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Valuation Flashcards

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1
Q

Are you aware of the updated framework?

A

Yes the Valuation Red Book was updated from 31st January 2025.

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2
Q

Why was there an update?

A
  • Reflect Changes to latest version of international valuation standards
  • Incorporate changes from RICS valuation review.
  • Futureproof Valuation Practice
  • Help valuers provide best standard of service
  • Simplify guidance
  • Revised order of VPS’s to align with IVS
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3
Q

What is the structure of the new Red Book

A
  • Introduction
  • Glossary
  • Professional standards (PS1 and PS2)
  • (VPS’s) Valuation technical and performance standards
  • (VPGs) Valuation practice guidance applications
  • (IVS) International valuation standards
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4
Q

Which parts of the structure are mandatory?

A

Part 3 and 4

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5
Q

Which parts of the structure are advisory?

A

Part 5

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6
Q

What is PS1?

A

Compliance with standards and practice statements where a written valuation is provided.

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7
Q

What is professional standard 2?

A

Ethics, competency, objectivity and disclosures.

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8
Q

What does ps2 mean for members?

A
  1. Members undertaking valuations must act in accordance with RICS Rules of Conduct 2021.
    2 Valuer and firm must act objectively and independently, must not be influenced by any situation which could threaten professional objectivity.
    Should apply professional scepticism when reviewing information.
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9
Q

What are the Valuation Technical and Performance Standards (VPS)

A

VPS 1 - Terms of Enagement
VPS 2 - Bases of Value, assumptions and special assumptions
VPS 3 - Valuation approaches and methods
VPS 4 - Inspections and investigations
VPS 5 - Valuation models
VPS 6 - Valuation reports

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10
Q

Which VPS is new in the latest addition?

A

VPS 5 - Valuation models

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11
Q

Where does the new Red Book Apply?

A

Globally

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12
Q

What are the 5 methods

A

Investment
comparable
residual
profits
contract

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13
Q

What is a yield

A

return on investment

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14
Q

What are the different types of yields

A

All risk yield
Gross yield
Initial yield
equivalent yield
nominal yield

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15
Q

What is the Red Book?

A

The Red Book is a publication offering best practice and guidelines for surveyors and valuers.

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16
Q

When does the Red Book not apply to a valuation?

A
  • Agency purposes
  • Providing valuation advice in preparation for or during negotiations or litigations.
  • Acting or preparing to act as an expert witness
  • Performing statutory functions
  • providing advice for internal purposes.
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17
Q

Definition of Market Value

A

Estimation for which asset or liability should exchange for on the valuation date between a willing buyer and seller in an arms length transaction after proper marketing where the parties had eached acted knowledgeably and without compulsion

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18
Q

Definition of Market Rent

A

The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion

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19
Q

Definition of Fair Value

A

Price that would be paid to sell an asset or transfer liability in orderly transaction between market participants at measurement date.

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20
Q

Definition of Investment Value

A

Value of an asset to owner or prospective owner for individual investment or operational objectives.

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21
Q

For your investment comparables what did you look for?

A

I could use national evidence as long as it was in a similar submarket to the property.

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22
Q

What is special purchaser?

A

A buyer who has a a unique advantage compared to other market participants.

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23
Q

What is a reversionary asset?

A

A property that is under rented.

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24
Q

How would you value a reversionary asset.

A

Term and reversion method of valuation?

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25
What is the method?
You value the term at a specific yield, and then you value the reversion at another yield.
26
What's the difference between a Red Book Valuation and a brokers opinion of value?
You can rely on a Red Book valuation for funding.
27
What is an equivalent yield?
Weighted average between reversionary and initial yield.
28
what is a residual valuation?
Method used in Real Estate to determine the value of an asset
29
How do you do a residual valuation?
Determine GDV Subtract development cost Deduct developers profit Arrive at residual land value
30
If property is rack rented what method do you use?
Investment method
31
If property is under-rented what method?
Term and Reversion
32
If property is overrented what method?
Hardcore and Topslice
33
What is an all risk yield
rate of interest used in a valuation of a fully let property @ market rent to reflect the risks
34
What is an reversionary yield?
current price on investment let below market rent
35
What is an initial yield?
Simple income yield for current income and price
36
What is a true yield?
Assumes rent is paid in advance not arrears
37
What is a nominal yield?
Annual income/initial cost x 100
38
Equivalent yield
Average weighted yield of initial and reversionary
39
What is an implicit yield?
A yield that is not explicitly stated or calculated directly but rather implied.
40
What is an explicit
An explicit return relates to a rate of return derived from a DCF model, where future cash flows are projected and discounted back to their present value.
41
Talk me through a residual valuation
Determine the Gross Development Value Calculate total development costs: - Construction costs - Professional fees - Site prep/demolition - Financing costs - Marketing and Sales costs - Contingency costs - Developers profit margin Gives you residual value.
42
What is the contingency cost for a residual valuation on an industrial spec unit?
3-5%
43
What is developers profit likely to be on a speculative industrial scheme
15/20%
44
What is the profit likely to be on a pre-let?
10%
45
If unit is under rented what method do you use?
Term and Reversion
46
How do you calculate a rental yield.
Income/price x 100
47
How would you define A Years Purchase?
Dividing 100 by the yield.
48
How do you calculate a years purchase?
Calculated by dividing 100 by the Yield.
49
What is a key factor you consider when determining a yield?
Risk is the major factor. Also consider: - Prospects for rental growth - Quality of location and covenant - Use - Lease terms - Voids
50
How do you calculate the Internal Rate of Return?
You could use a DCF calculation to find the internal rate of return.
51
What are the current yields expected for prime and secondary industrial properties?
5.25% - 5.5% (Prime) 6.0% - 7.25% (Secondary)
52
Can you tell me the levels of Stamp Duty Land Tax for commercial properties?
Up to £150,000 - Zero £150,000 - £250,000 - 2% £250,001+ - 5%
53
Why undertake valuation due diligence
To check there are no material matters which could impact upon valuation. Such as Check for flood risk Environmental matters Contamination EPC Asbestos register Business rates Equality act compliance
54
What is VPS 1
Terms of Engagement (Scope of work)
55
What is VPS 2
Bases of value, assumptions, special assumptions
56
What is VPS 3
Valuation approach and methods
57
What is VPS 4
Inspections investigations and records
58
What is VPS 5
Valuation models
59
What is VPS 6
Valuation reports
60
What is included in valuation TofE
Identification and status of valuer Client Identification of any other users Asset to be valued Currency Purpose of valuation Basis of value Valuation date Extent of investigation Nature and source of information Assumptions and special assumptions Format of report restriction for use Confirmation of Red Book compliance Fee basis Complaints handling procedure Statement that valuation may be subject to RICS compliance Limitation on liability
61
What are the minimum requirements to be stated within a report
Identification and status of the valuer Client and other intended users Asset to be valued Purpose of valuation basis of value valuation date extent of investigation nature & source of information relied upon Assumptions & special assumptions restrictions on use and distribution instruction undertaken in accordance with IVS Valuation approach and reasoning Valuation figure
62
What are the 3 valuation approaches set out in IVS 105
Income Cost Market
63
When would you use the comparative method of valuation?
For a direct comparison. For investment or vacant possession properties.
64
When would you use the Investment method of valuation?
Use a rent and yield, when there is an income stream to value. Loan Security Purpose. Regulatory Valuations (Relied upon by 3d parties, IPOs, Account valuations
65
How do you do the conventional investment method?
MR multiplied by years purchase to calculate market value.
66
How do you use the Term and Reversion method
Term is capitalised until review or expiry at an initial yield. Reversion to market rent valued in perpetuity at reversionary yield.
67
How do you use the Layer/Hardcore method
Income flow divided horizontally Bottom slice = Market Rent Top slice = Rent passing less Market Rent until next lease event Higher yield applied to top slice (additional risk) Different yields used to depend on comparable investment evidence and relative risk
68
What is a loan security valuation?
Conducted to determine the value of an asset or property that is being used as collateral for lending.
69
Why would you do a loan security valuation?
New finance/refinance Mortgage/Lending Financial Covenant
70
When would you use the Residual method of valuation
To get the value of land. Development appraisal.
71
When would you use the profits method of valuation?
Used for valuations of trade related properties, where there is a monopoly position (Pubs, petrol stations, hotels). Principle that the value of the property depends on the profit generated from the business.
72
What is the method for a profits valuation?
Annual turnover less costs/ purchases = Gross Profit Less reasonable working expenses = unadjusted net profit Less operators remuneration = Adjusted net profit known as the Fair Maintainable Operating Profit (FMOP)
73
When would you use the DRC or Contractors method of valuation?
For specialist properties with no readily available comparable evidence. Used for accounts purposes. Rating valuations
74
What are the steps to a DRC valuation
Value of land in its existing condition. Add current cost of replacing the building, plus fees, less discount for depreciation
75
What are some examples of the due diligence you would undertake for a Valuation?
You could check: - Asbestos Register - Business rates - Contamination - Equality act compliance - Environmental matters - EPC rating - Flooding (Environmental agency website) - Health and Safety compliance - Highways - Legal title
76
Why would you use fair value than market value?
To value an asset is required for a specific purpose i.e pension fund purposes
77
What is the difference between fair value and market value?
Fair value represents an assets true worth. Market value is the value if it was to sell at a specific date in the current market.
78
What are the current stamp duty rates
Up to £150,000 = 0% Next £100,000 = 2% The remaining amount = 5%
79

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