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Valuation (Good Questions) Flashcards

1
Q

What is the timeline of a valuation instruction?

A
  1. Receive instructions
  2. Check Competence
  3. Check no CoI
  4. Issue terms of engagement to the client.
  5. Receive terms of engagement from client
  6. Gather information - leases / lease packet, title documents, planning information, OS plans etc.
  7. Undertake due diligence - to check there are no matters which could adversely impact upon value.
  8. Inspect and measure.
  9. Research market and assemble, verify, and analyse comparables
  10. Undertake valuation
  11. Draft report
  12. Have valuation checked by another surveyor
  13. Finalise and sign report
  14. Report to client.
  15. Issue invoice.
  16. Ensure valuation file in good order for archiving.
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2
Q

What three steps should you undertake before commencing a valuation instruction?

A
  1. Check competence (refer to RICS Find a surveyor service if not competent)
  2. Check for any conflicts or personal interests.
  3. Issue terms of engagement including extent and limitations of the valuers inspection and competence of the valuer.
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3
Q

Why would you undertake statutory due diligence for valuations?

A

To check if there are any material matters which could impact upon the valuation

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4
Q

What are some examples of statutory due diligence?

A

Could involve checking the following:
1. Asbestos Register
2. Business rates / council tax
3. Contamination
4. Equality Act 2010 compliance
5. Environmental matters
6. EPC rating
7. Flooding (check EA website)
8. Fire safety compliance
9. Health & Safety compliance
10. Highways (check if roads are adopted with the local highways agency)
11. Legal title and tenure (rights of way, ownership, deed of covenant etc)
12. Public rights of way
13. Planning history and compliance.

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5
Q

What are the three IVS 105 Valuation Approaches and Methods?

A
  1. Income Approach - converting current and future cash flows into a capital value (Investment, Residual and Profits method)
  2. Cost Approach - reference to the cost of the asset whether by purchase or construction (i.e DRC method)
  3. Market Approach - using comparable evidence available (comparable method)
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6
Q

What are the 5 main methods of valuation?

A
  1. Comparable method
  2. Investment method
  3. Profits method
  4. Residual method
  5. Contractors method
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7
Q

What are the six main steps in the comparable method?

A
  1. Search and select comparables
  2. Confirm / verify details and analyse headline rent to give a net effective rent as appropriate.
  3. Assemble comparables in a schedule
  4. Adjust comparables in schedule
  5. Analyse comparables to form opinion of value.
  6. Report value and prepare file note.
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8
Q

What RICS documents outlines the principles in the use of comparable evidence?

A

RICS Professional Standard: Comparable Evidence in Real Estate Valuation (2019)

  • Outlines principles in use of comparable evidence.
  • Provides advice in dealing with situations where there is limited availability of evidence and sets out a non-prescriptive hierarchy of evidence.
  • Notes that the valuer should use professional judgement to assess the relative importance of evidence on a case by case basis.

Sets out the Hierarchy of Evidence:
1. Category A - direct comparables of contemporary
a. Completed transactions of near identical properties for which full and accurate information is available.
b. Completed transactions of other, similar real estate for which full and accurate information is available.
c. Completed transactions of similar real estate for which full data may not be available.
d. Similar real estate being marketed where offers may have been made but a binding contract has not been completed.
e. Asking prices (only with careful analysis)

  1. Category B - General market data that can provide guidance.
    a. Info from published sources or commercial databases
    b. other indirect evidence
    c. historic evidence.
    d. Demand/supply data for rent, owner-occupation or investment
  2. Category C - other sources
    a. Transactional evidence from other real estate types and locations
    b. other background data (i.e interest rates, stock market movements.
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9
Q

Tell me about your understanding of the hierarchy of evidence?

A
  • Set out in RICS Professional Standard: Comparable Evidence in Real Estate Valuation (2019)

Hierarchy of Evidence:
1. Category A - DIRECT COMPARABLES OF CONTEMPORARY
a. Completed transactions of near identical properties for which full and accurate information is avilable.
b. Completed transactions of other, similar real estate for which full and accurate information is available.
c. Completed transactions of similar real estate for which full data may not be available.
d. Similar real estate being marketed where offers may have been made but a binding contract has not been completed.
e. Asking prices (only with careful analysis)

  1. Category B - GENERAL MARKET DATA THAT CAN PROVIDE GUIDANCE
    a. Information from published sources or commercial databases.
    b. other indirect evidence
    c. historic evidence
    d. demand/supply data
  2. Category C - OTHER SOURCES
    a. Transaction evidence from other real estate types and locations
    b. other background data i.e interest rates, stock market movements)
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10
Q

How do you find relevant comparables?

A
  1. Inspection of an area to find recent market activity by seeking agents boards.
  2. Visit / speak to local agents
  3. Auction Results (beware these are gross prices)
  4. In house Records/databases and websites such as EGI and Co-star

Date of evidence is crucial

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11
Q

What do you need to be careful about when using auction results?

A
  1. Auction sales comparables can be a special purchaser or an insolvency sale.
  2. Sale price is gross of costs
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12
Q

When do you use the investment valuation method?

A
  1. When there is an income stream to value.
  2. The investment method capitalises rental income to produce a capital value.
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13
Q

How would you calculate market value utilising the conventional investment method?

A

Market Rent x Years Purchase = Market Value

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14
Q

How would you calculate market value using the term and reversion method?

A
  1. Term is capitalised until the next review / lease expiry at an initial yield.
  2. The reversion to market rent is valued in perpetuity at a reversionary yield.
  3. Used for reversionary investments (UNDERRENTED)
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15
Q

When would you use the term and reversion method?

A
  1. Term and Reversion method is used for reversionary investments where market rent is higher than passing rent.
  2. (UNDERRENTED)
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16
Q

How would you calculate market value using the layer/hardcore method?

A
  1. Used for overrented investments where passing rent is higher than market rent (rackrented)
  2. Income flow is divided horizontally.
  3. Bottom Slice = Market Rent
  4. Top Slice = Rent passing less Market Rent until next lease event.
  5. Higher yield is applied to top slice to reflect additional risk.
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17
Q

When would you use the layer/hardcore method?

A
  1. Use for overrented investments where passing rent is higher than market rent (rackrented)
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18
Q

What is a yield?

A
  1. A measure of investment return, expressed as a percentage of capital invested.
  2. A yield is calculated by income divided by price x 100
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19
Q

What is a YP (years purchase)?

A
  1. Years Purchase is the number of years required for a its income to repay its purchase price.
  2. Calculated by dividing 100 by the yield.
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20
Q

Can you name me some different types of yields?

A
  1. All Risks Yield - The remunerative rate of interest used in the valuation of fully let property let at market rent. Reflects all the prospects and risks attached to the particular investment.
  2. True Yield - assumes rent is paid in advance not in arrears.
  3. Nominal Yield - assumes rent is paid in arrears.
  4. Gross Yield - The yield not adjusted for purchasers costs.
  5. Net Yield - The resulting yield adjusted for purchasers costs.
  6. Equivalent yield - average weighted yield when a reversionary property is valued using an initial and reversionary yield.
  7. Initial Yield - simple income yield for current income and current price.
  8. Reversionary yield - Market Rent (MR) divided by current price on an investment let at a rent below the MR.
  9. Running Yield - the yield at one moment in time.
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21
Q

Why are secondary yields higher than primary yields?

A
  1. More risk associated:

A. Quality of location and covenant
B. Prospects of rental and capital growth
C. Liquidity - ease of sale.
B. Obsolescence
E. Security and regularity of income.

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22
Q

What are the current prime yields in London?

A

High Street Retail
3% Bond Street
4.5% Oxford Street

Offices
City Prime - 5.25-5.5%
West End: Prime Core - 4%
West End: Non Core - 4.75%

Warehouse & Industrial
Prime Distribution / Warehousing - 5-5.5%
Secondary Distribution - 6%

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23
Q

What factors influence yields?

A

Risk is a major factor when determining a yield, in relation to the following factors:
1. Prospects for rental and capital growth
2. Quality of location and covenant
3. Use of property
4. lease terms
5. Obsolescence
6. Void risk
7. Security and regularity of income
8. Liquidity

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24
Q

What is a return?

A
  1. Return is a term used to describe the performance of a property
  2. DCF calculation is used to find the IRR
  3. It is measured retrospectively
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25
Q

What does All growth implicit mean?

A
  1. The yield adopted assumes many of the assumptions that are made explicitly in a DCF approach
  2. Risks are hidden in the selected yield.
  3. Need to use comparable method of valuation to decide the yield.
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26
Q

What is a DCF?

A
  1. DCF stands for Discounted Cash Flow Technique
  2. It is a growth explicit investment method of valuation
  3. It is a form of income approach valuation
  4. DCF valuations seek to determine the value of a property by examining its future net income or projected cash flow from the property and then discounting the cash flow to arrive at an estimated current value of the property.
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27
Q

When would you use a DCF valuation?

A
  1. Used for a number of valuations where the projected cash flows are explicitly estimated over a finite period such as:

a. Short leasehold interests and properties with income voids or complex tenures.
b. Phased development projects
c. Some Alternative investments
d. Non-standard investments

Thee approach separates out and explicitly identifies growth assumptions rather than incorporating them within an ARY.

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28
Q

What does NPV stand for? Can you explain it?

A

NPV = Net Present Value = The sum of discounted cash flows of the project

  1. An NPV an be used to determine if an investment gives a positive return against a target rate of return.
  2. When the NPV is positive, the investment has exceeded the investors target rate of return.
  3. When an NPV is negative, the investment has not achieved the investors target rate of return.
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29
Q

What does a positive NPV mean?

A

When the NPV is positive, the investment has exceeded the investors target rate of return

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30
Q

What does a negative NPV mean?

A

When the NPV is negative, the investment has exceeded the investors target rate of return

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31
Q

What is an IRR?

A
  1. IRR stands for internal rate of return
  2. IRR is the rate of return at which all future cashflows must be discounted to produce an NPV of Zero.
  3. It is used to assess the total return from an investment opportunity with assumptions regarding rental growth, re-letting and exit assumptions.,
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32
Q

How do you calculate IRR?

A

If a valuer does not have a software programme to calculate IRR than linear interpolation can be used to estimate the IRR.

  1. Input current market value as a negative cash flow
  2. Input projected rents over holding period as a positive value
  3. Input projected exit value at the end of the term assumed as a positive value.
  4. Discount Rate (IRR) is the rate chosen which provides an NPV of Zero.
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33
Q

What RICS guidance covers DCF valuations?

A

RICS Practice Information - Discounted cash flow valuations, November 2023.

  • Covers topics to include: Explicit DCF Valuation versus the Implicit method of valuation
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34
Q

Why might a DCF valuation be preferred over traditional investment methods?

A
  1. DCF’s consider the time value of money
  2. DCF’s provide a comprehensive financial analysis of a project
  3. DCF’s enable more accurate comparison of projects with different timelines.
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35
Q

Why might traditional investment methods be preferred over a DCF valuation?

A
  1. Traditional methods are simpler and easier to understand
  2. Provide a quick assessment of payback
  3. Suitable for shorter term projects
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36
Q

When would you use the profits method of valuation?

A
  1. Used for valuations of trade related property where there is a ‘‘monopoly’ position
  2. used where the value of the property depends on the profitability of its business and its trading potential.
  3. Used for pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure and healthcare properties and care homes.
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37
Q

How would you undertake a profits method valuation?

A
  1. Basic principle is that the value of the property depends on the profit generated from the business.
  2. Requires accurate and audited accounts if possible for three years.
  3. Audited accounts are superior to management accounts.
  4. Use estimates / business plan if needed for a new business.
  5. Adjust for maturity of business and any unacceptable or exceptional items of expenditure.

Simple Methodology:

Annual Turnover less costs/purchases
= Gross profit
less reasonable working expenses
= Unadjusted net profit
less operators remuneration
= Adjusted net profit known as the Fair Maintainable Operating Profit (FMOP)

FMOP can be expressed as the EBITDA and is capitalised at appropriate yield to achieve market value.

Cross check with comparable sales evidence if possible.

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38
Q

What is a development appraisal?

A
  1. A tool to assess the viability of a development scheme.
  2. It is a calculation / series of calculation to establish the value/viability/profitability and suitability of a proposed development.
  3. A development appraisal provides guidance as the the viability of the proposed development.
  4. It can assume site value or be used to calculate a site value.
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39
Q

What is the difference between a development appraisal and a residual valuation?

A
  1. A development appraisal establishes the value / viability / profitability and suitability of a proposed development.
  2. A development appraisal can assume site value or calculate a site value.
  3. A residual valuation establishes market value of the land and is at one moment in time, at the valuation date, for a specific purpose.
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40
Q

How would you undertake a residual valuation?

A
  1. Gross development value less
  2. Total Development Costs (including allowance for cost of finance & developers profit)
  3. = Residual value
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41
Q

How would you calculate GDV?

A
  1. Use comparable method to determine rate psm at date of valuation.
  2. Apply to measurements to plan to determine GDV
  3. Subtract purchasers costs to end up at NDV (if using NIY don’t need to subtract purchasers costs).
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42
Q

Talk me through some of the typical development costs?

A
  1. Site Preparation
    - Demolition / Remediation works / Landfill tax / site clearance / levelling and fencing
    - (Obtain contractors cost plan for these works).
  2. Planning Costs
    - S106 / CIL / Affordable Housing / Section 278 (Highways) / Planning consultant cost / Specialist reports (i.e environmental assessment) / Planning application / building regulation fees.
  3. Building costs
    - Sources include: Client information (development appraisal) / Spons Architects * Builders Price book / Quantity surveyor estimate / Building surveyor estimate / BCIS (GIA)
  4. Professional Fees:
    - 8-12% of total construction costs for the professional fees for architects / M&E consultants, project managers / structural engineers etc.
    - Architects usually the largest proportion of total fees.
    - CDM principal designer costs
  5. Contingency
    - 5-10% of construction costs depending upon level of risk and likely movements in building costs.
  6. Marketing Costs & Fees
    - Assume a realistic marketing budget
    - Cost of an EPC
    - NHBC warranty (resi)
    - Normal sale fee around 1-2% of GDV
    - Normal letting fees around 10% of initial annual rent.
  7. Cost of finance - three elements
    - Site purchase (compound interest on straight line basis)
    - Total construction and associated costs (S-CURVE)
    - Holding costs to cover voids until disposal of the scheme (Compound interest on a straight line basis)
  8. Developers Profit
    - Percentage of GDV or total construction cost (say around 15-20% depending on risk)
    - GDV more frequently used as a base for residential use
    - If scheme is low risk (pre-let / sold) a lower return may be required.
    - Percentage of profit required has risen given current riskier market conditions.
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43
Q

What different interest rate options can you use for finance assumptions?

A
  1. Current SONIA rate (Sterling Overnight Index Average)
  2. Bank of England Base rate plus premium
  3. Rate at which the developer can borrow money
44
Q

How would you calculate finance costs?

A
  1. Assume 100% debt finance
  2. Finance for borrowing the money to purchase the land is calculated on a straight line basis using compound interest over the length of the development period.
  3. Roll up method of calculation is used (compound interest)
  4. To calculate the finance required for the construction period, assume total construction costs (including fees) over half of time period using S-curve calculation.
  5. Calculate any finance required for on-going holding costs from completion of construction until disposal on a straight-line basis using compound interest.
45
Q

Why would you use an s-curve for build costs?

A
  1. Principle of the S-curve is that the payment of construction costs adopts the profile of an S shaped curve over the length of the development project.
  2. The usual assumption is to halve the interest that would be borrowed for all of the construction period.
  3. The purpose of the s-curve is to reflect when monies tend to be drawn down.
46
Q

What methods of development finance are there?

A

2 MAIN METHODS

  1. Debt finance - lending money from a bank or other funding institute
  2. Equity finance - selling shares in a company or joint venture partnership or own money used.

ALSO

  1. Joint Ventures -where 2 or more parties join to develop
  2. Forward Sales - where completed scheme is pre-sold to either an investor or occupier.
47
Q

What is a typical loan to value ration?

A
  1. Typically c. 60% but in difficult markets lenders may adopt a loan to cost ratio
48
Q

How is interest calculated?

A
  1. Interest is calculated up on a rolled up basis (i.e added to the loan as the project proceeds)
49
Q

What are swap rates?

A
  1. the market interest rate for fixed rate, fixed term loans
50
Q

What is senior debt? What is mezzanine funding? which one takes precedent?

A
  1. Senior debt is the first level of borrowing which takes precedence over secondary / mezzanine funding
  2. Mezzanine funding is additional funding for the additional monies required over the normal LTV rate.
51
Q

What is an overage?

A
  1. Arrangement made for the sharing of any extra receipts over the profits originally expected.
  2. It can be shared between the vendor / landowner and developer in a pre-arranged apportionment
52
Q

Is VAT payable on professional fees?

A

Yes - all of them

53
Q

What is the profit erosion period?

A
  • The term relate to the length of time it will take for the development profit to be eroded by holding charges following the completion of the scheme.
54
Q

What are the limitations of residual valuations and financial modelling?

A
  1. Residual valuations do not consider timing of cash flows.
  2. Residual valuations have implicit assumptions and not explicit (unlike a DCF).
  3. Very sensitive to minor adjustments.
  4. Importance of accurate information and inputs.
55
Q

What types of sensitivity analysis are there?

A

Three forms:
1. Simple sensitivity analysis of key variables such as the yield, GDV, build costs and finance rate.
2. Scenario Analysis
3. Monte Carlo Simulation

56
Q

What is your understanding of the RICS Professional Standard - Valuation of Development Property (2019)?

A
  1. Purpose of the professional standard is to supplement IVS 410 ‘‘Development Property’’
  2. Provides a detailed overview of the valuation of development property
  3. Defines development property as ‘interests where redevelopment is required to achieve the highest and best use, or where improvements are either contemplated or are in progress at the valuation date.
  4. When valuing development property assumptions and/or special assumptions must be clearly stated.
  5. Guidance note states that best practice avoids reliance on a single approach or method of assessing the value of development property.
  6. Best practice requires risk analysis to be used.
  7. Valuation should be reported as a single figure, except where this is a potential for significant variation (which should also be reported).
  8. For complex and/or lengthy development a discount cashflow might be best employed, whereas a basic residual model can be used in other cases.
57
Q

Which RICS document must practitioners comply with when undertaking financial viability assessments for a planning application?

A
  1. RICS Professional Standard - Financial Viability In Planning: Conduct and Reporting (2019)
58
Q

What is your understanding of the Depreciated Replacement Cost Method?

A
  1. Also known as contractors method
  2. Should only be used where direct market evidence is limited or unavailable for specialised properties
  3. Specialised properties could include sewage works, lighthouses, oil refineries, docks, schools, a submarine base etc.
  4. It is used for owner-occupied property, accounts purposes for specialised properties, or for rating valuations of specialist properties.
  5. Method is not suitable to be used for Red Book Global compliant valuations for secured lending purposes.
  6. Can be used for calculation of Market Value for specialised properties (ONLY FOR VALUATIONS FOR FINANCIAL STATEMENTS)
  7. Relevant guidance note is: RICS Guidance Note on Depreciated Replacement Cost Method of Valuation for Financial Reporting (2018)

SIMPLE METHODOLGY
1. Value of land in its existing use (assuming planning 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)

59
Q

How would you undertake a Depreciated Replacement Cost Method valuation?

A
  1. Value land in its existing use (assuming planning 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)

Have to estimate amount of depreciation appropriate for physical, functional and economic obsolescence:
1. Physical obsolescence = result of wear and tear
2. Functional obsolescence is where the design or specification of asset no longer fulfils the function for what it was originally designed.
3. Economic obsolescence is due to changing market conditions for the use of the asset.

60
Q

What different types of obsolescence are accounted for in a DRC valuation?

A
  1. Physical obsolescence = result of wear and tear
  2. Functional obsolescence is where the design or specification of asset no longer fulfils the function for what it was originally designed.
  3. Economic obsolescence is due to changing market conditions for the use of the asset.
61
Q

What statements should accompany a DRC valuation

A
  1. Must state the market value for any readily identifiable alternative use, i.g higher or;
  2. if appropriate, a statement that the market value on cessation of the business would be materially lower
  3. PRIVATE SECTOR = Statement that valuation is subject to adequate profitability of the business, paying due regard to the value of the total assets employed.
  4. PUBLIC SECTOR = statement that it is subject to the prospect and viability of the continued occupation and use.
62
Q

When is the Red Book Global Standards 2021 used?

A

Part 3 - Professional Standards 1 - Mandatory to use for all valuations except for the FIVE exceptions to VPS 1-5

  1. Advice is expressly provided in preparation for, or during course of negotiations or litigation. (Negotiations / Litigations)
  2. The valuer is performing a statutory function except for the provision of valuation for inclusion in a statutory return to a tax authority (Statutory Functions excl. statutory return to tax authority)
  3. Valuation is provided for a client purely for internal purposes, without liability and not communicated to any third party. (Internal purposes)
  4. Valuation is provided as part of agency and brokerage work in anticipation of receiving instructions to dispose of, or acquire, an asset, except when a purchase report is required which includes a valuation. (Agency / brokerage work excl. when purchase report required)
  5. Valuation is provided in anticipation of giving evidence as an expert witness (Expert witness)
63
Q

What are the five exceptions to a red book valuation?

A

Part 3 - Professional Standards 1 - Mandatory to use for all valuations except for the FIVE exceptions to VPS 1-5

  1. Advice is expressly provided in preparation for, or during course of negotiations or litigation. (Negotiations / Litigations)
  2. The valuer is performing a statutory function except for the provision of valuation for inclusion in a statutory return to a tax authority (Statutory Functions excl. statutory return to tax authority)
  3. Valuation is provided for a client purely for internal purposes, without liability and not communicated to any third party. (Internal purposes)
  4. Valuation is provided as part of agency and brokerage work in anticipation of receiving instructions to dispose of, or acquire, an asset, except when a purchase report is required which includes a valuation. (Agency / brokerage work excl. when purchase report required)
  5. Valuation is provided in anticipation of giving evidence as an expert witness (Expert witness)
64
Q

What were the key changes to the updated Red Book Global 2021?

A
  1. The need for compliance with the RBG and adequate terms of reference to reflect this (terms of reference must clearly state whether valuations are RBG complaint or not.)
  2. Valuation for financial reporting purposes (reference to IFRS 13 AND IFRS 16 and the need to provide reasonably possible fair value measurements)
  3. Reference to the use of the profits method for certain trade-related property valuations.
  4. Sustainability and ESG factors, particularly regarding:
    a, Definitions
    b. Inspections and reporting
    c. Valuations for secured lending purposes
    d. Direct and indirect valuation relevance and physical and transition risks.
    e. Definitions and scope of valuations contained within the international valuation standards.
65
Q

What is the structure of the RICS Global Standards 2021 (Red Book Global)?

A
  1. Introduction
  2. Glossary
  3. Professional Standards (PS)
  4. Valuation technical and performance standards (VPS)
  5. Valuation Applications (VPGA)
  6. The International Valuation Standards (IVS)
66
Q

What does PS 2 cover?

A
  1. Covers ethics, competency, objectivity and disclosures.
  2. Members undertaking valuations must act in accordance with the RICS Rules of Conduct
  3. The valuer / firm must act objectively and independent and should apply professional scepticism to information.
  4. Detailed advise is provided on dealing with conflicts of interest.
  5. Members must be able to demonstrate professional competence, understand client’s requirements and comply with the minimum terms of engagement.
  6. PS 2 is mandatory
67
Q

What are the minimum terms of engagement that must be agreed prior to commencing a Red Book Global Valuation?

A
  1. Identification and status of the valuer
  2. Identification of client
  3. Identification of any other intended users
  4. The asset to be valued
  5. Currency
  6. Purpose of the valuation
  7. Basis of value
  8. Valuation date
  9. Extent of investigation
  10. Nature and source of the information to be relied upon
  11. Assumptions and special assumptions to be mae
  12. Format of the report
  13. Restrictions for use, distribution and publication
  14. Confirmation of Red Book Global / IVS compliance
  15. Fee basis
  16. Complaints Handling procedure to be made available.
  17. Statement that the valuation may be subject to compliance by the RICS
  18. Limitation on liability agreed
68
Q

What is the difference between an assumption and a special assumption?

A
  1. Assumptions are made where it is reasonable for the valuer to accept that something is true without the need for specific investigation.
  2. Special assumption is a supposition that is taken to be true and accept as fact, even though it is not true.
  3. Special assumptions must be agreed with the client in writing at the commencement of the instruction.
69
Q

What does VPS 3 cover?

A

Valuation Reports

Covers minimum requirements to be stated within the report.

Covers preliminary (draft) valuation advice.

70
Q

What does VPS 2 cover?

A

Inspections, Investigations and Records

Inspections:
Valuers must take the steps to verify the necessary information being relied upon for a valuation to ensure the information is professionally adequate for its purposes.

Desktop Valuations:
Desk top valuations are red book global valuations unless for one of the 5 reasons set out in PS1. When undertaking desk top valuations, the valuer should consider the following four factors:

  1. The nature of the restriction must be agreed in the terms of engagement.
  2. The possible valuation implications of the restriction confirmed in writing before the value is reported.
  3. The valuer should consider whether the restriction is reasonable with regards to the purpose of the valuation.
  4. The restriction must be referred to in the report.

Revaluation/without a re-inspection:
When undertaking a revaluation (without a re-inspection)
1. Must not be undertaken unless the valuer is satisfied there have been no material changes to the property or the nature of its location since the last inspection.
2. This must be confirmed in the terms of engagement and in the valuation report.

Records:
1. Proper records must be held of the inspections and investigations and other key inputs in an appropriate business format.

71
Q

What are the minimum requirements to be stated within a valuation report according to VPS 3?

A
  1. Identification and status of the valuer
  2. Client and any other intended users
  3. Purpose of valuation
  4. Identification of the asset to be valued
  5. Basis of valuation
  6. Valuation date
  7. Extent of investigation
  8. Nature and source of information relied upon
  9. Assumptions and special assumptions
  10. Restrictions on use, distribution and publication
  11. Instruction undertaken in accordance with IVS standards
  12. Valuation approach and reasoning
  13. Valuation figure(s)
  14. Date of valuation report
  15. Comment on market uncertainty
  16. Statement setting out any limitations of liability that have been agreed.
72
Q

What does the red book advise in terms of preliminary draft valuation advice?

A
  1. Can be given, but must be marked as a draft, for internal purposes only, cannot be relied upon and on no account can it be published or disclosed.
  2. Must state that is a draft and is subject to completion of final report
  3. Can be discussed with client but can not be influenced to change
  4. Any changes must be noted on file and reasons provided
  5. Any additional information supplied by the client as a result of the discussion must be stated in the report.
72
Q

What does VPS 4 cover?

A

VPS4 Covers the Bases of Value and defines SIX bases of value:

  1. Market Value - The estimated amount for which an assessment or liability should exchange;
    - On the valuation date
    - Between a willing buyer and a willing seller
    - in an arms length transactions
    - after proper marketing
    - Where both parties had each acted knowledgeably, prudently and without compulsion
  2. Market Rent - the estimated amount for which an interest in real property should be leased;
    - on the valuation date
    - between a willing lessor and a willing lessee
    - on appropriate lease terms
    - in an arms length transaction
    - after proper marketing
    - when the parties had each acted knowledgeably, prudently and without compulsion
  3. Fair Value (IFRS13) - the 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.
    - The basis of valuation is now required if the International Financial Reporting Standards have bee adopted by a client.
    - It is adopted by the International Accounting Standards Board
    - RICS view that this definition is generally consistent with the definition of Market Value.
  4. Investment Value
    - The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives.
    - May differ from Market Value
    - Sometimes used as a measure of worth to reflect the value against the client’s own investment criteria
  5. Equitable Value (IVS 104) - The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties.
    - Not used in the UK
  6. Liquidation Value - basis of value to be used for a group of assets sold in a piecemeal basis considering the costs of getting the assets into a saleable condition
    - Not used in the UK
73
Q

Define Market Value as per VPS 4?

A

Market Value - The estimated amount for which an assessment or liability should exchange;
- On the valuation date
- Between a willing buyer and a willing seller
- in an arms length transactions
- after proper marketing
- Where both parties had each acted knowledgeably, prudently and without compulsion

74
Q

Define Market Rent as per VPS 4?

A

Market Rent - the estimated amount for which an interest in real property should be leased;
- on the valuation date
- between a willing lessor and a willing lessee
- on appropriate lease terms
- in an arms length transaction
- after proper marketing
- when the parties had each acted knowledgeably, prudently and without compulsion

75
Q

Define Fair Value as per VPS 4?

A

Fair Value (IFRS13) - the 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.
- The basis of valuation is now required if the International Financial Reporting Standards have been adopted by a client.
- It is adopted by the International Accounting Standards Board
- RICS view that this definition is generally consistent with the definition of Market Value.

76
Q

What is the difference between Market Value and Fair Value?

A

Market Value - The estimated amount for which an assessment or liability should exchange;
- On the valuation date
- Between a willing buyer and a willing seller
- in an arms length transactions
- after proper marketing
- Where both parties had each acted knowledgeably, prudently and without compulsion

vs

Fair Value (IFRS13) - the 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.
- The basis of valuation is now required if the International Financial Reporting Standards have been adopted by a client.
- It is adopted by the International Accounting Standards Board

RICS view the FAIR VALUE definition to be generally consistent with the definition of MARKET VALUE

77
Q

Define Investment Value as per VPS 4?

A
  • The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives.
  • May differ from Market Value
  • Sometimes used as a measure of worth to reflect the value against the client’s own investment criteria
78
Q

Define Equitable Value as per VPS 4?

A

Equitable Value (IVS 104) - The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties.
- Not used in the UK

79
Q

Define Liquidation Value as per VPS 4?

A

Liquidation Value - basis of value to be used for a group of assets sold in a piecemeal basis considering the costs of getting the assets into a saleable condition
- Not used in the UK

80
Q

What does VPS 5 cover? - Valuation Approaches and Methods

A
  1. Valuers are responsible for choosing and justifying their valuation approach and use of model
81
Q

Are valuers responsible for choosing their valuation approach?

A

Yes - According to VPS5 Valuers are responsible for choosing and justifying their valuation approach and use of model.

82
Q

What does Part 5 of the Red Book Global cover?

A
  1. Valuation Applications (Valuation Practice Guidance Applications (VPGAs)
  2. Provides 10 VPGA’s
83
Q

What VPGA’s are you aware of?

A

Red Book Global 2021

  1. VPGA 1: Valuation for inclusion in financial accounts.
  2. VPGA 2: Valuations for secured lending
  3. VPGA 8: Valuation of Real Property Interests
  4. VPGA 10: Matters that may give rise to material valuation uncertainty.

UK VPGA’S as per UK National Supplement 2023 include:

  1. Valuation for financial reporting
  2. Valuation of charity assets
  3. Relationship with auditors
  4. Valuation for commercial secured lending purposes
  5. Valuation for UK residential property
  6. Valuation of registered social housing for loan security purposes
  7. Valuation for CGT, Inheritance Tax, SDLT and ATED
84
Q

What is your understanding of VPGA 1?

A

Valuation for Inclusion in financial accounts

  1. Fair value will be adopted for all IFRS adopted accounts
  2. Prescribed performance standards must be adhered to
85
Q

What is your understanding of VPGA 2?

A

VPGA 2 covers Valuations for secured lending

  1. VPGA covers how deal with Conflicts of Interest for secured lending valuations as well as reporting procedures
86
Q

What does the red book advise in regards to dealing with conflicts of interest for secured lending valuations?

A
  1. VPGA 2 advises that any previous, current or anticipated involvement with the prospective borrower or the property to be valued must be disclosed to the lender.
  2. Previous involvement is defined as normally being within the past two years, but under certain circumstances it can be longer.
  3. If the valuer or client considers that any involvement creates a conflict that cannot be avoided, then the instruction should be declined.
  4. It is the valuers responsibility to decide whether or not to accept the instruction having regard to the principles of the RICS Rules of Conduct
  5. If the valuer and client agree that any potential conflict can be avoided by introducing arrangements to manage the instruction, these must be recorded in writing and included in the terms of engagement and valuation report.
87
Q

What additional reporting must be undertaken when undertaking Loan Security Valuations?

A
  1. Minimum requirements of a valuation report
  2. Disclosure of any involvement identified in ToE or subsequently and any arrangements agreement for avoiding the CoI. Alternatively a statement that the valuer is not involved.
  3. Valuation methodology adopted.
  4. Where a recent transaction has occurred, or provisionally agreed price has been disclosed, the extent to which that information has been accepted as market value.
  5. Comment on any environmental consideration.
  6. Where the enquiry does not reveal any information, the valuer will make a statement to that effect.
  7. Comment on the suitability of the property for mortgage purposes
  8. Any circumstances of which the valuer is aware that could affect the price.
  9. Any other factors that potentially conflicts with the definition of market value or its underlying assumptions.
  10. Any other relevant normal valuation enquires undertaken.
  11. When using a special assumption, then a comment must be made in the report on any material difference between the reported value with and without that special assumption.
87
Q

Give some examples of involvement that may result in conflicts of interest for loan security valuations?

A
  1. Having a longstanding professional relationship with the prospective borrower or owner
  2. When the valuer will gain a fee from introducing the transaction to the lender
  3. If there is a financial interest in the property holding or prospective borrower
  4. When the valuer is retained to act in the disposal or letting of the completed development on the subject property.
88
Q

What does VPGA 8 Cover?

A

VPGA 8 = VALUATION OF REAL PROPERTY INTERESTS

  1. Covers inspections and investigations.
  2. Particular emphasis on ESG and specific environmental constrains and sustainability issues.
  3. Identifies ESG and Sustainability issues including the need to consider direct valuation factors (i.e Storm and flood risk) and indirect valuation factors (e.g resilience or carbon emissions) and physical risks or transition risks (Wildfire / Regulatory change)
89
Q

What does VPGA 10 cover?

A

VPGA 10 = Matters that may give rise to material valuation uncertainty
1. Overriding requirement is that a valuation must not be misleading
2. Valuer should clearly draw attention to, comment on, any issues resulting in material uncertainty in the valuation
3. A standard caveat should not be used.

90
Q

What is your understanding of the RICS Valuation - Global Standards (UK National Supplement, 2023)?

A
  1. Latest UK National Supplement was published in October 2023.
  2. Will come into effect on 1st May 2024
  3. New edition reflects outcome of the independent review of real estate investment valuations.
  4. Sets out clarification that the UK National supplement augments the Red Book Global requirements and is not a substitute for it.
  5. Provides specific requirements for members on the application of Redbook valuations undertaken subject to UK jurisdiction.
  6. The changes are intended to reduce the risks of CoI in the commissioning of valuation reports.

Contents:
Part 1: UK Professional Standards (PS)
Part 2: UK Valuation Technical and Performance Standards (VPS)
Part 3: UK Valuation Practice Guidance Applications (UK VPGA’s)

91
Q

Can you give some examples of UK VPGA’s?

A
  1. Valuation for financial reporting
  2. Valuation of charity assets
  3. Relationship with auditors
  4. Valuation for commercial secured lending purposes
  5. Valuation for UK residential property
  6. Valuation of registered social housing for loan security purposes
  7. Valuation for CGT, Inheritance Tax, SDLT and ATED
92
Q

Can you give some examples of regulated purpose valuations?

A

UK VPS 3 sets out 5 regulated purpose valuations:

  1. Financial Reporting (company accounts)
  2. Stock Exchange listings / inclusion in prospectuses and circulars
  3. Takeovers and mergers
  4. Collective investment schemes
  5. Unregulated property unit trusts

Secured lending valuations are not regulated purpose valuations as they are not relied upon by third party or in the public interest.

93
Q

What RICS guidance is there in relation to ESG?

A

RICS Professional Standard - Sustainability and ESG in Commercial Property Valuation and Strategic Advice (2021)

  1. Document provides useful glossary of relevant terms and factors which valuers should incorporate into their valuation approaches
  2. Provides advise relating to sustainability considerations and risks
94
Q

What margin of error is acceptable in valuations?

A
  1. Margin of error can be varied, but will be narrower for a relatively straightforward valuation case and wider for a more complex case. (Singer & Friedlander Ltd v J.D. Wood (1977)
  2. Principle of 10% was reinforced in the case of K/S Lincoln and Others vs CB Richard ELLIS (2010) in respect of a valuation of 4 hotels. Judge stated margin may be 5% for standard residential property, 10% for one off commercial and 15% if there are exceptional features of the property.
  3. Dunfermline Building Society v CBRE (2017) assumed 15%
95
Q

What is Hope Value?

A
  1. The value arising from any expectation that future circumstances affecting the property may change.
  2. TWO TYPICAL EXAMPLES:

a. The future prospect of securing planning permission where no planning permission exists at the present time
b. The realisation of marriage value arising from the merger of two interest in land.

96
Q

What is marriage value?

A

Marriage Value is created by a merger of interest
1. Can be physical or tenurial
2. Undertake a before and after valuation and calculate the level of marriage value created.
3. Typical negotiated outcome is to split the marriage value 50:50 or divide it pro-rate to the value of the individual interest.

97
Q

What are the SDLT bands?

A

Non-residential / Mixed-use
0-£150,000 = nil
£150,001 - £250,000 = 2%
Over £250,000 = 5%

Residential
0-£250,000 = NIL
£250,001 - £925,000 = 5%
£925,001 - £1,500,000 = 10%
Over £1,500,000 = 12%

New Leases
NPV of up to £150,000 (£125,000 for residential) = 0
NPV of over £150,000 (£125,000 for residential) = 1%
NPV of over £5,000,000 = 2%

98
Q

What are typical purchasers costs?

A
  1. SDLT (prevailing rate)
  2. Agent’s fees (1% of purchase price + VAT)
  3. Solicitors Fees (0.5% of the purchase price + VAT)
99
Q

What is a special purchaser? What is special value?

A
  1. Red Book Global defines a special purchaser as ‘‘a particular buyer for whom a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market’’
  2. Special Value is an amount that reflects particular attributes of an asset that are only of value to a special purchaser.
  3. Special value may be generated when the transaction is not at arms length and there is a special purchaser.
100
Q

How can you calculate a net effective rent?

A
  1. Straight line method
  2. Straight line method assuming time value of cash flow using a yield.
  3. Use of DCF
101
Q

What is a WAULT?

A
  1. Weighted average unexpired lease term remaining to the first break or expiry of ease across the asset weighted by contracted rent.
  2. Often undertaken when valuing an asset or considering appropriate investment yield comparables for multi-occupied individual investments or portfolios.
101
Q

Tell me your understanding of Zoning?

A
  1. Valuation technique, not a method of valuation
  2. Used for the comparison of retail properties
  3. Halving back principle with 6.1m zones
102
Q

Tell me your understanding of the RICS Valuer Registration Scheme (VRS)?

A
  1. Introduced October 2011 to:
    a. Improve quality of valuation and ensure highest standards
    b. meet RICS requirement to self-regulate effectively
    c. Protect and raise the status of the valuation profession as the leading expertise
  2. Registration is not mandatory for work excluded from red book global
  3. Registered valuers are entitled to use the term RICS Registered Valuer
  4. Only eligble if they have completed the APC valuation competency to level 3 or have subsequently qualified for registration
  5. Annual fee needs to be paid to RICS upon registration.
  6. Head of Regulation has power to remove a valuer from the scheme.
  7. RICS monitor the valuer through the submission of their firms annual return.

APC (18 decks)

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