Red Book Global Flashcards
RICS Valuation: Global Standards 2021 effective January 2022
Red Book Global
Structure?
- Introduction
- Glossary
- PS - Professional Standards
- VPS - Valuation and Performance Standards
- VPGA - Valuation Applications
- IVS - International Valuation Standards
PS1
Compliance with standards and practice statements where a written valuation is provided
PS1 5 Exceptions to the Red Book?
E - Expert Witness
A - Agency and Brokerage apart from purchase report
S - Statutory Purposes
I - Internal Accounts
N - Negotiation or litigation
PS2
Ethics
C - Compliance with the rules of conduct
I - Independence
T - Terms of Engagement
VPS 1 - Minimum Terms of Engagement
- Name and status of valuer
- Identification of the Client/other intended users
- Asset to be valued (if portfolio then lotting of assets considered)
- Valuation currency (2017)
- Purpose of valuation
- Basis of value
- Valuation date
- Extent of investigation
- Nature and source of information to be relied upon
- Assumptions and special assumptions to be made
- Format of report
- Restrictions for use, distribution and publication
- Confirm RBG/IVS compliance
- Fee basis
- Complaints handling procedure to be made available
- Statement that the valuation may be audited by RICS
- Limit on PII liability agreed
VPS2 – Inspections, Investigations and Reports
Valuers must take steps to verify the necessary information being relied upon for a valuation to ensure professionally adequate.
Desktop Valuation
Without an Inspection - RBG valuation unless for one of the 5 exceptions outlined in PS1.
Valuers should consider the following:
1. The nature of the restriction must be agreed in writing in ToE
2. Possible valuation implications of restriction confirmed in writing before the value is reported.
3. Valuer should consider whether the restriction is reasonable about the purpose of the valuation.
4. The restriction must be referred to in the report.
VPS3 – Valuation Reports (IVS 1103 Reporting)
- Identification of the status of the valuer
- Client
- Purpose of valuation
- Asset
- Basis of value
- Valuation date
- Extent of investigation
- Nature and source of information to be relied upon
- Assumptions and special assumptions
- Restrictions for use, distribution and publication
- Instruction undertaken in accordance with IVS standards
- Valuation approach and reasoning
- Valuation Figure
- Date of valuation report
- Commentary on any market uncertainty
- Any limitations on liability that have been agreed
VPS4 – Bases of Value
Market Value – The estimated amount for which an asset or liability should exchange between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where each party had acted knowledgeably, prudently and without compulsion.
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 where each party had acted knowledgeably, prudently and without compulsion.
Fair Value IFRS13 – The price that would be received to sell an asset or transfer a liability in an orderly transaction between two market participants at the measurement date.
Investment Value – The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives.
Equitable Value IVS104 – The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties. Not used in the UK.
Liquidation Value – A group of assets sold in a piecemeal basis considering the costs of getting assets into saleable condition. Not used in the UK.
VPS 5 – Valuation Approaches and Methods (IVS 105)
- Valuers are responsible for selecting and justifying their use of model and valuation approach.
- In some cases, more than one approach may be appropriate.
VPGA 1 – Valuation for inclusion in Financial Accounts
- Fair Value will be adopted for all IFRS adopted accounts.
- Prescribed ‘performance standards’ must be adhered to.
VPGA 2 – Valuation for secured lending
- Previous involvement with property/borrower disclosed to the lender, usually within past 2 years.
- If instruction accepted, the conflict management details must be recorded in ToE and report.
VPGA 8 – Valuation of real property assets
- Covers inspections and investigations, with particular emphasis on ESG and sustainability issues.
- Need to consider direct/indirect valuation factors, physical risks and transition risks.
VPGA 10 – Matters that may give rise to material valuation uncertainty
- Overriding requirement is that a valuation report must not be misleading.
- Valuer should clearly draw attention to issues relating to material uncertainty in the valuation on the specified date relating to risk, surrounding the valuation of the asset.
Statutory due diligence
- Asbestos register
- Business Rates/Council tax
- Contamination/Flooding/Environmental matters
- Equality Act compliance
- EPC
- Fire safety/Health & Safety
- Highways/Public Rights of Way
- Legal title
- Planning history (subject to S106 agreement or CIL)
Timeline of an instruction
- Receive instruction from the client.
- Check competence and independence.
- Issue ToE, receive signed ToE.
- Gather info/due diligence/market research/comparables.
- Inspect and measure.
- Undertake valuation.
- Draft report and peer review with another surveyor.
- Finalise and sign report.
- Report to client.
- Issue invoice.
- Ensure file is in good order to archive.
Methods of Valuation
- Comparable method
- Investment method
- Profits method
- Residual method
- Contractors Method (Depreciated Replacement Cost)
Comparable Method
- Gather comparables and confirm details.
- Adjust headline rent to ‘net effective rent’ if appropriate.
- Assemble in a schedule adjust using ‘Hierarchy of Evidence’.
- Analyse to form an opinion of value and report the value.
Comparable Professional Standard
RICS Professional Standard: ‘Comparable Evidence in Real Estate Valuation’ 2019 (Reissued as Professional Standard April 2023)
RICS Professional Standard: ‘Comparable Evidence in Real Estate Valuation’ 2019 (Reissued as Professional Standard April 2023)
Hierarchy of Evidence
Cat A – direct comparables, accurate, recent, asking prices (analysis)
Cat B – general market data to give guidance, historic and reports
Cat C – other asset classes, locations, background data interest rates
Investment Method
- Used when there is an income stream, rental income is capitalised to produce a capital value.
- Conventional method assumes growth implicit where implied growth rate is derived from the market capitalisation rate (yield).
Term and Reversion – Used for reversionary investments, term capitalised until rent review then into perp at new yield.
Layer/hardcore – Used for overrented investments, horizontally split, different yields used due to risk of higher income.
Discounted Cashflow Technique (DCF)
- Estimate the cashflow (income less expenditure)
- Estimate the exit value at the end of the holding period
- Select discount rate and discount the cash flow at the rate
- Value is the sum of the completed DCF to provide the NPV
DCF Terminology
Net Present Value (NPV)
Sum of the DCFs for the project – NPV can determine if the investment will give a positive/negative return against a target rate of return.
Internal Rate of Return (IRR)
The rate at which all future cashflows must be discounted to produce NPV of zero. IRR = total return from an investment opportunity if no software to calculate can use linear interpolation.
- MV as -, Rent as +, Exit as +, discount rate chosen, if NPV is more than zero, target rate of return is met.
Profits Method
- trade related – monopoly position (3 years of audited accounts)
- Income – costs = gross profit – less expenses & operator’s remuneration = Fair Maintainable Operating Profit (FMOP).
- Expressed as EBITDA (earnings before interest, taxation, depreciation and amortisation. Capitalised at yield.
Residual Method
- MUST be MARKET led, ONLY used to calculate LAND VALUE
- GDV of scheme at today’s date assuming current market.
- Comparable method used to establish rent and yield (ARY). Rent free and void periods can be assumed and purchaser’s costs are usually deducted.
RICS Valuation – Global Standards (UK National Supplement 2018)
- Provides requirements for valuations undertaken in the UK.
- Contains 18 Valuation Practice Guidance Applications (UK VPGAs).
- Most advice is not mandatory but is good practice.
- Bigger difference between UK GAAP and IFRS requirements.
All Risks Yield
Rate of interest, fully let at MR, reflecting prospects and risks
Net Yield
Simple income yield for current income and current price
UK VPS 3 – Regulated purpose valuations
relied upon by 3rd party who haven’t commissioned the valuation.
5 purposes – financial statements, stock exchange, takeovers/mergers, collective investment schemes, unregulated property unit trusts.
Can only value if: company has not acted for purchase in last 12m, must state if more than 5% of annual fees, 7-year rotation policy.
Peter Pereira Gray Review (December 2021)
- Developing time-specific rotation for valuers
- Developing Valuation Compliance Officer within firms
- Process to raise issues on ethical conduct in firms
- Establishing a vals regulatory quality assurance panel and separating vals from agency in firms
- DCF as the principal model in property investment vals
ESG
RICS has issued a global Guidance Note: Sustainability and ESG in commercial property valuation and advice Dec 2021
* Includes advice on ToE, valuation purpose, inspection, reporting.
* Relevant sustainability characteristics, considerations and risks.
* How these should be reflected in the choice of valuation method.
Margin of Error
Range allowed by courts in respect of valuation.
K/S Lincoln v CB Richard Ellis (2005) reinforced +/-5% but if one off commercial property +/-10%.
Hope Value
- Arising from expectation that future circumstances may change.
- Future prospect of the site gaining planning permission.
- The realisation of marriage value from merging interests
- ‘An element of market value in excess of the existing use value, reflecting the prospect of some more valuable future use.’
Marriage Value
- Merger of interests – physical or tenurial
- Before and after valuations
- Negotiated outcome – usually shared 50/50 of uplift or pro rata
- ‘an additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values’
Assumption
Reasonable for valuer to accept something is true without the need for specification (eg building is structurally sound)
Special Assumption
Assumption that is taken to be true and accepted as fact even though it is not true (eg vacant possession)
WAULT - Weighted Average Unexpired Lease Term
Time remaining to the first break or expiry of a lease across asset weighted by contracted rent. Used to consider investment comps.
Analysis of Rent-Free Periods/Headline Rents
How to devalue a headline rent with rent-free and void to produce a net effective rent. 3month fitting out period deducted before devaluation.
Zoning
Valuation technique, comparison of retail properties as rental value reduces away from the street. Halving back principle 6.1m zones.
RICS Guidance Note 2016 Rights of Light
RoL – Arises 20 years after uninterrupted enjoyment of light without the consent of the 3rd party by way of an easement.
Stamp Duty – Commercial
£0-150k = 0%
£150,001-250k = 2%
£250k+ = 5%
Stamp Duty - Residential
£0-250k = 0%
£250,001-£925k = 5%
£925,001-£1.5m = 10%
£1.5m+ = 12%
The Garage, Egham LEVEL 2
Desktop - Market Value
Comps and looked at passing rent.
Comps and did a SWOT.
Deducted PC and got to Market Value.
Benchmarked value per bed against other investment evidence.
What is different about a desktop?
There is no inspection, although it is still Red Book unless one of the 5 expectations in PS1.
Valuers should consider the following:
1. The nature of the restriction must be agreed in writing in ToE
2. Possible valuation implications of restriction confirmed in writing before the value is reported.
3. Valuer should consider whether the restriction is reasonable about the purpose of the valuation.
4. The restriction must be referred to in the report.
What is in an operational budget?
Utilities, staff costs, maintenance, marketing.
The Garage, Egham - Strengths and Weaknesses
Brand new spec, large rooms, best-in-class Egham.
Only a one university town with large reliance on international students.
Kingmaker House, New Barnet
LEVEL 2
Quarterly - FV
Stabilised BTR asset.
Desktop DD before inspecting and measured the property.
Calculated FV in excel.
How did you verify your comparable data?
- Looking on websites
- Making phone calls
- Use internal and external databases and resources
What did you include in your ToE?
- Name and status of valuer
- Identification of the Client/other intended users
- Asset to be valued (if portfolio then lotting of assets considered)
- Valuation currency (2017)
- Purpose of valuation
- Basis of value
- Valuation date
- Extent of investigation
- Nature and source of information to be relied upon
- Assumptions and special assumptions to be made
- Format of report
- Restrictions for use, distribution and publication
- Confirm RBG/IVS compliance
- Fee basis
- Complaints handling procedure to be made available
- Statement that the valuation may be audited by RICS
- Limit on PII liability agreed
How did you measure Kingmaker House?
I used a distometer to measure the units on an NIA basis.
IPMS3c - will include areas of restricted height of 1.5m and balconies (stated separately).
ARY but Comps are NIY
An initial yield is passing rent/purchase price, but we don’t have a passing rent in a development appraisal. Therefore we cannot just adopt an initial yield. Therefore, we take an ARY which is income/purchase price recognizing potential risk/reward within an ARY, and take holistic view of an ARY baking in potential growth/risk over time.
1 sqm = x sqft
10.7639
Quarterly Co-living Accounts Valuation
LEVEL 3
- Q2 to Q3 2023 strong rental growth
- Sui Generis Planning Consent so can also be let to students.
- Looked at comps to check the rental growth and was let at MR.
What is driving strong rental growth?
- Lack of good quality, affordable housing stock.
- Sheer demand for property, particularly in London from professionals is unprecedented.
- People are now transient for longer periods and want a flexible housing solution without the commitment of buying a property.
What other residential planning use classes are there?
C1 – Hotels and Hostels
C2 – Residential Institutions
* a hospital or nursing home
* a residential school, college or training centre
C2A – Secure Residential Institutions
Prison, Young Offenders Institution
C3 – Houses, Flats, Apartments
* by a single person or by people living together as a family, or
* by not more than 6 residents living together as a single household (including a household where care is provided for residents).
C4 – HMO (Houses in Multiple Occupation)
Small shared dwelling houses occupied by between 3-6 unrelated individuals, as their only or main residence, who share basic amenities such as a kitchen or bathroom.
Sui Generis
No specified use class – planning consent always required
For co-living - GLA space standards.
PDR
Permitted Development Rights - goes to C3 consent
Kingston PBSA Accounts Valuation
LEVEL 3
FV - fully let PBSA asset in Kingston
-Weaker yield as asset achieving sky high rents.
-Strong rental growth in the market
-PBSA market had weakened
-could also let to Young Professionals
-asset appeal to wider pool of investors
Cap val benchmarked against local property values
In what circumstances could you change your draft valuation?
-In light of new information
-If a new update was available like a rent roll
What was causing the PBSA market to weaken?
Cost of debt increasing i.e. bank of England base rate in order to ensure inflation comes down to encourage people to save.
Across the whole market not just PBSA.
CONSTRUCTION on FF and FC structures.
UK National Supplement (2018)
- UK VPGA 1 – Valuation for financial reporting – general matters
- UK VPGA 10 – Valuation for commercial secured lending purposes
