Vals Flashcards
What are the five methods of valuation?
Comparable method
Investment method
Profits method
Residual method
Depreciated replacement cost method
What is an internal valuer?
“Employed by a company to value their assets
Valuation for internal use only
No third-party reliance”
What is an external valuer?
Has no material links with the asset to be valued or the client
“What are the THREE steps you should undertake
prior to commencing a valuation?”
“CCT:
Competence - check you have the correct level of skills, understanding and knowledge
Conflict of Interest - check you are able to act independently on the instruction
Terms of engagement - issue to the client and receive written confirmation”
“Why do you undertake statutory due diligence for
valuations?”
Confirm that there are no material matters which could impact on the valuation
“What types of statutory due diligence checks would you undertake when valuing a property?”
“Asbestos register
Business rates / Council tax
Contamination
Equality Act Compliance
Environmental matters (high voltage power lines,
electricity sub-stations, telecoms masts etc.)
EPC rating if available
Flooding
Fire safety compliance
Health and safety compliance
Highways (check roads adopted with the local highways agency)
Legal title and tenure (check boundaries,
ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves)
Public rights of way (from an OS sheet)
Planning history and compliance (check any onerous planning conditions, whether the property is in a conservation area / listed and subject to a s. 106 agreement or CIL)”
“What are the THREE valuation approaches set out in IVS 105?”
“Income approach - converting current and future cash flows into a capital value
Cost approach - reference to the cost of the asset whether by purchase or construction
Market approach - using available comparable evidence”
“What are the SIX steps used when collecting
comparable evidence?”
1) Search and select comparables (agent’s boards, online databases)
2) Confirm / verify information with a party directly involved in the transaction
3) Assemble comparables in a schedule
4) Interpret comparables using hierarchy of evidence
5) Analyse comaprables to form an opinion of value
6) Report value and prepare file note”
What guidance did the RICS recently release on
using comparable evidence?”
“RICS Comparable evidence in real estate
valuation, 2019”
“What are the THREE categories of evidence outlined in RICS Comparable evidence in real estate valuation, 2019?”
“Category A: direct comparables
Category B: general market data
Category C: other sources”
What is the hierarchy of direct comparable evidence outlined in the RICS Comparable evidence in real estate valuation, 2019?
Contemporary, completed transactions of near-identical properties for which full and accurate information is available (may include the subject property)
Contemporary, completed transactions of other, similar real estate assets for which full and accurate information is available
Contemporary, completed transactions of similar real estate for which full data may not be available
Similar real estate being marketed where offers have been made but a binding contract has not been completed
Asking prices (with careful analysis)”
What is the hierarchy of other sources outlined in the RICS Comparable evidence in real estate valuation, 2019?”
“Transactional evidence from other real estate type and locations
Other background data (e.g. interest rates, stock market movement and returns which can given an indication for real estate yields)”
“When would you use the investment method of
valuation?”
Used when there is an income stream to value
“How does the conventional investment method
work?”
Rent received (or Market Rent) x Years Purchase = Market Value. Assumes growth implicit valuation approach”
“When would you use a Term and Reversion method?
How does it work?”
“Used for reversionary investments i.e. where Market Rent is more than passing rent
Term capitalised until next rent review / lease expiry at an initial yield
Reversion to Market Rent valued into perpetuity at reversionary yield”
“When would you use the Layer / Hardcore method?
How does it work?”
“Used for over-rented investment i.e. where passing rent is more than Market Rent
Income flow divided horizontally
Bottom slice = Market Rent
Top slice = passing rent - Market rent until the next lease event
Higher yield applied to the top slice to reflect additional risk
Different yields used depending on comparable investment evidence and relative risk”
What is a yield?
“Measure of investment return, expressed as a percentage of capital invested
Calculated as income divided by price x 100”
“How would you calculate Years Purchase?
What does this show?”
“Divide 100 by the yield
* Number of years required for the income to repay the purchase price”
“What factors would you considering when
determining a yield?”
“Prospects for rental and capital growth
Quality of location and covenant
Use of the property
Lease terms
Obsolescence
Voids
Security and regularity of income
Liquidity”
What is an All Risks yield?
Yield which encompasses all the prospects and risks attached to a particular investment
What is a True yield?
Assumed rent is paid in advance (traditional valuation practice assumes rent is paid in arrears)
What is a Nominal yield?
Initial yield assuming rent is paid in arrears
What is a Gross yield?
Yield based on the net purchase price (i.e. not adjusted for purchasers’ costs)
What is a Net yield?
Yield based on the gross purchase price (i.e adjusted for purchasers’ costs)
What is an Equivalent yield?
Average time weighted yield reversionary property is valued using an initial and reversionary yield
What is an Initial yield?
Simple income yield for current income and current price
What is a Reversionary yield?
Market Rent divided by current price on an investment that is under rented
What is a Running yield?
Yield at one moment in time
“When would you use the profits method of
valuation?”
Used for the valuation of trade related property where the value of the property is directly linked to the profit generated by the business e.g. pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure, healthcare properties and care homes
“What do you require to conduct the profits method of valuation?”
Accurate and audited accounts for 3 years
“How would you use the profits method of valuation to value a new business?”
Use estimates / business plan
What is the methodology for the profits method of
valuation?”
EBITDA (earnings before interest, taxation, depreciation and amortisation) is capitalised at an appropriate yield
How should you verify a value obtained using the
profits method of valuation?”
Cross check with comparable sales evidence if possible
When would you use the depreciated replacement cost method of valuation?
Where direct market evidence is limited or not available for specialised properties e.g. sewage works, lighthouses, oil refineries, docks, schools, submarine base etc.
What is the purpose of the depreciated replacement cost method of valuation?
Used for owner-occupied properties
For accounts purposes for specialist properties
For rating valuations of specialist properties”
What are the TWO steps of the depreciated replacement cost method of valuation?
“Value land in its existing use (assume planning permission exists)
Add current cost of replacing the building plus fees (used BCIS). Then make a discount for depreciation and obsolesce / deterioration”
“How do you estimate the amount to depreciate the property by when using the depreciated replacement cost method of valuation?”
“Physical obsolescence - result of deterioration / wear and tear over the years
Functional obsolescence - where the design or specification of the asset no longer fulfils the function for what it was originally designed
Economic obsolescence - due to changing market conditions for the use of the asset”
Are valuations using the depreciated replacement cost method of valuation Red Book Global compliant?
“Not suitable to be used for valuations for secured lending purposes
Can only be used for the calculation of Market Value for specialised properties for valuations for financial statements”
“When reporting a valuation carried out using the
depreciated replacement cost method, what must the valuer state with regards to alternative use?”
“If higher, the valuer must state the Market Value for any readily identifiable alternative use
If appropriate, they must state that the Market Value must be materially lower on cessation of the business”
“What guidance has the RICS produced on the
depreciated replacement cost method of valuation?”
RICS Depreciated replacement cost method of valuation for financial reporting, 2018
When did the new RICS Valuation - Global Standards become effective as of?
31st January 2022
What are the SIX parts of the RICS Valuation - Global Standards (“Red Book Global”)?
1) Introduction
2) Glossary
3) Professional Standards (PS)
4) Valuation technical and performance standards (VPS)
5) Valuation applications (VPGA)
6) The International Valuation Standard (IVS)”
“What are the material changes that have been
included in the Red Book Global?”
“PS1: “Written” means any valuation conveyed by paper, any electronic or digital means or in the form of recorded media. This could include the output of valuation software e.g. an AVM
PS2: Reinforces that valuers must apply independence and objectivity to their work and “professional scepticism” when reviewing information and data
VPS3: Valuation reports must clearly state the valuation approach and relevant reasoning which led to their findings. Where appropriate, sustainability and environmental matters should form an integral part of the valuation approach
VPS5: Reinforcement of the obligation to ensure that the valuation model is appropriate for the basis of value, that this is recorded and the model’s assumptions are understood (as per new IVS 105)
IVS 410: requirement for valuers of development property to apply a minimum of two method of valuation”
What does PS1 of the Red Book Global cover?
Requirements on when a valuation has to be Red Book Global Complaint
“What are the FIVE exceptions, where a valuation
does not have to be Red Book Global compliant?”
“Advice is provided in preparation for, or during the course of negotiations or litigation
Statutory function except for the provision of a valuation for inclusion in a statutory return to a tax authority
Internal purposes, without liability and not communicated to any third party
Agency and brokerage work in anticipation of receiving instructions to dispose of or acquire and asset (except where a purchase report is required which includes a valuation)
Expert witness”
What does PS2 of the Global Red Book cover?
Ethics, competency, objectivity and disclosures
“What does PS2 of the Global Red Book state with
regards to Professional and Ethical Standards?”
All members undertaking valuations must act in accordance with the RICS Global Professional and Ethical Standards, 2015 and be bound by the RICS Rules of Conduct, 2007 (as amended)
“What does PS2 of the Global Red Book state with
regards to independence, objectivity and the identification and management of conflicts of interest?”
“Valuers and firms must act objectively and independently
Should apply “professional scepticism” when reviewing information and data before relying on it
Identify and manage conflicts of interest”
“What does PS2 of the Global Red Book state with
regards to Terms of Engagement?”
“Members must understand the client’s requirements and comply with the minimum terms of engagement
Members must be able to demonstrate professional competence”
“What is the hierarchy of evidence for establishing
Market Rent?”
1) Open market lettings
2) Lease renewals
3) Rent reviews
4) Third party determinations
5) Sale and leasebacks
6) Inter-company transactions”
What does VPS 1 of the Red Book Global cover?
Minimum matters that must be confirmed in writing to the client prior to commencing a valuation
According to VPS 1, what matters must be confirmed in writing to client prior to the commencement of valuation?
” Identification and status of the valuer
b. Identification of the client
c. Identification of any other intended users
d. The asset to be valued
e. Currency
f. Purpose of the valuation
g. Basis of value
h. Valuation date
i. Extent of investigation
j. Nature and source of the information to be relied upon
k. Assumptions and special assumptions to be made
l. Format of the report
m. Restrictions for use, distribution and publication
n. Confirmation of the Red Book Global / IVS compliance
o. Fee basis
p. Complaints handling procedure to be made available
q. Statement that the valuation may be subject to compliance by the RICS
r. Limitation on liability agreed”
“What is an Assumption, as defined in the Red Book Global?”
Supposition taken to be true and accepted as fact without the need for specific investigation
“What is a Special Assumption, as defined in the
Red Book Global?”
Supposition taken to be true and accepted as fact, even though it is not true
What does VPS 2 of the Red Book Global cover?
Inspections, Investigations and Records
“According to VPS 2, what does it state with regards to the necessity to inspect properties?”
Valuers must take the steps to verify the information being relied upon for a valuation to ensure the information if professionally adequate for its purpose
“If a valuer undertakes a desktop valuation, is it still Red Book Global compliant?”
Yes, as long as it does not meet any of the criteria outlined in the PS 1
“When a valuer conducts a valuation on the basis of restricted information or without a physical
inspection, what FOUR factors should they do?”
“Nature of the restriction must be agreed in writing in the Terms of Engagement
Possible valuation implications of the restriction confirmed in writing before the value is reported
Valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
he restriction must be referred to in the report”
“According to VPS 2, is it permitted for a valuer to
conduct a revaluation without re-inspecting the property?”
Must not be undertaken unless the valuer is satisfied that there has been no material changes to the property or nature of its location since its last inspection (this must be confirmed in the Terms of Engagement and in the valuation report)
“What does VPS 2 state with regards to the holding
of records?”
A proper record must be kept of inspections and investigations, and of other key inputs in an appropriate business format
What does VPS 3 of the Red Book Global cover?
Minimum requirements to be stated within a valuation report
According to VPS 3, what are the minimum
requirements to be stated within a valuation report?”
a. Identification and status of the valuer
b. Client and any other intended users
c. Purpose of valuation
d. Identification of the asset to be valued
e. Basis of value
f. Valuation date
g. Extent of investigation
h. Nature & source of information relied upon
i. Assumptions and special assumption
j. Restrictions on use, distribution and publication
k. Instruction undertaken in accordance with IVS standards
l. Valuation approach and reasoning
m. Valuation figure(s)
n. Date of valuation report
o. Comment on market uncertainty
p. Statement setting out any limitations on liability that have been agreed”
“According to VPS 3, is preliminary valuation advice able to be given?”
Can be given but must be marked as a draft, for internal purposes only, which cannot be relied upon and on no account, can it be published or disclosed
According to VPS 3, can a draft report be provided to a client?
“Yes, although the valuer is not to be influenced by the client in any way with respect to the final valuation figure stated in the report
A draft report provided to a client must state that it is a draft and it is subject to the completion of the final report
Any changes made to a preliminary valuation must be noted on file and reasons provided”
What does VPS 4 of the Red Book Global cover?
Basis of Value, Assumptions and Special Assumptions
“What is the definition of Market Value according to VPS 4 of the Red Book Global?”
“The estimated amount for which an asset or liability should exchange
* On the valuation date
* Between a willing buyer and a willing seller
* In an arm’s length transaction
* After proper marketing
* Where the parties had each acted knowledgeably, prudently and without compulsion”
“What is the definition of Market Rent according to
VPS 4 of the Red Book Global?”
“The estimated amount for which an interest in real property should be lease
* On the valuation date
* Between a willing lessor and 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”
“What is the definition of Fair Value (IFRS 13)
according to VPS 4 of the Red Book Global?”
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
When would you be required to report Fair Value?
Used when undertaking valuations for inclusion in financial statements, if the International Financial Reporting Standards have been adopted by the client
“What is the difference between Fair Value and
Market Value?”
“RICS view that Fair Value is generally consistent with the definition of Market Value
Fair value relates to the actual worth of an asset and would be the mutually beneficial value between the buyer and the seller
Market value is the price which the asset will exchange between parties in the market and is influenced by market forces”
“What is the definition of Investment Value
according to VPS 4 of the Red Book Global?”
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives i.e. the measure of worth to reflect the value against the client’s own investment criteria
“What is the definition of Equitable Value (IVS 104)
according to VPS 4 of the Red Book Global?”
“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”
“What is the definition of Liquidation Value
according to VPS 4 of the Red Book Global?”
“Used for a group of assets sold on a piecemeal basis considering the cost of getting the assets into a saleable condition
Not used in the UK”
What does VPS 5 of the Red Book Global cover?
Valuation Approaches and Methods (IVS 105)
“What does VPS 5 of the Global Red Book state with regards to Valuation Approaches and Methods?”
“Valuers are responsible for choosing and justifying their valuation approach and use of model
More than one valuation approach may be appropriate in some cases”
What do the VPGAs in the Red Book Global cover?
Valuation Applications (Valuation Practice Guidance Applications)
What does VPGA 1 of the Red Book Global cover?
Valuation for inclusion in financial accounts
“According to VPGA 1, what must you do when
valuing for inclusion in financial accounts?”
Where the entity has adopted IFRS, the basis of value will be Fair Value
