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Valuation > L1 > Flashcards

L1 Flashcards

1
Q

What is the residual method and how is it applied?

A

Aim - establish how much someone should pay for a development site
GDV is first established and there after all the costs associated with undertaking the development are then deducted
This leaves a surplus amount remaining which is known as the residual value

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2
Q

What is the depreciated replacement cost method of valuation and how does it work

A

Used where there is no active market for the asset being called. The current cost of replacing an asset with its modern equivalent asset less deductions for physical deterioration and all relevant forms of obsolescence

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3
Q

When is the profit method used and how is this undertaken?

A

This method is derived from trade related properties where the value is derived from the business and its trading potential. This trading potential is the profit that a reasonably efficient operator would expect to realise from occupying the property.
Eg. Schools, hotels, cinemas

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4
Q

What is the comparable method of valuation and how does it work

A

Uses sales data of properties that have recently been sold focussing on assets of a similar size, location, condition, specification
Comparable evidence is then analyse and applied to the asset being valued

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5
Q

What are the different purposes of valuation

A

For financial reporting
For secured lending
For inheritance tax

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6
Q

What is the red book

A

A set of global standards which set out procedural rules and guidance for written valuations

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7
Q

What are the key sections of the red book

A

Introduction
Glossary
Professional standards
PS1 - compliance with standards where a written valuation is provided
PS2 - ethics, competency, objectivity and disclosures
VPS1 - Terms of engagement
VPS2 - inspection, investigation and records
VPS3 - valuation report
VPS4 - bases of value, assumptions and special assumptions
VPS5 - valuation approaches and methods
VPGA 1 - valuation for inclusion in financial statements
VPGA 2 - valuation of interests for secured lending
VPGA 3 - valuation of businesses and business interests
VPGA 4 - valuation of individual trade related properties
VPGA 5 - valuation of plant and equipment
VPGA 6 - valuation of intangible assets
VPGA 7 - valuation of person property, including arts and antiques
VPGA 8 - valuation of real property interests
VPGA 9 - identification of portfolios, collections and groups of properties
VPGA 10 - matters that may give rise to material valuation uncertainty

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8
Q

What steps would you take following a valuation instruction?

A

Would have already done a conflict check and received formal instruction with purpose of val
Then obtain
Purchase price if applicable
Statutory enquiries - rating/epc etc
Inspection and measurements
Research market
Valuation
Second signatory
Report to client
Invoice

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9
Q

What would you expect to see in a bankers letter of instruction on a valuation for secured lending

A

Borrower
Property
Purpose
Conflicts
Details of loan
Who the report it to be addressed to
Special assumptions
Details for access
What the report should contain

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10
Q

What are the 5 methods of valuation

A

Comparable
Income
Profits
Residual
DRC

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11
Q

Define market value

A

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

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12
Q

Define market rent

A

The estimated amount for which a property, or space within a property should lease/let on the date of valuation between a willing lessor and willing lessee on appropriate lease terms in an arm’s length transaction and after proper marketing where both parties have acted knowledgeably, prudently and without compulsion.

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13
Q

What is hope value

A

Market value of land based on the expectation of getting planning permission for development on it

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14
Q

What’s marriage value

A

The extra value that arises from the merger of two physical or legal interests

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15
Q

What is the IVSC

A

International valuation standards committee

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16
Q

Define equivalent yield

A

Is a weighted average yield from the current rental income and all future reversionary income

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17
Q

Define equated yield

A

Yield on a property investment which takes into account growth in future income

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18
Q

How would you value a property where there are no comparables?

A

Discounted cashflow method

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19
Q

What factors effect yields

A

Covenant
Location
Specification
Rent levels
Growth potential

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20
Q

What are deleterious materials and how do they effect value

A

Are considered prohibited and have an effect on the structural integrity, performance and longevity of a property. Can result in non compliance with building regs and therefore decrease a property’s value

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21
Q

How would structural defects be reflected in your valuation

A

Draw clients attention to them
Advise them to have a structural survey
Can’t comment on area outside of one’s expertise

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22
Q

What would you caveat in a valuation report

A

Publication
Confidentiality
Planning
Information supplied
Environmental matters

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23
Q

What are the 3 valuation approaches set out in IVS 105?

A

Income approach- converting current and future cash flow into capital value
Cost approach - reference to the cost of the asset by purchase or construction
Market approach - using comparable evidence

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24
Q

Under VPS 1 - terms of engagement, what matters must be included in ToEs?

A

Identification & status of the valuer
Identification of the client
Identification of any other intended users
Identification of the asset or liability being valued
Valuation currency
Purpose of valuation
Basis of value adopted
Valuation date
Nature and extent of the valuers work
Nature and sources of information relied upon
All assumptions and special assumptions to be made
Format of the report
Restrictions on use, distribution and publication
Confirmation that the valuation will be undertaken in accordance with the IVS
The basis on which the fee will be calculated
Where the firm is registered for regulation by RICS, reference to firms complaint handling procedure

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25
Q

What is the purpose of the red book?

A

Consistency
Objectivity
Transparency

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26
Q

When does a valuer not need to follow VPS 1-5?

A

A L I E S

statutory basis
Negotiation or litigation
Internal purposes only
Agency - marketing appraisal
Expert witness valuation

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27
Q

What does VPGA 10 include?

A

Matters that may give rise to material valuation uncertainty
The purpose of this is to ensure any client relying on a valuation report understands that it has been prepared under extraordinary circumstances and where a valuer feels the unknowns are so significant. It does not meal the valuation cannot be relied upon, but that less certainty can be attached to the valuation than normally would be the case

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28
Q

What is the RICS Valuation UK National Supplement?

A

It was published in 2023 and is effective in May 2024
It sets out specific requirements together with supporting guidance for members on the application of the Red Book

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29
Q

What is a negligence claim?

A

When a duty of care is breached which results in a loss and damages

30
Q

What is the Scullion v Bank of Scotland case?

A

Dates back to 2010 and relates to a breach of duty of care owed to Mr Scullion in relation to a valuation report prepared for a flat in Surrey. The court of appeal held that a surveyor who provided advice on value to a lender in respect of a buy-to-let purchase, does not have a duty of care to the borrower

31
Q

Explain the Freemont Ltd v Knight Frank case

A

2014 case which related to a secured lending valuation of the redevelopment of commercial land. The high court upheld the precedent set in the Scullion case and confirmed that no duty of care was owned to the borrower. Also, a duty of care to the borrower was prevented as the surveyors terms of engagement and report confirmed the limited scope of reliance and purpose of the valuation

32
Q

Define Investment value

A

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

33
Q

Define synergistic value

A

Is the result of a combination of two or more assets where the combined value is more than the sum of the seperate values

34
Q

When is the red book due to be updated?

A

The red book is being updated throughout 2024 and due to be published in the autumn and to be effective 31 Jan 2025

35
Q

When was the UK National Supplement updated?

A

It was published in October 2023 and is effective from 1 May 2024

36
Q

What changes have been made to the UK National Supplement ?

A

VPS 1 & 2 have not been substantially updated but VPS 3 has been completely changed. It relates to valuation for regulated purposes, where there is third party reliance on the valuation advice.

37
Q

What parts of the red book are mandatory and what parts are guidance?

A

PS 1 -2 and VPS 1-5 are mandatory
VPGAs are guidance

38
Q

In what circumstances under VPGA 10 would you include a material valuation uncertainty paragraph within a valuation report?

A

1) the asset or liability has very particular characteristics that make it hard to form an opinion on value
2) if the information available to the valuer is limited or restricted and matters cannot be sufficiently addressed by adopting one or more reasonable assumptions
3) if the market has been disrupted by unique factors including legal, political or even natural events

39
Q

Define special value

A

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

40
Q

Define fair value

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

41
Q

What is meant by an external valuer?

A

A valuer, who, together with any associates has no material links with the client, an agent acting on behalf of the client or the subject of the assignment

42
Q

What is meant by an internal valuer?

A

A valuer who is employed by the entity that owns the assets being valued

43
Q

What does VPS 2 say about revaluation without re-inspection ?

A

Must not be undertaken unless the valued is satisfied that there have been no material changes to the physical attributes of the property, or the nature of its location since the last assignment.

44
Q

What RICS document is there regarding comparable evidence?

A

RICS Profession Standard- Comparable Evidence in real estate valuation effective October 2019

45
Q

What are the main principles of the RICS document regarding comparable evidence?

A

1) recent
2) comprehensive
3) verifiable
4) similarity
5) result of an arms length transaction
6) consistent with local market practice

46
Q

Why was the UK National Supplement updated?

A

Was updated following an independent review led by Peter Gray. Concerns raised included valuation reliability, valuer independent and market dynamics

47
Q

What does VPS 2 say about storing photos and notes?

A

Details of the inspection must be clearly and accurately recorded in a manner that is not ambiguous nor misleading and does not create a false impression.

To maintain a proper audit trail and be in a position to respond effectively to an future enquiry, legible notes of findings and limits of the inspection

48
Q

What are the thresholds for SDLT of commercial properties?

A

Property value up to be £150,000 @ 0%
Property value between £150,000 and £250,000 @ 2%
The remaining amount (the proportion above £250,000) @ 5%

49
Q

You refer to valuing an industrial unit in Okehampton using the comparable method. What explanation did you give your client in terms of why you chose this method?

A

I informed my client that as the property was vacant at the date of valuation and was to be owner occupied upon purchasing, valuing the property using the comparable method would be the most appropriate

50
Q

What are the advantages of the comparable method of valuation?

A

Readily available
Can obtain recent transactions
Allows you to compare like for like and make adjustments for differences

51
Q

When might you advise a client you could undertake a valuation on a desktop basis?

A

If I had previously inspected the property and if the client had confirmed that the property hasn’t materially changed or the nature of the location. It’s down the professional judgement of the valuer to choose the interval between inspections

52
Q

What are the advantages of a desktop valuation by comparison to a full inspection?

A

Reduced costs for client
Less time consuming for both the valuer and client

53
Q

You valued a property in Exeter for inheritance tax purposes. How might your advice differed?

A

The date of valuation is the date of death

54
Q

What guidance do you have regard to when carrying out valuations for inheritance tax?

A

VPGA 15 of the national supplement
Section 160 of the inheritance tax act 1984

55
Q

What is the purpose of terms of engagement?

A

An agreement of the scope of works, purpose of valuation and timescales involved. Also, they are an importance defence against negligence claims

56
Q

How do you calculate a yield?

A

Income / price x 100

57
Q

How do you calculate years purchase?

A

100/Yield

58
Q

What is years purchase?

A

Number of years required for its income to repay the purchase price

59
Q

What’s a discount cashflow forecast? (DCF)

A

A valuation model that seeks to determine the value of an investment property by examining its future net income or projected cash flow from the investment and then discounting that cash flow to arrive at an estimated current value of the investment

60
Q

Name some typical conflicts of interest stated in VPGA 2

A

Where the valuer or firm:
- is acting for the owner of the property in related transaction
- has a financial interest in the property or borrower
- has recently acted in a market transaction involving the asset

61
Q

Please can you provide three examples of external factors that could impact upon your valuation figures?

A

1) the economy
2) interest rates
3) statutory changes e.g EPC regulations

62
Q

What is your understanding of why valuations are required for pension funds?

A

It is a statutory requirements that properties in pension funds are valued every 3 years
To ensure the fund has appropriate assets to cover its accrued liabilities

63
Q

What property to land ratio would you typically expect to see for an industrial property?

A

Typically 60% property 40% land

64
Q

What section of the red book relates to valuation approaches and methods?

A

VPS 5

65
Q

How does your valuation advice relate to clients?

A

Enables lenders to make an informed decision on whether to lend against the property or not

Enables future investment planning and risk profiling

66
Q

I note you applied a higher yield to your reversion, why did you do this?

A

To reflect the higher risk of obtaining a higher rent and to account for the fact that this market rent is not being received as at the valuation date

67
Q

You refer to purchasers costs, what do these comprise and what basis?

A

Agent fees @ 1.5%
Legal fees @ 0.5%
SDLT

68
Q

How might your valuation advice differ between an IRI lease vs an FRI lease?

A

Market rent for an IRI lease would likely be higher than the market rent of an FRI lease given more responsibility is placed on the landlord for repairs and maintenance

69
Q

When valuing the units in Paignton, you used a higher yield for the top lice, why does the property being over rented attract more risk?

A

1) Reflects that the level of rent may not be achievable in perpetuity
2) Higher chance of the tenant defaulting on payment as above market levels

70
Q

I note you provided a SWOT analysis, what’s your understanding of risk profiling?

A

Assists the client in the decision making process

71
Q

Can you give an example of a typical PVQ that you’ve dealt with?

A

Often I am asked to confirm that the title plan is correct and is what I inspected / valued.

72
Q

What is the valuer registration scheme?

A

It’s a risk monitoring and quality assurance programme which checks compliance with the Redbook.

Valuation (1 decks)

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