Valuation

Question 1

What are the main drivers that have an impact on value?

Answer 1

location, planning status, economic conditions and infrastructure provisions.

Question 2

The principles and application of the latest relevant valuation standards

Answer 2

Ethical standards and regulatory frameworks governing valuations including the RICS Valuation – Global Standards (‘Red Book’) Red Book UK National Supplement and International Valuation Standards (IVS)

Question 3

What are the relevant RICS best practice guidance notes and Professional Statements?

Answer 3

• RICS Valuation - Global Standards (Red Book) (31st Jan 25) with UK National Supplement (2023)
• Specific Asset Class Valuations - Valuation of Development Property
• Valuation Methodologies –
  1Comparable Evidence in Real Estate Valuations, 2019
  2 Depreciated Replacement Cost Method of Valuation for Financial Reporting (1st Edition - Prof Std)
  3 Discounted Cash Flow (DCF) Valuation (1st Ed - 2023)

Question 4

What is the International Valuation Standards (IVS)

Answer 4

International Valuation Standards Council (IVSC). 31st Jan 24.
Regulatable framwork

Question 5

What are the 5 methods of valuaiton?

Answer 5

Comparable
Investment
Residual
DRC
Profit

Question 6

What is the Residual Method?

Answer 6

Used to value land with development potential. Estimate the GDV of the completed project and then deducting all associated costs for land value.

It is used to value land with development potential.

Question 7

What is the Comparison (Market) Approach?

Answer 7

Similar properties that have recently sold in the same market, djustments are made reflecting differences in characteristics and analysis of the local market whilst applying professional scepticism – need similar and most comparable

Question 8

What is the income Approach (Investment Method)?

Answer 8

Used to value commercial premises on the basis of a flow of rental income. Estimating future income (e.g., rent) and discounting it back to the present value using a capitalisation rate or discounted cash flow (DCF)

Question 9

What is the profits method?

Answer 9

Value operational assets where profitability of the business is a key component of value.

e.g. care home, restaurant, hotel, pub.

FMOP (Fair Maintainable Operating Profit), which is then capitalised at an appropriate yield to achieve Market Value.

Question 10

Cost Approach

Answer 10

Value sets which rarely transact on the open market, therefore very limited comparable evidence

Depreciating Replacement Cost – cost to obtain an asset of equal utility.
Reproduction cost method – a direct replica

Question 11

If the yield is increased in an investment valuation, what happens to the capital value?

Answer 11

If the yield increases, the capital value decreases.

Question 12

What is a yield?

Answer 12

A measure of investment return, expressed as a percentage of capital value invested.

Question 13

How do you calculate a yield?

Answer 13

Income/Price x 100

Question 14

How do you calculate years purchased?

Answer 14

100 / yield

Question 15

What is the major factor in determining a yield?

Answer 15

Risk.

prospects for rental and capital growth
quality of location
quality of covenant strength
lease terms
voids
liquidity (how quickly it can sell)

Question 16

What is a gross yield?

Answer 16

The yield not adjusted for purchasers costs

Question 17

What is a net yield?

Answer 17

he yield adjusted for purchasers costs

Question 18

What is an initial yield?

Answer 18

Simple income yield for current income and current price.

Question 19

What are Automated Valuation Models (AVMs)?

Answer 19

statistical modelling and algorithms to estimate property values. Quick and cost-effective valuations, often for mortgage lending or portfolio valuations

Question 20

Define Gross Development Value?

Answer 20

The aggregate market value of the proposed development,

Question 21

What is an arm’s length transaction?

Answer 21

Where the seller and purchaser don’t know each other, there’s no personal interest and no special purchasers.

Question 22

Define synergistic/marriage value?

Answer 22

Synergistic Value is the result of a combination of two or more assets or interests where the combined value is more than the sum of the separate values

Question 23

How are Discount rates calculated for a valuer -

Answer 23

(a) a capital asset pricing model (CAPM),
(b) a weighted average cost of capital (WACC),
(c) observed or inferred rates/yields,
(d) a build-up method.

Question 24

Is there any guidance note on the Comparable Method? What does it say?

Answer 24

Comparable Evidence in Real Estate Valuations, 2019 (effective 2019).
* Provides guidance on the sources of comparable evidence, how to record and how to analyse.
* Provides information on the hierarchy of evidence.
IVS Standards

Question 25

What was your valuation task for OWS hotel?

Answer 25

- Site inspection - Local and regional market, estimated the likely price per bed at an agreed occupancy for similar standard of hotels, assessing the likely yield through engagement with an agent - Calculated the yearly income (occupancy rates at an agreed price) and multiplied this by the yield to generate the Gross Development Value - Comparable cost plans and BCIS, finance costs deducting the grant funding available (at 7%) and developer’s profit (at 20%) - Sensitivity Analysis. - £5m

Question 26

Outline the new guidance note on Valuing Development Property?

Answer 26

Valuation of Development Property, 2019 (effective 2020) The purpose of the guidance note is to supplement International Valuation Standard (IVS) 410 ‘Development Property’. Confirms best practise when valuing development property that both the residual and comparable methods should be used together. The residual method should be cross-checked with comparable evidence.

Question 28

What is the margin of error for valuation reports?

Answer 28

There is a permissible range allowed by courts as found in numerous cases. This ranges from 5 - 15% depending on the nature of the valuation,

Question 29

What is a special purchaser?

Answer 29

Is someone who a particular asset will have a special value to them due to the advantages arising from its ownership, that would not be available to other buyers

Question 30

When would a DCF valuation be used?

Answer 30

Used where the projected cash flows are explicitly estimated for a long period Includes phased development projects.

Question 31

Describe the process of using a DCF?

Answer 31

1 Estimate cash flow (Income less expenditure) 2 Estimate Exit Value at the end of the holding period 3 Select discount rate 4 Discount cash flow 5 Provides NPV - sum of discounted cash flow

Question 32

What is IRR?

Answer 32

The rate of return at which all future cashflows must be discounted to produce an NPV of zero. It assesses the total returns from an investment opportunity making some assumptions on rental growth, re-letting and exit assumptions

Question 33

Who can carry out Red Book Valuations?

Answer 33

Register Valuar under the Valuer Registration Scheme