Valuation Flashcards
Tell me what the 5 methods of valuation are.
Comparable method
Investment method
DRC
Profit method
Residual land valuation
Tell me about how you would value a building using the profits/DRC/investment/comparable/residual method of valuation.
Comparable method - comparing to similar assets that recently transacted in the market, adjust to reflect the differences
Investment method - capitalize NOI at appropriate yield
Residual - property with a development potential, highest value use, GDV (value of a finished scheme), deduct costs to build, development profit and finance costs
Profits - specialist properties, such as hotels, golf courses, petrol stations, hospitals etc. The profits method involves establishing fair maintainable operating profit (FMOP) capable of being generated by a reasonably efficient operator (REO). This is based upon assessment and analysis of fair maintainable turnover (FMT), requiring sound knowledge of accounting principles and market norms for the specific industry sector. the FMOP is capitalised at an appropriate rate of return reflecting the risk and rewards of the property and its trading potential.
DRC - used for specialised property that is rarely sold on the open market. It is also known as the method of last resort and should not be used where there are market sales of comparable properties. It could, of course, be used as a check valuation against another method.
Reinstatement cost + contingency/professional costs - depreciation + land price = DRC
How do you decide which valuation method to apply?
The nature of the property
Income producing (Investment), vacant (Comparable), specialist (profit), specialized (DRC) , under construction/development potential (RLV)
What is a years purchase multiplier?
the number of years’ worth of income that an investor is willing to pay for an asset.
inverse of the yield
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 (i.e. that it’s decreasing)
1/i
What is PI Insurance (PII)?
Professional Indemnity Insurance (PII) - type of insurance policy that provides financial protection to professionals from legal claims made against them by clients or third parties alleging negligence, errors, or omissions in their professional work.
Tell me about the RICS requirements in relation to PII.
RICS requires its members to have adequate PII coverage that meets its minimum requirements, which are based on the type of work they do, their annual fee income, and the geographical areas in which they operate.
What level of PII cover does your firm have?
USD 10,000,000
How would you distinguish limitations on liability in your valuations?
Standard cap
If providing valuation for IPO - unlimited cap
Where in your valuation report do you state any limitations on liability?
Legal certificate - beginning of report
What would you do if you received a notice of a PII claim from a client or their solicitor?
work with the legal team, review the claim, gather evidence, maintain communication, take actions
What is run off cover?
Run-off cover is a type of insurance policy that provides coverage for claims made against a professional or business after they have ceased trading or stopped providing a particular service. Essentially, it provides coverage for “historical” liabilities
What is the Red Book?
Global Professional Standards that define procedural rules and guidance for carrying out Valuations.
Effective 31 January 2022
Made up of 2 PS (professional standards), 5 VPS (valuation performance standards) and 10 VPGAs (valuation practice guidance applications). IVS 2022 are included in full at the end.
Why does the Red Book exist?
COT.
Consistency, objectivity, transparency
- Consistency in approach
- Credible and consistent valuation opinions
- Independence, objectivity, transparency
- Clarity regarding TOEs
- Clarity regarding Basis of Value
- Clarity in reporting relevant matter in the report
Reduce the risk of negligence claims - “Framework for best practice”
Tell me about a factor which may impact value.
Nature, quality, size, location, market conditions
What is your duty of care as a surveyor when undertaking a valuation?
the surveyor’s duty of care is to provide an impartial, honest, and reliable valuation that meets the needs of their clients while also complying with professional standards and regulations.
To whom do you owe this duty of care?
Client, if reliance extended third party, and act in the public’s interest
Why is independence and objectivity important when valuing?
Provide fair, accurate and reliable valuation, not influenced
When was the Red Book last updated? What changes were made?
Effective 31 January 2022
IVS are updated on a rolling program every 2 years - new IVS 2022. The 2020 edition of the Red Book needed minor updates to remain aligned with the IVS 2022 and to increase sustainability and ESG focus.
Sustainability and ESG are the driver behind most of the updates in substance, style and tone. The term is defined in the new glossary
Does this differ from when IVS were last updated?
No, IVS is effective from 31 January 2022
Which sections of the Red Book are mandatory and which are advisory?
Professional Standards - mandatory
Valuation technical and performance standards – mandatory
RICS global valuation practice guidance – applications (VPGAs) – advisory
What does PS1-2/VPS1-5/VPGAs relate to?
Professional Standards 1 - Compliance
Professional Standards 2 - Ethics and conflicts
Valuation Practice Statement 1 - TOE
VPS 2 - Inspections
VPS 3 - Reporting
VPS 4 - Bases of valuation
VPS 5 - Valuation approach
VPGA 1 – Valuation for inclusion in financial statements
VPGA 2 – Valuation of interests for secured lending
VPGA 4 – Valuation of individual trade related properties (Profits valuations)
VPGA 8 – Valuation of real property interests (inspection)
VPGA 10 – Matters that may give rise to material valuation uncertainty.
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
PS 2 - 3.12
the opinion is provisional and subject to completion of the final report
the advice is provided for the client’s internal purposes only and
any draft is on no account to be published or disclosed.
If any matters of fundamental importance are not reflected, their omission must be
declared.
What type of valuations might be relied upon by a third party?
secured lending
Tell me what the definition of MR/MV/investment value/fair value?
MR - The estimated amount for which an interest in real property should
be leased on the valuation date between a willing lessor and willing
lessee on appropriate lease terms in an arm’s length transaction, after
proper marketing and where the parties had each acted knowledgeably,
prudently and without compulsion
MV - 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 arm’s
length transaction, after proper marketing and where the parties had
each acted knowledgeably, prudently and without compulsion
Investment value - The value of an asset to the owner or a prospective owner for individual investment or operational objectives
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
What is the difference between an assumption and 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.
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.
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
Yes disclose previous involvement with the asset to ensure transparency and expose any potential conflict of interest
If your firm is too small to have a rotation policy or valuation panel, what else can you do to ensure objectivity?
Arrange to be periodically reviewed by other members at intervals not greater than seven years
What must be included in your terms of engagement / valuation report?
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
Where is this covered in the Red Book?
Under Valuation Practical Statements 1 and 4
What is a restricted valuation service and can you provide one?
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.
How do you deal with limitations on inspection or analysis?
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.
Can you revalue a property without inspecting?
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.
What RICS guidance relates to the use of comparable evidence?
(Comparable Evidence in Real Estate Valuation 2019) published in October 2019.
What is an internal valuer?
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.
Is special value from a special purchaser reflected in MV?
It is not reflected in the Market Value
Where does the definition of fair value come from?
IFRS 13 (International Financial Reporting Standards)
Does this differ from MV?
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.
When is fair value used?
For financial reporting purposes
(Inclusion in financial statements)
What are the 3 approaches under VPS5?
Market Approach (comparable method)
Income Approach (investment method, profits method)
Cost Approach (residual method, DRC)
What is the Valuer Registration Scheme?
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.
Are there any instances where certain sections of the Red Book may not apply?
It does not apply to estimated replacement cost figures for insurance purposes.
What additional criteria apply to secured lending valuations?
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.
What information should you specifically request for a secured lending valuation?
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
What is a yield?
return earned on an investment expressed as a percentage of the investment’s value
What is a Net Initial Yield?
return on an investment as at the date of purchase - NOI as at current year divided by purchase price
What is a reversionary yield?
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
What is an equated yield?
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.
What is an equivalent yield?
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.
