Valuation Flashcards
1
Q
What is the RICS Red Book called?
A
RICS Valuation - Global Standards
2
Q
When was the RICS Red Book (global) published?
A
published December 2024 and effective 31 January 2025
3
Q
What is the purpose of the Red Book?
A
Consistency, objectivity, transparency
4
Q
What is the Red Book?
A
Set of global standards which set out procedural rules and guidance for written valuations
5
Q
What is a VPS?
A
Valuation Technical and Performance Standards and they are mandatory
6
Q
VPS 1
A
Terms of Engagement
7
Q
VPS 2
A
Bases of value, assumptions and special assumptions
8
Q
VPS 3
A
Valuation approaches and methods
9
Q
VPS 4
A
Inspections, investigations and records
10
Q
VPS 5
A
Valuation models
11
Q
What is a VPGA?
A
RICS Valuation Practice Guidance Applications
12
Q
Can you tell me what is covered under VPGA 1
A
Valuation for financial reporting
13
Q
Can you tell me what is covered under VPGA 2
A
Valuation for secured lending
14
Q
Can you tell me what is covered under VPGA 3?
A
Valuation of businesses and business interests
15
Q
Can you tell me what is covered under VPGA 4?
A
Valuation of trade related properties
16
Q
Can you tell me what is covered under VPGA 5?
A
Valuation of plant and equipment (including infrastructure)
17
Q
Can you tell me what is covered under VPGA 6?
A
Valuation of intangible assets
18
Q
Can you tell me what is covered under VPGA 7?
A
Valuation of arts and antiques
19
Q
Can you tell me what is covered under VPGA 8?
A
Valuation of real property interests
20
Q
Can you tell me what is covered under VPGA 9?
A
Valuing portfolios and groups of assets
21
Q
Can you tell me what is covered under VPGA 10?
A
Material valuation uncertainty (MVU)
22
Q
When might a valuation not be Red Book?
A
Agency (market appraisal)
Expert Witness
Internal purposes
Statutory
Litigation (rent review)
23
Q
What is a valuation date?
A
Date on which opinion of value applies
24
Q
What is the date of the valuation report?
A
Date on which the valuer signs the report
25
What is the difference between an assumption and a special assumption?
An assumption is something that is taken to be true without the valuer needing to verify (e.g., we have assumed the services at the property are in working order). A special assumption is something that is known not to be true, but is taken as true for the purpose of the valuation (e.g., vacant possession when property is occupied)
26
Are there any RICS guidance notes or professional statements you would have regard to when carrying out valuations?
RICS Sustainability and ESG Professional Statement
Comparable Evidence in Real Estate Valuation (professional standard - effective October 2019)
27
What are the principles/purposes of PII?
The purpose of professional indemnity insurance is to ensure that if a firm faces a claim it is protected from financial loss that it cannot meet from its own resources.
28
Does the RICS provide any guidance to assist regulated firms understanding risks and liabilities associated with professional services provided by its members?
Risk, liability and insurance - guidance note effective April 2021
29
What is a liability cap?
Contractual agreement a client can only claim damages up to the amount agreed, even if the law would otherwise award a greater sum in damages
30
What are minimum limit of indemnity?
Firms turnover in proceeding year £100,000 or less = minimum limit of indemnity £250,000
Firms turnover in proceeding year £100,001 to £200,000 = minimum limit of indemnity £500,000
Firms turnover in proceeding year £201,000 or above= minimum limit of indemnity £1,000,000
31
What are the different purposes valuations are undertaken for?
Asset
Tax
Loan Security
Pension
Probate
32
Why is due diligence taken?
To check there are no material matters which could impact on the valuation
33
What statutory due diligence do you undertake as part of the valuation process?
Business Rates; contamination; EPC; flooding; legal title and tenure
34
Why is it important to understand the purpose of a valuation?
To consider the appropriate risks
35
How many minimum terms must be included in the ToE and can you name a few?
19 minimum terms:
o Identification and status of valuer
o Identification of client
o Identification of any other intended users
o identification of the assets/liability being valued
o purpose
o basis of value
36
How many report headings must be included as per VPS 6 and can you name a few?
17 minimum headings:
o Identification and status of valuer
o Identification of client and other intended users
o Purpose
o Identification of asset/liability
o Basis of value
o Valuation date
37
What is the definition of Market Value?
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing where parties acted knowledgeably, prudently and without compulsion
38
What is the definition of Market Rent?
The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate market terms, in an arm’s length transaction, after proper marketing where parties acted knowledgeably, prudently and without compulsion
39
What is Investment Value?
The value of an asset to the owner or a prospective owner for individual investment or operational objectives
40
What is Fair Value?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
Used for IFRS 13 for accounts purposes
41
What is the process to become a registered valuer?
Valuation to L3 at APC
Valuer Registration Application Form
Renewed annually by firm
Alternative route requires an assessment, 100 days valuation experience signed off by registered valuer, case study submission and CPD
42
Which parts of the Red Book apply specifically to loan security?
VPS 1-5
VPGA 2 – valuation of interests for secured lending
VPGA 8 – valuation of real property interests
VPGA 10 – matters that may give rise to valuation uncertainty
43
Are you aware of a recent piece of valuation negligence case law?
Hart v Large
Highlights that you must be clear and advise clients on the survey level and scope of inspection, limitations and caveats
44
What is an internal valuer?
Employed by company to value internal assets, no third party reliance
45
What is an external valuer?
Has no material links with the asset to be valued
46
What are the three steps to undertake prior to commencing with a valuation instruction?
Competence
Independence
Terms of engagement
47
What are the 6 steps when undertaking the comparative method?
* Search
* Verify
* Schedule
* Hierarchy
* Analyse
* Report
48
What is a yield?
A measurement of investment return, expressed as a percentage of capital invested
49
How do you calculate a yield?
Income/price x 100
50
What is a years purchase?
Number of years required for its income to repay its purchase
51
How do you calculate a Years Purchase?
100/Yield
52
What are some key risks that should be considered when arriving at a yield?
Quality of covenant
Lease terms
Voids
Security
Use of property
Market sentiment
53
What is a gross yield?
Not adjusted for purchasers costs
54
What is a net initial yield?
Adjusted for purchasers costs
55
What are the 3 valuation approaches?
Market
Income
Cost
56
What are the 5 valuation methods?
Comparable
Investment
Profits
Depreciated Replacement Cost
Residual
57
When would you use the investment method and how?
When there is an income stream to value. The conventional method assumes growth implicit valaution approach. The rental income is capitalised to produce a capital valuation.
58
When would you carry out a hardcore and top slice valuation? And what does the hardcore represent?
When the property is over-rented / hardcore represents the market rent
59
When would you use the term and reversion method of valuation?
When the property is under-rented
60
When would you use the profits method?
For a trading premises
61
Can you explain the methodology behind a profits valuation?
The value is dependent on business profitability. It is derived from an assessment of the FMT (fair maintainable turnover) and deducting costs, reasonable working expenses and operators remuneration to establish the FMOP (fair maintainable operating profit) capable of being achieved by a REO (reasonable efficient operator) and is then capitalised at a yield to achieve a market value
62
What is the Depreciated Replacement Cost Method?
The current cost of replacing an asset with its modern equivalent asset less any deductions for physical deterioration and all relevant forms of obsolescence and optimisation
63
What is the Residual Method?
The purpose is to calculate what a developer should be paying for a development site. This is done by working out the GDV and deducting all associated costs in completing the development (i.e., site prep, marketing, contingency) and deducting developers profit which leaves a surplus (residual) which is the amount a developer can be expected to pay for the development site
64
What does growth implicit mean?
Rental growth is built into the choice of yield and not explicitly modelled within the calculation
65
What is the market approach?
An approach which provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available
66
What is the cost approach?
An approach that provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or construction
67
What is the income approach?
An approach that provides an indication of value by converting future cash flows to a single current capital value
68
What are the main drivers that can have an impact on a property's value?
Location
Condition
Lease terms
Tenant covenant
69
When might you undertake a desktop valuation?
Where the property has been previously inspected by the valuer/firm
When following discussion with the client, they have confirmed that there have been no material changes to the physical attributes/location of the property
Any assumptions made to this affect must be set out in the ToE
Guidance is within VPS 2
70
What changes did the new Red Book introduce?
* Alignment with developments in other relevant global standards and regulations such as the new International Valuation Standards (IVS)
* The addition of new content relating to modelling and methods
* Adaptation to practice and process changes from evolving areas such as technology and ESG
71
VPS 6
Valuation reports
72
Can you tell me what is covered under VPGA 11?
Relationship with auditors
73
How would you deal within a shortage of comparable evidence?
*Emphasise lack of evidence and use expertise and judgement of valuer to use historic / indirect data in wider market and apply local or national data (trends) to data
* Refer to Red Book on material uncertainty to ensure clarity to the client on the data that has been relied upon
74
How would you analyse comparable evidence?
* Establish a common measurement or other comparison standard (i.e., IPMS where applicable)
* Make adjustments to the evidence in a matrix format (i.e., adjust for lease terms, condition, size, location)
* This process will lead to a ranking of the comparable evidence.
* The comparable evidence should be coupled with the valuer's knowledge of the local market
75
How do you record your comparable evidence?
I ensure that my comparable evidence is recorded clearly and accurately on the job file. This file is secure on our system. I record the address, real estate type, size, description of the property, transaction details (i.e., for a sale when it completed and price / for a letting the start date, rent reviews, break clauses and lease incentives) and who and when I spoke to the agent who holds the details of the transaction.
76
What is the hierarchy of evidence?
Hierarchy of evidence is ranking comparable data based on its relevance. For example a property which is near identical to property and full and accurate information is available should have more weighting placed upon it over say similar real estate being marketed where offers have been made but a binding contract has not been agreed / asking prices.
77
What should a comparable be?
* comprehensive (i.e., several comps)
* identical / similar
* recent (i.e., representative of the market at the date of valuation)
* result of an arm's length transaction
* verifiable
* consistent with local market practice
* the result of underlying demand (i.e., comps have taken place with enough potential bidders to create an active market)
78
What is the purpose of comparable evidence?
79
What changes did the latest Red Book introduce?
* Revised order of VPSs to map IVS, including a new VPS 5 covering valuation models to align with International Valuation Standards (IVS) (published January 2024)
* Adaptation to practice and process changes from evolving areas such as technology (AI) and ESG. For example it has amended existing mandatory standards (PS 1) around AVMs, and incorporated new standards covering automation, AI and ESG
* Revision of VPGA 1 (valuations for financial reporting) and introduced an additional VPGA 11 (relationship with auditors), and technical revision of the other VPGAs
* IPMS - wording changed from 'should' to 'where possible'
80
What is a Red Book valuation?
A Red Book valuation is a valuation that complies with the RICS Valuation – Global Standards, commonly referred to as the Red Book. These standards are published by the Royal Institution of Chartered Surveyors and provide a framework of mandatory rules and best practice guidance for RICS members carrying out valuations of real estate, businesses, or other assets. The purpose of a Red Book valuation is to ensure consistency, objectivity, and transparency, as well as to promote public confidence in the valuation process. These valuations must be prepared by a qualified RICS member.
81
Why may someone require a Red Book valuation rather than a market appraisal?
A Red Book valuation is a formal, regulated valuation carried out by an RICS member that complies with the RICS Valuation – Global Standards (the Red Book). In contrast, a market appraisal is typically an informal estimate of value, often provided for advisory or marketing purposes. omeone may require a Red Book valuation over a market appraisal when a higher level of reliability, objectivity, and professional liability is needed — particularly in situations where the valuation will be relied upon by third parties, or used for statutory, regulatory, or financial purposes. Red Book valuations are subject to strict professional standards including independence, clear reporting, and proper due diligence, whereas a market appraisal may not be subject to any formal regulation or standards and can be influenced by factors like client instruction or marketing aims.
