Valuation Flashcards
What is the DRC method?
Not a basis of valuation but a method – value land in existing use, add current cost of replacing building plus fees less discount for depreciation.
NOT for loan security, MV only for financial statements, must report alternative use values where appropriate
What is the profits method?
Trade related – monopoly position (3 years of audited accounts)
Income – costs = gross profit – less expenses & operator’s remuneration = adjusted Net Profit. Capitalised at yield
What are the 5 methods of Valuation?
- Investment
- Comparison
- Residual
- Profits
- DRC – Depreciated Replacement Cost
What is some Statutory Due Diligence you would do before undertaking a valuation?
- Asbestos register
- BR/Council tax
- Contamination
- Equality Act compliance
- Environmental matters
- EPC
- Flooding
- Fire safety
- Health & Safety
- Highways
- Legal title
- Planning history
What are the benefits of the Valuation Registration Scheme?
- Improve quality and ensure professional standards
- Meets RICS requirement to self-regulate
- Raise status of valuation profession
What is VPGA 10?
VPGA 10 – Matters that may give rise to material valuation uncertainty
• Valuer should draw attention to the issue affecting the certainty
• Should consider using special assumptions and sensitivity analysis
• Degree of uncertainty caveat must be specific to each valuation
What is the definition of Market Value (or Rent)?
Market Value (Rent)
The estimated amount that an asset or liability should exchange:
• On the valuation date
• Between a willing buyer and seller
• Arm’s length transaction
• (Appropriate lease terms (Market Rent))
• After proper marketing
• Knowledgably, prudently & without compulsion
What is the definition of 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 Investment Value?
The value of an asset to the owner, or prospective owner
• For individual or investment or operational objectives
• May differ from MV
What is SDLT?
- £0 - £150,000 = 0%
- £150,001 - £250,000 = 2%
- £250,000+ = 5%
What are Purchasers Costs?
Stamp Duty Land Tax = c.5%
Agents fees = 1%
Legal fees = 0.5%
VAT on fees = 0.3%
What is the Hierarchy of Evidence?
- Open market lettings
- Lease renewals
- Rent reviews
- Third party determinations
- Sale and Leasebacks
- Intercompany transactions
What are three steps to commencing a valuation instruction?
Competence
Conflicts of Interest
Terms of Engagement
How would you check your competence?
Competence – Skills, Understanding, Knowledge (SUK)
What are the valuation approaches?
Income approach – converting cash into future cash flows (investment, residual and profits method)
Cost approach – reference to the cost of the asset (DRC method)
Market approach – using comparable evidence available (Comparable method)
How would you value using the comparable methodology?
- Search and select comps
- Verify / Confirm and analyse headline rents (UKGN 6 – Analysis of commercial lease transactions)
- Assemble comparable in a schedule
- Adjust comparables using hierarchy of evidence
- Analyse comparable to form opinion of value
- Report value and prepare file
What are the weaknesses of Auction Comparables?
- Special purchaser
- Solvency sale
- Sale price is a gross of costs
When would you use the Investment Method?
Used when there is an income stream to value
Rental income is capitalised to produce a capital value
Conventional method assumes growth Implicit valuation approach
An implied growth rate is derived from the market capitalisation rate (yield)
What is the conventional Investment Method?
Rent received (or market rent) X Years Purchase = market value
What is the Term and Reversion Method?
Used for under-rented properties (reversionary)
Term capitalised until next review / lease expiry at an initial yield
Reversion to market rent valued into perpetuity at a reversionary yield
What is the Hardcore and Layer method?
Used for over-rented investments
Income flow divided horizontally
Bottom slice = market rent
Top slice (froth) = Rent passing less market rent
Higher yield applied to top slice to reflect additional risk
Different yields used for different scenarios having regard to comparable evidence and relative risk
What is a yield?
A measure of investment return expressed as a percentage of capital invested
How is a yield calculated?
Income / Price X 100
Why are different yields used for different properties?
Depends if they are over-rented, under-rented, rack rented etc.
What is a Year’s purchase and how do you calculate it?
The number of years required for income to repay purchase price
Calculated by = 100/Yield
- What factors do you take into account when determining a yield (risk)?
- Location
- Covenant
- Use
- Lease terms
- Obsolescence
- Voids
- Security of income
- Liquidity
- Prospects for rental and capital growth
What is a return?
Property performance - use a DCF – find the IRR
What is a secondary yield?
Takes into account additional risk – obsolescence, longer voids, lower rental growth prospects etc
What does All Growth Implicit mean?
Yield adopted assumes many of the assumptions that are made explicit in a DCF approach and risks hidden in yield selected
What is an All Risk Yield?
The remunerative rate of interest used in the valuation of fully let property let at market rent reflecting all prospects and risk attached
What is a True Yield?
Initial Yield assuming rent is paid in advance
What is a Nominal Yield?
Initial yield assuming rent is paid in arrears
What is a Gross Yield?
Current rent/price paid*100
What is a Net Yield?
Current rent/price+purchaser’s costs*100
What is an Equivalent Yield?
Average weighted yield when a reversionary property is valued using an initial and reversionary yield
What is a Running Yield?
The yield at one moment in time
When would you expect an equivalent yield to be more than the initial?
When you have a reversionary property (under rented)
When would you use an EY over an IY?
- Property is severely over/under rented
* When the property is vacant
What is a DCF?
Growth explicit investment method of valuation
Projected future cash flows + Projected exit value (from ARY) discounted back to present value via a discount rate (known as the target rate of return- reflects perceived risk)
= Capital Value (sum of completed DCF to provide NPV)
What is an NPV?
Sum of the discounted cash flows
When positive – investment has exceeded investors target rate of return
When negative – it has not achieved rate of return
What is the IRR?
- Rate of return that all future cash flows are discounted to produce NPV of 0
- Total return from an investment
How do you calculate an IRR?
- Current market value as a negative cash flow
- Input projected rents
- Input projected exit value
- IRR is rate chosen to provide an NPV of 0
- If NPV > 0 = target rate of return met
What are the benefits of a DCF?
- Sensitivity analysis
- Project future cash flow
- Takes into account time periods
- Set different interest rates
What is the purpose of the Profits method?
Used for valuations of specialist properties – works on valuing business profits rather than physical building / location.
Pubs, Petrol Stations, Hotels
What is the approach of the profits method?
- I have not used this method before but am familiar with the methodology.
- 3 years audited accounts
- Gross turnover
- Net Profits less tenants remuneration
- = Adjusted Net Profits (aka FMT or EBITDA) (What a hypothetical reasonable business operator could trade at in the building)
- Adjusted Net Profit x Appropriate Yield (ARY from comps)
- = Capital Value
What does EBITDA mean?
Earnings Before Taxation Depreciation Amortisation (adjusted net profit)
What does FMT mean?
Fair Maintainable Trade
How would you conduct a DRC?
- Value of land in existing use (assume planning)
- Add current cost of replacing the building
- Plus fees
- Less a discount for depreciation and obsolescence
- Use BCIS and then judge level of obsolescence
What are regulated purpose valuations?
Valuations relied upon by third parties who have not commissioned the valuation and they are subject to valuation monitoring
What are the 5 regulated purpose valuations?
- Financial statements (company accounts)
- Stock exchange listings
- Takeovers and mergers
- Collective investment schemes
- Unregulated property unit trusts
What are the valuation monitoring requirements for regulated purposes?
Annual declaration to include:
- Length of time valuer has acted for client
- Extent and duration of firms relationship with client
- In last financial year, whether percentage fee income from client is less than or more than 5% of the total income
How often should you rotate personnel for regulated purposes?
• RICS state minimum of 7 years
Can properties introduced or purchased by the valuers firm be valued for regulated purpose by that firm?
No not for 12 months by the same firm.
What is synergistic / marriage value?
A merger of interests – physical or tenurial
If brought together increases the value than the being separate
What is hope value?
Value arising from any expectation that circumstances affecting the property may change in the future
E.g. planning permission and realisation of marriage value
How do you value a long leasehold interest?
Rent received less ground rent = net rental income
Capitalised at an appropriate yield for the remaining length of the lease
= Market value of Leasehold interest
What is zoning?
A valuation technique for comparison of retail properties of different sized buildings
How do you zone a property?
H- Halving back principle with 6.1m (20 ft) zones (Basements and first floor treated as A/10 approx)
U- a zone A rate is a unit of comparison
T – Zoning is a valuation Techniques not a method
How do yuo work out a Net Effective Rent?
UKGN 6 – Analysis of commercial lease transactions
On a straight line basis until end of the lease or next rent review (depends who you are acting for)
A 3 month fitting out period deducted before devaluation
= Months of income (deduct rent free – 3 months)/total lease length*Headline Rent
What are the three approaches to calculate rent free periods?
Straight line basis
Straight line method assuming time value of cash flow using a yield
Use of DCF
What is a part wall and what is the law?
A wall is a party wall if it stands astrde the boundary of land belonging to two or more different land owners
Party Wall Act 1996 – provides a framework for resolving disputes
What are the requirements for registration as a Registered Valuer?
Annual fee
Type of valuations
Purpose of valuations
Number of valuations
Firms total fee income from Red Book Vals
What data sources used
Quality assurance procedures
History of negligence claims
N.B. – RICS monitor through the submission of firms annual return
What impact could flooding have on your valuation?
Valuation report should include advice on risk of flooding
Detrimental impact on marketability and valuation – as might be expensive or difficult to obtain insurance
What are VPS 1-5?
VPS1 = Terms of Engagement
VPS2 = Inspections
VPS 3 = Reporting
VPS 4 = Bases of Valuation
VPS 5 = Valuation approach
When dont VPGA 1-5 apply?
ALIES:
A: Agency - marketing appraisal
L: Litigation or Negotiation e.g. Rent Review
I: Internal Purposes only
E: expert witness valuation - duty to court
S: Statutory basis - where carried out by statutory officer
What is the purpose of the Red Book?
Supports High valuation Standards Worldwide
COT
Consistency, Objectivity and Transparency
What is in VPS 1?
Terms of Engagement
What are the minimum terms of Engagement? (18)
1) Identification and Status of the Valuer
2) Identification of the client
3) Identification of any other user
4) Identification of the asset
5) Valuation currency
6) Purpose of the valuation
7) Basis of valuation adopted
8) Valuation Date
9) Nature and Extent of valuers work - incl. limitations
10) Nature and source of information relied upon
11) All assumptions and special assumptions
12) Format of the report
13) Restrictions on use
14) Confirmation of valuation in accordance with IVS
15) Basis of fee calculation
16) For RICS regulated firms, reference to complaints handling procedure
17) Statement that compliance to standards may be subject to monitoring under RICS
18) statement setting out limitations to liability
What are the 10 VPGA in 2020 Red Book (Global)?
VPGA 1: Financial Statements
VPGA 2: Loan Security
VPGA 3: Business Valuation
VPGA 4: Trade-related valuation
VPGA 5: Plant and Equipment
VPGA 6: Intangible Assets
VPGA 7: Personal Property
VPGA 8: Valuation of Real property (inspection checklist)
VPGA 9: Portfolio Valuation
VPGA 10: Uncertainty
What is VPS 4?
Basis of Value, assumptions and special assumptions - Market Value, Market Rent, Investment Value, Fair Value
What is the definition of Assumptions, Special assumptions and what VPS are they in?
VPS4
Assumptions - made where it is reasonable for the valuer to accept that something is true without the need for specific investigation or verification.
Special Assumptions- 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.
Q
What is the structure of the Global Red Book?
- Introduction
- Glossary
- Professional Standards
- Valuation Technical and Performance Standards
- Valuation Applications
- International Valuation Standards
What is PS1?
Compliance with standards where a written valuation is provided
- Sets out exceptions to the Red Book
- States Red Book applies in all written valuations (except ALIES)
- A replacement cost valuation is not a written valuation
What is PS2?
Ethics, Competency, Objectivity and Disclosures
- Must comply with minimum TOE
- Act in accordance with all RICS ethical standards and codes of conduct
A3. pply professional skepticism - Deal appropriately with Conflicts of Interest
- Act objectively and transparently.
What is VPS 2?
Inspections, Investigations and Records
What does the Red Book say about Inspections?
You must inspect to take steps to verify necessary information
What should you do if you can only provide a desktop inspection?
- Agree restriction in TOE with client
- Confirm possible valuation impacts in writing
- Consider whether the restriction is reasonable
- Include in report
Can you revalue without reinspection?
You should not revalue without reinspection unless you are satisfied there have been no material changes.
What is VPS3?
Valuation Reports
- Name and Status of Valuer
- Name of Client + any other users
- Purpose of Valuation
- Identification of Asset
- Basis of Value
- Valuation Date
- Extent of Investigation
- Nature and source of the information to be relied upon
- Assumptions and Special Assumptions
- Restrictions on use/ publication/ distribution
- Instruction in accordance with IVS
- Valuation approach and reasoning
- Valuation Figure
14.Date of Valuation report - Comment on Market Uncertainty
- Limitations Liability.
What is VPS 4?
Bases of Value, Assumptions and Special Assumptions
What are the Bases of Value (6)
Market Value
Market Rent
Fair/Equitable Value
Investment Value
Synergistic Value
Liquidation Value
What is the definition of Market Value?
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.
What is the definition of 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 appropriate lease terms in
an arm’s length transaction,
after proper marketing
and where the parties had each acted knowledgeably, prudently and without compulsion.
What is the definition of 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 definition of Investment Value?
The value of an asset to the owner or a prospective owner for individual investment or operational objectives
What is VPS 5?
Valuation Approaches and Methods
Sets out the 3 main approaches - Income, Market and Cost.
What is VPGA 1?
Fair Value
Provides additional commentary on the valuation of property, assets and liabilities for inclusion in financial statemen
What is VPGA 2?
Secured Lending
- Pay particular consideration to Conflicts of Interest (where there has been any involvement in the last 2 years)
- Also, to additional info in reports that is important for other parties to rely upon e.g. any external circumstances that could affect price
What is VPGA 8?
Valuation of Real Property Assets
Sets out the importance of Inspections, Investigations and Assumptions.
Investigations - a) Characteristics of location, b) Characteristics of Property c) Characteristics of site d) Potential for redevelopment
What is VPGA 10?
Material Uncertainty
- Valuation must not be misleading
- Valuer should clearly draw attention to and comment on any issues resulting in material uncertainty
Can arise due to:
- Being an unusual asset
- Lack of Information
- Market Issues
What is UK PS1?
Ensures compliance with UK Law.
What is UK VPS1?
States all valuations deemed ‘in accordance with the Red Book’ in the UK are in accordance with Global Red book and UK supplement
What is UK VPS2?
Relates to Residential in Scotland
What is UK VPS 3?
Regulated Purpose Valuation
What are the 5 purposes forming a Regulated Purpose Valuation?
- Inclusion in Financial Statements
- Stock Exchange Listing
- Takeovers + Mergers
- Unregulated Property unit Trusts
- Collective Investment Schemes
What are some rules around Regulated Purpose Valuations?
- Must declare annually how long you have acted as valuer (RICS recommend no more than 7 years)
- Must declare whether the fees from the client represent more than 5% of total fee income
- If a firm has been the agent in acquisition they cannot value for a minimum of 12 months.
What are some key UK VPGA’s?
VPGA1 - Financial Reporting (IFRS and UK GAAP)
VPGA10 - Commercial Secured Lending
VPGA 8 - Valuation for Charities
VPGA 11 - Residential Mortgages
VPGA 15 - Valuation for elements eg. CGT, SDLT or Inheritance Tax
What do you need to remember about Special Assumptions
Must be agreed in writing before commencement of the instruction.
Are the UK sections of the Red Book issued separately to the global sections?
Yes
When was the global Red Book last updated?
31 January 2022
What are the 3 VPS 5 valuation approaches?
Income
Market
Cost
What are the 5 methods of valuation?
Investment
Depreciated Replacement Cost
Profits
Comparable
Residual
What does IVS stand for?
International Valuation Standards
Which sections of the Red Book are mandatory?
PS 1-2
VPS 1-5
What does PS1 relate to?
Compliance with standards where a written valuation is provided
What does PS2 relate to?
Ethics, competency, objectivity and disclosures
Which section of the Red Book relates to valuation reports?
VPS3
Which section of the Red Book relates to terms of engagement?
VPS1
How would you find out about the bases of value?
Look in VPS4
Which VPGA relates to secured lending?
VPGA2
Is an excepted valuation also exempt from complying with PS 1-2?
No
When was the UK Red Book last updated?
With effect from 14 January 2019
What does VPGA 1 relate to?
Financial statements
Why do financial statement valuations require particular care?
They must comply strictly with the financial reporting statements adopted by the entity
They may be relied upon by third parties
What are the two commonly used financial reporting standards used in the UK?
IFRS
UK GAAP
What additional criteria apply to secured lending valuations?
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 (for 24 months, or longer if requested)
What does UK VPS 3 relate to?
Regulated purpose valuations: supplementary requirements
What does VPGA 9 relate to?
Identification of portfolios, collections and groups of properties
What is the general principle when dealing with a portfolio valuation
The valuation purpose and your client’s instructions will dictate the approach you take to lotting
What would require a regulated purpose valuation?
Inclusion in financial statements
Inclusion in prospectuses and circulars issued by UK companies
In connection with takeovers and mergers
For collective investment schemes
For unregulated property unit trusts
What additional disclosures must you make in a regulated purpose valuation?
In relation to the firm’s preceding financial year the proportion of the total fees, if any, payable by the client to the total fee income of the valuer’s firm expressed as either less than 5%, or if more than 5%, an indication of the proportion within a range of 5 percentage points
If since the end of the last financial year, it is anticipated that there will be a material increase in the proportion of the fees payable, or likely to be payable by the client
What is the statutory basis of market value (defined in the relevant tax legislation)?
Price which the property might reasonably be expected to fetch if sold in the open market at that time, but that price must not be assumed to be reduced on the grounds that the whole property is to be placed on the market at one and the same time
Exceptions to the red book?
- agency or brokerage
- expert witness
- statutory functions
- internal purposes
- valuation adivce expressly in prep for negotiations or litigation
