Valuations Flashcards

Question

What is GDV?

Answer 1

- Market value of completed proposed development at today's date - Comparable method used to establish rents and yield - All Risks Yield - Allowance for rent-free period / tenant's incentives / marketing void can be assumed - Purchaser's costs usually deducted for commercial property valuations

Answer 2

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

Answer 3

- Site preparation - Planning costs - Building costs - Professional fees - Contingency - Marketing fees and costs

Answer 4

Demolition, remediation works, landfill tax, provision of services, site clearance, levelling, fencing

Answer 5

S106 payments, CIL payments, AH level, planning policy requirements like open spaces / playgrounds, section 278 payments for highways, planning application fees, building regulation fees, planning consultant, specialist reports (EIA)

Answer 6

- Total cost of building works - From client info, quantity surveyor, building surveyor, BCIS (GIA basis)

Answer 7

10-15% of construction costs Architects, M&E, PMs, Structures, CDM Principal Designer

Answer 8

- EPC - NHBC warranty (for resi schemes) - Sales fee 1-2% GDV, Letting fee 10% annual rent

Answer 9

- SONIA rate - Bank of England Base Rate + Risk - Rate at which developer can borrow money

Answer 10

1. Site purchase (compound interest - straight line) 2. Construction and associated costs (S curve) 3. Holding costs to cover voids (empty rates, service charges, interest charges) (compound interest - straight line)

Answer 11

Construction costs take form of an S over the time of development projects Shows when money is likely to be drawn down

Answer 12

Percentage of GDV or total construction costs (15-20% depending on risk) - Percentage of profit is higher at the moment due to riskier market conditions - Cross check with comparables

Answer 13

- Debt finance (borrowing) - Equity finance (selling shares in company)

Answer 14

Typically in region of 60%

Answer 15

First level of borrowing which takes precedence over secondary / mezzanine

Answer 16

Additional funding for monies required over normal LTV

Answer 17

Market interest rate for fixed term loans

Answer 18

- JV - Forward sales Silvertown is combination of JV funding from Starwood, debt financed through Homes England loan

Answer 19

Sharing extra receipts over or above the profits expected, also known as 'claw-back'

Answer 20

Payable on all professional fees

Answer 21

Length of time it will take for the development profit to be eroded by holding charges following the completion of the scheme, until the profit has been drawn down

Answer 22

- Rely on accurate inputs - Residual valuations do not consider timing of cash flow - Sensitive to minor adjustments - Implicit assumptions hidden and not explicit (unlike DCF) - Always cross check with comparable

Answer 23

Shows range of values

Answer 24

- Simple (on yields, GDV, build costs, finance rate) - Scenario (development content, timing, costs, phasing the scheme or modifying design) - Monte Carlo simulation (probability theory, like Crystal Ball)

Answer 25

- Supplements IVS 'Development Property' - Stipulate if assumption or special assumption - Comparative method should be cross checked with residual method, don't rely on one method if possible - For lengthy projects, DCF might be best used - Risk analysis so scenarios can be modelled, risk and return levels should be explicitly stated in the valuation report - When valuing land, determine land plus costs, and completed development minus costs - check against each other - Valuation reported as single figure

Answer 26

A reasonable thing for the valuer to accept without specific investigation A valuer might make an assumption about the treatment of purchaser's costs when using an income capitalization approach

Answer 27

An assumption that differs from the actual facts at the valuation date A valuer might value a property without planning permission on the special assumption that it has planning permission

Answer 28

- Used for specialised properties like sewage works, lighthouses, oil refineries, docks, schools 1. Value of land in existing use (assume planning permission exists) 2. Add current cost of replacing the building plus fees, less a discount for depreciation and obsolescence / deterioration (use BCIS and then judge level of obsolescence)

Answer 29

- Physical - Functional - Economic

Answer 30

No - Not compliant for secured lending purposes - Only used for financial statements - Private sector: statement that it is subject to adequate profitability of the business - Public sector: statement that it is subject to the prospect and viability of the continued occupation and use - Valuer must state the market value for any readily identifiable alternative use, if higher or if appropriate, a statement that the market value on cessation of the business would be materially lower

Answer 31

RICS Guidance Note: Depreciated Replacement Cost Method of Valuation for Financial Reporting (2018)

Answer 32

1. Part 1 - Introduction 2. Part 2 - Glossary 3. Part 3 - Professional Standards (PS) 4. Part 4 - Valuation technical and performance standards (VPS) 5. Part 5 - Valuation applications (VPGA) 6. Part 6 - The International Valuation Standards

Answer 33

- Make clear if it's Red Book compliant or not, can't be quasi - Profits method includes self-storage, flexible workspace and purpose built student housing - Sustainability and ESG including how they could impact a valuation / collection of data - Valuation for secured lending and how Sustainability and ESG will impact a valuation to meet investor expectations - Direct valuation factors include storm or flood, indirect valuation factors include resilience or carbon emissions, physical risks include heat or wildfire, transition risks include regulatory change or carbon emissions

Answer 34

1. Advice is prepared for a negotiation or litigation 2. It's a statutory function (except tax) 3. Purely for internal purposes, without liability and not communicated to any third party 4. Provided as part of agency work in anticipation of receiving an instruction to dispose, acquire, expect when a purchase report of required which includes a valuation 5. Provided in anticipation of giving evidence as an expert witness

Answer 35

Terms of Engagement 1. Identify valuer 2. Identify client 3. Identify intended user 4. The asset 5. Currency 6. Purpose 7. Basis of value 8. Valuation date 9. Extent of investigation 10. Nature and source of the information relied on 11. Assumptions and special assumptions 12. Format of report 13. Restrictions of use / publication 14. Confirmation of Red Book / IVS compliance 15. Fee basis 16. Complaint's handling procedure 17. Statement that valuation mat be subject to compliance by RICS 18. Limitation on liability agreed

Answer 36

Market Rent Market Value - For loan security Fair Value Investment Value - For regulatory

Answer 37

- Asset or liability would be leased - On the valuation date - Between a willing buyer and a willing seller - In an arm's length transaction - After proper marketing - And where the parties had each acted knowledgeably, prudently, and without compulsion

Answer 38

- Asset or liability would be leased - On the valuation date - Between a willing buyer and a willing seller - In an arm's length transaction - After proper marketing - And where the parties had each acted knowledgeably, prudently, and without compulsion

Answer 39

- Price received to sell an asset, or paid to transfer a liability - In an orderly transaction between market participants - At the measurement date

Answer 40

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

Answer 41

Inspections, Investigations and Records - Inspections: To verify info - Desktop valuations: If restricted info and no inspection undertaken (still a Red Book Valuation) - Revaluation (without re-inspection): Must not do this unless satisfied no material changes, must be confirmed in TOE - Records: Record inspections and investigations If undertaking a desktop valuation: 1. Nature of restriction must be agreed in writing in TOE 2. Valuation implications of the restriction confirmed in writing 3. Consider whether restriction is reasonable with regard to purpose of valuation 4. Restriction must be referred to in the report

Answer 42

Valuation Reports 1. Identify valuer 2. Identify client 3. Purpose of valuation 4. Identification of asset 5. Basis of value 6. Valuation date 7. Extent of investigation 8. Information relief upon 9. Assumptions and special assumptions 10. Restrictions on use and publication 11. Accordance with IVS? 12. Valuation approach and reasoning 13. Valuation figure(s) 14. Date of valuation report 15. Comment on market uncertainty 16. Limitations on liability Draft advice - Can be given for internal purposes, but no relied upon. Draft report to client must state that it is draft. Can't be influenced by client after issuing draft. If changed must be noted on file and reasons stated.

Answer 43

Bases of Value 1. Market Value 2. Market Rent 3. Fair Value 4. Investment Value 5. Equitable Value 6. Liquidation Value

Answer 44

Not used in UK Estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties

Answer 45

Not used in UK Used for group of assets sold in piecemeal basis considering the costs of getting the assets into a saleable condition

Answer 46

Valuation Approaches and Methods

Answer 47

Valuations for inclusion in financial accounts - Use fair value

Answer 48

Valuations for secured lending If COI: - If previous involvement with borrower, must disclose (past 2 years) - Decline if involvement created conflict - E.g. if you have a longstanding relationship with the borrower or owner (might value higher, get a fee, if valuer is retained to act in disposal or letting of completed development)

Answer 49

Report additional info to the lender to advise whether to agree to the loan / borrower defaults: - Disclose involvement / COI - Method adopted and calculation - If transaction on property has occurred, extent to which that info has been accepted as market value - Environmental considerations - Suitability of property for mortgage purposes - Circumstances that could affect price - Potential conflicts - Valuation enquiries - If used special assumption, comment made in the report on any material difference between reported value and without special assumption - Sustainability factors becoming more significant

Answer 50

Valuation of Real property Interests - Covers inspections and investigations - Emphasis on ESG and sustainability

Answer 51

Matters that may give rise to material valuation uncertainty - Must not be misleading - Comment on issues relating to material uncertainty - Standard caveat should not be used

Answer 52

Relationship between Red Book and UK National Supplement - Came into effect May 2024 - Reflects outcomes of review by Peter Pereira Gray - The National Supplement expands on the RB and is not a substitute - Specific requirements for members on application of RICS Valuation - Global Standards

Answer 53

Regulated Purpose Valuations Valuation for five purposes: 1. Financial reporting (company accounts) 2. Stock Exchange listings / inclusion 3. Takeovers and mergers 4. Collective investment schemes 5. Unregulated property unit trusts Valuation monitoring: - Declare how long members have acted for clients - Whether the % fee income from a client is less / more than 5% total fee income - Whether the above will change Governance requirements: - Max 10 years before rotation of a valuation firm - Max single engagement of 5 years - Max 5 years before rotation of individual responsible valuer - Min 3 years break after rotating off - Valuer must also ask about individual parties involvement - Record preliminary advice

Answer 54

- Review by Peter Pereira Gray to futureproof practises - All recommendations implemented 13 recommendations: - Commissioning and receiving of valuation reports - Rotation of valuers for regulated purpose valuations - Valuation of profession should incorporate the use of DCF as the principal model applied in preparing property investment valuations - Valuation audit trails - Valuation Assurance Committee

Answer 55

- Glossary of terms which should be incorporated (TOE, valuation purpose, inspection, reporting) - Sustainability characteristics, considerations and risks impact value of property - Valuers must be clear how they've reflected sus and ESG in valuation

Answer 56

- Permissible range allowed by courts - Smaller margin for simpler valuation (Singer & Freidlander Ltd vs. J D Wood, 1977) - 5% for standard resi, 10% for one off commercial, 15% if exceptional features (KS Lincoln vs. CB Richard Ellis, 2010)

Answer 57

- Value arising from expectation that future circumstances affecting property may change e.g. through planning permission / marriage value from merger of two interests in land

Answer 58

- Created by merger or interests, physical or tenurial - Undertake a before and after valuation - Split the marriage value 50:50

Answer 59

Non resi tax: £0 - 150,000 = Nil £150,001 - 250,000 = 2% £250,000 + = 5% Resi: £0 - £250,000 = Nil £250,001 - £925,000 = 5% £925,001 - £1,500,00 = 10% £1,500,000 + = 12% - £% extra is second home / buy to let - First time buyers can claim relief up to £425,000, and 5% on portion from £425,001 to £625,000 - SDLT is payable on grant of new leases, calculated on the NPV of the lease, discounted at the RPI NPV up to £150,000 (£125,000 for resi) = 0 NPV over £150,000 (£125,000 for resi) = 1% NPV over £5,000,000 = 3% - NPV is defined as the total rent payable over the term of the lease, reduced by an annualised discount rate

Answer 60

Annual Tax on Enveloped Dwellings - Stops on shore and off shore individuals using companies to avoid SDLT

Answer 61

Wall is a party wall is it stands astride the boundary of land belonging to two or more land owners - Must always inform adjoining owners if intent to undertake works Party Wall Act (1996)

Answer 62

Right to light arises after 20 years uninterrupted enjoyment of light without consent of a third party by way of an easement with a prescriptive right. If a right to light is infringed, an injunction can be granted, or damages awarded HKRUK II (CHC) Ltd v Heaney (2011) RICS Guidance Note: Rights to Light (2016) RICS Consumer Guide to Right to Light (2022)

Answer 63

- When a LL / tenant wants a surrender of the existing lease and agrees to grant a new lease - longer / different terms - Calculate premium to reflect change in value of leasehold interest - Value before and after

Answer 64

- Charities must obtain valuation prior to disposal of an asset - Report must confirm charity has obtained best terms for transaction Charities Act (2011)

Answer 65

- Special buyer: particular buyer for whom an asset has a special value because of advantages arising from its ownership that would not be available to other buyers - When a transaction is not at arm's length and there is a special purchaser - E.g. tenant purchasing their freehold interest

Answer 66

- For building insurance purposes, the cost of reinstating a building without profit - Use BCIS adopting GIA for commercial properties - Add VAT, demolition costs, professional fees, planning and building regulation fees and inflation - Replacement cost figure is not a 'written opinion of value' so RB compliance not required

Answer 67

- Rent received less ground rent = Net rent - Net rent capitalised at yield for remainder of lease = Market Value

Answer 68

- Capital payment made by one party to another e.g. to retail tenant, to tenant for FF&E, to tenant to represent positive difference between passing rent and market rent, this is profit rent, if negative it can be reversed, paid by landlord to tenant for surrender of a leasehold

Answer 69

- Deduct likely costs of purchase from the gross market value to provide a net market value of a property as a purchaser will have to pay these costs - Usually include SDLT. agents fees (1% purchase price plus VAT), solicitors fees (0.5% of purchase price plus VAT)

Answer 70

Weighted average unexpired lease term Remaining to the first break of a lease across asset weighted by the contracted rent Used when valuing an asset / considering investment yield for multi-occupied investments or portfolios

Answer 71

- Devalue a headline rent with a rent-free period to produce a net effective rent - Straight line basis either until end of lease or until next review / lease event - Net effective rent is the market rent - 3 month fit out period is deducted from rent free period Three approaches to calculate net effective: 1. Straight line method 2. Straight line method assuming time value of cash flow using a yield 3. Use of DCF

Answer 72

- Piece of land which controls access to another piece of land - The Upper Tribunal suggests that value of ransom strip could be in the order of 15-50% of the development value unlocked by the inclusion of the ransom strip within the proposed development scheme. In some cases, a fixed sum has been awarded. Stokes v Cambridge (1961) when a value of one third of the uplift in the development site value was awarded to the owner of the ransom strip

Answer 73

- Used for comparison of retail properties to create a unit of comparison for different sized buildings - Rental value reduces away from the street - Halving back principle with 6.1m zones - 9.14m (30ft) zones are used in prime London streets - Basements / first floor areas are usually treated as A/10 approx - 'End allowances' allowed for shape, such as split levels, excessive front to depth ratio and hard frontages - Return frontages add 10% uplift - Natural zoning is when property zones reflect physical changes in the building such as steps - Mirror zoning if shop has two main frontages - Masking for hidden areas

Answer 74

Regulatory monitoring scheme for all valuers carrying out RBG valuations. 1. To improve quality of valuation and ensure highest standards 2. To meet RICS requirement to self-regulate 3. To protect and raise the status of the valuation profession as the leading expertise in valuation Clients can expect: - Openness and transparency - RICS protection and IVS - Expertise and clear reporting - World class regulations -Registration not mandatory for non RBG work - Valuer can use RICS Registered Valuer on marketing - Have to have done APC L3 Vals - Annual fee To register: - Type of valuations - Purpose of valuations - Number of valuations - Firm's total fee income from RBG vals in the last year - Data sources - Quality assurance audit procedures - History of negligence Monitored through submission of firm's annual return. Aditional monitoring ranges with Risk Based Reviews from desktop investigations to site based Regulatory Review Visits (RRVs), dependent on risks identified. Head of Regulation can remove you.

Answer 75

RICS Professional Standard: Valuation of Development Property (2019)

Answer 76

DA - Viability of proposed development RLV - Residual market value of land at a given time

Answer 77

Revenue - Rents influenced by demand Costs - Construction cost inflation

Answer 78

GDV Costs Profit

Answer 79

Nationally Describes Space Standards (2015) Requirement for GIA of new dwellings at a defined level of occupancy as well as floor areas and dimensions

Answer 80

Simple (yields, GDV, build costs, finance rate) Scenario (development content, timing, costs, phasing, modifying design) Monte Carlo (probability theory so you get random outcomes each time, use to produce the probability of every possible outcome)

Answer 81

Comparable Investment Residual Depreciated Replacement Costs Profit

Answer 82

Terms of Engagement

Answer 83

Identify valuer Identify client Purpose of valuation Valuation date Extent of valuation Bases of value Assumptions and special assumptions Confirmation of Red Book / IVS compliance

Answer 84

As long as there have been no material changes Must be confirmed in TOE

Answer 85

Fundamental measurement assumption of a valuation Also known as the standard of value

Answer 86

The basis of value

Answer 87

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

Answer 88

The value of an asset to the owner or a prospective owner for individual investment or operational objectives Also known as worth

Answer 89

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

Answer 90

The result of a combination of two or more assets or interests where the combined value is more than the sum of the separate values Also known as marriage value

Answer 91

A valuation technique used for the comparison of retail properties to create a unit of comparison for different sized buildings The rental value of the property reduces away from the street

Answer 92

Assumption - Supposition taken to be true involving facts and conditions that do not need to be verified Special assumption - An assumption that either assumes facts that differ from the actual facts existing or that would not be made by a typical market participant

Answer 93

VPGA 1 - Financial accounts VPGA 2 - Secured lending

Answer 94

The comparable method can be used where there is a good body of recent, reliable comparable rental, yield or sales evidence A comparable is defined as an item of information used during the valuation process as evidence to support the valuation or another, similar item

Answer 95

A - Direct comps (completed transactions / asking) B - Market data (commercial databases/indices/historic evidence/market demand) C - Other sources (locations/assets)

Answer 96

The IVS are not RICS, whereas the VPGAs are RICS - they fully incorporate concepts defined in the IVS IVS are the global baseline for valuation, RICS has fully adopted them into the VPGAs

Answer 97

Published 31st January 2024 - Revised structure - Increased focus on ESG, data, and modelling

Answer 98

- Development properties defined as where development is required to achieve the highest and best use - Valuer's responsibility to understand intended use of development

Answer 99

- Headline is total rent paid over the lease, including the value of any incentives (e.g. 100k) - Net effective rent total rent paid over the lease, less the value of any incentives (e.g. 80k) £20k worth of incentives

Answer 100

A deal where the buyer and seller act independently, without any special relationship or influence, ensuring the property is values at its true market value

Answer 101

Assumption: Statements that are accepted as true without evidence E.g. Assumption about tenure or property condition Special assumption: Statements that are not necessarily true but used to illustrate the effect of possible changes E.g. That planning consent has been granted / works being complete

Answer 102

Published 31st January 2024 Effective 31st January 2025 Key changes: - Alignment with updated IVS (also published on 31st January 2024 and effective from 31st January 2025) - Incorporate changes from the RICS Valuation Review - Futureproof valuation practise in evolving areas such as technology and ESG - New content relating to modelling and methods - Help valuers to provide the highest standard of service - Simplify and clarify guidance for valuers - Build public trust in valuations provided by RIVS Registered Valuers

Answer 103

IVS: - Red book structure was revised to align with updated IVS ('ve always learnt the new way with the 6 x VPS's) - VPS 5 'Valuation Models' is new - VPGA 1 'Valuations for financial reporting' has been rewritten (to mention IFRS) - Added VPGA 11 Relationship with Auditors Models and methods: - New coverage on these topics that encourages analytical approaches, but maintaining the valuer's choice and judgement (e.g. where AI is used in automated valuations, the outputs are only considered to be a written valuation if a valuer has applied their professional judgement to it' Technology and ESG: - Amended PS1 (Compliance) around automated valuation models, and incorporated new standards covering automation, AI and ESG (e.g. built into valuation guidance such as in ToE, inspection, investigations, recordings and reporting)

Answer 104

Published 19th October 2023 Effective from 1st May 2024 It was reissued in January 2025 to reflect the changes in the updated Red Book

Answer 105

- Minor UK specific terms added to the glossary - UK VPGA 1 'financial reporting - Minor amends - UK VPS 3 'valuation approaches and methods' - Addition of mandatory rotations for valuers: - Max single valuer period of 5 years - Max single firm period of 10 years - Min 3 year break after rotating off the above

Answer 106

Valuations have to be RCB if they are for taxation, finance, insurance, or legal purposes (e.g. for LPAs, institutional lenders, solicitors, accountants, HMRC, the courts) RCB have to be undertaken by a RICS Registered Valuer RBC valuations include: - Comparable method - Investment method - Residual method - Profit's method DRC is not suitable to be used for RBG compliant valuations for secured lending purposes, can only be used for market value / valuations for financial statements

Answer 107

Yes: - FVAs that include valuation elements should be RBG - Unless the PPG (Planning Practise Guidance) overrises the requirements of the RBG - If PPG does not override, then yes surveyors need to ensure that any valuation elements of FVAs adhere to RBG

Answer 108

Loan Security: Assesses a property's worth to determine if a lender can realistically recover the loan amount if a borrower defaults. Regulatory: Used for specific legal or regulatory purposes, such as determining the value of a property for taxation or insurance.