Valuation Flashcards
Tell me what are the 5 methods of valuation.
Comparable, Investment, Profits, Depreciated Relpacement Cost, Residual
Tell me about how you would value a building using the profits/contractors/investment/comparable/residual method of valuation.
(Comparable) Terms of engagement, research, inspect, adjust evidence, give heirarchy of evidence
What is PI Insurance (PII)?
Professional Indemnity Insurance, covers the cost of compensating clients for loss or damage resulting from negligent service
Why do surveyors need PII?
Mandatory requirement of RICS surveyors, it protects clients and surveyors against financial impact of mistakes
Tell me about the RICS requirements in relation to PII.
Mandatory, minimum cover levels are dictated by the firm size, turnover up to £100k needs a minimum of £250k cover, up to £200k is £500k cover and £200,001 and over is £1m
What is run off cover?
Provides insurance cover once a firm has ceased trading, also a mandatory requirement
What is the Red Book?
Mandatory document that combines professional, technical & performance standards to deliver high quality valuation advice that meets the requirements and expectations of clients, governments and the public.
Why does the Red Book exist?
Promote and support high standrards in valuation work and offers useful resource for valuation users, gives mandatory practices for registered valuers and ensures a consiten approach
Tell me about a factor which may impact value.
Location - position in relation to local services/schools and or desirability of the area can impact on value
What is your duty of care as a surveyor when undertaking a valuation?
You owe a duty of care to the client, that you will complete the instruction with care and skill
Why is independence and objectivity important when valuing?
It is important that my opinion and advice is free from bias due to the impact on clients, the wider market and trust in the profession plus it is used for financial decision making
Is there a separate UK Red Book?
There is the Red Book, UK Suppliment published in July 2019
When was the Red Book last updated? Does this differ to when IVS were last updated? What changes were made?
New Redbook was published in November 2021 and came into effect from January 2022, it reflects changes to the IVS and measurment rules, adds more detail on Terms of Engagement when exceptions are used, adds more detail on sustainability, sample report wording was removed and make it clearer and easier to use. The new IVS came into effect at the same time
Which do you follow - the latest IVS or the Red Book Global?
The Red Book incorporates the key guidance in the IVS
Which sections of the Red Book are mandatory and which are advisory?
The VPS 1-5 & PS 1-2 are mandatory, the VPG-A’s 1-10 are advisory
What does PS1-2/VPS1-5/VPGAs relate to?
PS1 is compliance with standards where a written valuation is provided, PS 2 - Ethics, competency, objectivity & disclosures,
VPS1-5 are mandatory requirements and are performance standards, 1 is Terms of engagement, 2 is inspections, investigations and records, 3 is valuation reports, 4 is basis of value, assumptions and special assumptions, 5 is valuation approaches and methods
VPGAs are application guidelines for specific circumstances
What type of advice does the Red Book cover?
VPG-A offer advice on the practical application of the standards in specific contexts
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
You must state the opinion is provisional and subject to completion of the final report, provided for the clients internal purposes only and it is not to be published or disclosed.
What type of valuations might be relied upon by a third party?
Managers of a property fund, publication in a companies accounts, prospectuses etc
Tell me what the definition of MR/MV/investment value/fair value?
MV/MR The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion IV The value of an asset to the owner or a prospective owner for individual investment or operational objectives FV The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
What is the difference between an assumption and a special assumption?
An assumption is made where specific investigation by the valuer is not required in order to prove that something is true.
A special assumption is an assumption that either assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date.
What sources of information would you consider when preparing a valuation report?
The inspection, online research, documents provided by the vendor, market data
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
Yes, need to disclose to all parties and obtain prior consent to continue, you need to disclose the nature of the relationship with the previous client and previous involvement, rotation policy, time as signatory and any proportion of fees
If your firm is too small to have a rotation policy or valuation panel, what else can you do to ensure objectivity?
Arrange for a valuation to be reviewed by another member at periods of no greater than seven years when the same asset is being valued on a regular basis to demonstrate that objectivity is being followed
When might a conflict of interest exist in relation to a valuation instruction?
Where there is a pre-existing relationship with either party, where you have acted for the client within the past 12 months, where a referral fee has been payable, has a financial interest in the asset etc
What must be included in your terms of engagement / valuation report?
Covered in VPS 1, must state, who the valuer is and their status, the valuation date, identify the asset to be valued, valuation currency, purpose of the valuation, who the users of the report are and if it can be shared, basis of value, any investigations, basis of fee
What is a restricted valuation service and can you provide one?
A client may require a restricted service; for example, a short timescale for reporting may make it impossible to establish facts that would normally be verified by inspection, or by making normal enquiries; or the request may be for a valuation based on the output of an automated valuation model (AVM). Note that the provision of an AVM-derived output would be regarded as the provision of a written valuation for the purpose of these standards. Accordingly valuers should be alert to, and aware of, the implications of either accepting or manually modifying an AVM output. A restricted service will also include any limitations on assumptions made in accordance with VPS 2.
How do you deal with limitations on inspection or analysis?
The valuer should consider if the restriction is reasonable, with regard to the purpose for which the valuation is required. The valuer may consider accepting the instruction subject to certain conditions, for example that the valuation is not to be published or disclosed to third parties. If the valuer considers that it is not possible to provide a valuation, even on a restricted basis, the instruction should be declined. The valuer must make it clear when confirming acceptance of such instructions that the nature of the restrictions and any resulting assumptions, and the impact on the accuracy of the valuation, will be referred to in the report.
Can you revalue a property without inspecting?
Yes but only when you are satisfied that there have been no material changes to the property , that you have previously inspected it and that this assumption is included in the report
What RICS guidance relates to the use of comparable evidence?
Guidance Note: RICS Comparable evidence in real estate valuation October 2019
What is an internal valuer?
Valuer that is in the employ of the firm that owns the subject asset or accounting firm compiling the firms financial records/reports
Can an external valuer provide an internal purposes valuation?
Yes, but there will need to be clear Terms of Engagement and clear instructions about non disclosure to third parties
What happens if market conditions change between the valuation date and report date?
This should be mentioned in the report and brought to the attention of the client that markets are subject to change
Is special value from a special purchaser reflected in MV?
No, becauase the specuial value reflects a purchaser where the asset holds value above that of the rest of the market
Where does the definition of fair value come from?
IFRS 13- Internation Financial Reporting Standards
Does fair value differ from MV?
Yes, fair value is a measure of an assets worth and does not normally account for market forces but market value is the price of an asset in the marketplace but both figures will normally be the same
When is fair value used?
Usually used in financial reporting
What are the 3 approaches under VPS5?
Market approach - comparing against other or similar assets
Income approach - capitalisation or conversion of future income
Cost approach - purchaser will pay no more than the cost of obtaining one of equal equity
What is the Valuer Registration Scheme?
RICS scheme, which is a quality assurance mechanism that monitors RICS registered members who carry out valuations within the scope of the Red Book
Are there any instances where certain sections of the Red Book may not apply? What are these and which sections don’t apply?
Yes, PS 1-2 will always apply but VPS 1-5 may not in certain circumstances, for example when providing advice on insurance re-instatements or for internal purposes only where no third parties will see the result, when acting as an expert witness, when providing agency or brokerage advice or during negotiations or litigation where the valuer is acting as an advocate
What is the basis of value under UK GAAP FRS 102?
Fair Value, the amount at which an asset could be exchanged on that date between 2 knowledgable, willing parties
What is a SORP?
Statement of Recommended Practice
When would you use EUV?
Existing Use Value - Existing use value (EUV) is to be used only for valuing property that is owneroccupied by an entity for inclusion in financial statements.
What is the definition of EUV?
Existing Use Value - descirbes what a property is worth in it’s current form and it being continued to be used in it’s current purpose, like a social housing property, the value reflects it being continued to be used for social housing
What additional criteria apply to secured lending valuations?
VPGA 2 applies in this case, additional criteria may be dependant on the lender, market value is the usual methods, it identifies the price at that particular time. Must include a report date, inspection date and valuation date as well as a statement on conflict of interest and a statement on PII
What information should you specifically request for a secured lending valuation?
Any alternative requirements of the lender, identity of the lender, any recent transaction on the property or agreed price, extent of marketing, any incentves, what lending facilities there are.
What is a regulated purpose valuation?
Valuations for inclusion in this such as prospectuses, financial reports, takeovers and mergers etc. Found in the Red Book UK supplement
What additional disclosures must be made for a regulated purpose valuation?
Fees paid to the valuer from the client in the preceeding financial year and if it is likely if this figure will increase in the next year
What is the basis of value for a statutory valuation?
They are for capital taxation purposes and will usually use market value
What might a statutory valuation relate to?
Capital gains tax, inheritance tax, stamp duty
What is the definition of the statutory basis of valuation?
Price it would fetch if sold in the open market at that time based on the whole of the asset is to be sold
What is a yield?
It is a rate of annual return you are likely to get on your investment, it is calculated by expressing a years rental income as a percentage of how much the property cost.
What is a Net Initial Yield?
It is the ratio of net rental income and gross purchase price of a property
What is a reversionary yield?
The yield that should be achieved if the passing rent adjusts to the level of the estimated rental value
What is an equated yield?
Yield on a property investment which takes into account growth in future income
What is an equivalent yield?
Equivalent Yield (true and nominal) is a weighted average of the Net Initial Yield and Reversionary Yield and represents the return a property will produce based upon the timing of the income received. The true equivalent yield assumes rents are received quarterly in advance.
How would a yield reported from auction differ from a Net Initial Yield?
Taxation or pruchase price affecting the yield figures? Not included the purchase fees?
What purchaser’s costs do you deduct from a valuation?
Stamp duty, legal fees, agency fees
How would you value a property in uncertain market conditions - does the Red Book give any guidance?
Yes, VPGA 10 covers market uncertainty, you would provide a valuation but comment on the uncertainty and your level of confidence in it
How could you value a long leasehold interest?
Usually on the basis of fair value for a lease over 50 years
How does a term and reversion and DCF differ?
DCF is discounted cash flow, in DCF the forecasted cash flow is discounted back to the valuation date to give a present value based on it’s future economic benefits.
Term & Reversion is a variation of DCF and is used when existing lease periods are due to expire, the new lease will have new contract terms so the current rate will probably differ from the market rate, if that’s the case it’s said to have revisionary potential. So the term rate is separated from the revisionary rate.
T&R will use different capitalisation rates
What is the difference between a growth explicit and a growth implicit yield?
An ‘implicit method’ of valuation consists of using a capitalisation rate and current market rent based on comparable evidence. The capitalisation rate is often referred to as an ‘all risks yield’, with all risks hidden in the selected yield.
Explicit method - the expected cash flows are determined and discounted at a target rate of return.
Give examples of each of these types of yield.
Not something I have done, I would refer to RICS practise standards note on Discounted Cash Flow for commerical property investments
How would you value an under/over rented investment property?
Not something I have done but I would refer to guidance on iSurv
When would you use a dual rate investment calculation?
When you are looking at an investment for a leasehold property and want to set aside some of the annual rent in a sinking fund to account for the reduction in the length of the lease.
Where can you find yield evidence from?
Comparables? Guidance on iSurv
What is the hierarchy of evidence?
Weight given to the evidence used, with 1 being direct comparables, 2 being market data and 3 is other sources such as other background date like interest rates
What would you do if comparable evidence was limited?
Widen the search area, make adjustments to available data and expand info to other property types, include it in your report
What is NPV?
Net Present Value -Net present value is the present value of the cash flows at the required rate of return of your project compared to your initial investment
What is IRR?
The internal rate of return (IRR) isa metric used in financial analysis to estimate the profitability of potential investments.
It is calculated by taking the difference between the current or expected future value and the original beginning value, divided by the original value and multiplied by 100
What is a term and reversion?
The term-and-reversion approach is a method to value real estate for which the existing lease contracts are expected to expire
What is a hardcore and topslice?
The theory with the layer method of valuation is:It capitalises present rent (hardcore rent) into perpetuity.Then it capitalises the top slice rent (difference between the market rent and the hardcore rent) that will start from reversion into perpetuity, this defers it as is appropriate
What is a Discounted Cash Flow (DCF)?
Discounted cash flow (DCF) isa valuation method used to estimate the value of an investment based on its expected future cash flows. DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future.
What is a short-cut DCF?
TheShort-cut DCFmethod is based on a model developed by ProfessorNeil Crosbyof theUniversity of Reading(and ultimately based on earlier work by Wood and Greaves). TheRICShave encouraged use of the method in appropriate circumstances.[8]The Short-cut DCF is an adaptation to property valuation of the DCF method, which is widely used in finance
When would you use a DCF?
Discounted cash flow DCF analysisdetermines the present value of a company or asset based on the value of money it can make in the future so is used mostly when valuing property for investments.
The assumption is that the company or asset is expected to generate cash flows. In finance, it is used to describe the amount of cash (currency) in this time frame.
What are the advantages of a DCF?
It’s detailed, gives a good comparision of differing assets with differing timeframes by giving a comparsion at a set moment in time
What are the disadvantages of a DCF?
It can be very sensitive to small changes and adjustments and can be quite complicated
What is a YP/PV/YP in perpetuity?
Years Purchase (YP), single rate or the Present Value (PV) of £1 per annum receivable at the end of each year after accounting for a sinking fund to accumulate at the same rate of interest as that which is required on the invested capital and ignoring the effect of income tax on that part of the income used to provide the annual sinking fund instalment
What is marriage value?
The value created by combining one or more assets which are worth more together than when sold separately. It is also used in Leasehold enfranchisement as the property becomes more valuable with an extension of the lease when the existing lease being extended is less than 80 years. Usually then 50% if the increase in value is paid to the freeholder, however Government consultation makes it look like this payment requirement might be scrapped
When would you include an element of hope value in a valuation?
When looking at a property where improvement is likely but planning approval has not yet been granted
How would you value a ransom strip?
It’s a small piece of land that’s been retained once a larger piece has been sold and can prevent access for developers etc. Set by the Stokes Vs. Cambridge case. The owner is entilted to 1 third the increase in value of the adjacent land.
How does market value differ to investment value/fair value?
Fair value refers to the actual worth of an asset, which is derived fundamentally and is not determined by the factors of any market forces. Market value is solely determined by the factors of the demand and supply, and it is the value that is not determined by the fundamental of an asset.
What is a dual capitalisation rate and when would you use one?
Putting asside some of the income into a sinking fund to account for the loss of value of the diminishing leasehold, the sinking fund will attract an interest rate of it’s own, which is the second rate on top of the leasehold income.
Is the profits/DRC method used for specialised or specialist property?
Profits is used for specialist property like hotels and cinemas, DRC is commonly used for property which may not regularly be on the market, or where there is no income associated with it such as churches or libraries.
What type of properties would you use the profits method for?
Specialist ones like hotels, petrol stations and cinemas where their worth is closely linked to their trading potential and have been designed for a specific use
When would you use the profits method?
When valuing a hotel or cinema where spacing/zoning wouldn’t work
What is intangible goodwill?
It is an excess in the value, above the total of the value of the assets and liabilities
What is turnover / gross profit / net profit?
The total of the income made by a business
Total of sales, less cost of sales before tax
Total left over after cost of sales and tax is removed from turnover
What are the steps to providing a profits valuation?
Work out the fair maintainable turnover and fair maintainable profit, look at future operating potential while ignoring the skill of the current occupier, the FMOP is then capitalised at an appropriate rate of return reflecting the risk and reward of the property and it’s future earnings potential, taking into account comparable evidence
What is Fair Maintainable Turnover?
It is the level of trade an asset/business is expected to achieve if it is operated in a reasonably efficient way. It assumes the property is well equiped and in good repair
What is a Reasonably Efficient Operator?
a valuer should disregard any impact on turnover and profit attributed solely to the personal skill, reputation, and expertise of the existing owner.
Does the assessment of the REO (reasonably efficient operator) include personal goodwill and trading potential?
No, it removes elements related to one individual from the equation
What is personal goodwill?
Personal goodwill isan asset that is owned by an individual, not the business itself. It is generated from the personal expertise or business relationships of an individual employee or shareholder.
What is trading potential?
It is the trade that could be achieved at an optimum output, assuming the business is well run
How do you calculate the tenant’s proportion of rent in a profits valuation?
It can typically be done by calculating the net profit then dividing that figure by 50% to give a rental figure
What is EBITDA?
Earnings before interest, tax, depreciation, Amortization
What is Fair Maintainable Operating Profit?
It is the level of profit an asset/business is expected to achieve if it is operated in a reasonably efficient way. It assumes the property is well equiped and in good repair
How do you calculate the divisible balance?
It is Gross Profit minus the operating expenses
What accounts information would you want to review for a profits valuation?
The financial accounts for at least the last 3-4 years
Do RICS provide any guidance on RLVs or valuing development property?
Yes, the Guidance Note, Valuation of development property 2019
What is an RLV?
Residual Land valuation, finding the value of a piece of property or land with potential for development. It works out the value by removing the builders costs and profit from the estimated sales achieved by selling the end properties
What is a development appraisal? How do they differ? (from RLV)
A development appraisal assesses the ability of a scheme to make sure it is financially viable, the RLV is a method to set the value of the land to be developed
How else can you value development land?
The comparable method if there are suitably similar sales to base your calculations on
What is the basic process of undertaking a RLV/development appraisal?
Assess land and project, work out GDV, work out expenses and profit required then take the development costs from the GDV to leave a value for the land
What does a development appraisal show?
an objective financial viability test of the ability of a development project to meet its costs including the cost of planning obligations, whilst ensuring an appropriate site value for the landowner and a market risk adjusted return to the developer in delivering the project
What are the key things you need to consider when appraising /inspecting a development site?
Characteristics of the site and surrounding area, likely demand for any development and if its likely to obtain planning, plus any restrictions such as access, slopes etc
What else should you consider in appraising a development site?
Safety for inspection, what was the past use of the site and likihood of contamination, waste management, rights of access, mineral extraction rights
Tell me about your due diligence when undertaking a development appraisal.
You want to look at things such as rights of way, contamination, planning restrictions, site restictions, access, TPO’s, site address, right to light etc
What sources of information do you use when undertaking a development appraisal?
Many, past projects, geotechnical information, market sales
How can you assess development potential?
You can look if the scheme is profitable or at least to cover its costs, is there demand for the finished project, is the site suitable for development or do restrictions make it unviable
What is GDV/NDV?
Gross development value is the value achieved by selling the houses at the end of the project, Net development value is the figure left over after selling the houses and deducting the builders costs and profit
How do you calculate GDV?
Find a value for the finished properties, usally by comparable method to find the market value
What do development costs include?
Site clearance, labour and material costs, purchase price of the land, builders profit
Where can you source build costs from?
BCIS can be a useful tool to check accuracy, as can schedules of rates or information from a QS
What are typical finance costs?
Loans and interests on them, plus fees for arranging the finance
What would you apply finance costs to and on what basis?
Mostly through discounted cash flow calculations, you’d want to include it in fees and expenses in a residual appraisal for an accurate outcome
What is an S curve?
A way of showing costs through the lifecycle of a project, as they are unlikely to come in on a straight line basis as costs are likely to be lower in the early stages of a project but increase as construction progresses
What do holding costs typically include?
They are the costs of owning the site and might include interest on finance, maintenance costs, security and taxes payable
How do you typically calculate developer’s profit?
It is typically worked out as a percentage of the development costs, usually around 20%
What are some typical inputs (and %/£) in a RLV?
Costs of labour and materials, selling fees, design costs, builders profits. Selling fees can often be between 1-2%
What other criteria might be assessed in terms of performance measurement for a RLV?
How quickly the property could sell, it’s ability to cover it’s costs, cash on cash returns
What are the advantages/disadvantages of a RLV?
Advantages are that it is an effective way of determining a value of a piece of land or property, especially when there are no comparables available, it can also be a way of determining likely build costs to see if the scheme is worth it. The disadvantage is that they can be very sensitive to small changes in the inputs which can give very different results
What is included in the development programme?
Programmesdescribe the sequence in which tasks must be carried out so that a project (or part of a project) can be completed on time. Programmes will often identify: Dates and durations allocated to tasks. A critical path (the sequence of critical tasks upon which the overall duration of the programme is dependent).
What is CIL?
The Community Infrastructure Levy (CIL) isa levy that local planning authorities can charge on certain types of new development in their area. It can fund roads, parks, new schools etc
What is S106?
It is a legal agreement between developers and the local authority during developments. When the developments are deemed to have a big impact on the local area the local authority will place obligations on the developer to include improvements to the local areas as part of any approvals. This typically includes social or affordable housing in the development, improvements to roads, town centres or education
What are the differences between CIL and S106?
A CIL is a community infastructure levy, it is a charge that the authority will then use to spend on local infastructure. The 106 usually places the emphasis on the developer doing the work themselves
What is CIL charged on?
Community Infrastructure Levy
On developments of new houses, for extensions over 100m2 and new retail buildings over 100m2
What is a Monte Carlo simulation?
It is a mathmatical simulation that generates random variables to model risk and uncertainty
What is a sensitivity analysis?
It is a look at how costs in the project can be subject to change to see what impact they will have on the project to see if it is still worth it or if changes need to be accounted for or made
How do you carry out a sensitivity analysis?
You can alter the costs or finished prices to see what change they have to the viability of the project. I have done this by using an excell spreadsheet to allow easy analysis that these changes can have on the project finances
What variables might you change in a sensitivity analysis and why?
You might change the projected costs as material and labour prices and be subject to change based on supply and demand. The likely selling price could be subject to change as well on a longer project so these changes need to be assessed to ensure the project is still viable if things do change
What factors affect sensitivity of a development appraisal?
Cost of finance, building material and labour costs, availability of either, likely prices for the finished product
Tell me about your understanding of incorporating affordable housing into development appraisals.
Under local planning regulations and depending on the size of the project there may be a requirement for an element of affordable housing needed in order to obtain planning permission. This can vary between authorities and it can include lower cost housing, housing reserved for social housing or schemes with restrictions on who can buy them such as those with local connections or certain public sector jobs
Tell me about software you have used to provide a RLV.
MS excel & BCIS (Building Cost Information Service) to confirm estimated build costs.
What RICS guidance relates to the valuation of development property?
Valuation of development property, guidance note October 2019
Give me a limitation of this software.
It can be venerable to human error in the data that is input into it
BCIS may be behind the times if material and labour prices are rapidly changing
What is viability?
It is a check to see if the development can meet the requirements of the project, typically if it is profitable but it can be other things
When would a cost approach be used?
Cost approach is a way of caluculating value based on the cost of building a replacement, plus the cost of the land, less the cost of depreciation. It may be used with the valuation of a new building where there are no or very few comparables. It can also be used for things such as Churches, libraries, schools where there is no income and they are rarely sold
What type of buildings would a cost approach be used for?
Usually either something new where there are no comparables or where they are rarely sold and there is no income associated with them such as schools, churches, libraries etc
What is the supposition that a DRC is based upon?
The underlying theory is that the potential buyer in the exchange would not pay any more to acquire the asset being valued than the cost of acquiring an equivalent new one. The technique involves assessing all the costs of providing a modern equivalent asset using pricing at the valuation date
What are the 3 components of the cost approach?
Cost of buying the land, cost of building the property, cost of depreciation
