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Valuation Flashcards

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1
Q

What valuations are exceptions to the Red Book?

A

Internal purposes
Agency/brokerage work prior to acquisition or disposal instructions
Statutory function
Expert witness
Negotiation or litigation

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2
Q

What valuations are carried out for Statutory Functions?

A

lease renewal (see S34 of 1954 Act)
rating
compulsory purchase

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3
Q

Purpose of U.K. National supplement?

A

supplement Red Book
ensured U.K. valuations are consistent with U.K. accounting standards

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4
Q

What is the full title of the Red Book?

A

RICS Valuation - Global Standards Oct 2021, Effective 31st Jan 222

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5
Q

Uk National Supplement?

A

RICS Global Standards : National UK Supplement 2023 Edition, Effective May 1st 2024

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6
Q

Who are the International Valuation Standards Council?

A

non profit organisation that set the global standards for valuation
RICS are a member and sponsor of IVSC

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7
Q

To what valuations does the Red Book apply

A

All valuations unless listed as exception

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8
Q

Difference between valuation technical and performance standards (VPS) and valuation practice guidance applications (VPGA)?

A

VPS mandatory
VPGA advisory
Note: these are two elements that make up the Red Book

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9
Q

What are the consequences if valuer does not comply with VPS?

A

RICS can take disciplinary action
action depends on severity of breach

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10
Q

What are the consequences if valuer does not comply with VPGA?

A

if inappropriate to comply with VPS 1 - 5
if client agrees
EG if good reason not to enter the property

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11
Q

What information is required to do a valuation?

A

location
type of property
Note: also need to know purpose of valuation and to check for conflict of interest

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12
Q

What do valuation files contain?

A

conflict of interest check
agreed terms of engagement
inspection notes (photos, plans)
comparable evidence
valuation calculations
valuation report

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13
Q

Main contents of terms of engagement?

A

valuer name
client name
property address
purpose of valuation
basis of value
date
currency
fee basis
inspection and limitations
assumption and special assumptions
reference to CHP
statement on PII

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14
Q

PS1 Red Book

A

Compliance with valuation standards within U.K. jurisdiction

(comply with U.K. law)

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15
Q

PS2 Red Book

A

Ethics, competency, objectivity and disclosures

(valuer must have appropriate experience, skill and judgement, and avoid conflict of interest)

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16
Q

What assumptions are made in producing a valuation

A

planning permission for existing use
free from contamination and hazardous substances
if any parts are covered, assume those areas are free from defects

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17
Q

Examples of Special Assumptions

A

if property vacant, assume let on defined terms (and vice versa)
if property being refurbished, assume refurb has completed
if no planning, assume planning permission has been granted

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18
Q

Market Value definition

A

The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arms length transaction after proper marketing where all parties have acted knowledgeably, prudently and without compulsion

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19
Q

Market Rent definition

A

The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lesser on appropriate lease terms in an arms length transaction after proper marketing and where all parties have acted knowledgeably, prudently and without compulsion

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20
Q

When is market rent not appropriate as a basis of value?

A

rent review (use definition of rent in lease)
lease renewal (S34 of LL&T Act 1954)

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21
Q

When is fair value the appropriate basis of value?

A

when valuations for accounting or financial reporting EG company accounts
usually same as market value

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22
Q

What is a regulated purpose valuation (asset valuation)?

A

used where public has interest or third parties rely on valuation
Note: RICS recommends rotation of valuer every 7 years to avoid influence from past valuations

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23
Q

Examples of regulated purpose / asset valuations?

A

for financial statements (company accounts)
for stock exchange listings
for takeovers and mergers
for collective investment schemes
for unregulated property unit trusts

Note: asset usually valued annually or quarterly

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24
Q

Market Value v Existing Use Value

A

Market value takes into account highest and best use of an asset (development potential) whereas existing use value is value of building as it is

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25
When is DRC used in asset valuations?
for properties where there is not enough comparable evidence for specialised properties that would not sell other than as part of a sale of the business in occupation
26
What are situations that can adversely affect the certainty of a valuation?
unusual property (unique characteristics) market volatility (covid, politics) lack of information (not inspected interior)
27
5 conventional methods of valuation
comparative investment residual profits / accounts contractors / depreciated replacement cost
28
What makes a property transaction comparable to the property being valued?
Similarities in terms of: - physical characteristics - location - use - tenure - time scale
29
What is the Hierarchy of Evidence?
ranking evidence by transaction type - open market lettings - lease renewals - rent reviews - independent expert determination - arbitrator award - sale and leaseback
30
What factors make up the all risks yield?
physical characteristics of building tenant covenant strength market rent other lease terms (unexpired term) anticipated rental growth (location)
31
What is the market capitalisation rate?
another name for All Risks Yield rate at which the market capitalises the income
32
How would you carry out a residual valuation?
Demolition costs site clean up costs building / construction costs fees for construction finance costs contingency agent and legal fees on disposal agent and legal fees on acquisition purchasers costs when buying site
33
How did you calculate developer profit in residual valuation
15% of gross development value can also take 25% of total costs Note: percentage increases when risk increases
34
What are the usual acquisition costs?
a purchase price stamp duty land tax agent fees legal fees VAT on agent and legal fees
35
Name property types valued by profits method?
Leisure properties - petrol station - pub - theatre - golf course - casino
36
What is the basic approach to the profits method?
take estimated annual turnover net of VAT deduct costs of generating turnover leaves net operating profit capitalise this
37
What is a Replacement Cost Assessment for insurance?
insures building so if damaged by fire / storm it can be demolished and rebuilt in accordance with current regulation takes into account professional fees demolition costs shoring up/weather protecting of adjoining buildings if they’ve been damaged build costs professional fees
38
What are the principle sources of investment?
a gilts equities properties
39
Gross Yield
rent expressed as percentage of purchase price
40
Net Yield
rent expressed as percentage of gross acquisition price (purchase price and costs like SDLT, agent and legal fees)
41
Quantify purchasers costs in percentage terms
a SDLT: - 0% if under £150k - 2% on next £100k - 5% if over £250k Agent Fees - 1% Legal Fees 0.5% VAT - 20% (0.3% when of the 1.5%) Total = 1.8%
42
How is rental/capital growth accounted for in conventional investment valuations?
It is included in All Risks Yield (implicit)
43
What techniques can be used to value under rented reversionary investment?
term and reversion hardcore / layer
44
Explain process of Term and Reversion technique
Capitalise passing rent until review or reversion Take market rent to be received at review/reversion and then capitalise that into perpetuity Defer it further at PV of £1 for the period of the term Note: if under rented, then term is capitalised at lower rate due to lower risk. If over rented, then term is capitalised at higher rent due to higher risk
45
Explain the process of the hardcore / layer technique
Capitalise passing rent into perpetuity Take market rent at review/reversion and capitalise it into perpetuity Defer it back for the period of the term at a PV of £1 per annum Note: if under rented, bottom slice capitalised at below market rate due to reduced risk and top slice capitalised at above rate due to increased risk. If over rented, then vice versa
46
Initial Yield
Net income (passing rent) at date or purchase expressed as percentage of purchase price
47
Reversionary Yield
Market rent expressed as percentage of market value (purchase price)
48
Running / Straight Yield
Present income of property expressed as percentage of market value
49
Equivalent Yield
a Weighted average of Initial/Running/Reversionary yields takes into account importance rather than treating all equally AKA Internal Rate of Return (disregarding rental or capital growth)
50
True Equivalent Yield
a Yield taking into account that rent is received quarterly in advance, rather than annually in arrears (nominal yield) Note: does not affect valuation
51
Equated Yield
a Overall rate of return, taking into account growth - true investment yield - discount rate at which DCF equals purchase price of investmen
52
How is top slice income valued?
a Capitalised above market rented rate to reflect increased risk
53
How do you value leasehold interest / ascertain if premium can be charged for assignment of lease?
capitalise profit rent Note: only has value if profit rent and unexpired lease term of more than 1 year
54
How do you get from gross value to net value?
Deduct purchases costs
55
How do you capitalise an income stream to arrive at gross value?
Multiply by YP into perpetuity
56
How do you present scenarios to your client after a residual valuation?
Sensitivity Analysis Note: financial model where you can change input variables to see how outcome changes
57
How do you carry out a valuation for vacant possession?
use comparative method if possible use investment method if not use a high yield to take into account the risk, or reflect that there is a void period (term and reversion with void period of 6 months / 1 year)
58
VPS 1 - 5
VPS 1 – TERMS AND ENGAGMENT (SCOPE OF WORK) VPS 2 – BASIS OF VALUE, ASSUMPTIONS, SPECIAL ASSUMPTIONS VPS 3 VALUATION APPROACHES AND METHODS VPS 4 – INSPECTIONS, INVESTIGATIONS AND RECORDS VPS 5 – VALUATION MODELS VPS 6 – VALUATION REPORTS VPGA 1 – Valuation for financial reporting VPGA 2 – Valuations for secured lending VPGA 3 – VALUATION OF BUNSESSES AND BUISNESS INTEREST
59
Contents of Red Book
1. INTRO 2. GLOSSARY 3. PROFESSIONAL STANDARDS (MANDATORY) 4. VALUATION TECHNICAL AND PERFORMANCE STANDARDS (MANDATRY) (VPS) 5. VALUATION PRACTICE GUIDANCE APPLICATIONS (VPGS) 6. INTERNATIONAL VALUATION STANDARDS
60
Comparable Method
1) search for comparable 2) confirm details with agent 3) assemble in schedule 4) adjust using hiarachy of evidence 5) anaylse and form an opinion 6) report and prepare file note
61
Investment method
Used to value shops, offices, industrial and warehouse (use when there is an income to value) majority of comparables are - rents (lettings, rent reviews, lease renewals)
62
Investment basic form?
Market value (net of outgoings) X Years purchase (YP) = MARKET VALUE
63
Profits method (value leisure properties)
Turnover - costs of generating turnover = net operating profit (this is then capitilised)
64
Gross and Initial yield
Gross Initial Yield = rent expressed as a percentage of purchase price (no fees) Net initial yield = rent expressed as a percentage of gross cost of acquisition (fees)
65
Leasehold interests have value when:
1) a profit rent (market rent less than rent paid) 2) an unexpired lease term of 1 year Valued by capitilising the PROFIT RENT YP DUAL RATE YP SINGLE RATE
66
Contractors method (DEPRECIATED COST METHOD)
- Last resort - Value property that doesnt change hands on the market other than part of sale of business (football club)
67
Contractors method
Cost of reinstatement value +land value =total value
68
Discounted cash flow (growth explicit method of valuation)
- projecting cash flows over an assumed investment holding period PLUS an exit value at end of the period (usually arrived on a conventional ARY basis) - Cashflow is then discounted back to the present value day at a discounted rate (known as the desired rate of return)that reflects the perceived level of risk = RISK FREE RATE + RISK PREMIUM

Main Summaries Revision (7 decks)

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