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APC Revision > Valuation > Flashcards

Valuation Flashcards

1
Q

What is the difference between an internal and external valuer?

A

Internal - employed by a company to value its assets.

External - has no material links to property or client.

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2
Q

What are the 3 steps to undertake before a valuation instruction?

A
  1. Competence
  2. Independence
  3. Terms of Engagement in line with VPS 1
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3
Q

What might you check before proceeding with a valuation instruction?

A
  1. Asbestos register
  2. Business rates/council tax
  3. Contamination
  4. Equality Act 2010 compliance
  5. EPC rating
  6. Health and Safety compliance including fire safety
  7. Legal title and tenure, leases, deeds of covenant etc.
  8. Public Rights
  9. Planning History
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4
Q

What steps would you take to undergo a valuation instruction?

A
  1. instruction from client
  2. Competence
  3. COI
  4. Terms of Engagement
  5. Gather documents, leases, freehold titles, Deed of covenants, planning etc
  6. Inspect and measure
  7. gather comparable evidence and analyse
  8. Draft report
  9. Have report checked by another surveyor
  10. Finalise and sign report
  11. Issue to client
  12. Invoice
  13. Archive file
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5
Q

What are the 5 methods of valuation?

A
  1. Comparative Method
  2. Investment Method
  3. Profits Method
  4. Residual Method
  5. Depreciated Replacement Method (DRC)
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6
Q

How would you carry out a comparable method valuation?

A

6 steps:

  1. Find comparables
  2. verify comparables
  3. Assemble in schedule
  4. Adjust comparable based on heirarchy of evidence
  5. Analyse comparables and provide opinion of value
  6. Report value and prepare report.
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7
Q

Are there any RICS guidance on comparable evidence and what are the main points?

A

RICS Professional Standard: Comparable evidence in real estate valuation (2019)

Main points:

  • provides advice on dealing with situations where there is limited comparable evidence.
  • sets on non-prescriptive hierarchy of evidence and provides that valuer should use professional judgement as to hierarchy.
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8
Q

What are good places to find relevant comparable evidence?

A
  1. ask local agents
  2. online databases
  3. auction results
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9
Q

What is the investment method of valuation and when is it used?

A
  • used when there is an income stream.
  • rental income is capitalised to produce a capital value.
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10
Q

What are the different types of investment methods?

A
  1. Conventional Method - Passing rent or Market Rent x years purchase = Market Value
  2. Term and Reversion:
    - used for under-rented properties.
    - Term income capitalized to next break or termination date.
    - Reversion income capitalized into perpetuity.

Layer/ Hardcore Method

  • Used for over-rented properties.
  • Income flow split into slices
  • top slice = passing rent less market rent
  • bottom slice = market rent
  • higher yield applied to top slice due to additional risk.
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11
Q

What does the term yield mean
?

A

a measure of investment return, expressed as a percentage of capital invested.

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12
Q

What factors can affect the yield?

A
  • location
  • covenant strength
  • voids
  • use of property
  • lease terms
  • obsolescence
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13
Q

What are the different yields

A

Gross yield - Yield not adjusted for purchasers costs.
Net Yield - resulting yield adjusted for purchasers costs.
Equivalent yield - weighted average of term yield and reversionary yield.
Running yield - Yield at one moment in time.

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14
Q

What is the profits method and when is it used? and what is the methodology?

A

used for the valuation of trade related properties where the value of the property is related to to the profitability of the business.

e.g pubs, petrol, stations, hotels

Method
Annual turnover less costs/ purchases = gross profit
less working expenses = net profit
less operators remuneration = EBITDA (Earnings Before Interest, Tax, Depreciation, amortization)

Capitalize by appropriate yield = market value

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15
Q

What is the residual method and when is it used? and what is the methodology

A
  • Used to find the value of a development site
  • Form of development appraisal

Method

GDV - DEVELOPMENT COSTS = GROSS SITE VALUE

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16
Q

What are limitations of the residual method?

A
  • important to have accurate information and inputs
  • very sensitive to minor adjustments
  • Implicit assumption if not a DCF
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17
Q

What is the DRC method, when is it used and what is the methodology?

A

Depreciated replacement cost method.

Used where there is very limited or no comparable evidence for specialized properties. e.g. schools, lighthouses, oil refineries.
Used for financial statement valuations

Method:

Value land in existing state + Cost of replacement - depreciation for obsolescence/ deteriation = Value

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18
Q

What is the Redbook? and what is its structure

A

RICS Valuation - Global Standards (2022)

  1. Introduction
  2. Glossary
  3. 2 Professional Standards
  4. 5 Valuation Performance Standards
  5. 10 Valuation Practice Guidance Applications
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19
Q

What is PS1 of the Redbook? and what valuations are excluded from the Redbook?

A

PS1: Compliance with standards & practice statements where a written valuation is provided.

Redbook must be used except for 5 exceptions:

  1. Litigation and Negotiation
  2. Internal Purposes
  3. Statutory Functions
  4. Agency and Brokerage
  5. Expert Witness
20
Q

What is PS2 of the Redbook?

A

PS2: Ethics, competency, objectivity, disclosures.

  • members should comply with the rules of conduct when undertaking valuations.
  • A valuer must always act independently and objectively
  • should apply professional skepticism when relying on data
  • members should demonstrate competence and comply with minimum terms of engagement
21
Q

What is VPS1 and what does is set out?

A

Terms of enagagement

Sets out minimum matters to be confirmed in the terms of engagement:

a. valuer
b. client
c. intended users
d. asset to be valued
e. purpose of valuation
f. basis of value
g. valuation date
h. assumptions and special assumptions
i. format of report
j Redbook compliance confirmation
k. fee basis
l. complaints handling procedure

Also defines assumption & special assumption.

ASSUMPTION: something reasonable to assume is true with investigation.
SPECIAL ASSUMPTION: something taken to be true and accepted as fact even though it is not true.

22
Q

What is VPS 2? and what does it set out

A

VPS 2: inspections, investigations and records

  • Valuers must ensure they verify the information they rely on.
  • re-inspections required for revaluations unless valuer has confirmation that there has been no material changes.
  • proper records should be kept of inspections and investigations.
23
Q

What is VPS 3? and what does it set out?

A

VPS 3: Valuation Reports

Minimum requirements to be stated in a report:

  1. valuer
  2. client
  3. intended users
  4. asset to be valued
  5. basis of value
  6. valuation date
  7. assumption and special assumptions
  8. restrictions to use
  9. valuation approach
  10. date of report
  11. Market commentary
  12. Limitations

Valuers should also be aware of ESG and sustainability factors and they should be considered in the valuation.

24
Q

What is VPS 4 and what does it set out?

A

VPS4: Basis of value, assumptions and special assumptions

6 basis of value:

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

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

INVESTMENT VALUE: The value of an asset to the owner or a prospective owner for individual investment or operational objectives.

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

EQUITABLE VALUE: The estimated price for the transfer of an asset or liability between
identified knowledgeable and willing parties that reflects the respective
interests of those parties

25
Q

What is VPS 5 and what does it set out?

A

VPS5 Valuation Approaches and Methods

Sets out:

That valuers are responsible for choosing and justifying the valuation approach and use of model.
More than 1 method can be appropriate.

26
Q

What is VPGA2 and what does it set out?

A

VPGA 2 - secured lending valuations

Purpose: Provides guidance around doing loan security valuations.

Provides that:

  • Guidance on managing conflicts
  • other information to be provided to lender such as:
  • previous involvement
  • environmental considerations
  • mortgage suitability
  • circumstances that could affect price
27
Q

What is the UK National supplement (2018)?

A

provides guidance for redbook valuations carried out in the UK.

Broken down into 3 sections:

  • UK professional standards
  • UK Valuation Performace Standards
  • UK valuation practice guidance
28
Q

What typical margin of error is allowed for Redbook valuations?

A

Commercial property - +/- 10%
Commercial property with special features = +/- 15%

29
Q

What are the SDLT thresholds?

A

0 -150k - 0%
150,001k - 250k - 2%
250k+ - 5%

30
Q

What is a premium?

A

capital payment paid from one party to another

31
Q

How are purchasers costs broken down?

A

SDLT = 5%
AGENT FEES - 1%
SOLICITOR FEES - 0.5%

32
Q

What does WAULT stand for?

A

weighted average unexpired lease term

33
Q

What approaches are there to calculating net effective rent?

A
  1. Straight-line Method
  2. Straight-line Method assuming time value of cashflow using a yield
  3. DCF
34
Q

What is Zoning?

A
  • A valuation technique
  • used to comparison of retail properties.
  • Based on the principle that value decreases the further away from street.
  • Involves halving back using 6.1m zones.
  • basements and first floors usually treated as A/10.
35
Q

What are the updates to the UK National Supplement effective 1st May 2024?

A

updates aim to reduce the risks of conflict of inters when producing a valuation report.

Updates include:

  • Mandatory rotation policy.
  • alternative basis valuations should not be provided unless confirmed in the terms of engagement.
  • Sustainability and ESG to form an integral part of valuations.
36
Q

Hope Value

A

Value arising from any expectation that future circumstances affecting the property may change.

37
Q

What is the current prime p/psf for each sector in your area?

A

office - £42 psf
retail - £250 - 300 - 7%
Industrial - £9- 10 for 50k plus units- 6%

38
Q

What papers have the RICS produced to provide advice and guidance regarding valuation? Can you name some?

A

Peter Gray review of real estate investment valuations (2021)

advice includes:

  • use of mandatory rotations
  • developing a valuation compliance officer role for firms
  • dcf as a principle model for investment valuations.
  • review of post-qualification requirements of valuers.
39
Q

Can you describe a valuation that you have carried out for market rent?

A
  • comparable method of valuation to find P/psf
  • gather comparables
    -verify with agents
  • assemble in terms of heirarchy
  • make any subjective adjustments
  • apply suitable p/psf to floor area
  • That gives you market rent.
40
Q

Can you describe a valuation for market value?

A
  • investment method of valuation
  • Compare market rent to passing rent to determine is property is under, over or rack rented.
  • under rented so term and reversion used.
  • market yield used on the reversion.
  • lower yield applied to the term due to its certainty.
  • add the two values together to get the Market Value.
41
Q

What was your comparable spread for Blakenall heath?

A

Retail:
£6.31 - £14 = £10 market rent.

Office
£2.26 - £8.93 = £4.50 market rent

Transactional Yields
Retail:
- 8.4% - 13.93% = reversionary yield 11.5%
Office:
- 10.4% - 13.4% = reversionary yield 12%

42
Q

Why were the retail units secondary?

A

Retail:

  • Secondary location
  • small size retail units
  • sales area in front, ancillary storage area to the back
  • Fit out was dated
  • suspended ceiling
  • inset LED lighting.
43
Q

Why were the office units secondary?

A
  • Secondary location
  • low specification
  • painted plaster ceilings
  • strip fluorescent lighting
  • partitioned rooms rather than open plan
  • wall mounted radiator system
44
Q

What characteristics of Lichfield House affected the value?

A
  • location
  • proximity to motorways or transport
  • eaves height
  • office content around 10%
  • Low site coverage
  • Yard depth
  • Number of loading doors
45
Q

What was your comparable spread for Lichfield House

A

Comparable rents:
£2.77 - £6.90= market rent £4.65

Comparable Yield:
6.07% - 8.48% = Market yield = 8%

APC Revision (15 decks)

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