Valuation

Question 1

What is the residual method of valuation?

Answer 1

A method to establish how much a purchaser should pay for a development site by deducting costs from the gross development value to find the residual value.

The residual value represents how much the developer can afford to pay for the development site.

Question 2

What is gross development value (GDV)?

Answer 2

The aggregate market value of the development based on the assumption that the development is complete at the date of valuation.

GDV is a key component in the residual method calculation.

Question 3

What costs are deducted from GDV in the residual method?

Answer 3

Costs considered and deducted include:
* Site preparation
* Construction
* Sales and marketing
* Contingency
* Financing fees
* Developer’s profit

Question 4

When is the profit method used?

Answer 4

The profit method is used for trade-related properties where the value is derived from the business and its trading potential.

Examples include hotels, schools, cinemas, and theatres.

Question 5

What is the purpose of the income and expenditure forecast in the profit method?

Answer 5

It is based on historical and comparable information to represent the fair maintainable turnover and profit that a reasonably efficient operator would hope to achieve.

Question 6

What is the depreciated replacement cost method?

Answer 6

A valuation method that indicates value based on the cost to obtain the asset’s modern equivalent, considering deductions for physical deterioration and obsolescence.

Question 7

What is the comparable method of valuation?

Answer 7

A method that uses sales data of recently sold properties focusing on assets that are similar in size, location, condition, and features.

Question 8

What are the different purposes of valuation?

Answer 8

• Valuation for Financial Reporting
• Valuation for Commercial Secured Lending
• Valuation for Residential Mortgage
• Valuation for Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax
• Valuation for Compulsory Purchase and Statutory Compensation

Question 9

What is the RICS Red Book?

Answer 9

A document containing mandatory rules and best practice guidance for asset valuations, including International Valuation Standards.

Question 10

What steps should be taken following a valuation instruction?

Answer 10

• Obtain property details
• Conflict of interest check
• Signed letter of instruction
• Confirm valuation purpose
• Information gathering
• Identify ratings and planning info
• Property inspection
• Research market values
• Compile valuation report
• Internal check and sign off
• Report to client
• Submit invoice

Question 11

What details are typically included in a Bank’s Letter of Instruction for secured lending?

Answer 11

• Borrower
• Property
• Purpose
• Conflicts
• Details of loan
• Report address
• Special assumptions
• Information access details
• Report content requirements

Question 12

What are the different methods of valuation?

Answer 12

• Comparable
• Income method
• Profits
• Residual
• Depreciated Replacement Cost (DRC)

Question 13

What is meant by the term market value?

Answer 13

The estimated amount for which an asset should exchange between a willing buyer and seller in an arm’s length transaction after proper marketing.

Question 14

What is the definition of market rent?

Answer 14

The estimated amount for which a property should lease on the date of valuation between a willing lessor and lessee under appropriate lease terms.

Question 15

What is hope value?

Answer 15

The market value of land based on the expectation of obtaining planning permission for development.

Question 16

What is marriage value?

Answer 16

The extra value that arises from merging two physical or legal interests.

Question 17

What does TEGOVA stand for?

Answer 17

The European Group of Valuer’s Associations, uniting national valuer’s associations from 38 countries to harmonize valuation across the EU.

Question 18

What is the IVSC?

Answer 18

The International Valuation Standards Committee, which publishes valuation standards and procedural guides for asset valuation.

Question 19

What is the difference between specialist properties and specialised properties?

Answer 19

• Specialist: Trading properties designed for specific purposes (e.g., hotels).
• Specialised: Properties rarely sold on the market (e.g., chemical plants).

Question 20

What is the difference between market rent and estimated rental value?

Answer 20

• Market Rent assumes vacant possession and compares with similar properties.
• Estimated Rental Value considers occupancy and specific lease terms.

Question 21

What is the term and reversion approach?

Answer 21

A valuation method considering existing lease terms separately from expected new lease terms for properties with reversionary potential.

Question 22

What is the hardcore/layer approach?

Answer 22

A valuation method that considers current market rent on a perpetual basis and the difference between current and expected rent.

Question 23

What is the definition of equivalent yield?

Answer 23

A weighted average of the net yield from current rental income and future reversionary income.

Question 24

What is the definition of equated yield?

Answer 24

The yield on a property investment that accounts for future income growth, not applicable to reversionary situations.

Question 25

What is goodwill?

Answer 25

An intangible asset in real estate transactions that exceeds the net fair value, often due to brand name and reputation.

Question 26

What are the different types of goodwill?

Answer 26

* Purchased Goodwill: Created when an asset is exchanged above fair market value. * Inherent Goodwill: Derived from factors like location and reputation, not recorded on the balance sheet.

Question 27

What is the difference between a residual valuation and a development appraisal?

Answer 27

* Development Appraisals do not adhere to Red Book standards, while Residual valuations do. * Development Appraisals consider phasing and client input.

Question 28

When would you use the discounted cash flow valuation method?

Answer 28

When there are no comparable market transactions, expected short-term market volatility, or for comparing multiple investments.

Question 29

What factors affect yields?

Answer 29

* Covenant * Location * Specification * Rent levels * Growth potential * Asset management and development value

Question 30

What are deleterious materials?

Answer 30

Materials that affect structural integrity, potentially leading to non-compliance with regulations and decreased property value.

Question 31

What are the main components of a valuation report?

Answer 31

* Tenure * Date of valuation * Inspection extent * Opinion of value * Allowance for VAT * Third party references * Publication clause * Independent valuer * Date of report

Question 32

What are deleterious materials?

Answer 32

Materials considered as prohibited that affect structural integrity, performance, and longevity of a property ## Footnote Deleterious materials can result in non-compliance with building regulations and decrease a property's value.

Question 33

What are the main components of a valuation report?

Answer 33

* Tenure * Date of valuation * Extent of inspection and who inspected * Opinion of value in words and figures * Allowance for VAT * Third party references * Clause prohibiting publication * External or independent valuer * Date of report * Statement that the valuer is qualified

Question 34

How should structural defects be reflected in a valuation report?

Answer 34

* Draw clients' attention to them * Advise them to have a structural survey done * Can't comment on area outside of one's expertise * Seek and obtain cost input to remediate and include within report

Question 35

Are valuers allowed to know the purchase price when valuing?

Answer 35

Yes, the valuer must request and verify it ## Footnote If the valuation differs, the valuer must state why, based on market evidence and bona fide.

Question 36

What can a client do if a valuer is found to be negligent?

Answer 36

The complainant can demonstrate losses and pursue the valuer or valuing company through the courts for the losses incurred ## Footnote The case Merrett vs. Babb proved that valuers, not firms, can be pursued.

Question 37

What should be caveated in a valuation report?

Answer 37

* Publication * Confidentiality * Deleterious Materials * Planning * Taxation * Information supplied * Environmental matters

Question 38

How would you rentalise the reception of an office building?

Answer 38

50% if single tenant; not at all if multi-let

Question 39

What items are contained within your terms of engagement but not referenced within your Valuation report?

Answer 39

Reference of the professional fees for undertaking the valuation

Question 40

What is included in your Valuation Report but not in your Terms Of Engagement?

Answer 40

* Opinion of value * Valuation approach

Question 41

Provide examples of Conflicts Of Interest

Answer 41

* Acting for buyer and seller of a property in the same transaction * Acting for two or more parties competing for an opportunity * Valuing for the lender while advising the borrower * Valuing a property previously valued for another client * Undertaking a valuation for third party consumption where the valuers firm has other fee earning relationships with the client * Valuing both parties' interests in a leasehold transaction

Question 42

What is meant by the term passing rent?

Answer 42

The annual rental income currently generated by a property as recorded on the balance sheet date ## Footnote Passing rent excludes any rental income when a rent-free period is in effect and is based on actual income received.

Question 43

Why does the report include an ‘opinion’ and not an actual valuation?

Answer 43

Case law has found that valuations in accordance with the RICS Red Book cannot be wrong if based on opinion ## Footnote If the valuation is within reasonable tolerances, the surveyor cannot be considered wrong in their opinion.