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RICS Session 1 > Valuation > Flashcards

Valuation Flashcards

1
Q

What are the different purposes you may undertake a valuation for?

A

Loan security, rating, accounts, landlord and tenant functions, Inheritance tax, Corporate advice

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2
Q

What is VPS and PS in relation to red book?

A

Valuation practice statements- which are processes to follow

Professional standards- which are things to think about (guidance)

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3
Q

What is the red book?

A

The red book is a set of global standards, sets out valuation procedure rules and guidance.

Not an instruction manual for individual cases.

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4
Q

What is the most recent red book update? What does it include

A

RICS valuation global standards 2022.

Recent update includes a glossary definition to ESG (environmental social and governance)

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5
Q

What is the purpose of the red book?

A

To provide consistency, objectivity and transparency

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6
Q

Why is the red book updated?

A

The IVS (international valuation standards) are updated on a rolling basis every 2 years therefore the red book needs updates to remain aligned.

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7
Q

why is RICS aligned with IVS?

A

A key member of the IVS council along with other VPOs (valuation professional organisations). They work together to create IVS standards.

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8
Q

What is the contents of the Red book?

A

2 professional statements (PS)
5 Valuation practise statements (VPS)
10 Valuation practise global applications (VPGA)

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9
Q

What are the two professional statements in the red book?

A

PS1 compliance

PS2 ethics and conflicts

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10
Q

What are the 5 VPS (valuation practise statements)

A

1 TOE

  1. Inspections
  2. Reporting
  3. Bases of Valuation
  4. Valuation Approach
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11
Q

Tell me what some of the VPGAs are (Valuation practise global applications)?

A

10 including-

VPGA1 - accounts valuation

VPGA2- loan security

VPGA 4- profits valuation

VPGA 8- Real Estate Valuation (inspection)

VPGA 10 certainty

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12
Q

When do you not need to follow VPS 1 to 5?

A 
ALIES-
A agency 
L Litigation
I Internal purpose
E Expert Witness
S statutory
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13
Q

What is new about PS1 2022?

A

Sets out the need for clear unambiguous and documented TOE.

Needs to state whether or not it is a red book valuation.

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14
Q

what are included in the minimum terms within TOEs? (VPS1 valuation practice statement 1)

A

18 total- (client may require more)

  1. Identification and status of valuer
  2. identification of client
  3. identification of other intended users
  4. Identification of what is being valued
  5. Currency of valuation
  6. purpose of valuation
  7. basis(es) of value
  8. valuation date
  9. nature and extent of valuers work
  10. nature and sources of information
  11. all assumptions to be made
  12. format of report
  13. restrictions on use/ distribution of report
  14. confirmation that the valuation will be undertaken in accordance with IVS
  15. basis on which the fee is calculated
  16. CHP reference
  17. a statement regarding compliance with RICS
  18. A stement setting out any limitations on liability that have been agreed.
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15
Q

What are the minimum headings within a valuation report? (VPS3)

A
  1. identification and status of valuer
  2. identification of client and any intended users
  3. purpose of valuation
  4. What is being valued
  5. basis of value required/adopted
  6. valuation date
  7. extent of valuation
  8. nature of sources and information relied upon
  9. restrictions on use and distribution
  10. confirmation that it is in line with IVS
  11. valuation approach and reasoning
  12. amount of valuation
  13. date of valuation report
  14. commentary on any material uncertainty
  15. a statement setting out any limitations on liability that have been arraged.
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16
Q

What is market value-

A

The estimated amount for which an asset/liability should exchange on the date of valuation between a willing buyer and seller in an arms length transaction.

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17
Q

what is market rent?

A

The estimate amount for which an interest in real property should be leased on the valuation date between a willing lessor and lessee on appropriate terms in an arms length transaction.

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18
Q

what is investment value?

A

( worth)The value of an asset to a particular owner or potential owner.

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19
Q

What is VPS4?

A

Valuation practise statement 4 - definitions of bases of value and special assumption

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20
Q

What is Fair value? IFRS 13

A

normally used for accounts purposes. Its the price that would be received for a property at measurement date. Should be consistent with MV

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21
Q

What is a special assumption valuation? how does this differ from an assumption

A

A special assumption valuation is a valuation where an assumption is made that differs from the reality of the situation at valuation date. Eg that rectifying works have been made.

An assumption- made by the valuer when something is needed to be assumed true for the purposes of the valuation. Has to be reasonable and relevent.

22
Q

What is Synergistic Value?

A

the value of a combination of 2 or more assets where sum is more than than that of them separate.

23
Q

What is a valuation approach? (VPS5)

A

a brief description of how you approached the valuation

IE- market, income, cost

24
Q

Explain the three approaches to valuation?

A

Market- based on comparing subject asset with similar/identical assets which have sold recently. COMPARABLE METHOD

Income- Based on capitalizing or conversion of present and predicted incomes. INVESTMENT AND PROFITS

Cost approach- value based on principle that buyer will not pay more than it costs to obtain similar asset, whether by purchase or construction. RESIDUAL and DRC

25
Q

Talk me through your valuation of….

A 
1 Property
2 purpose
3 basis
4 TOEs
5 method (comparable or investment)
6 technique (term and reversion)
7 advice to client
26
Q

What are the five methods of valuation?

A
  1. comp
  2. investment
  3. residual
  4. profits
  5. DRC
27
Q

How do use the comparable method?

A

1 look at property

  1. find comps and verify
  2. analyse comps
  3. display in matrix / hub
  4. value property
  5. review
28
Q

What are the 4 investment method techniques? explain each

A
  1. term and reversion- good if under rented. capitalise passing rent for term and then reversion into perp (higher yield)
  2. hardcore and layer- useful for institutional investment market (underrented) e.g prime offices. capitalize term in to perp at equivalent yield and then reversionary top slice deffer ed until reversion
  3. hardcore and top slice- useful when current rent is more than market rent. With NI yield. cap the core at market rent and then top slice at higher yield.
  4. DCF- projecting potential future cashflows and discounting back to today.
29
Q

How would you complete a profits valuation?

A

Capital value=

  1. get three years accounts (preferably audited)
  2. work out fair maintainable trade
  3. deduct costs/expenses to get fair maintainable operating profit (FMOP)
  4. FMOP * YP = CV

rental=

  1. FMOP= divisible balance
  2. 50/50 split between LL and tenant.
30
Q

explain how a residual valuation is carried out

A

GDV - all costs to develop (inc profit) = residual land value.

31
Q

How is a development appraisal carried out?

A

GDV- all costs to develop (including land value) = developers profit

32
Q

How do you calculate net effective rent?

A

Straight line- add up stepped rent and divide by lease length

33
Q

whats the best rental evidence-

A

Ive listed best to worse for the sake-

  1. new lettings
  2. lease renewal
  3. OMRR
  4. independent expert
  5. opinion
  6. arbitration
  7. asking rents
34
Q

What is an all risks yield?

A

a yield that incorporates risk, return and growth

35
Q

whats gross initial yield?

A

full rental value / price

36
Q

net initial yield

A

add purchasers costs to price and dived by FRV

37
Q

what is Equivalent yield?

A

weighted average between term and reversion

38
Q

what is equated yield

A

IRR internal rate of return

39
Q

what is Nominal yield?

A

Initial yield assuming annually in arrears payment pattern

40
Q

what is true equivalent yield?

A

calculated on actual payment pattern ( quarterly in advance)

41
Q

tell me about the Valuer Registration Scheme?

A

need to be a registered valuer to be able to do RED book valuations. Fee is paid which is used to pay for regulation checks.

42
Q

what sort of due diligence do you carry out within a valuation?

A

competence, conflict, TOES, asbestos, flooding, radon, contamination, title, planning etc

43
Q

Talk me through a valuation from inception to completion?

A
  1. receive instruction
  2. conflict and competence check
  3. Issue TOE
  4. due diligence pre inspection check
  5. inspect and measure
  6. decide appropriate method
  7. research market
  8. analyse comps
  9. weight compables
  10. value.
  11. draft report
  12. second signature
  13. issue report and invoice
    14 keep secure records for at least 6 years.
44
Q

What is the valuation national supplement UK?p

A

provides specific red book advice in relation to uk property.

an example would be UK VPGA1- relates to financial accounts valuation using UK GAAP

45
Q

Tell me about comparable evidence in real estate 2019?

A

guidance provided by RICS.
Includes - scope, heirarchy of evidence split into cat a b and c

Basis of recording transaction

46
Q

What is included in the hierarchy of evidence?

A
  1. Sale or leasing transactions that have
    taken place for similar real estate to that being valued will provide the best evidence,
  2. while databases and indices will offer more general guidance.
  3. Rent review and lease
    renewal agreements reached via negotiation or settled by an expert

Cat A B and C

A= direct comparables
B= general market data
C= other sources
47
Q

Explain how you would complete a Term and Reversion?

A
  1. Capitalise passing rent at yield from comps for term.
  2. Capitalise reversion at X years deferred into perp using yield (higher to represent risk of future) discounted to PV
  3. add together
  4. Review
48
Q

Explain Hardcore and layer?

A

Used for valuation for institutional market ie prime office ( Always will be a market)

  1. Capitalise term into perp at equivalent yield
  2. Capitalise reversionary top slice at equivalent yield deferred until reversion
  3. Add together
  4. Review
49
Q

Explain Hardcore and topslice (froth)

A

Used when the current rent is more than market rent with Net initial yield.

  1. Establish market rent and capitalise into perp using market yield
  2. Establish Passing rent and capitalise over rented top slice until next review or lease end. use a riskier yield to reflect overreacted
  3. Add together
  4. Review
50
Q

How would you complete a DCF?

A

When an investor has a target rate.

Using a table-

  1. show purchase price in one row
  2. Display net income in a table
  3. Multiply by PV £1 at target for yrs until received
  4. Assume an exit value at say 10 years
  5. Add up all discounted cash in end column
  6. IF NPV is more than 0 target rate is met.
51
Q

How would you complete a profits valuation?

A

No experience but

  1. Get 3 years accounts
  2. Work out Fair maintainable trade
  3. Deduct costs and expenses= FMOP (fair maintainable operating profit) FMOP
  4. FMOP * YP = capital value

RICS Session 1 (19 decks)

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