Level 2 - Valuation Flashcards
What statutory due diligence would you undertake for a valuation?
Check for any material matters which could impact the valuation.
- Asbestos Register
- Business Rates
- Contamination
- Environmental matters
- EPC
- Flooding
- Fire safety
- Health and safety compliance
- Highways
- Legal title and tenure
- Public rights of way
- Planning history and compliance
What steps are involved in undertaking a valuation?
16 Steps
- Receive instructions
- Check competence (SUK)
- Check independence
- Issue terms of engagement
- Receive signed terms of engagement
- Gather information (Leases, title docs, planning info etc)
- ## Undertake statutory due diligence
Why is Japanese Knotweed so important in the context of Valuations?
Because you cannot secure lending for properties with Japanese Knotweed.
What is an all risks yield?
This is a yield accounting for risk, return and growth.
What is an initial yield?
Current income divided by current price
What is equivalent yield?
The weighted average yield of the initial and reversionary yields.
What is a nominal yield?
The initial yield assuming rent is paid annually in arrears.
What is a reversionary yield?
The market rent divided by current price. (When under rented)
What is a running yield?
The yield at one moment in time.
What is a true yield?
The yield assuming rent is paid in advance.
Can you tell me what valuation approaches you’re aware of?
(IVSC, 2013)
Three approaches!!!
- Income approach
Future cash flow -> capital value (i.e. investment, residual and profits method.)
- Cost approach
Reference to cost (DRC/contractors method)
- Market approach
Using comparables (Comparable method)
Name me six checks you would undertake during Valuation due diligence?
Asbestos register
Environmental matters
EPC
Health and safety compliance
Equality act compliance
Legal title and Tenure
Can you name any other checks you would undertake during due diligence for a valuation?
Business rates
Contamination
Flooding
Highways
Public rights-of-way
Planning
Fire safety compliance
Can you tell me the structure of the RICS valuation – global standards, 2017 (the Redbook)
Six parts!!!
- Introduction
- Glossary
- RICS professional status (PS)
- RICS valuation technical and performance standards (VPS)
- RICS global valuation practice guidance applications (VPGA)
- The international valuation standards (IVS)
What does the Redbook consist of?
- Introduction
- Glossary
- PS (PS 1 and PS 2)
- VPS (VPS 1 – 5)
- VPGA (VPGA 1 – 10)
- IVS
Explain term and reversion to me?
The term and reversion method is an investment method of valuation.
It is used to value reversionary or ‘under rented’ investments.
First you capitalise the income for a term until the next lease event at an initial yield.
Then you capitalise the market rent into perpetuity at a reversionary yield.
Add together.
Can you explain the conventional investment method to me.
This is simply the rent received multiplied by the years purchase.
Years Purchase = 1/i (1/yield)
What method would you use if the investment was over rented?
The hardcore method (Layer method)
Explain the hardcore/layer method to me.
Hard-core method is used for over rented investments, where the passing rent is higher than market.
This is calculated by adding the bottom and top slice together.
The bottom slice being the market rent capitalised at an initial yield.
The top slice being the rent passing less the market rent, capitalised at a higher yield to reflect risk.
What is a yield?
It is a measure of investment return, expressed as a percentage of capital invested.
How do you calculate a yield?
Income/price X 100
When determining your yield what factors would you take into account?
I would take into account risk looking at factors such as:
Location
Covenant
Lease terms
Voids
What is the hierarchy of evidence?
Open market lettings (new leases) Lease renewals Rent reviews Third-party determinations Sale and leasebacks Opinion
Can you tell me about the methodology of the profits method?
This used for valuations of trade related property such as pubs.
It is calculated by capitalising the fair maintainable operating profit (FMOP) by an appropriate yield.
What is the fair maintainable operating profit (FMOP)?
How is fair maintainable operating profit calculated?
Turnover - Costs = gross profit
Gross profit - expenses = Unadjusted net profit
Unadjusted net profit - remuneration = FMOP
Can you tell me some of the key changes in the new Redbook?
Exemptions are now known as exceptions.
It incorporates recent developments in international measurement standards. (IPMS)
It includes changes and new advice regarding conflicts of interest.
Oral valuation advice is now covered by the Redbook.
VPS 1 includes 3 additional requirements for terms of engagement.
VPS 4 only has one definition of fair value as per IFRS 13.
Can you tell me why the Redbook has been updated?
To take into account significant changes to the international valuation standards (IVS) introduced this year.
To make it clear that professional standards (PS) and valuation technical and performance standards (VPS) or mandatory, and Valuation practice guidance applications (VPGA) or advisory.
Can you tell me the methodology of the comparable method?
SIX steps
- Source Comps
- Verify Comps
- Assemble Comps
- Adjust Comps (hierarchy of evidence)
- Analyse Comps (form opinion on value)
- Report value – prepare file note
Define Market Rent
The estimated amount for which an interest in real property should be leased
On the valuation date
Between a willing lessor and a willing lessee
On appropriate lease terms
In an arm’s-length transaction
After proper marketing
Where the parties had each acted knowledgeably, prudently and without compulsion.
Define Market Value
The estimated amount for which an asset or liability should exchange
On the valuation date
Between a willing purchaser and a willing seller
In an arm’s-length transaction
After proper marketing
When the parties had each acted knowledgeably, prudently and without compulsion.
For what purposes are valuations undertaken?
Agency and Brokerage purposes
Internal purposes
Loan security purposes
Accounts purposes
Define fair value
(As defined by the International Accountancy Standards Board)
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
Define investment value
The value of an asset to the owner or prospective owner
For individual investment or operational objectives
In your own words define market value
Market value is the estimated price at which an asset will transact on the open market between two willing parties having been properly marketed.
Define market rent in your own words
Market rent is the price at which a lease can be agreed on the open market between two willing parties.
Define fair value in your own words
Fair value is the price at which an asset could be transacted between two parties but doesn’t assume the property has been tested on the open market.
Find investment value in your own words
Investment value is what an asset is worth to an individual.
Not necessarily market value.
What is PS 1 in the Redbook?
This refers to compliance with standards were written valuation is provided.
All members who provide written valuation advice are required to comply with the standards.
What is PS 2 in the Redbook?
This refers to ethics, competency, objectivity and disclosures.
– Professional and ethical standards
– Independence objectivity and conflict of interest
– Terms of engagement
– Disclosure requirements
What is VPS 1 in the Redbook?
This refers to the minimum terms of engagement that must be confirmed in writing prior to commencing redbook valuation.
What are the minimum terms of engagement?
Set out in VPS 1
- Identification/status of valuer
- Identification of client
- Identify other intended users
- Identification of asset being valued
- Valuation currency
- Purpose of valuation
- Basis of value
- Valuation date
- Extent of investigations
- Nature/source of info being relied upon
- Assumptions/special assumptions
- Format of report
- Restrictions for use/distribution/publication
- Confirmation of IVS compliance
- Fee basis
- Complaints handling procedure
- Statement – Valuation may be investigated by RICS
- Statement - setting out limitations on liability
What is an assumption?
An assumption is made when it is reasonable to accept something is true without specific investigation.
What is a special assumption?
Special assumption is when something is taken to be true even though it is not.
i.e. assuming planning permission.
Must be clearly stated in terms of engagement!
What is VPS 2 in the Redbook?
This refers to inspections and investigations.
Inspections must be carried out to extent necessary to produce a valuation adequate for purpose.
Can you undertake a valuation without inspection?
Yes:
- Restricted information valuations
- Revaluations
What is VPS 3 in the Redbook?
VPS 3 refers to the minimum requirements to be stated within valuation reports.
What are the minimum requirements to be stated within valuation reports?
(Set out in VPS 3) – 14 points!!!
- Identification/status of valuer
- Identification of client/other intended uses
- Purpose of valuation
- Identification of asset to be valued
- Basis of value
- Valuation date
- Extent of investigations
- Nature/source of information relied upon
- Assumptions/special assumptions
- Consent/restrictions to publication
- Confirmation valuation has been undertaken in accordance with Redbook/IVS standards
- Valuation approach/reasoning
- Valuation figure(s)
- date of valuation report
What is VPS 4 in the Redbook?
VPS 4 refers to the Bases of Value
The valuer must determine the basis of value that is appropriate for valuation to be reported.
How do lease terms affect valuations?
Which terms in particular affect valuations?
A lease which is more in favour towards the landlord is likely to have positive impact on the value.
For example:
- Lease term
- Alienation clause
- Any landlord contributions (rent free post break)
- if it’s protected under the 1954 Act
- Service charge caps
Are all valuations Redbook?
What are the exceptions?
No, there are five exceptions.
- Valuation for internal purposes
- Valuation for agency and brokerage purposes
- Valuation advice for evidence as an expert witness.
- Valuation advice provided during negotiation/litigation
- For statutory purposes
What are regulated purpose valuations?
These were set out in the previous Redbook under UKVS 4.
They are now incorporated in PS2.
It includes certain types of valuation that may be relied upon by third parties such as…
Valuations for:
- Financial statements
- Stock exchange listings
- Takeovers/mergers
- Investment schemes
How would you value a long leasehold interest?
Rent received - ground rent = net rental income
Capitalise at appropriate yield for remaining length of lease
= market value
Alternatively a DCF calculation can be used
What is zoning?
This is a valuation technique used for retail properties.
Used to help rentalise retail properties ITZA.
Rental value reduces away from the street
6.1 m zones – halving back principal
What do you understand about the RICS valuation registration scheme?
VRS (Valuation Registration Scheme)
This regulates all valuers carrying out Redbook valuations.
Registration is not mandatory for valuation were excluded from the Redbook.
Why is you opinion of the VRS?
Positive as clients can feel confident that valuations are being undertaken by qualified professional valuers.
What would you take into consideration when undertaking a valuation on behalf of charity?
I would take into account section 119 of the charities act 2011.
Hey section 119 report must decide whether the terms agreed are the best that can reasonably be obtained for the charity.
Can you explain to me the methodology of the DRC method?
Value the land in existing use
Add current cost of replacing the building plus fees less a discount for depreciation and deterioration.
Advise client to seek specialist advise.
For purpose would you use the DRC method?
For owner occupied property
For specialist properties (Lighthouse or submarine base)
What is the format of the old Redbook?
- Professional standards (PS)
- Valuation practice statements (VPS)
- International valuation standards (IVS)
- Valuation practice guidance applications (VPGA)
- UK valuation standards (UKVS)
- UK appendices
- UK guidance notes (UKGN)
- International valuation standards (IVS)
Why is the new Redbook required?
To take into account changes to the international valuation standards (IVS), 2017
What changes does new Redbook take into account?
Incorporates recent adoption of the international property measurement standards.
Updates advice on conflicts of interest in line with new requirements.
Exemptions are now called exceptions.
Clear advice is given on dealing with Valuation uncertainty with in VPGA 10.
3 additional requirements for terms of engagement. - Identity of asset, valuation currency and limit on liability must be stated.
VPS 4 - only one definition of fair value
What is PS 1?
Refers to compliance with standards and practice statements.
What is PS 2?
Refers to:
– Ethics
– Competency
– Objectivity
– Disclosures
What are the first six minimum terms of engagement?
- Name/status of valuer
- Name of client/other intended uses
- Purpose of valuation
- Identification of the asset
- Basis of value
- Valuation date
What are the requirements of a Restricted information valuation?
4 requirements:
– Nature of restriction agreed in writing
– implications confirmed in writing prior to reporting
– Is restriction reasonable for purpose of valuation
– Restriction must be referred to in report
What are the requirements for Revaluations?
- Valuer must be satisfied there are no material changes to property or nature of location.
- Must be confirmed in terms of engagement and valuation report
What can you tell me about valuations for secured lending?
They establish whether a loan can be secured against the value of the property.
Avoiding conflicts is particularly important
- Any previous involvement
- Any recent transaction of the property.
- Comment on suitability of property for mortgage purposes.
- Comment on circumstances valuer is aware of that could affect the price.
Are you aware of any regulated purpose valuations?
Old red book - UKVS 4
New red book - PS 2
These are valuations relied on by third parties including Valuations for:
– Financial statements
– Investment schemes
– Stock exchange listings
– Takeovers and mergers
– Unregulated property unit trusts
What is marriage (synergistic) value?
This is value created when there is a merger of interests.
Normally undertake a before and after valuation to ascertain the marriage value.
Marriage value split between parties
When will you undertake evaluation for building costs reinstatement?
For building insurance purposes
Reflects cost to reinstatement without profit
What is hope value?
The value arising from any expectation that circumstances affecting the property may change in the future.
e.g. the prospect of securing planning permission for development
What is VPS 5 in regard to?
This details valuation approaches and methods.
What is VPGA 1 in regard to?
This details guidance for valuations for inclusion in financial statements.
What section in the Redbook refers to valuations for inclusion in financial statements?
VPGA 1
What is VPGA 2 in regard to?
This details guidance on valuations for secured lending.
What part of the Redbook gives guidance on valuations for secured lending?
VPGA 2
What is set out in VPGA 4 in the Redbook?
This provides advice on valuations for trade related properties.
(The profits method)
What part of the Redbook would you have regard to for valuing trade related properties?
VPGA 4
What does VPGA 10 in the Redbook refer to?
This refers to matters that may give rise to material valuation uncertainty.
(Brexit)
What part of the Redbook would you have regard to when assessing uncertainty?
VPGA 10
What is a ransom strip?
How would you calculate the value a ransom strip?
Do you know any case law?
It is a piece of land which controls access to another piece of land.
The value of a ransom strip is normally calculated as anything from 15-50% of the value of the development land.
Stokes vs Cambridge
What does and IRR show?
It shows the discount rate required for the NPV to equal zero.
What risks are reflected in the ARY?
Tenant
- Covenant/Lease term/rent
Building
- materials/deterioration/defects/obsolescence
Market
- expected growth
What is hope value?
This is the value that arises from an expectation that circumstances affecting the property may change in the future.
Such as securing planning permission.
What would you take into consideration if you are undertaking you valuation for a charity?
I would consider the charities act 2011, which sets out that a surveyor must comment on his opinion as to whether the terms agreed of the best that can reasonably be obtained for the charity in a section 119 report.
How would you value a long leasehold interest?
This can be valued simply as:
Read received - ground rent = net rental income
Capitalised at an appropriate yield for the remaining length of the lease = market value.
Alternatively using dual rate sinking fund tables or a DCF calculation.
What is a premium?
A capital payment from one party to another.
What could a premium reflect?
The value of fixtures/fittings within a building
The value of a leasehold interest
– Difference between passing rent and market rent (Capitalise profit rent until lease event)
– if negative a reverse premium may be paid
Landlord paying a tenant for the surrender and grant of a new lease.
What are purchasers costs made up of?
Stamp duty land tax
Agents fee
Legal fee
What are the rates for SDLT on commercial property?
Incremental tax.
Up to £150,000 – nil
£150,000-£250,000 – 2%
Over £250,000 – 5%
What is a WAULT?
The weighted average unexpired lease term.
How is a WAULT calculated?
This is calculated by taking the remaining lease term of each lease and multiplying it by the percentage weight of income for that lease.
What is a party wall?
This is a wall which sits on the Boundry of land belonging to 2 or more landowners.
I would not advise my client in this regard as I would always recommend specialist advice.
What is a reversionary yield?
This is the relationship between rent and capital value after a lease event.
Are you aware of any RICS material which governs valuation?
The RICS valuation global standards, 2017
Also known as the Redbook
What is the difference between Market value and Fair value?
The RICS have stated that they see the definition of fair value as being consistent with Market Value.
However I would say that fair value does not assume it has been tested in an open market place whereas market value does.
I believe you would use fair value when doing accounts valuations.
How else apart from asking your client could you find an appropriate discount rate?
I would speak with my director to see if they had any recent projects that were similar.
Alternatively you could look at 10 year swaps rate and add a percentage for risk.
What is the 10 year swaps rate?
It is the rate at which government can borrow money and is assumed to be the the most risk free investment.
How would you assess a comparable that was reversionary?
I would look at the equated yield.
What are the limitations of a residual valuation?
The importance of accurate inputs.
It does not consider the timing of cash flows.
Sensitive to minor adjustments.
Assumptions are hidden and not explicit.
How would you check the accuracy of a residual valuation?
I would try to cross check it with comparables if possible.
How would you reflect risk within a valuation?
I would look at comparable evidence to establish an appropriate market yield and then adjust it accordingly to reflect the risk.
What is it referring to in the terms of engagement when it says ‘status’ of the valuer?
It is referring to whether they are an internal or external valuer.
When did the new Redbook come into action?
1 July 2017
Are you aware of any RICS guidance notes on Valuation?
Risk, Liability and Insurance in Valuation Work 2nd edition 2018.
Use of liability caps
3rd party reliance
Details of ADR
Why would investor demand have an impact on value?
Investor demand impacts the ease of sale or liquidity of a property which would impact on value.
Consider liquidity when assessing the appropriate yield.
When would you use the comparable method?
Where lots of similar properties have transacted.
Rental valuations.
When would you use the investment method?
Where likely buyers will be looking for an income.
Office
When would you use the profits method?
When valuing trade related properties where value is based on trading profits.
Pubs, hotels, etc
When would you use the residual method?
When valuing development property or properties due to undergoing refurbishment?
Land or property under construction
When would you use the DRC method?
Specialist properties with no comparable evidence.
Prisons, power stations, etc
What steps should you take prior to commencing a valuation instruction?
Do I have the skills, understanding and knowledge? (Competence)
Are there any conflicts? (Independence)
Set out in writing instructions and receive written confirmation of instructions from the client. Confirm competence and extent and limitations of values inspection. (Terms of Engagement)
