Valuation

Question 1

What are the principles contained in the RICS red book?

Answer 1

Consistency, transparency, duty of care. All advice provided must be objective and independent. Members and firms must comply with the RSCS rules of conduct and avoid conflict of interest.

Question 2

Why choose the red book global standards?

Answer 2

Enhance technical and market knowledge. Highest professional standards in principles. Recognition for valuation reports globally. Best practice and consistency. Heightened business reputation and trust and services. Rent assured with RICS value of registration.

Question 3

What are some of the changes which have come into effect within the RICS red book?

Answer 3

It is now mandatory to record relevant ESG data and consider factors which might value. There has been an increase focus and recognition to data and modelling as evidenced by the introduction of VPS Five. The international evaluation standards are incorporated into the document in section 6.

Question 4

How to did you ensure valuation work was carried out in line with the Red Book?

Answer 4

I ensured that there was no conflict of interest, and that I was competent to carry out the valuation. I undertook statutory due diligence such as looking at the business rates for the property, the EPC rating, fire safety compliance, planning history, flood risk.

I took necessary steps to verify information on my inspection.

My work was carried out in line with the red book, but I did not carry out an official red book valuation, as my examples fell out outside of the requirements, due to the fact I was only providing advice to a client.

Question 5

What are the five exemptions from the red book?

Answer 5

If advice is provided for litigation. If the valuer is performing a statutory function. If it is purely for internal purposes. If it is purely for agency purposes. If it is as part of advice when acting as an expert witness.

Question 6

What is the RICS registration scheme?

Answer 6

The RICS introduce a regulatory monitoring scheme for all values carrying out red valuations from 2011. Aims to improve the quality evaluation, ensure self regulation and protect and raise the status of the evaluation profession

Question 7

What is the hierarchy of comparable evidence?

Answer 7

Category A : direct comparables. Weighted in order, open market lettings, lease renewals, rent reviews , independent expert determinations, arbitrator determinations.

Category B : general market data - supply and demand evidence.

Category C : other sources. For example, evidence from background data such as interest rates which could influence the yield.

Question 8

What are the main factors which influence the value for retail (comparative method)

Answer 8

Location, Shop frontage and display windows, shop layout, adjacency complementary uses, footfall and access to public transport.

Question 9

What are main factors which influence value for an investment valuation of retail?

Answer 9

Location and layout, tenant covenant strength, lease terms and length. The weighted unexpired average lease term. Market sentiment.

Question 10

How do you calculate the average weighted lease term?

Answer 10

This is a calculation often undertaken when valuing an asset or considering an appropriate investment yield for multi occupied individual investments or portfolios.

You multiply the annual rent paid by each tenant for the number of years remaining on their lease and all of these together. Divide this total by the sum of annual rents paid by all tenants to find the Wault. This is expressed in years.

Question 11

What are some physical and transitional risks to consider?

Answer 11

Transitional risks include those such as environmental regulation such as changes to MEES and EPC requirements. This also relates to carbon emissions. Physical risks. Include those such as heat, wildfire storms and flooding. For flooding, you will check the environmental agency website.

Question 12

What is the structure of the RICS Red Book?

Answer 12

Part 1 - introduction

Part 2 - glossary

Part 3 - Professional Standards:

PS1: compliance with standards and practice statements. Here you will find the five exemptions for a red book valuation.

PS2: ethics, Competency, objectivity, and disclosures.

VPS - valuation performance standard.

VPS1 - terms of engagement

VPS two – basis of value / assumptions and special assumptions

VPS3 - valuation approaches/methods

VPS4 - inspection

VPS5 - data modelling

VPS 6 - reporting

VPGA - valuation guidance applications

Part 6 - the international valuation standards.

Question 13

Are you aware of the UK National Supplement, 2018?

Answer 13

It sets up clarification that the UK read book global UK national supplement augments the red book global require requirements for evaluations in the UK and it’s not a substitute for it. It provides specific examples and requirements for valuations undertaken in the UK.

The valuation guidance applications provide advice on various different assets for valuation

Question 14

What is the definition of market value?

Answer 14

The estimated amount for which an asset or liability should Exchange on the evaluation date the willing buyer and a willing seller in an arms length transaction after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion.

Question 15

What is the definition of market rent?

Answer 15

The estimated amount for which an interest in real property should be leased at a valuation date between a willing lessee and lessor unappropriate these terms, at an arm’s length transaction, after proper marketing and both parties acting knowledgeably, prudently and without compulsion.

Question 16

What are the four bases of value?

Answer 16

Fair value , market value, market rent, investment value.

Question 17

What is fair value?

Answer 17

The price that would be received to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. It is broadly similar to market value and is incorporated if the international financial reporting standards have been adopted by the client. This falls under IFRS 13

Question 18

What are the five methods of valuation?

Answer 18

Investment method, comparative method, residual method, profits method, contractors method (DRC method)

Question 19

What are the three First important steps to take on valuation?

Answer 19

Check your competent, check there are no conflicts of interest, sign terms of engagement

Question 20

What is included in a terms of engagement for valuation?

Answer 20

The status of the client, the status of the valuer. The evaluation date. The basis of value the property and address. Currency. Complaint handing procedure. Fee agreement. Assumptions and special assumptions. Scope of services. All of these can be found in VPS 1 of the global red book.

Question 21

The international valuation standard 105 sets out three valuation approaches - what are they?

Answer 21

Cost approach, market approach, income approach.

Question 22

What would you do if the property was under rented?

Answer 22

I would use the term and reversion method. The current rent is capitalised until the next lease event at an initial yield. For the reversion, the market rent is valued in perpetuity at a reversion of the yield. Both values are then added together to reach the market value.

Question 23

What would you do if the property was over rented?

Answer 23

I would use the layer and hardcore method. The top slice equals the rent passing minus the market rent until the next lease of rent. A higher yield is applied to the top slice to reflect the additional risk. This is then divided by the bottom slice which is the market rent.

Question 24

What is an all risks yield?

Answer 24

The rate of interest used in the valuation of a fully let Property at the market rent reflecting all the prospects and risks attached to the particular investment.

Question 25

What is an equivalent yield?

Answer 25

The average weighted yield when a reversionary property is valued using an initial and reversionary yield.

Question 26

What is a reversionary yield?

Answer 26

Market rent divided by current price on an investment let at a rent below the market rent.

Question 27

What does traditional valuation practice assume rent is paid in?

Answer 27

Arrears I.e the nominal yield

Question 28

Why is it important to consider the tenure?

Answer 28

The property may be owner occupied, which will influence the amount of rent paid as this will be been minimal ground rent. A long lease hold will generate a high value over a short leasehold which is due to expire soon.

Question 29

When is a residual site valuation used?

Answer 29

To find out the value of land, for a particular purpose. Essentially it is what you can afford to pay for the land.

Question 30

What is a discounted cash flow technique?

Answer 30

The discount of cash flow involves projecting estimated cash flows over an assumed investment holding period plus an exit value at the end of that period , usually arrive at on a conventional all risks yield basis. The cash flow is then discounted back to the present day at a discount rate (also known as the internal rate of return) to proceed the level of risk. When the net pressure value is positive, the investment has exceeded the target rate of a return

Question 31

How do you work out a residual method of valuation?

Answer 31

Gross development value minus total development costs minus the development profit (15-20% depending on risk). The gross development value is the market value of the completed scheme at today’s date. The total development costs include the likes of site preparation, planning costs, build costs, professional fees. This process assumes 100% debt finance

Question 32

What is the profits method of valuation?

Answer 32

Used for the valuation of property where there is a monopoly position. Depends on the profitability of the business and its potential. You need accurate and audited accounts if possible for three years. Essentially, it is earnings before interest taxation depreciation and amortisation, capitalise at an appropriate yield to achieve market value.

Question 33

What yield did you apply for the investment method and why?

Answer 33

I decided to apply a yield of 6%, which was lower than other comparables, as the property was occupied by a strong covenant in the form of a fast food chain with a a 15 year lease unexpired. I also deemed the property to be in a good condition, in comparison to other units. It was on a return corner to in a prime position on the street.

Question 34

Was your example in Watford a red book valuation?

Answer 34

No, as per the professional standards, PS1, our role was purely to advise a client with a headline view of what we believe they could sell their property for if they were to bring it to the market.

Question 35

Can you undertake a re-evaluation without inspection?

Answer 35

Yes, if the valuer is satisfied that there had been no material changes to the property or nature of its location since the last inspection. This should be confirmed and notified in the terms of engagement.

Question 36

How would you value a long leasehold?

Answer 36

Deduct the ground rent, from the gross income, to reach a net rent which is then capitalised at a yield for the length for the lease to create a market value.

Question 37

Did you need to deduct anything from your final valuation figure?

Answer 37

Yes, purchasers costs which were 6.8%. These costs include stamp duty land tax, Agent fees and solicitor fees.

Question 38

What is the depreciated replacement cost method of valuation?

Answer 38

It should only be used when direct evidence is limited. It’s for specific properties like lighthouses, docks and schools. Used for owner occupied property. To calculate, you add the current cost of replacing the building to the value of land in its existing use and then you minus a discount for depreciation and deterioration. There are three types of depreciation, physical, functional and economic. Physical is a result of deterioration. Functional is whether the design is no longer relevant. Economic is due to changing market conditions for the use of the asset. Used to determine market value. A statement that if the business were to close then the market value would significantly decrease.

Question 39

What should you do if there is a lack of evidence?

Answer 39

Still press ahead with the valuation. Professional judgement and expertise becomes more important.

Question 40

What are the thresholds for stamp land duty tax?

Answer 40

Up to 150k = 0 150-250k = 2% 250k + = 5%

Question 41

Why did you still follow the principles of the red book?

Answer 41

I thought it was important to at least adhere to key aspects such as methodology, transparency, and ethics to ensure quality and integrity in my work.