General Valuation Flashcards
What is an internal Valuer?
- Employed by company to value assets of the company.
- Valuation of internal use
- No third party reliance
What is an external valuer?
- Has no material links to the asset or client
Can an external valuer provide an internal purposes valuation?
Yes. But ToE must clearly state about non-disclosures to third parties
What do you do before undertaking a valuation instruction?
CIT
Competence – SUK
Independence - COI
Terms of Engagement – in writing, full confirmations, confirm competence
What does the front page of the red book look like?
Grey with a red sphere – RICS Valuation Global Standards
When you say you undertake statutory due diligence for valuations what do you look at?
- Asbestos register
- Business rates
- Contamination
- Equality Act Compliance
- Environmental matters
- EPC rating available
- Flooding
- Fire Safety
- Health and Safety
- Highways
- Legal title and tenure
- Public rights of way
- Planning history and compliance
KF Terms of Engagement for Valuation
- Date
- Client
- Property/properties to be valued
- Valuation standards and RICS regulation
- Status of Valuer
- COI
- Purpose of Valuation
- Limitation of Liability
- Reliance + Disclosure
- Basis of Valuation, Assumptions and Special Assumptions
- Scope of Work (inspection/reinstatement costs)
- Valuation Date
- Currency
- Report format
- Fees
- Confirmation (signature)
5 methods of Valuation?
- Comparable method
- Investment method
- Profits method
- Residual method
- DRC
3 Valuations approaches?
- Income (investment, residual, profits)
- Cost Approach (DRC)
- Market Approach (comparable)
Tell me about how you would value a building using the profits/contractors/investment/comparable/residual method of valuation.
Comparable
* Search and select comparables
* Confirm details / analyse rents
* Assemble comparable schedule
* Adjust comps in line with hierarchy of evidence
* Analyse to form opinion of value
* Report value and prepare file note
Investment method
* Undertake the comparable method to ascertain rent and yield
Three types:
* Conventional method – MR*YP in perp
* Hardcore/Topslice – overrented properties –
* Term/Reversion – under rented capitalise market rate at a lower rent – low risk / capitalise – higher yield risk
Residual Method
* Calculate GDV from comparable method
* Deduct all costs such as finance, profit, construction costs, contingency, professional fees, planning costs
Profit’s method
1. Fair maintainable trade
* Trade costs
2. Gross profit
* Operating costs
3. Fair maintainable operating costs
4. YP in perp @%
= Capital value
Depreciated replacement method
1. Cost of producing a replacement building
2. Depreciate the cost of replacement building to reflect age and obsolescence
3. Calculate the land value
4. + depreciated replacement building to land value to give capital value
Comparative Methodology, what is it?
Search and select comparables
2. Confirm/verify details
3. Assemble comps in a schedule.
4. Adjust comps using hierarchy of evidence
5. Analyze comps to form opinion of value
6. Report value and prepare a file note
What professional standard relates to Comparable evidence?
RICS Professional Standard: ‘Comparable Evidence in Real Estate Valuation’ 1st Edition, 2019
Principles in use of comparables evidence. Provides situations where there is limited availability + non descriptive hierarchy.
What is the hierarchy of evidence?
- Cat A: direct comps. Based on near accurate properties.
- Cat B: General market data to provide guidance e.g info from published sources
- Cat C: other sources transactional evidence from other real estate types and locations
Ways to compare comparables?
Through locations (inspection of areas), speak to local agents, inhouse data bases, third party databases, market sentiment and date of sold/rented property.
Please run me through an investment method valuation?
tbc
Investment Values:
Value = rent/yield
Rent = value x yield
Yield = rent/value
What is a yield?
Annual rate of return of investment expressed as %
Relationship between income and capital value (risk free rate + risk taking into account anticipated rental growth)
What are examples of Risk?
Sector risk, structural risk, legislation risk, planning risk, legal risk
What is the conventional investment method?
Implicit Method (All risks yield)
Rent received (or MR) multiplied by the years purchase to calculate MV
What is term and reversion? For under rented properties
For under rented properties
Term (under rented and current rent) until lease expires @ capitalization rate (initial yield) @ 6%
Reversion into MR valued into perp @ higher capitalization rate (reversionary yield) e.g 7%
- Higher capitalization rate because the risk is higher
What is the layer/hardcore method?
For over rented properties
Top slice: is the current rent passing at higher yield to reflect the level of risk until lease event
Bottom slice: is valued into perpetuity at a lower yield to reflect lower risk ascertained from market evidence
Prime Yield Guide?
BTR Zone 1 London Prime Yield = 3.9%
BTR Zone 2 London Prime Yield = 4%
Regional Tier 1 = 4.5%
Will need to be updated
What are the major factors that affect a yield?
Rental growth, location, use of property, lease terms, voids, security, liquidity
What is return?
Return is used to describe the performance of a property
What is a secondary yield?
Yield for the gap between prime and secondary yields to reflect the above risks
What is Years Purchase?
The amount of time to pay back the capital value
What is present value?
It is the current worth of a future sum of money
What is the equivalent yield?
Average weighted yield when a reversionary property is valued using an initial yield and reversionary yield
What is the difference between equivalent yield and equated yield?
Equivalent: Average weighted yield when a reversionary property is valued using an initial and reversionary yield
Equated: The yield on a property investment which takes into account growth in future income
What is all growth implicit?
Assumption that they are made explicit in a DCF approach and the risks are hidden in the selected yield.
What is All Risks Yield?
Interest used in a valuation to of fully let property let at the MR reflecting all prospects and risks in the whole investment
True Yield
Assumes rent is paid in advance not in arrears
Nominal Yield
Initial yield assuming rent is paid in arrears
Gross Yield
Rent/yield excluding purchasers’ costs
Net Yield
Rent/value plus purchasers costs
Initial Yield
The amount of return received for a current income and current price
Reversionary yield
yield that should be achieved if the passing rent adjusts to the level of the estimated rental value.
Running yield
Yield at one moment in time
What is the discounted cash flow?
Growth explicit Investment method of valuation
Valuation model that seeks to determine the value of a property by examining the future net income then discounting the cashflow to arrive at estimated current value.
Where do you use a cashflow for a finite period?
- Phased development
- Shortlease hold interest
Simple methodology of cashflow investment?
- Estimate the cashflow (income less expenditure)
- Estimate the exit value at the end holding period
- Select discount rate
- Discount cashflow at discount rate
- Value the sum of the completed discounted cashflow to provide NPV
What is the Net Present Value?
It is the sum of the discounted cash flows of the project
It can be used to see if the investment gives a positive return against TRR
NPV = Positive = investment has exceeded the investors TRR
NPV = Negative = not achieve the TRR
Implicit v Explicit?
Implicit – something that is understood to be happening but not described clearly or directly.
Explicit – set interest/inputs out very clearly without ambiguity
What is the IRR?
Rate of return where all future cashflows must be discounted to produce NPV = zero.
It is used to assess the total return of an investment opportunity, regarding growth, reletting and existing assumptions.
How do you calculate the IRR?
- Input current MR as a negative cashflow
- Input projected rents as positive value
- Input projected exit value
- Discounts rate IRR is chosen to provide NPV of zero.
- If NPV is more than zero, then TRR is met
What does the RICS provide to follow this?
RICS Practice Information: Discounted cashflow valuations, Nov 23
What is a Discounted Cash Flow (DCF)?
I haven’t used a DCF, however I understand that it is a growth explicit method that estimates the exit value.
If I was asked to undertake one of these, I would ask a senior colleague to undertake the valuation.
What is a short-cut DCF?
The passing rent which is constant for the duration of the rent period, is discounted at an appropriate rate of return
When would you use a DCF?
- Short leasehold
- Phased development projects
What are the advantages and disadvantages of a DCF?
Advantages:
* Detailed
* Used to work out IRR
* Scenarios can be built in
Disadvantages:
* Prone to errors
* Requires large number of assumptions
What is the Profits method?
Value for trade related property e.g pub/hotels/petrol stations.
What are the assumptions of the profit method?
Property generates a profit, must have audited account for 3 years.
What is the method for profits?
Annual turnover – less costs
= gross profit
Less reasonable working expenses
= unadjusted net profit
Less operators renumeration
= Fair maintainable operating profit
= EBITDA
Then capitalize that by yield.
What is EBITDA?
Earnings Before Interest, Taxes, Depreciation and Amortization
What is residual valuation?
It is determining the MV but valuing a site with development potential in accordance with the Red Book. Using market inputs at the date of valuation.
Do RICS provide any guidance on RLVs or valuing development property?
Yes, RICS Professional Standard: Valuation of Development Property, 2019
What is an RLV?
Residual land valuation
A red book valuation that assesses land value with development potential.
It uses market inputs to assess the value.
How else can you value development land?
Comparable method
What is the basic process of undertaking a RLV/development appraisal?
Calculate
1. GDV
2. – total construction costs
3. – profit
= Land Value
What does a development appraisal show?
The suitability/viability/profitability of a proposed scheme
Client inputs
What are the key things you need to consider when appraising / inspecting a development site?
- Adhere to Health and Safety – surveying safely
- Walk the site boundaries
- Check for contamination
- Previous uses
What is GDV/NDV?
Gross development value – capital market value of the completed scheme
Net development Value – appropriate basis of value for the completed development net of any sale costs
What do development costs include?
- Demolition
- Planning costs
- Construction costs
- Finance
- Contingency
- Marketing costs
- Profit
Where can you source build costs from?
- BCIS
- Quantity surveyors
client
What would you apply finance costs to and on what basis?
- Site purchase – straight-line basis
- Construction costs – s curve
- Holding costs – straight-line basis
What is an S curve?
Reflects when money would be drawn down.
It halves the amount of interest that would be borrowed over the construction period.
Developers only draw down when they require more for the next phase.
What do holding costs typically include?
- Void periods
- Empty rates
Holding costs lead to profit erosion
What other criteria might be assessed in terms of performance measurement for a RLV?
- Profit
- IRR
What are the advantages/disadvantages of a RLV?
Advantages
* Allows costs and incomes specific to that particular project to be reflected
Disadvantages:
* Very sensitive to inputs
* Doesn’t consider timings of cashflow
* Require accurate inputs and information
What is the Depreciated Replacement Cost (DRC)?
Value specialized properties e.g sewage works, lights house, submarine base.
Use for owner-occupied services, and accounts purposes for specialized properties
What are the 3 components of the cost approach?
Depreciation allowance:
a. Physical
b. Functional
c. Economic
What is the methodology for DRC?
- Value the land in its existing use
- Add current costs of replacing the building plus a discount for depreciation.
Limitations of DRC?
- Not suitable for Red Book Global for secured lending
- Only used to calculate MV for specialized properties for financial statements
- Undertaken by private sector, should be accompanied by statement of profitability of business
- Undertaken by public sector accompanies by statement of subject to prospect and viability of occupation
What is the RICs publication on DRC?
RICS Professional Standard: Depreciated Replacement Cost method of Valuation for Financial reporting 2018
How would you deal with depreciation/obsolescence?
It depends on:
Depreciation – condition
Obsolescence – how it works as a building
What types of obsolescence are there?
a. Functional
b. Economic
c. Physical
Is the cost approach a market valuation?
It can be used to calculate the market value of a specialised property for financial statements. But not for red book reports.
What is the Red Book Global?
Set of global valuation standards created to achieve high standards of integrity, clarity and objectivity in adopting valuation best practice
Why does the Red Book exist?
To ensure consistency, objectivity and clarity
What is PS, VPS, VPGA and IVS?
PS – Professional standards
VPS – Valuation technical and performance standards
VPGA - Valuation Practice Guidance Applications
IVS – The International Valuation Standards
What are the key updates from the Previous version?
It has been updated to reflect market changes and developments.
- Need for compliance with RBG reflecting PS1 and PS2. Relating to clears terms of where something is Red Book Compliant or not.
- VPGA 1 – need to provide reasonably possible fair value measurements for financial reporting purposes
- Sustainability and ESG – relating to inspections and reporting, secured lending, physical and transition risks.
PS1 – written means any valuation conveyed by paper, electronic or digital means
PS2 – reinforces professional scepticism when reviewing information and data
IVS 410 – valuers of development property to “apply a minimum of 2 appropriate methods to valuing development property for each project” e.g use comparable method as well as residual method
Does this differ to when IVS were last updated?
The latest IVS come into effect in Jan 2024.
Key guide for valuation professionals globally to underpin consistency, transparency and confidence in valuations.
Revised structure and increased focus on ESG, data and valuation modelling.
IVS 101 – Scope of work
IVS 102 – Bases of Value
IVS 103 – Valuation Approaches
IVS 104 – Data & Inputs
IVS 106 – Documentation & Reporting
What is the Red Book National Supplement?
-Effective from May 2024. Sets out specific requirements for members of the application of RICS Valuation Global Standards to valuations undertaken subject to UK jurisdiction
What is in the Red Book Global?
Professional Standards:
PS1 – Compliance with standards and practice statements
PS2 – Ethics, Competency, objectivity and disclosure
Valuation Technical & Performance Standards
VPS 1 – Terms of Engagement
VPS 2 – Inspections, Investigations and Records
VPS 3 – Valuation Reports (reporting)
VPS 4 – Bases of Value
VPS 5 – Valuation approached and methods
Valuation Practice Guidance Applications
VPGA 1 – Valuation of financial accounts
VPGA 2 – Valuation for secured lending
VPGA 8 – Valuation of real property interests
VPGA 10 – Matters that give rise to material valuation uncertainty
PS1 – Compliance with Standards and Practice Statements
Mandatory use for all valuations EXCEPT 5:
- In prep for negotiations or litigations
- Internal purposes
- Agency and brokerage work
- Expert witness
- Valuation for inclusion in statutory return to a tax authority
PS2 – Ethics, Competency, objectivity and disclosure?
- Professional and ethical standards
- Independence, objectivity and management of conflicts
- Terms of engagement
VPS 1 – Terms of Engagement
Must be confirmed in writing prior to valuation:
1. Status of Valuer
2. Client
3. Asset
4. Currency
5. Purpose of Valuation
6. Basis of value
7. Valuation date
8. Extent of investigation
9. Assumption and special assumption
10. Format the report
11. Restrictions for use
12. Confirmation of Red Book Global
13. Fee basis
14. Complaints handling
15. Statement of compliance
16. Liability agreed
Assumption vs Special Assumption
Assumption: reasonable to accept that something is true without the need for specific investigation
Special Assumption: something that is taken to be true and accepted as a fact, even though its not true
e.g a property without planning permission could be valued on the special assumption that it has planning permission.
VPS 2 - Inspection, Investigation and Records
Inspection: valuers must verify the necessary info
Desktop:
1. Nature of restriction written in TOE
2. Possible of valuation implications of restriction confirmed in writing before value reported
3. Consider if restrictions are reasonable
4. Restrictions must be referred to
Re-valuation (without reinspection):
- Re valution without reinspection must not be undertaken until satisfied there are no material changes, must inspect.
- Confirmed in TOE
Records:
- Proper records held after inspection
VPS 3: Valuation Reports (reporting)
What is normally in a vals report
Executive Summary
About the report: status of valuer, COI, use of valuation, limitation of liability, scope of work
The Property:
Location, site, decription, services, planning, title
Market Analysis:
Market commentary
Valuation:
Methodology
Vaulation basis
Market value
Property Risk Analysis:
General comments
SWOT
Appendices
Preliminary Advice: marked as DRAFT for internal purposes only. Cannot be relied upon until completion of final draft, Valuer not to be influenced by Client.
VPS 4: Bases of Value
- Market value
- Market rent
- Fair Value (FRS13)
- Investment Value
- Equitable value (IVS 104)
- Liquidation Value
VPS 5 Valuation Approaches and Methods
Values responsible for choosing and justifying valuation methods/approaches
Market Value
The estimated amount for which an asset or liability should exchange:
- On valuation date
- Between willing buyer and a willing seller
- In an arm’s length transaction
- After property marketing
- Where parties had acted knowledgably, prudently and without compulsion
Market Rent
The estimated amount for which an interest in real property should be leased:
- On the valuation date
- Between a willing lessor and willing lessee
- On appropriate lease terms
- In an arms length transaction
- After proper marketing
- Where parties had acted knowledgably, prudently and without compulsion
Fair Value (FRS 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:
- basis of valuation is now required if IFRS have been adopted by client
- Adopted by International Accounting Standards have been adopted by Client
Investment Value:
The value of an asset to a particular owner, or prospective owner for induvial investment or operational objectives
- Differ from MV
- Sometimes used as measure of worth to reflect the value against the Clients own investment
Equitable Value (IVS 104)
‘The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interest of those parties’
Not used in the UK
Liquidation Value
The basis of value can be used for a group of assets sold in a piecemeal basis considering the costs of getting the assets into a saleable condition
Not used in the UK
Valuation Practice Guidance Applications - VPGAs
VPGA 1 – Valuation for inclusion in financial accounts
VPGA 2 – Valuations for Secured lending
VPGA 8 – Valuation of Real Property Interests
VPGA 10 – Matters that give rise to material uncertainty
What is VPGA 1 – Valuation for inclusion in financial accounts
Fair Value will be adopted for all IFRS, ‘performance standards’ must be adhered to
What is IFRS?
a set of accounting rules for the financial statements of public companies that are intended to make them consistent, transparent, and easily comparable around the world
What is VPGA 2 – Valuations for Secured lending
Dealing with COI for secured lending
- Any previous, current, anticipated involvement with borrower must be disclosed to lender
- ‘previous involvement’ – past 2 yrs
- If created a conflict that cant be avoided then should be declined.
What type of COI can you find in secured lending?
Conflicts for secured lending include:
- Valuer gaining a fee from intro
- Financial interest in property from perspective borrower
- Valuer is retained to act in disposal
What additional elements do you have to report on for loan security?
- Disclosure of any involvement identified in TOE avoiding the COI.
- Recent transaction on property has been disclosed
- Comment on suitability of property for mortgage purposes
- Use of special assumption, comment on material difference between reported value and that without special assumption
- Acknowledge sustainability factors are becoming more significant influence and loan sec vals should have appropriate regard to this
What additional elements do you have to report on for loan security?
What is VPGA 8 – Valuation of Real Property Interests
Covers inspection and investigations, with particular regard to ESG and sustainability issues.
E.g factors that consider direct valuation factors (e.g storm and flood risk), indirect factors (carbon emissions), physical risk factors (heat or wildfire), transition risk (regulatory change or carbon emissions)
What is VPGA 10 – Matters that give rise to material uncertainty
Requirement that valuation report must no be misleading. Valuer should specifically comment on issues resulting in material uncertainty.
Limitations: unique characteristics, limited info or disrupted market.
Global Standards National Supplement 2023?
Published Oct 2023 can into affect May 2024.
New edition: reflects independent review of real estate investment valuations under taken by Peter Gray. It argues red book requirements and isn’t a substitute
Provides specific requirements for members of applications of RICs Valuation Global standards. UK VPGAs
UK National Supplement contains?
Part 1: PS (mandatory)
Part 2: VPS (mandatory
Part 3: VPGA (guidance)
UK VPGAs:
(1) Valuations for financial reporting
(8) Valuation for Charity Assets
(9) Relationship with auditors
(10) Valuation for commercial secured lending
(11) Valuation for UK Residential Property
(14) Valuation for registered social housing for loan security purposes
(15) Valuation for CGT, Inheritance tax, SDLT, ATED
The changes to UK National Supplement intend to reduce risk of COI in commissioning of vals reports, in the public interest.
Key changes:
VPS 3: Regulated purpose valuations: supplementary governance requirements
VGPA 8 Valuation for Charity Assets
- Charities act 2022
VPGA 10 Valuation for commercial secured lending
- Incorporates new ESG principles
VPS 3: Regulated purpose valuations
Relied on by third parties who have not commissioned the valuation and are subject to valuation monitoring
5 valuation purposes:
1. Financial reporting (company accounts)
2. Stock exchange
3. Takeovers and mergers
4. Collective investment schemes
5. Unregulated property units trusts
Excludes secured lending as not relied upon by third parties.
Current valuations:
Inspections by RICS professional regulation team. Annual declarations, declare length of time value has been in place.
Percentage fee: less or more than 5% of total fee income
Property purchase excepted by firm can’t be valued for regulatory purposes for 12 months by same firm
New National Supplement from 1st May: Peter Gray: May 2025
RICS Independent review of Real Estate Investment Valuations, 2021.
Review undertaken by Peter Gray and make 13 recommendations which were accepted by RICs Standards and Regulatory Board (SRB).
Response to changing market dynamics to future proof practices for real estate assets for investment purposes.
Recommendations included:
1. Commissioning and Receiving of Valution reports
2. Rotating valuers for regulated purpose valuations. Regularly rotating valuers (5 year then valuers changes, then 5 years to next value, then every 10 years the company changes, ensure level of independence. Min of 3 year break after after rotating off.
3. Encouraging use of DCF, in investment vals
4. Valuation audit trails
5. A new valuation insurance committee
6. Increase diversity
7. ESG and sustainability (needs to be largely accounted for in the valuation, send questionnaire out, what sustainability features they may have, comment on obsolescence risk).
VPS 3 – Regulated purpose valuations
ESG and sustainability in Valuations
RICs Professional Standard: Sustainability and ESG in Commercial Property Valuation and strategic advice December 2021.
Factors which valuers should incorporate into valuation approaches:
- Terms of engagement
- Valuation purpose
- Inspection
- Reporting
Provide advice for: sustainability charactertics, considerations and risks when analysing comps + how it should be reflected in valuation methodology
RICS documentation for loan security valuations?
RICS Professional Standard: Bank lending valuations and
mortgage lending value 2018
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
- Must state clearly or provide a watermark that the report is in draft form.
- The opinion is provisional and subject to the completion of the final report
- Any draft is not to be published or disclosed
What type of valuations might be relied upon by a third party?
For example:
* A published financial statement
* Stock exchange
* Takeovers or mergers
What sources of information would you consider when preparing a valuation report?
RICS Red Book Global 2021
International valuation standards 2024
RICS – UK National Supplement 2023
Dependent on the purposes of the valuation other professional statements such as development
Where do you find documentation on Development?
IVS 410 – valuers of development property to “apply a minimum of 2 appropriate methods to valuing development property for each project” e.g use comparable method as well as residual method
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
Yes, within your ToE, report and other published reference you must state:
* The relationship with the client and previous involvement
* Rotation policy
* Time as signatory
* Proportion of fees
If your firm is too small to have a rotation policy or valuation panel, what else can you do to ensure objectivity?
Can have the valuation periodically reviewed at intervals no greater than 7 years by another member.
What must be included in your terms of engagement / valuation report?
VPS 1 – TOE
* Property to be valued
* Basis of value
* Valuation date
* Client
* Any previous dealings
* Valuer and their status
* Fee
* CHP
* Extent of investigation
VPS 3 – Valuation Report
* Valuer and their status
* Client and any other intended users
* Basis of value
* VD
* Valuation figure
* Purpose of valuation
* Extent of investigation
When might a conflict of interest exist in relation to a valuation instruction?
- Financial benefit
- Personal
What is a restricted valuation service and can you provide one?
Yes, but it is the duty of the valuer to discuss the requirements and needs of the client.
The valuer should consider if the restriction is reasonable with regard to the purpose of the valuation.
How do you deal with limitations on inspection or analysis?
Inspections must be carried out in line with VPS 2. My firm do not allow drive-by valuations and where undertaking desktop valuations it is where the property has already been inspected by the valuer and they are happy that material change has occurred.
Any limitations on inspection and analysis is clearly stated within the report
Can you revalue a property without inspecting?
Yes, you can provided that the valuer is satisfied that there have been no material changes to the property.
It must be stated clearly within the ToE and report that the property has not been inspected.
What RICS guidance relates to the use of comparable evidence?
RICS PS: Comparable Evidence in Real Estate Valuations 2019
Margin of Error
Permissible range allowed by courts – Singer & Friedlander Ltd v J.D Wood 1977.
Principal 10% marign or error – K/S Lincoln and Others v CB Richard Ellis (2010)
- +/-5% standard resi property
- +/- 10% for one off commercial property
- +/- 15% for unusual property
Hope Value
Any expectation that future circumstances affecting the property may change.
e.g securing planning permission for development of land
marriage value
Marriage Value:
Merge of 2 interest. Undertaken before and after valuation and calculate level of marriage value created
SDLT
Payable by purchaser in respect of transfer of land
commercial:
£0-£150k = nil
£150,001 - £250k = 2%
Over £250k = 5%
Resi:
£0-£250k = nil
£250,001 - £925k = 5%
£925,001 - £1.5m = 10%
Over £1.5m = 12%
3% added above the current SDLT for second homes or B2L
First time buyers can claim relif:
£0-£425k = nil
£425-£625 = 5%
No relif above £625k
ATED
Annual Tax on Enveloped Buildings
Aim: stop on-shore and off-shore individuals using companies to avoid SDLT for resi. Threshold is £500k. Revaluation every 5 yrs.
Party Walls
Party Wall Act 1996 – framework for resolving disputes. Wall stands astride the boundary of land belonging to 2 or more different land owners
Rights of Light
RICS Guidance Note: Rights of Light 2016. long-standing owner (20 mmore years) of a building with windows a right to maintain an adequate level of light.
Valuation of Long Leasehold interest?
- Rent received – less ground rent = net rental income
- Capitalized at appropriate yield for length of remaining lease = MTLI
Difference between leasehold and freehold?
Freehold, you own the property and the land it’s built on.
Leasehold, you own the property for a set period but not the land.
What is a Random Strip?
Piece of land that controls access to another piece of land
RICS Valuers Registration Scheme?
Regular monitoring scheme for all valuers carrying out Red Book Valuations from Oct 2011.
Aim:
1. Improve quality of valuation and ensure highest professional standards
2. Meets RICS requirement to self regulate effectively
3. Protect and raise status of valuation profession as leading expertise in valuation
Register information required:
1. Type of valuation
2. Purpose of valuation
3. Number of valuations
4. Total fee income for valuations
What is the Valuer Registration Scheme?
A monitoring scheme for all valuers carrying our Red Book valuations.
Only eligible if have undertaken valuation to L3 at APC or subsequently qualify for registration.
Monitored through a firm’s annual return
Difference between a lease and a license?
Lease: formal contract granting exclusive possession of property (usually real estate) to a tenant for a specific period in exchange for rent. It creates an interest in the property for the tenant.
License: a permission to use property for a specific purpose, but it does not grant exclusive possession or an interest in the property. The licensor can typically revoke the license at any time, flexible on timing.
What happens if market conditions change between the valuation date and report date?
Must draw attention to this in the report. Also explain clearly to the client that values change over time.
Is special value from a special purchaser reflected in MV?
No
Where does the definition of fair value come from?
International Financial Reporting Standards
Does fair value differ from market value?
Yes, fair value is the standard measure of an asset and relied on by valuers, appraisers and accountants as the standard measure for assets, businesses and property.
MV: he price we can reasonably expect an asset to sell for. It is not necessarily related to the original purchase price of that asset, only what it is currently worth.
Are there any instances where certain sections of the Red Book may not apply?
The advisory sections VPGA 1-10 depending on the type of valuation you are undertaking
What is the basis of value under UK GAAP FRS 102?
Fair Value
Generally Accepted Accounting Principles FRS 102
* Where tangible assets are required to be revalued
What is a SORP?
Statement of recommended practice – provides advice on financial reporting.
When would you use EUV?
Existing use value – when the property is owner-occupied
What is the definition of EUV?
The estimated amount for which a property should exchange on the valuation date
* Between a willing buyer
* And willing seller
* In an arm’s length transaction
* After proper marketing
* And where both parties have acted knowledgably prudently and without compulsion
* Assuming that the buyer is granted vacant possession of all parts of the asset
* Disregarding alternative uses
* That would cause its MV to differ
What additional criteria apply to secured lending valuations?
Banks want to know about the risks associated with the assets so will request a SWOT analysis
What information should you specifically request for a secured lending valuation?
The details of the loan. Everything else is exactly the same for all standard valuations so tenancy info, floor areas etc
What is a regulated purpose valuation?
UK VPS 3
Valuations for inclusion in prospectuses and circulars
What additional disclosures must be made for a regulated purpose valuation?
a. The proportion of the fees, paid by the client to the total fee income of the valuer’s firm expressed as either more or less than 5%
b. Since the end of the financial year, it is anticipated that there will be a material increase in the proportion of the fees payable by the client
What is the basis of value for a statutory valuation?
Market Value with assumptions
It is related to Valuation for taxation purposes e.g., capital gains tax
What is the definition of the statutory basis of valuation?
The price for which a property might reasonably be expected to fetch if sold
* On the open market at that time
* And that price must not be assumed to be reduced
* On the grounds that the whole property is to be placed
* On the pne market at one and the same time
How would you value a property in uncertain market conditions – does the Red Book give any guidance?
VPGA-10
Valuer must draw any attention to material uncertainty.
It wont be reflected in the figure but in the report.
How could you value a long leasehold interest?
Long leasehold
1. Rent received – ground rent
2. Capitalised at appropriate yield for the remaining lease
How does a term and reversion and DCF differ?
DCF – explicit – expected future cash flows
Term and reversion – implicit
How would you value a ransom strip?
In line with Stokes v Cambridge
Assumption that the value of the ransom strip is one third of the development value of the land that it releases
What is intangible goodwill?
Non-physical features associated with an asset.
What is turnover / gross profit / net profit?
Turnover – total company’s revenue
Gross profit – revenue - costs of goods sold
Net profit – gross profit – expenses
What is Fair Maintainable Turnover?
The level of trade that
* A reasonable efficient operator
* Would expect to achieve
* On the assumption that the property
* Is in good repair and suitably equipped
What is a liability cap and when would one be used?
Liability cap would be used for PII
It reduces the amount for which a claim can be brought against a surveyor and firm
My firm cap instructions at £5m
What is the difference between negligence and margin of error?
- Negligence and you breach your duty of care and fail to act with reasonable care and skill
- A Mistake is covered by the margin of error 10-15%
What is the Parry’s table?
Valuation Table can be used to quickly create multiple desk-top appraisals using different key factors including the investment period, interest rates
Difference between Red Book Global and UK National Supplement 2023?
UK National Supplement ‘sets out specific requirements, together with supporting guidance, for members on the application of the RICS Valuation – Global Standards
UK National Supplement was commissioned from Peter Gray Review in 2021
Specific requirements:
Key changes:
VPS 3: Regulated purpose valuations: supplementary governance requirements
- valuations relied on by third parties e.g financial reports
- inspections by RICS professionals, declaring length of time vlauer has acted for client for regulated valuation purposes
- when property is purchased fee is accepted by firm, it cannot be valued for regulatory purposes.
VGPA 8 Valuation for Charity Assets
- Charities act 2022
VPGA 10 Valuation for commercial secured lending
Incorporates new ESG principles
- National supplement: clearer, ESG and sustainability (should sent a questionnaire to client on ESG and report on ESG)
- Coming into effect in Jan: new VPS
- 18 VPGAs in New Supplement
Difference between Red Book Global and UK National Supplement 2023?
Latest version of red book: New additions?
- ESG and sustainability
- Give more consideration to DCF
- Regulation to which firms value which assets
Difference of loan sec and financial reporting
- Loan sec (market value) relied up upon by just who it is addressed to (client)
- Financial reporting (fair value) relied upon by third party
Do you think the Conflict in the Middle East will affect the Property Market?
- Israeli and other middle eastern countries need to move their money therefore invest in London. More overseas investment
- London seen as a safe haven’t. Less risky, increase demand will push prices up and yields downs.
- Inflation – oil prices increased.
- However, war escalation can increase pushing up shipping prices and oil prices
What is Material Uncertainty?
Unforeseen financial, macroecnomic, legal and political or natural events which makes it hard to form an acceptabl e and accurate opinion of values
- e.g covid, Ukraine and Russia but now this is factored into valuations
What is Market Uncertainty?
Issues that affect market like as interests rates and foreign investment, can adjust of this to reflect these issues e.g Isreal war in impacts elsewhere therefore add market uncertainty clauses into valuations
A keener yield?
Reflects lower risk e.g 3.8%
Contracted and deemed initial yield:
- Contracted: what you are contractually owed
- Deemed: however if there is a outstanding rent, the valuation will take this into account therefore include the uplift
Different between DCF and Investment?
- DCF = explicit. Based on future values and how much it
- Investment = implicit
What is an arms length transaction
After proper marketing
parties have no relationship.
- is market dependent
What is a Gilt Rate?
- 3.94%. Guaranteed income, from the Govt.
