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RICS APC - NH > VALUATION > Flashcards

VALUATION Flashcards

1
Q

What are the 5 methods of valuation?

A

3 Approaches

  1. Market approach
  2. Income approach
  3. Cost approach

Market approach has the COMPARBALE METHOD

Income approach has the INVESTMENT and PROFITS METHOD

Cost approach has the RESIDUAL and DEPRECIATED REPLACEMENT COST

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2
Q

When would you use the Profits method?

A

It is used for the valuation of trade related properties, i.e. when properties are directly linked to profit generated by a business (Pubs, hotels, guest houses, healthcare properties and carehomes).

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3
Q

What do you require to conduct the Profits method of valuation?

A

Accurate and audited accounts for 3 years.

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4
Q

What is the methodology of the Profits method of valuation?

A

EBITSA - Earnings before interest, taxation, depreciation and amortisation - capitalised by an appropriate yield.

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5
Q

When would you use the Depreciated Replacement Cost Method of valuation?

A

Where direct market evidence is limited or not available for specialised properties, eg. schools, sewage works, lighthouses, docks etc.

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6
Q

What is the purpose of the Depreciated Replacement Cost Method of valuation?

A

Used for accounts or rating purposes for specialist properties.

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7
Q

What are the two steps of the Depreciated Replacement Cost Method of valuation?

A
  1. Value land in its existing use

2. add current costs of replacing the building plus fees (use BCIS). Then make a discount for depreciation.

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8
Q

What is an internal and external valuer?

A

Internal valuer - values assets for internal use only, usually employed by a company to value their assets.
External Valuer - values assets which has no material link to them.

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9
Q

What are the steps you should undertake before commencing a valuation?

A

Competence & Instruction, Conflict of Interest and Terms of engagement.

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10
Q

Why should you undertake statutory due-diligence for valuations?

A

Confirm there are no material matters which could impact your valuation.

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11
Q

What is the latest RICS guidance on comparable evidence?

A

RICS Comparable evidence in real estate, 2019.

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12
Q

What are the 3 categories of evidence outlined in RICS Comparable evidence in real estate, 2019?

A

A - Direct Comparables
B - General Market Data
C - Other sources

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13
Q

When would you use the Investment method?

A

When valuing an asset with a stream of income.

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14
Q

How does the investment method work?

A

Rent x Years Purchase = Market Value

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15
Q

When would you use the Term and Reversion method? How does it work?

A

When the market rent is more than the passing rent.
Term collapsed until next rent review or lease expiry at initial yield. Reversion to market rent valued into perpetuity at reversionary yield.

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16
Q

What is a yield?

A

The return of investment expressed as a percentage.

Calculated = income/price x 100

17
Q

How would you calculate years purchase?

A

Divide 100 by the yield - shows the number of years required for the income to repay the purchase price.

18
Q

What factors should you consider when determining a yield?

A
  • Rental and capital growth.
  • Location
  • Use of property
  • Lease terms
  • Security of income
  • Liquidity
19
Q

What is an All Risks yield?

A

Yield which expresses all prospects and risks attached to a particular investment.

20
Q

What is the difference between an assumption and a special assumption?

A

Assumption is an idea taken to be true and accepted as a fact, without the need for specific investigation.

Special Assumption is an idea to be taken as true and accepted as a fact, even through it is not true.

21
Q

What guidance is there for Valuations?

A

RICS Valuation - Global Standards 2020 (Red Book)
International Valuation Standards
Guidance on methods of valuation such as comparable evidence.

22
Q

What is a Red Book Valuation & what is its importance?

A

A Red Book Valuation contains mandatory rules, best practice guidance and related commentary for all members undertaking asset valuations.

23
Q

What changes were included in the 2020 update of the Red Book?

A

PS1: Written means any valuation conveyed by paper, electronic, or digital means.

PS2 - valuers must apply independence and objectivity to their work

VPS2 - Valuation reports must clearly state the method of valuation, reasoning to findings and matters which affect valuation.

VPS5 - Reinforce obligation to ensure the valuation model is appropriate.

IVS410 - valuers of development valuation must apply 2 methods of valuation.

24
Q

What changes were included in the 2020 update of the Red Book?

A

Updated to reflect updates to the International Valuation Standards.

PS1: Written means any valuation conveyed by paper, electronic, or digital means.

PS2 - valuers must apply independence and objectivity to their work

VPS2 - Valuation reports must clearly state the method of valuation, reasoning to findings and matters which affect valuation.

VPS5 - Reinforce obligation to ensure the valuation model is appropriate.

IVS410 - valuers of development valuation must apply 2 methods of valuation.

25
Q

What is market value?

A

Estimated amount which an asset or liability should exchange between a willing buyer and seller in an arms length transaction.

26
Q

What is Fair Value?

A

The price that would be achieved to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement of date.

27
Q

What is the terms of engagement, what is included and why is it important?

A

Contractual document stating the clients requirements and instruction. Members must be able to demonstrate professional competence.

28
Q

Selkirk Road - What are your thoughts on the staircasing for H2B?

A

Not a fan of the staircasing/help to buy process.
- although helps people get onto the property ladder, I feel that it takes advantage of them; having to pay back rent ontop of mortgage, pay for damages, valuations and if the price increases it ups their payments.

29
Q

Jubilee Way - Where would you find guidance on LSV?

A

VPGA 2 of the Red Book

30
Q

Jubilee Way - How do you find a suitable yield?

A

I used an all risks yield, used by the comparable listed by dividing their rent/price to arrive at a suitable yield. I took the average yield and multiplied it by the rent to compare it to the market value I arrived at.

31
Q

Jubilee Way - How would you make adjustments for parking?

A

Using market research and knowledge of the area. I knew in that area, that a parking space averages for 20k.

32
Q

Jubilee Way - How did covid impact your valuation?

A

Covid has really impacted the market for both commercial and residential. Commercial especially because of people working from home at the time; there were not, and still is not many comparables for commercial property.

33
Q

What would cause market uncertainty and how could it affect your valuation?

A

Drops in the market such as covid, lack of data etc. If there is market uncertainty then it can affect the accuracy of your valuation. In accordance with the Red Book, we must state if there is uncertainty within the valuation.

34
Q

What can be implications of a virtual tour instead of an inspection?

A

Not seeing the property limits your knowledge of the property. Ie. surrounding area and could possibly mask any damages such as damp and cracking, which can affect the value in analysis.

35
Q

When would you advise on a Red Book Valuation rather than another type of valuation?

A

Depends on the purpose. If the purpose requires a specialist valuation, such as secured lending or for accounting purposes, I would suggest a Red book - if it was for staircasing or probate reasons, I would advise on a basic valuation.

36
Q

Oliver Grove - How did you justify the negative factors of condition and a short lease to your valuation?

A

I compared the poor condition and short lease to properties in the area which were in good condition and had longer leases and determined how much to discount by.

37
Q

Sainfoin Road - What would be your advice on challenging the HMRC?

A

Would need reason for challenging, evidence that the valuation figure is wrong and a statement to support it. The VOA will then review the evidence and will contact to discuss it. If they agree they will amend, if they don’t then they issue decision with an explanation and any amendments.

RICS APC - NH (7 decks)

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