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Valuation > Valuation Cards > Flashcards

Valuation Cards Flashcards

1
Q

You say you are familiar with the 5 methods of valuation what are these?

A

Profits
Comparative
Investment
Residual
Depreciated Replacement Cost

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2
Q

When would the depreciated replacement cost method be used?

A

Where there is limited to no comparable evidence for specialist properties such as oil refineries, submarine bases or an ancient monument. Also known as “method of last resort”

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3
Q

Can you talk me through the depreciated replacement cost methodology?

A
  • Value of land in its existing use (assuming planning permission exists)
  • Add cost of replacing building plus fees
  • Make discount for depreciation, deterioration and obsolescence
  • Use BCIS then judge level of obsolescence
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4
Q

What can and can’t a DRC be used for?

A

Not for vals for secured lending but can be used for calculating market value of specialist properties but only for financial statements

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5
Q

What are the international valuation standards?

A

These are valuation standards published by the International Valuation Standards Council to promote transparency and consistency in valuation exercises which are implemented in the red book.

For example - IVS 105 Refers to valuation approaches such as income, cost and market.

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6
Q

What is the UK National Supplement?

A

This augments the red book global and sets out requirements for members undertaking valuations subject to the UK jurisdiction.

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7
Q

Tell me 3 types of valuation covered by the national supplement

A

Valuations for secured lending
Valuations for capital gains tax
Valuation of charity assets

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8
Q

What are the some of the mandatory requirements of the UK National Supplement?

A
  • Compliance with valuation standards in the UK jurisdiction
  • clear terms of engagement
  • reporting requirements (minimum within valuation report)
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9
Q

How are the IVS and National Supplement linked to the red book

A

The IVS are published separately but implemented within the Red Book and the National Supplement augments this for members undertaking valuations subject to the UK jurisdiction.

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10
Q

When was the red book last updated?

A

31 January 2022

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11
Q

What are the some of the changes from the previous red book

A
  • Need for clear unambiguous terms of engagement
  • Term ‘non red book’ should not be used in terms of engagement
  • Greater focus on ESG and Sustainability
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12
Q

Can you tell me what the hardcore layer method of valuation is?

A
  • Used for over rented properties.
  • Split the valuation into two slices effectively
  • MR on bottom
  • MR - Rent passing on the top and apply higher yield to reflect riskier portion.
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13
Q

What is the term and revision method?

A
  • Used for under rented properties / investments
  • Term is capitalised until next review or lease expiry at initial yield
  • Reversion to MR valued in perpetuity at reversionary yield
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14
Q

What is the difference between and internal and external valuer?

A

Internal - employed by company to value their assets / enterprise.

External - no material links to the asset to be valued or the client.

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15
Q

What is the structure of the Red Book

A

6 parts as follows:

  1. Introduction
  2. Glossary
  3. Professional Standards (PS) Mandatory
  4. Valuation Performance & Technical Standards (Mandatory)
  5. Valuation Applications (VPGA)
  6. International Valuation Standards
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16
Q

What parts of the Red Book are mandatory?

A

PS 1-2 are mandatory and VPS 1-5 unless otherwise stated for one of the exemptions from red book compliance.

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17
Q

What are the FIVE exemptions from Red Book Global Compliance?

A

1.Advice in negotiations or litigation

  1. When provided for internal purposes
  2. When provided for agency/brokerage work
  3. Evidence as expert witness
  4. When valuer performing statutory function
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18
Q

What is Professional Standard 1 and 2?

A

PS 1 = Compliance with compliance and practice statements where written valuation is provided. (Red book compliance).

PS 2 = Ethics, Competency, objectivity and disclosures (i.e CIT)

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19
Q

What are VPS 1 - 5?

A

VPS 1 - Terms of Engagement (minimum)

VPS 2 - Inspections, Investigations and Records

VPS 3 - Valuation Reports (minimum)

VPS 4 - Bases of Value, Assumptions + Special Assumptions

VPS 5 - Valuation Approaches and Methods

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20
Q

What Valuation Applications within the Red Book are relevant to your line of work?

A

VPGA 2 - Valuations for secured lending

VPGA 4 - Valuations of trade related property

VPGA 8 - Valuation of real property interests (inspections and investigations)

VPGA 10 - Matters that give rise to material uncertainty (valuation report not misleading)

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21
Q

What is the structure of the UK National Supplement?

A

4 parts:

  1. Intro
  2. UK professional and valuation standards
  3. Uk valuation practice guidance applications
  4. Summary of changes from Red Book 2014
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22
Q

What are some of the UK VPGA

A

Secured Lending = UK VPGA 10

Capital Gains = UK VPGA 15

Valuation for Charity Assets = UK VPGA 8

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23
Q

Have there been any reviews into valuation at the RICS currently?

A

PETER GRAY REVIEW

  • Independent review of real estate investment valuations (Dec 2021)
  • 13 recommendations including
  • Implementing a rotation process for valuers
  • Use of DCF as the principal method for investment val
  • Valuation compliance officer role in firms
  • review of post qualification requirements for valuers and regular revalidation of valuers.
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24
Q

What is Margin of error?

A

Permissible range allowed by court in respect of valuation.

Plus or minus 5% resi

Plus or minus 15% for commercial depending on complexity of asset (usually 10%).

25
Q

What is hope value?

A

Value arising from a change in future circumstances affecting the property such as granting of planning permission.

26
Q

What is marriage value?

A

Enhanced value created from the merger of two interests (physical or tenural)

27
Q

What are the SDLT rates?

A

0 to £150k = Nil

£150k to £250k = 2%

Over £250k = 5%

28
Q

What is a special purchaser?

A

Someone who’s ownership of an asset gives them particular advantages that would not be available to other buyers in the market / market participants.

E.g adjoining landowner

29
Q

Talk me through the investment method of valuation

A

Rent Received or MR x YP = MV

Comps important for yields and rent

30
Q

What is a yield and what factors do you consider when establishing a yield?

A

Yield = A measure of investment return (expressed as a percentage)

  • RISK is a major factor when determining a yield
  • Quality of location
  • Quality of covenant
  • Prospects of rental and capital growth
  • Use of the property
  • Lease terms
  • Security and regularity of income
  • Liquidity - ease of sale
31
Q

What is a net initial yield and why did you choose this?

A
  • Based off how comparables analysed
  • annualised rent, net of costs, expressed as a percentage of capital value, after adding notional purchasers costs
32
Q

How do you calculate a yield?

A

Income \ price x 100

33
Q

What is a YP multiple and how is it calculated?

A

100 / Yield = YP

This is the amount of years the income will take to repay the purchase price

34
Q

What is a Reasonably Efficient Operator (REO) ?

A

A reasonably efficient operator is an assumption made by the valuer that the market participants are competent operators that operate in an efficient manner.

35
Q

What is adjusted net profit?

A

Valuers assessment of actual net profit of a currently trading property.

36
Q

What is Fair Maintainable Operating Profit (FMOP).

A

Level of profit stated prior to depreciation and finance costs relating to the asset itself

37
Q

What is Fair Maintainable Trade / Turnover (FMT)

A

Level of trade expected by REO on the assumption that the property is fully operational, equipped and maintained.

38
Q

Can you talk me through the profits method of valuation and how would you go about doing this?

A

Establish level of turnover (wet / dry trade and any machine income)

Less costs / purchases = Gross profit

Less reasonable working expenses
= Unadjusted net profit

Less directors remuneration

= Unadjusted net profit

X YP multiple gathered by comparable evidence = Value

39
Q

What is the Peter Gray review?

A

Independent review into real estate investment valuations:

13 key reccomend such as:

  • compliance role specific to valuation
  • rotation of valuers
  • increased diversity within the valuation profession
  • raising any concern about ethical conduct

Also stated the 13 recommendations come as a package and must be implemented together

40
Q

Where does the hierarchy of evidence come from?

A

Guidance Note ‘Comparable Evidence in Real Estate Valuation’ 1st edition 2019

41
Q

What is the hierarchy of evidence?

A

CATEGORY A - Direct comparables of:

  • completed transactions of near identical properties
  • completed transactions of other similar real estate full data avail
  • completed transactions of similar real estate where enough data avail
  • similar real estate where offers received but no contract
  • asking prices (careful consideration)

CATEGORY B - General market data

  • historic data, other indirect evidence (indices), demand / supply data.
  • published sources or commercial database

CATEGORY C - other sources

  • transactional evidence from other real estate types and locations
  • other background data (interests rates and stock market movements and returns which give an indication of real estate yields)
42
Q

What is growth implicit?

A

Reflects all prospects of rental / capital growth in the yield

43
Q

What is growth explicit ?

A

Assumptions can be seen throughout the calculation such as a DCF - in comparison to growth implicit.

44
Q

What is an all risks yield?

A

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

45
Q

What is a true yield?

A

Assumes rent is paid in advance

46
Q

What Is a nominal yield?

A

Initial yield assuming rent paid in arrears

47
Q

What is a gross yield?

A

Yield not adjusted for purchasers costs e.g auction result

48
Q

What is an equivalent yield?

A

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

49
Q

What is an initial yield

A

Simple income yield for current income and current price

50
Q

What is a reversionary yield

A

MR / Current price on an investment let at below MR

51
Q

What is a running yield

A

Yield at one moment in time

52
Q

What do purchasers costs consist of?

A

Stamp duty at the prevailing rate

Agents fees 1%

Legal fees 0.5%

53
Q

What is Net Present Value

A

Sum of the discounted cash flows of a project

Can be used to determine if an investment give a positive return against a target rate of return.

54
Q

What is IRR?

A

Internal Rate of Return - the rate of return at which all future cash flows must be discounted to produce a NPV of zero.

55
Q

What is market value?

A

The 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

Where the parties had acted knowledgeably, prudently and without compulsion

56
Q

What is market rent?

A

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 arms length transaction

After proper marketing

When the parties had acted knowledgeably, prudently and without compulsion

57
Q

What is investment value?

A

Value of an asset to a particular owner or prospective owner for an individual investment or operational objectives.

58
Q

What is fair value?

A

Considered to be the same as market value but in regard to IFRS 13 this is the value stated for financial reporting.

Fair value - price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Valuation (2 decks)

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