Valuation Flashcards
1
Q
What is an internal valuer?
A
- Employed by a company to value their assets
- Valuation for internal use only
- No third-party reliance
2
Q
What is an external valuer?
A
Has no material links with the asset to be valued or the client
3
Q
What are the THREE steps you should undertake prior to commencing a valuation?
A
CCT:
- Competence - check you have the correct level of skills, understanding and knowledge
- Conflict of Interest - check you are able to act independently on the instruction
- Terms of engagement - issue to the client and receive written confirmation
4
Q
Why do you undertake statutory due diligence for valuations?
A
Confirm that there are no material matters which could impact on the valuation
5
Q
What types of statutory due diligence checks would you undertake when valuing a property?
A
- Asbestos register
- Business rates / Council tax
- Contamination
- Equality Act Compliance
- Environmental matters (high voltage power lines, electricity sub-stations, telecoms masts etc.)
- EPC rating if available
- Flooding
- Fire safety compliance
- Health and safety compliance
- Highways (check roads adopted with the local highways agency)
- Legal title and tenure (check boundaries, ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves)
- Public rights of way (from an OS sheet)
- Planning history and compliance (check any onerous planning conditions, whether the property is in a conservation area / listed and subject to a s. 106 agreement or CIL)
6
Q
What are the FIVE main methods of valuation?
A
- Comparable method
- Investment method
- Profits method
- Residual method
- Depreciated replacement cost method
7
Q
What are the THREE valuation approaches set out in IVS 105?
A
- Income approach - converting current and future cash flows into a capital value
- Cost approach - reference to the cost of the asset whether by purchase or construction
- Market approach - using available comparable evidence
8
Q
What are the SIX steps used when collecting comparable evidence?
A
- Search and select comparables (agent’s boards, online databases)
- Confirm / verify information with a party directly involved in the transaction
- Assemble comparables in a schedule
- Interpret comparables using hierachy of evidence
- Analyse comaprables to form an opinion of value
- Report value and prepare file note
9
Q
What guidance did the RICS recently release on using comparable evidence?
A
RICS Comparable evidence in real estate valuation, 2019
Now a professional standard 2023
10
Q
What are the THREE categories of evidence outlined in RICS Comparable evidence in real estate valuation, 2019?
A
Category A: direct comparables
Category B: general market data
Category C: other sources
11
Q
What is the hierarchy of direct comparable evidence outlined in the RICS Comparable evidence in real estate valuation, 2019?
A
- Contemporary, completed transactions of near-identical properties for which full and accurate information is available (may include the subject property)
- Contemporary, completed transactions of other, similar real estate assets for which full and accurate information is available
- Contemporary, completed transactions of similar real estate for which full data may not be available
- Similar real estate being marketed where offers have been made but a binding contract has not been completed
- Asking prices (with careful analysis)
12
Q
What is the hierarchy of general market data outlined in the RICS Comparable evidence in real estate valuation, 2019?
A
- Information from published sources or commercial databases
- Other direct evidence (e.g. indices)
- Historic evidence
- Demand/supply data for rent, owner-occupation or investment
13
Q
What is the hierarchy of other sources outlined in the RICS Comparable evidence in real estate valuation, 2019?
A
- Transactional evidence from other real estate type and locations
- Other background data (e.g. interest rates, stock market movement and returns which can given an indication for real estate yields)
14
Q
When would you use the investment method of valuation?
A
Used when there is an income stream to value
15
Q
How does the conventional investment method work?
A
- Rent received (or Market Rent) x Years Purchase = Market Value
- Assumes growth implicit valuation approach
16
Q
When would you use a Term and Reversion method? How does it work?
A
- Used for reversionary investments i.e. where Market Rent is more than passing rent
- Term capitalised until next rent review / lease expiry at an initial yield
- Reversion to Market Rent valued into perpetuity at reversionary yield
17
Q
When would you use the Layer / Hardcore method? How does it work?
A
- Used for over-rented investment i.e. where passing rent is more than Market Rent
- Income flow divided horizontally
- Bottom slice = Market Rent
- Top slice = passing rent - Market rent until the next lease event
- Higher yield applied to the top slice to reflect additional risk
- Different yields used depending on comparable investment evidence and relative risk
18
Q
What is a yield?
A
Yield is a return measure for an investment over a set period of time, expressed as a percentage.
Calculated (income / price) x 100
19
Q
How would you calculate Years Purchase? What does this show?
A
- Divide 100 by the yield
* Number of years required for the income to repay the purchase price
20
Q
What factors would you considering when determining a yield?
A
- Quality of location
- Covenant
- Property
- Lease terms
- Voids
- Security of income
- Liquidity (ease of sale)
- prospects for rental and capital growth
21
Q
What is an All Risks yield?
A
Yield which encompasses all the future risks and benefits attached to a particular investment
22
Q
When would you use the profits method of valuation?
A
Used for the valuation of trade related property where the value of the property is directly linked to the profit generated by the business e.g. pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure, healthcare properties and care homes
23
Q
What do you require to conduct the profits method of valuation?
A
Accurate and audited accounts for 3 years
24
Q
How would you use the profits method of valuation to value a new business?
A
Use estimates / business plan
25
What is the methodology for the profits method of valuation?
EBITDA (earnings before interest, taxation, depreciation and amortisation) is capitalised at an appropriate yield
26
How should you verify a value obtained using the profits method of valuation?
Cross check with comparable sales evidence if possible
27
When would you use the depreciated replacement cost method of valuation?
Where direct market evidence is limited or not available for specialised properties e.g. sewage works, lighthouses, oil refineries, docks, schools, submarine base etc.
28
What is the purpose of the depreciated replacement cost method of valuation?
* Used for owner-occupied properties
* For accounts purposes for specialist properties
* For rating valuations of specialist properties
29
What are the TWO steps of the depreciated replacement cost method of valuation?
1. Value land in its existing use (assume planning permission exists)
2. Add current cost of replacing the building plus fees (used BCIS). Then make a discount for depreciation and obsolesce / deterioration
30
How do you estimate the amount to depreciate the property by when using the depreciated replacement cost method of valuation?
1. Physical obsolescence - result of deterioration / wear and tear over the years
2. Functional obsolescence - where the design or specification of the asset no longer fulfils the function for what it was originally designed
3. Economic obsolescence - due to changing market conditions for the use of the asset
31
Are valuations using the depreciated replacement cost method of valuation Red Book Global compliant?
* Not suitable to be used for valuations for secured lending purposes
* Can only be used for the calculation of Market Value for specialised properties for valuations for financial statements
32
When reporting a valuation carried out using the depreciated replacement cost method, what must the valuer state with regards to alternative use?
* If higher, the valuer must state the Market Value for any readily identifiable alternative use
* If appropriate, they must state that the Market Value must be materially lower on cessation of the business
33
What guidance has the RICS produced on the depreciated replacement cost method of valuation?
RICS Depreciated replacement cost method of valuation for financial reporting, 2018
34
When was the RICS Valuation - Global Standards published and when did it become effective as of?
Published in November 2021 and become effective on 31st January 2022
35
What does PS1 of the Red Book Global cover?
Sets out the mandatory compliance with standards required where a written valuation is provided.
1. Mandatory application - All members who are providing written valuations must comply with the professional and valuation and technical performance standards (denoted PS and VPS) within parts 3 and 4 of the RICS Valuation Global Standards 2022.
RICS bye-law B5.2.1(b) Liability of Members and RICS bye-law B5.3.1 Liability of Firms, these global standards are therefore of mandatory application to any member of RICS or RICS-regulated firm involved in undertaking or supervising valuation services by the provision of written valuation advice.
2. Compliance with Firms
Firms regulated by RICS. Firm and RICS Members within the must ensure that all processes and valuations are fully compliant with the mandatory requirements in these global standards. Includes valuations that are a not a responsbility of a RICS member.
Firms not regulated by RICS: While such firms may have their own corporate processes over which RICS cannot exert control, individual members in these firms who are responsible for valuations must comply with the mandatory requirements in these global standards
3. Compliance with international standards
International Valuation Standards - published by the International Valuation Standards Council which compromise internationally accepted valuation principles and definitions.
International Ethics Standards - RICS is a member of the international coalition of professional organisations stablished
to develop and implement the first set of globally recognised ethics standards for property and related professional services.
International Property Measurement Standards - international coalition of professional organisations established to develop and implement consistent and transparent property (i.e. real estate)
measurement standards.
4. Compliance with jurisdictional or other valuation standards
Regcognises that a member may be requested to provide a report that complies with standards other than the standards set out in Red Book Global Standards. Needs to be clear what standards are being adopted. Set out within terms of engagement and report.
5. VPS 1-5 exceptions
36
What are the FIVE exceptions, where a valuation does not have to be Red Book Global compliant?
1. Agency and brokerage work in anticipation of receiving instructions to dispose of or acquire and asset (except where a purchase port is required which includes a valuation)
2. Acting / preparing to act as an expert witness
3. Performing statutory function except for the provision of a valuation for inclusion in a statutory return to a tax authority
4. Internal purposes, without liability and not communicated to any third party
5. Advice is provided in preparation for, or during the course of negotiations or litigation
37
What does PS2 of the Global Red Book cover?
Ethics, competency, objectivity and disclosures
All members practicing as valuers must have the appropriate experience, skill and judgment for the task in question and must always act in a professional and ethical manner free from any undue influence, bias or conflict of interest
38
What does PS2 of the Global Red Book state with regards to independence, objectivity and the identification and management of conflicts of interest?
* Valuers and firms must act objectively and independently
* Should apply "professional skepticism" when reviewing information and data before relying on it
* Identify and manage conflicts of interest
39
What does PS2 of the Global Red Book state with regards to Terms of Engagement?
* Members must understand the client's requirements and comply with the minimum terms of engagement
* Members must be able to demonstrate professional competence
40
What does VPS 1 of the Red Book Global cover?
Terms of Engagement - sets out the minimum matters that must be confirmed in writing to the client prior to commencing a valuation
41
According to VPS 1, what matters must be confirmed in writing to client prior to the commencement of valuation?
a. Identification and status of the valuer
b. Identification of the client
c. Identification of any other intended users
d. The asset to be valued
e. Currency
f. Purpose of the valuation
g. Basis of value
h. Valuation date
i. Extent of investigation
j. Nature and source of the information to be relied upon
k. Assumptions and special assumptions to be made
l. Format of the report
m. Restrictions for use, distribution and publication
n. Confirmation of the Red Book Global / IVS compliance
o. Fee basis
p. Complaints handling procedure to be made available
q. Statement that the valuation may be subject to compliance by the RICS
r. Limitation on liability agreed
42
What is an Assumption, as defined in the Red Book Global?
Supposition taken to be true and accepted as fact without the need for specific investigation
43
What is a Special Assumption, as defined in the Red Book Global?
would not be made by a typical market participant in a transaction on that valuation date but expected to be taken as true
44
What does VPS 2 of the Red Book Global cover?
Inspections, Investigations and Records
45
According to VPS 2, what does it state with regards to the necessity to inspect properties?
Valuers must take the steps to verify the information being relied upon for a valuation to ensure the information if professionally adequate for its purpose
46
If a valuer undertakes a desktop valuation, is it still Red Book Global compliant?
Yes
For revaluation without re-inspection. Valuer to make sure there isn’t a material change.
If agreed with the Client and set out within the terms of engagement (PS1) and valuation report.
47
When a valuer conducts a valuation on the basis of restricted information or without a physical inspection, what FOUR factors should they do?
1. Nature of the restriction must be agreed in writing in the Terms of Engagement
2. Possible valuation implications of the restriction confirmed in writing before the value is reported
3. Valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
4. The restriction must be referred to in the report
48
According to VPS 2, is it permitted for a valuer to conduct a revaluation without re-inspecting the property?
Must not be undertaken unless the valuer is satisfied that there has been no material changes to the property or nature of its location since its last inspection (this must be confirmed in the Terms of Engagement and in the valuation report)
49
What does VPS 2 state with regards to the holding of records?
A proper record must be kept of inspections and investigations, and of other key inputs in an appropriate business format
50
What does VPS 3 of the Red Book Global cover? and what are the general principles?
Valuation Reports - sets out the minimum requirements to be stated within a valuation report.
General principles:
1. Report must clearly and accurately set out the conclusions of the valuation. Cannot be ambiguous or misleading.
2. If appropriate, the valuer should draw attention to, and comment on, any issues affecting the degree of certainty, or uncertainty, of the valuation under item (o) below.
3. The report should deal with all the matters agreed between the client and the valuer in the terms of engagement (scope of work) (see VPS 1)
51
According to VPS 3, what are the minimum requirements to be stated within a valuation report?
a. Identification and status of the valuer
b. Client and any other intended users
c. Purpose of valuation
d. Identification of the asset to be valued
e. Basis of value
f. Valuation date
g. Extent of investigation
h. Nature & source of information relied upon
i. Assumptions and special assumption
j. Restrictions on use, distribution and publication
k. Instruction undertaken in accordance with IVS standards
l. Valuation approach and reasoning
m. Valuation figure(s)
n. Date of valuation report
o. Comment on market uncertainty
p. Statement setting out any limitations on liability that have been agreed
52
According to VPS 3, is preliminary valuation advice able to be given?
Can be given but must be marked as a draft, for internal purposes only, which cannot be relied upon and on no account, can it be published or disclosed
53
According to VPS 3, can a draft report be provided to a client?
* Yes, although the valuer is not to be influenced by the client in any way with respect to the final valuation figure stated in the report
* A draft report provided to a client must state that it is a draft and it is subject to the completion of the final report
* Any changes made to a preliminary valuation must be noted on file and reasons provided
54
What does VPS 4 of the Red Book Global cover?
Basis of Value, Assumptions and Special Assumptions
55
What is the definition of Market Rent according to VPS 4 of the Red Book Global?
The estimated amount for which an interest in real property should be lease
• On the valuation date
• Between a willing lessor and willing lessee
• On appropriate lease terms
• In an arm's length transaction
• After proper marketing
• Where the parties had each acted knowledgeably, prudently and without compulsion
56
What is the definition of Fair Value (IFRS 13) according to VPS 4 of the Red Book Global?
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
57
When would you be required to report Fair Value?
Used when undertaking valuations for inclusion in financial statements, if the International Financial Reporting Standards have been adopted by the client
58
What is the difference between Fair Value and Market Value?
* RICS view that Fair Value is generally consistent with the definition of Market Value
* Fair value relates to the actual worth of an asset and would be the mutually beneficial value between the buyer and the seller
* Market value is the price which the asset will exchange between parties in the market and is influenced by market forces
59
What is the definition of Investment Value according to VPS 4 of the Red Book Global?
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives i.e. the measure of worth to reflect the value against the client's own investment criteria
60
What does VPS 5 of the Red Book Global cover?
Valuation Approaches and Methods
61
What does VPS 5 of the Global Red Book state with regards to Valuation Approaches and Methods?
Valuers are responsible for adopting, and as necessary justifying, the valuation approach(es) and the valuation methods used to fulfil individual valuation assignments. These must always have regard to:
- the nature of the asset (or liability)
- the purpose, intended use and context of the particular assignment and
- any statutory or other mandatory requirements applicable in the jurisdiction concerned
More than one valuation approach may be appropriate in some cases
62
What do the VPGAs in the Red Book Global cover?
Valuation Applications (Valuation Practice Guidance Applications)
63
What is the relationship between the Red Book Global and the RICS Valuation - Global Standards (UK National Supplement, 2023?
* The UK National Supplement augments the Red Book Global requirements for valuations in the UK and is not a substitute for it
* Provides requirements for members on the application of the RICS Valuation - Global Standards in the UK jurisdiction
64
What were the key changes introduced in the RICS Valuation – Global Standards: UK National Supplement, 2023?
Glossary: Replicated from RICS Valuation – Global Standards (‘Red Book’) with some additional UK-specific terms included. Draft IVS 2023 ESG definition adopted.
Minor changes to the VPGA to align which updates to new and updated professional standards, guidance and regulations. For example, UK VPGA 8 Valuation of charity assets: Major amends in conjunction with major updates made to the Charities Act 2022.
65
What are the Three parts of the RICS Valuation –
Global Standards: UK National Supplement, 2023?
Introduction
Glossary of technical terms
1. UK Professional Professional Standards (UK PS) (Mandatory)
2. UK Technical and Performance Standards(UK VPSs) (Mandatory)
* UK VPS 1 - Terms of engagement and reporting - Red Book compliance
* UK VPS 2 - Terms of engagement and reporting - supplementary provisions in Scotland
-* UK VPS 3 - Regulated purpose valuations: supplementary
governance requirements
3. UK Valuation Practice Guidance Applications (UK VPGA) (Advisory) - 17 different UK VPGA
66
What is hope value?
The value arising form any expectation that future circumstances affecting the property may change
67
Provide some examples of where hope value may arise.
* Future prospect of securing planning permission for the development of land, where no planning permission exists at the present time
* The realisation of marriage value arising from the merger of two interests in land
68
What are the typical purchasers costs deducted from the gross market value?
* Stamp Duty Land Tax: at prevailing rate
* Agent's fees: 1% of purchase price (+ VAT)
* Legal fees: 0.5% of purchase price (+ VAT)
69
What is marriage value? How do you calculate the level of marriage value?
* Created by the merger of interest - can be physical or tenurial
* Undertake a before and after valuation and calculate the level of marriage value created
70
How does the Red Book Global define a Special Purchaser?
A particular buyer for who a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market
71
How does the Red Book Global define Special Value?
An amount that reflects particular attributes of an asset that are only of value to a special purchaser
72
What is a right of light? When does it arise?
* Arises after twenty years uninterrupted enjoyment of light without the consent of a third party by way of an easement with a prescriptive right
* If a right to light infringed, an injunction can be granted or damages awarded
73
What schemed did the RICS introduce in October 2011 for the regulatory monitoring of all valuers carrying out Red Book valuations?
RICS Valuer Registration Scheme (VRS)
74
What are the THREE aims of the RICS Valuer Registration Scheme (VRS)?
1. Improve the quality of valuation and ensure the highest possible professional standards
2. To meet the RICS requirement to self-regulate effectively
3. To protect and raise the status of the valuation profession as the leading expertise in valuation
75
What are the professional standards you must adhere to as part of a Red Book Valuation?
PS 1) Compliance with standards where a written valuation is provided
PS 2) Ethics Competency, objectivity and disclosure
76
What are the 5 VPS?
VPS 1) Terms of Engagement
VPS 2) Inspections, Investigations and record
VPS 3) Valuation Report
VPS 4) Base of Value, assumptions and special assumptions
VPS 5) Valuation approaches and method
77
Can you name any of the VPGAs?
1) Inclusion in financial statements
2)Secured lending
3) Valuation of businesses and business’ interests
4)trade related properties
5)plant and equipment
6)intangible assets
7) personal property
8) Real Property Interest
9)portfolios
10) Matters that may give rise to material uncertainty
78
How is valuation defined?
Valuation is defined as a opinion of an asset or liability on a stated basis on a specified date
79
What are the basis of Value?
Market Value
Market Rent
Investment Value
Fair Value
80
Who is a registered valuer?
A registered valuer is a valuer who:
* adheres to the Red Book valuation standards
* is committed to openness and transparency
* are experts in their field, delivering credible and high-quality reports.
81
What is a valuation registration scheme?
Valuer Registration is a risk monitoring and quality assurance programme which checks compliance with the RICS Red Book.
A- To improve the quality of valuation and ensure the highest possible professional standards.
B- To meet the RICS requirements to self regulate effectively
C- To protect and raise the status of the valuation profession as the leading expertise in valuation.
82
Please explain the structure of the red book ?
1, Introduction
2, Glossary
3, Professional standards
4, Valuation technical and performance standards
5. Valuation practice guidance applications
6. International valuation standards
83
In what circumstance shall a red book not be used?
In all circumstances except for the exceptions
84
How do you value affordable housing units?
Using a discounted cashflow factoring rental value, a discount rate and management costs
85
What is the timeline of a valuation
Receive Instructions
Check Competence
Check that there are no conflicts of interest
Issue terms of engagement
Receive signed terms of engagement
Gather information
Undertake due diligence
Inspect and measure
Research market and assemble, verify and analyse information.
Undertake valuation
Draft report
Check by another surveyor
Finalise and sign report
Report to client
Issue invoice
Archive file.
86
What method of valuation would you use to establish rents and yields?
Comparable
87
What is a residual method of valuation ?
Is a method of valuation used to establish a market value of a site based on market inputs at a particular moment in time and on a valuation date.
GDV-TDC-Profit = Site value
88
What is a DRC method of valuation
Method used to value public and specialist buildings. i.e. school, churches, town halls, airports, oil refinery, town centers etc.
Modern equivalent - obsolescence + value of site = value.
DO not guess the percentage on Obsolescence and this comes with experience.
89
What are the three valuation approaches ?
a. Income (Investment, profits and DCF)
b. Cost approach (DRC and residual)
c. Market approach (Comparable)
90
When would you use the profits method:
Used for income-producing properties that, due to location or some other factor, enjoy a monopoly. It is used when the physical buildings are normally only sold as part of a business.
Examples would be:
* hotels;
* golf courses and other purpose-built sport and leisure centers;
* petrol stations; and
* some restaurants.
91
What is gross profit?
Total revenue minus the cost of making a product or providing a service.
Gross profit = Total revenue – Cost of goods sold (COGS)
Calculating gross profit does not take additional expenses into account.
92
What is net profit?
A business's total revenue after subtracting all interest; income and payroll taxes; and mortgage, utility or rent expenses. Net profit is the gross profit minus all other expenses.
Net profit = Gross profit – Total expenses
93
Tell me of another way that you could calculate term and reversion
Term- use discounted cashflow to work out term
Reversion
Deffered Yp % x years perpetuity = new yp
New YP x market rent = capital value
Used for under rented property
94
What elements of the Red Book are Mandatory and which are advisory?
PS (Professional Standards) and VPS (Valuation Technical and Performance Standards) are mandatory
VPGA (Valuation Practice Guidance Applications) are advisory
95
Have there been any supplements to the Red Book?
The Red Book UK National Supplement was published on 19 October 2023 and will become effective 1 May 2024
96
Q
What have been the key changes in the last update of the Red Book?
Reflect changes to the International Valuation Standards 2022
Updated to reflect latest Rules of Conduct
Emphasising the need to agree clear and unambiguous terms of engagement, even when valuations are undertaken for excepted purposes (i.e., VPS 1-5 do not apply) under PS 1 Section 5.
The terms quasi, partial or non Red Book should not be used in terms of engagement or reporting. Instead, the exception should be specifically stated and explained in the terms of engagement and valuation report.
More detailed commentary on sustainability/resilience and environmental, social and governance (ESG)matters in VPGA 8 Valuation of Real Property Interests. These terms are defined in Part 2: Glossary. There is also a reference to the proposed RICS Guidance Note Sustainability and ESG in Commercial Property Valuation and Strategic Advice 3rd Edition, also due to be published in 2022.
Various amendments are made to the VPGAs, in particular VPGA 4 Individual Trade Related Properties and the reference to IVS 230 Inventory.
Valuers must refer to the latest RICS valuation guidance, as well as being aware of the changes and how they affect their valuation work -amending any valuation templates or proformas used, including reports and terms of engagement.
97
What are the different types of yield?
Initial Yield -The relation between current income and price (usually allowing for the cost of Purchase) = Current Income / Price
Reversionary Yield -The relation between the rent receivable at a future date, such as when re-letting takes place, and the price of property = Market rent / price
Equivalent Yield -Is the weighted average between initial and reversionary yield.
Equated Yield -Is the internal rate of return given certain growth assumptions.
All Risk Yield -Is a yield figure which reflects within it the future benefits and risks to which the investment is subject.
98
Name a time you utilised the investment method?
Town Centre, Camberley – I was asked to appraise the site following it being marketed on the Homes England Dynamic Purchasing System.
Following discussion with the Local Planning Authority it was determined that there was a not a need for retail anymore, however there was still a need for Office space.
To value this I reviewed various rental comparables for office uses and discussed with local commercial agents regarding expected yields and rental levels in the area.
Using the information gathered I utilized the investment valuation to determine capital values for the various uses and included these within my overall residual valuation for the scheme.
99
What rental value and yield did you use at Camberley?
100
How do you calculate IRR
101
What is IRR
102
What is NPV
103
How do you calculate NPV
104
What does the RICS Guidance Note Comparable Evidence in Real Estate Valuation say?
Outlines the Hierarchy of Comparable Evidence:
Category A Evidence - Direct Comparables:
Completed transactions of near-identical properties for which full and accurate information is available; may include information from the subject property itself.
Completed transactions of near-identical properties for which some information is available.
Where offers have been made but there is no binding contract.
Asking Prices
Category B Evidence - General Market Data that can provide evidence:
Historic evidence/ demand and supply data from renta, owner occupier or investment data,
Category C evidence -
Transactional evidence from other real estate types and locations
other background data, i.e. interest rates
105
Is there any RICS Guidance on the comparable method?
Yes - RICS Guidance Note Comparable Evidence in Property Valuation, 2019
106
What is a years purchase?
The number of years it will take for a property to repay its purchase price
107
What are the Valuation Technical and Performance Standards?
VPS 1 - Terms of Engagement (scope of work)
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.
108
Where are the definitions in the Red Book?
VPS 4 - Basis of value, assumption and special assumptions.
109
VPS 4 - how many bases of value are there?
Market Value
Market Rent
Fair Value
Investment Value
Equitable Value
Liquidation Value
110
When was the Red Book UK National Supplement published?
Published on 19 October 2023 and will become effective 1 May 2024.
111
What is the purpose of the Red Book?
Purpose of the Red Book:
Impose mandatory obligations regarding competence, objectivity, transparency, and performance
Establish a framework for uniformity and best practice for valuation assignments through adoption of the IVS
Consistency in approach -aiding understanding of the process and value reported
112
What key documents are available for surveyors when undertaking valuations?
RICS Valuation – Global Standards effective from 31 January 2022, commonly known as RICS Red Book Global Standards
International Valuation Standards (IVS)published by the International Valuation Standards Council (IVSC) -mandatory
IVS Technical Standard delivered within wider framework of RICS Standards (professional statements)
International Ethics Standards
International Property Measurement Standards (IPMS)
Comparable Evidence in Real Estate (2019) Guidance note - now professional standard
The Red Book UK National Supplement was published on 19 October 2023 and will become effective 1 May 2024
113
Who publishes the International Valuation Standards (IVS)?
The International Valuation Standards Council (IVSC).
114
What are the International Valuation Standards
IVS consist of mandatory requirements that must be followed in order to state that a valuation was performed in compliance with it. Some aspects of the standards do not direct or mandate any particular course of action, but provide fundamental principles and concepts that must be considered in undertaking a valuation
115
What do professional standards do? (PS - Section 2)
1.They define the parameters for compliance with the Red Book Global Standards, including adoption of the International Valuation Standards
2.They set out the associated RICS regulatory requirements;
3.They clarify the detailed application of the RICS Rules of Conduct when members are undertaking valuation work
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What are the strengths and weaknesses of the comparable method
Strengths:
*Reflects balance of supply and demand by using prices in local market for similar property
*Complies with the definition as the price the market will pay
*It reflects the behaviour of buyers and sellers
*It is often preferred by the courts as it reflects the actual market
Weaknesses:
* Market conditions:
a. During property collapses many transactions that take place are forced or distressed sales. They may be market evidence but do not conform to the willing seller rule.
b. Economic conditions can vary quickly making past sales and leases unreliable
c. Values will follow irrational behaviour of markets
* Limited number of comparable transactions available e.g. specialist industrial plant
* A lack of similar evidence / Real Estate markets are not fully transparent:
- Evidence can be difficult to obtain and all information may not be available –e.g. developing companies has less transparency of information.
- The Uniqueness of each property in both physical and legal attributes means that few comparisons are straight forward.
* Special Purchasers: Prices can be influenced by special purchasers (e.g. Marriage Value)
* Not all purchasers and vendors are well advised
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What is a return
measures the performance of a property, measured retrospectively, uses a DCF to calculate IRR check a cashflow calc
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What is investment value
Sum of present values. The present value is an estimation of how much future cash flow (or stream of cash flows) is worth right now.
The present value recognise the time value of money, so . All future cash flows must be discounted to the present using an appropriate rate that reflects the expected rate of return (and risk value) because of the “time values of money”.
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What is the formula for yield
A yield - the annual return on investment expressed as a percentage of capital value.
Yield Calculation = (income / price) x 100
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How do you calculate present value
Present Value (PV) = FV / (1 + r) ^ n
FV = Future Value – projected cash flow expected to be received in the future (i.e. the cash flow we are discounting to the present date)
r = Rate of Return (discount rate) – expected rate of return (interest) – which is a function of the riskiness’s of the cash flow (greater risk – higher discount rate)
n = Number of Periods – duration between the date the cash flow occurs and the present date
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How did you determine the residual at Romford Gasworks?
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What did you learn in the Red Book Compliance Workshop?
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When were the latest IVS published and what were the changes
Update from IVS 2020 published in January 2024
Updates included a revised structure and increased focus on:
- ESG
- data
- valuation modelling
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Why is the Red book being updated and when is it due to come into effect
To align with the new IVS.
Updates will include:
Implementation of valuation review recommendations
Practice and process changes driven by evolving areas such as ESG and technology
Alignment with wider RICS objectives
Reflect developments in other global standards e.g. IFRS and Basel 3.1
Due to be published in Autumn 2024 and be effective from January 2025
