Valuation

Question 1

Can you explain what a Special Purchaser is?

Answer 1

Where a particular asset has special value to a particular purchaser because of advantages arising from its ownership that would not be available to other buyers in a market.

Question 2

What is the All Risks Yield (ARY)?

Answer 2

This is a yield which reflects all the prospects and risks attached to a particular investment

Question 3

What is a true yield?

Answer 3

This yield assumes that rent or any income is paid in advance and not in arrears

Question 4

Define what a yield is?

Answer 4

It is the annual return on an investment expressed as a percentage of capital value.

Question 5

How do you calculate the yield?

Answer 5

The income/capital value (price paid) x100%.

Stand back and look and see if the yield looks reasonable based on the type of investment.

Question 6

What are the five methods of valuation?

Answer 6

Comparable
Investment
Residual
Depreciated Replacement Cost
Profits

Question 7

What is another name for the DRC method of valuation?

Answer 7

Contractors Method

Question 8

What is another name for the Profits Method of valuation?

Answer 8

Receipts and Expenditure

Question 9

What are the different valuation approaches?

Answer 9

1. Market
2. Income
3. Cost

Question 10

What is the definition of Market Value?

Answer 10

Estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

Question 11

Where can you find the definition of Market Value?

Answer 11

VPS 2 Basis of Value in the RICS Red Book

Question 12

What is the RICS Red Book?

Answer 12

The Red Book is a set of global standards which set out procedural rules and guidance for written valuations.

Question 13

What is the full title or what is another name for the RICS Red Book?

Answer 13

RICS Valuation Global Standards 2025 31 January

Question 14

What is the purpose of the Red Book?

Answer 14

To provide greater consistency, objectivity and transparency with valuations.

Question 15

Why does the Red Book get updated?

Answer 15

The International Valuation Standards (IVS) are updated every two years and as such the RICS Red Book is updated to align with the updated IVS.

Question 16

What does IVS stand for?

Answer 16

International Valuation Standards

Question 17

Who creates the IVS?

Answer 17

The International Valuation Standards Council (IVSC) - which includes members including RICS.

Question 18

What does ESG stand for?

Answer 18

Environmental, Social and Governance.

Question 19

What does PS 1 mean in the Red Book?

Answer 19

Professional Standard 1 which requires compliance with the set standards where a written valuation is provided.

Question 20

What does PS 2 mean in the Red Book?

Answer 20

Professional Standard 2 which covers ethics, objectivity and disclosures

Question 21

Why would you adopt a gross yield?

Answer 21

To determine the market value without any deductions for purchasers costs and taxes.

Question 22

Name some factors that you would adjust for when using the comparable method of valuation?

Answer 22

• Locality
• Size
• Age
• Build/Construction type
• Accommodation
• State of repair
• Material condition
• Any changes in the market since the transaction
• Level of parking.

Question 23

When might a valuation not be found in the Red Book?

Answer 23

• When carrying out a market appraisal
• Litigation of rent reviews
• Internal valuations
• Expert witness - duty to the court
• Statutory Valuations

Question 24

Can you give some examples as to why a valuation may be needed?

Answer 24

• Taxation (CGT, IHT, Business Rates, Council Tax)
• Loan security
• Mortgages
• For property Insurance
• Financial Planning.

Question 25

What does investment value mean?

Answer 25

The value of an asset to the owner or a prospective owner for individual investment or operational objectives.

Question 26

What does Fair Value or Fair Market Value mean?

Answer 26

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date (IFRS 13).

Question 27

When is Fair Value needed?

Answer 27

Used for accounts and various accounting purposes

Question 28

What are Terms of Engagement (TOEs)?

Answer 28

The contract with a client detailing the work assignment. It can be used as an important defence against any hypothetical negligence claims.

Question 29

What is the cost approach based on?

Answer 29

Gives an indication of value using the economic principle that a buyer would pay no more for an asset than the cost to get an equal asset by construction or purchase. E.G. Residual method and Depreciated replacement cost method.

Question 30

When would DCF be a suitable alternative to the traditional valuation methods?

Answer 30

To determine market value and investment value (or worth).

Question 31

Why would you not use DCF?

Answer 31

The method is too long and time consuming. It may also go into a level of detail that the client did not need or request.

Question 32

What is the income approach based on?

Answer 32

Capitalisation or conversion of present and future incomes to a single capital value Two methods: 1.) capitilaisation of a conventional market based income. 2.) discounting a income projections Deciding by consideration of what is standard in the market. E.g. investment and profits method

Question 33

How do you carry out a valuation using the comparable method?

Answer 33

1. Look at subject property (sale and letting evidence) 2. Find and Select comps (verify info) 3. Analyse comps 4. Display comps and subject in a summary matrix/table 5. Apply appropriate weighting to chosen comps 6. Value property by adjusting sales prices of these comps 7. Stand back and look to see if reasonable.

Question 34

In the hardcore method of valuation, what does top slice mean?

Answer 34

Top slice is the amount of rent that is above the market rent.

Question 35

What valuation technique might you use to value a shop or office which is under-rented?

Answer 35

The Term and Reversion Method.

Question 36

What are the headings you would expect on a RICS style red book valuation report?

Answer 36

* Identification and status of the valuer * Identification of the client * Purpose of the valuation * Identification of the asset/property * Basis of value * Valuation date * When it was inspected or how you investigated * Extent of your investigation * Nature and sources of information used * All assumptions to be made * Restrictions on use, distribution and publication of the report * Confirmation the valuation complies with IVS * Valuation approach and reasoning * Amount of the valuation * Date of the valuation report * Commentary on any material uncertainty * Statement on any limitations

Question 37

How would you carry out a comparable valuation?

Answer 37

1. Consider the attributes of the subject property (e.g. any historic sales and/or lettings). 2. Identify comparables. 3. Analyse comparables. 4. Display comparables and the subject in a summary table/matrix. 5. Adjust according to the differences between the comparables and the subject property. 6. Value the property. 7. Consider any factors that would influence the property's value to the relevant valuation date i.e. consider market movement, inflation and any macroeconomic factors. 8. Stand back and look.

Question 38

Should you re-value a property without inspecting it?

Answer 38

Ideally the property should be inspected: 1) if a substantial of time has elapsed since the previous valuation 2) If there has been a material change in the locality 3) If there has been any changes to the property i.e. conversion or extension.

Question 39

What is Net Initial Yield?

Answer 39

The Net Initial Yield is the return on an investment as at the date of purchase. It can be calculated by dividing the net operating income (NOI) by the purchase price.

Question 40

Can you define what the equivalent yield is?

Answer 40

The equivalent yield is a single weighted average yield that can be used to capitalise both the term and reversionary incomes. It is the internal rate of return of a growth implicit cash-flow, meaning it accounts for any potential future growth in the income stream.

Question 41

When do we use Profits method of Valuation?

Answer 41

* Used for valuations of trade related properties * Where value of property relates to its trading profitability and potential * Establishes the Fair Maintainable Operating Profit (FMOP) capable of being generated by a reasonably * Efficient Operator (REO) *Examples include: Pubs Hotels Petrol stations Theme Parks Children’s nurseries Leisure and healthcare Care homes Must use audited accounts, preferably over three years Annual turnover

Question 42

Talk me through the methodology of the Profits method. Methodology:

Answer 42

Methodology: * Less costs / purchases = gross profit * Less reasonable working expenses = unadjusted net profit * Less operator’s remuneration = adjusted net profit known as Fair Maintainable Operating Profit (FMOP) * Capitalised at appropriate all risks yield to achieve market value * Cross check with comparable sales if possible The value reflects the trading potential of the property and it includes the property interest, business and locational good will and fixtures and fittings all reflected as a single figure. The Income and expenditure forecast is based on historical and comparable information. The actual performance is compared with similar trade properties to determine whether the fair maintainable turnover is realistic based on current market conditions.

Question 43

What is the income approach based on?

Answer 43

Capitalisation or conversion of present and future incomes to a single capital value Two methods: 1) Capitalisation of a conventional market based income. 2.) Discounting an income projections Deciding by consideration of what is standard in the market. E.g. investment and profits method

Question 44

What is the latest RICS Red Book?

Answer 44

The latest RICS Red Book has become effective from the 31 January 2025.

Question 45

What are the changes to the RICS Red Book?

Question 46

What are the checks you do before undertaking a valuation?

Question 47

What are the checks you do before undertaking a valuation?

Question 48

Can you do all the methods of valuation?

Question 49

What is the Present Value of £1 (PV) used to calculate?

Answer 49

The value today of a cash sum that will be received in the future.

Question 50

What is the present Value of £1 per annum?

Answer 50

This is also known as Years Purchase (YP). It is used to calculate the capital sum of a steady annual income.

Question 51

What is a special assumption?

Answer 51

An assumption that either differs from facts at the valuation date or would not be made by a typical market participant.

Question 52

What is an assumption?

Answer 52

Something that is reasonable for the valuer to accept without the need for specific investigation or verification.

Question 53

Is DCF now mandatory?

Answer 53

Why has DCF been proposed as the primary method of investment valuations?

Question 54

What is the hierarchy of evidence?

Answer 54

Category A - direct comparables (sales and asking prices) Category B - General market data (indices, historic evidence, demand and supply data) Category C - Other sources (transactions on other types, stock market movements)