Definitions and Processes

Question 1

What is the definition of Market Rent?

Answer 1

• Market rent: estimated amount for which an interest in property should be leased on a valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arms length transaction after proper marketing and where both parties have acted knowledgeably, prudently and without compulsion

Question 2

What is the definition of Market Value?

Answer 2

• Market value: estimated amount for which an asset or liability should exchange for on the valuation date between willing buyer and a willing seller in arms length transaction after proper marketing and where both parties have acted knowledgeably, prudently and without compulsion

Question 3

What is the definition of Investment Value?

Answer 3

• Investment value: value of an asset to a particular owner or prospective owner for individual investment or operational objectives

Question 4

What is the definition of Fair Value?

Answer 4

• Fair value: 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 5

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

Answer 5

Assumption: made where it is reasonable for the valuer to accept that something is true without need for specific investigation or verification. Assumption must be reasonable and relevant having regard to the purpose for which valuation is required
Special assumption:
* Made my valuer where an assumption either assumes facts that differ from those existing at valuation date or that would not be made by a typical market participant
* Special assumptions where they are necessary to provide valuation, must be expressly agreed and confirmed in writing before report issued
* Only made if they can be reasonably regarded as realistically relevant and valid

Question 6

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

Answer 6

• Competence, independence, terms of engagement
• Gather information: lease, title documents, planning information, OS plans
• Inspect and measure
• Due diligence - research market and assemble, verify and analyse, draft value and report, peer review

Question 7

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

Answer 7

Where valuation of an asset has been previously valued by the valuer or valuers firm the following disclosures must be made:
* Relationship with client and previous involvement
* Rotation policy
* Time as signatory
* Proportion of fees

Question 8

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

Answer 8

If valuation is undertaken on a regular basis then an arrangement could be made to have valuation periodically reviewed at intervals of not greater than seven years by another member would demonstrate objectivity

Question 9

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

Answer 9

• Long standing relationship with borrower or owner
• Introducing the transaction to lender / borrower
• Acting for owner in property or related transaction
• Acting for borrower on purchase
• Retained to act in disposal or letting of completed development
• Recently acted in market transaction in property / asset
• Provided fee earning advice on property before and / or development consultancy for previous owners
• Risk of disclosure of confidential information i.e. disclose details of the valuers involvement

Question 10

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

Answer 10

• Restricted service might be a short timescale for reporting without inspection or time for thorough investigation
• Restricted service will include limitations on assumptions of VPS 2
• Valuer should consider if restriction reasonable with regard to the purpose of valuation might be subject to conditions like no disclosures to third parties
• If not possible to value on restricted basis then should decline
• Valuer should make clear restrictions and assumptions and accuracy of report

Question 11

How do you deal with limitations on inspection or analysis?

Answer 11

• Limitations on inspection or restrictions on the inspection, inquiry or analysis for the purpose of valuation must be identified and recorded in Terms of Engagement
• If relevant information not available due to restrictions then assumptions or special assumptions must be identified and recorded in ToE

Question 12

Can you revalue a property without inspecting?

Answer 12

• A revaluation without inspecting previously valued must not be undertaken unless the valuer is satisfied that there has been no material changes to property or nature of its location since time since last inspection
• This must be confirmed in writing in ToE

Question 13

What RICS guidance relates to the use of comparable evidence?

Answer 13

RICS Comparable Evidence in Real Estate Valuation 2019 - GN

Question 14

What is an internal valuer?

Answer 14

• Employed by a company to value the assets of a company / enterprise
• Valuation for internal use only
• No third-party reliance

Question 15

Can an external valuer provide an internal purposes valuation?

Answer 15

• Internal valuations are provided without liability, communication to third party
• Needs to be stated in ToE
• Possible yes for external valuer to do internal valuation if exclusion of liability and non-disclosure to third party

Question 16

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

Answer 16

• If there has been a change in market conditions or in circumstances of a property, asset or portfolio between valuation date of report, valuer should draw attention to this
• Prudent to draw attention to the fact that values change overtime and a valuation on a given particular day might not be valid earlier / later

Question 17

Is special value from a special purchaser reflected in MV?

Answer 17

No - market value ignores any price distortions caused by special value or marriage value

Question 18

When is fair value used?

Answer 18

• Adopted by the International Accounting Standards Board
• Required if IFRS is adopted by the client

Question 19

What is the Valuer Registration Scheme?

Answer 19

Introduced October 2011. Aims:
* Improve quality of valuation and ensure highest professional standards
* Meet RICS requirements to self-regulate
* Protect and raise status of valuation profession

Question 20

What is the basis of value under UK GAAP FRS 102?

Answer 20

Fair Value

Question 21

When would you use EUV?

Answer 21

Used to form benchmark land value in FVA

Question 22

What is the definition of EUV?

Answer 22

Market or other value assuming the property remains in its existing use with no exception of that use changing in the future

Question 23

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

Answer 23

Usual market practice to deduct likely cost of purchase from gross market value to provide net market value of a property as a purchaser will have to pay
* SDLT - Prevailing rate
* Agents fees
* Solicitors fees

Question 24

What is the hierarchy of evidence?

Answer 24

RICS Comparable Evidence in Real Estate Valuation 2019 - GN
* Category A - Direct Comparables: contemporary completed transactions with full or sufficient reliable data can be found, real estate where offers not completion made = asking prices)
* Category B - General Market Data: indirect evidence e.g. yields. Historic evidence, supply / demand data
* Category C - Other Sources: (transactional evidence, background data)

Question 25

What would you do if comparable evidence was limited?

Answer 25

RICS Comparable Evidence in Real Estate Valuation 2019 - GN
* Lack of evidence should not prevent valuations being undertaken
* Red Book standards state ‘valuers should not treat a statement expressing less confidence in valuation as a sign of weakness is a matter for disclosure’
* Red Book standards require valuer to comment on material uncertainty in relation to valuation where it is essential to ensure clarity to the user

Question 26

What is NPV?

Answer 26

Net Present Value:
* Sum of discounted cash flows of a project
* A NPV can be used to determine if an investment gives a positive return against a target return
* NPV is positive = investment exceeds investors target rate of return
* NPV is negative = not achieved target rate of return

Question 27

What is IRR?

Answer 27

Internal Rate of Return:
Rate at which future cash flows must be discounted to produce a NPV of zero
IRR used to assess total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumption

Question 28

What is marriage value?

Answer 28

The value created by a merger of two physical or tenurial interests. Undertake a before and after valuation to calculate level of marriage value. Level of payment is divided 50:50 or pro-rata to the level of interest

Question 29

When would you include an element of hope value in a valuation?

Answer 29

• Include hope value when expectation that future circumstances affecting the property may change
• Two typical examples of hope value are: future prospects of securing planning permission and realisation of marriage value from merger of two interests of land

Question 30

How would you value a ransom strip?

Answer 30

• Piece of land controls access to another piece of land
• Upper Tribunal (Lands Chamber) evidence suggests that value of a ransom strip could 15-50% of the development value unlocked by inclusion of ransom strip
• Stokes v Cambridge 1961 was where one third of the uplift in development value was awarded to owner of ransom strip

Question 31

How does market value differ to investment value / fair value?

Answer 31

Market value is broadly similar to fair value as it relates to a willing market participant, however, investment value differs from MV as it is used to measure a worth for a client’s own investment criteria

Question 32

What is turnover / gross profit / net profit?

Answer 32

• Turnover = total income recieved
• Gross profit = turnover less costs and purchases (costs needed to generate the revenue)
• Net profit = less working expenses and operators remuneration (taxes, interests)