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PH_APC_2025 > Valuation (1-2) > Flashcards

Valuation (1-2) Flashcards

1
Q

What are the five main methods of property valuation?

A

The five methods are: depreciated replacement cost, profits, investment, residual and comparable methods.

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2
Q

What is the profits method and when is it used?

A

The profits method is used for specialist trade-related properties where value depends on business profitability and trading potential, such as hotels.

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3
Q

What is the investment method and when is it used?

A

The investment method is used when there is an income stream to value, such as rental income.

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4
Q

What is the residual method and when is it used?

A

The residual method is used when there is development potential for the property.

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5
Q

What is the depreciated replacement costs method and when is it used?

A

The DRC method is used as a last resort for specialist properties. The value is based on site cost plus building cost, less depreciation and deterioration (e.g., lighthouses or churches).

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6
Q

What is the comparable method and when is it used?

A

The comparable method is the most common approach, estimating value through analysis and adjustment of recent market transactions of similar properties.

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7
Q

What are the three categories in the hierarchy of evidence?

A

Category A: Direct comparables
Category B: General market data providing guidance
Category C: Other sources offering wider value indication.

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8
Q

What makes the best quality comparable evidence?

A

Sales evidence from the exact property (Land Registry), followed by similar properties nearby, then transactional evidence from properties further afield.

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9
Q

What factors should be considered when evaluating comparable evidence?

A

Location
Date sold
Type of property
Size
Condition
Tenure
Energy efficiency.

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10
Q

What are the four bases of value?

A

Market value
Market rent
Investment value
Fair value.

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11
Q

What are the four types of property sale?

A

Private treaty
Informal tender
Formal tender
Auction.

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12
Q

How do you estimate tenant life expectancy?

A

Using Parry’s tables.

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13
Q

How do you undertake a leasehold valuation?

A

The investment method (term and reversion)

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14
Q

What is the investment method?

A

A way to calculate property value based on income like rent payments

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15
Q

What are the three key steps in the investment method?

A
  1. Analyse current and future income
  2. Convert income streams to total property value
  3. Use yields to calculate present value of future income
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16
Q

What is market value according to IVS 102?

A

The estimated amount for which an asset should exchange between willing buyer and seller, at arm’s length, after proper marketing, where parties acted knowledgeably and without compulsion.

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17
Q

What is market rent according to IVS 102?

A

The estimated amount for which a property should be leased between willing lessor and lessee, on appropriate terms, at arm’s length, after proper marketing, where parties acted knowledgeably and without compulsion.

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18
Q

What is Investment Value?

A

The value of an asset to a particular owner or prospective owner for individual investment or operational objectives

Investment value is how much a property is worth to a specific owner or potential owner, based on their own investment goals or business needs.

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19
Q

What is Fair Value?

A

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. It is primarily used for accounting purposes.

Fair value is the price that someone would get for selling something, or would pay to take over a debt, in a normal business deal between willing participants. This term is mainly used in accounting.

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20
Q

What are the 3 approaches to valuation?

A

Income, cost and market.

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21
Q

What is the Income Approach?

A

Converting current and future cash flows into capital value (investment, residual and profits methods)

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22
Q

What is the Cost Approach?

A

Refers to the cost the asset whether by purchase or construction (DRC method)

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23
Q

What is the market approach in property valuation?

A

Uses comparable evidence available from similar properties to determine value.

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24
Q

RICS Valution - Global Standards Dec 2024 (effective 31 Jan 2025)

What are the main sections of the RICS Red Book?

A

Introduction, glossary, Professional Standards, Valuation Technical and Performance Standards, Valuation Practice Guidance Application and International Valuation Standards.

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25
Q

RICS Valution - Global Standards Dec 2024 (effective 31 Jan 2025)

What is PS 1 in RICS valuation standards?

A

PS 1 covers compliance with standards where a written valuation is provided. It’s mandatory for all RICS members providing written valuations.Compliance with Standards where a written valuation is provided

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26
Q

RICS Valution - Global Standards Dec 2024 (effective 31 Jan 2025)

What does PS2 cover?

A

Ethics, competency, objectivity and disclosures

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27
Q

RICS Valution - Global Standards Dec 2024 (effective 31 Jan 2025)

What is VPS1?

A

Terms of Engagement

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28
Q

RICS Valution - Global Standards Dec 2024 (effective 31 Jan 2025)

What is VPS2?

A

Base of value, assumptions & special assumptions

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29
Q

What is VPS3?

A

Valuation approaches & methods

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30
Q

What is VPS4?

A

Inspections, Investigations & Records

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31
Q

What is VPS5?

A

Valuation models

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32
Q

What is the purpose of the Red Book?

A

To promote and support high standards in valuation delivery worldwide

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33
Q

What is the role of International Valuation Standards?

A

To improve valuations standards globally and maintain cohesiveness for all member bodies

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34
Q

What is a restrictive covenant?

A

A restriction placed over a property that prohibits certain activities from taking place. Found in the title register, it may have been placed by a previous owner.

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35
Q

What is the full name of the Red Book?

A

RICS Valuation – Global Standards 2024

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36
Q

Who is a special purchaser?

A

A particular buyer for whom an asset has special value due to advantages from its ownership that would not be available to other buyers in the market.

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37
Q

What is the RICS Valuation - Global Standards (Red Book)?

A

It’s a comprehensive set of standards that applies to various types of valuations

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38
Q

What are the main types of valuations covered by the Red Book?

A
  • Financial reporting valuations
  • Secured lending valuations
  • Business and business interests valuations
  • Trade related property valuations
  • Plant and equipment valuations (including infrastructure)
  • Intangible asset valuations
  • Arts and antiques valuations
  • Real property interests valuations
  • Portfolio and groups of assets valuations
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39
Q

What guidance does the Red Book provide for these valuation types?

A

Each valuation purpose has specific Valuation Practice Guidance Applications (VPGAs) that provide detailed requirements and best practices for valuers.

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40
Q

Who must comply with PS 1, PS 2, and VPSs?

A

All members of RICS or RICS-regulated firms involved in undertaking or supervising valuation services through written valuation advice.

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41
Q

What is “highest and best use” of an asset?

A

The use that would produce the highest value for an asset from a participant perspective, that is possible, legally permissible, and financially feasible.

42
Q

What factors can affect market rent?

A

Duration of lease, frequency of rent reviews, responsibilities for maintenance, outgoings, and statutory factors in certain countries.

43
Q

What must valuers ensure regarding the basis of value?

A

Valuers must ensure the basis of value is appropriate for and consistent with the purpose of valuation.

44
Q

What are the main bases of value defined in IVS 102?

A

Market value, market rent, investment value (worth), equitable value, synergistic value, and liquidation value.

45
Q

What is special value?

A

An amount that reflects particular attributes of an asset that are only of value to a special purchaser

46
Q

What is synergistic value?

A

Also known as marriage value, it’s the additional value created by combining two or more assets or interests.

47
Q

What must be included in terms of engagement regarding ESG factors?

A

Any requirements relating to the consideration of significant environmental, social and governance (ESG) factors must be included.

48
Q

How should ESG factors be considered in valuations?

A

The valuation must consider potential impact of significant ESG factors on value, to the extent they are reasonably identifiable and quantifiable

49
Q

What happens if using a non-standard basis of value?

A

It must be clearly defined and stated in the report, with attention drawn to the fact that it’s a departure if use is voluntary.

50
Q

What is required for sensitivity analysis in valuation reports?

A

It must be carefully presented so as not to undermine the basis of value adopted.

51
Q

What responsibility does a valuer have regarding basis of value?

A

Ensuring it’s consistent with valuation purpose and appropriate to circumstances, subject to mandatory requirements.

52
Q

Can different bases of value coexist?

A

Yes, bases are not mutually exclusive. Worth to a specific party may match market value despite different assessment criteria.

53
Q

What must be done when using assumptions different from market value?

A

The valuer must clearly distinguish assumptions or special assumptions that differ from those appropriate for market value

54
Q

How should market value reflect market conditions?

A

It must reflect the actual market state and circumstances as of the effective valuation date.

55
Q

What aspects of future value can impact current market value?

A

Prospects of development without current permission and potential synergistic value from future mergers can impact current market value.

56
Q

What must be included in both terms of engagement and report?

A

The basis of value must be reproduced or clearly identified in both documents.

57
Q

What does RICS VRS stand for?

A

RICS Valuer Registration Scheme, which all members must comply with when providing valuations.

58
Q

When can a valuer use other bases of value besides those in the standards?

A

A valuer can use other bases when legitimately instructed, but must set out the definition in full, explain it, and meet PS 1 paragraph 6.3(b) requirements.

59
Q

What role does ‘proper marketing’ play in market value?

A

It’s a key component of market value definition, ensuring the asset has been exposed to the market in the most appropriate manner to achieve the best price.

60
Q

What is meant by ‘arm’s-length transaction’?

A

A transaction between parties who are unconnected and operating freely in the marketplace without any special relationship affecting the price.

61
Q

How should market participants’ perspective be considered?

A

Valuers must reflect the views and criteria that would be used by market participants at large, not just specific parties.

62
Q

What makes a basis of value ‘ambiguous or misleading’?

A

Using an unrecognised or bespoke basis without good reason could make the valuation report ambiguous or misleading, breaching VPS 6 section 1.

63
Q

How should changes in asset circumstances be handled in market value?

A

If market participants would factor in expected future changes, these expectations should be reflected in the market value, even if the changes haven’t occurred yet.

64
Q

What is the relationship between market value and special assumptions?

A

The impact on value from special assumptions should not be confused with additional value that might be attributed by a special purchaser.

65
Q

How does ‘without compulsion’ affect market value?

A

It ensures the value reflects willing participants acting freely, without pressure or force to buy or sell.

66
Q

What makes lease terms ‘appropriate’ in market rent valuation?

A

They should normally reflect current market practice in the property’s location, though unusual terms may sometimes be needed for specific purposes.

67
Q

What is an Assumption in valuation?

A

A supposition taken to be true without verification during the valuation process, involving facts, conditions, or situations affecting the subject.

68
Q

What is the Basis of Value?

A

The fundamental premises on which reported values are or will be based.

69
Q

Define Cost Approach

A

An approach indicating value based on the principle that a buyer will pay no more than the cost to obtain an asset of equal utility.

70
Q

What is the Income Approach?

A

An approach that determines value by converting future cash flows to a single current capital value.

71
Q

What is Special Value?

A

An amount reflecting particular attributes of an asset that are only of value to a special purchaser.

72
Q

What is a Specialised Property?

A

A property rarely sold separately from its business due to its unique nature, design, configuration, size, or location

73
Q

What is Internal Valuer?

A

A valuer employed by the enterprise owning the assets or the accounting firm preparing its financial records.

74
Q

What are Investment Properties?

A

Properties held by owners to earn rentals or for capital appreciation, rather than for production, administration, or sale

75
Q

What is Personal Property?

A

Assets not permanently attached to land/buildings, including arts, antiques, gems, furnishings, but excluding trade fixtures and business interests.

76
Q

What is a Special Assumption?

A

An assumption that differs from actual facts at valuation date or wouldn’t be made by typical market participants.

77
Q

What is Sustainability in valuation?

A

Carrying out activities without depleting resources or having harmful impacts, including environmental, social, and governance considerations.

78
Q

What are Terms of Engagement?

A

Written confirmation of conditions agreed between member and client regarding the undertaking and reporting of valuation.

79
Q

What is Trade Related Property?

A

Property designed for specific business type where value reflects trading potential for that business.

80
Q

What is a Valuation Review?

A

An assessment of either the valuation process or value conclusion (or both), but not a valuation itself unless a new value is provided.

81
Q

What is a Valuation Date?

A

The specific date on which the opinion of value applies, including time if the asset value can change materially in a single day.

82
Q

What is a Valuation Model?

A

A quantitative implementation of a method that converts inputs into outputs used in developing a value.

83
Q

What is Worth/Investment Value?

A

The value of an asset to a particular owner or prospective owner for individual investment or operational objectives.

84
Q

What are Trading Stock Properties?

A

Land and buildings held for sale in the ordinary course of business, typically by builders and development companies.

85
Q

What is Infrastructure in valuation?

A

A collection of assets, systems, and facilities dedicated to specific production processes, including equipment, civil works, land improvements, and structures.

86
Q

What are Records/Valuation Records?

A

Stored information, either digital or hard copy, including data, inputs, and documentation used in the valuation process.

87
Q

What is a Responsible Valuer?

A

A named, appropriately qualified valuer who accepts responsibility for the valuation.

88
Q

What are Standards in RICS valuation?

A

Mandatory requirements that include International Valuation Standards (IVS) and RICS professional standards, denoted by prefixes PS and VPS.

89
Q

What is Guidance in RICS valuation?

A

Advisory content denoted by prefix VPGA, providing recommended best practices but not mandatory requirements.

90
Q

What types of valuation fall outside the Red Book?

A

Expert witness, valuations for agency/market appraisal, valuations used in negotiations/litigation, internal valuations, valuations for statutory use.

91
Q

How would you define Gross Development Value?

A

Market Value of the proposed development assessed on the special assumption that the development is complete as at the date of valuation in the market conditions prevailing at that date.

92
Q

What is hope value?

A

Hope value is the value arising from the expectation that circumstances affecting the property may change in the future.

93
Q

Do you include VAT in a reinstatement cost valuation?

A

The RICS recommend including VAT in a reinstatement cost valuation, however this depends on the VAT status of the company/property.

94
Q

What is a yield?

A

A return on investment.

95
Q

How would you calculate a yield?

A

Annual income/capital value x100

96
Q

How would you arrive at an appropriate yield for valuing an asset under the investment method?

A

A yield is the amount earned on a security over time. You would need to consider the amount of risk involved, for example something of high risk would generate a higher yield.

97
Q

Is an accounting valuation Red Book compliant?

A

Yes

98
Q

What are the main headings in Terms of Engagement?

A

Valuer, Client, purpose of valuation, currency, CHP, assumptions or special assumptions, fee basis, report format.

99
Q

What are the main headings in a valuation report?

A

Purpose of valuation, client, intended uses, valuer, property, date of valuation, basis of value, assumptions and special assumptions etc.

100
Q

What are the minimum standards for a Red Book compliant valuation report?

A

A Red Book compliant valuation report must:

  • Be undertaken by an RICS Registered Valuer
  • Comply with PS1 (Professional Standards) and PS2 (Ethics, Competency, Objectivity)
  • Comply with VPS1-5, which cover:
    • Terms of Engagement
    • Inspections, Investigations and Records
    • Valuation Reports
    • Bases of Value, Assumptions and Special Assumptions
    • Valuation Approaches and Methods
101
Q

What valuations are exempt from VPS 1-5?

A

These include:

  • Valuations for internal purposes only (not intended for third party use)
  • Statutory valuations where specific rules apply
  • Agency and brokerage work
  • Tax planning valuations
  • Investment valuations purely for internal purposes

However, even exempt valuations must still comply with PS 1 and PS 2 professional standards and ethics requirements.

PH_APC_2025 (19 decks)

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