Valuation Flashcards
What is the correct name for the red book?
RICS Valuation Global Standards
When was the RICS Valuation Global Standards come into effect?
31 January 2022
Give examples of key changes
Emphasis on the need to agree on clear and unambiguous terms
Give examples of key changes in the RICS Valuation Global Standards
Emphasis on the need to agree on clear and unambiguous terms
Exceptions should be specifically stated in the Terms of Engagement and Valuation report
Detailed commentary on Sustainability and ESG ( Environmental social and governance)
When did the RICS Comparable Evidence in Real Estate Valuation come into effect?
1st edition October 2019
What is the purpose of the RICS Comparable Evidence in Real Estate Valuation?
Outline principles of comparable evidence
Encourage consistency
address issues of availability of evidence
Provide examples of sources of comparable evidence
Market Evidence
Public available information
Published databases
Asking Prices
What are Indicies
Guide to general trends in a given market
Who provides best Indicies?
Morgan Stanley Capital Investment
What is the Hierarchy of evidence?
structure to comparable data providing consistency to the importance to comparable data
What are the 5 valuation methods?
Comparative
Investment
Profits
Residual
Contractor (Depreciated Replacement Cost)
what are the 3 approaches to valuation?
Income - Converting cash flows into capital value
Investment, Residual, Profits
Cost - Cost of the asset either by purchase or construction
DRC
Market approach - using comparable data
Explain the methodology of the comparative method
1 - Search and select comparable data
2 - Confirm details, analyse headline rent to give net effective
3 - Assemble comparables into a schedule
4 - Adjust comparables using the hierarchy of evidence
5 - Analyse comparables to form an opinion
6 - Report value
How would you find relevant comparables?
Inspection - look at the local area
Speak with local agents
in-house records/ databases
auctions - care - could be special purchaser or insolvancy sale
market reports
when would you use the investment method?
When there is an income stream to value
What is the conventional investment method?
rent received or market rent is multiplied by Yp (Years Purchase) to produce market value
What is a Term and revision method?
Used for reversionary investments (Market rent more than the passing rent) - under rented
Term is capitalised until review/ lease expiry at an initial yield
Reversion to market rent valued in perpetuity at reversionary yield
What is the Hardcore/ layer method?
used on over-rented investments - Passing rent higher than market rent
Income flow is divided horizontally
Bottom slice - market rent
Top slice - Rent passing less market rent until next lease event
Higher yield applied to top slice to reflect risk.
What is a yield
measure of investment returned, shown as a percentage of capital investment
How is a yield calculated
income divided by price X 100
how is years purchased calculated
dividing 100 by the yield
what factors assess risk within a yield
The prospect of rental and capital growth
location and covenant
use of the property
lease terms
voids
security and regularity of income
What is a all risk yield?
rate of interest used in the valuation of a fully let property at market rent, reflecting all the prospects and risks attached to the investment
What is an equivalent yield?
average weighted yield when a reversionary property is valued using an initial yield and reversionary yield
What is an initial yield?
Income yield for current income and current price
what is a reversionary yield?
market rent divided by the current price on investment let at a rent below Market rent.
what is net present value used for?
To determine if an investment gives a positive return against a target rate of return
what is part 3,4 &5 of the Red book?
Part 3 - Professional Standards (PS)
Part 4 - Valuation technical and performance standards (VPS)
Part 5 - Valuation applications (VPGA)
What are the exceptions under Professional Statement 1
The advice provided for negotiations or litigation
Valuer performing a statutory function
Valuation is for internal purposes only
Valuation is provided for agency and brokerage purposes
Valuation advice provided in relation to evidence as an expert witness
What part of the red book covers Ethics
Professional statement 2
what Part of the red book covers Terms of engagement
Professional statement 2 & Valuation technical and performance standards (VPS)
Name some of the 18 minimum terms of engagement
1 - Identification and status of the valuer
2 - Identification of the client
3 - Identification of any other intended user
4 - asset to be valued
5 - Currency
6 - Purpose of the Valuation
7 - Basis of the valuation
8 - Valuation Date
9 - Extent of the investigation
10 - Nature and source of the information to be relied upon
11- assumptions and Special assumptions to be made
12 - format of the report
13 - Restrictions for the use, distribution, and publication
14 - Confirmation of Redbook compliance
15 - fee basis
16 - complaints handling procedure
17 - a statement the valuation may be subject to compliance with the RICS
18 - limitations and liability agreed
What is Market Value
the estimated amount for an asset between a willing buyer and willing seller in an arms-length transaction
What is market rent
the estimated amount an interest property should be leased between a willing lessor and lessee or appropriate lease terms in an arms-length transaction after proper marketing
what is the hierarchy of evidence in the Comparable evidence for real estate valuation 2019
1 - Catagory A - Direct comparable
2- Catagory B - General market data - published sources and other indirect evidence
3 - Catagory C - Other transactional data from other real estate types and background data such as stock market or interest rate.
What is fair Value
Consistent with Market value and is the price that would be received to sell an asset between market participants at the measurement date
What would you include in a Red book valuation
A) Identifiaction and status of valuer.
B) Client and other intended users.
C) Purpose of valuation
D) Identification of the asset to be valued
E) Basis of Value
F) Valuation date.
G) Extent of investigation
H) Nature and source of information relied upon.
I) Assumption and special assumption
J) Restrictions on the use
K) instruction undertaken in accordance with IVS.
L) Valuation approach and reasoning
M)Valuation figure
N) Date of valuation report.
O) Comment on market uncertainty
P) Statement setting out any limitations on liability that have been agreed.
What section of the Redbook would still comply with if the valuation was not a red book valuation?
VPGA 1-10
When is a DCF valuation used?
Growth explicit investment method
used for valuations where the projected cash flows are explicitly estimated over a period, such as
1) Short leasehold interests with income voids or complex tenures
2) phased development projects
3) non standard investments
4) over rented properties and social housing.
What is the methodology to find the Market value in a DCF
1) Estimate cash flow (income less expenditure)
2) estimate the exit value at the end of the holding period
3) Select the discount rate
4) Discount cash flow
5) Value is the sum f the completed DCF to provide a NPV.
What is a NPV
is the sum of the discounted cash flows
used to determine if an investment gives a positive return against a target rate of return
When would you use the profits method
Used for valuations of trade properties such as pubs, Hotels, care homes and petrol stations
What is the methodology of the profits method
1) Annual turnover
2) less costs/ purchases
= Gross profit
3) Less reasonable working expenses
= Unadjusted profit
4) Less operator’s remuneration
= Adjusted net profit known as fair maintainable operating profit
Can also be expressed as EBITDA
What is DRC
Depreciated Replacement Cost
used where direct evidence is limited or unavailable for specialised properties
such as sewage works, lighthouses, docks, schools
What is the methodology of the DRC method
- Value of land in its existing use (assume planning permission exists)
- Add current cost of replacing the building plus fees less discount for depreciation, obsolescence/ deterioration
