Valuation L2 Flashcards
(98 cards)
1
Q
What are the two pieces of RICS documentation relating to valuation in the UK?
A
RICS Valuation - Global Standards effective from 31st Jan 2022
RICS Valuation - Global Standards 2017: UK National Supplement effective from 14th January 2019
2
Q
What are the 5 methods of Valuation?
A
- Comparable
- Investment
- Residual
- Profits
- Depreciated Replacement Cost
3
Q
What are the three valuation approaches outlined in the Red Book?
A
- The Market Approach (comparable)
- The Income Approach (investment, residual, profits)
- The Cost Approach (DRC)
4
Q
What are the parts of the RICS Valuation Global standards 2021 (effective January 2022)?
A
- Introduction
- Glossary
- Professional Standards (Mandatory)
- Valuation technical and performance standards (VPS)
- Valuation Practice Guidance Apps (VPGA)
- The international valuation standards 2017 (IVS)
5
Q
What is Professional Standard 1?
A
Compliance with standards where a written valuation is provided
6
Q
What are the 5 exemptions from the PS1?
A
- Agency (In anticipation of receiving instructions to dispose of a property)
- Litigation & negotiation eg. RR’s
- Internal purposes only
- Expert witness - duty to court
- Statutory basis- where carried out by statutory officer
7
Q
If you want to undertake a valuation which is an exception to the Redbook, what do you have to do?
A
It would need to be set out in the terms of engagement and report that your client has agreed that it is an exception.
8
Q
What is Professional Standard 2 of the Redbook?
A
- COMPETENCY Relates to ethics and an individual’s competency to deliver.
- Relates to having the appropriate knowledge and experience of dealing with a particular property (asset class) and location.
- RULES OF CONDUCT Ethics (members must act in accordance with RICS Rules of Conduct)
- CONFLICTS OF INTEREST Includes detailed advice on conflicts of interest.
9
Q
What is part 4 of the Redbook?
A
Valuation Technical and Performance Standards (VPS) - mandatory
10
Q
What is VPS1?
A
VPS1 relates to Terms of Engagement
11
Q
Can you tell me the minimum requirements under VPS1?
A
- Identification and status of valuer
- Identification of client
- Identification of any other intended users
- The asset to be valued
- Currency
- Purpose of valuation
- Basis of value
- Valuation date
- Extent of investigation
- Nature and source of information to be relied upon
- Assumptions and special assumptions to be made
- Format of report
- Restrictions of use, distribution and publication
- Confirmation of Redbook/IVS compliance
- Fee basis
- CHP
- Statement that the valuation may be subject to compliance by RICS
- Limitation on liability agreed
12
Q
What is an assumption?
A
- An assumption is made where t is reasonable for the valuer to accept that something is true without need for specific investigation.
- Such as that the property has all the relevant planning permissions
13
Q
What is a Special Assumption?
A
- A term used to describe an assumption which is factually untrue at the time of valuation.
14
Q
What Special Assumptions are you aware of?
A
- Vacant possession.
- Restricted Marketing period.
- Anticipation of a physical change.
- Anticipation of a new letting.
- Existence of a special purchaser.
15
Q
What does VPS2 relate to?
A
Inspections, investigations and records. Refers to restricted information (where you have been asked to undertake a valuation without an inspection).
16
Q
What does VPS2 state in relation to restricted valuations?
A
- It is still a Red Book Global valuation unless for one of the exemptions set out in PS1.
When a valuer is instructed to undertake a valuation on the basis of restricted information without a physical inspection they MUST consider:
1. Restriction must be set out in TOE
2. Possible valuation implications of the restriction must be confirmed in writing
3. Valuer should consider whether the restriction is reasonable for the purpose
4. Restriction must be referred to in the report.
17
Q
What does VPS2 state about revaluation without reinspection?
A
A revaluation without re-inspection of the property must not be undertaken unless the valuer is satisfied that there have been no material changes to the property or nature of its location since the last inspection.
18
Q
What does VPS2 state about records?
A
Records must be held of the inspections and investigations and other key inputs in an appropriate business format
19
Q
What does VPS2 state about records?
A
Need to be kept in a business folder
20
Q
What are the minimum requirements to be stated in a report under VPS3?
A
identification and status of valuer
* b) client and any other intended users
* c) purpose of valuation
* d) Identification of asset to be valued
* e) Basis of Valuation
* f) Valuation date
* g) Extent of investigation
* h) Nature of source of info relied upon
* i) Assumptions and special assumps
* j) restrictions on use, distribution& publication
* K) instruction undertaken in accordance with IVS standards
* l) Valuation approach & reasoning
* M) Valuation figure(s)
* n) Date of Valuation report
* o) Comment on market uncertainty
* p) Statement setting out any limitations on liability that have been agreed
21
Q
What does VPS3 in the Redbook state about preliminary (draft) advice?
A
- It can be given but MUST:
- be marked as a draft
- for internal purposes only
- cannot be relied upon
- or no account can it be published or disclosed
- subject to the completion of final report
- can be discussed with the client but the valuer must not be influenced by the client in any way
- any changes to draft must be noted and reasoned
- any additional info supplied following discussion must be stated
22
Q
What is VPS4?
A
Bases of value, assumptions and special assumptions
23
Q
What are the 6 bases of value?
A
- Market Value
- Market Rent
- Fair Value
- Investment Value – the value of an asset to a particular owner for individual investment
- Equitable Value
- Liquidation Value
24
Q
What is Market Value?
A
- The estimated amount for which an asset or liability should exchange at the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing where both parties has acted knowledgably, prudently and without compulsion.
25
What is Market Rent?
* The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and lessee on appropriate lease terms in an arm’s length transaction, after proper marketing, where both parties had acted knowledgably, prudently and without compulsion.
26
If you were to carry out a valuation for accounting purposes, what basis of value would you use?
* Fair Value
27
What is fair value?
* A basis of valuation carried out for accounting purposes which is required by the International Financial Reporting Standards.
* ‘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’
28
What are the two financial reporting frameworks?
IFRS and GAAP
29
Can publicly listed companies choose GAAP or IFRS?
No, publicly limited companies must comply with IRFS. Other entities can choose.
30
What’s the difference between fair value and market value?
There is no material difference between the two. Fair value is a defined term in the International Financial Reporting Standards and is used for financial reporting.
31
What does VPS stand for?
Valuation Technical and Performance Standards - Valuation Approaches and Methods
32
What are the valuation approaches?
* The Market Approach (equates to the comparison method)
* The Income Approach (refers to the investment method/residual method/profits method)
* The Cost Approach (refers to the DRC)
33
What does Part 5 of the red book cover?
* Valuation applications (Valuation Practice Guidance Application- VPGA’s) Advisory worldwide
* 10 VPGAs.
34
What is VPGA1?
* Valuations for financial accounts. Fair value will be adopted for all IFRS adopted accounts
35
What is VPGA2?
* Valuations for secured lending and dealing with COI for this and to be transparent with them.
36
What is VPGA8?
* Valuation of real property interests – covers inspections and investigations, with particular emphasis on ESG and sustainability issues.
* Including the need to consider direct valuation factors (e.g flood risk), indirect valuation factors (carbon emissions), physical risks (through heat or wildfire).
37
What is VPGA10?
* Relates to material uncertainty clauses.
* This is a standard clause explaining that the property has not been inspected.
38
What is the RICS Global Standards UK Supplement 2018?
Specifically for the UK.
Not mandatory just advisory guidance
39
What is a discounted cash flow?
* DCF is an investment method technique.
* DCF valuation involves projecting estimated cash flows over an assumed investment holding period, plus an exit value at the end of that period, usually arrived at on a All Risks Yield basis. The cash flow is then discounted back to the present day at a discount rate (the desired rate of return) that reflects the perceived level of risk.
* DCF works by examining a property’s projected future income or projected cash flow from the investment, and then discounting that cash flow to arrive at an estimated current value of the investment. This estimated current value is commonly referred to as net present value, or NPV.
* Simple methodology to establish MARKET VALUE;
1. Estimate the cash flow (income less expenditure)
2. Estimate the exit value at the end of the holding period
3. Select the discount rate
4. Discount cash flow at discount rate
5. Value is the sum of the completed discounted cash flow to provide the NPV.
40
What is an Exit Value?
* The value of an investment asset at the end of the holding period. Holding period is the amount of time the investment is held by an investor.
41
What is Net Present Value?
* The sum of the discounted cash flows of the project.
* A NPV can be used to determine if an investment gives a positive return.
42
What is the internal rate of return?
* The rate of return at which all future cash flows must be discounted to produce a NPV of zero.
* The IRR is used to assess the total return from an investment opportunity making assumptions regarding rental growth and re-letting.
* IRR is calculated using the same concept as net present value (NPV), except it sets the NPV equal to zero.
43
What is Hope value?
* The value arising from an expectation that future circumstances affecting the property may change. Such as:
o The future prospect of securing planning permission for the development of land, where no planning permission exists at the present time. Or the realisation of marriage value arising from a merger of two interests of land.
44
What is Marriage value?
* The merging of two interests.
* An additional element of value created by the combination of two or more interests where the combined value is more than the sum of the separate values.
* Undertake a before and after valuation and calculate the level of marriage value created.
* Typical negotiation outcome is to split the marriage value created 50:50.
45
What are purchaser’s costs for a SALE?
* Agents Fees- 1%
* Legal Fees - 0.50%
* Stamp Duty - see below
* VAT - 20%
46
What are the Stamp Duty Land Tax brackets?
* Commercial property:
o £0 -£150,000 – Nil
o £150,000-£250,000 – 2%
o Over £250,000 – 5%
* The brackets are different in England, Wales and Scotland depending on government.
47
What is the investment purchasers costs?
* Circa 6.8% (depends on stamp duty brackets)
48
What are purchasers costs for a RELETTING?
* Reletting Cost/Agents Fees- 10%
* Legal Fees - 5%
* VAT - 20%
49
Define Special Purchaser?
* A party who’s interest in the property means it is of a higher value to them than in the open market. E.G a tenant purchasing their freehold interest
50
What is a Building Cost Reinstatement Valuation?
* Used for building insurance purposes.
* It is the cost to reinstate the building without profit.
* Calculated using the RICS Building Cost Information Service (BCIS) adopting a GEA for commercial properties.
51
Who is the BCIS owned by?
* RICS
52
How do you value a long leasehold interest?
* Gross income, less ground rent = Net rental income
* Then capitalise at an appropriate yield for the remaining lease length = MV of a long leasehold interest.
53
What is a WAULT?
Weighted average unexpired lease term. It is an indicator of the average remaining life of the leases within their portfolios. Can go to expiry or break.
54
How do you calculate a WAULT?
1. Multiply the current rent by the remaining lease term for each of the tenants.
2. Sum the total of results from step 1.
3. Divide the result from step 2 by the sum of current rent for each of the tenants.
55
What is headline rent?
The total rent paid, inclusive of any incentives given.
56
What is net effective rent?
The rent after any incentives have been granted. It is the expected income a LL can expect from a tenant.
57
How do you calculate net effective rent?
DCF or Straight Line - multiplying headline/gross rent with lease length minus the free months discounted by your landlord. You divide this amount with the total length of the lease
58
What is a ransom strip?
Piece of land or property that controls access to a less developable piece of land.
59
What did the Stokes v Cambridge 1961 case achieve?
When a value of one third of the uplift in the development site value was awarded to the owner of the ransom strip.
60
What is zoning?
* A valuation TECHNIQUE not a method.
* Used for the comparison of retail property
* The first 6.1m is most valuable then halved ERV technique.
* Sometimes 9.14 m in Central London
* Basements/first floors are usually treated as A/10.
61
What does ITZA mean?
* ITZA is surveyor-abbreviation meaning 'area in terms of Zone A'. Totalling the areas of each zone and expressing the total in terms of Zone A is the quick way to analyse (devalue) a rent.
62
What is the RICS Valuer Registration Scheme (VRS)
* RICS introduced a scheme for regulatory monitoring for all valuers carrying out Redbook valuations
63
What are the aims of the RICS VRS?
1. Improve the quality of valuation and ensure the highest possible professional standards
2. To meet the RICS requirement to self-regulate effectively
3. To protect and raise the status of the valuation profession as the leading expertise in valuation
64
What are the advantages of KEL?
* Quick and easy to use
* Generating reports is user friendly/industry standard and can be used for client reports
* Flexible – new methodologies continue to be added, such as the new turnover rent feature.
65
What are the disadvantages of KEL?
* Requires a large budget for access.
* Cannot see the formulas therefore you rely on input from the valuer.
* Can be slow to use.
66
What sort of statutory due diligence would you carry out prior to undertaking your valuation?
* EPC certificate
* Asbestos register
* Flood risk
* Planning history and policy
* Rateable value
* Title
67
How did you assess the covenant strength?
* Obtained a CreditSafe report, which summarised the past 3 years’ worth of audited accounts. This generates a ‘Risk Score’ based on the combination of the key financials including a company’s turnover, pre-tax profit, shareholders’ funds and credit limit.
68
What would you do if a CreditSafe report was not available?
* Use the Profits Test-
* net profit” test where the net profits of the tenant are shown to equal or exceed a multiple (usually 3 times) of the rents reserved by the lease for up to 3 years and the “net assets” test where the net assets of the tenant are equal to a multiple (often 5 times) of the rents reserved by the lease.
* This is a measure used to indicate that no deposit is required.
69
What document uses the categories A, B and C for the comparable method?
* RICS Guidance Note: Comparable Evidence in Real Estate Valuation, October 2019.
70
What are categories A, B and C for the comparable method?
* RICS guidance note Comparable Evidence in Real Estate 2019. A hierarchy of evidence which places a level of reliability onto evidence.
Cat A: Direct Comparables –
- completed transactions of near identical properties of which full and accurate information is available for
Cat B: General Market Data
Cat C: Transactional Evidence
71
What is a yield?
* A yield is a return on an investment and a measure of risk.
72
How do you calculate a yield?
* Yield= annual income/ capital value x 100
73
What impacts a yield?
* Covenant strength, unexpired lease term/WAULT, rent, market conditions & location, condition (re-lettability).
74
What is an Initial Yield?
The yield based on a property’s current annual income.
75
What is a net initial yield?
Initial yield factoring in purchasers’ costs and any incentives.
76
what is a reversionary yield?
The yield based on the ERV. The MR divided by the current price on an investment let at a rent below the MR.
77
what is an equivalent yield?
The average of the initial and reversionary yields.
78
What is a true yield?
Assumes rent is paid quarterly in advance (as opposed to in arrears). Will normally be slightly higher than equivalent yield.
79
What is an all risks yield?
Takes growth into account within the yield and is used for calculating growth implicit valuations. Also takes into account differences in comps, return on capital, security on income, selling costs etc.
80
What is an equated yield?
A yield which builds in assumptions about future rental growth drawn from general market knowledge. Used in growth explicit valuation models such as a DCF.
81
What is the difference between a growth implicit valuation and a growth explicit valuation?
* A growth implicit valuation assumes rental growth and this is reflected in the yield (IE Term and reversion). Growth explicit does not assume this and values the income which is certain (such as a DCF).
82
When would you use the investment method?
* When there is an income stream to value
83
What are the different investment method TECHNIQUES?
1. Conventional technique (rack rented)
2. Term and reversion technique (under rented)
3. Hardcore and layer technique (over rented)
4. Discounted cash flow technique
84
When would you use the conventional technique and how could you calculate a value?
* When a property is deemed to be ‘rack rented’ (currently let at your opinion of market rent)
* NI x YP =MV
85
How would you establish the years purchase?
* 100/yield
* Years purchase is the number of years required for its income to repay its purchase price.
86
What is a vacant possession value?
* Value of the property vacant with no income
87
How would you calculate a VPV?
There are 2 methods:
1. Comparative method on a £ per sq ft basis. (Search for relevant owner-occupied evidence)
Hypothetical Investment Method – This is used both as a sense check and when there is not enough comparable evidence relatable to the subject property. The hypothetical investment scenario will need assumptions to be made regarding:
a) Void Periods/Marketing Period
b) Incentives/Rent Free Period
c) Opinion of Market Rent
d) Length of the term
Then capitalise the ERV into perpetuity at a higher yield to reflect risk. Deduct purchasers costs to get NET value.
88
When would you allow for void periods?
* If there was less than 5 years remaining on the lease.
89
Why would a bank client request a vacant passion value?
* To understand what the property would be worth if the current occupational tenant went into liquidation/ vacates and the bank re-possess the property.
90
Why would a bank client request a valuation with a restricted marketing period?
* A bank would only request this for a valuation for secured lending purposes. Banks need to know what the value of property would be if their client defaults. This would result in a quick sale hence the restricted marketing period.
91
What is the Profits Method?
* Used for valuations of trade related properties and is used where value of the property depends on the profits of the business and its trading potential.
92
What is the methodology of the profits method?
* Methodology:
1) Annual turnover (income received) LESS costs = Gross Profit of business
2) LESS working expenses = unadjusted net profit
3) Less operators remuneration = adjusted net profit known as Fair Maintainable Operating Profit or EBITDA (Earnings before interest, taxation, depreciation and amortisation.
93
What is the Residual Method of Valuation and when would you use it?
* The Residual method is used to calculate the value of land.
* It establishes the gross development value and then deducts all the costs required to complete the development. What is left is surplus and is known as the residual land value and is how much the developer can afford to pay for a development site.
94
What is the methodology for residual?
GDV - the market value based on the special assumption that the development is complete as at the date of valuation.
Deduct costs such as:
Planning costs
Professional fees (10%)
Contingency/construction costs (5-10%)
Marketing costs (1%)
Developers Profit (15-20%)
Sensitive to its inputs therefore specialist software is used to realistically manage inflow and outputs.
95
What is the difference between a development appraisal and a residual valuation?
* A development appraisal will typically give you the profitability of a proposed development and a residual valuation will give you the value of the land.
96
What is the Depreciated Replacement Costs/Contractors method?
* Method of last resort and there usually no market evidence for that asset class.
* Tends to be used when the property is not traded on the open market. Usually for insurance or rating purposes. Used for owner occupied property.
* Types of properties include; Ancient monument, dilapidated castle, sewage works, church, lighthouse.
97
What is the methodology for DRC?
Value of land in its existing use (assume planning permission exists)
Add current cost of replacing the building plus fees less a discount for depreciation and deterioration.
98
Is DRC Redbook?
* Yes, but it is not suitable for secured lending valuations.
