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Valuation > Subs and general > Flashcards

Subs and general Flashcards

1
Q

What are the 5 methods of valuation?

A
  1. Comparative
  2. Investment
  3. Residual
  4. Profits
  5. DRC
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2
Q

When is the comparative method used?

A

For vacant and owner occupied properties with good comparable evidence available. E.g. owner-occupied house.

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3
Q

When is the investment method used?

A

For investments with an income stream to be valued. E.g. commercial property held as an investment.

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4
Q

When is the residual method used?

A

For properties where the value lies in development value and to find the value of a site at a particular point in time. E.g. development site.

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5
Q

When is the profits method used?

A

For properties where value is based on trading potential and business profitability, often where there is a monopoly position. E.g. pubs and hotels.

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6
Q

When is the Depreciated Replacement Cost method used?

A

Unusual and specialised assets where direct evidence is unavailable or limited. E.g. lighthouses, state schools, docks.

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7
Q

How can the 5 valuation methods be categorised in 3 approaches?

A
  1. Income approach - converts cash flow into capital - investment, residual, profits
  2. Cost-based approach - DRC
  3. Market approach - comparable
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8
Q

For what purposes might a valuation be undertaken?

A
  1. Loan security
  2. Internal purposes
  3. Litigation
  4. Statutory functions such as statutory return
  5. Negotiation
  6. Sale or purchase
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9
Q

What is the latest Red Book and when is it effective from?

A

Valuation - Global Standards 2021, effective from January 2022

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10
Q

What were the key changes from the last Red Book to the current?

A
  • VPGA 1 - Valuation for financial reporting purposes with reference to IFRS 16 - fair value
  • VPGA 4 - Examples of use of the profits method for trade-related valuations including purpose built student housing
    ESG focus:
  • VPS 2 & 3 - (Inspection and reporting) valuers should have consideration to ESG when collecting data and in their valuation approach and reasoning
  • VPGA 2 (valuation for secured lending) - ESG should be integral to the approach and comments should be provided on relevant upcoming costs
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11
Q

Under VPGA 8, what are examples of direct and indirect valuation factors, physical and transition risks with regard to ESG?

A

Direct - e.g. storms or flood risk
Indirect - e.g. resilience and carbon emissions
Physical risks - e.g. heat and wildfires
Transition risks - e.g. regulatory change

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12
Q

What is the difference between IVS and the RICS Red Book?

A

International Valuation Standards are published by the IVS council, an independent body, these standards are fully adopted by the Red Book, which provides further standards and guidance for RICS valuers.

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13
Q

What are the 5 requirements for a Red Book TOE which are not required by IVS?

A
  1. Statement of compliance with IVS
  2. Statement that the RICS may monitor
  3. CHP
  4. Fee
  5. Limit on liability
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14
Q

What are the different Red Book standards and who do they apply to?

A

Professional Standards (PS) - mandatory for all members providing written valuations
Valuation Technical and Performance Standards (VPS) - Mandatory for provision of IVS-compliant valuations
Valuation Practice Guidance Applications (VPGA) - Practical guidance on ‘best practice’

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15
Q

How does the Red Book define ESG?

A

Environmental, social and governance - Criteria that establishes the framework for assessing the impact of sustainability and ethical practices of a company on its financial performance and operations. Comprises environmental, social and governance - which collectively contribute to effective performance, with positive benefits for the wider markets, society and world as a whole.

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16
Q

What does VPS 1 cover?

A

TOE for a Red Book Valuation (IVS 101 Scope of Work)

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17
Q

Under VPS 1 (IVS 101), what must a Red Book TOE cover?

A
  1. Identify Client
  2. Identify valuer and their status (internal/ external)
  3. Identify asset being valued
  4. Identify other reliance parties
  5. Valuation date
  6. Valuation basis
  7. Valuation purpose
  8. Extent of investigations
  9. Information relied on and sources
  10. Assumptions and Special Assumptions
  11. Report format
  12. Valuation currency
  13. Restrictions on use, publication and distribution
  14. Fee basis
  15. Red Book and IVS compliance
  16. Statement of RICS compliance
  17. Limitation on liability
  18. CHP
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18
Q

What’s the difference between an assumption and a special assumption?

A

Assumption - reasonable for the valuer to assume this is reality without making specific investigations
Special assumption = knows this isn’t reality, must be agreed in writing at the start of the instruction

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19
Q

What is VPS 2 and what does it cover?

A

Inspections, Investigations and Planning
Inspections, desktop valuations and revaluations, records

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20
Q

What does VPS 2 say about inspections?

A

Valuers must take steps to verify information relied on for a valuation and ensure it is adequate for its purpose.

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21
Q

What does VPS 2 say about desktop valuations?

A
  • Desktops are still red book
  • Restriction and its valuation implications must be agreed in writing before the value is reported (TOE)
  • Consider whether reasonable for valuation purpose
  • Refer to restriction in report
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22
Q

What does VPS 2 say about revaluation without inspection?

A

Valuer must be satisfied there is no material changes to the property or location since the last inspection.
Must confirm in TOE and report.

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23
Q

What does VPS 2 say about records?

A

Proper records must be kept on inspections, investigations and other inputs, and in an appropriate business format. This includes sufficient ESG data.

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24
Q

What does VPS 2 say about ESG?

A

Valuers should collect and record appropriate and sufficient sustainability and ESG data for the valuation.

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25
Q

What is VPS 3 and what does it cover?

A

Valuation Reports (IVS 103 Reporting) - covers minimum report requirements and preliminary reports

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26
Q

What are minimum Red Book report requirements under VPS 3?

A
  • Identify - valuer and their status, the client and other intended users, the asset
  • Valuation - The valuation purpose, basis, date
  • Information - The extent of investigation, the nature and source of info
    -Report - restrictions on use, publication and distribution, report date
    Figures - Assumptions and SAs, approach and reasoning, figures
    Compliance - Statement that valuation is undertaken in accordance with IVS
    Comment on market uncertainty and agreed liability limitations
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27
Q

What is VPS 4 and what does it cover?

A

Bases of value, Assumptions and Special Assumptions.

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28
Q

Under VPS 4, what are the six bases of value?

A

Market Value, Market Rent, Fair Value, Investment Value, Equitable Value, Liquidation Value

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29
Q

How does VPS 4 define MV?

A

Estimated amount for which an asset/ liability should exchange:
- on the valuation date
- between a willing buyer and seller
- arms length transaction
- after proper marketing
- parties acted knowledgeably, prudently and without compulsion

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30
Q

How does VPS 4 define MR?

A

Estimated amount for which an interest in real property should be leased
- on the valuation date
- between a willing lesser and lessee
- on appropriate lease terms
- arms length transaction
- after proper marketing
- parties acted knowledgeably, prudently and without compulsion

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31
Q

How does VPS 4 define Fair Value?

A

“Based on IFRS (International Financial Reporting Standards 13)
‘The price that would be received to sell and asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date’”

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32
Q

How does VPS 4 define Investment Value?

A

Value for a particular owner/ prospective owner for individual investment or objectives, this may differ from MV
Sometimes used to reflect against clients own investment criteria.

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32
Q

Which basis of value is sometimes referred to as worth?

A

Investment value

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32
Q

Under VPS 4, what is an assumption?

A

Made where it is reasonable for the valuer to accept that something is
true without the need for specific investigation or verification. Must be reasonable and relevant to the purpose of the valuation.

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33
Q

Under VPS 4, what is a Special Assumption?

A

Assumption which the valuer knows is not true, or would not typically be made by a market participant, at the valuation date.
If necessary to provide a client with the valuation, must be confirmed in writing prior to report.
Must only be made if they are reasonably considered realistic, relevant and valid for the valuation circumstances.

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34
Q

What is VPS 5 and what does it say?

A

Valuation approaches and methods (IVS 105)
Valuers are responsible for adopting and justifying approach - must consider the asset, valuation purpose and intended use, statutory requirements, best practice.
Good practice to use multiple methods when appropriate.

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35
Q

What is VPGA 2 and what does it cover?

A

Valuations for secured lending
Gives guidance on dealing with conflicts and reporting procedures

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36
Q

Under VPGA 2 , what is previous involvement?

A

Usually involvement with the borrower or property in the last 2 years, but can be longer in some cases.

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37
Q

What are examples of conflicts under VPGA 2?

A
  1. Longstanding relationship with the borrower
  2. Valuer will receive a fee for introduction to the lender
  3. Valuer has a financial interest in the property
  4. Valuer retained to act in the disposal or letting of the property
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38
Q

Under VPGA 2 , if a conflict is managed, what must be done?

A

The conflict and the management arrangements must be recorded in writing in the TOE and report

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39
Q

Under VPGA 2, what additional information needs to be reported in a loan security valuation?

A
  1. COI and arrangements in place to manage
  2. Valuation methodology, supported by calculations if appropriate
  3. Recent transaction price OR statement that there is no recent price, and the extent to which this has been adopted as market value
  4. Environmental considerations
  5. Comment on suitability for secured lending purposes
  6. Any other factors or circumstances which could affect price or conflict with the definition of MV or underlying assumptions
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40
Q

Under VPGA 2, when a loan security valuation uses a SA, what needs to be included in the report?

A

Comment on any material differences between MV and the value reported using the SA

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41
Q

What does VPGA 2 say about sustainability?

A

Sustainability and ESG factors can have significant market influence and loan security valuations should have appropriate regard to their relevant to the particular assignment.

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42
Q

What is VPGA 4 and what does it cover?

A

Trade related valuations

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43
Q

What is VPGA 8 and what does it cover?

A

Valuation of real property interests - covers inspection and investigations, with a particular focus on ESG and sustainability
Identifies need to consider direct and indirect valuation factors and physical and transition risks.

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44
Q

Under VPGA 8, what sustainability factors might a valuer consider?

A
  1. ESG matters - including climate change and resilience
  2. configuration and design - including ‘wellness’
  3. accessibility and adaptability - including disabled use
  4. Carbon emissions, energy efficiency, building intelligence, other costs in use
  5. Fiscal considerations
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45
Q

What is VPGA 10 and what does it cover?

A

Matters that give rise to material uncertainty.
Key is that reports should not be misleading, must detail risk surrounding valuation of the asset, standard caveat shouldn’t be used.

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46
Q

What is PS1?

A

Compliance with the Red Book

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47
Q

Under PS1, what are the 5 situations where a valuation doesn’t need to be Red Book compliant?

A
  1. Negotiation or litigation
  2. Statutory function (other than statutory tax return)
  3. Internal purposes (without liability or third party)
  4. Agency or brokerage work
  5. Expert witness work
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48
Q

What is PS2 and what does it cover?

A

Ethics, Competency, Objectivity and Disclosures
1. Must act in accordance with the RICS Rules of Conduct
2. Valuer and firm must act objectively, including applying ‘professional scepticism’ to info and data
3. Gives detailed guidance on conflict
4. TOE - Members must understand client requirements and comply with minimum TOE

49
Q

How many UK VPGAs are there?

A

10

50
Q

What is the Global Standards (UK National Supplement)?

A

Augments global Red Book and provides specific guidance for valuations undertaken under UK jurisdiction

51
Q

What does UK VPS3 cover?

A

Regulated purpose valuations - for third parties who haven’t comissioned e.g. financial reporting, stock exchange listings, unregulated trusts

52
Q

What are the requirements for regulated purpose valuations under VPS3?

A
  • Annual declaration including length of time valuer has acted for the client and % of fee income from regulated purpose vals
  • Valuers should be rotated if asset valued regularly, RICS recommends 7 years
  • If a property is purchased by a firm, or an introductory purchase fee accepted, the firm can’t value for regulated purposes for 1 year
53
Q

What are the three kinds of conflict?

A
  1. Party Conflict - e.g. acting for both sides in the same/ a related transaction
  2. Personal conflict
  3. Confidential information conflict
54
Q

What are the stages of managing a conflict?

A
  1. Avoidance - do you need to decline instruction
  2. Written advice - seek informed consent, information needs to be fully explained and understood, including advising the parties to seek independent advice when relevant, explain how it will be managed and seek consent for this
  3. Management - information barrier, must be robust, if different surveyors ideally they should be physically separated, keep a clear audit trail, managed by compliance officer
55
Q

What is the GN on comparable evidence?

A

Comparable Evidence in Real Estate 2019

56
Q

What are the 3 categories of evidence in GN: Comparable Evidence in Real Estate 2019?

A

Cat A - Direct evidence - recent transactions, under offer, asking prices
Cat B - General Market data - e.g. databases, indices, historic evidence, supply and demand data
Cat C - Other - other locations, background info such as interest rates

57
Q

What does GN: Comparable Evidence in Real Estate 2019 say you should do when limited evidence is available?

A
  • Look further afield
  • Consider a wider range of evidence, including indirect evidence such as market data
  • May be necessary to include a statement uncertainty - as required under VPS 3.
58
Q

Why might there be limited comparable evidence?

A
  1. Inactive market
  2. Rapidly changing market - meaning evidence goes out of date quickly
  3. Unusual property
  4. Lack of transparency in the market
59
Q

What is a yield and what does it show?

A

Shows a relationship between income and price - income/ price - indicative of return and growth.

60
Q

How do you calculate Years Purchase?

A

YP = 100/ yield

61
Q

What does YP show?

A

Years to repay the purchase price

62
Q

What is meant by implicit model of valuation?

A

Implicit methods use market data to derive a yield to apply to a rent - income and capital growth is ‘implied’ in the yield, rather than explicitly stated - e.g. a higher yield can be used to reflect a lack of predicted growth.

63
Q

When is term and reversion used?

A

For ‘reversionary’ properties - under-rented.

64
Q

When is hardcore used?

A

For over-rented properties

65
Q

What are prime yields for offices?

A
  • City 5%
  • West end core 3.5%
  • Regional single let 5.75%
  • Regional multi let 6.5-7%
66
Q

What are prime yields for retail?

A
  • 6.75% prime towns
  • 7% regional
  • 9% secondary locations
67
Q

What are prime areas for industrial?

A
  • prime distribution 5.25%
  • secondary 5.5-5.75%
  • south east estates 5%
  • secondary estates 6.5-7%
68
Q

What factors need to be considered in yield?

A
  1. Rental and capital growth
  2. Quality of location and covenant
  3. Use
  4. Lease Terms
  5. Obsolescence
  6. Security of income
  7. Liquidity
69
Q

What is a true yield?

A

Assumes rent paid quarterly in advance, nominal assumes paid annually in arrears

70
Q

What is a nominal yield?

A

Assumes paid annually in arrears, true assumes rent paid quarterly in advance

71
Q

What is mirror zoning?

A

Used for shops with two main frontages

72
Q

What is natural zoning?

A

Reflecting the shape of the building e.g. zone boundaries based on steps etc

73
Q

What is masking?

A

Valuation of hidden/ obscured areas

74
Q

How would you read a D&B check?

A

1 Financial strength indicator (5A-H) - showing tangible net worth, may also show N (negative), O (undetermined), 5A means over £35m net worth
2. Risk indicator (1-4) based on probability of failure - considers parent company risk, fraudulent activity, failure events, 1 means minimal risk

75
Q

What method is DCF?

A

Form of investment method

76
Q

What is the difference between a growth implicit and growth explicit method?

A

Growth implicit = rental and capital value considered in yield adopted, explicit = growth assumptions separated out

77
Q

How does DCF work?

A

Cash flows are projected forward and then discounted back using rates reflecting perceived risk

78
Q

In a DCF, what is Net Present Value?

A

Sum of discounted cash flows - positive NPV means the investment has exceeded its target

79
Q

In a DCF, what is Internal Rate of Return?

A

Rate of return for future cash flows to produce an NPV of 0

80
Q

How does the profits method work?

A

Annual turnover
- costs and purchases = gross profit
- reasonable working expenses = unadjusted net profit
- operator’s remuneration = unadjusted net profit/ FMOP - can also be expressed as EBITDA
This is then capitalised at an appropriate yield and sense checked

81
Q

What is FMOP?

A

Fair Maintainable Operating Profit, a profit measure

82
Q

What were the key recommendations of the Pereira Gray Review?

A
  1. Separation of valuation and advisory activities within a firm
  2. Rotation process for valuers
  3. Valuation compliance officer
  4. DCF as the main investment valuation model
  5. Continued focus on inclusion etc
83
Q

What is the key RICS guidance on ESG?

A

GN - Sustainability and ESG 2021 - provides a glossary of terms and definitions, relevant considerations and risks and how to reflect these within valuation

84
Q

What is an acceptable error margin?

A

Depends on the asset - range of case law suggesting 10%, but can be 5% for a residential property and 15% on an unusual asset

85
Q

What is hope value?

A

Potential future value based on the possibility of future development or marriage value

86
Q

What is a charities act valuation?

A

Under 2011 Charities Act, valuation required prior to sale or purchase to advise the Trust as to whether the charity has achieved the best possible price for any given property asset

87
Q

Which RICS guidance addresses charities act valuations?

A

Valuer must follow the guidance of uk VPGA 8 and must comment if the sale/ purchase is within the best interest of the charity.

88
Q

What are the current SDLT rates for resi?

A

None under £250,000, then 5% to £925,000, then 10% to £1.5m, then 12%

89
Q

What are the current SDLT rates for commercial?

A

None under £150,000, then 2% to £250,000, then 5%

90
Q

What is ATED?

A

Annual Tax on Enveloped Dwellings’ - taxes companies holding residential property worth over £500,000, this prevents individuals avoiding stamp duty using companies

91
Q

When is SDLT paid?

A

By the purchaser when land/ buildings are transferred

91
Q

How is SDLT on the grant of a new lease calculated?

A

NPV of the property over the term of the lease, discounted based on RPI, HMRC has a calculator

91
Q

When are BCIS values used in a valuation report?

A

For insurance purposes only - not a written opinion of value

91
Q

What is a special buyer?

A

A buyer to whom an asset has a ‘special value’ e.g. also own adjoining property. This is not an arms length transaction

92
Q

When valuing a long leasehold interest, what is meant by a wasting asset?

A

An asset which is losing value - e.g. leasehold is getting shorter

92
Q

When valuing a long leasehold interest, what is net rental income?

A

Rent received - ground rent

92
Q

Why might you not use a sinking fund when valuing a long leasehold interest?

A

In practice, leaseholders don’t always use sinking funds, difficult to determine the value of a sinking fund.

92
Q

What is a sinking fund?

A

A fund formed by periodically setting aside money for the replacement of a wasting asset.

93
Q

How would you value a long leasehold interest?

A

Can adjust a leasehold interest based on freehold interests by factoring in a sinking fund - explicit - or factor into yield implicitly

93
Q

When might a premium be paid?

A

By an incoming tenant for fit-out and fittings, profit rent premium

93
Q

What is profit rent?

A

When a leaseholder is paying less than the market rent, for example if a lease is assigned

93
Q

What are typical purchasers costs (inc. typical percentages)?

A

Acquisition fees - 1.00%
Legal Fees - 0.50%
SDLT - current rate, depending on asset value

94
Q

What are the three methods of calculating net effective rent and when might you use them?

A
  1. Straight line - ammortised over term - used for ERV
  2. Straight line using time value of money by using a yield - used for cap val
  3. DCF - used for cap val of more complex assets
95
Q

What is a ransom strip?

A

Land controlling access to another piece of land

96
Q

What does case law suggest about the value of a ransom strip?

A

Can be 15-50% of development value unlocked by inclusion of the ransom strip in the scheme

97
Q

How big is a typical zone?

A

6.1 m/ 20 ft

98
Q

What zones are used on some prime streets e.g. bond street?

A

9.14 m/ 30 ft

99
Q

What act governs party wall disputes?

A

Party Wall Act 1966 - provides dispute resolution framework, provides owner who wishes to carry out works to the wall with additional rights, they must inform the other owners of their intention

100
Q

What is the valuer registration scheme?

A

Regulatory monitoring scheme for those carrying out red book valuations

101
Q

When was the valuer registration scheme introduced?

A

October 2011

102
Q

What were the aims of the valuer registration scheme?

A
  1. To improve valuation quality and ensure professional standards
  2. To meet RICS self-regulation requirements
  3. To protect and raise the status of the valuation profession
103
Q

What information is needed to register for the valuer registration scheme?

A

Type of valuations, purpose of valuations, number of valuations, income from red book valuations, quality assurance audit procedures, history of neligence claims

104
Q

How does the RICS monitor valuers on the valuer registration scheme?

A

Through the annual return, but also desktop and site based (regulatory review visit) depending on risk, can be removed from the scheme

105
Q

What are likely changes in the new Red Book?

A
  • New chapter on inventory (IVS 230)- part of intangible asset standards - includes raw materials and finished goods from production processes
  • Enlarged and updated glossary
  • Real Property (IVS 400) - additional clarification that this chapter inc agricultural land and now incorporates unregistered and communal land
106
Q

What does the Red Book provide?

A

Framework for uniformity and best practice in the execution and delivery of valuations and valuation reports. Covers processes, procedures and ethical standards.

107
Q

What does VPGA 4 cover?

A

Valuation of trade-related properties

108
Q

What is YP Perp? When would you use it? How would you calculate it?

A

Years Purchase into Perpetuity is the valueof £1 forever, at an assumed rate of interest
I would use it calculate the value of a reversion, or single/ equivalent yield.
YP perp = 1/ yield (as a decimal)
I would then multiple this by the assumed annual income to calculate the value of the reversion

109
Q

What is YP Term? When would you use it? How would you calculate it?

A

Years Purchase to term is the amount £1 will accumulate over a set number of years, at a sent rate of interest.
I would use it to calculate e.g. the term on a term and reversion calculation, or the top-slice/ layer in the hardcore approach
YP term = (1/PV)/i
PV = 1/((1+i)^n) = the future value of £1 discounted back at an assumed rate of interest over a set number of years

110
Q

What due diligence would you undertake for a Red Book valuation report?

A
  1. Asbestos register
  2. Business rates and council tax
  3. Contamination
  4. Equality Act 2010 compliance
  5. Environmental matters e.g. power lines, electricity sub-stations etc
  6. EPC
  7. Flooding
  8. Fire safety compliance
  9. H&S compliance
  10. Highways
  11. Legal title and tenure
  12. Public rights of way
  13. Planning history and compliance inc. planning conditions, s106/ CILs, conservation
111
Q

When would you use a DCF?

A

When I want to explicitly show cash flow over time:
Short leasehold interests/ properties with complex tenure/ tenancy (e.g. unusual RR pattern)
Phased developments
Alternative and non-standard investments
Over-rented properties
Social housing

112
Q

What are the 5 key areas of due diligence under VPGA 8?

A

VPGA 8 = Valuation of real property interests
- Title - state info relied on and any assumptions
- Condition of buildings - need to clearly state this is not a full building survey
- Services
- Planning
- Sustainability and ESG e.g. flooding, hazardous substances

Valuation (4 decks)

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