Valuation Flashcards
(84 cards)
1
Q
What 3 things must you do prior to accepting a valuation instruction?
A
- Check competence
- Independence (CoI)
- ToE (signed before starting work)
2
Q
What statutory due diligence must be done for valuations?
A
- Asbestos register
- Flood info
- Planning history
- Environmental credentials (EPC)
3
Q
What is the timeline of a valuation instruction?
A
- Check competence
- CoI and CDD
- ToE
- Due diligence on property
- Inspect and measure
- Draft report
- Issue to client
- Issue invoice
4
Q
What are the 5 methods of valuation?
A
- Profits
- Residual
- Income
- Comparative
- Contractors (DRC)
5
Q
What are the 3 valuation approaches under IVS 105
A
- Income - residual, investment, profits
- Cost - contractors
- Market - comparative
6
Q
What are the categories of the hierarchy of evidence?
A
Category A - direct comparables
Category B - general market data
Category C - other sources (stock market, interest rates etc)
7
Q
When is the investment method used?
A
When there is an income stream to value.
8
Q
Is the growth implicit of explicit in the investment method of valuation?
A
Implicit - an implied growth rate is derived from the market capitalisation rate (yield)
9
Q
What is the term and reversion method?
A
Used for reversionary investments (passing rent is lower than MR)
Term capitalised until review / expiry, and reversion to MR valued into perpetuity at reversionary yield (higher to reflect increased risk of not being able to achieve reversion)
10
Q
Used for over- rented investments (passing rents higher than MR)
Income flow divided horizontally.
Bottom slice = passing rent upto MR
Top slice = passing rent above MR
Higher yield applied to top slice to reflect additional risk.
A
11
Q
What is the profits method?
A
Used for valuations of trade related property where the property is an inherent part of the business
12
Q
What is the residual method?
A
Values development land
13
Q
What is the depreciated replacement cost?
A
Method of last resort
Not suitable for loan security purposes
14
Q
How do you calculate Years Purchase?
A
Dividing 100 by the yield - the number of years to recoup the purchase price
15
Q
What is the all risks yield?
A
Used in a valuation of a fully let property let at a market rent reflecting all the prospects and risks attached to an investment.
16
Q
What is the true yield?
A
Assumes rent paid in advance
17
Q
What is the nominal yield?
A
Assumes rent is paid in arrears (usual in valuation)
18
Q
What is the gross yield?
A
Yield not adjusted for purchases costs
19
Q
What is an initial yield?
A
Current passing rent divided by a purchase price
20
Q
What is an equivalent yield?
A
Average weighted yield between the net initial yield and reversionary yield.
21
Q
What is the running yield?
A
The yield at one moment in time
22
Q
What are the key aspects of a DCF?
A
- Growth explicit
- Form of income approach valuation
- Determines value through examining future net income or projected cash flow and then discounting the cash flow to arrive at the current value.
23
Q
What is the internal rate of return
A
The rate of return at which all future cash flows must be discounted to produce a NPV of zero.
24
Q
What is a DCF?
A
Growth explicit model of valuation
Form of income approach
Determines value by examining its projected cash flow and discounting the cash flow to arrive at current value
25
What is simple method undertaking a DCF?
1. Estimate cash flow
2. Estimate exit value
3. Select discount rate (IRR)
4. Discount the cash flow at this rate
5. Value is the sum of the discounted cash flow to provide the NPV
26
What is the IRR?
Rate at which all future cash flows must be discounted to produce a NPV of zero
27
What is the net present value
Value of all future cash flows (positive and negative) over life of the investment
28
What is the structure of the RICS Valuation - Global Standards (2024) “global red book”
1. Introduction
2. Glossary
3. Professional standards (PS)
4. Valuation technical and performance standards (VPS)
5. Valuation applications (VPGAs)
6. International Valuation Standards (IVS)
29
What are the key changes to the updated Red Book?
Terms must provide clarity as towards whether red book compliant or not
Reference to IFRS 13 and IFRS 16 in VPGA1
Increased weighting towards sustainability
30
What are the RICS Professional Standards?
PS 1 - compliance with standards and practise statements (where a valuation has to be red book compliant)
PS 2 - ethics (members must comply with rules of conduct when valuing)
31
What are the 5 exemptions to red book valuation?
1. Advice in course of litigation
2. For statutory functions (except for tax return)
3. For internal purposes without liability
4. Part of agency or brokerage
5. Giving evidence as expert witness
32
Are the contents of PS 1 and PS 2 mandatory for all valuations?
Yes
33
What are the valuation technical and performance standards (VPS)?
VPS 1 - Terms of engagement
VPS 2 - Bases of value
VPS 3 - Valuation approaches and methods
VPS 4 - inspections
VPS 5 - valuation models
VPS 6 - valuation reporting
34
What is included in VPS 1? (Terms of engagement)
Identification of values
Identification of client
Asset
Currency
Basis of value
Valuation date
Assumptions and special assumptions
Few basis
CHP made available
35
If a desk top valuation is undertaken, what must be considered?
1. Nature of restriction must be agreed in ToE
2. Possible valuation implications confirmed in writing
3. Whether the restriction is reasonable with regard to purpose of valuation
4. Restriction must be referred to in report
36
can a desk top valuation be a red book valuation?
Yes unless for one of the specified reasons set out in PS 1
37
When does a valuer not have to inspect the property?
When they are satisfied there has been no material change since previously valuing the property
38
What is required under VPS 6?
1. Identification of valuer
2. Client
3. Basis of value
4. Valuation date
5. Assumptions and special assumptions
6. Valuation figures
7. Date of valuation
8. Nature and source of information
39
Under what circumstances can a draft valuation be issued?
Marked as draft
For internal purposes only
Cannot be relied upon
Must not be influenced by client with regard to final valuation figure
Any changes must be made clear with reasons why
40
What are the 6 bases of value (VPS 2)?
1. Market value
2. Market rent
3. Fair value (IFRS 13)
4. Investment value
5. Equitable value (IVS 104)
6. Liquidation value
41
What is market value?
Estimated amount for which an asset of liability should exchange:
1. On the valuation date
2. Between willing buyer and seller
3. In arms length transaction
4. After proper marketing
5. Where parties acted knowledgeably, prudently and without compulsion
42
What is market rent?
The estimated amount for which an interest in real property should be leased:
1. On the valuation date
2. Between willing lesser and lesser
3. On appropriate lease terms
4. In arms length transaction
5. After proper marketing
6. Where parties acted knowledgeably, prudently, and without compulsion
43
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
44
Under what circumstance is fair value required?
If the International Financial Reporting Standards have been adopted by the client
45
What is investment value?
The value of an asset to a particular owner for individual investment or operational objectives
May differ from MV
46
What is equitable value? (IVS 104)
Estimated price for the transfer of an asset or liability between identified knowledgable and willing parties that reflects their respective interests of those parties - not used in uk
47
What is liquidation value?
This can be used for a group of assets sold in a piecemeal basis considering the costs of getting the assets in a saleable position - not used in uk
48
What is the basis of VPS 3 (Valuation approaches and methods)?
Valuers are responsible for choosing and justifying their valuation approach. In some cases more than 1 approach may be applicable
49
What are the Valuation Practise Guidance Applications? - VPGAs?
VPGA 1 - valuations for financial accounts
VPGA 2 - valuations for secured lending
VPGA 8 - valuations of real property interests (with emphasis on ESG)
VPGA 10 - matters giving rise to material uncertainty
50
Fair value will be adopted for what type of accounts?
IFRS adopted
51
What are the key points associated with conflicts of interest for secured lending?
1. Any previous, current, or anticipated involvement with prospective borrower or property must be disclosed to lender
2. Previous involvement is defined as during the past 2 years
3. Instruction should be declined if valuer or client considers any involvement creates a conflict that cannot be avoided
52
What are some examples of conflict of interest associated with secured lending?
1. Long standing relationship with borrower
2. Financial interest in the property holding
3. Valuer is retained to act in the disposal or letting of the completed development of the subject property
53
Where must any arrangements to avoid potential conflicts of interest be stated?
1. Terms of engagement
2. Valuation report
54
What is the key message of VPGA 8?
Covers inspections and investigations
Identifies ESG and Sustainability issues - flood risk etc
55
What is the key message of VPGA 10?
Overriding requirement is that valuation report must not be misleading
Valuer must draw attention to any issues which result in material uncertainty
56
What is included in the RICS Valuation - Global Standards (U.K. National Supplement, 2023)
Provides additional guidance to the Red Book, and doesn’t replace it
Aimed to reduce CoI in val reports.
1. U.K. VPS 3 - supplementary governance requirements
2. U.K. VPGA 8 - valuation of charity assets (reference to Charities Act 2022)
3. U.K. VPGA 10 - new ESG principles in commercial secured lending
57
What is U.K. VPS 3 Regulated Purpose Valuations?
Valuations relied upon by 3rd parties who have not commissioned the valuation
58
What are the 5 valuation purposes under U.K. VPS 3?
1. Financial reporting (company accounts)
2. Stock exchange listings
3. Takeovers and mergers
4. Collective investment schemes
5. Unregulated property unit trusts
59
Are secured lending valuations regulated purpose valuations?
No as they are not replied upon by 3rd parties
60
What are current valuation monitoring requirements?
1. Declaration of length of time valuer has acted for the client
2. Whether the % fee income from the client is more or less then 5% of total fee income
61
What is the rule associated with valuing a property purchased or introduced by the valuer’s firm?
Cannot be valued for 12 months
62
What are the mandatory rotation timelines for valuers?
1. Max period of 10 years before firm rotation
2. Max single engagement period of 5 years
3. Max period of 5 years before individual valuers roll off
4. Min 3 year break following roll off an instruction
63
What are the key aspects of the RICS Independnt Review of Real Estate Investment Valuations (2021)?
Aimed to future proof valuation practises
1. Rotation of valuers
2. Incorporation of DCF
3. Valuation audit trails
64
What is a permissible margin for error in valuations?
10% for a one off commercial property
5% for residential property
65
What is hope value?
Value arising from any expectation that future circumstances affecting the property may change. E.g.
1. Future prospect of planning permission
66
What is marriage value
Created by a merger of interest (physical or tenurial)
Undertake a before and after valuation to calculate it.
67
What is the SDLT for non- dom or mixed use property?
£0 - £150,000: Nil
£150,001 - £250,000: 2%
Over £250,000: 5%
68
What is the SDLT for residential?
£0 - £250,00: Nil
£250,001 - £925,000: 5%
£925,001 - £1.5M: 10%
Over 1.5M - 12%
69
When are higher SDLT payable
1. Second homes (3% above)
2. Buy to let (3%)
70
what are party walls?
A wall that stands astride the boundary of land belonging to more than 1 land owner.
71
When does right of light apply?
After a building has 20 years of interrupted enjoyment of light - damages can be awarded or building scale reduced
72
How is a lease surrender and renewal calculated?
Calculation of a premium to reflect the change in the value of the leasehold interest.
73
What are the special requirements for the valuation of charities?
1. Charities Act 2011 - trustees must obtain valuation prior to disposal
2. Report must confirm the charity has obtained the best terms for the transaction
74
What is a special purchaser?
A buyer for whom a particular asset has special value because of the advantages arising from its ownership of which would not be available to other buyers
75
What is building reinstatement costs?
For building insurance purposes
Cost of reinstating the building without a profit
Can be done using BCIS
Not a written opinion of value and so Red Book not compliant
76
What is the single method of valuing long leasholds?
Rent received less ground rent = net rental income
Capitalise this at approaches yield for remaining lease length
77
What is WAULT
Weighted average unexpired lease term
Weighted by the contracted rent
78
What are the 3 approaches to calculating net effective rent?
1. Straight line
2. Straight line assuming time value of cash flow using a yield
3. Use of DCF
79
How do you calculate net effective rent?
E.g. 1 year rent free on 10 year term:
Take 90% of total rent roll and divide this By the total lease length (10 years in this case). This can then be divided by the sq ft to work out the net effective £psf
80
What is zoning?
A valuation technique, not a method
Used to compare retail property
Rationale is retail property is less valuable further from the street
Halving back principle with 6.1M zones
81
What is a ransom strip?
This is a piece of land which controls the access to develop another piece of land
82
What is the value of a ransom strip?
Could be 15-50% of developable value
83
What is the RICS valuer registration scheme (VRS)
Regulatory monitoring scheme for all valuers carrying out Red Book Global valuations from 2011
Aims to :
1. Improve quality of valuation
2. Meet rics requirements for self retaliation
3. Protect and raise status of valuation profession
84
What are the key changes to the 2024 Red Book?
