Level 1 Flashcards
What is the definition of Market Value?
The estimated amount for which an asset or liability should exchange for on the valuation date between a willing buyer and seller in an arms length transaction after proper marketing
Parties to act knowledgeably, prudently and without compulsion
What is the definition of Market Rent?
The estimated amount for which an interest in the property should be leased on the valuation date between a willing lessor and lesser in an arms length transaction after proper marketing
Parties to act knowledgeably, prudently and without compulsion
What is the definition of WAULT?
Weighted Average Unexpired Lease Term- is a metric which shows the average time period remaining on leases within a property or portfolio, relative to the rental income of each tenant
How does WAULT effect the value of an asset?
WAULT assesses the stability of cash flows and risk profile of an investment. Therefore a higher WAULT infers a more stable income forecast and lower risk for the investor, making the property more valuable
How would you calculate WAULT?
- Multiply rent of each tenant by the remaining term
- Sum the total
- Divide by the total annual rent
E.g 5yr x £10k = £50k
2yr x £50k = £100k
£150k / £60k = 2.5
What are the five methods of valuation?
- Comparable
- Investment (conventional, T&R, L/H, DCF)
- Profits
- Residual
- Contractors (DRC)
How does location impact the value of an asset?
A central London location would be seen as more valuable than a rural location as it’s provides proximity to transport, footfall, and expenditure
How does condition impact the value of an asset?
A high specification property would be more desirable to an investor or tenant, therefore would be willing to pay higher prices. E.g Grade A office space
How would covenant strength impact the value of an asset?
A tenant with a stronger covenant would provide a more stable income forecast and therefore would be less risky and more appealing to an investor.
How would tenure impact the value of an asset?
A tenancy with a longer lease term and higher rent would be more attractive to an investor as it would create a more stable income forecast and therefore increase the returns of the property and its value
When would you use the comparable method of valuation?
The comparable method is used to derive comparable evidence of similar property transactions/lease events to calculate an ERV for agency a or yield for investment.
When would you use the investment method of valuation?
When the property is occupied and income producing. To calculate the Market Value of an investment for loan security, accounts or agency purposes.
When would you use the profits method of valuation?
For trade related properties e.g pubs, care homes, hotels etc where the value of the property depends on the profitability of the business
When would you use the Contractor’s method of valuation?
Used where direct market evidence is limited for specialised properties including lighthouses, schools, sewage works. For accounts purposes or ratings valuation (not RBG compliant)
When would you use the Residual method of valuation?
To financially assess the viability of a development scheme through a development appraisal or residual site valuation
Contracting out LTA 1954 - types of declaration
Simple - parties have at least 14 days prior to committing to lease
Statutory- fewer than 14 days
Stat dec must be made infront independent solicitor
What is included within purchasers costs?
Legal fees 0.5% + VAT at 20%
Agents fees 1% + VAT at 20%
Stamp duty - depending on price of building (assumed 5% above £250k)
Usually 6.8%
Within a corporate transaction, how would purchasers costs differ?
No stamp duty tax
Just agents fees 1% and legal fees 0.5% plus VAT
What is the threshold levels for SDLT?
£0-£150k - Nil
£150,001- £250k - 2%
Over £250k - 5%
What is the SDLT threshold levels on grants of lease renewals?
Net Present Value of:
Up to £150k - Zero
Over £150k - 1%
Over £5mill - 2%
Why is the DRC method not Red Book Compliant?
Doesn’t take into account market figures or conditions
What is the difference between a development appraisal and and residual site valuation?
Development appraisal is based upon client inputs to find a developers profit
Whereas residual site valuation uses market inputs to find a market value
RICS Valuation- Global Standards 2021 RBG Structure
Part One- Intro
Part Two- Glossary
Part Three- Professional Standards
Part Four- Valuation Technical and Performance Standards (VPS)
Part Five - Valuation Applications (VPGA)
Part Six- International Valuation Standards (IVS)
Where would you find Terms of Engagement within RBG?
Part 4 - VPS1
When commencing a valuation instruction what would you undertake first?
CIT
Competent?
Interests
Terms of engagement
What part of the RBG provide guidance on valuation preparation (inspection)?
Part 4 VPS 2 - inspection, due diligence, verification of info
Part 3 of RGB
Mandatory Professional Statements
PS1- compliance with standards (outlines five exceptions)
PS2- ethics, competency
(Conflicts, ToE)
Part 4 of RGB
Mandatory worldwide
VPS1- Terms of Engagement- minimum
VPS2- Inspections and Record
VPS3- Valuation reporting- minimum
VPS4- Bases of Value
VPS5- Valuation Approaches and Methods
Uk Supplementary 2023
Valuation Practice Guidance Applications
VPGA1: Valuation for financial reporting
VPGA2- Valuations for secured lending
VPGA8- Valuation or charity assets (Charity Act 2022)
VPGA10- valuation for commercial secured lending (incorporated new ESG)
What are the mandatory rotations within the Red Book?
VPS 3
New National Supplement provides requirements from 1st May 2023
Maximum period 5 years before rotation of individual values
Maximum period 10 years before rotation of valuation firm
Minimum 3 year break after rotating
Three approaches to calculating NER
Straight line method
Straight line method assuming time value of cash flow using a yield
Use of DCF
Where are Terms of Engagement found in the Red Book?
Part 4 VPS 1
Where are assumptions and special assumptions found in the Red Book?
Part 4 VPS 1
Where are the requirement for valuation reports found in the Red Book?
Part 4 VPS 3
Where are the bases of value found in the Red Book?
Part 4 VPS 4
Market value
Market rent
Fair value
Investment value
Equitable value
Liquidation value
Where would guidance for valuations for secured lending be in the Red Book?
Part 5 - VPGA 2
Any additional legislation coming into effect for Valuations?
Following Pereira Review as of 1st May 2024
Global standards Uk National Supplement 2023
UK VPGA10 - valuation of commercial secured lending - new ESG principles
What are the five valuation purposes that third parties rely upon?
Stock exchange listings
Financial reporting - company accounts
What’s the difference between internal and external valuer?
Internal- employed by company and for internal purposes
External- no material links with asset
