Valuation Flashcards
What are the 3 approaches to valuation and 5 methods?
IVS 105 Valuation and methods
1 Income approach
2 Cost approach
3 Market approach
1 Investment
2 Profits
3 Cost approach (DRC)
4 Residual method
5 Comparative method
What is the structure of the RICS Valuation Global Standards
Professional Statement (PS)
PS1 Compliance with written statements and 5 exceptions
PS2 Ethics, Competence, Objectivity, Disclosures (CIT)
Valuation Technical Performance Standards (VPS)
VPS1 Terms of engagement
VPS2 Inspection
VPS3 Valuation reports
VPS4 Basis of value, Assumption and Special Assumption
VPS5 Valuation Approach and Method
Valuation Practice Guidance Application VPGA) (Guidance)
VPGA 1 – Valuations for inclusions in financial accounts
VPGA 2 – Valuations for secured lending
VPGA 8 – Valuation of real property interests
VPGA 10 – Matters that give rise to material valuation uncertainty
What are the FIVE exceptions to the REDBOOK and where are they?
PS1
Litigation/Negotiations
Expert witness
Statutory function
Internal purposes
Agency and brokerage
Industrial Valuation Southampton
Did you measure the industrial units? What measurement did you use?
RICS code of measuring practice 6th ed 2015
GIA for industrial warehouses
Include columns, lift wells, mezzanine with permanent access, loading bays
Exclude canopies, fire escapes and covered walkways
Industrial Valuation Southampton
Did you measure the office space separately?
Ancillary office can be measured using GIA
Industrial Valuation Southampton
What was the construction of the industrial units?
Steal framed with brick and block elevations steel profile clad roof.
Industrial Valuation Southampton
Did you note any defects?
Smashed window
Cut edge corrosion to steel profile clad roof
Industrial Valuation Southampton
During your inspection what were you looking out for?
Contamination – it would appear possible that land contamination exists. Instructed to value on the assumption that it has not suffered any land contamination.
Industrial Valuation Southampton
How did you conclude the rent and yield you adopted?
NIY 6.6% £8psf
Industrial Valuation Southampton
What form of investment method did you adopt?
Term and reversion
Industrial Valuation Southampton
What premium did you apply to take into account the site was by the waterside?
Managed to rely on waterside comparable which included this premium
Industrial Valuation Southampton
Why didn’t you use the DCF method?
XXX?!
Office Valuation Chichester
Did you measure the office building? What measurement did you use?
RICS property measurement 2nd ed January 2018 incorporating IPMS.
I chose to adopt IPMS3 as this was a multi let office
Office Valuation Chichester
Where is the specific guidance on loan security in the Global and UK Red book?
Under Valuation Practice Guidance Application
Global red book
VPGA 2 valuations for secured lending
UK red book
VPGA 10 lending for commercial secured lending
Office Valuation Chichester
What is the definition of Market Value?
The estimated amount at 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
Acting prudently and without completion
Office Valuation Chichester
What is the definition of Market Rent?
The estimated amount at which an interest in real property should be leased
On the valuation date
Between a willing lessor and a willing lease
On appropriate lease terms
In an arm’s length transaction
After proper marketing
Where parties have acted knowledgably, prudently and without compulsion
Office Valuation Chichester
What is a special assumption? How do you deal with a special assumption?
VPS4 basis of valuation and special assumptions
A special assumption is a supposition that is taken to be true and accepted as fact even though it is not. E.G VP
Office Valuation Chichester
What was the setting, construction and condition and accommodation of the property?
Town setting on a road connecting to the main high street. Brick elevations, single glazed windows and a number had cracked. A number of the bricks had splayed. Internally the property was in very good condition.
Office Valuation Chichester
What yield and rent did you adopt?
7/8% yield rent of £17psf
Office Valuation Chichester
How did you value the office with VP?
Utilized VP comps and undertook the valuation assuming a 1-year void.
Residential development, South downs
What was this instruction?
A site of 18 dwellings we were only instructed to value the 9 open market dwellings. The site had full planning consent.
CIL - £370k
S106 – 15k
GDV of £8m plot value of circa £220,000
Land value of £2,000,000
Residential development, South downs
What valuation method did you adopt?
I adopted the residual method and cross referenced with land transactions. There were not many good quality land comparables.
Residential development, South downs
How did you gather your comparable evidence and what category was it?
For the GDV Rightmove and conversations with local agents
Guidance - Comparable evidence in real estate 1st ed 2019
Category A
Land comps planning searches and land reg titles
Residential development, South downs
How many dwellings where there?
18 units
Residential development, South downs
How did you conclude your build costs?
BCIS and conversations with building surveyors £140psf
Clients costings
Residential development, South downs
What timescales did you adopt for pre-construction?
3 months pre-construction
12 months construction
6 months sales (3 off plan)
Residential development, South downs
What did you include within your sensitivity analysis?
A step up and down in both build cost and sale values
Residential portfolio valuation, Southampton
Why did you only inspect the newly acquired dwellings?
It was agreed in the terms of engagement
The valuation implications stated
Considered the restriction reasonable
Restriction referred to in the report
I was satisfied that there had been no material changes to the property or nature of its location
Residential portfolio valuation, Southampton
How did you measure the houses and flats?
Houses using IPMS2
Flats using IPMS 3B
Residential portfolio valuation, Southampton
What were the age, construction and condition of the properties?
The houses were mostly semidetached of brick construction, with timber tiled roofs.
Number of small blocks of flats
Residential portfolio valuation, Southampton
How did you gather comparable evidence?
Right move and conversations with local agents
Residential portfolio valuation, Southampton
What was the overall NIY?
6.5%
Residential portfolio valuation, Southampton
Could you have used DCF?
Yes
Residential portfolio valuation, Southampton
How do you deal with a special assumption?
In accordance with VPS4
Agreed in T of E
Agreed in the report
Residential portfolio valuation, Southampton
Special assumption assuming VP as a single block incurred a 15% deduction why?
VPS4 basis of valuation and special assumptions
A special assumption is a supposition that is taken to be true and accepted as fact even though it is not. E.G VP
From conversations with the portfolio investment team a 15% deduction is market facing.
Professional Statement PS1 ?
It is mandatory
Compliance with written statements and 5 exceptions to a written valuation
Litigation/Negotiations
Expert witness
Statutory function
Internal purposes
Agency and brokerage
Professional Statement PS2 ?
Ethics, Competence, Objectivity, Disclosures (CIT)
Valuation Technical Performance Standards VPS1
The minimum matters that must be confirmed in writing to the client prior to undertaking an instruction.
A – identification and status of the valuer
B – identification of the client
C – identification of any other intended users
D – the asset be valued
E – currency
F – purpose of the valuation
G – basis of value
H – valuation date
I – extent of investigation
J – nature and source of the information to be relied upon
K – assumptions and special assumptions to be made
L – format of the report
M – restrictions for use distribution and publication
N – confirmation of Redbook global/IVS compliance
O – fee basis
P – complaints handling procedure to be made available
Q – statement that the valuation may be subject to clients by the RICS
R – Limitation on liability agreed
Valuation Technical Performance Standards VPS2
Desktop Valuations
Inspection, investigation and records
1. Restriction agreed in writing
2. Valuation implications in writing
3. Restriction reasonable
4. Restriction referred to in report
VPS 2
Revaluation without re-inspection
- Satisfied no material change in property or location
- Confirmed in TOE and Report
Valuation Technical Performance Standards VPS3
Valuation reports
Minimum requirements to be stated within a report are:
A – Identification and status of the valuer
B – Client and any other intended users
C – Purpose of valuation
D – Identification of the asset to be valued
E – Bases of value
F – Valuation date
G – Extent of investigation
H – Nature and source of information relied upon
I – Assumptions and special assumptions
J – Restrictions on use, distribution and publication
K – Instruction undertaken in accordance with IVS standards
L – Valuation approach and reasoning
M – Valuation figure(S)
N – Date of valuation report
O – Comment on market uncertainty
P – Statement setting out any limitations on liability that have been agreed
Valuation Technical Performance Standards VPS4
Basis of value, Assumption and Special Assumption
Used in the UK
1 Market Value
2 Market Rent
3 Fair Value (IFRS13)
4 Investment Value
Not used in the UK
5 Equitable value
6 Liquidation value
Assumptions and special assumptions
- Assumptions are made where it is reasonable for the valuer to accept that something is true without needing for specific investigation
- A special assumption is a supposition that is taken to be true and accepted as fact even though it is not true
- It must be agreed with the client in writing at the commencement of the instruction for example relating to such matters as assuming planning consent has been granted for a particular use all the property is vacant or let at the date of the valuation
Valuation Technical Performance Standards VPS5
Valuation Approach and Method
Valuers are responsible for choosing and justifying the valuation approach in some cases more than one approach may be appropriate
Valuation Practice Guidance Application (VPGA)
VPGA 1 - Valuation for inclusion in financial accounts
VPGA 2 - Valuation for secured lending
VPGA 8 - Valuation of real property interests
VPGA 10 -Matters that give rise to material uncertainty
All risks yield
The remunerative rate of interest used in the valuation of fully left property let at market rent reflecting all the prospects and risks attached the particular investment
True yield
Assumes rent is paid in advance not arrears
Nominal yield
Initial yield assuming rent is paid in arrears
Gross yield
The yield not adjusted purchase costs
Net yield
The resulting yield adjusted for purchasers costs
Equivalent yield
Average weighted yield when a reversionary property is valued using an initial and reversionary yield. (Between the initial and reversionary yield)
Initial yield
Initial income / purchase price
Reversionary yield
Market rent / purchase price
Running
The yield at one moment in time
What is the landlord and tenant act 1954?
Created to provide security of tenure
What is the difference between a licence and a lease?
Licence - A personal right to enter the property
A lease as set out in Street v Mountford sets out the difference
1. Exclusive occupation
2. Payment of rent
3. A specified term
When valuing with the investment method what do you have regard to within the lease?
Term length
Break option
Rent review clause
If inside or outside the Act
How would being inside or outside the 1954 L & T act affect value?
Inside the act provides security of tenure.
- More onerous at lease renewal
- Possible timely and costly to increase rent if the property is under rented
- If inside the act could affect the yield by around 1/2%
Outside the act there is no right to renewal (S.24-28 missing)
UK redbook VPGAs
18 VPGAs
VPGA8 - Valuation of charity assets
VPGA10 - Commercial Scured Lending
