Valuation Lv 1

Question 1

Tell me what the 5 methods of valuation are

Answer 1

“1) Comparable method
2) Investment method
3) Profits method
4) Residual method
5) Depreciated replacement cost (contractors method)”

Question 2

“Tell me about how you would value a building using the
profits/contractors/investment/comparable/residual method of
valuation.”

Answer 2

“Purpose:

1.Where the value of the property depends on the profitability of its business and trading potential rather than physical attributes of the building e.g. pubs, hotels, children’s nurseries, leisure properties.

2. Must have accurate and audited accounts if possible for 3 years or a business plan for a new business.

Methodology:
1. Annual turnover – costs = gross profit

2. Gross profit – reasonable working expenses = unadjusted net profit
3. Unadjusted net profit – operator’s remuneration (salary) = adjusted net profit (known as Fair Maintaining Operating Profit)
4. Often expressed as EBITDA: earnings before interest, taxation, depreciation and amortization
5. Capitalised at appropriate yield (Years Purchase Multiplier) to achieve market value
6. Cross check with comparable sales evidence if available”

“1. Used when there is an income stream to value

2. The rental income is capitalised to produce a capital value
3. Growth is implicit
4. An implied growth rate is derived from the market capitalisation rate (yield)

Three methods:

1. Conventional - Market rent multiplied by years purchase = MV
2. Term and Reversion – When property is under-rented, term capitalized until next lease event, reversion to market rent valued in perpetuity.
3. Layer/hardcore – over-rented property, income flow divided horizontally, higher yield applied to top slice for risk, lower slice is market rent”

“6 Steps of Methodology:

1. Search and select comparables
2. Confirm details and analyse headline rent to give NER
3. Assemble comparables in schedule
4. Adjust comparables using hierarchy of evidence
5. Analyse comparables to form opinion of value
6. Report value and prepare to file”

“Purpose:
A tool to financially assess the viability of a development scheme. Can ne used to establish residual site value. Can be used to assess profitability or proposed scheme and sensitivity to changing imputs.

Methodology:
Gross development value: capital value of completed scheme using comparable method to establish rents and all risks yield.

You then minus costs such as; planning costs, building costs, professional fee, market fees, developers profit.

Cross check with valuation of a comparable site if possible. “

Question 3

What is the Red Book?

Answer 3

“The Red Book (Gobal Standards) is issued by RICS and contains mandatory rules, best practice guidance and related commentary for all members undertaking asset valuations.

It combines professional, technical and performance standards. “

Question 4

Why does the Red Book exist?

Answer 4

To deliver high quality valuation advice that meets the expectations and requirements of clients

Question 5

Tell me about a factor which may impact value.

Answer 5

Restrictive user clauses: limits assignment or sub-letting potential (up to 10% discount appropriate)

Question 6

What is your duty of care as a surveyor when undertaking a valuation?

Answer 6

“Valuers owe a duty of care towards their clients, both in contract and in tort (for negligence).

In a claim (for breach of contract or negligence), the Court will ask whether the ‘valuation given was one that no reasonable valuer in the actual valuer’s position could have given’ “

Question 7

Why is independence and objectivity important when valuing?

Answer 7

“PS 2 - Ethics, competency, objectivity and disclosures:

Independence and objectivity are both linked in order to ensure conficentiality of information and also the identification and management of conflicts of interest.

A threat to the member’s objectivity can arise where the outcome of a valuation is
discussed before its completion with either the client or another party with an interest in the
valuation.”

Question 8

Is there a separate UK Red Book?

Answer 8

Yes - UK Supplement last updated in 2017 - It is being reviewed with release Autumn 2022

Question 9

When was the Red Book last updated?

Answer 9

Effective 31st January 2022

Question 10

Does this differ from when IVS were last updated?

Answer 10

Yes - IVS 2020 was incorporated in to Red Book Global and is effective 31st January 2022

Question 11

What changes were made?

Answer 11

“1. A list of core principles added into the introduction

2. Glossary has been extended
3. IVS 105 Valuation Approaches and Methods – Wording has been reinstated to clarify that
   market, income and cost approaches are not exclusive and may be used in any combination”

Question 12

Which do you follow - the latest IVS or the Red Book Global?

Answer 12

TheRed Book Global

Question 13

Which sections of the Red Book are mandatory and which are advisory?

Answer 13

“Mandatory:
Part 3: Professional Standards - PS1, PS2

Part 4: Valuation and performance standards - VPS1, VPS2, VPS3, VPS4, VPS5

Advisory
Part 5: Valuation Applications - VPGA 1 - 10”

Question 14

What does PS1-2/VPS1-5/VPGAs relate to?

Answer 14

“Professional Standards (PS):
PS 1 - Compliance with standards and practice statements
PS 2 - Ethic, competency, objectivity and disclosures

Valauiton technical and performance Standards (VPS):
VPS 1 - Terms of engagement
VPS 2 - Inspections, Investigations and records
VPS 3 - Valuation reports
VPS 4 - Bases of value, assumptions and special assumptions
VPS 5 - Valuation Approaches and Methods

Valuation Applications (VPGA):
10 VPGAs - Sets out key issues that need to be taken in to account in specific contexts “

Question 15

What type of advice does the Red Book cover?

Answer 15

Provides mandatory practice guidance to members undertaking valuations

Question 16

“If you provide preliminary advice / draft valuation report, what should
you state in writing to your client?”

Answer 16

“In the report you must state:

1.The opinion is provisional and subject to completion of the final report

2. The advice is provided for the client’s internal purposes only and
3. Any draft is on no account to be published or disclosed.
4. If any matters of fundamental importance are not reflected, their omission must be
   declared.”

Question 17

What type of valuations might be relied upon by a third party?

Answer 17

“1. A published financial statement

2. A stock exchange, or similar body
3. Publication, prospectus or circular
4. Investment schemes
5. Takeovers or mergers.”

Question 18

Tell me what the definition of investment value?

Answer 18

Investment value is a concept that describes the value that an investor is willing to pay for the property based on his or her own objectives and parameters.

Question 19

Tell me what the definition of fair value?

Answer 19

“As per VPS 4:

Fair Value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. (generally consistent with MV). “

Question 20

Tell me what the definition of MV ?

Answer 20

” As per VPS 4:

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 arm’s length transaction,
• After proper marketing,
• Where the parties had each acted knowledgeably, prudently and without compulsion”

Question 21

Tell me what the definition of MR ?

Answer 21

“As per VPS 4:

Market Rent is the estimated amount an interest in real proeprty should be leases on a valuation date between:

• Willing lessee and lessor in an arms length transaction
• On appropriate lease terms
• After proper marketing
• Where the parties had each acted knowledgeably, prudently and without compulsion”

Question 22

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

Answer 22

“Assumptions are made where it is reasonable for the valuer to accept that something is true without the need for specific investigation.

A special assumption is a supposition that is taken to be true and accepted as fact, even though it is not true.

*Must be agreed in writing with the client at commencement of instruction. “

Question 23

“What sources of information would you consider when preparing a
valuation report?”

Answer 23

“Official sources of informaiton such as government or council databases

Primary information from the agents

In house information

Online data bases such as EGI or Costar - I would look to verify this information”

Question 24

“If you have previously valued an asset, do you need to make any
additional disclosures and what might they be?”

Answer 24

“Where the valuation is of an asset that has previously been valued by the valuer, or the valuer’s
firm for any purpose, the following disclosures must be made in the terms of engagement:

1. The relationship with the client and previous involvment
2. Rotation policy
3. Time as signatory
4. Proportion of fees”

Question 25

“If your firm is too small to have a rotation policy or valuation panel, what
else can you do to ensure objectivity?”

Answer 25

“Where the same valuation instruction is undertaken on a regular basis, an arrangement for
the valuation to be periodically reviewed at intervals not greater than seven years by another
member would assist in demonstrating that the member is taking steps to ensure that objectivity
is maintained”

Question 26

“When might a conflict of interest exist in relation to a valuation
instruction?”

Answer 26

Where the valuer has previosly valued the asset for the same purpose or was involved with the purchase of the same asset within 12 months preceding the valuation date

Question 27

What must be included in your terms of engagement / valuation report?

Answer 27

“a. Status of valuer
b. Identification of valuer, client, other intended users and of the asset or liability
c. Currency
d. Purpose of valuation
e. Basis of value adopted
f. Valuation date
g. Nature and extent of valuers work
h. Nature and sources of information
i. Assumptions and Special assumptions
j. Format of the report
k. Restrictions of use and publication
l. In accordance with IVS
m. Fee basis calculation
n. Complaints handling procedure
o. Compliance with RICS
p. Statement of liability agreed”

Question 28

What is a restricted valuation service and can you provide one?

Answer 28

Restricted information is a desktop valuation with no inspection undertaken. However, must be agreed in writing along implications written in report.

Question 29

How do you deal with limitations on inspection or analysis?

Answer 29

Consider the implications of restrictions and decide whether to accept instruction

Question 30

Can you revalue a property without inspecting?

Answer 30

“A revaluation without re-inspection must not take place unless the valuer is satisfied there have been no material changes to the property or nature of its location since its last inspection.

This must be confirmed in the terms of engagement and in the valuation report.”

Question 31

What RICS guidance relates to the use of comparable evidence?

Answer 31

Comparable Evidence in Real Estate Valuation, 2019 (1st Edition):

Question 32

What is an internal valuer?

Answer 32

Employed by company to value assets of the company, for internal use only (no third-party reliance)

Question 33

Can an external valuer provide an internal purposes valuation?

Answer 33

Yes - An external valuer must have no material links with the asset to be valued, or the client

Question 34

“What happens if market conditions change between the valuation date
and report date?”

Answer 34

The valuer should draw attention to this and also the fact that the values change over time.

Question 35

Is special value from a special purchaser reflected in MV?

Answer 35

Yes, Market Value ignores any price distortions casued by a special purchase

Question 36

Where does the definition of fair value come from?

Answer 36

“A particular buyer for whom a particular asset has special value because of advantages arising from its ownership not available to other buyers

Physical, functional or economic association . E.G Tenant purchasing freehold interest “

Question 37

Does this differ from MV?

Answer 37

The RICS view is that this definition as being generally consistent with Market Value

Question 38

When is fair value used?

Answer 38

If the International Financial Reporting Standards have been adopted by the client.

Question 39

What are the 3 approaches under VPS5?

Answer 39

“As oulined in VPS 5:

Income approach – converting current and future cashflows into capital value (Investment, Residual and Profits method)

Cost Approach – reference to cost of asset and whether by purchase or construction (DRC approach)

Market Approach – using comparable evidence (Comparable Method)”

Question 40

What is the Valuer Registration Scheme?

Answer 40

“Scheme for regulatory monitoring

Three aims of the scheme:

1. Improve quality of valuation and ensure highest possible professional standards
2. Meet RICS requirement to self-regulate effectively
3. Protect and raise status of valuation profession as leading expertise”

Question 41

“Are there any instances where certain sections of the Red Book may not
apply?”

Answer 41

“The Red Book does not apply when;

Its for an estimated replacement cost figures for insurance purposes.

VPS 1-5 maybe unsuitable when:
1. Acting as an expert witness
2. Providing Agency advice
3. For internal purposes only “

Question 42

What is a Net Initial Yield?

Answer 42

“A yield is a measure of investment return, expressed as a percentage of capital invested.

A yield is calculated by ; Income divided by price x 100”

Question 43

What is a reversionary yield?

Answer 43

Market Rent (MR) divided by current price on an investment let at a rent below the MR – The yield that should be achieved if the passing rent adjusts to the level of the estimated rental value.

Question 44

What is an equivalent yield?

Answer 44

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

Question 45

How would a yield reported from auction differ from a Net Initial Yield?

Answer 45

A yield from an auction would be a gross yield as there would be no purchaser costs.

Question 46

What purchaser’s costs do you deduct from a valuation?

Answer 46

Agents fees at 1%, Legal Fees at 0.5% Stamp Duty at 4%

Question 47

Where can you find yield evidence from?

Answer 47

Similar Property Sales

Question 48

What is the hierarchy of evidence?

Answer 48

“RICS Guidance Note ‘Comparable Evidence in Real Estate’, 1st Ed. 2019

Hierarchy of evidence:

Category A – direct comps such as completed transactions

Category B – general market data such as historic evidence or indices

Category C – other sources such as transactional evidence form other real estate types.”

Question 49

What would you do if comparable evidence was limited?

Answer 49

“May be necessary to consider more indirect evidence: for example,
local or national economic data that can indicate trends to give guidance towards, rather
than direct evidence of, value.”

Question 50

What is NPV?

Answer 50

“Sum of discounted cashflows

Used to determine if positive return against target rate of return”

Question 51

What is IRR?

Answer 51

“1. Rate of return which future cashflows must be discounted to provide NPV of zero

2. IRR assesses total return from investment making assumptions regarding rental growth, re-letting and exit assumptions.
3. Linear interpolation can be used to estimate

Calculation:

1. Current market value as negative cashflow
2. Projected rents over holding period as positive
3. Projected exit value at end of term assumed as positive
4. Discount rate chosen which provides NPV of zero. If NPV is more than zero then target rate of return met”

Question 52

What is a term and reversion?

Answer 52

“Method to value building that is under-rented

Use different yields for the term income (contracted) and higher yield to incorporate risk of reversionary income (ERV)”

Question 53

What is a hardcore and topslice?

Answer 53

When there is an over-rented property, higher yield applied to top slice for risk.