Valuation Flashcards
1
Q
What does the front cover of the Red Book look like?
A
- Global - prominent grey and red RICS written on it - RICS Valuation Global Standards, effective from 31st January 2022 - 296 pages
- UK supplement - white background, effective from 14th January 2019, issues November 2018 - 148 pages
2
Q
Which sections of the Red Book are mandatory?
A
- Professional Standards:
- PS1 - Compliance with standards (example IPMS or Ethics) where a written valuation is provided
- PS2 - Ethics, competency (qualifying professional to undertake work)
- Valuation Performance Standards:
- VPS 1 - Terms of Engagement
- VPS 2 - Inspection, investigation and records
- VPS 3 - Valuation reports
- VPS 4 - Bases of value, assumptions and special assumptions
- VPS 5 - Valuation approaches and methods
3
Q
What are the contents of the Red Book?
A
- 2 Professional Standards (PS’s)
- 5 Valuation Performance Standards (VPS’s)
- 10 Valuation Practice Guidance Applications (VPGA’s)
- Part 6 - Internal Valuation Standards (IVS)
4
Q
Give me some examples of the VPGA’s, there are 10
A
- Valuation for inclusion in Financial Statements
- Valuation of interests for Secured Lending
- Valuation of businesses and business interests
- Valuation of individual trade related properties
- Valuation of plant and equipment
- Valuation of intangible assets
- Valuation of personal property, including arts and antiques
- Valuation of real property interests
- Identification of portfolios, collections and groups of properties
- Matters that may give rise to material valuation uncertainty
5
Q
What is the UK supplement of the Red Book?
A
- Specific adoption for use in the UK where the Global Edition falls short
6
Q
Can you give me some examples of guidance in the UK supplement of the Red Book that is different to the Global Edition?
A
- There are 15 UK Valuation Practice Guidance Applications (VPGA’s) including:
- Valuation of Local Authority Assets for account purposes
- Valuation of Charity Assets
- Valuation for Residential Mortgage purposes
- Valuation for Capital Gains, Inheritance, Stamp Duty and Enveloped Dwellings Tax
7
Q
How does the Red Book define Market Rent?
A
- Estimated value of an asset which is to be leased on the valuation date
- Between a willing lessor and a willing lessee on appropriate lease terms
- In an arms length transaction after proper marketing
- Where both parties have acting knowledgeably, prudently and without compulsion
8
Q
How does the Red Book define Market Value?
A
- The estimated amount for which an asset or liability should exchange on the valuation date
- Between a willing buyer and willing seller
- In an arms length transaction after proper marketing
- Where both parties have acted knowledgeably, prudently and without compulsion
9
Q
How does the Red Book define Fair Value?
A
- Broadly similar to market value
- The price which would be received for an asset, or paid to transfer a liability in an orderly transaction
- Between market participants at the measurement date
- The definition is from IFRS 13
10
Q
Tell me the 5 methods of valuation
A
- Comparative
- Residual
- Profits
- Investment
- DRC
11
Q
Tell me how you would undertake a profits valuation
A
- Used for valuation of trade related properties such as pubs, bars, nightclubs
- Assess the fair maintainable turnover (FMT) through 3 years worth of accounts by a reasonably efficient operator (REO)
- Make an assessment of the gross profit from the FMT
- Assess the Fair Maintainable Operating Profit with allowances made based on the REO
- Assess the market value of the property (using comparative method)
- Capitalise the FMOP at an appropriate yield to reflecting the risk and return of the operator
- Allowances to be made for a new operator who would make improvements to the business
12
Q
Tell me how you would undertake a residual valuation
A
A residual valuation is based on the concept that the value of a property with development potential is derived from the value of the property after the development, minus the costs of undertaking said development
- Gross development value - Gross development cost = residual land value
- It is a form of development appraisal to understand the development potential of a building and/or assess the price to be paid for the land
- DCF’s can be used for phased developments
- Inputs of a GDV:
- Valuation of the properties based on the clients requirements using comparable method with a market approach (do they wish to sell or lease) - taken at the valuation date
- For freeholds, comparable yields used to understand market value
- An allowance for tenants incentives as required
- Inputs of GDC:
- Site preparation e.g. clearance, remediation, landfill tax, contamination etc
- Planning costs e.g. S106, community infrastructure levy, affordable housing for LPA’s, planning consultant, environmental impact assessment
- Building costs e.g. Q.S bill of quantities, BS estimate, BCIS cost, contractor quotes
- Professional fees e.g. architects, consultants, CDM cost
- Contingency
- Finance for scheme (holding charges, interest )
- Developers profit (15-20% of GDV)
- Sensitivity analysis also required:
- Simple sensitivity in key areas such as fees, GDV estimates and finance rate
- Scenario analysis such as changing timings, content, modifying design
- Software can also be used for sensitivity analysis
13
Q
Can you tell me what a yield is?
A
- A measure of investment return, reflecting a percentage of capital invested compared to market rent
- Yields also reflect relevant risk associated with an asset including:
- Prospects for rental and capital growth
- Quality of the location and covenant
- Use of the property and future use
- Lease terms
- Obsolescence
- Risk of voids
- Security and regularity of income
- Liquidity - ease of sale
14
Q
Can you tell me different types of yields?
A
- All risks yield - based on a fully let property, let at a market rent, reflecting all the prospects and risks attached to the investment
- Gross yield - the yield adopted not adjusted for purchasers cost e.g. auction result
- Net yield - the resulting yield minus purchasers costs
- Running yield - the yield at one moment in time
- Initial yield - simple income yield for initial income
- Reversionary yield - a yield for a property below market rent, market rent divided by current price on an investment
15
Q
Why do yields differ based on asset type?
A
- Expresses investment return and the prospects for rental and capital growth
- An assessment of risk and security of income have key factors:
- Location and covenant
- Use of the property
- Lease terms
- Obsolescence of the property
- Risk of voids
- Security and regularity of income
- Ease of sale
16
Q
If you had an investor of X, what would you advise they invest in and why?
A
- Compare yield rates for different asset classes
- Look at the capital they wish to invest and the type of covenant which can be attracted based on the asset
- High Street retail is a falling market with yields between 6-8% with retail warehouses around 6-7% reflecting a better prospect of return
- Look at current trends - currently a lot of service based operators which pushes up demand for warehouse space
17
Q
What are the terms of engagement for a valuation?
A
- Contained in VPS 1:
- Status of valuer
- Client
- Other intended users
- Asset or liability being valued
- Currency
- Purpose of the valuation
- Basis of value adopted
- Valuation date
- Nature of the work including investigation and any limitations
- Nature and source of information relied upon
- All assumptions and special assumptions
- Format of the report
- Restrictions on use and distribution of the report
- Confirmation the valuation will comply with IVS
- The basis of the fee
- The firm, including complaints handling procedure and a copy available upon request
- A statement regarding monitoring by the RICS
- A statement of any limitation of liability agreed
18
Q
Tell me what statutory due diligence you would need to consider for a valuation?
A
- Asbestos register
- Business rates
- Any contamination
- Equality Act compliance such as disabled access
- Environmental matters
- EPC rating
- Fire safety compliance
- Highways
- Legal title and tenure
- Public rights of way
- Planning history
19
Q
What personal checks do you need to carry out before commencing a valuation?
A
- A competency check
- Any conflicts of interest with the instructing party
- Check the terms of engagement - set out in writing your confirmation to carry out the work based on the terms in VPS 1 of the Red Book
20
Q
Tell me how you would carry out a comparative valuation
A
- Competence check
- Check Terms of Engagement, Conflicts of Interest, PII
- Understand what type of valuation it is - market rent, capital valuation
- Conduct lease analysis if applicable
- Take measurements and areas for the property you’re valuing
- Search and select relevant comparable evidence, judgement using the hierarchy of evidence. Analyse comps based on proximity to property, use, pitch, how recent it is etc
- Verify details from counterpart by confirming with occupier or checking the lease
- Report an opinion of market rent to client, issue invoice
- Capital valuation:
- Prepare ERV as above
- Capitalise at appropriate yield based on factors effecting the property
- Obtain yield details from sale information and market reports
21
Q
What guidance is there for comparable evidence?
A
- RICS Guidance Note - Comparable evidence in Real Estate, 1st Edition, October 2019
- General principles are evidence needs to be:
- Comprehensive
- Similar and possibly identical
- Recent
- The results of an arms length transaction
- Verifiable with the occupier
- Consistent with the market - special purchaser is someone who will overpay for space due to special interest
- The results of underlying demand
- If there is limited evidence, expand the search and make allowances for market conditions
- Real Estate markets are not fully transparent so treat information with caution e.g. unrepresented tenants
22
Q
Tell me how you would carry out an investment valuation.
A
- It is used when there is an income stream to value
- Check competence, conflicts of interest, PII
- Issue terms of engagement
- The rental income is capitalised to produce a capital value
- The valuation assumes there is implicit growth (market conditions dictate possibility of growth and are reflected in the yield)
-
Conventional method:
- Rent received (market rent) multiplied by the years purchase = market rent
- Evidence key to determining ERV & yield
- Other methods include term & reversion (under rented) and hardcore & layer (over rented)
-
Term & reversion:
- Used for reversionary investments such as when the property is under rented
- The current term is capitalised until the event at an initial yield
- Reversion, depending on the market rent is capitalised at a reversionary yield (yield at reversion to perpetuity)
- Usually the reversionary yield would be higher than initial due the risk of change in market conditions
-
Hardcore & Layer:
- Used for over rented investments
- Bottom slice is market rent
- Top slice is passing rent until next lease event
- Higher yield applied to top slice to reflect the additional risk
- Different yield used depending on comparable evidence and the relevant risk
23
Q
Can you tell me how you would carry out a DRC/Contracts valuation.
A
- Depreciated replacement cost used where there is no direct market evidence for specialist properties
- Examples such as schools, hospitals, museums, military bases
- Used for owner occupied properties for accounting purposes
- Inappropriate for Red Book valuation for secured lending
- Methodology:
- Value the land in its existing use
- Calculate the cost to replace the building (using BCIS) plus fees less a discount for depreciation and obsolescence
- Different types of obsolescence:
- Physical - wear and tear
- Functional - the design or spec of the building no longer fulfils the current function
- Economic obsolescence - changing market conditions for the use of the asset
24
Q
What are the six steps used when collecting comparable evidence?
A
- Search and select comparable’s (agents board, online databases, tenant details)
- Confirm/verify information with a party directly involved in the transaction
- Assemble comparables in a schedule
- Interpret the evidence using the hierarchy of evidence
- Analyse comparables to form an opinion of value such as rent free analysis
- Report value and prepare file note
25
Q
What is the hierarchy of direct evidence outlined in the RICS Comparable Evidence in Real Estate Valuation, 2019
A
- 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 transaction 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)
26
Q
What is the hierarchy of other sources outlined in the RICS Comparable Evidence in Real Estate Valuation, 2019?
A
- Transactional evidence from other real estate type and locations
- Other background data (e.g. interest rates, stock market movements and returns which can give an indication for real estate yields)
27
Q
How would you calculate Years Purchase? What does this show?
A
- Divide 100 by the yield figure e.g. 100/7 = 14 years purchase
- It shows the number of years required for the income to pay the purchase price
28
Q
How do you estimate the amount to depreciate the property by when using the DRC method of valuation?
A
- Physical obsolescence - result of deterioration/wear and tear over the years of use
- Functional obsolescence - where the design or specification of the asset no longer fulfils the function for what it was originally designed for
- Economic obsolescence - due to changing market conditions for the use of the asset
29
Q
What does PS1 of the Red Book Cover?
A
- Compliance with standards where a written valuation is required
- A red book valuation is not required when:
- For agency and brokerage
- When acting as an expert witness
- Performing statutory functions e.g. rating
- Providing internal valuation advice
- Valuing for the purpose of a negotiation
30
Q
What does PS2 of the Red Book cover?
A
- Ethics, competency, objectivity and disclosures
- Ethics:
- Comply always with the IVSC and the RICS ethics, Rules of Conduct and Conflicts of Interest of which they are bound
- A member means a Fellow, Member, Associate or Honour Member of the RICS
- Members must be competent to carry out the work
- RICS valuers are also subject to monitoring through the RICS Value Monitoring scheme
- A valuer must always confirm that they have the knowledge and competence to carry out work in the market or area of which they are operating
- A Conflicts of Interest check must be carried out prior to commencing, a confirmation is required within the valuation work that this has been completed
31
Q
What’s Hope Value?
A
- The value derived from expected changes in the market, affecting the property
- Examples:
- The future prospect of planning permission being obtained for the land where no current planning exists
- The realisation of marriage value
32
Q
What’s Marriage Value?
A
- Created by merging two assets next to each other e.g. buying a neighbouring piece of land or property
33
Q
How would you value Long Leasehold interests?
A
- If it is occupied - deduct the ground rent from rent received to reach a net rental income
- Capitalise for the remaining lease term at an appropriate yield
- If unoccupied - capitalise the remaining term by an appropriate yield
- A LLH property is viewed as a wasting asset
- Conventional method would use a dual rate table to adjust a LLH to a FH using a sinking fund
- Sinking funds are rarely used to practice so a single rate would would be used, discounted for the risk
- A DCF can also be used
34
Q
What is contained in VPS 1?
A
- Terms of engagement:
- Identification and status of the valuer
- Identification of the client
- Identification of other intended users
- Identification of the asset or liability being valued
- Valuation currency
- Purpose of the valuation
- Basis of value adopted
- Valuation date
- Nature and extent of the valuers work - including investigations - and any limitations
- Nature of source of information being relied upon
- All assumptions and special assumptions
- Format of the report
- Restrictions of distribution, publication of the report
- Confirmation that the valuation will be undertaken in accordance with the IVS
- The basis of which the fee will be calculated
- Where the firm is registered for regulation by RICS, reference to firms Complaints Handling Procedure
- A statement that the compliance with these standards may be subject to monitoring by the RICS
- A statement setting out any limitations on liability that have been agreed
35
Q
What is contained in VPS 2?
A
- Inspections, investigations and records, such as:
- The information relied upon
- If measurement is required, the basis of measurement under RICS Property Measurement
- Where revaluation without reinspection has occurred, statement confirming this has occurred. The valuer must be sure no material changes to the asset have occurred which require re-inspection
- Records - the value will note the details of any inspections, investigations and accurately record them
- An audit trail must be followed
- Records must be kept in an appropriate business format and for a period of time which is appropriate for the nature of the valuation (usually 6 years)
36
Q
What is contained in VPS 3?
A
- Valuation reports
- The report must reflect the requirements for Terms of Engagement as set out in VPS 1, including:
- Identification and status of the valuer
- Identification of the client and other intended users
- Purpose of the valuation
- Identification of the asset or liability being valued
- Basis of value adopted
- Valuation date
- Extent of investigation
- Nature and source of the information relied upon
- Assumptions and special assumptions
- Restrictions on use, distribution and publication of the report
- Confirmation that the valuation has been undertaken in accordance with the IVS
- Valuation approach and reasoning
- Amount of the valuation or valuations
- Date of the valuation report
- Commentary on any material uncertainty in relation to the valuation where it is essential to ensure clarity on the part of the valuation user
- A statement setting out any limitations on liability that have been agreed
37
Q
What is contained in VPS 4?
A
- Bases of value, assumptions and special assumptions
- Bases of value include:
- Market rent
- Market value
- Investment value
- Equitable value
- Synergistic value
- Liquidation value
- An assumption is made where is is reasonable for the valuer to accept that something is true without the need for specific investigation or verification
- These need to be made in writing
- Used where facts cannot be fully verified
- Often linked to limitations on investigations
- A special assumption is made by the valuer where an assumption either assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant, such as:
- Where a bid has been made by a special purchaser or is anticipated
- A past change in the physical aspects of the property
- An impending change in the physical aspect of the property
- The treatment of alterations and improvements carried out under the terms of a lease
- Change of use planning has been or will be granted
- Proposed development has been completed
38
Q
What is contained in VPS 5?
A
- Valuation approaches and methods
- Valuers should consider
- The nature of asset or liability
- The purpose, intended use and context of the particular assignment
- Any statutory or mandatory requirements
- The three main categories of valuation approach are:
- The market approach
- The income approach
- The cost approach
- Further information on the application of approaches and methods can be found in IVS 105
39
Q
Tell me the recent changes to the Red Book
A
- A list of core principles for standard setting has been added to the introduction, including:
- Purpose (objective)
- Valuation standards
- Development and revision of standards
- Jurisdiction
- The glossary has been extended
- Two additional clauses to explain what is meant by compliance with the standards and when a departure is made
- Other changes indicating an individual or group of individuals responsible for preparing a valuation must be appropriately qualified, competent, unbiased and act ethically
- Changes to wording in:
- IVS 101 - Scope of work
- IVS 104 - Bases of value
- IVS 105 - Valuation approaches and methods
- IVS 200 - Businesses and business interests
- IVS 230 - Inventory
- IVS 400 - Real Property Interests
40
Q
What’s Stamp Duty and what are the thresholds?
A
- Stamp duty is a tax paid on property transactions including FH prices, NPV for LH’s and premiums
- Up to £150,000 - zero
- Between £150,001 - £250,000 - 2%
- The remaining portion over £250,000 - 5%
- NPV’s for LH
- £0 - £150,000 - 0%
- £150,001 - £5,000,000 - 1%
- The next portion over £5,000,000 - 2%
- Non residential property is defined as:
- Commercial property e.g. shops, offices,
- Property that isn’t suitable to be lived in
- Forests
- Agricultural land
- Any other land or property that isn’t part of a dwelling
- 6 or more residential properties bought in a single transaction
41
Q
You mention in your submission the latest International Valuation Standards were released in 2020, were they?
A
- No, this is a mistake in my submission
- The latest Red Book was released in November 2021, effective from 31st January 2022
- Changes include:
- A list of Core Principles for standard setting and valuation has been added to the introduction
- The Glossary has been extended
- Amendments to IVS 101, 104, 105, 200, 230 and 400
- Emphasis on agreeing clear unambiguous terms of engagement
- More detailed commentary required on sustainability/ESG in VPGA 8
- An addition to the 2020 red book, not a brand new red book
42
Q
You attended a CPD lecture on valuation during Covid-19, can you tell me about this.
A
- The pandemic had a profound affect on the property market and almost reset the market
- When looking at comparable evidence, the weighting of it if pre-pandemic would be reduced as it was a reflection of a different market
- Now, dependant on the pitch, I have seen a pattern of declining high street value but stable local parade values
43
Q
I note you undertook valuations for a sale a leaseback
A
- These were undertaken using the investment method of valuation with a market approach
- A mistake in my submission states these were comparative but it was investment
- The investment was a Ladbrokes, Coral covenant on a 10 year lease with a break and rent review at 5
- I used this is a basis for valuing the market rent with an all risks yield multiplied to give an estimated market value for the inclusion in an auction
44
Q
You mention you used an auction for the sale and leaseback, can you tell me why you used this method of sale.
A
- Quick - subject to hitting the reserve (10% yield on ERV)
- Legally binding
- Arms length transaction with proper marketing through the auction house’s marketing platform
- Open room where buyers can put forward offers
- Transparency of process for auditors when selling FH assets
45
Q
Can you tell me some other methods of sale other than auction?
A
- Private treaty - between two parties
- Open market with an agent
- Auction
46
Q
Why do you think there have been changes to the Red Book?
A
- To reflect the changes to the International Valuation Standards
- Such as:
- Clearer terms of engagement
- The terms, quasi, partial or non red book should be documented clearly in the Terms of Engagement
- More details commentary on sustainability and ESG in VPGA 8
- Changes to definitions of IVS’s and expansion of the Glossary
