Valuation Level 1

Question 1

New RICS introduces mandatory rotation rules - New rules will prevent valuation firms from valuing an asset for regulated purposes for more than ten consecutive years, requiring a change or “rotation” to a different valuation firm

Answer 1

Tailored approach is necessary for public sector-related investment properties. This is because a legislative and regulatory framework exists for the public sector, and some valuation is undertaken internally.

Question 2

Describe 2 of the 5 methods of valuation and explain them in broad detail.

Answer 2

Comparable method - collect evidence, compare evidence, similarities and differences, similar have more influence.
Residual method - land or property with development potential, highest value of developed use, value of financial scheme i.e. Gross Development Value (GDV), deduct development costs, developers profit and finance costs

Question 3

What factors can effect value?

Answer 3

location, market, use, age

Question 4

Why do asset values differ from open market values?

Answer 4

Depends on use, objectives, i.e. want to fill and reduce vacancies

Question 5

What is the Red Book?

Answer 5

RICS Valuation - global standards details mandatory practices for RICS members undertaking valuation services

Question 6

What is RICS guidance note Comparable evidence in real estate valuation, 1st edition?

Answer 6

Outline principles of the use of comparable evidence, encourage consistency, address availability and use of comparable evidence, consider sources and importance

Question 7

What is a valuation for insurance purposes?

Answer 7

Value provided to insurers when required, needed to cost replacement

Question 8

What is an AVM?

Answer 8

Automated Valuation Model - software used to determine property value. Uses mathematical or statistical modelling and data from database to determine value

Question 9

What is a DRC valuation and when would it be used?

Answer 9

Depreciated replacement costs - last resort - cost of buying site and building an equivalent building.

Question 10

What challenges did Covid and/or Brexit bringing to Valuation?

Answer 10

withdrawal of global Covid 19 valuation practice alert, less work, shortage of comparable evidence. transactions could have been influenced by political decisions, reduced market activity, uncertainty in the market. Don’t take comparable during turbulent times, might not reflect the truth.

Question 11

What assumptions do you commonly have to make in your valuations and why?

Answer 11

Stable market, similar condition between units, length of term, use, risk, demand.

Question 12

What is hope value

Answer 12

The value expected after getting planning permission

Question 13

What is a cap and collar?

Answer 13

The cap is the max a rent can increase to and collar is the minimum it must increase to.

Question 14

What are some online databases for comparables?

Answer 14

Costar and EIG

Question 15

What are the 4 bases of value?

Answer 15

Market Value
Market Rent
Investment Value
Fair Value

Question 16

What is Market Value?

Answer 16

The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arms length transaction, after property marketing and where the parties had each acted knowledgably, prudently and without compulsion.

Question 17

What is Market Rent?

Answer 17

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 property marketing and where the parties had each acted knowledgably, prudently and without compulsion.

Question 18

What is Investment Value?

Answer 18

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

Question 19

What is Fair Value?

Answer 19

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.

Question 20

What is covered in the RICS Valuation - Global Standards (Red Book)

Answer 20

Ethics, competence, conflicts of interest
Terms of engagement
Inspections and investigations
Valuation reports
Bases of value, assumptions and special assumptions
Valuation approaches and methods
Valuation applications: financial statements, secured lending, business interests, trade related property, plant and equipment, intangible assets

Question 21

What is the difference between an assumption and a special assumption

Answer 21

An assumption is where it is reasonable that the valuer can accept something as true without the need for specific investigation or verification.

A special assumption is where the assumption assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant.

Question 22

What valuation approaches or methods are covered in the Red Book?

Answer 22

Market approach - Comparable and Residual techniques
Income approach - Investment, Profit and Residual techniques
Cost approach - Residual and Contractors / Depreciated Replacement Costs techniques

Question 23

What is covered in the RICS Valuation - Global Standards: UK national supplement?

Answer 23

Terms of engagement
Valuation for financial reporting
Valuation for other regulated purposes
Valuation for adequacy of financial resources
Valuation of local authority assets for accounting
Valuation of central government and NHS assets for accounting
Valuation of charity assets
Valuation of UK residential property
Valuation of social housing
Valuations for tax reasons
Valuations for compulsory purchase and statutory compensation
Local authority disposal of land

Question 24

What is the hierarchy of evidence?

Answer 24

How much weight you put on information?

Who gathered it and where is the information from?
I did it > agent > heresy or third party

When was the info gathered?
Recent > older

Similarity?
Similar > dissimilar

Question 25

What is a special purchaser?

Answer 25

Person who can receive value from an asset.
Such as selling a property to someone who is already leasing it and in occupation

Question 26

How would you value an office property for sale?

Answer 26

Term and reversion calculation

Question 27

What is depreciated replacement costs?

Answer 27

Calculate using residual land value + building costs - depreciate the building (physical, functional, economic)

Question 28

How do you calculate Yield?

Answer 28

Rent / Capital Value = Yield

Question 29

What are the five valuation methods?

Answer 29

Comparable method
Investment method
Profits method
Depreciated replacement cost/contractor’s method
Residual method

Question 30

Explain the comparable method?

Answer 30

The most widespread valuation method
Assess the market rent and market value of both commercial and residential properties.
It can also be used to assess the market value of farms, farmland and land with development potential.

RICS guidance note Comparable evidence in real estate valuation 1st edition.

Essentially, the comparable method can be used where there is a good body of recent, reliable comparable rental, yield or sales evidence.

The hierarchy of evidence should also be considered to ensure that appropriate weighting is applied, based on the type of transaction, for example, open market letting vs quoting rent.

Typical sources of comparable evidence include published databases, internal records, discussions with other agents and direct involvement in deals. Comparable evidence should always be verified with the parties involved and a suitable range of evidence compiled to avoid over-reliance on just one piece of evidence.

Challenges that candidates may face when using the comparable method include: limited transaction, lack of up-to-date evidence, existence of a special purchaser – which may lead to a price paid which is above the market tone due to circumstances specific to one party – lack of similar evidence given the complex nature of real estate, and limited market transparency.

Question 31

Explain the investment method?

Answer 31

The investment method is used where there is an income stream to value, i.e. the property is tenanted. This can include commercial, residential, retail, industrial and agricultural properties.

Assess rental values (market rent) and a market-based yield. A yield can be simply defined as the annual return on investment expressed as a percentage of capital value.

The investment method can reflect income streams which are under-, rack- and over-rented by incorporating risk within the yield choice (i.e. an all risks yield) and by structuring the calculation appropriately, for example a “Term and Reversion” for under-rented income streams and a hardcore and topslice for over-rented income streams.

The alternative approach is to use a growth-explicit discounted cash flow (DCF), where the cashflow is explicitly modelled incorporating a wide range of valuer-inputted assumptions. Typically the rate of return used in a DCF will reflect a risk-free rate plus a property risk premium. If a DCF is based on client data rather than market data, then it will represent investment value rather than market value.

Question 32

Explain the profits method?

Answer 32

The profits method, or receipts and expenses or income and expenditure method, is also used for income-producing properties. However, these are typically referred to as being specialist properties, such as hotels, golf courses, petrol stations, care homes and some restaurants.

These types of properties are only usually sold as part of a business and are designed specifically for the intended use. Their value will depend on business profitability and trading potential, also known as intangible goodwill.

This introduces the concept of market value vs. investment value; the latter relating to the ‘measure of the value of the benefits of ownership to the current owner or to a prospective owner, recognising that these may differ from those of a typical market participant’.

Only candidates carrying out specialist valuation work will have experience of this method, although it is important for all candidates to have a good theoretical knowledge of the process behind it. The profits method involves establishing fair maintainable operating profit (FMOP) capable of being generated by a reasonably efficient operator (REO). This is based upon assessment and analysis of fair maintainable turnover (FMT), requiring sound knowledge of accounting principles and market norms for the specific industry sector. A market-based profit multiplier is then used to convert FMT into a capital value.

Question 33

Explain the depreciated replacement cost/contractor’s method?

Answer 33

The depreciated replacement cost (DRC) method is used for owner-occupied or specialised property that is rarely sold on the open market. It is also known as the method of last resort and should not be used where there are market sales of comparable properties. It could, of course, be used as a check valuation against another method.

Again, this is a specialist area of valuation that many candidates will not have experience of. However, they will need to understand the basic process and be aware of when it could be applied; example assets include oil refineries and airports.
The DRC method is based upon the assumption that the market will pay no more for the existing property than the amount it would cost to buy an equivalent site, plus the cost of constructing an equivalent building.

The basic steps involved include assessing the cost to replace the land and the building – with a modern equivalent, including all associated costs – before making appropriate deductions for depreciation and obsolescence.

Question 34

Explain the residual method?

Answer 34

The residual method is typically used for property or land with development potential. The output is market value of the land and it requires valuers to make a variety of assumptions around input costs.

Candidates need to understand the difference between a residual land valuation (i.e. output of market value of the land) and a development appraisal (i.e. output of profitability or viability).

To apply the residual method, candidates need to first assess the development potential of the land, i.e. highest value use. They then need to calculate the value of the finished scheme, i.e. gross development value (GDV) based on market comparables. All development costs are then deducted from GDV, including developer’s profit and finance costs.

The output, market value of the land, can be very sensitive to the inputs used. This means that sensitivity analysis can be used to advise clients on the impact on the output of minor changes to the input. Candidates should also cross-check their valuation using the comparable method based on land sales, as per the requirements of the RICS guidance note Valuation of development property.

Question 35

For asset valuations, what are the 6 types of assets?

Answer 35

Property, Plant and Equipment
Investment Property
Investment Property Under Construction
Assets Under Construction
Assets Held for Sale
Heritage Assets

Question 36

Briefly, how would you value Investment Property?

Answer 36

Use a term and reversion calculation
I would calculate the value of the asset for the remainder of the current income term.
Then add the value deferred to the end of the term and into perpetuity.

Question 37

What would be categorised as an Investment Property?

Answer 37

Property which is generating an income for the council.
i.e. leased out

Question 38

What would be categorised as Property, Plant and Equipment?

Answer 38

Operational assets i.e. Rushcliffe Arena Office, Leisure Centres, Land, Community Assets

Question 39

What does WAULT stand for?

Answer 39

Weighted Average Unexpired Lease Term

Question 40

Briefly, how would you value Property, Plant and Equipment?

Answer 40

Using either:
Depreciated Replacement Costs (DRC)
Cost to replace the land and the building – with a modern equivalent, including all associated costs – before making appropriate deductions for depreciation and obsolescence.
Local Authorities should use the “instant build” approach for asset valuations.

OR

Existing use Value (EUV)
How much you might expect if the property was on the market available with vacant possession in its current use

Question 41

What is Existing Use Vaue?

Answer 41

Essentially Market Value disregarding potential alternative uses that would cause its market value to differ.

Question 42

What are some valuations that are exempt from the Red Book?

Answer 42

Valuations:
In respect of the acquisition or disposal of one or more assets
As an expert witness
Performing statutory functions
For purely for internal purposes
For litigation purposes