Core - Valuation (L3) Flashcards
What are the THREE steps you should undertake prior to commencing a valuation?
CCT:
- Competence - check you have the correct level of skills, understanding and knowledge
- Conflict of Interest - check you are able to act independently on the instruction
- Terms of engagement - issue to the client and receive written confirmation
Why do you undertake statutory due diligence for valuations?
Confirm that there are no material matters which could impact on the valuation
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What types of statutory due diligence checks would you undertake when valuing a property?
- Asbestos register
- Business rates / Council tax
- Contamination
- Equality Act Compliance
- Environmental matters (high voltage power lines, electricity sub-stations, telecoms masts etc.)
- EPC rating if available
- Flooding
- Fire safety compliance
- Health and safety compliance
- Highways (check roads adopted with the local highways agency)
- Legal title and tenure (check boundaries, ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves)
- Public rights of way (from an OS sheet)
- Planning history and compliance (check any onerous planning conditions, whether the property is in a conservation area / listed and subject to a s. 106 agreement or CIL)
How do you calculate WAULT? (weighted average unexpired lease term)
Adding up all the contracted rental income on the portfolio between now and the time the leases expire, and dividing it by the sum of the contracted annual rent.
It is expressed in number of years
Describe the timeline to a typical valuation instruction?
Preamble:
- Receive instruction from the client
- Check competence
- Check independence
- Issue terms of engagement (inc. Scope of works, fee, PII, CHP)
- Receive Countersigned terms
Due Diligence:
- Gather information – leases, title, planning doc, OS plans etc.
- Undertake statutory due diligence (listed previously)
- Inspect and measure
- Research market / analyse comps
Valuation & Reporting
- Undertake the Valuation
- Draft Report
- Have another Surveyor review your work
- Finalise and sign report
- Report your valuation to the client
Completion
- Issue invoice
- Ensure filing in good order for audit.
What are the FIVE main methods of valuation?
- Comparable method
- Investment method
- Profits method
- Residual method
- Depreciated replacement cost method
What are the Three Valuation Approaches and Methods According to International Valuation Standards (IVS) 105 (Published by the International Valuation Standards Council, not RICS)
- Income approach - converting current and future cash flows into a capital value
- Cost approach - a reference to the cost of the asset whether by purchase or construction
- Market approach - using available comparable evidence
What are the SIX steps used when collecting comparable evidence?
- Search and select comparables (agent’s boards, online databases)
- Confirm/verify information with a party directly involved in the transaction
- Assemble comparables in a schedule
- Interpret comparables using a hierarchy of evidence
- Analyse comparables to form an opinion of value
- Report value and prepare file note
What guidance did the RICS recently release on using comparable evidence?
RICS guidance note Comparable evidence in real estate valuation, 2019
What is the Hierarchy of Evidence when Considering Leasing Deals?
- Open Market Lettings
- Lease Renewals
- Rent Reviews
- Third Party Determinations
- Sale and Leasebacks
- Inter-company transactions.
In terms of comparable evidence, why is lease renewal better than rent review?
RR often upwards only, and the tenant has no ability to leave so less negotiation, also other terms not negotiable within RR.
Describe the Traditional Investment Method of Valuation
A rent capitalised at a yield (or multiplied by a year’s purchase). Growth is implicit
What is a term and reversion valuation, when is it used, and can you draw it?
Term and reversion methodology is used for reversionary assets (ERV>Passing).
The term is valued until break/review at the initial yield, the reversion capitalised into perp at the reversionary yield.
What method of valuation do you use when a property is over-rented?
You use the Layer / Hardcore Method. Apply a froth rate to the over-rented section.
A higher yield reflects a greater risk on rent.
Define Equivalent Yield
The weighted average yield between the initial and reversionary yields.
Define Nominal Yield
Initial yield assuming rent is paid in arrears
Define True Yield
Assumes rent is paid in advance, most traditional valuation assumes that rent is paid in arrears.
What is an All Risks yield?
Yield which encompasses all the prospects and risks attached to a particular investment
What is a Gross yield?
Yield based on the net purchase price (i.e. not adjusted for purchasers’ costs)
What is a Net yield?
Yield based on the gross purchase price (i.e adjusted for purchasers’ costs)
What is an Initial yield?
Simple income yield for current income and current price
What is a Reversionary yield?
Market Rent divided by current price on an investment that is under rented
Define NPV
Net Present Value = sum of all the discounted cash flows of the project. Can be used to determine the viability of an investment given a certain level of desired return.
Define IRR
Internal rate of Return,
“The rate at which all future cash flows must be discounted to produce an NPV of 0”
When is the Profits Method of Valuation Used and How does it Work?
Used to value property on the basis of a business/trading potential. Used commonly for the valuation of pubs, petrol stations, hotels, and healthcare properties. Value is determined by the profitability of the operation within the asset.
It uses the EBITDA (Earnings Before Interest Tax Depreciation and Amortization).
How Many Years of Audited Accounts would you ideally like to see for a Profits Method Valuation?
3 years
What is the difference between a development appraisal and residual valuation?
A development appraisal assesses the viability of a project for a specific developer. It can assume site value or calculate it for a given developers profit requirements.
A residual valuation looks to the market for assumptions to appraise the value of a piece of development land. A residual valuation is a one moment in time valuation for a specific purpose.
When should you use the depreciated replacement cost method of valuation? And how is it calculated?
It should be used when there is limited availability of market evidence. It is calculated:
(1) Value of land, with existing use planning permission in place.
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(2) Cost of replacing the building, with an allowance for depreciation. (BCIS)
What are the three types of obsolescence?
Physical, Functional, Economical.
What does the Red Book say about the DRC Method of Valuation?
The Red Book says that the method should not be used for loan security valuations, but may be used for valuations to form part of a financial statement.
What must a valuer include when reporting a DRC valuation?
They must state the value for any readily identifiable alternative use if it is higher than the current use if appropriate, or if appropriate a statement that the market value would be lower on cessation of the business use.
What is the Red Book Called?
RICS Valuation Global Standards (2022)
What is the reason for the RICS Valuation- Global Standards 2022 update?
RICS have confirmed that this is only an update to the Red Book Global 2020, rather than a full new edition.
The aim of the update is to reflect changes to the International Valuation Standards 2022, as well as to clarify certain sections of the existing Red Book Global.
What are the key changes in the RICS Valuation- Global Standards 2022 update?
- Emphasising the need to agree on clear and unambiguous terms of engagement.
- The terms quasi, partial or non-Red Book should not be used in terms of engagement or reporting.
- Requiring more detailed commentary on sustainability/resilience and environmental, social and governance (ESG) matters in VPGA 8 Valuation of Real Property Interests.
What is the Structure of the Red Book (Parts 1-6)?
Part 1 - Introduction
Part 2 – Glossary
Part 3 – Professional Standards (PS)
Part 4 – Valuation Technical and Performance Standards (VPS)
Part 5 – Valuation Applications (VPGA)
Part 6 – The International Valuation Standards, 2020, (IVS)
What sections are contained within Part 3 – Professional Standards (PS)
PS1 – Compliance with standards where a written valuation is required.
PS2 – Ethics, Competency, Objectivity, Disclosures.
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What are the: Part 4 – Valuation Technical and Performance Standards (VPS)
VPS1 – Terms of Engagement
VPS2 – Inspections, Investigations and Records
VPS3 – Valuation Reports
VPS4 – Bases of Value, Assumptions and Special Assumptions
VPS5 – Valuation Approaches and Methods
What are the: Part 5 - Valuation Practice Guidance Applications (VPGA)
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VPGA 1 Valuation for inclusion in financial statements
VPGA 2 Valuation of interests for secured lending
VPGA 3 Valuation of businesses and business interests
VPGA 4 Valuation of individual trade-related properties
VPGA 5 Valuation of plant and equipment
VPGA 6 Valuation of intangible assets
VPGA 7 Valuation of personal property, including arts and antiques
VPGA 8 Valuation of real property interests
VPGA 9 Identification of portfolios, collections and groups of properties
VPGA 10 Matters that may give rise to material valuation uncertainty
What is Part 6 – The International Valuation Standards, 2020, (IVS)
General Standards – terms of engagement, approaches to/methods of valuation, reporting
Asset Standards – specific asset requirements, such as real property and development property
What are the 2 Red Book “Professional Standards” (PS)?
(1) PS1 – Compliance with standards where a written valuation is required.
(2) PS2 – Ethics, Competency, Objectivity, Disclosures.
What is the Application of PS1?
PS1 details when a valuation needs to be red book compliant. Makes IPMS uptake and International ethical standards mandatory.
What are the FIVE situations in which a valuation does not have to be Red Book Compliant? According to RICS Valuation Global Standard 2022?
If supplied in written form, all valuation advice given by members is subject to at least some of the requirements of the Red Book Global Standards – there are no exemptions
(1) When providing an Agency or Brokerage Service (During an Instruction, in an Expectation of Instruction, or Evaluating a Bid)
(2) When Acting as An Expert Witness (Because they will have to follow the specific procedures of the Court)
(3) Performing a Statutory Function (Tax Return for example)
(4) Providing Valuation to a Client for Internal Purposes (Situation in which the valuation will be without liability outside the client)
(5) When valuation is for Negotiation or Litigation purposes (As written valuation advice may extend to matters beyond value such as tactics etc.)
(AESIN)
What five things does PS2 of the Red Book make Mandatory
(PS2 = Ethics, Competency, Objectivity and Disclosures)
- All members are bound by the RICS Rules of Conduct
- Members and firms must ensure that services are provided by competent individuals who have the necessary expertise.
- Maintaining strict separation between advisers
- Members must follow the mandatory requirements in Conflicts of interest, RICS professional statemen
- Members must understand their client’s goals and ensure they are competent at the point of agreeing the terms of engagement. [Standards for Terms of Engagement are set out in VPS1].
Where in the Red Book does it Talk About Rotation policy, and What is this?
Rotation Policy is talked about in PS2 of the Red Book, it refers to a policy of rotating the valuing firm or valuing member, in order to maintain objectivity.
RICS considers it good practice, albeit not mandatory, to rotate valuers at intervals not exceeding seven years.
What are the 5 Valuation and Technical Performance Standards (VPS)?
VPS1 – Terms of Engagement
VPS2 – Inspections, Investigations and Records
VPS3 – Valuation Reports
VPS4 – Bases of Value, Assumptions and Special Assumptions
VPS5 – Valuation Approaches and Methods
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According to VPS1 What are the Minimum Requirements to be Confirmed in Writing Prior to a Red Book (2022) Valuation Commencing?
(a) Identification and status of the valuer
(b) Identification of the client
(c) Identification of any other intended users
(d) Identification of the asset being valued
(e) Valuation currency
(f) Purpose of the valuation
(g) Basis of value adopted
(h) Valuation date
(i) Scope of work
(j) Nature and source(s) of information upon which the valuer will rely
(k) All assumptions and special assumptions to be made
(l) Format of the report
(m) Restrictions on use, distribution and publication of the report
(n) Confirmation that the valuation will be undertaken in accordance with the IVS
(o) The basis on which the fee will be calculated
(p) Where the firm is registered for regulation by RICS, reference to the firm’s complaints handling procedure, with a copy available on request
(q) A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations
(r) A statement setting out any limitations on liability that have been agreed.
What is VPS2 of the Red Book about?
Inspections, Investigations and Records.
According to VPS2 of the Red Book, what is the Main Purpose in Inspection and Investigation?
Verification of the adequacy of the information:
“The valuer must take reasonable steps to verify the information relied on in the preparation of the valuation and, if not already agreed, clarify with the client any necessary assumptions that will be relied on”.
Are Desk-top Valuations (i.e. without inspection) Red Book Compliant?
Yes, these can be considered a Red Book compliant valuation (unless for reasons set out in PS1), however, VPS2 of the Red Book sets out the following steps which should be taken by a valuer in this situation of restricted information:
- The client has confirmed that no material changes to the physical attributes of the property.
- If this has been confirmed a revaluation without re-inspection may be undertaken. The terms of engagement must state that this assumption has been made.
- The Surveyor should consider whether it is reasonable to inspect for the purposes of the valuation.
- A desktop valuation can be undertaken even though an inspection is needed if providing the client confirms in writing that it is required solely for i_nternal management purposes only_ and that the client accepts responsibility for the associated risk.
Can you undertake a Re-Valuation of a property without Re-Inspection?
In accordance with VPS2 of the Red Book, you can re-value a property without re-inspection providing you as the valuer are satisfied there has been no material change that will impact the property’s value. This should be stated in the Terms of Engagement.
What Does VPS2 say about Record Keeping?
Comprehensive records of investigations and inspections must be kept in a business format.
What does VPS3 of the Red Book (2022) say?
It applies International Valuation Standard (IVS) 103 Reporting
VICARIANCE ACID PB
What does VPS3 say that a Valuation Report should Contain? (This mimics VPS1 on the Terms of Engagement).
- Valuation approach and reasoning
- Identification and status of the valuer
- Confirmation that the valuation has been undertaken in accordance with the IVS
- Assumptions and special assumptions
- Restrictions on use, distribution and publication of the report
- Identification of the client and any other intended users
- Amount of the valuation or valuations
- Nature and source(s) of the information relied upon
- Confirmation that the valuation has been undertaken in accordance with the IVS
- Extent of investigation
- Amount of the valuation or valuations
- Confirmation that the valuation has been undertaken in accordance with the IVS
- Identification of the asset(s) or liability(ies) valued
- Date of the valuation report
- Purpose of the valuation
- Basis(es) of value adopted
Does a Valuer have to sign a Valuation Report?
Yes according to VPS3 of the Red Book, a valuer must sign a valuation report and make clear that they are objectively able to value the property. The RICS does not allow a firm to sign a valuation, it is signed off by an individual.
What must you do and Consider when Providing Preliminary (or Draft) Valuation Advice?
According to VPS3 of the Red Book, when providing preliminary (or draft) advice you must:
- Mark the report draft
- It is not to be shared and is for internal purposes only – There is no reliance.
- It can be discussed with the client but the valuer must not be influenced by the Client.
- Any changes to the final report or additional information considered must be included as a note in the final report.
What is the Red Book Definition of Investment Value (as in IVS04)?
“The value of an asset to a particular owner or prospective owner for individual investment or operational objectives”.
What is the Red Book Definition of Fair Value (as in IFRS 13)?
“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”.
What does VPS4 of the Red Book say about Special Assumptions?
“A special assumption is made by the valuer where an assumption either assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant in a transaction on that valuation date”.
What is an assumption?
An assumption is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation or verification.
