Valuation Flashcards
(121 cards)
1
Q
What is the difference between an Internal and External valuer?
A
Internal: Employed by the company to value an asset of the company. For internal use only. No 3rd party reliance.
External: Has no links with the asset or the client.
2
Q
What does the Red Book look like?
A
Grey front page with a red globe on the front
3
Q
How is the ‘Red Book’ structured?
A
- Introduction
- Glossary
- Professional Standards
- Valuation Technical and Performance Standards (VPS)
- Valuation Practice and Guidance applications (VPGA’s)
- International Valuation Standards
4
Q
What is the proper name of the ‘Red Book’?
A
The RICS Valuation Global Standards
5
Q
What are the 3 steps to take before undertaking a Valuation instruction?
A
- Competence
- Independence
- Terms of Engagement
6
Q
Name 5 areas of Due Diligence that should be carried out before a Valuation instruction?
A
- Asbestos Register
- Rateable Value
- EPC Register
- Flood Zone
- Legal Title & Tenure
7
Q
What are the 5 Methods of Valuation?
A
- Comparable Method
- Residual Method
- Profits Method
- Investment Method
- DRC (Depreciated Replacement Cost) Method
8
Q
What are the 3 Valuation approaches?
A
- Income
- Cost
- Market
9
Q
What Valuation methods would be involved within a Cost Valuation approach?
A
- DRC Method
10
Q
What Valuation methods would be involved within a Income Valuation approach?
A
- Profits Method
- Investment Method
- Residual Method
11
Q
What Valuation methods would be involved within a Market Valuation approach?
A
- Comparable Method
12
Q
What is the main RICS Professional Standard for the Comparable method?
A
RICS Professional Standard: Comparable Evidence in Real Estate Valuation, 2019
13
Q
What is the 6 step Comparable Evidence Methodology?
A
- Search for Comps
- Confirm and verify details
- Assemble comps into a schedule
- Adjust comps using the ‘Hierarchy of evidence’
- Analyse comps to form Opinion of Value
- Report value and prepare file note
14
Q
Under the RICS Professional Standard: Comparable Evidence in Real Estate Valuation, 2019 how should Comparable evidence be weighted?
A
Hierarchy of Evidence:
1. Direct Comparable (near-identical properties)
2. General Market Data (historic evidence)
3. Other sources (transactional data for other uses classes etc.)
15
Q
When would you take an Investment Method approach?
A
When their is an ‘income stream’ to be valued
16
Q
What is the basic premises of the Investment Method?
A
‘This approach applies a net initial yield to the passing rent (if
appropriate) to arrive at a Market Value after deducting standard purchaser’s costs’
17
Q
What factors would have an impact on the adopted Net Initial Yield? (Name 5)
A
- Location
- Physical characteristics of the property
- Repair and Delaps of the property
- Level of passing rent in comparison to Market Rent
- Covenant strength
18
Q
What are the 3 main Investment Valuation Methods?
A
- ‘Conventional Method’
- ‘Term & Reversion Method’
- ‘Hardcore Method’
19
Q
Within an Investment Valuation what is the basic premises of the ‘Conventional Method’?
A
Applying a Yield to the Passing Rent to give a Capital Value
20
Q
Within an Investment Valuation what is the basic premises of the ‘Term & Reversion Method’?
A
- The passing rent is capitalised until the next lease event at a Yield.
- The rent then reverts to Market Rent into perpetuity.
21
Q
Describe the formal for a term and reversion valuation?
A
- Current rent: £40,000 per year
- Market rent: £50,000 per year
- Lease expires in 5 years
- Capitalisation rate (yield): 8%
- Present value factor for 5 years at 8%: 0.6806
- Present value of £1 after 5 years at 8%: 0.6806
Step One: Term Value
= £40,000 × 5 × 0.6806 = £136,120
Step Two: Reversionary Value
= £50,000 ÷ 0.08 × 0.6806 = £425,375
Step Three:
- Total Value = £136,120 + £425,375 = £561,495
0.6806 is calculated:
1 over (1+ 0.08) to the power for 5
0.08 = Yield
5 = term remaining
22
Q
Within an Investment Valuation what is the basic premises of the ‘Hardcore Method’?
A
- An Income Flow is divided horizontally
- Bottom Slice = Market Rent
- Top Slice = Rent Passing less Market Rent until the next lease event
- A higher Yield is applied to reflect the additional risk
23
Q
Describe the formal for a term and reversion valuation?
A
Let’s say:
- Current rent = £40,000
- Market rent (ERV) = £50,000
- Lease expires in 5 years
- Yield (ARY) = 8%
- Discount rate = 8%
- PV factor for 5 years at 8% = 3.9927 (annuity factor)
Step 1: Capitalise Market Rent
£50,000 / 0.08 = £625,000
Step 2: Calculate Shortfall
£10,000 per year (difference) × 3.9927 = £39,927
Step 3: Subtract Shortfall
£625,000 - £39,927 =£585,073
0.39927 is calculated:
PV(annuity)= 1 - (1+0.08) -5 / 0.08
24
Q
When would a ‘Term & Reversion Method’ be used?
A
When a property is ‘under-rented’
25
When would a 'Hardcore Method' be used?
When a property is 'over-rented'
26
Under a Hardcore Method, does the 'Top Slice' have a higher yield applied to it?
Yes - A higher Yield or cap rate is applied to reflect the additional risk
27
What is NIY stand for?
Net Initial Yield
28
What does NIY take into account?
Purchaser Costs
1. Stamp Duty
2. Agency Fees
3. Solicitors Fees
29
What roughly are purchasers costs as a %?
How is it calculated?
6.8% in total
- 5% stamp Duty
- 1% Agency fees (Plus VAT)
- 0.5% Agency fees (Plus VAT)
30
What is an 'All Risks Yield'?
- Rate of intertest used for fully let properties at Market Rent.
- Reflects all the risks of the investment
31
What is a Gross Yield?
Where would a Gross Yield be used?
A 'flat' yield, it does not adjust for purchasers costs.
At Auction
32
What is the basic premise of the Profits Method?
The value of the property depends on the profit generated from the business, not the properties physical location
33
What is the definition of the Profits Method?
- 'An assessment of the FMT for a particular business,
- being the level of trade that a REO would expect to achieve from all forms of income
- when running the business in a proper manner
- on the assumption that the property is property maintained, repaired and decorated.'
34
What would be required to carry out an accurate Profits Method Valuation?
Last 3 years Audited Accounts
35
What is the basic Profits Method calculation where accounts are provided?
= Turnover
- Less costs e.g. buying beer and supplies
= Gives Gross Profit
- Less Working Expenses e.g. staff costs
= Net Profit
- Less operators remuneration
= Gives FMOP
A 'multiplier' is then applied to give Market Value
Then 'sense checked' against comparable evidence
36
What are the steps to a Profits Method calculation?
Step 1:
- Assessment of the FMT that could be generated by a REO
Step 2:
- Assessment of potential gross profit resulting in FMT
Step 3:
- Assessment of FMOP
Step 4:
- FMOP is capitalised against a 'years purchase multiplier'
37
Where would the profits method apply?
Where the value of the property depends on the profitability of its business and trading potential
38
What RICS guidance is there for the Valuation of individual
trade related properties
VPGA 4
39
What assumptions would you have for a Profits method approach?
That the property is...
1. Equipped
2. Repaired
3. Maintained
4. Decorated
40
What is EBITDA?
Earnings before Interest Taxation, Depreciation and Amortization
41
What is an REO?
Reasonably Efficient Operator
42
Give an explanation of what a REO is
- The concept that a valuer is assuming that the operator or tenant etc. is acting in an efficient manner.
- It involves estimating the trading potential rather than 'passing trade'.
- It excludes goodwill
43
What is FMOP?
Fair Maintainable Operating Profit
44
Are EBITDA and FMOP the same thing?
Roughly, Yes.
45
What is the definition of Market Value?
The amount at which an asset or liability can exchange:
- On a Valuation Date
- Between a willing seller and a willing buyer
- In an arms length transaction
- After proper marketing
- Where both parties have acted knowledgably, prudently and without compulsion
46
What is the definition of Market Rent?
The amount at which a real property can be leased:
- On a Valuation Date
- Between a willing lessor and a willing lessee
- On appropriate lease terms
- In an arms length transaction
- After proper marketing
- Where both parties have acted knowledgably, prudently and without compulsion
47
What is the definition of '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'
- RICS view is that this value is generally consistent with Market Value
48
What is the definition of 'Investment Value'?
- ‘The value of an asset to a particular owner,
- or prospective owner
- for individual investment
- or operational objectives'
Often used as a measure of worth to reflect the value against the client's own investment criteria
49
What is the definition of 'Hope Value'?
'The value arising from any expectation that future circumstances affecting the property may change'
- E.g. future hope of securing planning permission
50
What are the 6 Bases of Value?
1. Market Rent
2. Market Value
3. Fair Value
4. Investment Value
5. Equitable Value (not used in UK)
6. Liquidation Value (not used in UK)
51
When did the latest version of the 'Red Book' come into effect?
31st January 2025
52
What are the key changes to the 'Red Book' effective 31st January 2025?
- Greater focus on ESG and its impact on Valuations
- Comment on the use of AI in Valuations
- Revised VPS'
- VPGA 11 relates to relationship with Auditors
53
What are PS's?
RICS Professional Standards
54
What does PS 1 cover?
Compliance with standards where a written valuation is provided
55
What are the 5 exemptions under PS1?
1. Providing agency or brokerage services in the acquisition of disposal of one or more assets
2. Providing valuation advise in preparation of negotiations or litigation
3. Acting as an expert witness
4. Performing statutory functions
5. Providing valuations toa client purely for internal purposes, without communication to a 3rd party
56
What does PS 2 cover?
RICS Professional and Ethical Standards
57
What must RICS members do under PS 2?
- Members undertaking Valuations must act in accordance with the RICS Rules of Conduct, 2021
- The Valuer and Firm must act objectively and independently always and not be influenced by any situation which could threaten professional objectively
58
When reviewing data what must Valuers do?
Apply 'Professional Scepticism' before relying on data
59
What are VPS's
Valuation technical & Performance Standards
60
Are Valuation technical & Performance Standards mandatory?
Yes
61
How many VPS's are there?
6
62
What does VPS 1 relate to?
Terms of Engagement
63
Under VPS 1 how many many minimum matters are there for Terms of Engagement?
19
64
Name 5 of the 19 minimum matters required under VPS 1 for Terms of Engagement?
1. Identification and status of the valuer
2. Identification of client
3. Identification of any other intended users
4. Asset to be valued
5. Currency
6. Purpose of valuation
7. Basis of valuation
8. Valuation date
9. Extent of investigation
10. Nature and source of information
11. Assumptions and special assumptions
12. Format of the report
13. Restrictions for use, distribution and publication
14. Confirmation of Red Book Global / IVS compliance
15. Fee basis
16. Complaints handling procedure to be made available
17. Statement that the valuation may be subject to compliance by RICS
18. Limitation on liability agreed
19. Consideration of any significant environmental, social and governance (ESG) factors
65
What does VPS 2 relate to?
Bases of Value, Assumptions and Special Assumptions
66
What does VPS 3 relate to?
Valuation Approaches and Methods
67
What does VPS 4 relate to?
Inspections, Investigations and Records
68
What does VPS 5 relate to?
Valuation Models (New in 2024)
69
What does VPS 6 relate to?
Valuation Reports
70
How many requirements are there under VPS 6 (Valuation Reports)?
Name 5 requirements.
17
1. Identification and status of the responsible valuer
2. Client and any other intended users
3. Purpose of the valuation
4. Identification of the asset(s) to be valued
5. Basis of value
71
What is Marriage Value?
The value in bringing property interests together, it could be physical or tenurial
72
What is a Ransom Strip?
A piece of land that completely or partially stops the development of another piece of land
73
What is the Case Law for Ransom Strips?
Stokes vs Cambridge Corporation 1961
74
What precedent did Stokes vs Cambridge Corporation 1961 set?
That the value of a Ransom Strip is enhanced by 1/3.
75
What is the definition of Margin of Error?
The permissible range allowed by courts, for example in respect to valuation.
76
What did Singer & Friedlander Ltd v J D Wood 1977 establish?
Established that the Margin of Error would be narrower for easier for more simple valuations and wider for more complex valuations.
77
What did K/S Lincoln & Others v CBRE 2010 establish?
Established a Margin of Error of:
- 5% for standard Residential Property
- 10% for 'one off' commercial property
- 15% if a property has exceptional features
78
What are VPGA's
Valuation Practice Guidance Applications
79
How many VPGA's are there?
11
80
What does VPGA 11 relate to?
Relationship with auditors
81
What does VPGA 2 cover?
What does VPGA 2 note?
Valuations for secured lending.
Notes that:
- 'Any previous, current or anticipated involvement with the prospective borrower or the property to be valued must be disclosed to the lender'.
- If involvement creates a Conflict of Interest then the instruction should be declined.
82
What is an assumption in valuation?
Where it is reasonable for the valuer to accept that something is true without the need for specific investigation
83
What are special assumptions?
Give an example.
An supposition that is taken to be true and accepted as fact, even though it is note true.
Providing a valuation basaed on getting VP when a tenant was in occupation.
84
What are the Stamp Duty thresholds for Resi Property as of 1st April 2025?
Up to £125,000 - 0%
£125,001 to £250,000 - 2%
£250,001 to £925,000 - 5%
£925,001 to £1.5m - 10%
Over £1.5m - 12%
85
What are the Stamp Duty thresholds for Commercial Property as of 1st April 2025?
- £0 - £150,000 = 0% Stamp Duty
- £150,001 - £250,000 = 2% Stamp Duty
- Over £250,000 = 5% Stamp Duty
86
What does WAULT stand for?
Weighted Average Unexpired Lease Term
87
What is the basic premise of a WAULT?
Its a calculation used when valuing an asset of multi-occupied investments
88
Would a rent free period effect headline rent?
Yes
89
What is Secured Lending or Loan Security?
Can a surveyor see the loan terms before doing a Loan Sec Valuation?
Where a lender takes a legal charge over a property as security for a loan, such as a mortgage.
Yes, a surveyor can see the loan terms.
90
What factors would make a property suitable for loan security?
- Having a 'clean title' with could there be any potential ownership disputes?
- Property condition - is the property in good structural repair?
- Local market - high demand areas offer better security
91
What is Zoning (ITZA)?
A form of Valuation Analysis commonly used to compare retail properties
92
When would Zoning (ITZA) be used?
When Valuing Retail properties.
93
What is the basic premise of Zoning (ITZA)?
That the first 20 ft (6.1m) of a retail property are the most valuable. Zone B, C etc. past that are less valuable.
94
How could natural Zoning occur?
When a retail property is 'oddly shaped'.
95
Why would you compare ITZA or Zone A values or measurements?
Using ITZA or Zoning helps to give a standardised value across different shop sizes and layouts
96
Under what circumstances can a material change be made to the report after the draft is issued?
A report can only be changed if...
- New evidence is found/brought forward
- Can under no circumstances be influenced by the client/borrower
97
What does VPGA 4 cover?
Valuation of individual trade related properties
98
Where would a Gross Yield apply? What type of property?
Residential Property
99
Under VPGA 2 - How long must a valuer disclose previous involvement with a borrower or property when assessing independence for secured lending?
24 months
100
What does 'Rack-Rented' mean?
Means that a property is let at 'market rent'
101
What is an Equivalent Yield?
An average weighted yield when a reversionary property is valued using an initial and reversionary yield
102
What is the UK National Supplement?
The UK's implementation of the RICS Valuation Global Standards
103
What parts of the Red Book are mandatory and what parts are guidance?
- Mandatory: PS's & VPS's
- Guidance: VPGA's (in the name VPGA)
104
For your Loan Sec example why would being located next to the Brewery have a 'material impact' on the property?
- Low Supply Costs
- Increased 'footfall' in association with the brewery
105
For your Loan Sec example what factors made is suitable for loan security?
- Good standard of repair
- In good operational condition
- Strong road-side location
106
For your Loan Sec example, what other factors did you considered when judging whether the pub was suitable for loan security?
- Economic Factors - base rate etc.
- Pub Market - rising labour costs / rates relief
107
For your Loan Sec example, are you as a graduate / non registered valuer able to give an opinion on Loan Security?
- No, however, I drafted the report and provided my findings to a Director in my team who confirmed by findings
108
How would you assess the strength of a businesses when doing an investment method valuation?
By using a Dun and Bradsheet Report for example.
- Assesses the Risk of the businesses Failure
- Gives a tenant score
109
What impact would a weaker covenant have on an investment method?
It would be reflected within my report and a higher yield would be applied to reflect the additional risk.
110
How would you approach a Residual Method Valuation?
- I don't encounter Residual Appraisals frequently.
- Within my firm order to do one at my firm I must be sat within the Development team for PII because of the inherent risk
However, I understand that you get to a Residual Value by:
- GDV - Total Costs = Residual Value
111
What costs are associated within a Residual Appraisal? (7 areas)
1. Building costs (sourced from BCIS)
2. Professional Fees (10%)
3. Finance Costs
4. Agency Fees (2%)
5. Contingency (5%)
6. CIL
7. Developers Profit (15-20%)
112
For Accounting Purposes what would be your Basis of Value?
Fair Value rather than Market Value
113
What type of analysis would you do for a Loan Sec Valuation?
Why would you included one?
- SWOT Analysis
- Outlines potential threats to a lender
114
Why would you value a property with a special assumption of Vacant Possession?
- As a 'Worse Case Scenario'. what value does the property hold vacant
115
Under the RICS UK National Supplement what is the valuer rotation scheme and what are the timings?
It allows for improve impartiality in valuations
- For a firm an asset can be valued for a max of 10 years
- For an individual an asset can be valued for a max of 5 years
116
Within Loan Security what are the sources of Debt?
- Primary debt (e.g. from banks)
- Secondary debt (e.g. from special investors)
primary debt repayments take precedence
117
What part of the Red Book relates to accounting valuations?
VPGA 1 (Valuation for inclusion in financial accounts)
118
Why is a Loan Security Valuation deemed to be more risky?
Because there is a following transaction based off of the evidence that you are providing
119
What is the role of debt financing within the property market?
To release funds into the market and increase liquidity
120
What is 'gearing'?
The level of debt held against a property
121
Where would you carry out a valuation?
- Accounting purposes (VPGA 1)
- Loan Security Purposes (VPGA 2)
- For lease events e.g. rent reviews or lease renewals
