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Valuation > General Valuation > Flashcards

General Valuation Flashcards

1
Q

What is an internal Valuer?

A
  • Employed by company to value assets of the company.
  • Valuation of internal use
  • No third party reliance
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2
Q

What is an external valuer?

A
  • Has no material links to the asset or client
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3
Q

Can an external valuer provide an internal purposes valuation?

A

Yes. But ToE must clearly state about non-disclosures to third parties

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4
Q

What do you do before undertaking a valuation instruction?

A

CIT
Competence – SUK
Independence - COI
Terms of Engagement – in writing, full confirmations, confirm competence

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5
Q

What does the front page of the red book look like?

A

Grey with a red sphere – RICS Valuation Global Standards

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6
Q

When you say you undertake statutory due diligence for valuations what do you look at?

A
  1. Asbestos register
  2. Business rates
  3. Contamination
  4. Equality Act Compliance
  5. Environmental matters
  6. EPC rating available
  7. Flooding
  8. Fire Safety
  9. Health and Safety
  10. Highways
  11. Legal title and tenure
  12. Public rights of way
  13. Planning history and compliance
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7
Q

KF Terms of Engagement for Valuation

A
  1. Date
  2. Client
  3. Property/properties to be valued
  4. Valuation standards and RICS regulation
  5. Status of Valuer
  6. COI
  7. Purpose of Valuation
  8. Limitation of Liability
  9. Reliance + Disclosure
  10. Basis of Valuation, Assumptions and Special Assumptions
  11. Scope of Work (inspection/reinstatement costs)
  12. Valuation Date
  13. Currency
  14. Report format
  15. Fees
  16. Confirmation (signature)
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8
Q

5 methods of Valuation?

A
  1. Comparable method
  2. Investment method
  3. Profits method
  4. Residual method
  5. DRC
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9
Q

3 Valuations approaches?

A
  1. Income (investment, residual, profits)
  2. Cost Approach (DRC)
  3. Market Approach (comparable)
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10
Q

Tell me about how you would value a building using the profits/contractors/investment/comparable/residual method of valuation.

A

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

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11
Q

Comparative Methodology, what is it?

A

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

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12
Q

What professional standard relates to Comparable evidence?

A

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.

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13
Q

What is the hierarchy of evidence?

A
  1. Cat A: direct comps. Based on near accurate properties.
  2. Cat B: General market data to provide guidance e.g info from published sources
  3. Cat C: other sources transactional evidence from other real estate types and locations
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14
Q

Ways to compare comparables?

A

Through locations (inspection of areas), speak to local agents, inhouse data bases, third party databases, market sentiment and date of sold/rented property.

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15
Q

Please run me through an investment method valuation?

A

tbc

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16
Q

Investment Values:

A

Value = rent/yield
Rent = value x yield
Yield = rent/value

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17
Q

What is a yield?

A

Annual rate of return of investment expressed as %

Relationship between income and capital value (risk free rate + risk taking into account anticipated rental growth)

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18
Q

What are examples of Risk?

A

Sector risk, structural risk, legislation risk, planning risk, legal risk

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19
Q

What is the conventional investment method?

A

Implicit Method (All risks yield)
Rent received (or MR) multiplied by the years purchase to calculate MV

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20
Q

What is term and reversion? For under rented properties

A

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

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21
Q

What is the layer/hardcore method?

A

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

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22
Q

Prime Yield Guide?

A

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

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23
Q

What are the major factors that affect a yield?

A

Rental growth, location, use of property, lease terms, voids, security, liquidity

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24
Q

What is return?

A

Return is used to describe the performance of a property

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25
Q

What is a secondary yield?

A

Yield for the gap between prime and secondary yields to reflect the above risks

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26
Q

What is Years Purchase?

A

The amount of time to pay back the capital value

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27
Q

What is present value?

A

It is the current worth of a future sum of money

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28
Q

What is the equivalent yield?

A

Average weighted yield when a reversionary property is valued using an initial yield and reversionary yield

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29
Q

What is the difference between equivalent yield and equated yield?

A

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

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30
Q

What is all growth implicit?

A

Assumption that they are made explicit in a DCF approach and the risks are hidden in the selected yield.

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31
Q

What is All Risks Yield?

A

Interest used in a valuation to of fully let property let at the MR reflecting all prospects and risks in the whole investment

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32
Q

True Yield

A

Assumes rent is paid in advance not in arrears

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33
Q

Nominal Yield

A

Initial yield assuming rent is paid in arrears

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34
Q

Gross Yield

A

Rent/yield excluding purchasers’ costs

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35
Q

Net Yield

A

Rent/value plus purchasers costs

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36
Q

Initial Yield

A

The amount of return received for a current income and current price

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37
Q

Reversionary yield

A

yield that should be achieved if the passing rent adjusts to the level of the estimated rental value.

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38
Q

Running yield

A

Yield at one moment in time

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39
Q

What is the discounted cash flow?

A

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.

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40
Q

Where do you use a cashflow for a finite period?

A
  • Phased development
  • Shortlease hold interest
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41
Q

Simple methodology of cashflow investment?

A
  1. Estimate the cashflow (income less expenditure)
  2. Estimate the exit value at the end holding period
  3. Select discount rate
  4. Discount cashflow at discount rate
  5. Value the sum of the completed discounted cashflow to provide NPV
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42
Q

What is the Net Present Value?

A

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

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43
Q

Implicit v Explicit?

A

Implicit – something that is understood to be happening but not described clearly or directly.

Explicit – set interest/inputs out very clearly without ambiguity

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44
Q

What is the IRR?

A

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.

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45
Q

How do you calculate the IRR?

A
  1. Input current MR as a negative cashflow
  2. Input projected rents as positive value
  3. Input projected exit value
  4. Discounts rate IRR is chosen to provide NPV of zero.
  5. If NPV is more than zero, then TRR is met
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46
Q

What does the RICS provide to follow this?

A

RICS Practice Information: Discounted cashflow valuations, Nov 23

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47
Q

What is a Discounted Cash Flow (DCF)?

A

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.

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48
Q

What is a short-cut DCF?

A

The passing rent which is constant for the duration of the rent period, is discounted at an appropriate rate of return

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49
Q

When would you use a DCF?

A
  • Short leasehold
  • Phased development projects
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50
Q

What are the advantages and disadvantages of a DCF?

A

Advantages:
* Detailed
* Used to work out IRR
* Scenarios can be built in

Disadvantages:
* Prone to errors
* Requires large number of assumptions

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51
Q

What is the Profits method?

A

Value for trade related property e.g pub/hotels/petrol stations.

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52
Q

What are the assumptions of the profit method?

A

Property generates a profit, must have audited account for 3 years.

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53
Q

What is the method for profits?

A

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.

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54
Q

What is EBITDA?

A

Earnings Before Interest, Taxes, Depreciation and Amortization

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55
Q

What is residual valuation?

A

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.

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56
Q

Do RICS provide any guidance on RLVs or valuing development property?

A

Yes, RICS Professional Standard: Valuation of Development Property, 2019

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57
Q

What is an RLV?

A

Residual land valuation

A red book valuation that assesses land value with development potential.

It uses market inputs to assess the value.

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58
Q

How else can you value development land?

A

Comparable method

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59
Q

What is the basic process of undertaking a RLV/development appraisal?

A

Calculate
1. GDV
2. – total construction costs
3. – profit
= Land Value

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60
Q

What does a development appraisal show?

A

The suitability/viability/profitability of a proposed scheme

Client inputs

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61
Q

What are the key things you need to consider when appraising / inspecting a development site?

A
  • Adhere to Health and Safety – surveying safely
  • Walk the site boundaries
  • Check for contamination
  • Previous uses
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62
Q

What is GDV/NDV?

A

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

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63
Q

What do development costs include?

A
  • Demolition
  • Planning costs
  • Construction costs
  • Finance
  • Contingency
  • Marketing costs
  • Profit
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64
Q

Where can you source build costs from?

A
  • BCIS
  • Quantity surveyors
    client
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65
Q

What would you apply finance costs to and on what basis?

A
  1. Site purchase – straight-line basis
  2. Construction costs – s curve
  3. Holding costs – straight-line basis
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66
Q

What is an S curve?

A

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.

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67
Q

What do holding costs typically include?

A
  • Void periods
  • Empty rates

Holding costs lead to profit erosion

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68
Q

What other criteria might be assessed in terms of performance measurement for a RLV?

A
  • Profit
  • IRR
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69
Q

What are the advantages/disadvantages of a RLV?

A

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

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70
Q

What is the Depreciated Replacement Cost (DRC)?

A

Value specialized properties e.g sewage works, lights house, submarine base.

Use for owner-occupied services, and accounts purposes for specialized properties

71
Q

What are the 3 components of the cost approach?

A

Depreciation allowance:
a. Physical
b. Functional
c. Economic

72
Q

What is the methodology for DRC?

A
  1. Value the land in its existing use
  2. Add current costs of replacing the building plus a discount for depreciation.
73
Q

Limitations of DRC?

A
  • 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
74
Q

What is the RICs publication on DRC?

A

RICS Professional Standard: Depreciated Replacement Cost method of Valuation for Financial reporting 2018

75
Q

How would you deal with depreciation/obsolescence?

A

It depends on:
Depreciation – condition
Obsolescence – how it works as a building

76
Q

What types of obsolescence are there?

A

a. Functional
b. Economic
c. Physical

77
Q

Is the cost approach a market valuation?

A

It can be used to calculate the market value of a specialised property for financial statements. But not for red book reports.

78
Q

What is the Red Book Global?

A

Set of global valuation standards created to achieve high standards of integrity, clarity and objectivity in adopting valuation best practice

79
Q

Why does the Red Book exist?

A

To ensure consistency, objectivity and clarity

80
Q

What is PS, VPS, VPGA and IVS?

A

PS – Professional standards
VPS – Valuation technical and performance standards
VPGA - Valuation Practice Guidance Applications
IVS – The International Valuation Standards

81
Q

What are the key updates from the Previous version?

A

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

82
Q

Does this differ to when IVS were last updated?

A

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

83
Q

What is the Red Book National Supplement?

A

-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

84
Q

What is in the Red Book Global?

A

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

85
Q

PS1 – Compliance with Standards and Practice Statements

A

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

86
Q

PS2 – Ethics, Competency, objectivity and disclosure?

A
  • Professional and ethical standards
  • Independence, objectivity and management of conflicts
  • Terms of engagement
87
Q

VPS 1 – Terms of Engagement

A

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

88
Q

Assumption vs Special Assumption

A

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.

89
Q

VPS 2 - Inspection, Investigation and Records

A

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

90
Q

VPS 3: Valuation Reports (reporting)

A

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.

91
Q

VPS 4: Bases of Value

A
  1. Market value
  2. Market rent
  3. Fair Value (FRS13)
  4. Investment Value
  5. Equitable value (IVS 104)
  6. Liquidation Value
92
Q

VPS 5 Valuation Approaches and Methods

A

Values responsible for choosing and justifying valuation methods/approaches

93
Q

Market Value

A

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

94
Q

Market Rent

A

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

95
Q

Fair Value (FRS 13)

A

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

96
Q

Investment Value:

A

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

97
Q

Equitable Value (IVS 104)

A

‘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

98
Q

Liquidation Value

A

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

99
Q

Valuation Practice Guidance Applications - VPGAs

A

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

100
Q

What is VPGA 1 – Valuation for inclusion in financial accounts

A

Fair Value will be adopted for all IFRS, ‘performance standards’ must be adhered to

101
Q

What is IFRS?

A

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

102
Q

What is VPGA 2 – Valuations for Secured lending

A

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.

103
Q

What type of COI can you find in secured lending?

A

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

104
Q

What additional elements do you have to report on for loan security?

A
  1. Disclosure of any involvement identified in TOE avoiding the COI.
  2. Recent transaction on property has been disclosed
  3. Comment on suitability of property for mortgage purposes
  4. Use of special assumption, comment on material difference between reported value and that without special assumption
  5. Acknowledge sustainability factors are becoming more significant influence and loan sec vals should have appropriate regard to this
105
Q

What additional elements do you have to report on for loan security?
What is VPGA 8 – Valuation of Real Property Interests

A

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)

106
Q

What is VPGA 10 – Matters that give rise to material uncertainty

A

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.

107
Q

Global Standards National Supplement 2023?

A

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

108
Q

UK National Supplement contains?

A

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

109
Q

VPS 3: Regulated purpose valuations

A

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

110
Q

New National Supplement from 1st May: Peter Gray: May 2025

A

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

111
Q

ESG and sustainability in Valuations

A

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

112
Q

RICS documentation for loan security valuations?

A

RICS Professional Standard: Bank lending valuations and
mortgage lending value 2018

113
Q

If you provide preliminary advice / draft valuation report, what should you state in writing to your client?

A
  • 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
114
Q

What type of valuations might be relied upon by a third party?

A

For example:
* A published financial statement
* Stock exchange
* Takeovers or mergers

115
Q

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

A

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

116
Q

Where do you find documentation on Development?

A

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

117
Q

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

A

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

118
Q

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

A

Can have the valuation periodically reviewed at intervals no greater than 7 years by another member.

119
Q

What must be included in your terms of engagement / valuation report?

A

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

119
Q

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

A
  • Financial benefit
  • Personal
120
Q

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

A

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.

121
Q

How do you deal with limitations on inspection or analysis?

A

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

122
Q

Can you revalue a property without inspecting?

A

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.

123
Q

What RICS guidance relates to the use of comparable evidence?

A

RICS PS: Comparable Evidence in Real Estate Valuations 2019

124
Q

Margin of Error

A

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

125
Q

Hope Value

A

Any expectation that future circumstances affecting the property may change.
e.g securing planning permission for development of land
marriage value

126
Q

Marriage Value:

A

Merge of 2 interest. Undertaken before and after valuation and calculate level of marriage value created

127
Q

SDLT

A

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

128
Q

ATED

A

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.

129
Q

Party Walls

A

Party Wall Act 1996 – framework for resolving disputes. Wall stands astride the boundary of land belonging to 2 or more different land owners

130
Q

Rights of Light

A

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.

131
Q

Valuation of Long Leasehold interest?

A
  1. Rent received – less ground rent = net rental income
  2. Capitalized at appropriate yield for length of remaining lease = MTLI
132
Q

Difference between leasehold and freehold?

A

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.

133
Q

What is a Random Strip?

A

Piece of land that controls access to another piece of land

134
Q

RICS Valuers Registration Scheme?

A

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

135
Q

What is the Valuer Registration Scheme?

A

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

136
Q

Difference between a lease and a license?

A

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.

137
Q

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

A

Must draw attention to this in the report. Also explain clearly to the client that values change over time.

138
Q

Is special value from a special purchaser reflected in MV?

A

No

139
Q

Where does the definition of fair value come from?

A

International Financial Reporting Standards

140
Q

Does fair value differ from market value?

A

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.

141
Q

Are there any instances where certain sections of the Red Book may not apply?

A

The advisory sections VPGA 1-10 depending on the type of valuation you are undertaking

142
Q

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

A

Fair Value

Generally Accepted Accounting Principles FRS 102
* Where tangible assets are required to be revalued

143
Q

What is a SORP?

A

Statement of recommended practice – provides advice on financial reporting.

144
Q

When would you use EUV?

A

Existing use value – when the property is owner-occupied

145
Q

What is the definition of EUV?

A

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

146
Q

What additional criteria apply to secured lending valuations?

A

Banks want to know about the risks associated with the assets so will request a SWOT analysis

147
Q

What information should you specifically request for a secured lending valuation?

A

The details of the loan. Everything else is exactly the same for all standard valuations so tenancy info, floor areas etc

148
Q

What is a regulated purpose valuation?

A

UK VPS 3

Valuations for inclusion in prospectuses and circulars

149
Q

What additional disclosures must be made for a regulated purpose valuation?

A

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

150
Q

What is the basis of value for a statutory valuation?

A

Market Value with assumptions

It is related to Valuation for taxation purposes e.g., capital gains tax

151
Q

What is the definition of the statutory basis of valuation?

A

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

152
Q

How would you value a property in uncertain market conditions – does the Red Book give any guidance?

A

VPGA-10

Valuer must draw any attention to material uncertainty.

It wont be reflected in the figure but in the report.

153
Q

How could you value a long leasehold interest?

A

Long leasehold
1. Rent received – ground rent
2. Capitalised at appropriate yield for the remaining lease

154
Q

How does a term and reversion and DCF differ?

A

DCF – explicit – expected future cash flows

Term and reversion – implicit

155
Q

How would you value a ransom strip?

A

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

156
Q

What is intangible goodwill?

A

Non-physical features associated with an asset.

157
Q

What is turnover / gross profit / net profit?

A

Turnover – total company’s revenue
Gross profit – revenue - costs of goods sold
Net profit – gross profit – expenses

158
Q

What is Fair Maintainable Turnover?

A

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

159
Q

What is a liability cap and when would one be used?

A

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

160
Q

What is the difference between negligence and margin of error?

A
  • 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%
161
Q

What is the Parry’s table?

A

Valuation Table can be used to quickly create multiple desk-top appraisals using different key factors including the investment period, interest rates

162
Q

Difference between Red Book Global and UK National Supplement 2023?

A

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
163
Q

Difference between Red Book Global and UK National Supplement 2023?
Latest version of red book: New additions?

A
  • ESG and sustainability
  • Give more consideration to DCF
  • Regulation to which firms value which assets
164
Q

Difference of loan sec and financial reporting

A
  • Loan sec (market value) relied up upon by just who it is addressed to (client)
  • Financial reporting (fair value) relied upon by third party
165
Q

Do you think the Conflict in the Middle East will affect the Property Market?

A
  • 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
166
Q

What is Material Uncertainty?

A

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

167
Q

What is Market Uncertainty?

A

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

168
Q

A keener yield?

A

Reflects lower risk e.g 3.8%

169
Q

Contracted and deemed initial yield:

A
  • 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
170
Q

Different between DCF and Investment?

A
  • DCF = explicit. Based on future values and how much it
  • Investment = implicit
171
Q

What is an arms length transaction

After proper marketing

A

parties have no relationship.

  • is market dependent
172
Q

What is a Gilt Rate?

A
  • 3.94%. Guaranteed income, from the Govt.

Valuation (4 decks)

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