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APC Revision > Valuation > Flashcards

Valuation Flashcards

1
Q

What is the Red Book?

A

The RICS Valuation - Global Standards (2021) effective 31 Jan 22

Global Standards - UK Supplement (2018) - effective 14 Jan 2019

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2
Q

How is the Red Book structured?

A 
Intro
Glossary
2x Professional Standards (PS1, PS2)
5x Valuation technical and performance standards (VPS1 - 5)
10x Valuation applications (VPGA 1 - 10)
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3
Q

What refinements were made in the latest Red Book updates?

A
  • More documented terms of engagement for when exceptions are applied to Valuation standards
  • Enhanced focus on ESG
  • Reflect feedback and evolving needs
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4
Q

What are the focuses for the three main types of standard in the Red Book?

A

Professional standards - ethics, conduct, competence, etc.

Technical standards - conventions, common definitions and approaches

Performance standards - analysis, objectivity and rigour

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5
Q

The standards of what other body does the Red Book incorporate?

A

The International Valuation Standards Council

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6
Q

In what instances does the Red Book apply and not apply?

A

Under PS1 of the Global Standards:

PS1 and PS2 apply to all members regardless of valuation type - no exemptions.

Exemptions for VPS 1-5 include:

  • Agency or brokerage services
  • Acting as an expert witness
  • Statutory valuations, e.g. lease extensions
  • Internal valuations (without liability)
  • Negotiations
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7
Q

What does PS1 of the Red Book cover?

A

PS1 - Compliance with standards including within firms, with international standards, jurisdictions and departures / exemptions

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8
Q

What does PS2 of the Red Book cover?

A
  • Professional and ethical standards
  • Qualification and competence
  • Conflicts and objectivity
  • Disclosures
  • Reviewing other valuers’ work
  • Terms of engagement
  • Responsibility for the valuation
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9
Q

What are the five VPS in the red book?

A 
VPS1. Terms of engagement
VPS2. Inspections, investigations and records
VPS3. Reports
VPS4. Bases of value and assumptions
VPS5. Approaches and methods
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10
Q

What are the 10 VPGA (Valuation practice guidance - applications)?

A 
VPGA 1 - Inclusion in financial statements
VPGA 2 - Interest for secured lending
VPGA 3 - Businesses and interests
VPGA 4 - Trade related properties
VPGA 5 - Plant and Equipment
VPGA 6 - Intangible Assets
VPGA 7 - Personal property
VPGA 8 - Real property investments
VPGA 9 - Portfolios
VPGA 10 - Matters creating uncertainty
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11
Q

What RICS guidance exists regarding comparable evidence?

A

Guidance note: Comparable Evidence in Real Estate Valuation, 1st Edition (2019)

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12
Q

What is the purpose of the guidance note Comparable Evidence in Real Estate Valuation?

A
  • Outline the principles of using comps
  • Encourage consistency in the use of comps
  • Address issues of availability and use of comparable evidence
  • Consider potential sources of comparable evidence
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13
Q

What are the principles behind using comparable evidence as a basis for valuation?

A

The economic principle of substitution is well-established. A buyer would not pay more than the cost of acquiring a satisfactory subsitute.

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14
Q

What are the factors that make up ideal comparable evidence?

A
  • Multiple transactions
  • Similarity to the item being valued
  • Recent
  • Verifiable
  • Arm’s length
  • Result of underlying demand - i.e. enough potential buyers
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15
Q

What are the three main valuation approaches outlined in VPS 5?

A
  • Market approach - using comparables
  • Income approach - capitalising income
  • Cost approach - cost of purchase / creation / construction
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16
Q

What are Scarett’s five methods?

A
  1. Comparative method - most commonly used
  2. Investment method - income-generating assets
  3. Residual method - development sites
  4. Profits method - used for pubs, hotels etc
  5. Contractor/cost method - last resort, unreliable
17
Q

Which valuation standard deals with future projected valuations?

A

Valuation Performance Standard 4 -Bases of value, assumptions and special assumptions

18
Q

If a real estate asset is let as an investment, what factors would impact the value and should be considered in comparables?

A
  • Lease terms
  • Unexpired term
  • Break options
  • Covenant strength
  • Rent reviews
19
Q

What types of market evidence are there?

A
  • Direct transactional evidence
  • Publicly-available information
  • Databases
  • Asking prices - use with caution
  • Historic evidence
20
Q

What is the hierarchy of comparable evidence?

A

Cat A - direct comparables
Cat B - general market data
Cat C - other sources (e.g. from other locations and types of asset)

21
Q

What details should be collected regarding comparables?

A 
Address
Property type
Leasehold/freehold details
Location
Lease terms
Description and specification
Area / size
Data of transaction
Sale / rent price
Price per unit of measurement
Source of information
Commentary
Date collected/confirmed
22
Q

How might you consider making adjustments on the basis of condition?

A

An adjustment could be made based on the cost to bring the worse property up to the standard of the better property.

Care is needed in this approach as in practice, a purchaser may also factor in uncertainty, inconvenience, time to renovate, etc. Valuer should consider how a purchaser would act.

23
Q

How should you treat shortages of comparable evidence?

A

Lack of evidence should not preclude a valuation from being done but more reliant on the skills of the valuer.

Do not shy away from reporting material uncertainty and it should be disclosed.

24
Q

What standards exist around valuing BTR assets?

A

RICS Guidance Note - Valuing residential property purpose built for renting (1st Edition), 2018

25
Q

In considering valuation of a BTR asset, what considerations should be taken into account re the net income stream?

A
  • Security of existing income
  • Potential for growth
  • Voids / lease up rates
  • Expenditure required to underpin rental values
  • Legal / planning considerations
  • Appropriate investment return
  • Break up potential
26
Q

What approach would you take in assessing the value of a BTR asset?

A

As per Valuing Residential Property Purpose Built for Renting (1st Edition, 2018):

  • Net income capitalisation
  • Reduction of capital expenditure, set up costs and lease up
  • Benchmark against DCF, comparable transactions and break up value
27
Q

What factors might result in a valuer making a different assessment of market rent than the current gross income achieved?

A
  • Incentives

- Seasonality of lettings market

28
Q

How would you categorise expenditure? What could you use?

A

MCSI (formerly the IPD) have operational expenditure categories for their residential index.

29
Q

How do you treat capital replacement costs in assessing operating expenditure and valuation of BTR assets?

A

Clients have different approaches depending on their profile.

RICS Guidance suggests that valuers take these into account through a capital deduction in value where investors would clearly want to make an adjustment.

30
Q

How does a DCF calculation work?

A

Find the cashflow for each year and apply an appropriate discount rate to that year, giving the value of that discounted cash flow (similar to a lease extension). Add up all of the discounted cash flows.

The initial cost of investment can then be subtracted from this total to provide the NPV.

31
Q

What deductions should be made from the capitalised stabilised NOI in valuing a new BTR asset?

A
  • Initial lease up period
  • Initial set up costs
  • Purchasers costs
  • Any capital contributions that might apply
32
Q

What are some of the factors that affect the yield?

A
  • Location
  • Size of building
  • Tenure
  • Covenants
  • Security of tenure
  • Income security
  • Capital growth
  • Investor sentiment
  • Competition
33
Q

What do rack-rented, reversionary and overrented mean?

A

Rack-rented - at market rent
Reversionary - passing rent below market
Overrented - passing rent above market

34
Q

What are some differences to take into account when looking at valuing Scottish BTR assets?

A
  • Taxation - some SDLT relief for properties with 6 or more residential units and exemption from Land and Buildings Transaction Tax
  • Different tenure rules - Model Tenancy Agreement with open-ended terms

APC Revision (9 decks)

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