Valuation Flashcards
1
Q
What are the key comparative elements?
A
- building age and condition
- building spec and layout
- efficiency and adaptability
- legal
- limitations on use
- location
- size
- transaction date
2
Q
What are the sources of comparable evidence?
A
Market evidence:
- direct transactional evidence
- publicly available info
(published by gov or e.g. real estate agents)
- published databases
(can provide a background to market trends)
- asking prices
- historic evidence
Indices:
- MSCI indices (cover principal commercial investment markets)
- larger firms of real estate advisors
- bdg cost data indices (for residuals)
AVMs
3
Q
What is the hierarchy of evidence?
A
CAT A: direct comparables
- contemporary completed transactions for near-identical properties with full and accurate info
- similar real estate, enough reliable data
- similar real estate marketed, offers, not completed
- asking prices
CAT B: general market data
- info from published sources/commercial databases
- other indirect evidence (e.g. indices)
- historic evidence
- demand/supply data
CAT C: other sources
- transactional evidence from other real estate types and locations
- other background data (e.g. interest rates, stock, market movements)
4
Q
What factors affect value?
A
- resi = location, aspect, outlook, physical condition, facilities
- retail = prime/secondary/tertiary, location, size, accessibility, parking ratio, tenant quality and mix, bdg quality
- offices = location, bdg quality, layout, facilities, service costs, bdg efficiency
- industrial = accessibility to transport links, bdg design, size, age, condition
- dev. potential = amount and density of permitted dev,
assumed value of completed dev,
ground conditions, dev costs,
allowance for risk, finance costs - investment: lease terms, break option, covenant, RR, tenure
5
Q
How do you analyse a comparable?
A
- establish a common measurement or comparison standard
- analysis of the comparable data to provide meaningful comparable evidence (adjustments):
quantitative (cost of renovation)
qualitative (diff in location) - a matrix format often assists the valuer’s judgement
- valuer has to stand back and weigh up range of evidence
- requires technical ability and experience of relevant market and judgement developed from that experience- the process should lead to a ranking of the comparable evidence and an assessment of where the asset being valued fits into that ranking
6
Q
How do you deal with a shortage of comparable evidence?
A
- the valuer has to look further afield and across a wider range of indicators when transactional evidence of direct comps lacking
- uncertainty generated by a lack of comp evidence is a common feature of the real estate market
- ensure the client understands this!
7
Q
What is a comparable?
A
- an item of information used during the valuation process as evidence to support the valuation of another, similar item
- val of any asset relies on the economic principle of substitution
- ideally, comparable evidence should be:
comprehensive;
very similar;
recent;
the result of an arm’s length transaction in the market;
verifiable;
consistent with local market practice;
the result of underlying demand
8
Q
Why might comparables not meet ideal criteria?
A
- a limited no. of available comparable transactions
- a lack of up-to-date evidence
- special purchasers
- a lack of similar or identical evidence
- real estate markets are not fully transparent
9
Q
What valuation approaches might you use comparables in?
A
Market approach:
- adopts the principle that the value of one property may be derived by comparing it directly with market transactions of similar properties
Income approach:
- investment method
net rental income and a capitalisation factor
DCF key inputs inc rent, rental growth rate, discount rate
- profits method
assessment of a fair and maintainable level of trade
Cost approach:
- DRC 2 components: depreciated cost of bdg and val of land
10
Q
What is a reversionary yield?
A
the Market Rent expressed as a % of the Purchase Price or Market Value
11
Q
What is an initial yield?
A
the net income at the date of purchase expressed as a % of the Purchase Price
12
Q
How did you/would you value an over-rented investment?
A
Term and reversion
- the term income has the higher risk
- the term income is capitalised at a higher rate than the reversionary income to reflect the risk
- the % uplift from the market-rented rate is a function of
the amount of over-renting
the time period until reversion to the market rent
the quality of the tenant’s covenant
if tenant of 1st class covenant, no risk so market rent rate
Hardcore
- the top slice income (overage/froth) is capitalised from now until reversion
13
Q
Explain the process of the hardcore/layer technique?
A
(under-rented)
- the bottom slice of the income is capitalised at below the market-rented rate to reflect the reduced risk
- the top slice is capitalised above this rate to reflect the increased risk
14
Q
Explain the process of the term and reversion technique?
A
(under-rented)
- the term is capitalised at a rate slightly lower than the market-rented rate to reflect the reduced risk
- the rent at review/reversion should arguably be an increased risk as it is not yet agreed
15
Q
What techniques can be used to value an under-rented reversionary investment?
A
- term and reversion
- hardcore/layer
16
Q
What is a reversionary investment?
A
A reversionary freehold is an investment that is let at a rent other than the Market Rent
- traditionally, under-rented
- can be over-rented
17
Q
How is rental and capital growth accounted for in a conventional investment valuation?
A
Expectations of rental growth are not made explicit in the valuation but are implicit in the capitalisation rate
18
Q
What would you do if you had to value an investment property but could not find any evidence of yields?
A
gilt yield + risk premium - growth rate
19
Q
How would you carry out a diminution valuation in relation to a dilapidations claim?
A
usually carry out vals of property “in compliance” and “out of compliance” (not Red Book val)
- assess MV of property in each condition
- likely purchaser of property in each condition
- vals may be required for each scenario
- val date is termination date
- judgement as to whether items in SoD ind or cumulatively likely to affect value and how cost of remedial work is reflected in val if at all
20
Q
What is “supersession” in relation to dilapidations claims?
A
e.g. where a LL completed remedial work that is grander than “basic”;
sometimes the LL’s claim could have been superseded
i.e. if the LL would still have undertaken the grander work or the market demands grander work be undertaken,
whereas at other times the LL would still be able to claim for the cost of basic remedials
21
Q
What is recoverable under dilaps according to Dilapidations GN 2016?
A
typically the lower of the cost of the works and diminution of value of the LL’s reversion as a consequence of the T’s breaches
s18 of LTA 1927 limits the damages:
Limb 1: damages shall not exceed the amount by which the value of the reversion is diminished
Limb 2: no damage shall be recovered for a breach if the premises would at or shortly after termination be pulled down or structurally altered
(an example of “supersession”)
22
Q
Why do property investors require a risk premium?
A
to adequately compensate them for the risk taken
23
Q
What do you understand by the expression risk premium?
A
comprises Market Risks and Specific Risks
24
Q
What is a risk-free rate?
A
the gross redemption yield on UK gilts
25
How would you arrive at a discount rate when carrying out a discounted cash flow?
The discount rate should adequately compensate an investor for the risk taken
- an adequate return can be calculated by taking a Risk-Free Rate and adding a Risk Premium
(gross redemption yield on UK gilts
+ Market Risks i.e. rental growth, structural change
+ Specific Risks i.e. covenant, lease structure)
26
How is growth calculated in a discounted cash flow?
The target rate/IRR/Equated Yield for growth-explicit calcs
The All Risks Yield/Market Cap Rate for growth-implicit calcs
27
What is the fundamental difference between conventional investment valuation techniques and discounted cash flow techniques?
With DCFs, assumptions about future cash flows are explicitly shown
28
What effect does rent received quarterly in advance have on the yield?
A nominal yield is based on rent being received annually in arrears
The True Equivalent Yield is the effective rate when rent is received quarterly in advance
It is slightly higher
29
What are the names of the two yields in the YP Dual Rate?
- The remunerative rate
(generally taken at 1% to 2% above the freehold market rent rate to reflect that
- the profit rent is the top slice income
- the inconvenience of having a LL and a lease
- the difficulty of assigning/sub-letting near end of lease
- the poss of substantial liability for dilapidations)
- the accumulative rate
(the interest rate paid on the sinking fund element used to replace the capital outlay,
may be adjusted for tax)
30
How would you value a leasehold interest/ascertain if a premium can be charged for the assignment of a lease?
- a leasehold interest has a value when there is a Profit Rent (Market Rent less rent paid) and an unexpired term of at least 1 year
- a leasehold interest is valued by capitalising the Profit Rent by either:
the YP dual rate
the YP dual rate, tax adjusted, or
the YP single rate
31
How is top slice income valued?
For under-rented properties, a higher yield is applied to work out the YP to times the marginal income by to reflect the additional risk.
For over-rented properties, the froth is capitalised from now until reversion - again, a higher yield is applied.
32
What do you understand top slice income to be?
When a property is under-rented, it is the additional income to market rent.
When a property is over-rented, it is the amount it is over-rented by.
33
What is a true equivalent yield?
A nominal yield is based on rent being received annually in arrears.
The TEY is the effective rate when rent is received quarterly in advance.
34
What is an equated yield?
- The Internal Rate of Return with growth of a property investment
- the overall rate of return with growth, the true equivalent yield
- the discount rate at which the DCF equals the purchase price of the investment
i.e. the rate of which the NPV is 0
- can be calculated by Parry's Internal Rate of Return table (reflecting projected Rental Growth)
35
What is an equivalent yield?
- the weighted average of the Initial Yield/Running Yield and the Reversionary Yield
- the internal rate of return from an investment disregarding any rental or capital growth
36
What are the VPS1 Terms of Engagement?
a. ID & status of the valuer
b. ID of the client(s)
c. ID of any other intended users
d. ID of the asset(s) or liability(ies) being valued
e. Valuation (financial) currency
f. Purpose of the valuation
g. Basis(es) of value adopted
h. Valuation date
i. Nature & extent of valuer's work inc investigations and limitations
j. Nature & source(s) of info upon valuer will rely
k. All assumptions & special assumptions to be made
l. Format of the report
m. Restrictions on use, distribution and publication of the report
n. Confirmation that val will be undertaken in line with IVS
o. Basis on which fee will be calculated
p. Where the firm is registered by RICS, ref to complaints-handling procedure with a copy available on request
q. A statement that compliance with these standards may be subject to monitoring under RICS conduct and disciplinary regs
r. A statement setting out any limitations on liability that have been agreed
37
What are the components of a comparable?
1. Address
2. Real estate type e.g. office, shop
3. Exact nature of the asset being valued or compared i.e. FH or LH
4. Location details
5. Legal e.g. lease terms
6. Brief description, spec, condition and any other relevant attributes e.g. energy efficiency
7. Accommodation/area - inc method of measurement
8. Type of transaction e.g. sale, letting
9. Date of transaction
10. Financial info e.g. rent or sale price and any incentives
11. Analysis per unit area (where appropriate)
12. Parties involved e.g. owner, tenant, agents
13. Source of info e.g. name, org, contact details
14. Any comments on the reliability of data employed
15. Date of confirmation of information
38
What are the components of a valuation report?
a. ID & status of the valuer
b. ID of the client & any other intended users
c. Purpose of the valuation
d. ID of the asset(s) or liability(ies) valued
e. Basis(es) of value adopted
f. Valuation date
g. Extent of the investigation
h. Nature & source(s) of the info relied upon
i. Assumptions & special assumptions
j. Restrictions on use, distribution & publication of the report
k. Confirmation that the valuation has been undertaken in accordance with the IVS
l. Valuation approach & 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 essential to ensure clarity on the part of the valuation user
p. A statement setting out any limitations on liability that have been agreed
39
What is an assumption under VPS4?
- an assumption is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation or verification
- any assumption must be reasonable and relevant having regard to the purpose for which the valuation is required
40
What is a special assumption under VPS4?
- a special assumption is made by the valuer where an assumption either assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant in a transaction on that valuation date
- where special assumptions are necessary in order to provide the client with the valuation required, these must be expressly agreed and confirmed in writing to the client before the report is issued
41
What is the income approach?
- based on capitalisation or conversion of present and predicted income (cash flows), which may take a number of different forms, to produce a single current capital value;
among the forms taken, capitalisation of a conventional market-based income or discounting of a specific income projection can both be considered appropriate depending on the type of asset and whether such an approach would be adopted by market participants
42
What is the cost approach?
- based on the economic principle that a purchaser will pay no more for an asset than the cost to obtain one of equal utility whether by purchase or construction
43
What are the valuation applications?
VPGA1: Val for inclusion in financial statements
VPGA2: Val of interests for secured lending
VPGA3: Val of business and business interests
VPGA4: Val of ind trade related properties
VPGA5: Val of plant and equipment
VPGA6: Val of intangible assets
VPGA7: Val of personal property, inc arts and antiques
VPGA8: Val of real property interests
VPGA9: ID of portfolios, collections and groups of properties
44
What does "Comparable evidence in real estate valuation" GN say about recording evidence?
NEED TO ADD DATE & EFFECTIVE DATE
- evidence used to arrive at an opinion of value should be recorded clearly and kept on file
- a tabular/spreadsheet layout is often appropriate
45
What is 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
(for most practical purposes consistent with market value)
46
What does VPS3 say about valuation reports?
- the report must clearly and accurately set out the conclusions of the valuation in a manner that is neither ambiguous nor misleading, and which does not create a false impression;
if appropriate, the valuer should draw attention to, and comment on, any issues affecting the degree of certainty, or uncertainty, of the val
- the report must deal with all matters agreed between the client and the valuer in the terms of engagement
47
What is a basis of value?
- a statement of the fundamental measurement assumptions of a valuation
48
What is investment value?
- the value of an asset to a particular owner or prospective owner for individual investment or operational objectives
49
What standards must valuers comply with in "PS1 Compliance with standards where a written valuation is provided"?
- International Valuation Standards
- International Ethics Standards
- International Property Measurement Standards
- Compliance with jurisdiction or other val. standards (inc statement in ToE and report that the named standards have been complied with i.e. statutory requirements)
50
What does "PS2 Ethics, competency, objectivity and disclosures" require?
- must have appropriate experience, skill and judgement and must always act in a professional and ethical manner free from any undue influence, bias or conflict of interest (professional scepticism)
- must mention strict separation between advisers once "informed consent" obtained
- RICS considers good practice to rotate valuers at least every 7 years
51
Who are the valuation standards mandatory for?
mandatory to any member or firm undertaking or supervising val services by the provision of written valuation advice
(inc AVMs, exc insurance)
52
What are the exceptions to PS1?
- providing an agency or brokerage service
- acting as an expert witness
- performing statutory functions
- providing vals purely for internal purposes
- providing val advice expressly for negotiations/litigation/as an advocate
(as a matter of good practice, VPS1-5 should be followed where not precluded by the specific requirement or context)
53
What does VPS2 say about inspections and investigations?
- inspections and investigations must always be carried out to the extent necessary to produce a valuation that is professionally adequate for its purpose;
the valuer must take reasonable steps to verify the info relied on in the prep of the val and, if not already agreed, clarify with the client any necessary assumptions that will be relied on
- any limitations or restrictions on the inspection, enquiry and analysis for the purpose of the valuation assignment must be identified and recorded in the ToE and also in the report;
any necessary assumptions or special assumptions made as a result of the restriction must be identified and recorded in the ToE and the report
54
What does VPS2 say about records?
- a proper record must be kept of inspections and investigations, and of other key inputs, in an appropriate business format
55
What does VPS2 say about revaluations?
- a revaluation without reinspection of an interest in real property previously valued by the valuer or firm must not be undertaken unless the valuer is satisfied that there have been no material changes to the physical attributes of the property, or the nature of its location, since the last assignment
56
What is the market approach under "VPS5 Valuation approached and methods"?
- based on comparing the subject asset with identical or similar assets (or liabilities) for which price info is available, such as a comparison with market transactions in the same, or closely similar, type of asset (or liability) within an appropriate time horizon
57
What is market value?
- the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and willing seller in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion
58
What is market rent?
- the estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on the appropriate lease terms in an arm's length transaction, after proper marketing and where the partners had each acted knowledgeable, prudently and without compulsion
59
Quantify purchaser's costs in percentage terms
NEEDS UPDATING SDLT
SDLT:
0% on first £150,000
2% on next £100,000
5% on all above £250,000
Agent's and legal fees:
1.8%
60
What is a net yield?
the rent expressed as a percentage of the gross acquisition price
i.e. purchase price plus purchaser's costs
61
Name the costs that a purchaser must incur when acquiring a property investment
- stamp duty land tax
- agent's fees @ 1%
- legal fees @ 0.5%
VAT on fees @ 20% ( = 0.3%)
= 1.8%
62
What is a gross yield?
the rent expressed as a percentage of the purchase price
63
What is another name for the all risks yield?
the market capitalisation rate
gilt yield + risk premium - growth rate
64
How did the all risks yield get its name?
takes into account all aspects of the investment:
- the construction (age, design, spec)
- the quality of the tenant's covenant
- the amount of rent (i.e. market-rented, under-rented, over-rented)
- the unexpired lease term
- the other lease terms
- anticipated rental growth (location)
65
What are the major disadvantages of property over the other two major investment opportunities?
- it's more management intensive
- liquidity is low
- transfer costs are high
- it's not divisible
66
What is the major attraction of property over the other two major investment opportunities?
Property investment has a higher level of risk and difficulties than investing in gilts
- so an investor will require a higher yield to compensate
67
What is a bond investment?
A bond investment has a fixed return (coupon) for a fixed period at the end of which the capital is repaid (redemption)
- over the life of a gilt/gov bond the value may fluctuate with changes in the economy
68
What are the three principle sources of investment?
- Gilts (UK government bonds)
- Equities (shares in companies)
- Property
69
Why is the YP single rate table also known as the Present Value of £1 per annum?
When an income is to be received annually
- the income received at the end of the first year has a lower PV than if the income was to be received immediately
The income received at the end of the second year
- has a lower PV than the income received at the end of the first year and so on
70
How would you value a property for which there are no comparables?
DRC
71
Explain what is included in a Reinstatement / Replacement Cost for Insurance Purposes
- Demolition
- Shoring up and weather-protection of adjoining buildings
- Rebuilding in accordance with current Building Regs
- Professional fees
72
Explain the basic approach to the Depreciated Replacement Cost Method
Gross Replacement Cost
Cost of Modern Building
LESS Depreciation
= Net Replacement Cost
PLUS Site Value
= Value as Existing
73
What is another name for the Contractor's Method?
Depreciated Replacement Cost
Basic principles of valuation:
1. Value by direct capital comparison if possible, or
2. Use the investment method, or
3. Resort to another method i.e. development = Residual,
leisure - Profits, or
4. Use the Contractor's Method
74
When is the Contractor's Method used in practice?
The method of last resort
- properties which do not usually change hands on the market (specialised properties)
- inclusion in company accounts and other financial statements
(asset vals)
- compulsory purchase (rule 5)
- rating
- non-specialised properties when there is no direct/inconclusive comparable evidence
75
What valuation checks can be carried out on a valuation produced by the Profits Method?
the valuation of leisure property is sometimes carried out by capitalising
- the gross turnover, excluding VAT, or
- the adjusted net profit by the required return on capital
other valuation checks are
- unit prices per seat (cinema)
- per bedroom (hotels/nursing homes)
76
What valuation checks can be carried out on a valuation produced by the Profits Method?
the valuation of leisure property is sometimes carried out by capitalising
- the gross turnover, excluding VAT, or
- the adjusted net profit by the required return on capital
other valuation checks are
- unit prices per seat (cinema)
- per bedroom (hotels/nursing homes)
77
Explain the basic approach to the Profits Method
It is a residual which can be expressed simply as:
Turnover (net of VAT)
LESS costs of generating the turnover
= Net Operating Profit (= rent/business profit)
which is capitalised
costs: - purchases
- wages
- heating/lighting
- repairs & decs
- insurance
- rates
- general expenses
78
Why are certain properties valued by the Profits Method?
a % of the net operating profit is taken to arrive at the Market Rent because the property is used to generate a profit
79
Name 3 property types that would be valued by the Profits Method
- cinemas
- hotels
- pubs
- theatres
80
What is the profits method also known as?
the accounts method
81
What does the case of Stokes v Cambridge mean to you?
- a compulsory purchase case
- valuation of farmland
- agreed that planning permission for development must be assumed
- subject to satisfactory access
- land which could provide satisfactory access was a track
- valued as 1/3 of the increase in value due to access
82
How would you value a ransom strip?
It is usual for the ransom strip to be valued at 1/3 of the increase in value of the development land resulting from the access
Stokes v Cambridge
83
What is ransom value?
The value of a ransom strip (land that gives access to development land)
84
What is a ransom strip?
land that gives access to development land
it has ransom value
it's usual for the ransom strip to be valued at 1/3 of the increase in value of the development land resulting from the access
Stokes v Cambridge
85
What are the usual acquisition costs of a development site?
NEEDS UPDATING
- agent's and legal fee: comprise 1% agent's fees, 0.50% legal fees and 20% VAT (0.30%) giving 1.8% of gross acquisition cost
- stamp duty land tax
from 17th March 2016 for commercial property:
0% on first £150,000
2% on next £100,000
5% above £250,000
86
How would you calculate developer's profit in a Residual Valuation?
can be calculated by either a % of total cost (eg 22-25%)
or a % of gross development value (eg 15-17%)
depends upon risk
87
What costs did you deduct (are deducted) in a Residual Valuation?
- demolition
- cost of construction
- construction fees
- cost of finance
- contingency
- agent's/legal fees
- acquisition costs
88
Describe how you have carried out (or would carry out) a Residual Valuation?
Market value of completed development
(calculated by:
- direct capital comparison
- the investment method
- the profits method)
LESS costs:
- demolition
- cost of construction
- construction fees
- cost of finance
- contingency
- agent's/legal fees
- acquisition costs
LESS developer's profit
= Market Value (Residual)
89
How would you value a green-field site with planning permission for residential development?
The Residual method is used to value land and properties with development, redevelopment and refurbishment potential
- where it is not possible to value by comparison
A residual valuation can be expressed as a simple equation:
value of completed development
LESS development costs
LESS developer's profits
= land value
90
What is the market capitalisation rate?
The yield i.e. the rate at which the market capitalises the income
91
What factors make up the all risks yield?
The yield is called the market capitalisation rate because it is the rate at which the market capitalises the income.
The yield is also known as the all risks yield as it considers all the risks of the investment:
- the construction (age, design, specification)
- the quality of the tenant's covenant
- the amount of rent (i.e. market-rented, under-rented, over-rented)
- the unexpired lease term
-the other lease terms
- anticipated rental growth (location)
92
How would you determine the Market Value of investment property let on internal repairing terms?
The investment method is used to value commercial properties that are:
- let as investments
- owner occupied
- vacant
where the majority of comparables are:
- rents (lettings, lease renewals, rent reviews) and
- investment transactions
for IRI, the outgoings that need to be deducted are:
- repairs
- management
Market Rent (net of outgoings) x YP (100/yield) = Market Value
93
How would you value a shop unit for rent review with frontages on two roads i.e. it is a through unit?
Two road frontages can result in:
- halving back from both frontages at the same or different Zone A rate(s)
94
How would you arrive at the Market Rent of a retail unit with a return frontage?
Return frontages can result in:
- a % uplift for the depth of the return (5% seems usual) depending upon the pedestrian flow
- all of a unit becoming Zone A if both frontages have equal pedestrian flow (could have a reduction for excessive Zone A)
- a % reduction for lack of internal space for shelving and display racks
95
How would you arrive at the Market Rent of the first floor of a retail unit?
Upper floors and basements may be taken as a fraction of X or:
- as a spot figure per sqm, depending upon the particular property and the comparable evidence
- x/10 is commonly used for first floor accommodation be it retail space or storage
- there is a case for valuing first floor space, which is part sales and part storage, as x/10 for the sales area and a spot figure psm for the storage space
96
What is the standard Zone depth?
6.10m (20ft)
97
What is the purpose of zoning?
the front of a shop is deemed to be more valuable than the back
98
What is extrapolation of comparable evidence?
calculating, or plotting on a graph, a value that lies outside 2 extreme points
99
What is interpolation of comparable evidence?
Calculating, or plotting on a graph, a value that lies between 2 extreme points.
After ranking the comparable evidence by weight, the valuer must adjust each piece for differences with the subject in terms of:
- physical characteristics
- location
- use
- tenure
- time scale
100
What do you understand by the expression hierarchy of evidence?
the order comps should be given weight:
- open market lettings
- lease renewals
- rent reviews
- independent experts' determination
- arbitrators' awards
101
What do you understand by the expression weighting of comparable evidence?
After assembling comparable evidence
- a valuer must weight and rank each piece
- some may be disregarded
suggest the following hierarchy of evidence:
- open market lettings
- lease renewals
- rent reviews
- independent experts' determination
- arbitrators' awards
102
What is the longest time period before a valuation date that a transaction could be accepted as being comparable?
It depends e.g. if it's a static market and the availability of comps
103
How many comparables are needed to produce a valuation?
as many as needed
104
What are contemporary valuation methods?
where DCF techniques are used
105
Name the conventional methods of valuation
- comparative
- investment
- residual
- profits/accounts
- contrator's/DRC
106
Name 3 situations that can adversely affect the Certainty of valuations
- the asset may have characteristics that make it difficult to value:
may be unusual or even unique;
potential planning permission
- limited or restricted information
- disrupted markets:
unforeseen financial, macroeconomic, legal, political or natural events
107
When is Depreciated Replacement Cost used in asset valuations?
The DRC method is used to value specialised properties
(a property that is rarely, if ever, sold in the market, except through a sale of the business or entity of which it is part, due to the uniqueness arising from its specialised nature and design, its configuration, size, location or otherwise)
DRC is the current cost of replacing an asset with its modern equivalent asset, less deductions for physical deterioration and all relevant forms of obsolescence and optimisation
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What is the fundamental difference between Market Value and Existing Use Value?
EUV disregards any alternative use
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When is Existing Use Value the valuation basis?
Local authority and central gov accounting (UK VPGA)
operational property i.e. owner-occupied is valued on the basis of Existing Use Value
(market value disregarding any alternative use)
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What is an asset valuation?
A valuation for financial reporting
There are 2 financial frameworks in the UK and RoI:
- IFRS (International Financial Reporting Standards)
- UK and Ireland Generally Accepted Accounting Practice (UK GAAP)
Publicly listed companies in the UK are required to apply IFRS, others have a choice between the 2
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What is a Regulated Purpose Valuation?
Disclosures where the public has an interest or upon which third parties may rely (rotation policy every 7 years)
- Valuation for financial statements (UK VPGA 1 and 2)
- Valuations in connection with takeovers and mergers
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When is Fair Value the appropriate valuation basis?
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
There would usually be no difference in the reported figure between Fair Value and Market Value
When valuing assets for company accounts under IFRS or UK GAAP
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When is Market Rent not appropriate as a Basis of Value in providing a report on the rental value of a property and why not?
if Special Value is more appropriate:
- an amount that reflects particular attributes of an asset that are only of value to a special purchaser
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What is a Special Purchaser?
a particular buyer for whom a particular asset has a special value because of advantages arising from its ownership that would not be available to other buyers in a market
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What is Marriage Value?
an additional element of value created by the combination of 2 or more assets or interests where the combined value is more than the sum of the separate values
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What is Synergistic Value?
the result of a combination of 2 or more assets or interests where the combined value is more than the sum of the separate values
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What is an arm's length transaction?
a transaction where the parties are unknown to each other or at least acting independently with appropriate distance between them
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What do you consider Proper Marketing to be in the Market Value definition?
marketed e.g. online on usual websites/ a to let board for a sufficient amount of time with viewings etc.
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Define Market Value in your own words
The estimated amount for which an asset 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 knowledgeable, prudently and without compulsion
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Give 3 situations when it would be appropriate to make a Special Assumption
- planning consent has or will be granted
- proposed development has been completed in accordance with a defined plan and specification
- the property has been changed in a defined way
- the property is vacant (when occupied at the valuation date)
- the property is let on defined terms (when vacant at the valuation date)
- that synergistic value is created where one of more parties has a special interest
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What is a Special Assumption?
A special assumption is made by the valuer where an assumption either assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant in a transaction on that valuation date.
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Describe 3 assumptions that are usually made in producing a valuation
- title
- condition of buildings
- services
- contamination and hazardous substances
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What is the difference between a Basis of Value and a Method of Valuation?
A basis of value is a statement of the fundamental measurement assumptions of a valuation
A method of valuation is a procedure or technique used to arrive at the value described by a basis of value
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Please name the UK-Specific Bases of Value
- Existing Use Value (UK VPGA 6)
- Existing Use Value for Social Housing (UK VPGA 7)
- Projected Market Value (UK VPGA 11.2)
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Please name the Red Book Global Bases of Value
A basis of value is a statement of the fundamental measurement assumptions of a valuation
- Market Value
- Market Rent
- Investment Value (or worth)
- Fair Value (under IFRS)
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How would you respond to a request to value a property from a Drive-by only?
- ask the reason for the request
- ask for information i.e. photos of the recent condition of the property
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What are the main contents of the Terms of Engagement for a Valuation?
- ID and status of the valuer
- ID of the client
- ID of the asset(s) being valued
- purpose of the valuation
- basis of value adopted
- valuation date
- nature and extent of the valuer's work inc investigations and limitations
- nature and source of info upon which the valuer will rely
- all assumptions and special assumptions to be made
- the basis on which the fee will be calculated
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What do your Valuation Files contain?
- Terms of Engagement
- site notes inc layout plan and measurements
- photographs
- comparable evidence
- research of the property
- valuation report
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What information would you require from a telephone enquirer who asked: "can you do me a valuation"?
the type of property, location and purpose of the valuation
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Describe how Departure from the Red Book mandatory requirements may be possible
No departure is permitted from PS1 or PS2
If there are special circumstances where it is considered inappropriate to comply with VPS1 to VPS5 these must be confirmed and agreed with the client as a departure with a clear statement in:
- the Terms of Engagement
- the Report
- ay published reference to the Report
The reasons for departure must be justified
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What are the possible consequences if a Valuer does not comply with a VPGA?
may be sued for negligence which would result in expulsion from RICS
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What is the difference between Valuation Technical and Performance Standards (VPS) and Valuation Practice Guidance - applications (VPGA)?
VPS are mandatory, VPGA are advisory
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Can you name some valuations that are carried out for a Statutory Function?
- asset vals for local gov accounts
- leasehold reform vals
- diminution vals for dilaps
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What valuations are Exceptions to the Red Book?
- agency or brokerage work in anticipation of disposal or acquisition instructions
(see "Real Estate agency and brokerage guidance 2016")
- acting or preparing to act as an expert witness
- performing statutory functions
- purely for internal purposes
- preparation for or during negotiations or litigation
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To what valuations does the Red Book apply?
PS1 and PS2 are mandatory for all written valuations
The mandatory applications of VPS1 to 5 may be unsuitable for some purposes but the application of the relevant standards is encouraged
Exceptions:
- agency or brokerage work in anticipation of disposal or acquisition instructions
(see "Real Estate agency and brokerage guidance 2016")
- acting or preparing to act as an expert witness
- performing statutory functions
- purely for internal purposes
- preparation for or during negotiations or litigation
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What is the purpose of the UK National Supplement?
Sets out specific requirements and guidance for valuations in the UK
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What is the purpose of the Red Book?
Consistency, objectivity and transparency
To assure users that a valuation provided anywhere in the world is in accordance with the highest professional standards
The standards set out procedural rules and guidance which:
a) impose mandatory obligations regarding competence, objectivity and transparency
b) establish a framework for uniformity and best practice
c) expressly comply with the RICS Rules of Conduct
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What editions of the Red Book have been in effect during your APC training period?
The RICS Valuation - Global Standards
issued November 2019,
effective from 31st January 2020
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Who are the International Valuation Standards Council?
a not-for-profit organisation that acts as the global standard setter for the valuation profession, serving the public interest
RICS are a sponsor of the IVSC
primary reason for the 2020 Red Book update to reflect changes in the International Valuation Standards published by the IVSC
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When did the current edition of the Red Book come into force?
issued November 2019,
effective from 31st January 2020
