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RICS APC > Valuation > Flashcards

Valuation Flashcards

1
Q

Why is statutory due dilligence done?

A

To check there are no material matters which could impact upon the valuation.

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2
Q

What could statutory due dilligence involve?

A

Checking the following:
Abestos Register
Contamination
Equality Act 2010 Compliance
Environmental matters (high voltage power lines / electric substations)
EPC rating
Flooiding (Envrionmental Agency website)
Fire Safety Compliance
Health and Safety Compliance
Highways (are roads adopted)
Legal title and tenure (check boundaries / ownership / deeds of covenant, easements, rights of way, restrictive covenants, way-leaves).
Public rights of way (from OS sheet)
Planning history and compliance.

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3
Q

What is the difference between an internal valuer and external valuer?

A

Internal valuer is employed by the company to value the asset of the company/enterprise. Internal use only. No 3rd party reliance.

External valuer has no material links with the asset or the client.

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4
Q

Three important steps before any valuation?

A

Competence - SUK - Skills, understanding, knowledge - If no, refer to RICS website.

Independance - Are their any conflict or personal interests.

Terms of engagement - Set out in writing the fill confirmation of instructions to the client prior to starting work and recieve written confirmation. Confirm competence of valuer. Confirm the extent of limitation of the valuers inspection.

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5
Q

GIve me a timeline of a valuation?

A

Receive instruction - Check CCC - Gather information (leases + planning etc) - Staturtory due dilligence - Inspect + Measure - Market research - Undertake Valuation - Draft report - Have valuation and report considered by another surveyor - Finalise and sign - Report to client - Issue invoice - Ensure file is in good order for archiving.

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6
Q

5 methods of valuation?

A

Comparable method.
Investment method.
Profits method.
Depreciated replacement cost.
Residual method.

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7
Q

Three Valuation appraoches?

A

Stated within IVS 105 -

Income approach - convert current and future cash flow into a capital value (Investment, residual and Profits)

Cost approach - reference to the cost of the asset via purchase or construction (DRC)

Market approach - Using comparable evidence available (Comps).

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8
Q

Hierarchy of Evidence for Valuations?

A

Different hierarchy to the rent review handbook.

Categorises evidence in to 3 categories.

CAT A - direct comparables to subject property, contemporary, near-identitcal properties with full and accurate information is availble / similar / near comparables / on the market stuff / asking prices.

CAT B - general market data that can provide guidance - information from published sources or commercial databases, historic evidence, demand and supply data.

CAT C - transactional evidence from other real estate types and locations and other background data (interest rates, yields, stock market).

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9
Q

When do you use the investment method of valuation?

A

When there is an income stream to value. The rental income is capitalised to produce a cap val.
Conventional method assumes growth implicit valuation approach.
An implied growth rate is derived from the market yield.

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10
Q

What is the term and reversion method?

A

Used for reversionary investments (MR is more than passing rent)/ under rented.
Term is capitalised until review/lease expiry at an initial yield.
Reversion to MR valued in perp on a reversionary yield.

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11
Q

UsedLayer/hardcore method?

A

Used for over rented investments (passing rent is more than MR).

Income flow divided horizontally.
Bottom slice = MR
Top Slice = Rent passing less MR
Higher yield applied to top slice to reflect additional risk
Different yields used depending on comparable investment evidence and relative risk.

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12
Q

How do you calculate yield?

A

Used to measure investment return, expressed as a % of capital invested.

Yield is calculated by income/price x 100.

Yield adopted = comparable evidence.

A YP is claiclated by 100/yield - number of years required to its income to repay its purchase price.

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13
Q

What factors affect yields?

A

Rental and captial growth
use of property
quality of tenant
quality of location
quality of building
Lease term
Obsolescence
Voids
Security and regularity of income
Liquidity

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14
Q

What are yield in your field of work?

A

Retail
Prime Prime = 2.75% -3.5%
Other = 6.5%
Secondary = 8.25%

Office
Grade A Prime = 4% - 4.5%
Secondary = 6% - 7%

Industrial
Prime = 3.5% - 4%
Secondary = 5% - 5.5%

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15
Q

Define All Risk Yield

A

The renumerative rate of interest used in the valuation of fully let property let at market rent reflecting all prospects and risks attached to the particular investment

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16
Q

Residual appraisal and methodology?

A

Work out gross development value

dedeuct

build cost
professional costs
s.106
cil
stamp duty
agent fees
contingency
finance cost
acquisition costs

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17
Q

Rate of construction?

A

£125 resi/office psf
£60 industrial psf

South West

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18
Q

An example of special purchasor?

A

Additional value through acquiring the property.

Leaseholder buying the freehold

Neighbouring/expanding owner.

Long leaseholder - outside act lease - marriage value.

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19
Q

Ransom strip

A

stokes v cambridge (1961) - ransom stip 1/3 value

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20
Q

Definition of a yield?

A

Rate of return on an investment

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21
Q

Equivalent yield?

A

Weighted average between term and reversion - inital and reversionary.

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22
Q

True yield?

A

Rent paid in advance.

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23
Q

Nominal yield?

A

rent paid in arrears.

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24
Q

When does the Red Book not apply?

A

ALIES

Agency
Litigation/negotiation
Internal
Expert Witness
Statutory Basis

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25
Q

Regulated purpose valuation?

A

Theres 5 examples,
`
When a valuation is relied upon by a 3rd party who did not comission the valuation.

i.e
Stock exchange
Financial accounts
Takeover and mergers
Unregulated property unit trusts
Collective Investments Schemes

UK RED BOOK SUPPLEMENT VPS 3.

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26
Q

What basis on IFRS?

A

Fair value

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27
Q

Give an example of special assumption?

A

Assuming planning has been granted.

Assuming something is true when its not the case.

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28
Q

Give an example of an assumption?

A

Something is believed is to be true and dont have to investigate it further.

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29
Q

How would you value a hotel?

A

Profits method

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30
Q

Profits method

A

Turnover - less costs of sales = Gross profit - less operating expenses - Interest/tax/deprection/amoritisation

Could include R = Rent

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31
Q

Structure of the Red Book

A

6 parts:

Introduction
Glossary
PS
VPS
VPGA
IVS

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32
Q

Changes in the Red Book?

A

Compliance with RBG + terms to reflect this in TOE
OFRS 13 and 16 need to provide reasonable possible fair value measurements.
Profit method - Self stroage, PBSH, flexible workspace
Interpretation of ESG and Sustainability. - note within VPGA 2.

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33
Q

When is the DRC not used?

A

For secured lending purposes

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34
Q

What does PS1 cover?

A

Professional Standards - Compliance with standards and practice statements where a written valuation is provided.

When does a valuation have to be a red book?

Mandatory use for all valuation - except for 5 reasons:
ALIES

35
Q

What does PS2 Cover?

A

Ethics, Competency, Objectivity and disclosures.

Members undertaking valuations must act with in accordance with the RICS rules of conduct.

Valuer and firm must act objectively - not influenced by any situation that could threaten objectivity.
Professional scepticism when revewing data
Detailed advice is proved on dealing with conflicts of interest.

TOE must understand the clients requirements and comly with the minimum TOE - demonstrate competence.

36
Q

What does VPS 1 Cover?

A

Terms of engagement (IVS 101 Scope of work)

Minimum matters must be confirmed in writing to the client as a minimum Prior to commencing Red Book. Include:

identification of valuer
Identification of client
identification of other intended users
Asset to be valued
Currency
purpose of valuation
basis of value
valuation date
extent of investigation
nature and source of the info to be relied on
assumptions and special assumptions
format of the report
restriction for use, distribution and publication.
confirmation of RBG/IVS compliance
Fee basis
Complaints handling procedure
Statement on the valuation may be subject to compliance by the RICS
Limitations on liability agreed

37
Q

Restricted information valuations

A

It is a RBG valuation unless for one of the specific purposes set out in PS1.
Valuer should consider:
Nature of restriction must be agreed in writing in TOE
Possible valuation implications of the restriction confirmed in writing before the value is reported
Is the restriction reasonable with regard to the purpose of the valuation
Restriction must be referred to in report

38
Q

What does VPS 2 cover?

A

Inspection, Investigations and Records

Inspections - valuers must take the necessary info to verify the info being relied and ensure info is professionally adequate to for its purpose

Restrictions should be given serious consideration as to TOE, Implications, Purpose and refer to it within the report.

Records - Proper records must be held of the inspectios and investigations and of other key inputs in an appropriate business format
Note importance of ESG and Sustainability

39
Q

What does VPS 3 cover?

A

Valuation reports (IVS 103 Reporting)

Minimum requirements to be stated in the report are:

ID and status of valuer
Client and any other intended users
Purpose of valuation
ID of the asset to be valued
Basis of value
Valuation date
Extent of investigation
Nature & Source of information relied on
Assumptions and Special Assumptions
Restriction on use, distribution and publication
Insutrction undertaken in accordance with IVS Standards
Valuation approach and reasoning
Valuation figures
Date of valuation report
Comment on market uncertainty
Statement setting out any limitations on liability that has been agreed.

40
Q

Tell me about draft valuations?

A

Can be given but must be marked DRAFT for internal purposes only, cannot be relied on and cannot be published on any account.
Subject to completion.

41
Q

What about ESG + Sustainability?

A

Note the importance given to Valuers having regard to the relevance and significance of ESG and Sustainability factors which should then form an integral part of the valuation approach and reasoning.

42
Q

What does VPS 4 Cover?

A

Valuer must determine the basis of value that is appropriate for every valuation to be reported.

Definitions

Market Value - estimated amount for which an asset or liability should exchange, on the valuation date, between a willing buyer and seller, in an arms length transaction, after proper marketing, where the parties have acted knowledgeably prudently and without compulsion.

Market Rent - estimated amount for which an asset should be leased, on the valuation date, between a willing lessor and a willing lessee, on appropriate lease terms, in an arms length transaction, after proper marketing, when parties had each acted knowledgeably, prudently and without compulsion.

Fair Value - IFRS 13 - the price that would be recieved to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, on the basis of valiation is now required if the IFRS have been adopted by the client - generally consistent with Market Value.

Investment value - the value of an asset to a particular owner, or prospective owner for individual investment or opertation objective, may differ from MV, this is sometimes used as a measure of worth to reflect the value against the clients own investment criteria.

43
Q

Whats does VPS5 Cover?

A

Valuation approaches and methods (IVS 105)

Valuers are responsible for choosing and justifying their valuaion appraoch and use of model - in some cases more than one may be appropriate.

44
Q

What does VPGA mean?

A

Valuation Practice Guidance Application

45
Q

How many VPGAs are there?

A

10

46
Q

VPGA 1?

A

Valuation for inclusion of financial accounts

Fair value will be adopted for all IFRS adopted accounts
perscribed Performance Standards (PS) must be adhered to

47
Q

VPGA 2 - Conflicts?

A

Valuations for secured lending

Check for conflicts for secured lending valuations:
Any previous current or anticipated involvement with the borrower or property to be valued must be disclosed.
Previous involvement is within last 2 years but under certain conditions can be longer.

If valuer or client consider that involvement creates a conflict that cannot be avoided then it must be declined. VPGA 2 gives examples: longstanding relationship with borrower or owner, valuer will gain a fee from intodiction the transaction to lender, financial interest in the property holding or borrower, valuer retained to act in the disposal or letting of the completed developemnt on the subject property.

It is clearly stated its the valuers repsonsiblity to accept or not. If conflicts can be managed then must have arrangements recorded and included in TOE and report.

48
Q

VPGA 2 - Reporting?

A

Additional information must be reported to give the lender more information regardign the instructions and be able to advise whether to agree the loan. Extra info includes:

Disclosure of any involveent identified in TOE or arrangements on COI. Or a statement that valuer is not involved.
Vals method adopted, supported where requested with the calculation.
Recent transaction has occured or a provisional agreed price has been disclosed - extent of which that info has been accpeted as MV. - a statement if no info has been revealed.
Comments on ESG
Suitability for mortgage
Anything that could affect the price.
Any other potential conflicts with definition of MV or its underlying assumptions.
If a special assumption - then a comment on the difference in valuation.

49
Q

VPGA 8?

A

Valuations of real property interests

Covers inspection and investigations, with particula emphasis on ESG and environmental constraints,
Identifies ESG and sustainability issues including the need to consider direct vals factors (storm or flood risk), indirect valuation factors (resilience or carbon emissions), physical risks (heat or wildfore) and transition risks (regulatory change or carbon emission).

Direct vals factors
Indirect vals factors
Physical risks
Transition risks

50
Q

VPGA 10?

A

Matters that may give rise to material valuation uncertainty

Overiding requirement that a vals report must not be misleading.
Valuer should clearly draw attention to and common on any issues resulting in material uncertainty on vals date relating to risks surrounding the valuation of the asset.
A standard caveat should not be used.

51
Q

Tell me about the IVS?

A

It includes
General Standards - address matters such as TOE, approaches to and bases and methods of valuation as well as reporting.
Asset Standards - provide requirement relationg to specific types of asset, such as real property and development property.

52
Q

RICS National Supplement UK?

A

Effective Jan 2019, and set out clarification that the UK Red Book supplement augments the Red Book. It provides specific requirements for members on the application of RICS valuations undertaking in the UK subject to UK Jursidictions. Most advice is advisory.

53
Q

What is a regulated purpose valuation?

A

These are valuations relied on by a 3rd party who have not commissioned the valuation.

Valuations for five purposes:
Financial reporting
Stock exchange listing / inclusion in prospectus
Takeovers / Mergers
Collective Investment Vehicles
Unregulated property unit trusts

CUFTS

Must state how long caluer has acted for client for regulated valuation purposes and the extent and duration of the firms relationship with the client
In the last financial year, whether percentage fee income from the client is less than or more than 5% of total fee income - if more than 5 its to the nearest %.
Whether since the end of the last financial year this has changed or will change.
There should be a policy in place on the rotation of valuers when the asset is reguarly valued. RICS recommends 7 year max rotation policy.

When a property was purchased or an intro fee accepted by the vauer when the property was purchased, it can not be valued for a regulatory purpose valuation for 12 months by the same firm.

54
Q

What are the 3 VPS 5 Valuation approaches?

A

Cost
Income
Market

55
Q

UK PS 1?

A

Compliance with valuation standards within the UK Jurisdiction

Ensure complaince with UK Law - requirements which are subject to UK jurisdiction.

They supplement the RICS Red Book Global

56
Q

UK VPS?

A

UK VPS 1: Terms of engagement and reporting red book compliance.

57
Q

UK VPS 3?

A

Regulated purpose valuation supplementary requirements.

Mandatory that you do not carry out vals on a property that you were part of the purchase 12 months ago

58
Q

Name some UK VPGAs?

A
  1. Financial reporting
  2. Registered social housing providers’ assets for financial statements
  3. Charity assets
  4. Commercial secured lending purposes.
  5. Residential mortgage purposes
  6. Registered social housing for loan security purposes
  7. Capital gains tax, Inheritance tax, SDLT and Annual Tax on Enveloped Dwellings.
59
Q

RICS indpendant review on investment valuations?

A

Done by Peter Pereira Gray
Commisoned by RICS Standards & Regulation Board
Have accepted findings in full and will implement them in due course
Recommendations include:
Standardising governence for high risk valuations
Rotation for process for valuers
Develop a Valuation compliance officer role to cover valuation process and rotation
Continue to diversify the RICS
Need for further specific RICS guidance to clarify RICS expectations around culture and behaviours of RICS members doing valuations.

60
Q

RICS Guidance Note on Sustainability and ESG in commercial property valuations 2021 (effective Jan 31 2022)

A

Procides useful glossary of relevant terms and factors which valuers should incorporate into their valiation approach:
TOE
Valuation purposes
Inspection
Reporting
Also provides guidance on relevant sustainability characteristics, considerations and risks to think of the when analysing comps.
How they should be reflected in valuation methodology.

61
Q

Margin of error?

A

Depends on type of property, narrower for relatively straight foward valuations.

10% margin gor KS Lincolnvs Richard Ellis om respect of 4 hotel in 2005.
Judge declared:
5% for standard residential property
one of commercial 10%
and if thre are exceptional features - 15%

62
Q

What is hope value?

A

The value arising from any expectation that future circumstances affecting the property may change - such as securing planning, where no planning exists.

63
Q

Charities valuations?

A

Outside my scope of competence, would refer them to the charities team at Rapleys. I am aware that valuations have to be done in accordance with the Charities Act 2011. Also UK VPGA 8. Market Value or Market Rent.

64
Q

Marriage value?

A

Created by the merger of interest - physical or tenurial
Undertake a before and after valuation and calculate the level of marriage value created.

65
Q

Stamp Duty?

A

£0 - £150k = 0%
£150k - £250k - 2%
£250k+ = 5%

66
Q

Stamp Duty on Leases?

A

Yes

Calculated on NPV of the lease. discounted at RPI.
NPV up to £150k = 0%
NPV over £150k = 1%
NPV over £5m = 2%

Break clauses excluded. Calculator on HMRC website.

67
Q

Surrender and renewal valuations?

A

Surrender of the existing and agree to grant a new lease - either extended or on differnet terms.
Premium to reflect the change in the value of the leasehold interest.
Need to value the before and after leasehold interests

68
Q

What is a particular buyer?

A

a particular buyer for whom a particular asset has special value because of advantages arising from its ownership that would not be avialbel to other buyers in a market.

Special value is an amount that reflects particular attributes of an asset that are only of value to a special purchasor.

Special purchasor - tenant buying their own freehold.

69
Q

How you value a long leasehold interest?

A

Deduct ground rent from the gross income to calculate the net rent recieved.
This is capitlaised at a yield for the length of the lease to create a market value.
Single rate yield duly discounted to relfect an additional element of risk.

DCF or Sinking fund can also be used.

70
Q

What are standard purchasors costs?

A

SDLT
Agent fees of 1% of purchase price + VAT
Solicitor fee of 0.5% of purchase price + VAT

71
Q

How to calucalte WAULT

A

Wheighted average unexpired lease term remaing to the first break of expiry of lease. Weighted by the contracted rent.

72
Q

Ransom strip?

A

Value of ransom strip in order of 15% - 50% of the development value unlocked by the inclusion of the ransom strip.
Stoke v Cambridge in 1961 33% of the uplift in the development site value was awarded to the owner of the ransom strip.

73
Q

Zoning?

A

valuation technique.
rental value reduces away from the street, halve back in 6.1m (20 ft zones)/
9.14m (30 ft) in prime london, belfast and scottish retail streets.
Basement and FF as a/10 depending on comps.
Return fronrage is 10% uplift - depending on comps
Natural zoning is when it reflects physical properties of the premises such as steps.
Masking is for hidden/obscured areas.

74
Q

Party Walls?

A

Specialist area - Party Wall Act 1996 provides framework. The act provides a building owner who wishes to carry out various sorts of work to an existing party wall - additional rights. If you are a party wall owner you must inform all adjoining owners of your intention.

75
Q

Right of Light?

A

Rights of light of a building arises after 20 years uninterupted enjoyment of light w/out the consent of a 3rd party, by way of an easement. Injunctions can be granted.

76
Q

Covid - 19 and Valuation practice alers?

A

RICS COVID-19 pratice alert in marhc 2020 and July 2021. Explains the need to ensure that inspection and use of data do not lead to unnaceptably reduced standards of service or risk.

Wording can be used if their is material uncertainty on the availability of sufficient market evidence.

along the lines…” our valuation of X is therefore reported as being subject to material valuation uncertainty as set out in VPS 3 and VPGA of RICS RBG. In respect of this vaulation less certainty and a higher degree of caution should be attached”.

Withdrawn March 2022.

77
Q

RICS Valuer Registration Scheme?

A

Regular monitoring scheme for all valuers carrying our RBG Vals from October 2011. 3 main aims:
Improve quality of vals and ensure highest possible professional standards
Meet RICS requirement to self regulate effectively
Protect and raise the status of the valuation profession as the leading expertise in valuation.

Clients should expect:
openness and transparency
RICS protection and international valuation standards
Expertise and clear reporting
World class regulations.

Not mandatory for work excluded from RBG

Vals level 3 or post route qualification.

To register info required on vals work undertaken:
type, purporse, number of vals, firms total fee income from RBG in last year, Data sources used, Quality assurance audit procedures in place, History of any negligence claims.

RICS monitor throught first annual return. and additional ranges with RISK Based Reviews from desktop investigations to site based Regulatory Review Visits, dependant on risks identified.

Head of Regulation has power to remove a valuer from the Scheme

78
Q

TOE for Vals?

A

identity and status of valuer
identify of client
any intended users
Asset
Currency

Purpose of valuation
basis of valuation
valuation date

extent of investigation
nature of source to be relied on
assumptions + special assumption

Format of report
restriction on use/distribution
Confirmation of RBG/IVS compliance

Fee basis
complaints handling
statement
RICS compliance subject to it
Limitation on liability

79
Q

Assumption example and special assumption example?

A

Assumption = area OOB was/is of the same specification. OR no restriction on title

Special assumption = has planning - requires investigation.

80
Q

Explain the proftis method?

A

Calculate turnover
Deduct operating costs
To get FMOP
Get yield from comparables to find multiplier.

81
Q

Where do i find TOE standards within the Red Book Global?

A

Located within VPS 1 of the RBG

82
Q

What types of yield are there?

A

All Risks Yield - renumarative rate used in the valuation of fully let property let at market rent reflect the prospects risks attached to teh particualr invesment.

True yield - Rent paid in advance and not in arrears.

Nominal Yield - assumes rent is paid in arrears

Gross yield - yield not adjusted for purchasors costs

Net yield - adjusted for purchasors costs

Equivalent yeild - average weighted in term and reversion

Initial yield - simple income yield - rent divided by current price

Reversionary yield - MR diveded by current rent on investment below MR.

Running yeild - Yield at any one moment.

83
Q

Contractors valuation?

A

Modern replacement costs
Adjust for obsolesence
Land Value

RICS APC (11 decks)

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