Valuation 1 Flashcards
Tell me what the 5 methods of valuation are.
comparable method
profits method
residual method
contractors method
investment method
Tell me about how you would value a building using the profits/ contractors/ investment/ comparable/ residual method of valuation.
Professional Standards-
RICS Global Redbook 2022 and
UK Supplement 2019.
RICS Comparable evidence in Real estate Valuation 2019
RICS Property Measurement 2018
UK valuations for Multi storey, multiple occupation residential buildings with cladding. 2022
Comparable method of valuation- I would inspect and measure a specific property using IPMS 2 residential.
I would record my site note, inspection and measurements and look for comparable properties as similar to the subject as possible that have completed recently.
I would use a property matrix to record my comps and try to get between 3-5 properties.
I would confirm the sale or sold details be calling agents or looking at land registry.
If there were slight differences between comparable I would make adjustments to make the comps similar to the subject. I would apply a hierarchy of evidence,
and rank the best comparable first with the least last.
This would give me valuation figure and I would sense check my findings before issuing my final figure.
How do you decide which valuation method to apply?
Comparable method-
Using comparable data, based on the subject property’s characteristics to assess the value.
Most common method of valuation.
I.e. Mainly residential sales such as Houses.
Provides an estimated market value.
Contractors Method/DRC-
Cost method of valuation for unique properties or developments
E.g. airports, shipbuilding yards, public sector buildings.
The current cost of replacing the asset - deductions for physical deterioration.
Investment/ Income Method-
Determining the market value of a freehold or leasehold property from its potential to generate an income.
Annual Rental income x Yield = Value
There are two types:
Traditional and DCF
Profit Method-
Used for Trade related properties where the value is derived from the business and its potential profitability.
E.g. pubs, restaurants
The method estimates the business’s gross profits and deducts all working expenses.
Residual Method-
Used to value land with development potential.
Residual value= GDV - Total Development costs
When and why would you use one of these methods?
Comparable method-
Using comparable data, based on the subject property’s characteristics to assess the value.
Most common
E.g. Houses, shops
Provides an estimated market value.
Contractors Method-
Cost method of valuation
E.g. airports, shipbuilding yards, public sector buildings.
The current cost of replacing the asset - deductions for physical deterioration.
Investment Method-
Determining the market value of a freehold or leasehold property from its potential to generate an income.
The Future rental income, which discounted back to the present day = Net Present Value
Profit Method-
When no comparable/sales data is available
E.g. pubs, restaurants
The method estimates the business’s gross profits and deducts all working expenses.
Residual Method-
Used to value property with development potential or vacant land.
Residual sum is the value the developer can spend on the property in its undeveloped form.
What is a years purchase multiplier?
Year’s purchase (Y.P.) value is calculated by assuming a suitable rate of interest prevailing in the market.
Used in the investment method of Valuation
Give me an example of a good covenant and how this might impact a valuation.
A covenant is a provision, or promise, contained in a deed to land.
I.e. Maintain the boundaries by erecting a fence. This would have a positive affect on value as its improving the saleability of the property.
What is PI Insurance (PII)?
Professional Indemnity Insurance
Why do surveyors need PII?
Covers the cost of compensating clients for loss or damage resulting from negligent services or advice provided
Tell me about the RICS requirements in relation to PII.
Minimum required PII based on turnover of firm
£100,000 or less = £250,000 minimum cover
£100,001 to £200,000 = £500,000
£200,001+ = £1 million
This should be fully retroactive!
How did the decision in Hart v Large affect PII?
It made surveyors more aware of their PPI requirements and ensured surveyors have adequate cover after they retire.
As well as recommending further investigation where required
What level of PII cover does your firm have?
£200,000+ = £1 million
How would you distinguish limitations on liability in your valuations?
A liability cap limits the amount of damages that can be claimed by a client in the event of loss.
Liability caps must be written explicitly into a firm’s Terms of Engagement and must be reasonable to be enforceable.
Where in your valuation report do you state any limitations on liability?
VPS1- Terms of engagement
VPS3 -p) A statement setting out any limitations on liability that have been agreed
What relevance does Hart v Large have on your valuation practice?
Being clear and advising clients on the survey level and scope of inspection, limitations and caveats
Recommending justifiable further investigation
Considering whether any new information provided after inspecting or reporting affects their original advice, and updating their advice if it is justified to do so
What aspect of Hart v Large allowed the judge to award damages without applying the SAAMCO cap?
The Court found that the Defendant should be responsible for all losses caused by the inadequacy of the advice as he didn’t request (the PCC (Negligent advise)) Whereas if Large did request the PCC it would have fell into the SAAMCO cap (Negligent information).
What is the SAAMCO cap?
Used as a “tool” to determine the difference between losses arising from negligently provided information and losses arising from a transaction itself
Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?
Valuers are not generally liable for additional losses suffered by their clients by market depreciation in the property between the date of the valuation and the date of the claim.
Under the SAAMCO cap, is a valuer’s liability usually limited to the overvaluation on the valuation date?
Yes.
What would you do if you received a notice of a PII claim from a client or their solicitor?
Notify insurer immediately. Send a copy of the letter, unanswered, to your firm’s broker or insurers .
Await further instructions before answering or entering into discussions.
It can be helpful to send your firm’s insurer a draft of what you might want to say to the client, seeking their approval.
Is there a difference between being negligent when undertaking a survey/valuation and providing negligent advice?
Hart v Large (Duty Of Care)
Not recommending further investigation when it should have been whereas negligent advice is giving poor or inaccurate advice when your are expected to give a professional level of service.
What is run off cover?
Run-off cover is a form of PII that protects firms or members against claims after they cease trading.
It must have at least £1m cover and last for 6 years from ceasing practice.
What is the Red Book?
Red Book 2022 is a mandatory professional standards for RICS Valuers when undertaking valuations.
Why does the Red Book exist?
To ensure Consistency, objectivity and transparency amongst all RICS valuers worldwide to deliver a better report for our clients.
Tell me about a factor which may impact value.
Home size
Location.
Age and condition
Economic factors.
What is your duty of care as a surveyor when undertaking a valuation?
Provide the highest levels of assurance to promote and maintain public trust in valuation professionalism and quality.
To whom do you owe this duty of care?
Clients or third parties.
Why is independence and objectivity important when valuing?
Promote and maintain a high level of public trust
Rules of conduct 2022
Is there a separate UK Red Book?
What is the UK valuation guidance called?
UK National Supplement 2019
Why does the UK guidance exist?
To provide advice on specific requirements and supporting guidance on the application of the global Red Book to UK valuation work.
When was the Red Book last updated?
January 2022.
What changes were made?
IVS 101 Scope of Work - Valuers preparing valuations for their own employers are now referred to as ‘employed valuers’. Valuers preparing valuations for a third-party client are called ‘engaged valuers’.
IVS 104 Bases of Value - A section on ‘allocation of value’ has been added.
IVS 105 Valuation Approaches and Methods - wording has been reinstated to clarify that market, income and cost approaches are not exclusive and may be used in any combination.
IVS 400 Real Property Interests - the Introduction has been amended to provide additional clarification of what this standard covers, including the valuation of agricultural land and unregistered land.
Which do you follow - the latest IVS or the Red Book Global?
The Red Book Global Standards 2022 however, these are in line with the International Valuation Standards.
Which sections of the Red Book are mandatory and which are advisory?
Mandatory
PS1 -PS2
VPS1-5
Guidance
VPGA 1-10
What does PS1-2/VPS1-5/VPGAs relate to?
PS 1 – Compliance with standards where a written valuation is provided
PS 2 – Ethics, competency, objectivity and disclosures.
VPS 1 – Terms of engagement (scope of work)
VPS 2 – Inspections, investigations and records
VPS 3 – Valuation reports
VPS 4 – Bases of value, assumptions and special assumptions
VPS 5 – Valuation approaches and methods.
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.
What type of advice does the Red Book cover?
Global professional and ethical standards, Valuation, technical and performance standards.
Provide further implementation guidance.
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
it is essential that the preliminary or provisional status is made clear, pending issue of the formal and final report, and this should be written in the report and term of engagement.
What type of valuations might be relied upon by a third party?
Valuation of an asset:
Published financial statement
Stock exchange, or similar body
Publication, prospectus or circular
Investment schemes, which may take a number of forms in individual jurisdictions
Takeovers or mergers.
Tell me what the definition of MR/MV/investment value/fair value?
Market Rent- The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
Market Value-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 and where the parties had each acted knowledgeably, prudently and without compulsion
Investment Value- The value of an asset to the owner or a prospective owner for individual investment or operational objectives
Fair Value- 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.’
What is the difference between an assumption and a special assumption?
An assumption is believed to be true (i.e. assumed to be connected to all mains services).
A special assumption is an an assumption which is untrue at the time of valuation. (I.e. The property has planning permission when it hadn’t been granted at the time of inspection).
What sources of information would you consider when preparing a valuation report?
Inspection and Measurement of property along with accurate notes and stored correctly.
Basis of Value
Assumptions and Special assumptions
Sustainability and ESG
Sold prices
Market Data
Agent Details
EPC
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
A statement should be made in the terms of engagement and in the report if there has been previous involvement in the asset being valued.
If your firm is too small to have a rotation policy or valuation panel, what
else can you do to ensure objectivity?
Arrangement for the valuation to be periodically reviewed at intervals not greater than seven years by another member, who would assist in demonstrating that the member is taking steps to ensure that objectivity is maintained and thus may retain the confidence of those relying on the valuation.
When might a conflict of interest exist in relation to a valuation instruction?
If a member has valued the asset for the same purpose, or has been involved with the purchase of the same asset for the client either within the period of 12 months
preceding the valuation date
What must be included in your terms of engagement / valuation report?
The firm’s policy on the rotation of the
valuer responsible for the valuation.
A statement of the length of time the
valuer has continuously been the signatory to valuations provided to the client for the
same purpose as the report and, in addition, the length of time the valuer’s firm has continuously been carrying out the valuation instruction for the client.
Where is this covered in the Red Book?
PS2 - Section 5.6
What is a restricted valuation service and can you provide one?
A restricted Valuation could be a valuation in a very short time frame where it might not be possible to establish all the facts.
Yes, you can provide a valuation, as long as you discuss the issues and limitations with the client before accepting. A restricted service will also include any limitations on assumptions made in accordance with VPS 2.
How do you deal with limitations on inspection or analysis?
Any limitations or restrictions on the inspection, must be identified and recorded in the terms of engagement and also in the report.
Can you revalue a property without inspecting?
No, unless the valuer is satisfied that there have been no material changes to the physical attributes of the property, or the nature of its location, since the last assignment.
What RICS guidance relates to the use of comparable evidence?
RICS Comparable Evidence In Real estate 2019
What is an internal valuer?
A valuer who is in the employ of either the enterprise that owns the assets, or the accounting firm responsible for preparing the enterprise’s financial records and/or reports.
Can an external valuer provide an internal purposes valuation?
An external valuer can provide an ‘internal purposes’ valuation, but it has to be, in the
terms of engagement and written advice to be absolutely clear about non-disclosure to third parties, and about the exclusion of liability
What happens if market conditions change between the valuation date and report date?
It may be appropriate for the valuer to draw the client’s attention to the fact that values
change over time and a valuation given on a particular date may not be valid on an earlier or later date.
Is special value from a special purchaser reflected in MV?
No, As Market Value is the price that would most likely be achievable for an asset across a wide range of circumstances and not for a special purchaser.
Where does the definition of fair value come from?
International Accounting Standards Board
(IASB)
Does this differ from MV?
(international Financial Reporting Standards)IFRS 13- no difference between
them in terms of the valuation figure reported.
When is fair value used?
Where the entity has adopted IFRS, the basis of value will be fair value and IFRS 13 Fair Value Measurement will apply.
What are the 3 approaches under VPS5?
Market Approach
Cost Approah
Income Approach
What is the Valuer Registration Scheme?
Monitors all registered RICS members who carry out valuations within the scope of RICS Valuation Standards “Red Book” in order to ensure consistent standards.
Are there any instances where certain sections of the Red Book may not apply?
Yes, but only 5 in relation to VPS1-5:
(ALIES)
1. Agency advice
2. Litigation Purposes
3. Internal Purposes
4. Acting as Expert witness
5.Performing Statutory Functions
What are these and which sections don’t apply?
The mandatory application of VPS 1 to VPS 5 would not be appropriate, If they are providing an agency service in respect of the purchase or sale of one or more assets and advice given in the process. I.e. Real estate.
What is the basis of value under UK GAAP(General Accepted Accounting Practise) FRS 102?
Fair Value
What is a SORP?
Statements of Recommended Practice (SORP)
are developed in the public interest and set out current best accounting practice.
When would you use EUV?
EUV (Existing Use Value)- measures the value that a property has for the operational business function being delivered from it at the valuation date, with the assumption that the business function will continue irrespective of who the future owner is.
What is the definition of EUV?
Existing Use Value
What additional criteria apply to secured lending valuations?
VPGA 2- Valuation of Interest for Secured Lending
PS1-2
VPS1-5
Plus:
Material Impact of Valuation Uncertainty
BCIS
Treatment of Incentives
What information should you specifically request for a secured lending valuation?
Terms of engagement must incorporate the minimum requirements of VPS 1 paragraph 3.1.
-Any special assumptions
-Any recent transaction or agreed price on any of the property to be valued.
-Terms of the lending facilities.
-All relevant disclosures.
What is a regulated purpose valuation?
A set of valuation purposes defined by RICS upon which third parties or the public rely
What additional disclosures must be made for a regulated purpose valuation?
a) in relation to the firm’s preceding financial year the proportion of the total fees, if any, payable by the client to the total fee income of the valuer’s firm expressed as either less than 5% or, if more than 5%, an indication of the proportion within a range of 5 percentage points and
b) where, since the end of the last financial year, it is anticipated that there will be a material increase in the proportion of the fees payable, or likely to be payable, by the client, the valuer must include a further statement to that effect, in addition to (a).
What is the basis of value for a statutory valuation?
Market Value
What might a statutory valuation relate to?
Charities and trusties
What is the definition of the statutory basis of valuation?
Market value or Market rent
Is this the same for all statutory valuations?
No, i.e. Where they have the benefit of certain tax exemptions or is a special purchaser.
What is a yield?
Income on an investment over a period of time.
What is a Net Initial Yield?
Net initial yield represents the income return in investment.
i.e. Net annual income / Total costs = Net Yield
Total costs - purchase, repairs, etc.
What is a reversionary yield?
Reversionary Yield is the anticipated yield, which the initial yield will be once the rent reaches the ERV (estimated rental value) and when the property is fully let.
What is an equated yield?
The equated yield is the yield on a property investment which takes into account growth in future income.
What is an equivalent yield?
The weighted average of the Net Initial Yield and Reversionary Yield and represents the return a property will produce based upon the timing of the income received.
How would a yield reported from auction differ from a Net Initial Yield?
Net Yield is the (rental) return of the property but taking into account the costs involved in buying and owning the property whereas, Gross yield is a basic calculation of the expected return on investment.
What purchaser’s costs do you deduct from a valuation?
All out-of-pocket costs and expenses incurred by Purchaser:
SDLT
Solicitors.
Legal fees.
Survey fees.
Mortgage fees.
When do you deduct purchaser’s costs from a valuation?
When Calculating the Net Yield.
How would you value a property in uncertain market conditions - does the Red Book give any guidance?
Where material uncertainty exists, it will normally be expressed in qualitative terms,
indicating the valuer’s confidence in the valuation opinion offered by use of a suitable form of words.
Must comment on, any issues resulting in material uncertainty in the valuation as at the specified valuation date.
Agree a special assumption with the client in Terms of Engagement.
How could you value a long leasehold interest?
Investment value basis-
Leasehold Relativity Model.
How does a term and reversion differ to a DCF?
Discounted Cashflow - used to determine the value of an investment based on its return in the future.
Term and Reversion- used to value real estate projects with specific lease structures.
What is the difference between a growth explicit and a growth implicit yield?
Implicit models reflect any expectation in the growth of market rents or capital value in the yield.
Explicit models on the other hand allow for any growth expectation in the cash flow and discount this at a required rate of return, which is usually higher.
