Valuation Flashcards
What is the full title of the Red Book?
RICS Valuation - Global Standards
When did current edition of Red Book come into force?
31 January 2022
Who are the International Valuation Standards Council?
- non profit organisation that set the global standards for valuation
- RICS are a member and sponsor of IVSC
What editions of the Red Book have been in effect during your training?
2020 and 2022
What is the purpose of the Red Book?
- consistency, objectivity and transparency
- ensures valuation anywhere in the world is in accordance with highest professional standards
- provides framework for uniformity and best practice
- ensures compliance with Rules of Conduct
What were the reasons for the 2022 Red Book update?
- reflect changes in IVS made by IVSC
- reflect progress in ethics and measurement
- more detail when applying exceptions to VPS 1 - 5
- improved definitions and commentary on ESG section in glossary
- clarify existing text
Purpose of U.K. National supplement?
- supplement Red Book
- ensured U.K. valuations are consistent with U.K. accounting standards
To what valuations does the Red Book apply?
All valuations unless listed as exception
What valuations are exceptions to the Red Book?
- Internal purposes
- Agency/brokerage work prior to acquisition or disposal instructions
- Statutory function
- Expert witness
- Negotiation or litigation
What valuations are carried out for Statutory Functions?
- lease renewal (see S34 of 1954 Act)
- rating
- compulsory purchase
Difference between valuation technical and performance standards (VPS) and valuation practice guidance applications (VPGA)?
- VPS mandatory
- VPGA advisory
Note: these are two elements that make up the Red Book
What are the consequences if valuer does not comply with VPS?
- RICS can take disciplinary action
- action depends on severity of breach
What are the consequences if valuer does not comply with VPGA?
- may get sued for negligence if giving advice
Note: even if complied with Red Book, can still be sued as could have used bad comparables etc
How is departure from the Red Book mandatory requirements possible?
- if inappropriate to comply with VPS 1 - 5
- if client agrees
EG if good reason not to enter the property
Exception vs Departure from Red Book
Exception = Red Book does not apply
Departure = Red Book does apply but valuer does not comply with mandatory requirements
What information is required to do a valuation?
- location
- type of property
Note: also need to know purpose of valuation and to check for conflict of interest
What do valuation files contain?
- conflict of interest check
- agreed terms of engagement
- inspection notes (photos, plans)
- comparable evidence
- valuation calculations
- valuation report
Main contents of terms of engagement?
- valuer name
- client name
- property address
- purpose of valuation
- basis of value
- date
- currency
- fee basis
- inspection and limitations
- assumption and special assumptions
- reference to CHP
- statement on PII
PS1 Red Book
Compliance with valuation standards within U.K. jurisdiction
(comply with U.K. law)
PS2 Red Book
Ethics, competency, objectivity and disclosures
(valuer must have appropriate experience, skill and judgement, and avoid conflict of interest)
How do you respond to request to value property for Pavement / Drive By / External assessment?
- if new building and you have floor plans, fine to go ahead
- if previously inspected, fine to go ahead
- if new instruction but no plans/leases to review then cannot go ahead
Note: this is still Red Book valuation, often carried out as re-valuation
Red Book Global Bases of Value
- market value
- market rent
- investment value
- fair value
U.K. Specific Bases of Value
- existing use value
- existing use value for social housing
- projected market value
Note: second two are residential ones
Basis of Value vs Method of Valuation
Basis of Value = Red Book definition of value
Method of Valuation = technique used to arrived at a figure that we would describe with a Basis of Value
What assumptions are made in producing a valuation?
- planning permission for existing use
- free from contamination and hazardous substances
- if any parts are covered, assume those areas are free from defects
Special Assumption
an assumption that assumes facts which differ from those existing at the date of valuation
Examples of Special Assumptions
- if property vacant, assume let on defined terms (and vice versa)
- if property being refurbished, assume refurb has completed
- if no planning, assume planning permission has been granted
Market Value definition
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arms length transaction after proper marketing where all parties have acted knowledgeably, prudently and without compulsion
Market Rent definition
The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lesser on appropriate lease terms in an arms length transaction after proper marketing and where all parties have acted knowledgeably, prudently and without compulsion
Special Value definition
An amount that reflects particular attributes of an asset that are only of value to a special purchaser
Special Purchaser definition
A particular buyer for whom a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market
EG can pay more than market value or can participate in synergistic value (might own property A and want to buy neighbouring property B so can merge assets to get synergistic value)
Synergistic Value definition
The result of a combination of two or more assets where the combined value is more than the sum of the separate values
Marriage Value definition
An additional element of value created by the combination of two or more assets where the combined value is more than the sum of the separate values
What is ‘proper marketing’?
- selling property via most appropriate method of sale
- allowing property to be in market for appropriate period to get market value
- advertising property to the target market
What is ‘arms length transaction’?
- no connection or relationship between parties
When is market rent not appropriate as a basis of value?
- rent review (use definition of rent in lease)
- lease renewal (S34 of LL&T Act 1954)
When is fair value the appropriate basis of value?
- when valuations for accounting or financial reporting EG company accounts
- usually same as market value
What is a regulated purpose valuation (asset valuation)?
- used where public has interest or third parties rely on valuation
Note: RICS recommends rotation of valuer every 7 years to avoid influence from past valuations
Examples of regulated purpose / asset valuations?
- for financial statements (company accounts)
- for stock exchange listings
- for takeovers and mergers
- for collective investment schemes
- for unregulated property unit trusts
Note: asset usually valued annually or quarterly
Market Value v Existing Use Value
Market value takes into account highest and best use of an asset (development potential) whereas existing use value is value of building as it is
When do you use Existing Use Value?
- when valuing Local Authority and Central Government owner occupied properties
When is DRC used in asset valuations?
- for properties where there is not enough comparable evidence
- for specialised properties that would not sell other than as part of a sale of the business in occupation
What are situations that can adversely affect the certainty of a valuation?
- unusual property (unique characteristics)
- market volatility (covid, politics)
- lack of information (not inspected interior)
5 conventional methods of valuation
- comparative
- investment
- residual
- profits / accounts
- contractors / depreciated replacement cost
What are contemporary valuation techniques?
- new techniques
- discounted cash flows are used
What makes a property transaction comparable to the property being valued?
Similarities in terms of:
- physical characteristics
- location
- use
- tenure
- time scale
How many comparables are needed to produce a valuation?
- all the comparable evidence
- enough to establish a trend
What is the longest time period that a transaction could be accepted as being a comparable
- most recent comparables tend to hold most weight
- either pre/post covid