Valuation

Question 1

What were the key changes to the UK National Supplement in 2023 and when did they take effect?

Answer 1

They took effect on 1st May 2024 and apply to all valuations where the valuation date is on or after this date.

The main changes were;
-UK VPGA 15 Valuations for capital gains tax, inheritance tax, stamp duty land tax and the annual tax on enveloped dwellings and residential property developer tax.
-Residential valuation guidance refined
-New financial and governance reporting standards introduced
-Valuation for public-sector accounting guidance amended

Question 2

What is the UK National Supplement?

Answer 2

It is supplementary to, but does not replace, the RICS Valuation - Global Standards (Red Book)

Question 3

What is the purpose of having valuation standards?

Answer 3

To promote and maintain a high level of public trust in valuation practice by establishing appropriate requirements for valuers

Question 4

What are the requirements of being a RICS Registered Valuer?

Answer 4

You must register on the VRS, pay the annual fee of (£120), have taken valuation to Level 3 in your APC, and complete an annual return describing the types of properties and value of the properties valued in that year.

Question 5

Can you give me 1 driver that impacts value and why?

Answer 5

Location can have a significant impact on value. For example, in my area of practice, properties within the grammar school catchment area have a significantly higher value than if they were located outside the catchment.

Other reasons for location impacting value could be crime rates, proximity to train stations and other transport routes, etc.

Question 6

Definition of Market Value

Answer 6

Market Value – the amount for which an asset or liability should exchange on the valuation date between a willing buyer and seller in an arm’s length transaction

Question 7

Definition of Market Rent

Answer 7

Market Rent – the amount for which an interest in real property should be leased on the valuation date between willing lessor and lessee in an arm’s length transaction for an appropriate lease

Question 8

What is Marriage Value?

Answer 8

Marriage Value – an additional element of value where the combined value of multiple assets is more than the sum of the separate values

Question 9

What is a Special Purchaser?

Answer 9

Special Purchaser – a particular buyer form whom the asset has special value due to advantages of ownership others do not have

Question 10

What is an assumption?

Answer 10

An assumption is a supposition taken to be true

Question 11

What is your firms Conflict of Interest Procedure?

Answer 11

Firstly, when I receive a new instruction I would add it to the email that goes around the firm, this is looked at by all colleagues to check any conflicts – I also check this list daily. I would also look on our online database of clients to ensure there was no conflict.

Question 12

What is an Assumption vs a Special Assumption?

Answer 12

An assumption is something that has a basis in fact, a special assumption is something that you know not to be factual that you are required to assume anyway – such as assuming that planning permission that is in place has actually not been granted.

Question 13

What are the Basis of Value?

Answer 13

Market Value

Market Rent

Investment Value

Fair Value

Question 14

What is the VRS?

Answer 14

Valuation Registration Scheme, all valuers need to register on this scheme.

Question 15

What is the typical “agricultural” value of a farmhouse assigned by HMRC for IHT purposes

Answer 15

70% market value, leaving a 30% taxable element.

Question 16

Explain the contents of a valuation report

Answer 16

• Identification and status of the valuer and client
• Outline purpose and scope of the valuation
• Identification and description of the asset/liability
• Valuation date
• Any assumptions and/or special assumptions
• Due dilligence
• Restrictions on use/distribution/publication of the report
• Confirmation the valuation has been done in line with Red Book IVS
• Valuation approach and methodology and reasoning
• Values
• Commentary on any uncertainty or limitations
• Disclaimer for firm – right to re-evaluate in light of new info
• MUST INCLUDE SIGNATURE of VALUER and Statement confirming they are competent and in a position to provide unbiased, objective valuation

Question 17

Give some examples of desktop due diligence for a valuation

Answer 17

• Obtain copy of the title documents
  -Restrictive covenants or Overage
• Any information on tenure – copy of leases/agreements if applicable
• Any rights granted to third parties – wayleave, easement etc.
• Designations – flood risk, NVS, AONB, SSSI etc.
• PROW
• National and Local planning policy – is the area zoned/allocated
• Any agri-environment schemes

Question 18

When was the latest edition of the RICS Valuation - Global Standards (Red Book) published?

Answer 18

Published November 2021

Effective from 31st Jan 2022

Question 19

What does VPS mean?

Answer 19

Valuation Practice Standards

Question 20

What does VPS 1 refer to?

Answer 20

ToE

-Must include: ID and status of valuer, client, property/asset, use of valuation, valuation date, bases of value, extent of work, assumptions and special assumptions, restrictions of use, fee, CPH, limitations on liability

Question 21

What does VPS 2 refer to?

Answer 21

Inspections, investigations, and records/

-Nature of inspection required defined in ToE, desktop studies, revaluation without re-inspection, property records must be held

• Valuer must take reasonable steps to validate info
• Measurements must be in line with IMPS and RICS Property Measurement professional statement

Question 22

What does VPS 3 refer to?

Answer 22

Valuation Reports

-Reports must be clear and address same things as ToE (ID, purpose of val, assets, date of valuation, bases of value, extent of investigation, assumptions, restrictions of use, approach, limitations of liability)

Question 23

What does VPS 4 refer to?

Answer 23

Basis of value, assumptions, and special assumptions

-Fundamental measurement assumptions (Market value, market rent, investment value, fair value)

• Assumptions – where it is reasonable the for the valuer to accept that something is true without specification verification (title, structurally sound, planning, contamination etc)
• Special assumptions – an assumptions whereby the facts differ from those existing at the valuation date (planning permission, vacant possession, synergistic value, special purchaser)

Question 24

What does VPS 5 refer to?

Answer 24

Valuation approaches and methods

-Valuation must be classed within a market approach, income approach or cost approach – valuer to choose appropriately

Question 25

What is VPGA?

Answer 25

Valuation Practice Guidance – Applications (Advisory)

Question 26

VPGA Summary

Answer 26

- Best practice guidance with specific reference to valuations for certain applications, such as financial statements, secured lending and plant and equipment - There are 10 and make reference to IVS guidance - VGPA1 – Valuation for inclusion in financial Accounts - VPGA2 – Valuations for secured lending (heightened COI checks/disclosure, reporting must include suitability of the property for mortgage purposes, anything that could affect the price, any difference in MV when using special assumption)

Question 27

Tell me why you think objectivity and independence is important?

Answer 27

To adhere to the Red Book Global Standards, to maintain public trust in the profession. Stakeholders rely on RICS valuations to be accurate, they must therefore be prepared with impartiality.

Question 28

Give an example of due diligence a valuer should undertake in preparing a report

Answer 28

-Flood Zone -Planning History -Status of the local plan and whether any policies may affect the subject property. -Agricultural land classification

Question 29

Why does the outcome of due diligence impact value?

Answer 29

Value is derived from a large number of factors. It is important to investigate these as part of your due diligence to arrive at a fair market value.

Question 30

Are there any proposed changes to the Red Book?

Answer 30

Yes, a revised Red Book is scheduled for publication in late autumn 2024 following the recent consultation. It becomes effective on 31 January 2025, in line with IVS.

Question 31

What are IVS?

Answer 31

International Valuation Standards - last updated in January this year.

Question 32

Are there any types of valuation that do not have to meet Red Book standards?

Answer 32

Yes, there are 5: - Providing agency or brokerage advice for an acquisition or disposal -Acting as an expert witness -Performing statutory functions -Providing a valuation purely for internal purposes, without liability and without communication to a third party -Providing valuation advice in the course of negotiations or litigation where the valuer is acting as an advocate

Question 33

Give me an example of an Asset type, and why a valuation of it would be needed?

Answer 33

Development land - a valuation may be needed for a client/company to either obtain finance, or to simply understand the costings of a development project.

Question 34

How would you value development land?

Answer 34

I would use a residual valuation.

Question 35

How many valuation methods are there?

Answer 35

5

Question 36

Talk me through one of the specific responses you need to give in a Charities Act Report, with regard to valuation?

Answer 36

The main purpose is to ensure that a charity disposes of land in a manner that maximizes its value and benefits the charity in accordance with legal requirements. A commentary on this is therefore essential.

Question 37

With regard to the marketing period at West Hoathly Road, what was the rationale for advising a suitable period had passed?

Answer 37

The Charities Act 2011 mandates 'adequate time to market the asset to ensure all potential buyers are reached'. A standard asset like this agricultural land would usually be on the market for a maximum of 3 months. This land was marketed for around 6 months and we therefore advised that this was a sufficient marketing period.

Question 38

Did the Charities Act 2022 replace the 2011 Charities Act?

Answer 38

No, it amended and updated it. The 2011 Act remains the dominant legislation. The 2022 Act simplifies some processes such as the disposal of assets, and provides greater flexibility for charities.

Question 39

Can I revalue without reinspecting?

Answer 39

Revaluation without reinspection cannot be undertaken unless you are satisfied that there have been no material changes to the physical or locational nature of the property since the last valuation.

Question 40

Mandatory or advisory?

Answer 40

- Professional Statements - PS 1-2 - these are mandatory for all members providing written valuations - Valuation Technical and Performance Standards - VPS 1-5 - these are mandatory unless otherwise stated - Valuation Practice Guidance Applications - VPGA 1-10 - these are advisory and provide guidance on best practice.

Question 41

Tell us about the term and reversion method

Answer 41

It is used for REVERSIONARY (under-rented) investments Income flow is divided vertically. Term (passing rent) is capitalised until next lease event (review/expiry) at an INITIAL yield Reversion to Market Rent valued in perpetuity at a reversionary yield There is a yield differential; term at a keener yield to reflect lower risk.

Question 42

Tell us about the hardcore and top slice method

Answer 42

It is used for OVER RENTED investments. Income flow is divided horizontally. The hardcore (MR) is valued into perpetuity at a net initial yield. The top slice (PR-MR) is capitalised to next lease event at a net initial yield with a risk adjustment. There is a yield differential; top slice at an inflated yield to reflect higher risk of over-renting. Different yield type can be used based on market comparable evidence. NO PV of £1 needed as both layers of income are being received NOW.

Question 43

What is the All Risks Yield (ARY) and what does it reflect?

Answer 43

The remunerative rate of interest used in valuation of fully let property let at Market Rent reflecting all the prospects and risks attached to particular investment. It is an implicit method of valuing, as risk and rental growth is wrapped up in the yield.

Question 44

When would you use the Profit method of valuation?

Answer 44

For valuations of specialist trading properties or entities, where there is a ‘monopoly’ position Where the value of the property depends upon the businesses trading potential i.e. pubs, petrol stations, hotels, care homes, cinemas, golf courses

Question 45

What is the simple methodology to undertake a Profit method valuation?

Answer 45

(Annual Turnover – Costs/Purchases) = Gross Profit (Gross Profit – Reasonable Working Expenses) = Unadjusted Net Profit (Unadjusted Net Profit – Tenant’s /share) = Fair Maintainable Operating Profit (FMOP) CAPITALISE at an appropriate yield to achieve capital value Cross check with comparable method if at all possible

Question 46

When is the Depreciated Replacement Cost used?

Answer 46

It is a method used where direct market evidence is limited or unavailable for specialised properties (i.e. sewage works, lighthouses, schools).

Question 47

How do you undertake a Contractor’s/DRC valuation?

Answer 47

Value of land in its existing use (assuming planning permission exists) Establish the replacement cost of the building PLUS Fee MINUS discount for depreciation* (use BCIS and then judge level of obsolescence) Add the two together *Estimate amount of depreciation appropriate for physical, functional and economic obsolescence