deleterious materials
- Planning
- Taxation
- Information supplied
- Environmental matters
36
What items are contained within the Terms of Engagement but not referenced within the valuation report?
Professional fees for undertaking the valuation
37
What is in your valuation report and not in your Terms of Engagement?
- Opinion of value
- Valuation approach
38
What is meant by the term 'passing rent'?
- The annual rental income currently generated by a property as recorded on the balance sheet date
- The passing rent generated by the property on the balance sheet date may be more or less than the estimated rental value
- Passing rent excludes any rental income when a rent free period is in effect and is based on actual income received
39
Why does the report include an 'opinion' and not an actual valuation?
- Case law has found that providing valuations are in accordance with the RICS Red Book a value based on opinion cannot be wrong
- Providing that the valuation is found to be within reasonable tolerances the surveyor cannot be considered wrong in their opinion
- If the valuation was provided based on an actual value this would not necessarily be accurate and may leave surveyors open to be pursued through court action
40
What is the difference between and internal and external valuer?
Internal = Someone who undertakes a valuation for internal use only
External = Has no material links with the asset or client
41
What are the 3 valuation approaches?
Income = Converting future cash flows into a capital value i.e. investment method, profits method and residual method
Cost approach = Reference to the cost of an asset e.g. DRC method
Market approach = Using comparable evidence e.g. comparable method
42
What is the hierarchy of evidence?
- Open market lettings
- Lease renewals
- Rent reviews
- 3rd party determinations
- Sale and leaseback
- Inter-company transactions
43
How do you find relevant comparables?
- Internal records/database and websites such as EGi and Focus
- Inspection of an area to find recent market activity by seeking agent boards
- Speak to local agents
- Auction results
44
What is a Years' Purchase?
It is the number of years required for its income to repay its purchase price
45
How is a Years' Purchase calculated?
Dividing 100 by the yield
46
What is a return?
This is the term used to describe the performance of a property. It is measured retrospectively.
47
What is a net initial yield?
- This is the relationship between rental income and capital value at the point of purchase.
- It is net of costs.
- The initial yield is based on annual passing rent.
48
What is a reversionary yield?
If a property is close to a rent review or lease renewal, it will be valued by the reversionary yield based on the estimated rents to which rents are expected to rise.
49
What are the steps when undertaking a DCF?
- Estimate the cash flow (income less expenditure)
- Estimate the exit value at the end of the holding period
- Select the discount rate
- Discount cash flow at discount rate
50
Is there any RICS guidance on DCF?
RICS Practice Information 'Discounted cash flow valuations' 1st edn 2023
51
What is NPV?
The sum of the DCFs of the project which can be used to determine if an investment gives a positive return against a target rate of return
52
What is a positive NPV?
This exceeds the investor's target rate of return so the investment is viable
53
What is the divisible balance?
- The divisible balance is the resultant figure when gross receipts are deducted from gross income.
- The divisible balance then needs to be split between the tenants profit levels and the amount they would be willing to pay in rent to occupy the premises.
54
What governs the way valuations are done?
The Red Book - RICS Valuation – Global Standards 2025
55
What is the basis of valuation in the Red Book?
There isn’t one, the most appropriate basis applicable to the valuation should be used. The bases of valuation detailed in the red book are:
* Market Value
* Market rent
* Investment value/worth
* Fair value IFRS Definition
56
What VPS are contained in the Red Book?
VPS 1-6 as of 2025
VPS1 - Terms of engagement (scope of work)
VPS 2 - Bases of value, assumptions and special assumptions
VPS3 - Valuation approaches and methods
VPS4 - Inspections, investigations and records
VPS5- Valuation models
VPS6 - Valuation reports
57
What PS' are contained in the Red Book?
PS 1-2
PS1 - Compliance with standards and practice statements where a written valuation is provided
PS2 - Ethics, competency, objectivity and disclosure
58
How do you deal with valuation uncertainty?
- I would value with reference to VPGA 10 Matters that may give rise to material valuation uncertainty.
- I would specify in my report that there was an element of uncertainty to the valuation and explain why e.g. because the valuation is based on limited evidence or because the market is prone to change.
59
What method of valuation do you use for shops?
Zoning method having regard to comparable evidence
60
What would you look for when valuing a return frontage?
You would look to see how busy the footfall is on the return frontage, the type of frontage, any masking etc.
61
If the first floor of a shop was retail rather than storage, how would you treat it?
You would value it on an overall basis at a factor of the Zone A rate (usually 10%).
An upwards adjustment would need to be made if there was lifted access to the first floor
62
How would you carry out a market valuation of an office?
You would use the appropriate method e.g. hardcore and layer or term and reversion.
If the office was multi let you would carry out a valuation for each individual occupation and add them together
63
If I wanted to value my property with a rent of £100,000 and a yield of 5% forever, how would I do it?
You would calculate the YP = 100/5 = 20
And then multiply this by the passing rent = £100,000 x 20 = £2,000,000
64
When carrying out an investment valuation how would you reflect a good tenant?
- I would adjust the yield to reflect the covenant strength of the tenant.
- For a good tenant the yield would usually be lower than if the tenant was not as good a covenant.
65
How long do you value the over rented bit for?
Until the end of the lease, or the next rent review depending on the lease terms.
Basically until the rent is likely to defer back to Market Rent values
66
How do you account for 3 year rent reviews?
- Depends on market norms.
- If the market norm was to have 3 yearly rent reviews you would not need to make an adjustment.
- If the market norm was say 5 -7 years then it would depend on the market prospects/presence of upwards/downwards rent review clauses.
- In a rising market with an upwards only review clause the yield would be lower as these circumstances are landlord favourable.
- If the market was declining and the review clause was upwards and downwards, the yield would be higher as these circumstances are tenant favourable.
67
How would you do a residual valuation?
There are three main steps to a residual valuation
* Establishing the gross development value
* Assessing all the development costs
* Deduct cost from value to leave you with the residual land value
68
How would you decide what could be developed in a residual valuation?
- Usually a specific development plan is in place.
- If there were no plan in place I would consider the surrounding area and use of the properties nearby as well as the local planning policy.
For example a housing estate in the middle of an industrial estate probably wouldn't be a suitable suggestion for development and there would be very little demand.
69
What is the typical amount for developers profit in a residual valuation?
- Between 15 and 20% of GDV or total construction cost, depending on the risk of the development.
- GDV more frequently used as a base for residential use.
- Percentage of profit required has risen recently given the riskier market conditions.
70
When might the developers profit be lower than normal in a residual valuation?
When the scheme is very small and not many houses are being built or when a high percentage of the properties on the site are affordable housing units and they therefore do not have the uncertainty of them
71
How much would you deduct for fees in a residual valuation?
10-15% plus VAT of total construction costs for architects, M&E consultants, project managers, structural engineers.
A lower % would be appropriate for a large project
72
How much would you deduct for purchasers costs in a residual valuation?
1% for agent fees, 0.5% for legal fees and 3% for stamp duty
73
How is the finance calculated on the residual method?
Finance is calculated using the estimated borrowing cost over the period of time the finance is required for.
For example, the finance costs for land would probably only be taken for half the period because when the build is halfway through it is generally expected that the development will have started to generate an income.
74
How much would you deduct for contingency fees in a residual valuation?
Say 5-10% of total construction costs depending on the level of risk and likely movements in building costs
75
What might the developer need to borrow the money for in a residual valuation?
- Site purchase (compound interest on a straight line basis)
- Total construction costs (calculation based on a S-Curve taking half of the costs over the length of the build programme)
- Holding costs to cover voids until disposal of the scheme, empty rates, interest charges (compound interest on a straight line basis).
76
What are the two main methods of funding in a residual valuation and which would you assume?
- Debt finance (borrowing money from a bank or another funding institution)
- Equity finance (selling shares in a company or joint venture partnership or own money used).
Assume 100% debt finance
77
Is VAT payable on all professional fees in a residual valuation?
Yes
78
What are the limitations of the residual method?
- Importance of accurate information and inputs
- Does not take into account the timing of cash flows
- Very sensitive to minor adjustments
- Implicit assumptions hidden and not explicit (unlike a DCF)
79
What are the three types of obsolescence in a DRC valuation?
- Physical
- Functional
- Economic
Physical obsolescence reflects deterioration in the property due to age. Although age itself is not a factor, the wear and tear of the property and higher maintenance costs are classed as physical obsolescence.
Functional/technical obsolescence reflects the fact the property may no longer be fully fit for purpose. For example the property may have very high ceilings, poor layout, inferior heating and ventilation or due to economic changes the actual whole property just may no longer be fit for the purpose it was originally intended.
80
What is an assumption?
A supposition taken to be true.
An assumption is made where specific investigation by the valuer is not required in order to prove that something is true.
81
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 participant in a transaction on the valuation date.
82
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 the market.
83
What are the requirements of PS2?
- All members must be competent to undertake the work
- All members must act in accordance with the 5 ethical standards
- All members undertaking valuations must comply with the RICS VRS requirements
- All valuers who have contributed to a valuation must be recorded
- Must act ethically
84
What are the disclosure requirements under PS2?
Where the property has previously been valued by the valuer, or the firm, the following disclosures must be made in the TOE and in the report:
- Relationship with the client and previous involvement
- Rotation policy
- Time as signatory
- Proportion of fees
85
Do you always inspect when undertaking a valuation?
Under VPS 4 inspections must always be carried out to the extent necessary to produce a valuation that is professionally adequate for its purpose. It is dependent on the asset and the purpose of the valuation.
86
Where would you find guidance on what matters are to be considered when undertaking an inspection?
VPGA 8 provides commentary on matters evident or to be considered during an inspection
87
With regards to inspections and investigations what records must be kept?
- Legible notes and photos
- Limits of inspection and the circumstances in which it was carried out
- Key inputs and all calculations
- Investigations and analysis
- Sustainability data for future comparability
88
Which parts of the Red Book are mandatory?
PS1 and 2, & VPS 1-6 are all mandatory
VPGA's are advisory
89
What guidance does VPGA 8 provide with regard to inspections and assumptions?
- Confirm the title of the property being valued
- Note the condition of the building
- What services are present
- Planning and the necessary consents
- Environmental factors such as flooding
- Sustainability
90
Under VPS 6 what must a valuation report contain?
- Must clearly set out the conclusions of the valuation
- Not be ambiguous
- Comment on any issues affecting certainty
- Deal with matters agreed in the TOE
91
What does the Red Book definition of market value ignore?
It ignores any price distortion caused by special value or marriage value. However special value for the prospect of development where there is no current permission for that development and the prospect of marriage value are reflected in the market value.
92
What factors cause market rent to vary?
The terms of the assumed lease contract e.g. lease length, frequency of rent reviews and responsibilities for maintenance.
93
What does VPS 3 cover?
Approaches and methods
- Market approach, based on comparing the subject asset with identical or similar assets for which price information is available
- Income approach, based on capitalisation or conversion of present and predicated incomes to produce a single current capital value
- Cost approach, based on the economic principle that a purchase will pay no more for an asset than the cost to obtain one of equal utility whether by purchase or construction.
94
Where do you find advice regarding the valuation of interests for secured lending?
VPGA 2
95
What basis of value is used for secured lending?
Market value is widely used
96
Which international standards are recognised by the Global Red Book?
- International Property Measurement Standards
- International Financial Reporting Standards
- International Ethics Standards
97
In which regions do the Global Red Book standards apply?
All countries across the world
98
Are VPGAs mandatory or advisory?
The VPGAs are advisory, but may reference mandatory parts of the Global Red Book
99
What is the Red Book?
A mix of professional and performance requirements and advice, providing practical implementation of wider RICS standards (including ethics and conduct) and relevant international standards such as IVS
100
What is the status of professional standards?
Professional standards have mandatory status and use the word 'must'
101
Who drives the need for standards?
- Governments
- The public
- Regulators
- Investors
- Employers
- Valuation professionals
102
Who chooses the basis of value?
The valuer chooses the correct basis of value in consultation with all of the above
103
Which approach should you use for a valuation?
Valuers should use the approach or approaches necessary to produce an accurate valuation
104
What basis of valuation is used for most financial reporting under IFRS?
Fair value
105
When should the valuer agree the level of inspection and investigation to be made?
As part of the terms of engagement
106
When selecting a basis of value, what should you have regard to?
- The purpose/use and context of the particular valuation assignment
- The nature of the asset
- Any statutory or mandatory requirements
107
When valuing a business, which VPGAs is it recommended you consider in addition to VPS 1-6?
VPGA 3 & 6
- VPGA 3 Valuation of businesses and business interests use full titles
- VPGA 6 Valuation of intangible assets
108
In respect of a potential conflict of interest where the valuer has valued the asset for the same purpose, or been involved with the purchase of the same asset, what should the valuer do?
Make the client aware if this has happened within a period of 12 months preceding the date of instruction or date of agreement of the terms of engagement (whichever is earlier) or a specific longer period prescribed or adopted in a particular jurisdiction
109
What is 'professional scepticism' in the context of the Red Book and valuation?
Critically assessing evidence relied on in the valuation process and being alert to conditions that may cause information provided to be misleading
110
What is a valuation?
An opinion of the value of an asset or liability on a stated basis, at a specified date.
Referred to in the Red Book glossary.
111
What is an asset valuation?
Where you determine the fair market value of an organisation's assets for financial reporting purposes.
112
What statutory due diligence should you carry out when valuing?
- Flooding (environmental matters)
- Fire/health and safety
- Mining
- Asbestos
- EPC
- Rights of way
- Legal title and tenure
- Planning history
113
What is in the ToE that's not in the report?
- Fee basis
- Complaints handling procedure
- Description of the report
114
Why would you use the traditional investment method as opposed to DCF?
As per VPS3, valuers are responsible for adopting and justifying their valuation approach and methods. This is backed by evidence, providing client care and value for money. I would use the traditional investment method where there is ample evidence. Look at the purpose of the instruction.
115
What is the RICS Valuer Registration Scheme?
- Independent monitoring scheme
- Reinforces professional standards
- Mandatory for the Red Book
116
What is a Value for Money report?
- A formal opinion of value of the market rent at the valuation date.
- It establishes whether the current rent is providing value for money.
117
What are the Heads of Terms?
Lease terms agreed in principle
118
Is BCIS reliable?
It's updated annually so may not reflect the actual costs at the valuation date. It also doesn't account for inflation and regional differences.
119
What is meant by a modern equivalent?
- Doesn't have to be like for like
- Functionality needs to be the same
120
What are some disadvantages of using the DRC method?
- Value based on cost rather than the actual value
- Subjective - no active market so inputs are subjective to the valuer
- Inflexible - can't reflect lease terms
121
Who sets the decap rate?
Central government.
2.6% - education, health and MOD
4.4% everything else
122
What's the difference between a rent free period and a stepped rent?
Covenant strength of the tenant.
123
Why is the reversionary income riskier than rack-rented?
Future income is uncertain
124
What are the DCF outputs?
- NPV - net present value
- IRR - internal rate of return
- payback period
125
What RICS guidance is there on DCF?
RICS Practice Information 2023 Discounted cash flow
valuations
126
What does VPS stand for?
Valuation Technical and Performance Standards
127
When date is the UK National Supplement of the Red Book?
2023 but effective May 2024
128
What is the margin of error?
5% residential
10% commercial
15% exceptional circumstances
129
What can you tell me about the Independent Review of Real Estate Valuation 2021?
13 recommendations by Peter Gray
- Ensure RICS continue to ensure diversity and inclusion
- Advocated the use of discounted cash flow as the
principal model applied in preparing property investment valuations
- Rotation policy - maximum duration of five years before the rotation of an individual “responsible” valuer and a maximum duration of 10 years before the rotation of a valuation firm
130
What are the key points from RICS Comparable Evidence in Real Estate Valuation?
Hierarchy of evidence for comparables
Cat A - direct comparables
Cat B - general market data
Cat C - other sources
131
Can you talk me through your DRC valuation?
Primary school in Rugeley. Original building constructed in 1936 and is grade II listed. Extensions carried out in 70s, 90s and 2006. Masonry construction with a mix of pitched tiled roof and felt flat roof.
1) Established gross replacement cost by using BCIS for costs and the GIA of the building.
2) Depreciated for age and obsolescence such as felt flat roof and poor surface car parking
3) Established land values - sourced comp evidence of both developed and undeveloped land (1.86 acres in total) - undeveloped land = 0.65 acres, amenity land comps £27,500/acre. developed land = 1.21 acres, residential land comps £585,000/acre.
4) Added the land and building values together to establish the depreciated replacement cost. Stand back and look.
132
What is the TPI?
Tender Price Index - measures the movement of prices in construction over time
133
What is the location factor?
Multiplier that is used to adjust costs based on the particular location of the project (factors in for local labour rates, material costs, availability particular to that location)
134
Can you talk me through your Red Book valuation in Ledbury?
Red Book report for the local authority for the acquisition of land allocated in the local development plan as playing fields. 4.6 hectares of land. Lack of comps of playing fields so had to search further afield for amenity land comparables. These comps all had development potential for residential housing so would likely achieve a higher value than the subject. As such, to establish the lower end of the range I looked at arable land comparables which I would expect to achieve a lower value than the subject. Having established the range of values, I adopted a figure of £75,000 per hectare - £345,000 in total. This value was signed off by a senior surveyor and reported to the client.
135
Why did you consider that the amenity land comps would achieve a higher value in your Red Book valuation?
Special assumptions on the subject that the land was allocated as playing fields and there was no residential development value. The comps with dev potential would therefore achieve a higher value.
136
Why is arable land less valuable than amenity land?
- Location and accessibility - amenity land tends to be in more urban areas with higher demand
- Development potential - this potential increases the market value as investors are likely to be willing to be pay more for land that will generate an income
- Societal demand - growing demand for green spaces and recreational land
137
Can you talk me through the advice you gave for the Value for Money report?
- Doctor's surgery in Worcester - advised on whether the proposed new lease provided value for money.
I ultimately advised that the proposed lease did not offer value for money, and I proposed recommended lease terms/rent such as TIR, no break clause, parking spaces to be made clear and the rent. On site I also advised the Practice Manager on the factors that would affect value such as DDA compliance, infection control measures as well as facilities, location, size etc.
Single storey converted surgery along a commercial parade in Worcester. Traditional brick construction with pitched tiled roof.
Proposed rent = £15,000 but having adopted comparables and making adjustments and analysing these, I established a £/m2 of £115 with £200 for car parking. Total rent adjusted to the proposed lease terms was just over £11,000.
138
Can you talk me through your investment valuation on the office units in Halesowen?
Yes this was for Inheritance Tax purposes. I obtained lease details of the tenanted units from the agent. I then sourced comparable rental evidence in order to establish the market value (including some from the subject units which carried the most weighting). From this I was able to determine which units were over, under or at market rent. I then sourced comparable yield evidence from CoStar and verified this with letting agents.
From this I adopted the rack rented approach for the vacant units and capitalised the market rent into perpetuity at an appropriate yield.
I noted some of the units were under rented so I adopted the term and reversion method. For the term, I capitalised the passing rent until the next lease event. For the reversion I capitalised the market rent into perpetuity deferring this until the next lease event.
I noted some of the units were over rented so I adopted the hardcore/layer method. For the bottom slice I capitalised the market rent into perpetuity. For the top slice, I firstly subtracted the market rent from the passing rent = additional income. I then capitalised this additional income until the next lease event.
After deducting for purchaser's costs, the capital value was in line with the value returned so I advised HMRC that this could be accepted.
139
What yield and what type of yield did you adopt for the offices in Halesowen?
Net initial yield of 8.5%.
Purchaser's costs were the deducted (5.8%) to reach a final capital value.
140
What are the exceptions to the Red Book?
1) Providing agency or brokerage service
2) Providing valuation advice during negotiations or litigation
3) Acting or preparing to act as an expert witness
4) Performing statutory functions
5) Providing valuations to a client purely for internal purposes
141
Talk me through the comparable method?
- Search and select comparables
- Confirm/verify details and analyse the headline rent to give a net effective rent (UKGN 6 Analysis of Commercial Lease Transactions)
- Assemble comparables in a schedule
- Adjust comparables using the hierarchy of evidence
- Analyse comparables to form an opinion of value
- Report value and prepare file note
142
How do you find relevant comps?
- Inspection of an area to find recent market activity by seeking agent’s boards
- Speak to local agents
- Auction results
- In house records/databases and websites such as EGi and Focus.
143
What guidance is there for DRC valuations?
RICS PS Depreciated replacement cost
method of valuation for
financial reporting 1st edn 2018
144
Land at Ledbury - What was the purpose of the valuation?
To provide a Red Book report for the local authority to acquire a parcel of land
145
What was in the Terms of Engagement?
- The client
- The purpose
- The subject property
- Valuation date
- Agreed departures
- Basis of value
- Special assumptions
- Nature and source of info to be relied on by the valuer
- Identity and status of the valuer
- Any restrictions or limitations
- Any conflict of interest
- Details of the report
- Fee basis
- Currency
146
How did you find relevant/good comparables?
- Inspection of an area to find recent market activity by seeking agent’s boards
- Speak to local agents
- Auction results
- In house records/databases and websites such as EGi and Focus.
147
Ledbury - Did the client supply a plan?
Yes
148
Ledbury - Did you identify any value significant factors?
- Its location adjacent to the Ledbury Rugby Club.
- Access
149
Ledbury - How did you know there weren't any environmental issues?
Carried out checks of mining and flooding on government websites. No visible signs of contamination/environmental issues on site and confirmed with occupier. Therefore I made clear in my report that I made the assumption there were no environmental issues.
150
Ledbury - Any evidence of invasive species?
No
151
Ledbury - How did you send the ToE to the client?
PDF format with an 'Official-Sensitive' marker and sent via email (verified email addresses)
152
Ledbury - What was included in your report?
- Identification of client
- Purpose
- Subject
- Date of valuation
- Confirmation of standards
- Basis of value
- Date of inspection
- The valuation methodology, approach and reasoning
- Opinion of value
- Market commentary
153
DRC - How did you establish costs?
BCIS (Building Cost Information Services)
154
DRC - What information are you using from BCIS?
The build costs, the tender price index and location factor
155
DRC - How can a property depreciate?
3 types of obsolescence: physical, functional and economic
156
DRC - What factors affect the life span of a building and is this the same for all buildings?
157
DRC - How did you source comps for land value?
Using internal records and external sources such as EIG
1.21 acres was developed land - sourced residential land comps - £500,000 per acre
0.65 acres undeveloped land - sourced agricultural comps - £27,500 per acre
158
DRC - what detail do you go into for land comps?
Consider comps in the same mode or category the best evidence, look at the grading of the land, topology, similar access etc.
159
DRC - How did you determine the value for the land?
Developed land (based on residential land transactions) 1.21 acres at £500,000 per acre
Undeveloped land (based on agricultural land) 0.65 acres at £27,500 per acre
160
DRC - Why did you adopt GIA?
GIA is often used as a baseline for calculating construction costs
161
What guidance is there for asset valuations?
RICS VPGA 1 - Valuations for financial reporting
RICS UK VPGA 4
Chartered Institute of Public Finance and Accountancy (CIPFA) Code of Practice
162
Are you aware of any software used for residual valuations?
Argus
163
What is the best practice to sense check residual values?
164
What RICS guidance is there for residual valuations?
RICS PS Valuation of
development property 1st edn 2019
165
Value for Money - How did you carry out the VfM report?
- Reviewed instruction, carried out a conflict of interest check and checked competence
- Drafted ToE and agreed with the client
- Arranged inspection at the surgery
- Used internal and external sources to find comparable evidence of similar surgeries
- Adjusted this evidence to reflect the value significant factors and weighted accordingly to arrive at a market rent. Then adjusted further in line with the proposed lease terms.
- Completed the VfM report and sought sign off from a senior valuer.
- Report then issued to client.
166
What yields does CoStar use and does it state what they are?
It does state the type of yield but it is usually the Net Initial Yield
167
What guidance is used for Value for Money reports?
GN60 and the NHS Premises Costs Directions
168
VfM - What were the proposed lease terms?
Break clause after the 5th year - Recommended to remove this unless client requires that flexibility as it increases value.
169
VfM - Who wanted the break clause?
Instructions didn't specify. I noted in the report that the break clause is acceptable if it meets the flexibility required by the client, but this increases the rental valuation so it should be considered whether this is required
170
VfM - What adjustments did you make?
Add 5% on to the CMR
171
Offices in Halesowen - What was the construction?
Two-storey office buildings of brick construction and pitched tiled roofs built in the 1990s.
172
Offices in Halesowen - What is Halesowen like?
Market town in Dudley around 7 miles from Birmingham city centre. Although predominantly urban or suburban in character, Halesowen borders on green belt land with excellent access to the countryside, for example the Clent Hills.
173
Offices in Halesowen - How did you value the over-rented units?
Adopted the hardcore/layer method of valuation. After establishing the market rent from comparable evidence, I capitalised the market rent into perpetuity at an appropriate yield. I then capitalised the top slice (i.e. the additional rent being paid) at an appropriate yield up to the next lease event. These values were added together to reach the capital value.
174
Offices in Halesowen - Did you adjust the yield and what impacts this adjustment?
Yes I applied a higher yield to the overrented part i.e. the top slice, as this carries a higher risk as the occupier is paying above market rent.
175
What does a higher yield mean?
Higher risk so therefore a lower value.
176
How would you find the covenant strength of a tenant?
- Dunn and Bradstreet credit check
- Check occupier's website
- Look at Companies House
177
Offices at Halesowen - What were the lease lengths of the units?
Generally between 3-5 years
178
Offices in Halesowen - As there were multiple properties, was there any other method that could be used?
Discounted Cash Flow
179
Offices in Halesowen - Why did you not adopt DCF?
As per VPS3, it is down to valuer judgment to choose the appropriate valuation method and approach to adopt. There was enough comparable evidence to adopt the term and reversion method which was quicker to undertake than DCF so providing value for money for the client and completing within the timescales, I considered the traditional investment more appropriate.
180
What is the IRR?
Internal Rate of Return
The rate of return at which all future cash flows must be discounted to produce an NPV of zero. It is used to assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions.
181
DRC - How did you depreciate for age and obsolescence?
Straight line method - assumes a property depreciates at the same rate each year (assume 1% per year)
182
DRC - What is the S Curve method?
Based on the principle that at the beginning, the property depreciates slowy and then as it gets towards the end of life it depreciates very quickly and then at the veery end it plateaus again
183
DRC - Was your school of mixed ages and how did this affect your valuation?
Yes the original building was constructed in the 1930s with extensions built in 1970s, 1990s and the early 2000s.
I then used these dates to establish an adjusted year of construction based on these ages - 1996.
184
VfM - What is rent reimbursement?
NHS uses privately owned surgeries to deliver its primary care services and reimburses the GPs with a rent for doing so
185
IHT Offices - What was the range of yields?
8.5% - 13% but the higher yields were on much larger estates posing a greater risk.
186
How would a different yield affect your valuation?
A higher yield indicates a riskier investment and therefore the capital value would have been lower.
187
IHT Offices - What was the value you reported to the client here?
£1.5m
188
What is a running yield?
The yield at one moment in time
189
Land at Ledbury - What was your final value?
£75,000 per ha - £345,000 market value
190
What was the valuation date for your Value for Money report?
25 March 2024
191
What was the valuation date for your offices in Halesowen?
09 January 2024
192
What was the valuation date for the land in Ledbury?
24 May 2024
193
What was the valuation date for the DRC children's centre?
31 March 2024
194
What review promoted increased the use of DCF?
Independent Review of Real Estate Investment Valuations by Peter Gray 2021
195
Why is it important to know the purpose of your valuation?
Affects how you carry out your valuation and the assumptions you make.
196
What basis of value did you use for valuing the playing fields?
Market value
197
What RICS document would consider when valuing to EUV?
Professional standard ‘Existing use value (EUV) valuations for UK public sector financial statements’.
198
What was the difference between the subject building and a modern equivalent building in this case?
Subject was pre-1900 so likely to be layout and technological changes. A modern equivalent would be more energy efficient with different construction materials to comply with Building Regs
199
Did you think the modern equivalent would be bigger or smaller?
Cannot be bigger but can be smaller - check client instruction
200
What are the IVS-defined bases of value?
Market value
Market rent
Investment value
Equitable value
Synergistic value
201
What are the notional lease terms for doctors rents and rates?
15 year lease
3 yearly rent reviews
TIR - Tenant Internal Repairing
2024 PCDS - rent does not fall below the initial level of notional rent
202
Is there case law in regards to using hindsight?
Chifley Holdings v HMRC
- can use post-AVD evidence but less weight is given
- disregard events when considering rental evidence
203
Land at Ledbury - Where this land was situated?
Outskirts of Ledbury, adjacent to Ledbury Rugby Club, brewery to the north of the site, lots of rural arable land to east of the site and south opposite the road is Ledbury Cricket club. Situated along A449 road providing links to Newport in South Wales but also to Stafford to the north.
204
Land at Ledbury - What was topography?
Flat land, no ditches or dips in the land nor any water sources.
205
DRC - Did area of land figure used include footprint of the building?
Yes
206
IHT Offices - Any case law for valuing portfolio of properties?
Duke of Buccleuch
207
IHT Offices - Why did you adopt a higher yield in top slice and not apply it to the entire rent?
Better establishing the core rent and part of additional risk within that is not only someone defaulting but time taken to get someone in to pay the market rent, letting voids.
208
What is a nominal yield?
Initial yield assuming payment made annually in arrears
209
What is the true equivalent yield?
Average of term and reversionary yield but assumes rents are received quarterly in advance.
210
What’s the YP usually between?
5-10%
211
What would you adopt a larger contingency fee for?
Listed building or a more complex project
212
What % would you adopt for external works
10-20%
213
Example of marriage value?
- 2 shops next door so they could merge into one larger shop
- freehold and leasehold merger
214
What’s a premium and why would someone pay a premium?
To secure a prime location or if they may not have a good covenant
215
Why would landlord pay premium?
Paid to surrender a leasehold interest
216
What's better, rent review vs lease renewal? And why?
More freedom in lease renewal, agree new terms whereas rent review existing lease
217
What’s better hearsay or asking price?
Asking prices as hearsay is not actual evidence - your word against mine
218
DRC - How did you depreciate for age and obsolescence?
I reviewed the design life of each component, made a valuer judgment as to the remaining life of each component, and this is what I depreciated via the straight line method.
219
What is the UK National Supplement?
Supplemental to the Red Book - provides specific requirements and guidance on valuations undertaken subject to UK jurisdiction
220
What is the main takeaway from the UK National Supplement?
Mandatory rotation policy (2 year transitional period to April 2026)
Single valuer after 5 years
Firms after 10 years
221
How is the UK National Supplement structured?
1 PS - Compliance with valuation standards in the UK
VPS 1-3 -
1 & 2 are ToE and reporting
3 is Regulated purpose valuations
17 VPGAs
222
How long has the Red Book been around?
1976
223
How is the Red Book structured?
Introduction
Glossary
Professional Standards
Valuation Technical and Performance Standards
Valuation Practice Guidance Applications
International Valuation Standards
224
Which UK VPGA relates to asset valuations?
VPGA 4 (and 1 and 6)
225
IHT Offices - Why did you use different investment methods depending on over/under rented?
The financial dynamics are slightly different in each scenario.
With under-rented properties, at the lease break/end of the lease, the rent reverts back to market rent and is seen as reversionary so a lower yield is attributed to the term to reflect the tenant paying below market rent.
With over-rented properties, investors would be cautious as the tenant is currently paying above market rent so a higher yield is adopted for the additional rent being paid to reflect the additional risk.
226
DRC - Why did you calculate the land value separately?
While this may be a site of a similar size and in a similar location to the actual site, if the actual site is clearly one that a prudent buyer would no longer consider appropriate because it would be commercially wasteful or would be an inappropriate use of resources, the modern equivalent site is assumed to have the appropriate characteristics to deliver the required service potential. The fundamental principle is that the hypothetical buyer for a modern equivalent asset would purchase the least expensive site that would realistically be suitable and appropriate for its proposed operations and the envisaged modern equivalent facility.
227
Does the Red Book tell you to how to value?
No it provides standards to follow when carrying out valuations as well as best practice guidance
228
How many headings of ToE?
19
229
Why is it important to stand back and look, particularly in a DRC?
Cost doesn't equal value so it's best practice to check that the value looks reasonable
230
What is the present value of £1?
Present value (PV) is the current value of a future sum of money or stream of cash flows. It is determined by discounting the future value by the estimated rate of return that the money could earn if invested.
It is based on the concept that a particular sum of money today is likely to be worth more than the same sum in the future because it can be invested and earn a return in the meantime.
231
How would you value a ransom strip?
There is no statutory framework governing the valuation of ransom strips.
However, the starting point is Stokes v Cambridge Corporation [1961]. The appropriate purchase price was one-third of the increase in the value of the land to be developed as attributable to the acquisition of the ransom strip.
232
What are the purposes of valuation?
- Tax
- Landlord and Tenant
- Accounts
- Rating
- Loan security
- Corporate real estate
233
Could you use a residual valuation for conversions?
Yes
234
Why did you use the straight line method instead of the S curve?
It offers simplicity and ease of understanding, allowing for straightforward cost and progress tracking, whereas the S-curve, while more realistic, can be more complex to interpret.
235
Ledbury - How did you check topography?
Contour lines on a topographic map - can check online
236
IHT Offices - How did some of the units being vacant at the valuation date have an impact on your valuation? How did you reflect this?
I reviewed the office market data in Halesowen and noted that take up rates were very high with limited supply so didn't consider there to be long void periods so I adopted the rack rented approach and capitalised the market rent into perpetuity.
