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Valuation L3 EP APC Residential 2022 > *Valuation > Flashcards

*Valuation Flashcards

1
Q

What is an internal valuer?

A

• Employed by a company to value their assets • Valuation for internal use only • No third-party reliance

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2
Q

What is an external valuer?

A

Has no material links with the asset to be valued or the client

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3
Q

What are the THREE steps you should undertake prior to commencing a valuation?

A

CCT:1. Competence - check you have the correct level of skills, understanding and knowledge2. Conflict of Interest - check you are able to act independently on the instruction3. Terms of engagement - issue to the client and receive written confirmation

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4
Q

Why do you undertake statutory due diligence for valuations?

A

Confirm that there are no material matters which could impact on the valuation

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5
Q

What types of statutory due diligence checks would you undertake when valuing a property?

A
  1. Asbestos register2. Business rates / Council tax3. Contamination4. Equality Act Compliance5. Environmental matters (high voltage power lines, electricity sub-stations, telecoms masts etc.)6. EPC rating if available7. Flooding8. Fire safety compliance9. Health and safety compliance10. Highways (check roads adopted with the local highways agency)11. Legal title and tenure (check boundaries, ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves)12. Public rights of way (from an OS sheet)13. 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)
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6
Q

What are the FIVE main methods of valuation?

A
  1. Comparable method2. Investment method3. Profits method4. Residual method5. Depreciated replacement cost method
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7
Q

What are the THREE valuation approaches set out in IVS 105 (Red Book) (MIC)?

A
  1. Market approach - (comparable)
  2. Income approach - converting income/cash into a capital value (investment, residual and profit)
  3. Cost approach - (DRC)
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8
Q

What are the SIX steps used when collecting comparable evidence?

A
  1. Search and select comparables (agent’s boards, online databases)2. Confirm / verify information with a party directly involved in the transaction3. Assemble comparables in a schedule4. Interpret comparables using hierachy of evidence5. Analyse comaprables to form an opinion of value6. Report value and prepare file note
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9
Q

What guidance did the RICS recently release on using comparable evidence?

A

RICS Comparable evidence in real estate valuation, 2019

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10
Q

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

A

Category A: direct comparablesCategory B: general market dataCategory C: other sources

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11
Q

What is the hierarchy of direct comparable 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 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)

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12
Q

What is the hierarchy of general market data outlined in the RICS Comparable evidence in real estate valuation, 2019?

A

• Information from published sources or commercial databases• Other direct evidence (e.g. indices)• Historic evidence• Demand/supply data for rent, owner-occupation or investment

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13
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 movement and returns which can given an indication for real estate yields)

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14
Q

When would you use the investment method of valuation?

A

Used when there is an income stream to value

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15
Q

How does the conventional investment method work?

A

• Rent received (or Market Rent) x Years Purchase = Market Value• Assumes growth implicit valuation approach

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16
Q

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

A

• 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

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17
Q

When would you use the Layer / Hardcore method? How does it work?

A

• 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

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18
Q

What is a yield?

A

• Measure of investment return, expressed as a percentage of capital invested• Calculated as income divided by price x 100

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19
Q

How would you calculate Years Purchase? What does this show?

A

• Divide 100 by the yield• Number of years required for the income to repay the purchase price

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20
Q

What factors would you considering when determining a yield?

A

• Prospects for rental and capital growth• Quality of location and covenant• Use of the property• Lease terms• Obsolescence - what is the likely future rate?• Voids - what is the risk?• Security and regularity of income• Liquidity - ease of sale

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21
Q

What is an All Risks yield?

A

Yield which encompasses all the prospects and risks attached to a particular investment

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22
Q

What is a True yield?

A

Assumed rent is paid in advance (traditional valuation practice assumes rent is paid in arrears)

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23
Q

What is a Nominal yield?

A

Initial yield assuming rent is paid in arrears

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24
Q

What is a Gross yield?

A

Yield based on the net purchase price (i.e. not adjusted for purchasers’ costs)

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25
Q

What is a Net yield?

A

Yield based on the gross purchase price (i.e adjusted for purchasers’ costs)

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26
Q

What is an Equivalent yield?

A

Average time weighted yield reversionary property is valued using an initial and reversionary yield

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27
Q

What is an Initial yield?

A

Simple income yield for current income and current price

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28
Q

What is a Reversionary yield?

A

Market Rent divided by current price on an investment that is under rented

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29
Q

What is a Running yield?

A

Yield at one moment in time

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30
Q

When would you use the profits method of valuation?

A

Used for the valuation of trade related property where the value of the property is directly linked to the profit generated by the business (where there is a ‘monopoly’ position) e.g. pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure, healthcare properties and care homes

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31
Q

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

A

Accurate and audited accounts for 3 years

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32
Q

How would you use the profits method of valuation to value a new business?

A

Use estimates / business plan

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33
Q

What is the methodology for the profits method of valuation?

A

EBITDA (earnings before interest, taxation, depreciation and amortisation) is capitalised at an appropriate yield

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34
Q

How should you verify a value obtained using the profits method of valuation?

A

Cross check with comparable sales evidence if possible

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35
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 e.g. sewage works, lighthouses, oil refineries, docks, schools, submarine base etc.

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36
Q

What is the purpose of the depreciated replacement cost method of valuation?

A

• Used for owner-occupied properties• For accounts purposes for specialist properties• For rating valuations of specialist properties

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37
Q

What are the TWO steps of the depreciated replacement cost method of valuation?

A
  1. Value land in its existing use (assume planning permission exists)2. Add current cost of replacing the building plus fees (used BCIS). Then make a discount for depreciation and obsolesce / deterioration
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38
Q

How do you estimate the amount to depreciate the property by when using the depreciated replacement cost method of valuation?

A
  1. Physical obsolescence - result of deterioration / wear and tear over the years2. Functional obsolescence - where the design or specification of the asset no longer fulfils the function for what it was originally designed3. Economic obsolescence - due to changing market conditions for the use of the asset
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39
Q

Are valuations using the depreciated replacement cost method of valuation Red Book Global compliant?

A

• 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

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40
Q

What is the hierarchy of evidence for establishing Market Rent?

A
  1. Open market lettings2. Lease renewals3. Rent reviews4. Third party determinations5. Sale and leasebacks6. Inter-company transactions
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41
Q

When a valuer conducts a valuation on the basis of restricted information or without a physical inspection, what FOUR factors should they do (RRIN)?

A
  1. Nature of the restriction must be agreed in writing in the Terms of Engagement
  2. Possible valuation implications of the restriction confirmed in writing before the value is reported
  3. Valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
  4. The restriction must be referred to in the report
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42
Q

When would you be required to report Fair Value?

A

Used when undertaking valuations for inclusion in financial statements, if the International Financial Reporting Standards have been adopted by the client

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43
Q

What is the difference between Fair Value and Market Value?

A

• 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

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44
Q

What does VPS 5 of the Red Book Global cover?

A

Valuation Approaches and Methods (IVS 105)

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45
Q

What does VPS 5 of the Global Red Book state with regards to Valuation Approaches and Methods?

A

• 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

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46
Q

What do the VPGAs in the Red Book Global cover?

A

Valuation Applications (Valuation Practice Guidance Applications)

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47
Q

What does VPGA 1 of the Red Book Global cover?

A

Valuation for inclusion in financial accounts

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48
Q

According to VPGA 1, what must you do when valuing for inclusion in financial accounts?

A

Where the entity has adopted IFRS, the basis of value will be Fair Value

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49
Q

What does VPGA 2 of the Red Book Global cover?

A

Valuations for secured lending

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50
Q

What does VPGA 2 state with regards to dealing with conflicts of interest for secured lending valuations (SIR)?

A

• Any previous, current or anticipated involvement with the prospective borrower or the property to be valued must be disclosed to the lender • “Previous involvement” is defined as normally being within the past two years but under certain circumstances it can be longer • If the valuer or the client considers that any involvement creates a conflict that cannot be avoided, then the instruction should be declined

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51
Q

What examples does VPGA 2 give of involvement that may result in a conflict of interest?

A

• Having a longstanding professional relationship with the prospective borrower or owner• When the valuer will gain a fee from introducing the transaction to the lender• If there is a financial interest in the property holding or prospective borrower• When the valuer is retained to act in the disposal or letting of the completed development on the subject property

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52
Q

According to VPGA 2, whose responsibility is to decide whether or not to proceed with an instruction? What should they have regard to?

A

• Valuer’s responsibility to decide whether or not to accept the instruction• Should have regard to RICS Rules of Conduct

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53
Q

According to VPGA 2, if it is agreed that any potential conflict can be avoided by introducing arrangements, what must be done?

A

The arrangements must be recorded in writing and included in the terms of engagement and valuation report

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54
Q

According to VPGA 2, as well as the minimum requirements of a valuation report, what additional information must the report include?

A

• Disclosure of any conflict of interest identified in the terms of engagement, or that has been subsequently discovered, including the arrangement that have been made. Alternatively a statement that the valuer is not involved• Valuation methodology adopted, supported where appropriate or requested, with the calculation• Where a recent transaction on the property has occurred or been provisionally agreed, the extent to which that information has been accepted as Market Value• Where the enquiry does not reveal any information, the valuer will make a statement to that effect in the report• Comment on any environmental considerations • Comment on the suitability of the property for mortgage purposes• Any circumstances the valuer is aware of that could affect the price• Any other factor that potentially conflicts with the definition of Market Value or its underlying assumptions

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55
Q

According to VPGA 2, what must you do if your valuation for secured lending purposes is subject to a Special Assumption?

A

Must be a comment on any material difference between the reported value with and without that special assumption

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56
Q

According to VPGA 2, how should you take account of sustainability factors?

A

Comment on the maintainability of the income over the life of the loan in a broader sustainability context (e.g. environmental risks, matters of design, accessibility)

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57
Q

According to VPGA 2, what should you comment on in relation to the end of the occupational lease?

A

Any potential for redevelopment or refurbishment

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58
Q

What does VPGA 8 of the Red Book Global cover?

A

• Valuation of real property interests• Covers inspections and investigations, with particular emphasis on environmental constraints and sustainability issues

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59
Q

What does VPGA 10 of the Red Book Global cover?

A

Matters that may give rise to material valuation uncertainty

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60
Q

What does VPGA 10 state that valuation reports must not be?

A

Misleading

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61
Q

According to VPGA 10, what should a valuer do/not do when it comes to material uncertainty?

A

• Valuer should clearly draw attention to, and comment on, any issues resulting in material uncertainty in the valuation on the specified date relating to the risk surrounding the valuation of the asset • A standard caveat should not be used

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62
Q

What does part 6 of the RICS Valuation - Global Standards (“Red Book Global”) cover?

A

• International Valuation Standards, 2020• “General Standards” addressing matters such as terms of engagement, approaches to, bases and methods of valuation as well as reporting• “Asset Standards” which provide requirements relating to specific types of asset, such as real property and development property

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63
Q

What is the relationship between the Red Book Global and the RICS Valuation - Global Standards (UK National Supplement, 2018)?

A

• The UK National Supplement augments the Red Book Global requirements for valuations in the UK and is not a substitute for it • Provides requirements for members on the application of the RICS Valuation - Global Standards in the UK jurisdiction

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64
Q

What were the key changes introduced in the UK National Supplement, 2018?

A

• More user friendly with clear advice on what is and is not mandatory• New UK VPGAs have been included for the valuation of central government assets, local authority assets and registered social housing providers’ assets• For financial reporting valuations, there is greater differentiation between UK GAAP and IFRS requirements• New section on valuation for commercial lending (UK VGPA 10)

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65
Q

What are the FOUR parts of the UK National Supplement, 2018?

A
  1. Introduction2. UK Professional and Valuation Standards (Mandatory)3. UK Valuation Practice Guidance Applications (Advisory)4. Summary of changes from Red Book UK, 2014 (revised 2015)
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66
Q

What is hope value?

A

The value arising form any expectation that future circumstances affecting the property may change

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67
Q

Provide some examples of where hope value may arise.

A

• Future prospect of securing planning permission for the development of land, where no planning permission exists at the present time• The realisation of marriage value arising from the merger of two interests in land

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68
Q

What are the typical purchasers costs deducted from the gross market value?

A

• Stamp Duty Land Tax: at prevailing rate• Agent’s fees: 1% of purchase price (+ VAT)• Legal fees: 0.5% of purchase price (+ VAT)

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69
Q

What is marriage value? How do you calculate the level of marriage value?

A

• Created by the merger of interest - can be physical or tenurial• Undertake a before and after valuation and calculate the level of marriage value created

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70
Q

How is marriage value typically split between parties?

A

Typically split the marriage value create 50:50 or on a pro-rata basis using the value of the individual interests

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71
Q

How would you value a long leasehold interest?

A

Deduct ground rent from the gross rent to calculate the net rent received. Then can either:• Capitalise at a yield for the remaining length of the lease• Use a dual rate to adjust the valuation to set up a sinking fund, so it is comparable to freehold investments• Discounted cash flow (DCF)• Capitalise into perpetuity at an adjusted yield to reflect the additional element of risk for the wasting asset

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72
Q

What is ATED? What does it aim to stop?

A

Annual Tax on Enveloped Dwellings (ATED)Aims to stop on-shore and offshore individuals using companies to avoid SDLT for residential property. Current threshold is £500,000

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73
Q

How does the Red Book Global define a Special Purchaser?

A

A particular buyer for who a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market

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74
Q

How does the Red Book Global define Special Value?

A

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

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75
Q

Provide examples of when a Special Purchaser would arise?

A

• Tenant purchasing the freehold interest• Association with the property e.g. owning an adjacent property

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76
Q

How does Market Value reflect Special Value?

A

Ignores any price distortions caused by Special Value

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77
Q

What schemed did the RICS introduce in October 2011 for the regulatory monitoring of all valuers carrying out Red Book valuations?

A

RICS Valuer Registration Scheme (VRS)

78
Q

What are the THREE aims of the RICS Valuer Registration Scheme (VRS)?

A
  1. Improve the quality of valuation and ensure the highest possible professional standards2. To meet the RICS requirement to self-regulate effectively3. To protect and raise the status of the valuation profession as the leading expertise in valuation
79
Q

What should clients be able to expect from a RICS valuation following the introduction of the RICS Valuer Registration Scheme (VRS)?

A

• Openness and transparency• RICS protection and international valuation standards • Expertise and clear reporting• World class regulations

80
Q

Which newly qualified members are eligible to apply for the RICS Valuer Registration Scheme (VRS)?

A

• Those who have completed the APC valuation competency to Level 3 qualify for registration• There is an alternative route post qualification to be a Registered Valuer for candidates who have taken Valuation to only Level 2. This includes undertaking more valuation experience (up to 100 days) and a case study submission

81
Q

Who is registration mandatory for under the RICS Valuer Registration Scheme (VRS)?

A

• Those undertaking valuation work in compliance with the Red Book Global• Registration is not mandatory for work excluded from the Red Book Global

82
Q

What information must be provided under the RICS Valuer Registration Scheme (VRS)?

A

• Type of valuations• Purpose of valuations• Number of valuations• Firm’s total fee income from Red Book Global valuations in the last year• What data sources used• Quality assurance audit procedures in place• History of any negligence claims and notifications

83
Q

How do the RICS monitor those signed up to the Valuer Registration Scheme (VRS)?

A

• Publishes a register of registered valuers • Monitor valuers through the submissions of their firms annual return• Risk based reviews, ranging from desktop investigations to site based Regulatory Review Visits (RRVs), dependent on the risk identified• Head of Regulation has the power to remove a valuer from the scheme

84
Q

What is a return, and how could you find the IRR?

A

Used to describe the performance of a property, measured retrospectively.Use a DCF calculation to find the internal rate of return.

85
Q

What does the Red Book say about how you should adjust and document comparable evidence analysis?

A

IVS 105 states that comparables must be adjusted on a qualitative and quantitative basis
- Also states the valuer should document the reasons for the adjustments and how they were quantified

86
Q

What is a years purchase?

A

The number of years it takes for a property’s income to repay its purchase price.

87
Q

How do you calculate Years Purchase from a yield and vice versa?

A

Years Purchase = 100/yield
Yield = 100/years purchase

88
Q

What are the Red Book UK Professional and Valuation Standards - mandatory?

A

UK VPS 1: Terms of engagement (scope of work) and reporting: Red Book compliance
UK VPS 2: Terms of engagement (scope of work): supplementary provisions in Scotland.
UK VPS 3: Regulated purpose valuations: supplementary requirements

89
Q

What is SDLT for residential?

A

Up to £125,000 = 0%
£125,001 - £250,000 = 2%
£250,001 - £925,000 = 5%
£925,001 - £1,500,000 = 10%
Over £1,500,000 = 12%

90
Q

Whats the difference between market value and fair value?

A

Market value is in an arms length transaction after proper marketing.

91
Q

What is meant by proper marketing?

A

1) Reasonable time period.
2) Appropriate method of disposal
3) Appropriate marketing technique

92
Q

What is a yield?

A

Outward looking measure of investment return.

93
Q

What effect does inflation have on interest rates?

A

Interest rates increase with inflation to discourage spending and inflation then decreases.

94
Q

The Red Book talks about Disclosure – what does this refer to?

A

Disclosure of competence and skill, disclosure of any personal interest or any conflict.

95
Q

What is the definition between the two Fair Value definitions?

A

The IVS definition can include special value

  1. (IFRS) “the price that would be received to sell and asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date”
  2. (IVS) “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.
96
Q

Describe how departure from the Red Book mandatory requirements may be possible.

A

Can depart from the Red Book if there are time or inspection constraint reasons. The departure must be agreed in terms of engagement giving reasons for the departure. The report would also need to state increased uncertainty.

97
Q

What are the possible consequences if a Valuer does not comply with VPGA’s?

A

: They are intended to embody best practice. It could be a major factor in any professional negligence claim. Should only depart from guidance notes for good reason.

98
Q

How would you respond to a request to value a property from a pavement assessment only?

A

Need enough information to adequately understand the property (floorplans, lease, trading information)

99
Q

Describe 3 assumptions that are usually made in producing a valuation?

A

Title – assumed good and clean title can be shown. Condition – assumed no material defect. Services – assumed in good working order. Free from contamination.

100
Q

What is an arm’s length transaction?

A

A transaction between unconnected parties – with no business or family connection

101
Q

How many comparables are needed to produce a similar valuation?

A

As many as possible, all of them.

102
Q

What is the longest time period before a val date a transaction could be accepted as being comparable?

A

Depends in the market and market conditions.

103
Q

What do you understand the expression Weighting of Comparable Evidence to be?

A

We attach weight to it by determining its compatibility to the subject property. Surveyors will have different opinion of evidence weighting.

104
Q

What do you understand by the expression Hierarchy of Evidence?

A

The nature of the transaction and the amount of weight attached to it. All things being equal, we attach the most rent to open market.

105
Q

What is Interpolation of comparable evidence?

A

Working between 2 known points. A range of values we know it falls within. Considered statistically safe

106
Q

What is Extrapolation of comparable evidence?

A

Working outside of known data. Making subjective adjustments. Considered to have additional risk.

107
Q

What is compounding?

A

When you add interest to the capital and interest on interest accrued. Growth relates to Compound – Amount of £1

108
Q

What is discounting?

A

Calculating the Present Value of a future sum of money

109
Q

What are the 3 principle investment opportunities?

A

Gilts, Equities and Property.

110
Q

What is a Bond investment?

A

Where you have fixed capital and fixed return.

111
Q

What is the major attraction of property over the other 2 major investment opportunities?

A

By proactive positive management you can improve its performance

112
Q

What are the major disadvantages of property over the other 2 major investment opportunities?

A

Liquidity – takes time to get in and time to get out of property. Management costs. Transfer (acquisition) costs. Surveyor fees.

113
Q

What is the Yield Gap?

A

The margin above gilts that property investors will require (in a non-inflationary market)

114
Q

What is the Reverse Yield Gap?

A

Where inflation pushes gilts upwards.

115
Q

How is Rental and Capital Growth accounted for in a conventional investment valuation?

A

It is implicit in the cap rate. Built into the rate. The higher the yield, the lower the growth opportunity

116
Q

What techniques can be used to value an under-rented reversionary investment?

A

Either the term & reversion or the hardcore method.

117
Q

What do you understand by the expression Risk Premium?

A

The Yield amount over and above Gilts to compensate for the additional complexities and difficulties

118
Q

Why do property investors require a Risk Premium?

A

As investing in Property is more risky than investing in Gilts.

119
Q

Can you discuss a draft valuation report with your client?

A

Yes I can verbally provide informal advice but would not provide written advice as this could be a valuation.

120
Q

What is a tangible asset?

A

A fixed property you can see, touch and feel

121
Q

What is an intangible asset?

A

Something you cannot see, touch or feel such as goodwill

122
Q

Does PII cover desktop valuations, and what do insurers expect to see?

A
  • PII covers desktop valuations, but insurers will expect to see some risk management control and a well-considered valuation file note as to how the value was arrived at and the factors influencing the valuation.
123
Q

What are the 3 common circumstances (VPGA 10, RB) RICS put forward where material uncertainty could arise?

A
  • Asset has very particular characteristics that present challenges forming opinion of value, regardless of approach/method used (typically a very unusual or unique property)
  • Where information available to valuer is limited/restricted, either by client or valuation circumstances, and the matter cannot be sufficiently addressed by adopting one or more reasonable assumptions.
  • Market disruptions: unforeseen financial, macro-economic, legal, political or even natural events. Inconsistent, or an absence of empirical data, or value being faced with an unprecedented set of circumstances on which to base a judgement.
124
Q

How does RICS advise material uncertainty is expressed in a report?

A
  • Be related to both commentary on general risk of future market movements/inherent risk involved in forecasting cash flows, and risk surrounding the valuation of the specific asset.
  • Expressed in qualitative terms, indicating the valuer’s confidence in the valuation opinion offered by use of a suitable form of words (this is only realistic, as the uncertainty itself arises from a lack of data)
  • In most cases it is either inappropriate/impractical to reflect uncertainty quantatively, and could appear contradictory. If a mathematical measure is included, it is essential that the method/model is adequately explained, with any limitations appropriately highlighted.
  • In some limited circumstances a sensitivity anaylsis may be judged appropriate in order to illustrate the effect that clearly stated changes to specified variables could have on the reported valuation, which should be accompanied by suitable explanatory comment. Be mindful the inherent risk that quantification of any sort can convey a misleading impression of precision.
  • Unless specifically requested, the expression of values within a stated range is not good practice and would not normally be regarded as an acceptable form of disclosure (or ‘in the region of’). Where different values may arise under different circumstances it is preferable to provide them on stated special assumptions.
125
Q

Give examples of the different types of properties that would be valued by the different methods of valuation.

A

Comparable - residential housing
Investment - offices (anything) with a rental income
Profits - pubs, hotels, leisure
Residual - development opportunities
DRC - owner-occupied properties or properties with no direct comparables i.e. specialised properties such as sewage works, lighthouses etc.

126
Q

Why must you have the correct level of competence to complete a valuation?

A

Professional standard 2 covers ethics, competence, objectivity and disclosure.
Under PS2 the valuer must act objectively and independently and act in accordance with the five RICS professional and ethical standards and RICS rules of conduct. One of the RICS rules of conduct for members is competence and for the professional to work with due skill, care and diligence.

127
Q

Why must you have signed terms of engagement?

A

Professional standard 2 says that the valuer must understand the clients’ requirements and comply with the minimum terms of engagement which are set out in VPS1

128
Q

What is the comparable method?

A

Use of comparable evidence to establish opinion of value - adjustments are made reflecting differences in characteristics and analysis of the local market whilst applying professional scepticism.

129
Q

What is the residual method?

A

It is used to value land with development potential.

Technicwue requires assessment of GDV, from which development costs (including build costs, professional fees, contingency, finance, marketing, legal and purchasers costs) and profit are deducted to arrive at a residual land value.

130
Q

What is the investment method?

A

Used to value commercial premises on the basis of a flow of rental income.

Techniques used depend on whether the unit is under-rented or over-rented.

Term and revision for under rented.

Layer/hardcore is used for over-rented.

131
Q

What are the different methods of completing an Investment Valuation?

A

Conventional Investment Method = let at MR or under-rented.

Term and Reversion = under-rented

Layer/Hardcore = over-rented

132
Q

If the yield is increased in an investment valuation, what happens to the capital value?

A

If the yield increases, the capital value decreases.

133
Q

What is a yield?

A

A measure of investment return, expressed as a percentage of capital value invested.

134
Q

How do you calculate a yield?

A

Income/Price x 100

135
Q

What is the major factor in determining a yield?

A

Risk! e.g.

  • prospects for rental and capitla growth
  • quality of location
  • quality of covenant strength
  • lease terms
  • voids
  • liquidity (how quickly it can sell)
136
Q

Define Gross Development Value?

A

The aggregate market value of the proposed development, assessed on the special assumption that the development is complete on the date of valuation in the market conditions prevailing on that date.

137
Q

Define existing use value?

A

What the property is worth in its current form. Usually used for internal financial statement purposes. Disregard potential alternative uses.

138
Q

Outline the new guidance note on Valuing Development Property?

A

Valuation of Development Property, 2019 (effective 2020)

  • The purpose of the guidance note is to supplement International Valuation Standard (IVS) 410 ‘Development Property’.
  • Confirms best practise when valuing development property that both the residual and comparable methods should be used together. The residual method should be cross-checked with comparable evidence.
  • Confirms best practice requires risk analysis to be used so that changes to inputs which might affect the valuation of development property can be assessed and various scenarios modelled.
139
Q

What is on the front cover of the Comparable Evidence in Real Estate Valuations, 2019?

A

RICS Logo
Title
Date
A staircase on the outside of a building

140
Q

What is on the front cover of Valuation of Development Property, 2019?

A

RICS Logo
Title Document
Date of Document
CGI image of a development.

141
Q

What makes a good comparable?

A

Similar to the asset being valued in terms of size, location, condition, specification, type etc.

Hierarchy of evidence - recently transacted and verifiable

142
Q

How do you collect comparables?

A

I use online databases such as Rightmove and the Land Registry sold prices.

I look to then verify this information with local agents.

I gain an understanding of the local market through research online, conversations with colleagues and local agents.

143
Q

How do you analyse comparables?

A

Professional Scepticism

Look at them on a sales rate psf basis and on a sales price basis.

144
Q

What is your company’s valuation sign off procedure?

A

All valuations requite a director sign off.

Development valuations also require a third signature from a director, as they are increased risk.

145
Q

What is a restricted 90-day sales period?

A

Where the transaction is pushed through within 3 months.

Would typically make a discount in order to push it through.

146
Q

Is material uncertainty a basis of valuation?

A

No, material uncertainty is a clause.

147
Q

What is the recent RICS advice document on valuation of clad buildings?

A

RICS Guidance Note - Valuation of Properties in a Multi-Storey, Multi-Occupancy Residential Buildings with Cladding, 2021

The paper discusses the use of EWS1 forms in the use of valuations of multi-storey residential properties such as blocks of flats, student accommodation, dormitories, care homes.

148
Q

What is the margin of error for valuation reports?

A

There is a permissible range allowed by courts as found in numerous cases.

This ranges from 5 - 15% depending on the nature of the valuation, whether it is straightforward or more complex.

149
Q

What is hope value?

A

The value arising from any expectation that the future circumstances affecting the property may change. i.e.

  • The prospect of achieving planning permission in the future
  • The realisation of marriage value
150
Q

Has there been any RICS guidance on how to value long leasehold interests?

A

RICS Guidance Note: Valuation of Residential Leasehold Premises, 2021

Focuses specifically on the valuation of leasehold interests expressed for secured lending purposes.

151
Q

What matters could effect the value of long leasehold interests?

A
  1. Remaining lease term
  2. Ground rents and rent review provisions
  3. Service charge/maintenance
  4. Fire safety legislation
  5. Repair works cost
  6. Restrictive covenants
  7. Planning Use
152
Q

How do you compare comparable evidence of long leasehold interests?

A

Use hierarchy of comparable evidence still.

Calculate the leasehold relativity, using the graph from the Valuation of Residential Premises, 2021.

153
Q

What is a special purchaser?

A

Is someone who a particular asset will have a special value to them due to the advantages arising from its ownership, that would not be available to other buyers.

i.e. tenant purchasing their freehold interest.

154
Q

Give me the rough outline of a valuation instruction?

A

Receive instruction
Check competence and independence

T o E signed and returned
Gather info/due diligence/market research
Inspect/measure
Undertake valuation
Draft report (Peer review)
Finalise and sign report
Report to client
issue invoice
File in good order and archive

155
Q

What are the four main areas being considered under the RICS independent review of real estate investment valuations?

A

Review by Peter Pereira Gray
Valuation methodology
Property risk analysis
Maintaining independence and objectivity
Measuring market confidence in RICS valuer performance
Recommendations by Q4 2021

156
Q

What does the RICS Publication - Beyond COVID 19 valuation approaches and evidence during the COVID-19 health crisis (June 2020) say?

A

Sets out information regarding lack of evidence and material uncertainty
Document reminds valuers of the importance of RICS Guidance note ‘Comparable evidence in re valuation 2019’

157
Q

What did the November 2020 COVID-19 practice alert state?

A

States that some markets might have experienced lower levels of transactional activity and liquidity during the pandemic, but this update states that transactional volumes and other evidence is broadly returning to normal, so not subject to material uncertainty
States wording to use if it is uncertain due to lack of evidence

158
Q

What does the updated COVID-19 guidance state as at July 2021?

A

Main update is on inspection, investigation and valuation information

Any restrictions must be agreed in TOE and made clear in reporting

If you can’t value on restricted basis, the instruction should be declined

159
Q

What is the key RICS publication that has been brought out to set out information on lack of evidence and material uncertainty in COVID-19?

A

RICS Publication - Beyond COVID-19 valuation approaches and evidence during the COVID-19 health crisis (June 2020)

160
Q

Is there anything COVID-19 related that you are currently including in your reports?

A

A note prepared by the RICS which states that there has been enough evidence to produce an opinion of value.

Therefore, the report is not reported as subject to ‘material uncertainty’.

161
Q

What is a tax valuation?

A

4 instances where you will need a valuation for capital gains tax:

  1. If it was a gift (MV @ gift date)
  2. If the property was sold less than MV to help the buyer (MV @ date of sale)
  3. IHT (date of death)
  4. Property owned before April 1982 (MV @ 31st March 1982)
162
Q

Time value of money

A

Money received now is worth more than the same amount in the future

163
Q

RPI

A

Measurement of inflation published by ONS

Favoured by Landlords as benefit from bigger uplift and occurs more often

164
Q

CPI

A

Measurement of changes to prices of goods and services

165
Q

What is the yield for lease extensions and why?

A

5%
Case of Earl Cadogan Vs Sportelli - the deferment rate.

166
Q

If you were doing an investment valuation, when might you use the hardcore method?

A

When a property is being overrented.

167
Q

When would you have regard to marriage value?

A

Additional value created by the combination of two or more assets or interests. E.g. lease extension.

168
Q

When valuing a residential block of apartments, why would you have regard to its vacant possession value?

A

If selling a freehold, you assess the vacant possession value and determine the term remaining,

169
Q

What is a protected or regulated tenancy?

A

A tenancy which started before the 15 January 1989 - governed by Rent Act 1977.

  • Tenants had strong rights in relation to rent, security of tenure and succession rights.
  • The rent must be fair and is determined by the Valuation Office.
170
Q

What is the investment (or worth) value?

A

The value of an asset to the owner or prospective owner for individual investment objectives.

171
Q

What is Equitable value?

A

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.

172
Q

What are the main drivers that impact value?

A
  • Age
  • Location
  • Tenure
  • Condition
  • Lease terms
  • Size
173
Q

Why is independence and objectivity important?

A

Ensures that a valuation is carried out to the appropriate level and standard.

174
Q

What are Automated Valuation Models (AVM)?

A

A service that can provide a value for a property using mathematical modelling combined with a database.

175
Q

What are the sections you include in a residential property valuation report?

A
  1. Identification and status of valuer
  2. Identification of client
  3. Purpose of Valuation
  4. Identification of asset valued
  5. Basis of value adopted
  6. Valuation date
  7. Extent of investigation
  8. Nature and course of the information relied upon
  9. Assumptions and special assumptions
  10. Valuation approach and reasoning
  11. Date of the valuation report
  12. Comment on material uncertainty and limitations
176
Q

What is loan security?

A

Security given to the lender, sometimes called collateral. The asset acts as protection for the lender.

177
Q

How would you value an asset for loan security?

A

.

178
Q

What are the main components of a residual valuation?

A

Purchase price/site acquisition value = GDV - (Construction + Fees + Profit)

179
Q

What are the Red Book VPSs?

A

Mandatory
Valuation technical and performance standards

180
Q

What are the Red Book VPGAs?

A

Advisory
Valuation Practical Guidance Applications

181
Q

What is professional scepticism and when should it be used?

A

An attitude that includes a questioning mind and critical analysis of data during the valuation process.

182
Q

Define a long leasehold flat

A

Lease of a residential demise held between two or more parties for longer than 21 years

183
Q

What is the lease extension process?

A
  1. Leaseholder must qualify - 2+ years / lease granted +21years
  2. Issue Section 42 Notice
  3. 2 months for landlord to issue S45 Notice
  4. parties make decision no sooner than 2 months, within 6 months. Solicitors will agree details of new lease.
184
Q

What does the Leasehold and Reform Housing and Urban Development Act 1993 Part 1 Chapter 2 allow?

A

Gives individuals tenants the right to acquire a new lease.

185
Q

What does a registered valuer determine the premium of a leasehold flat for a lease extension?

A

“1. Captialisation of Ground Rent (5%) - Remaining GR at current value.

  1. Freehold Reversionary Interest - compensated for increased time before receive VP.
  2. Marriage Value - 50% if less than 80 years remaining”
186
Q

When would a lease extension go to the FTT?

A

When parties can not agree on a premium

187
Q

What is a Reinstatement Cost Assessment?

A

Valuation to assess the total cost for rebuilding the whole property - declared value

188
Q

What are the key principles of the RICS Comparable Evidence in Real Estate Valuation 1st Ed?

A

Use of comparable evidence in valuation

  1. encourage consistency
  2. address issues of avilability
  3. consider potential sources and their relative importance
189
Q

What does the Leasehold and Reform Housing and Urban Development Act 1993 Part 1 Chapter 2 allow?

A

Gives individuals tenants the right to acquire a new lease.

190
Q

What is sustainability?

A

taken to mean the consideration of matters such as (but not restricted to) environment and climate change, health and well-being and corporate responsibility that can or do impact on the valuation of an asset.

In broad terms it is a desire to carry out activities without depleting resources or having harmful impacts.

191
Q

What is a valuation?

A

An opinion of the value of an asset or liability on a stated basis, at a specified date. Unless limitations are agreed in the terms of engagement this will be provided after an inspection, and any further investigations and enquiries that are appropriate, having regard to the nature of the asset and the purpose of the valuation.

192
Q

What does the leasehold reform aim to do?

A

The new reforms aim to accelerate the phasing out of ground rent in England in the following ways: ​

​- Existing leaseholders will be given the right to extend their lease by 990 years

  • ​New home buyers could also save thousands of pounds in the long-term by no longer having to pay ground rent to the freeholder.

​-Reforms in 2019 mean new houses must be sold freehold to make sure homeowners are not also paying “rent”. ​

​- When the reforms come into force, ground rent will be gradually phased out as existing leaseholders will also be able choose to extend the length of their lease and it will be set at zero pounds.

Valuation L3 EP APC Residential 2022 (2 decks)

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