Valuation Flashcards

Question

What is the difference between an assumption and a special assumption?

Answer 1

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. An assumption is made where it is reasonable for the valuer to accept something is true without the need for specific investigation or verification. Any such assumption must be reasonable and relevant, having regard to the purpose for which the valuation is required.

Answer 2

Yes disclose previous involvement with the asset to ensure transparency and expose any potential conflict of interest

Answer 3

Arrange to be periodically reviewed by other members at intervals not greater than seven years

Answer 4

ToE - VPS 1 1. Identification and status of the valuer 2. Identification of the client(s) 3. Identification of any other intended users 4. Identification of the assets (or liabilities) being values 5. Valuation (financial) currency 6. Purpose of the valuation 7. Basis of value adopted 8. Valuation date 9. Nature and extent of the valuer's work - including investigations - and any limitation thereon 10. Nature and source of information upon which the valuer will rely 11. All assumptions and special assumptions 12. Format of the report 13. Restrictions on use, distribution and publication of the report 14. Confirmation that the valuation will be undertaken in accordance with IVS 15. The basis on which the fee will be calculated 16. Where the firm is registered for regulation by RICS, reference to the firm's complaints handling procedure, with confirmation that a copy will be made available on request 17. A statement that compliance with these standards may be subject to monitoring under RICS' conduct and disciplinary regulations 18. A statement setting out any limitation on liability that have been agreed Valuation Report - VPS 3 1. Identification and status of the valuer 2. Identification of the client and any other intended users 3. Purpose of the valuation 4. Identification of the asset/liability being valued 5. Basis of value adopted 6. Valuation date 7. Extent of investigation 8. Nature and sources of information relied upon 9. Assumptions and special assumptions 10. Restrictions on use, distribution and publication of the report 11. Confirmation that the assignment has been undertaken in accordance with the IVS 12. Valuation approach and reasoning 13. Amount of the valuation/valuations 14. Date of the valuation report 15. Commentary on any material uncertainty in relation to the valuation where it is essential to ensure clarity on the part of the valuation user 16. A statement setting out any limitation on liability that have been agreed

Answer 5

Under Valuation Practical Statements 1 and 4

Answer 6

A client may require a restricted service; for example, a short timescale for reporting may make it impossible to establish facts that would normally be verified by inspection, or by making normal enquiries; or the request may be for a valuation based on the output of an automated valuation model (AVM) Desktop or drive by valuation. The valuer should consider if the restriction is reasonable, with regard to the purpose for which the valuation is required. The valuer may consider accepting the instruction subject to certain conditions, for example that the valuation is not to be published or disclosed to third parties.

Answer 7

Any limitations or restrictions on the inspection, inquiry and/or analysis for the purpose of the valuation assignment must be identified and recorded in the terms of engagement. If relevant information is not available because the conditions of the assignment restrict the investigation, then if the assignment is accepted, these restrictions and any necessary assumptions or special assumptions made as a result of the restriction must be identified and recorded in the terms of engagement.

Answer 8

A revaluation without a re-inspection 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.

Answer 9

(Comparable Evidence in Real Estate Valuation 2019) published in October 2019.

Answer 10

A valuer who is in the employ of either the enterprise that owns the assets, or the accounting firm responsible for preparing the enterprise’s financial records and/or reports. An internal valuer is generally capable of meeting the requirements of independence and professional objectivity in accordance with PS 2 section 3, but may not always be able to satisfy additional criteria for independence specific to certain types of assignment, for example under PS 2 paragraph 3.4.

Answer 11

It is not reflected in the Market Value

Answer 12

IFRS 13 (International Financial Reporting Standards)

Answer 13

The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. Indeed the references in IFRS 13 to market participants and a sale make it clear that for most practical purposes the concept of fair value is consistent with that of market value, and so there would ordinarily be no difference between them in terms of the valuation figure reported.

Answer 14

For financial reporting purposes (Inclusion in financial statements)

Answer 15

Market Approach (comparable method) Income Approach (investment method, profits method) Cost Approach (residual method, DRC)

Answer 16

quality assurance mechanism that monitors all registered RICS members who carry out valuations within the scope of RICS Valuation Standards “Red Book” in order to ensure consistent standards.

Answer 17

It does not apply to estimated replacement cost figures for insurance purposes.

Answer 18

The additional criteria are deemed to include a stipulation that the valuer has had no previous, current or anticipated involvement with the borrower, or prospective borrower, the asset to be valued or any other party connected with a transaction for which the lending is required. If the valuer and the client agree that any potential conflict can be avoided by introducing arrangements for managing the instruction, those arrangements are to be recorded in writing, included in the terms of engagement and referred to in the report.

Answer 19

The valuer should enquire if there has been a recent transaction or a provisionally agreed price on any of the properties to be valued. If such information is revealed, further enquiries should be made, for example, the extent to which the property was marketed, the effect of any incentives, the price realised or agreed and whether it was the best price obtainable. The valuer should request details of the terms of the loan being regarded by the lender

Answer 20

return earned on an investment expressed as a percentage of the investment's value

Answer 21

return on an investment as at the date of purchase - NOI as at current year divided by purchase price

Answer 22

expected potential yield of an investment taking into account the future differences in rental income that may be occurred over time due to factors such as rental escalations, rent reviews, and lease renewals

Answer 23

Discount rate selected by an investor, often based on a risk-free base rate plus risk premium but may be derived from comparison with other investments. It is to be distinguished from the internal rate of return which is ultimately achieved from the investment.

Answer 24

Single weighted average yield that can be used to capitalise both the term and reversionary incomes. It is the internal rate of return of a growth implicit cash-flow, meaning that any future growth in the income stream is allowed for in the choice of the yield.

Answer 25

Dubai Municipality Cost: 2.00% of value Acquisition Agent Fees: 1.00% of value Acquisition Legal Fees: 0.25% of value Abu Dhabi Municipality Cost: 1.00% of value Acquisition Agent Fees: 1.00% of value Acquisition Legal Fees: 0.25% of value

Answer 26

VPGA 10 - Matters that may give rise to material valuation uncertainty It would not normally be acceptable for a valuation report to have a standard caveat to deal with material valuation uncertainty. e.g., "We draw your attention to a combination of global inflationary pressures (leading to higher interest rates) and recent failures/stress in banking systems which have significantly increased the potential for constrained credit markets, negative capital value movements and enhanced volatility in property markets over the short-to-medium term. Experience has shown that consumer and investor behaviour can quickly change during periods of such heightened volatility. Lending or investment decisions should reflect this heightened level of volatility and the potential for deteriorating market conditions. It is important to note that the conclusions set out in this report are valid as at the valuation date only. Where appropriate, we recommend that the valuation is closely monitored, as we continue to track how markets respond to evolving events.'

Answer 27

Investment Method Analyse the terms of the lease, remaining term, rent and obligations on the leaseholder Select the appropriate yield to capitalise the income during the remaining term, arrive at the value

Answer 28

Term and Reversion method includes selecting yields to capitalise the contracted income and income on reversion; both yields are growth implicit. DCF - is growth explicit method where income is grown at appropriate growth rate, then the terminal value is estimated at the end of the holding period and all the net cash flow is discounted at the discount rate to arrive at NPV which is the value

Answer 29

Implicit models reflect any expectation in the growth of market rents or capital value in the yield. Explicit models on the other hand allow for any growth expectation in the cash flow and discount this at a required rate of return, which is usually higher.

Answer 30

Under rented property - term and reversion over rented - hardcore method

Answer 31

The relative weight attached to different types of evidence Open market lettings Lease renewals Rent reviews Sale and leasebacks Asking rents

Answer 32

A lack of robust evidence should not prevent a valuation being provided, this is where the skills and experience of the valuer become even more important. Valuers can also look further afield and at a wider range of evidence or indicators where direct comparables are limited. Uncertainty generated by a lack of comparable evidence is a common feature of the real estate market. Such uncertainty is inevitable, and the valuer should not be afraid to report it – indeed Red Book Global Standards states that ‘valuers should not treat … a statement expressing less confidence in a valuation than usual as an admission of weakness … it is … a matter entirely proper for disclosure’. If a client understands that unusual market conditions result in an uncertain valuation it may enable them to make a better-informed business decision. Where no comparable evidence is present, use Cost Approach.

Answer 33

NPV stands for Net Present Value. It is a financial calculation used to determine the present value of cash inflows and outflows from a project, taking into account the time value of money

Answer 34

The rate at which a cash-flow (including the purchase price) must be discounted to give an NPV of 0.

Answer 35

It is used for REVERSIONARY (under-rented) investments. Income flow is divided vertically. Term (passing rent) is capitalised until next lease event (review/expiry) at an INITIAL yield; Reversion to Market Rent valued in perpetuity at a reversionary yield; There is a yield differential; term at a keener yield to reflect lower risk.

Answer 36

Typically used by the institutional investment market, and used when the reversion is close in time. Income flow is divided horizontally. Both the hardcore (PR) and layer (MR-PR) are valued into perpetuity, but the layer is deferred to the next lease event. An Equivalent Yield is applied to both the hardcore and layer. Argus Val Cap uses this method.

Answer 37

DCF is a well-established method for determining value for both market value and investment value (or worth) definitions. It requires the estimated future cash flows to be determined at various levels of detail but generally includes estimates of future change in both values and costs, and estimates of the most likely outcomes of anticipated events over a specified time horizon. I would use DCF for more complex assets, assets that require a longer time to stabilise, assets where the projected cash flows are explicitly estimated over a finite period (short leasehold interests, income voids, phased development projects)

Answer 38

More explicit model enables the valuer to be more analytical concerning the different locational, physical, leasing and tenant characteristics of the assets.

Answer 39

The increased number of input variables within DCF

Answer 40

YP - The number of years it will take for the annual income to add up to the capital value, when taking into account the time value of money = 1/i PV- Present Value = 1÷(1+i)n

Answer 41

Marriage value, also called synergistic value, is 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"

Answer 42

Market value refers to the price that a property would fetch in an open and competitive market, assuming a willing buyer and a willing seller, both acting prudently and with full knowledge of the property's attributes and any relevant market conditions. Investment value, on the other hand, refers to the value of a property to a particular investor or buyer, based on their specific investment objectives, assumptions, and risk tolerance. Investment value may be different from market value, as it takes into account factors such as the investor's holding period, financing costs, and management expenses. In contrast to market value, this basis of value does not envisage a hypothetical transaction but is a measure of the value of the benefits of ownership to the current owner or to a prospective owner, recognising that these may differ from those of a typical market participant. It is often used to measure performance of an asset against an owner's own investment criteria. Fair value is same as Market Value in terms of value reported

Answer 43

Trade related properties; hotels, pubs and bars, restaurants, nightclubs, fuel stations, care homes, casinos, cinemas and theatres, and various other forms of leisure property. The essential characteristic of this type of property is that it has been designed or adapted for a specific use, and the resulting lack of flexibility usually means that the value of the property interest is intrinsically linked to the returns that an owner can generate from that use. The value therefore reflects the trading potential of the property.

Answer 44

DRC is used where there is no active market for the asset being valued – that is, where there is no useful or relevant evidence of recent sales transactions due to the specialised nature of the asset – and it is impractical to produce a reliable valuation using other methods. Specialised use: Industrial facilities and plants Hospitals and medical facilities Specialized manufacturing facilities Research and development facilities Historical buildings and landmarks Specialized infrastructure assets such as bridges, tunnels, and highways Large-scale power generation facilities

Answer 45

Certain properties are bought and sold on the basis of their trading potential and in such circumstances, it can be appropriate to use a profits method of valuation. Examples (whilst not an exhaustive list) include hotels, pubs and bars, restaurants, nightclubs, petrol stations, care homes, casinos, cinemas and theatres, and various other forms of leisure property. The essential characteristic of these types of property is that they have been designed or adapted for a specific use. In many instances, there is also some form of licence, certificate or statutory consent registered against the premises that distinguish it from more mainstream commercial property. The value of the property interest is intrinsically linked to the returns that an owner can generate from that use and thus the value reflects the trading potential of the property. The profits method of valuation involves the following steps: An assessment of the fair maintainable trade (FMT) and fair maintainable operating profit (FMOP) that could be achieved at the property. This is ascertained by making reference to recent trading information for the business (ideally profit and loss accounts for the last 3 years). The valuer’s assessment of FMT and FMOP may be above or below the recent trading history of the property. It reflects a range of factors (such as the location, design and character, level of adaptation and trading history of the property within the market conditions prevailing) that are inherent to the property asset. When assessing future trading potential, the valuer should exclude any turnover and costs that are attributable solely to the personal circumstances, or skill, expertise, reputation and/or brand name of the existing operator (i.e. personal goodwill). However, the valuer should reflect additional trading potential. To assess the market value of the property the FMOP is capitalised at an appropriate rate of return reflecting the risk and rewards of the property and its trading potential. Evidence of relevant comparable market transactions should be analysed and applied.

Answer 46

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA is calculated by taking a company's revenue and subtracting its operating expenses, excluding interest, taxes, depreciation, and amortization. This provides a measure of a company's earnings from its core operations, without the effects of non-operating factors such as financing or accounting practices.

Answer 47

Profits and Loss Statements for the last 3 years

Answer 48

RICS professional standards and guidance, global Valuation of development property 1st edition, October 2019

Answer 49

Residual Land Valuation - values the land GDV - all costs to develop including developer's profit = residual land value

Answer 50

Development appraisal calculates the viability of the development as a form of developer's profit on cost or on GDV

Answer 51

A development appraisal will typically give the profitability of a proposed development and a residual valuation will give the value of the land. Residual Valuation is a specific calculation to establish the residual value of a development site, by estimating the GDV of a proposed scheme, deducting the total proposed development costs to arrive at a MV of the development site. Development Appraisal Is a calculation to establish the viability of a proposed development. It can establish likely profit to be generated by the proposed development

Answer 52

GDV – input costs - fixed land cost = profit metric GDV - input costs - profit metric = land

Answer 53

Viability of the project

Answer 54

(a) Completed property value, (b) Construction costs, (c) Consultants fees, (d) Marketing costs, (e) Timetable, (f) Finance costs, (g) Development profit, (h) Discount rate.

Answer 55

The GDV is the value of a development once construction has been completed, or the total sum of the sales values for the finished developement. Net Development Value, which is the expected profit from a property development project after all the costs of development have been deducted from the GDV.

Answer 56

Comparable Method - sales prices of the units , absorption period, payment plan Investment Method - capitalised income from BTO assets

Answer 57

Build costs – these can be based on client figures, cost databases or input from a building or quantity surveyor. They will differ based on the use, specification, construction and location Professional fees – these are typically 10-20% of the build cost, relating to fees for professionals such as an architect, quantity surveyor, structural engineer Marketing, letting and disposal costs Contingency – typically 3-10% of build cost depending on the level of risk and market conditions Finance costs – based on client figures or market rates. Candidates need to be aware of the use of an S curve to reflect the pattern of construction costs Other site specific costs, such as demolition, site preparation or specialist surveys Fixed land cost

Answer 58

in-house AECOM Turner & Townsend Previous assignments

Answer 59

In UAE 6-8%

Answer 60

Debt/Equity ratio (on costs) finance costs on debt only

Answer 61

Typically developers do not need access to all the capital at once due to the S Curve nature of costs within a development scheme, that allow for costs to start at a low level, and rise through the construction process. The interest on the finance will normally be on a rolled up, compound interest basis, that will provide for the full amount of financing needed throughout the development. As not all of the money will not need to be drawn down on at once the interest rate payable will start low and will increase with the more borrowing. During site preliminaries there aren’t many outgoing costs and therefore your borrowing will be low. As time progresses into the construction phase your costs will increase particularly when the frame of your building is being put up etc. This may mean that the increase in borrowing is quite steep. Once your development is near complete and it is just the marketing your costs of finance will the tail off until you have sold your development and paid off your loan. You would typically look at it that you would only need to pay full interest for half of the proposed development, as interest payments will be very low and the start and then will be high in the second half. It in theory evens itself out!

Answer 62

% on GDV or costs

Answer 63

extremely sensitive to minor adjustments High quality of information for the inputs is essential

Answer 64

Development Appraisals are sensitive to many factors, particularly to the variables that are put into the appraisal, such as construction costs, finance costs, discount rate, sales prices/rental income A sensitivity analysis will show you how the outcome changes when the inputs are varied slightly

Answer 65

Construction costs, sales prices, absorption period, finance rates, discount rate

Answer 66

RICS professional standards and guidance, global Valuation of development property 1st edition, October 2019

Answer 67

Assessing whether a development is viable or not based on the level of profit achieved

Answer 68

. It may be used as the primary approach when there is either no evidence of transaction prices for similar property or no identifiable actual or notional income stream that would accrue to the owner of the relevant interest. In some cases, even when evidence of market transaction prices or an identifiable income stream is available, the cost approach may be used as a secondary or corroborating approach.

Answer 69

Specialized assets (government buildings, hospitals, schools)

Answer 70

The replacement cost method assumes that a participant would pay no more for the asset than the cost that would be incurred to replace the asset with a substitute of comparable utility or functionality

Answer 71

Direct (labour, materials) /indirect costs (professional, overheads, finance) + Value of the land -

Answer 72

Comparable method

Answer 73

Obtain costs in-house, records from previous assignments AECOM Turner & Townsend reports

Answer 74

(a) calculate all of the costs that would be incurred by a typical participant seeking to create or obtain an asset providing equivalent utility, (b) determine whether there is any deprecation related to physical, functional and external obsolescence associated with the subject asset, and (c) deduct total deprecation from the total costs to arrive at a value for the subject asset.

Answer 75

Functional obsolescence. Economic obsolescence. Physical obsolescence.

Answer 76

It may be used as the primary approach when there is either no evidence of transaction prices for similar property or no identifiable actual or notional income stream that would accrue to the owner of the relevant interest. In some cases, even when evidence of market transaction prices or an identifiable income stream is available, the cost approach may be used as a secondary or corroborating approach.

Answer 77

A liability cap is a legal provision that limits the amount of damages that a party can be held liable for in the event of a legal claim or lawsuit. In other words, it sets a maximum amount of financial responsibility that a party can have in case they are found liable for damages or losses caused to another party. Liability caps are often used in contracts or agreements.

Answer 78

Responding to feedback and rapidly changing market dynamics, the RICS Standards and Regulation Board (SRB) commissioned the Valuation Review in the public interest to futureproof practices in the valuation of real estate assets for investment purposes. In the Summer of 2020, the RICS Standards and Regulation Board appointed Peter J. Pereira Gray supported by an Expert Advisory Group to lead an independent review into real estate investment valuations and to provide evidence-backed recommendations.

Answer 79

Comparable evidence is not similar in nature, difficult to draw clear conclusions or make direct comparisons

Answer 80

Conflict of interest checks Anti Money Laundering checks KYC checks

Answer 81

comment on the suitability of the property as security for mortgage purposes, bearing in mind the length and terms of the loan being contemplated. Where the terms are not known, the comment should be restricted to the general marketability of the property

Answer 82

ToE - VPS 1 1. Identification and status of the valuer 2. Identification of the client(s) 3. Identification of any other intended users 4. Identification of the assets (or liabilities) being values 5. Valuation (financial) currency 6. Purpose of the valuation 7. Basis of value adopted 8. Valuation date 9. Nature and extent of the valuer's work - including investigations - and any limitation thereon 10. Nature and source of information upon which the valuer will rely 11. All assumptions and special assumptions 12. Format of the report 13. Restrictions on use, distribution and publication of the report 14. Confirmation that the valuation will be undertaken in accordance with IVS 15. The basis on which the fee will be calculated 16. Where the firm is registered for regulation by RICS, reference to the firm's complaints handling procedure, with confirmation that a copy will be made available on request 17. A statement that compliance with these standards may be subject to monitoring under RICS' conduct and disciplinary regulations 18. A statement setting out any limitation on liability that have been agreed

Answer 83

VPS 1- Terms of engagement (scope of work) mandatory In brief, the terms of engagement should convey a clear understanding of the valuation requirements and process and should be couched in terms that can be read and understood by someone with no prior knowledge of the subject asset, nor of the valuation process.

Answer 84

VPS 2 Inspections, investigations and records (mandatory) 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 information relied on in the preparation of the valuation and, if not already agreed, clarify with the client any necessary assumptions that will be relied on. Any limitations or restrictions on the inspection, inquiry and analysis for the purpose of the valuation assignment must be identified and recorded in the terms of engagement and also in the report. * If the relevant information is not available because the conditions of the assignment restrict the investigation, then if the assignment is accepted, these restrictions and any necessary assumptions or special assumptions made as a result of the restriction must be identified and recorded in the terms of engagement and in the report.

Answer 85

VPS 3- Valuation Report (mandatory) General principles 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 valuation under item (o) below. * deal with all the matters agreed between the client and the valuer in the terms of engagement (scope of work)

Answer 86

Firm provided a valuation to the owner of a residential apartment for internal decision purposes in relation to pricing the unit. Later received a request to provide a valuation for the same unit from a different client. The original owner had a debt to pay to the other and wished to use the apartment as the means for settlement; the other client disagreed on the amount of settlement and instructed us to provide a Market Value of the unit. When disclosing the details of the conflict and previous involvement, I have not received an informed consent from the owner to undertake the assignment, hence we declined the instruction.

Answer 87

Selected comps - verified the info Analysed the comps (location, size, date) Made adjustments to reflect better location and limited supply of land in that area, but high demand Was provided with the proposed development - adopted RLV method to cross check the value

Answer 88

Hierarchy of evidence, not actual transactions, prices could be negotiated

Answer 89

The condition of the property, the investment appetite for such asset

Answer 90

Reviewed the transactions, which were available for single use office units only Obtained current listings, verified via calling the agents and asking if the offers were received. Discussed what the typical negotiation discount could be achieved on the property. Adjusted the average rate (mean)

Answer 91

More security to the landlord to receive the rent with lower risk of defaulting by the tenant. As the ability to pay the rent in due course could be impacted from the school's borrowings.

Answer 92

The DRC has been performed to cross check the value derived via Investment Method

Answer 93

To capture a higher a risk of the Market Rent, as the rent on reversion is higher than the passing rent, risk of default.

Answer 94

Analysed the revenue received from each bed, applied Market Rent, deducted operational expenses Reviewed the contract for the ground lease which stated that the land was leased for 50 years, the remaining term was 35 years expiring in 2060. Also received an addendum to the contract which stated the extension of the contract by 20 years at a rent equating to 4% of the annual rent. Analysed that on per sq ft basis and compared to the ground rents available in the market. Adopted that on reversion Reflected the leasehold nature in the yield

Valuation Flashcards

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