Valuation Flashcards
(95 cards)
1
Q
What is the Red Book?
A
The red book outlines mandatory practices for RICS members conducting a valuation, ensuring consistency and adherence to high professional standards
2
Q
What is the structure of the Red Book?
A
- Introduction
- Glossary
- Professional Standards
- Valuation technical and performance standards (VPS 1-6)
- Valuation practice guidance applications (VPGA 1-11)
- International Valuation Standards
3
Q
What are the 5 exceptions to the RBG?
PS1
A
E - Expert Witness
A - Agency & brokerage apart from Purchase Report
S - Statutory purposes
I - Internal accounts
N - Negotiation or litigation
4
Q
What are the two RICS Profssional Standards outlined in the Red Book?
A
PS1 - compliance with standards and practice statements where a written valuation is provided (5 exemptions)
PS 2 - ethics, competency, objectivity and disclosures
5
Q
What does PS 2 outline?
A
- Professional and ethical standards - act in accordance with Rules of Conduct
- Independence - Apply ‘professional scepticism’ when reviewing information before relying on it
- Terms of engagement - must understand client’s requirements and comply with agreed terms
6
Q
Outline what VPS 1 states?
Minimum Terms of Engagement
A
Terms of engagement:
- Identification and status of the valuer
- Identification of the client
- The asset to be valued
- Currency
- Purpose of the valuation
- Basis of value
- Valuation date
- All assumptions and special assumptions to be made
- Confirmation that the valuation will be undertaken in accordance with RICS Red Book Global Standards
- Basis on which the fee will be calculated
- CHP
- Limitation on liability agreed
- Consideration of any ESG factors
7
Q
Outline what VPS 2 states?
A
Bases of value, assumptions and special assumptions
8
Q
What is the definition of market value?
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 arm’s length transaction, after proper marketing, and where the parties have acted knowledgeably, prudently, and without compulsion
9
Q
What is the 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 act knowledgeably, prudently, and without compulsion
10
Q
What is the definition of fair value?
A
The price that would be received to sell an asset or transfer a liability, in an orderly transaction between twiomarket participants at the valuation date
11
Q
What is the definition of investment value?
A
The value of an asset to a particular owner or prospective owner for individual investment or operational objectives
12
Q
What does VPS 3 state (Valuation approaches and methods)
A
- Valuers are responsible for selecting and justifying their use of model and valuation approach
- In some cases, more than one approach may be appropriate
13
Q
What does VPS 4 state (Inspections, Investigations and Reports)
A
- Valuers must take steps to verify the necessary information being relied upon for a valuation to ensure professionally adequate
- Any limitations or restrictions on the inspection or analysis must be identified and recorded in the TofE and report (such as desk top)
- A revaluation without reinspection of the property must not be undertaken unless the valuer is satisfied there have been no material changes to the property/location since the last inspection
- Proper records must be kept noting importance of ESG
14
Q
What does VPS 5 state (Valuation models)?
New in the 2024 edition
A
- Valuers must use professional judgement to ensure that the model used is suitable for the valuation purposes
- Greater vigilance needed to ensure there is no internal errors
15
Q
What does VPS 6 state (Valuation Reports)?
A
- Identification of the status of the valuer
- Cient
- Purpose of the valuation
- Asset
- Basis of value / valuation date
- Extent of investigation
- Nature and source of information to be relied upon
- Assumptions and special assumptions
- Restrictions for use, distribution and publication
- Instruction undertaken in accordance with IVS standards
- Valuation approach / figure
- Date of valuation report
- Commentary on any market uncertainty
- Any limitations on liability that have been agreed
- Significant ESG factors used and considered
16
Q
Part 5 of the RBG
What does VPGA1 state?
Valuation Practice Guidance Applications
A
Fair value must be adopted for valuations for accounts purposes
17
Q
Part 5 of the RBG
What does VPGA2 state?
Valuation Practice Guidance Applications
A
- Previous involvement with property/borrower disclosed to the lender, within past 2 years
- If instruction accepted, the conflict management details must be recorded in ToE and report
18
Q
What does the new RICS Valuation Global Standards seek to introduce?
A
- Alignment with the new International Valuation Standards
- New content relating to valuation modelling
- Valuers must now record relevant ESG data & consider factors which might impact valuation
- The use of AI
19
Q
What are the 5 methods of valuation?
A
- Comparative
- Investments
- Profits
- Residual
- Contractors (Depreciated Replacement Cost)
20
Q
IVS 105 Valuation Approaches and Methods
What are the 3 approaches?
A
- Income approach (investment/residual/profit method)
- Cost approach (contractors method)
- Market approach (comparable method)
21
Q
What is the comparative method of valuation?
A
- Gather comparables and confirm details
- Adjust headline rent to ‘net effective rent’ if appropriate
- Assemble in a schedule adjust using ‘Hierarchy of Evidence’
- Analyse to form an opinion of value and report the value
22
Q
When is the investment method of valuation used?
A
- Use when there is an income stream, rental income is capitalised to produce a capital value
23
Q
When is term and reversion used?
A
Used for reversionary investments (market rent more than passing rent), term capitalised until next lease event at an initial yield, reversion to market rent valued in perp at a reversionary yield
24
Q
When is layer/hardcore used?
A
Used for overrented investments, income flow horizontally split
Bottom slice = Market Rent into perp
Top slice = Passing rent less market rent unil next lease event
Higher yield applied to top slice to relfect additional risk
25
Can you talk me through the discounted cashflow technique?
- Growth explicit investment method of valuation
- Projects estimated cash flows over an assumed holding period and exit, usually ARY
- Cashflow is then discounted back to the present day usually at a discount rate (desired rate of return), reflects perceived risk
## Footnote
Short leaseholds/phased developments/overrented properties
26
What would the profits method be used for?
- Used where the value of the property depends upon the profitability of its business and its trading potential
- Used for pubs, petrol stations, hotels and care homes
- Must have accurate and audited accounts for 3 years
27
Can you talk me through the profits method?
Income - costs = gross profit - less expenses & operator's remuneration = Fair Maintainable Operating Profit (FMOP)
Expressed as EBITDA (earnings before interest, taxation, depreciation and amortisation)
Capitalised at yield
28
When would you use contactors / depreciated replacement cost method?
Used for owner-occupied or specialised property that is rarely sold on the open market
29
Can you talk me through the contractors method?
1. Value of land in its existing use (assume plannign permission exists)
2. Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence (use BCIS and then judge level of obsolescence)
30
When would the residual method be used?
- **Must be market led, only used to calculate land value **
- GDV of scheme at today's date assuming current market
- Comparable method used to establish rent and yield (ARY)
- Rnet free and void periods can be assumed and purchaser's costs are usually deducted
31
Why is PII important when undertaking valuation work?
* It is important to cover my firm & provides security for the bank lending against the property
* It is important to clearly set out the limitations of PI cover in the terms of engagement
32
What is the PI limit for loan security valuation?
25% of the market value
33
What does the Global Standards (UK National Supplement 2023) set out?
- Outlines specific requirements and guidance for applying the global standards to valuations in the UK
- It's a supplement, not a replacement, of the Red Book Global Standards, and it clarifies how to apply them in the UK context
34
UK Valuation Practice Guidance Applications (VPGA) in the National Supplement?
1. Valuation for financial reporting
8. Valuation of charity assets
9. Relationship with auditors
10. Valuation for commercial secured lending purposes
11. Valuation for UK residential property
14. Valuation of registered social housing for loan security purposes
15. Valuation for Inheritance Tax, SDLT and ATED
35
How do you value owner occupied?
Value at VP and use speculative investor (assume initial void period & RF)
36
What are the two definitions of a valuer?
1. Internal - no third party reliance
2. External - no material links with the asset to be valued or the client
37
How do you value a property that is over rented?
* Hardcore layer method
* Top slice is at a more risky yield
* Market rent is at a more stable yield
38
What purchaser's costs are deducted to arrive at market value?
- Allowance for SDLT
- Agents and legal fees plus VAT = 1.8%
39
What is the current rate of SDLT payable for commercial property?
£0 - £150k = £0
£150,001 - £250k = 2%
Over £250k = 5%
40
What are the implications of undertaking a desktop valuation?
The valuation is only based on assumptions as to the nature and condition of the property which will impair its accuracy
41
On what basis do you value for accounting purposes?
Fair value as stated in VPGA1 as per Red Book
42
Can you talk me through the initial stages of when you are instructed for a loan security valuation?
1. Provide a fee quote and check competence
2. Confirm there are no conflicts of interest
3. Bank instructs us, the terms of engagement was in line with our Serviced Level Agreement
4. The valuation date was confirmed which in this instance was the day I inspected
5. Signed by both parties
43
What info documents would you gather prior to inspecting?
- Lease
- Title documentation
- Floorplans
- Planning info
- EPCs
44
What would be a typical special assumption?
Market value on the assumption of VP
45
When setting up the inspection what do you need to think about?
- Surveying safely
- If by yourself - lone working policy
46
What due diligence is required prior to inspecting for valuation purposes?
- Asbestos information and survey
- Fire risk assessment
- Disability discrimination audit
47
# Example 2 - Loan security val
What were you noting on-site internally & externally?
- Age of the building (refurbished in 2017)
- Construction - reinforced concrete and externally cladded
- Lighting - LEDs
- Internal fit out - raised floors
48
How did you determine the yield to apply to the passing rent?
Comparable method - sourced investment sales of similar properties taking into account lease terms & tenant covenant strength
49
Following lease expiry or breaks what do you need to do?
- Take into account void period & rent free & reletting costs (10% of rent)
- In this case 12 months void & 12 months RF
50
What adjustment did you make to the yield to the reversionary income?
Made a 0.5% adjustment to reflect future uncertainty & risk
51
What did you consider for your Opportunities and Threat in your SWOT analysis?
Opportunities - let the vacant space and increase in rent
Threat - continuing impact of higher interest rates on the wider property market
52
What is a lender action point?
If an EPC has expired identifying this
53
What are the three types of obsolscence?
1. Physical - result of deterioation/wear and tear over the years
2. Functional - the design or specification of the asset no longer fulfills the function for what it was originally designed
3. Economic - due to changing market conditions for the use of the asset
54
Before commencing a valuation instruction, what are the three steps to undertake?
1. Are you competent to undertake this work?
2. Check for any conflicts or personal interests?
3. Set out in writing your full confirmation of instructions to the client prior to starting work and receive written confirmation of instruction
55
Why is statutory due diligence undertaken for valuations?
Required to check that there are no material matters which could impact the valuation
56
What are some examples of statutory DD?
- asbestos register
- contamination
- equality act 2010 compliance
- EPC rating
- fire safety compliance
- legal title and tenure
- planning history
57
What is the timeline of an insutrction?
1. Receive instruction from the client
2. Check competence and independence
3. Issue ToE, receive signed ToE
4. Gather info/DD/market research/comparables
5. Inspect and measure
6. Undertake valuation
7. Draft report
8. Finalise and sign report
9. Rpeort to client
10. Issue invoice
11. Ensure file is in good order to acheive
58
What is an all risks yield?
Rate of interest, fully let at MR, reflecting prospects and risks
59
What is a true yield?
Assumes rent is paid in advance not in arrears
60
What is a nominal yield?
Initial yield assuming rent is paid in arrears
61
What is a gross yield?
The yield not adjusted for purchaser's costs (auction)
62
What is an equivalent yield?
Average weighted yield of reversionary and initial yield
63
What is a net initial yield?
It is the current income level obtained from the asset expressed as a percentage as a return of the capital value plus any purchaser’s costs
64
What is a reversionary yield?
MR divided by current price - asset let below MR
65
What is a running yield?
The yield at a point in time
66
What is Net Present Value?
Sum of the DCFs for the project - NPV can determine if the investment will give a positive/negative return against a target rate of return
67
What is the IRR?
- The rate at which all future cashflows must be discounted to produce NPV of zero
- IRR = total return from an investment opportunity if no software to calculate can use liner interpolation
68
UK VPS 3 - Regulated purpose valuations
Relied upon by 3rd parties who haven't commissioned the valuation and they are subject to valuation monitoring
69
What are the 5 purposes of the UK VPS 3 valuations?
- Financial statements
- Stock exchange
- Takeovers / mergers
- Collective investment schemes
- Unregulated property unit trusts
70
What does the UK VPS 3 also state? Can only value if...
- Company has not acted for the purchase of the asset in last 12 months
- Maximum 10-year period before rotation of firm
- Max period of 5-years before the rotation of an individual responsible valuer
71
What are some of the recommendations from the Peter Pereira Gray Review (Dec 2021)
| Commissioned by the RICS Standards & Regulatory Board
- Governance arrangements for high-risk and regulated vals
- Separation of valuation from advisory services within firms
- Developing time-specific rotation for valuers
- Developing Valuation Compliance Officer within firms
- Process to raise issues on ethical conduct in firms
- Establishing a vals regulatory quality assurance panel
72
What does the RICS Guidance Note: Sustainability and ESG 2021 state?
- Includes advice on ToE, valuation purpose, inspection, reporting
- Relevant sustainability characteristics, considerations, and risks
- How these should be reflected in the choice of valuation method
73
What is the Margin of Error?
Range allowed by courts in respect of valuation
K/S Lincoln v CB Richard Ellis (2005) reinforced +/- 5% but if one off commercial property +/- 10%
74
What is hope value?
- Arising from expectation that future circumstances may change
- Future prospect of the site gaining planning permission
- The realisation of marriage value from merging interests
'An element of market value in excess of the existing use value, reflecting the propsect of some more valuable future use'
75
What is marriage value (synergistic value)?
- Merger of interests - physical or tenurial
- Before and after valuations
- Negotiated outcome - usually shared 50/50 of uplift or pro rata
'An additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values'
76
What is an assumption?
Reasonable for valuer to accept something is true without the need for specifcation (e.g. building is structurally sound)
77
What is a special assumption?
Assumption that is taken to be true and accepted as fact even though it is not true (e.g. VP)
78
What is zoning?
- Valuation technique, comparison of retail properties as rental value reduces away from the shop frontage
- Halving back principle 6.1m zones
79
What does the RICS Professional Standard: Rights of light 2024 state?
Rights of Light of a building arises 20 years after uninterrupted enjoyment of light without the consent of the 3rd party by way of an easement
80
What yields were your comps?
Net initial yields
81
Can you talk me through your desktop valuation?
- Initially assessed market rent by researching comparable evidence and made adjustments when comparing to the subject property
- I then calculated market rent to determine if the property was above or below passing rent
- I also researched yield evidence taking into account covenant strength and lease term as well as tenure and location
- Then I would determine the yield to be applied to the term income up to the lease event
- Then I would adopt a 12 month void to re-let and 12 month rent free before applying a weaker yield to the reversion income to reflect the risk & uncertainty & deducted purchaser's costs
82
Can you talk me through your loan security valuation example?
- I reviewed the tenancy schedule to check tenant covenant strength and the leases to check the lease term remaining and break and RR provisions
- After researching rental comp evidence and making adjustments I then applied my opinion of MR psf to the floor areas of the property to determine MR
- The tenants withint the property were all of a similar covenant strength so I adopted the same yield on the passing rent up to the lease event
- All of the rents were below passing rent
- Following the lease event, I then adopted my opinion of MR adjusting the yield to reflect the level of risk and applied a void & rent free in perpetuity (deferring by the relevant number of years for the term) to the reversion income
- I then deducted purchaser's costs to arrive at my opinion of MV
83
How would you value if on a VP/owner occupied basis?
- Usually apply vacant sales comparables and adopt a rate psf
- I don't deduct purchaser's costs as comp evidence tends not to factor in purchasers costs
84
How would you value a leasehold?
- Value at profit rent
- Only capitalise to lease event
- Apply more risky yield
85
Why is a lease renewal less best evidence than open market letting?
Because it is not an arm's length transaction
86
What are you looking at for when reviewing a tenancy schedule?
Looking at lease events such as RR's, breaks & expiries and tenant covenant strength
87
What are the limitations of a desktop study?
- Not inspecting and measuring the property
- Relying on measuremetns which may not be accurate and there may have been changes to physical characteristics or building or condition
88
What is the difference when valuing on a leasehold and freehold?
- A leasehold value is only over the period of the lease and would need to determine whether there is any element of profit rent
- Adjust the yield to reflect it is on a leasehold basis rather than a freehold basis - would be typically 1%
89
What yield are you targeting when undertaking a valuation on a reversionary property?
Equivalent yield
90
What RICS guidance is there related to DCF?
RICS Practice Information: Discounted cash flow valuations, November 2023
91
What RICS guidance is there related to Depreciated Replacement Cost method?
RICS Professional Standard: Depreciated replacement cost method of valuation for financial reporting, 2018
92
What is the current rate of SDLT payable for residential property?
| As of 1st April 2025
£0 - £125k = 0%
£125,001-£250k = 2%
£250,001-£925k = 5%
£925,001-£1.5m = 10%
Over £1.5m = 12%
93
How do you devalue a headline rent with rent-free and void to produce a net effective rent?
3-month fitting out period deduced before devaluation
94
Do you know some case law around the valuation of ransom strip land?
**Stoke v Cambridge (1961)**
Ransom strip value calculated in this case - 1/3 of the additional development value awarded
95
Do you know some case law around margin of errors in valuations?
**Singer & Friedlander Ltd v J. D. Wood (1977)**
Court held that margin for error can vary, will be narrower for straightforward valuations and wider for more complex cases
