Matt - Valuation - Level 1

Question 1

What are the five methods of valuation?

Answer 1

1. Comparable
2. Investment
3. Receipts and expenditure
4. Depreciated replacement cost
5. Residual

Question 2

What is the comparable method and when would you use it?

Answer 2

The comparable method is a method of valuation where a value of a property can be derived from the value of another property, on the basis that a purchaser wouldn’t pay more for a similar type of property.

I’d use the comparable method when there’s lots of evidence available such as residential, shops, offices and industrials.

Question 3

What is the investment method and when would you use it?

Answer 3

The investment method of valuation is a valuation method used to value a property based on its prospective income.

I would use this method to value commercial properties as most commercial properties are purchased as investments.

Question 4

What is the depreciated replacement cost method and when would you use it?

Answer 4

The depreciated replacement cost method is a method of valuation used to value properties which aren’t readily available on the market. It is done on the basis that an owner would have to construct a new building and acquire new land if the subject property wasn’t available.

I would use this method to value specialist properties like schools, universities and libraries.

Question 5

What is the receipts and expenditure method of valuation and when would you use it?

Answer 5

The receipts and expenditure method of valuation is a valuation method used to value a property based on its earning potential.

I would use this method to value properties that are trade focused such as cinemas, pubs, hotels and petrol stations.

Question 6

What is the residual method of valuation and when would you use it?

Answer 6

The residual method of valuation is a method of valuation used to assess the value of development land and development projects.

I would use this method if I wanted to establish the site value.

Question 7

What are the steps you would take to carrying out a comparable method valuation?

Answer 7

1. Look at the subject property
2. Search for comparables
3. Adjust and analyse comparables
4. Value the subject property
5. Stand back and look

Question 8

What are the steps you would take to carrying out an investment method of valuation?

Answer 8

There are various techniques within the investment method, so as to what technique I would use is dependent on the property type and any lease details.

Traditional growth implicit techniques are:

1. Capitalisation - If the subject is at market rent or there are no lease details
2. Term and reversion - If the subject is under rented
3. Hardcore and layer - If the subject property is over rented

Growth explicit valuation method is:

1. Discounted cash flow - if trying to value a multi let property

Question 9

What are the steps you would take to carrying out a depreciated replacement cost valuation?

Answer 9

If I’m trying to establish a capital value:

1. Establish the replacement cost of a modern equivalent
2. Depreciate for age and obsolescence
3. Add site/land value
4. Stand back and look

If trying to establish a rental value:

The same steps as above but an extra step of adding the statutory decap rate.

Question 10

What are the steps you would take to carrying out a receipts and expenditure valuation?

Answer 10

If I’m trying to establish a capital value:

1. Establish the fair maintainable trade of a reasonably efficient operator
2. Deduct costs and expenses to achieve the fair maintainable operating profit (FMOP)
3. Multiply the FMOP by a suitable YP to arrive at a capital value

If I’m trying to establish a rental value:

The same steps as above, however the FMOP instead becomes the divisible balance and is then split between the landlord and tenant

Question 11

What are the steps you would take to do a residual valuation?

Answer 11

Residual site value equals:

1. Estimate the value of the completed development
2. Less the total cost of the development
3. Less developers profit

Question 12

You mention that location, age, size and condition can affect the value of a property. Why is this?

Answer 12

Location - Depending where a property is located, such as transport links and amenities, this affects value.

Age - Newer built properties can come with a premium on the basis of being new and theoretically in the best condition.

Size - Quantum and reverse quantum.

Condition - Condition affects value as a prospective buyer will have to spend money to put the property in to a reasonable condition

Question 13

You mention that valuations are required for various purposes. What are some of these?

Answer 13

1. Loan security
2. Rating
3. Accounts
4. Landlord & Tenant functions
5. Tax - CGT and IHT

Question 14

What is an RICS Registered Valuer?

Answer 14

Chartered Surveyor part of the Valuer Registration Scheme that carries out Red Book valuations.

Question 15

What is the Red Book?

Answer 15

It is a set of global standards that set out procedural rules and guidance for written valuations.

Question 16

What isn’t the Red Book?

Answer 16

It isn’t a valuation manual prescribing members on how to value in each case.

Question 17

What is the current edition of the Red Book?

Answer 17

2022, effective 31 January 2022

Question 18

What is the full name of the Red Book?

Answer 18

RICS Valuation Global Standards

Question 19

What is the structure of the Red Book?

Answer 19

1. Professional Standards
2. Valuation Practice Statements
3. Valuation Practice Global Applications

Question 20

What are the Professional Standards?

Answer 20

There are 2 and they are:

1. Compliance
2. Ethics

Question 21

Are Professional Standards mandatory?

Answer 21

Yes

Question 22

What are the Valuation Practice Statements?

Answer 22

VPS 1 - Minimum terms of engagement

VPS 2 - Inspections (assumptions and special assumptions)

VPS 3 - Valuation reporting

VPS 4 - Bases of value

VPS 5 - Valuation approach

Question 23

Are the Valuation Practice Statements mandatory?

Answer 23

Yes

Question 24

What are the Valuation Practice Global Applications?

Answer 24

There are 10 in the 2022 edition of the Red Book.

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 personal 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

Question 25

Are the Valuation Practice Global Applications mandatory?

Answer 25

No, they are advisory of best practice.

Question 26

Are you aware of any proposed changes to the Red Book?

Answer 26

I understand that the latest edition of the International Valuation Standards has been published and the RICS is consulting its members about potential changes that would come in effect from 31 January 2025

Question 27

What are some of the proposed changes that are open to consultation for the next Red Book

Answer 27

As I understand, there is consultation about changing the layout of the Valuation Practice Statements as follows:

VPS 1 remains as VPS 1

VPS 2 becomes VPS 4

VPS 3 becomes VPS 6

VPS 4 becomes VPS 2

VPS 5 is split in to VPS 3 and VPS 5

Question 28

You state that you’re aware of the UK National Supplement. What is this document?

Answer 28

It is a supplement to the Red Book and is used by valuers in the UK.

Question 29

Is the U.K. National Supplement mandatory or advisory?

Answer 29

Mandatory for valuers who carry out valuations in the jurisdiction of the UK

Question 30

What is the structure of the U.K. National Supplement?

Answer 30

1 UK Professional Standard which is mandatory

3 UK Valuation Practice Statements which are mandatory

17 UK Valuation Practice Global Applications which are advisory

Question 31

What can you tell me about the Discounted Cash Flow paper produced by the RICS in November 2023?

Answer 31

1. It was produced to help provide further clarity around the differences between market value and investment value definitions as per VPS 4.
2. It also helps clarify the position regarding Discounted Cash Flows as the Gray report implied this was to be mandatory, but it now has been clarified that it is Valuers judgement as to when a DCF is used.

Question 32

Why was the UK National Supplement updated?

Answer 32

As a result of the Peter Gray report and also because the last edition was reflecting the 2019 Red Book.

Question 33

What are some of the changes in the UK National Supplement?

Answer 33

1. UK VPS 3 has been completely overhauled
2. There are now 17 UK VPGAs instead of 18
3. It has introduced a mandatory rotation policy for asset valuations

Question 34

What can you tell me about the mandatory rotation policy within the UK National Supplement?

Answer 34

This means that valuers can’t carry out the same instruction for clients in relation to asset valuations after a period of 10 years.

It’s not due to come into effect for another 2 years to allow firms and clients to set up alternative arrangements.