Valuation Flashcards
What are the professional standards you must adhere to as part of a Red Book Valuation?
PS 1) Compliance with standards where a written valuation is provided
PS 2) Ethics Competency, objectivity and disclosure
What is VPS?
Valuation Technical and Performance Standards
What are VPGAs?
Valuation Practice Guidance Application
What are the 5 VPS?
VPS 1) Terms of Engagement
VPS 2) Inspections, Investigations and record
VPS 3) Valuation Report
VPS 4) Base of Value, assumptions and special assumptions
VPS 5) Valuation approaches and method
Can you name any of the VPGAs?
1) Inclusion in financial statements
2)Secured lending
3) Valuation of businesses and business’ interests
4)trade related properties
5)plant and equipment
6)intangible assets
7) personal property
8) Real Property Interest
9)portfolios
10) Matters that may give rise to material uncertainty
How is market value defined?
Market Value is the estimated amount for which an asset or liability should exchange for on the valuation date between a willing buyer and seller in an arms length transaction after proper marketing where the parties acted knowledgeably and prudently without compulsion
How is valuation defined?
Valuation is defined as a opinion of an asset or liability on a stated basis on a specified date
Name the key elements of terms of engagement
a) identification
b) identification of the client
c) identification of any users
d) identification of asset/liability being valued
e) currency used
f) purpose of the valuation
g) basis of value adopted
h) Valuation date
i) nature of the valuer’s work (limitations + investigations)
j) sources of info relied on
k) assumptions
l) format of the report
m) restrictions in use/distribution
n) confirmed in accordance with IVS
o) the basis of which the free will be calculated
p) reference to CHP if regulated firm
q) Compliance statement - under RICS conduct/disciplinary actions
r) Limitations on liability that have been agreed
What are the basis of Value?
Market Value
Market Rent
Investment Value
Fair Value
Who is a registered valuer?
A registered valuer is a valuer who:
* adheres to the Red Book valuation standards
* is committed to openness and transparency
* are experts in their field, delivering credible and high-quality reports.
What is a valuation registration scheme?
Valuer Registration is a risk monitoring and quality assurance programme which checks compliance with the RICS Red Book.
RICS Valuer Registration is an independent system of regulatory monitoring, which includes a register of valuers. Monitoring by RICS Regulation begins as soon as members sign up to Valuer Registration.
What are the aims of the valuation scheme
A- To improve the quality of valuation and ensure the highest possible professional standards.
B- To meet the RICS requirements to self regulate effectively
C- To protect and raise the status of the valuation profession as the leading expertise in valuation.
How do you become a registered valuer?
Application form, which sets out how you met the competency requirements for Valuer Registration.
A period of valuation-based experience (maximum of 100 days), signed off by a Registered Valuer.
A single case study submission using work-based evidence.
CPD record.
What is a yield
Yield is a return measure for an investment over a set period of time, expressed as a percentage.
Define all risk yield
The rate used on fully let out building at market rent reflecting all the prospects and risks to a particular investment
Please explain the structure of the red book ?
1, Introduction
2, Glossary
3, Professional standards
4, Valuation technical performance standards
5 Valuation practice guidance applications
5 International valuation standards
What is effective date of the most up to date Red book?
31st January 2022
Can a desktop valuation be a red book valuation ?
Yes
For revaluation without re-inspection. Valuer to make sure there isn’t a material change.
If agreed with the Client and set out within the terms of engagement and valuation report.
What due diligence do you need to undertake when carrying out a valuation ?
a. Asbestos register
b. Business rates
c. Contamination
d. Equality act compliance
e. Environmental matters
f. EPC rating
g. Flooding
h. Fire safety compliance
i. Health and safety compliance
j. Highways
k. Legal title and tenure
l. Public rights of way
m. Planning history
In what circumstance shall a red book not be used?
In all circumstances except for the exceptions
What are the exceptions of the Red book?
a. Advice provided in preparation for and during negotiations or litigation
b. Valuer performing a statutory function except for the provision of a valuation for inclusion in a statutory return to a tax authority.
c. Valuation is provided for internal purposes without liability and not communicated to 3rd party
d. Valuation is provided as part of agency or brokerage in anticipation for receiving instructions.
e. Valuation advice is provided in anticipation of giving evidence as an expert witness
Please define Investment value
The value of an asset to a particular owner for individual investment or operational objectives
Please define market value
A
The estimated amount of which an asset or liability should exchange for on a valuation date between
Willing buyer and seller
In an arms length transaction
After proper marketing
Both parties have acted knowledgeably, prudently and without compulsion.
Please define fair value
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
Please define market rent
The estimated amount in which an interest in a property should lease for between
A- a willing lessee or lessor
B- On appropriate lease terms
C- In an arms length transaction
D- After proper marketing
E- Both parties have acted knowledgeably, prudently and without compulsion.
What are the key headings within a valuation report?
a Identification and status of the valuer
b Identification of the client and any other intended users
c Purpose of the valuation
d Identification of the asset(s) or liability(ies) valued
e Basis(es) of value adopted
f Valuation date
g Extent of investigation
h Nature and source(s) of the information relied upon
i Assumptions and special assumptions
j Restrictions on use, distribution and publication of the report
k Confirmation that the valuation has been undertaken in accordance with the IVS
l Valuation approach and reasoning
m Amount of the valuation or valuations
n Date of the valuation report
o Commentary on any material uncertainty in relation to the valuation where it is es-sential to ensure clarity on the part of the valuation user. A statement setting out any limitations on liability that have been agreed.
How do you value affordable housing units?
Using a discounted cashflow factoring rental value, a discount rate and management costs
What dictates the amount of profit you put on a scheme?
The risk profile
How do you define equivalent yield
Average weighted yield when a reversionary property is valued using an initial and reversionary yield.
How do you define net yield ?
The resulting yield adjusted for purchaser costs
How do you define gross yield
The yield not adjusted for purchasers cost (Such as an auction result)
How do you define initial yield
Simple income yield for current income and current price
How would you define reversionary yield ?
Reversionary yield is a term used in the property market to describe the yield that should be achieved if the passing rent adjusts to the level of the estimated rental value.
What is the timeline of a valuation
Receive Instructions
Check Competence
Check that there are no conflicts of interest
Issue terms of engagement
Receive signed terms of engagement
Gather information
Undertake due diligence
Inspect and measure
Research market and assemble, verify and analyse information.
Undertake valuation
Draft report
Check by another surveyor
Finalise and sign report
Report to client
Issue invoice
Archive file.
What method of valuation would you use to establish rents and yields?
Comparable
What are the five methods of valuation ?
A
Residual
Investment
Depreciated replacement costs
Profits
Comparison
What is a residual method of valuation ?
Is a method of valuation used to establish a market value of a site based on market inputs at a particular moment in time and on a valuation date.
GDV-TDC-Profit = Site value
What is a DRC method of valuation
Method used to value public and specialist buildings. i.e. school, churches, town halls, airports, oil refinery, town centers etc.
Modern equivalent - obsolescence + value of site = value.
DO not guess the percentage on Obsolescence and this comes with experience.
What is the profits method of valuation
Not competent etc
Profits method is based on the profit produced by the business operating in a premises.
Gross earnings- Expenses = profit
Profit @ 50% = Annual rental value
Annual rental value x yield = Capital value
Stand back and look.
Need to have knowledge of particular property.
What are the three valuation approaches ?
a. Income (Investment, profits and DCF)
b. Cost approach (DRC and residual)
c. Market approach (Comparable)
When would you use the profits method:
Used for income-producing properties that, due to location or some other factor, enjoy a monopoly. It is used when the physical buildings are normally only sold as part of a business.
Examples would be:
* hotels;
* golf courses and other purpose-built sport and leisure centers;
* petrol stations; and
* some restaurants.
What is net profit?
Gross profit less indirect costs
Indirect costs such as marketing, utilities, maintenance & property taxation
What is marriage value?
An additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values.
What is a special Assumption?
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.
Tell me of another way that you could calculate term and reversion
Term- use discounted cashflow to work out term
Reversion
Deffered Yp % x years perpetuity = new yp
New YP x market rent = capital value
Used for under rented property
Tell me if another way to calculate hardcore and layer
Standard calculation of investment method for the under rented part at yield low yield
Deffered yield calculation with higher cap rate due to uncertainty to calculate new YP. Then times the new YP by the difference between the under rented and market rent.
Used for overented
What are the 5 exceptions
Providing an agency or brokerage service
Acting it preparing to act as an expert witness
Performing statutory functions
Valuations for internal purposes
Valuation for negotiation
How did you decide on rental levels and expected yields at Camberley?
Using the comparable method after I sought advice from local agents
What was the psf at St Olav’s Court
circa 825 psf
What elements of the Red Book are Mandatory and which are advisory?
PS (Professional Standards) and VPS (Valuation Technical and Performance Standards) are mandatory
VPGA (Valuation Practice Guidance Applications) are advisory
Have there been any supplements to the Red Book?
RICS Valuation -Global Standards 2017: UK National Supplement
What did the RICS Valuation -Global Standards 2017: UK National Supplement include?
UK VPGA 6 Local authority and central government accounting: existing use value (EUV) basis of value
UK VPGA 7 Valuation of registered social housing providers’ assets for financial statements
UK VPGA 14 Valuation of registered social housing for loan security purposes
UK VPGA 18 Affordable rent and market rent under the Housing Acts in a regulatory context
What have been the key changes in the last update of the Red Book?
Reflect changes to the International Valuation Standards 2022
Updated to reflect latest Rules of Conduct
- Emphasising the need to agree clear and unambiguous terms of engagement, even when valuations are undertaken for excepted purposes (i.e., VPS 1-5 do not apply) under PS 1 Section 5.
- The terms quasi, partial or non Red Book should not be used in terms of engagement or reporting. Instead, the exception should be specifically stated and explained in the terms of engagement and valuation report.
- More detailed commentary on sustainability/resilience and environmental, social and governance (ESG)matters in VPGA 8 Valuation of Real Property Interests. These terms are defined in Part 2: Glossary. There is also a reference to the proposed RICS Guidance Note Sustainability and ESG in Commercial Property Valuation and Strategic Advice 3rd Edition, also due to be published in 2022.
- Various amendments are made to the VPGAs, in particular VPGA 4 Individual Trade Related Properties and the reference to IVS 230 Inventory.
- Valuers must refer to the latest RICS valuation guidance, as well as being aware of the changes and how they affect their valuation work -amending any valuation templates or proformas used, including reports and terms of engagement.
What are the different types of yield?
Initial Yield -The relation between current income and price (usually allowing for the cost of Purchase) = Current Income / Price
Reversionary Yield -The relation between the rent receivable at a future date, such as when re-letting takes place, and the price of property = Market rent / price
Equivalent Yield -Is the weighted average between initial and reversionary yield.
Equated Yield -Is the internal rate of return given certain growth assumptions.
All Risk Yield -Is a yield figure which reflects within it the future benefits and risks to which the investment is subject.
How to calculate IRR
- Input current market value as a negative cash flow
- Input projected rents over holding period as a positive value
- Input projected exit value at the end of the term assumed as a positive value
- Discount rate (IRR) is the rate chosen which provides a NPV of Zero
What is NPV
NPV is the summation of the discounted cashflows of the project
What does the RICS Guidance Note Comparable Evidence in Real Estate Valuation say?
Outlines the Hierarchy of Comparable Evidence:
Category A Evidence - Direct Comparables:
Completed transactions of near-identical properties for which full and accurate information is available; may include information from the subject property itself.
Completed transactions of near-identical properties for which some information is available.
Where offers have been made but there is no binding contract.
Asking Prices
Category B Evidence - General Market Data that can provide evidence:
Historic evidence/ demand and supply data from renta, owner occupier or investment data,
Category C evidence -
Transactional evidence from other real estate types and locations
other background data, i.e. interest rates
Is there any RICS Guidance on the comparable method?
Yes - RICS Guidance Note Comparable Evidence in Property Valuation, 2019
What is a years purchase?
The number of years it will take for a property to repay its purchase price
What types of valuations are excluded from the Red Book?
Statutory
Agency
Internal
Negotiation/Litigation
Expert Witness
What are the Valuation Technical and Performance Standards?
VPS 1 - Terms of Engagement (scope of work)
VPS 2 - Inspections, investigations and records
VPS 3 - Valuation reports
VPS 4 - Bases of value, assumptions and special assumptions
VPS 5 - Valuation approaches and methods.
VPS 1 - What is included with your standard Terms of Engagement?
In accordance with VPS 1:
- ID & Status of Valuer
- ID of Client
- ID of other users
- The property
- Currency
- Purpose of valuation
- Basis of Valuation
- Valuation date
- Nature and source of information to be relied upon
- All assumption and special assumptions
- Format of the report
- Restrictions on use
- Confirmation that it will be undertaken in accordance with IVS.
- Fee
- Firm registration and CHP
- Compliance
- PII Caps
Where are the definitions in the Red Book?
VPS 4 - Basis of value, assumption and special assumptions.
VPS 4 - how many bases of value are there?
Market Value
Market Rent
Fair Value
Investment Value
Equitable Value
Liquidation Value
What are the recent 2022 updates to the Red Book?
Not using the terms ‘quasi red book’ if a valuation is to deviate from the red book it should be explicitly stated and explained why
Reiterating the importance of clarity in terms of engagement
Need to comment on ESG factors VPGA8
What other RICS information is key to UK valuation?
RICS Valuation Global Standards: UK national supplement:
- published 2018, effective January 2019
- augments the Red Book Global, not a supplement
- contains 18 VPGAs,
- most advice is advisory guidance
What is the purpose of the RICS Valuation - Global Standards (UK National Supplement) 2018?
- To make it easier to read and more user-friendly.
- Clear advice on what is and isn’t mandatory.
- New UK VPGAs included for the valuation of central government assets, local authority assets and registered social housing provider’s assets.
What are the UK VPGAs?
- Valuation for financial reporting
- Valuation for registered social housing providers’ assets for financial statements
- Valuation for charity assets
- Valuation for commercial secured lending purposes
- Valuation for residential mortgage purposes
- Valuation of CGT, IT, SDLT and ATED
How would you value ground rents
Leasehold Reform (Ground Rent) Act 2022 puts to an end ground rents for new, qualifying long residential leasehold properties in England and Wales.
Name a time you utilised the investment method?
Town Centre, Camberley – I was asked to appraise the site following an off market introduction. As this site was a regeneration schemes the initial designs included Student Accommodation, Retail and Office space. To value this I reviewed various rental comparables for all three uses and seeked advice from local commercial agents regarding expected yields and rental levels in the area. Using the information gathered I utilised the investment valuation to determine capital values for the various uses and included these within my overall residual valuation for the scheme.
Name a time you utilised the comparable method?
St Olav’s Court, Rotherhithe – I prepared a residual valuation to advise Clarion’s bid for the site. To attain sales values I utilised the comparable method using Molior, Rightmove, Zoopla and Land Insight to identify comparables in the area, which I then utilised in the residual valuation for the site. I then reviewed the comparables in further detail to understand the variation in the comparables I had selected and decided on the correct sales value per sq. ft. This included at looking at the age of the development they belonged to, specification, whether the scheme was Permitted Development and the proximity to nearby infrastructure and amenities. I am aware that these comparables are limited and that each individual property has variables that affect its value such as condition and property type.
