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APC 2024 > BG Valuation Questions > Flashcards

BG Valuation Questions Flashcards

1
Q

What is a valuation?

A

An opinion of the estimated value of an asset or liability on a stated basis and a specific date.

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2
Q

Why do we need the Red Book?

A
  • Provides guidance when undertaking valuation work
  • Helps facilitate integrity, clarity and consistency adopting valuation best practice
  • Helps protect against negligence claims
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3
Q

What is the Red Book’s full name?

A

RICS Valuation - Global Standards - 2021 (Effective Jan 22)

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4
Q

What is the purpose of the Red Book?

A
  • To ensure Consistency, Objectivity and Transparency in valuation to build trust across the globe.
  • Ensure common valuation process for all valuers and provide a consistent approach for clients across global markets.
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5
Q

What is the structure of the Red Book?

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

What is the difference between the UK and Global Version?

A

The global version is applicable worldwide
UK version supplements the global version and provides guidance relative to UK legislation

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7
Q

Are any types of valuations are excluded from the Red Book?

A

As outlined in PS 1:
1. Provided in prep for negotiations/litigation
2. Statutory function
3. Internal purposes
4. Part of agency and brokerage work
5. Provided as evidence as expert witness

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8
Q

What is PS1?

A

Compliance with standards where a written valuation is provided

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9
Q

What is PS2?

A

Ethics, competency, objectivity and disclosures

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10
Q

What is Market Value?

A
  • The estimated amount for which an asset or liability should exchange
  • On the valuation date
  • Between a willing buyer/seller
  • In an arm’s length transaction
  • Where the parties have acted knowledgably/prudently and without compulsion.
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11
Q

What is Market Rent?

A
  • The estimated amount for which an interest in real property should be leased
  • On the valuation date
  • Between a willing lessee/lessor
  • In an arm’s length transaction
  • Where the parties have acted knowledgably/prudently
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12
Q

What is Fair Value?

A

The price to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measured date.

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13
Q

What is Investment Value?

A

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

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14
Q

What would you use when valuing for financial accounts?

A

Fair Value – VPS 4 and VPGA 1

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15
Q

What would you have regard to when undertaking a valuation for loan security?

A

I would ensure I carefully deal with any conflicts of interest and that my report matches the guidance in VPGA 2.

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16
Q

What is VPGA 1?

A

Valuation for inclusion in financial statements

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17
Q

What is VPGA 4?

A

Valuation of individual trade related properties

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18
Q

What are some potential conflicts of interest when undertaking a valuation?

A

Any involvement with the borrow or property must be disclosed to the lender (generally 2 years)
If the valuer/client considers any involvement as a conflict, the valuation should be declined.
Record any conflicts of interest management in Terms of Engagement and the report.

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19
Q

How would you comment on any uncertainty?

A

With regard to VPGA 10, I would draw attention to and comment on any issues resulting to material uncertainty, relating it to any risk surrounding the valuation of the asset.
I would not use a standard caveat.

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20
Q

How would you undertake a valuation?

A
  1. Receive instruction
  2. Check competence
  3. Check independence
  4. Terms of Engagement
  5. Gather info
  6. Undertake due diligence
  7. Inspect & measure
  8. Research market & analyse comps
  9. Undertake valuation
  10. Draft report
  11. Check valuation with another surveyor
  12. Finalise and sign report
  13. Report to client
  14. Issue invoice
  15. Ensure the valuation file is in good order
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21
Q

What due diligence might you consider as part of the valuation?

A
  • Title check
  • Environmental report
  • Flood report
  • EPC
  • Equality Act 2010
  • Health and Safety compliance
  • Fire safety compliance
  • Planning history and compliance
  • Asbestos register
  • Contamination
22
Q

What are the valuation approaches and methods?

A
  • Title check
  • Environmental report
  • Flood report
  • EPC
  • Equality Act 2010
  • Health and Safety compliance
  • Fire safety compliance
  • Planning history and compliance
  • Asbestos register
  • Contamination
23
Q

When would you use the comparable method?

A

Used in residential valuations and when establishing MR and capitalisation rate in the investment method.

24
Q

What guidance would you refer to when using the comparable method?

A

Used in residential valuations and when establishing MR and capitalisation rate in the investment method.

25
Q

Talk me through an example when you have used the comparable method

A
  1. Search and select comparables
  2. Confirm/verify details and analyse headline rent to give a net effective rent
  3. Assemble comps in schedule
  4. Adjust comps using hierarchy of evidence
  5. Analyse comps to form opinion of value
  6. Report value and prepare file note
26
Q

What is the hierarchy of evidence?

A

What is the hierarchy of evidence? A tool to help weight comparable evidence

Category A – direct comparables
- All types of relevant transactional comparable evidence
o Open market lettings
o Lease renewals and rent reviews
o Third party determinations
o Sales and leasebacks
o Inter-company transfers

Category B – general market data
- Data that can provide guidance rather than a direct indication of value

Category C – other sources
- Wide range of data that might provide broad indications of value
- Other real estate assets & other background data

27
Q

What is the investment method of valuation?

A

The investment method of valuation is used when there is an income stream to value. The rent is capitalised at an appropriate all risks yield, which implies a growth rate.

28
Q

What is the conventional investment method?

A

Rent received/market rent multiplied by the years purchase

29
Q

What is the Term and reversion method?

A

Used when a property is reversionary (market rent is more than the passing rent).
The term is capitalised until the next lease event at a yield sought from comparable evidence.
The reversion is capitalised by an ARY into perpetuity at a reversionary yield

30
Q

What is the layer and hardcore method?

A

Used when a property is over rented.
The income flow is divided horizontally, and a higher yield is placed on the top slice to reflect the higher risk of tenant default.
The bottom slice reflects the MR and is valued at an ARY in to perpetuity
Both the hardcore (PR) and layer (MR-PR) are valued into perpetuity, but the layer is deferred to the next lease event.
An Equivalent Yield is applied to both the hardcore and layer.
Argus Val Cap uses this method.

31
Q

What is a yield?

A

A measure of investment return – income divided by price.

32
Q

What risk factors would you consider when determining a yield?

A
  • Prospects for rental & capital growth
  • Quality of location & covenant
  • Use of the property
  • Lease terms
  • Obsolescence
  • Voids
  • Security and regularity of income
  • Liquidity - ease of sale
33
Q

What are the different types of yield?

A
  • All risks yield – the rate of interest used in the valuation of a fully let property, let at the market rent, reflecting the risks and opportunities for that particular investment
  • Initial yield - simple income yield for current income and current price
  • Equivalent yield - average weighted yield when a reversionary property is valued using an initial and reversionary yield.
  • Reversionary yield - MR divided by current price on an investment let at a rent below the MR
  • Gross yield – yield not adjusted for purchaser’s costs (such as an auction result)
  • Net yield - yield adjusted for purchaser’s costs
  • Running yield – yield at one moment in time
34
Q

How would you undertake a valuation using the Profits method?

A

The occupier must provide the valuer with 3 years audited accounts or 3 years management accounts.
EBITDA times an appropriate yield to gain the market value of the property.
Annual turnover less costs, reasonable working expenses, operators renumeration.
Check with comparable sales evidence if possible.

35
Q

What is the depreciated replacement cost (DRC) method of valuation?

A

Only used when direct market evidence is limited or unavailable for specialised properties.
Could include sewage works, lighthouse, oil refineries, etc.

Used for owner occupied properties & accounts purposes for specialised properties.

36
Q

How would you undertake a valuation using the DRC method?

A
  1. Value of the land in its current use (assume planning permission exists)
  2. Add current cost of replacing the building, plus fees, less a discount for depreciation and obsolescence/deterioration.
37
Q

What is hope value?

A

The value arising from any expectation that future circumstances affecting the property may change.

38
Q

What is marriage value?

A

Created by a merger of interests – can be physical or tenurial

39
Q

How would you value for charities?

A

I would have regard to s119 of the Charities Act 2011 - Need to comment if the sale/purchase is in the charities best interest and if the terms are the best that can be reasonably obtained for the charity.

40
Q

How would you value long leasehold interests?

A

Can use a DCF calculation
-deduct ground rent from the gross income and capitalise at a yield for the length of the lease to create a market value.
Sinking funds can be used in theory.

41
Q

What is a premium?

A

A capital payment made by one party to another.

42
Q

How would you calculate WAULT?

A

Weighted average unexpired lease term – weighted by contracted rent.

43
Q

What is a ransom strip?

A

A piece of land which controls the access to another piece of land.
Could affect value of 15-50% of the development value.

44
Q

What purchaser’s costs would you add to a valuation?

A

3 elements:
1. Stamp Duty Land Tax – at the prevailing rate
2. Agents fees – 1% of purchase price, plus VAT
3. Solicitors fees – 0.5% of the purchase price plus VAT

45
Q

How would you value a retail unit?

A

I would use zoning if applicable – halving back principle with 6.1m zones
-basement and first floor typically A/10 approx.

46
Q

Why do you use zoning?

A

Rental value of the property reduces away from the street – less footfall.
Zoning creates a unit of comparison for different sized buildings.

47
Q

Who is considered a special buyer?

A

A particular buyer for whom the asset has special value – advantages arising from ownership to other buyers.

48
Q

What is special value?

A

The amount that reflects particular attributes of an asset that are only of value to a special purchaser.

49
Q

How do you deal with rent free periods?

A

Devalue a headline rent to produce a net effective rent – straight line basis until end of lease or next rent review.
Normally a 3 month rent free period is included for fitting out.

50
Q

What is the RICS Valuer Registration Scheme (VRS)?

A

Regulatory monitoring scheme for all valuers carrying out Red Book Global Valuations from October 2011

51
Q

What is the purpose of the RICS Valuer Registration Scheme?

A
  • Maintain public confidence in the profession
  • Fulfill responsibility to self-regulate
    -Quality assurance

APC 2024 (27 decks)

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