Valuation Flashcards
Tell me what the 5 methods of valuation are.
Comparable
Depreciated replacement cost/contractor’s
Investment
Profits
Residual
What is a years purchase multiplier?
It is a multiplier which is calculated through the setting of a yield (or other variable) and a number of years. To find the years purchase multiplier, the valuer must make an assumption of a yield rate and refer to the Parrys tables
Give me an example of a good covenant and how this might impact a valuation.
A positive covenant requires some form of action to be taken e.g. to erect a fence along a boundary or to undertake specific repairs to the property which has a positive impact on the valuation
How would you distinguish limitations on liability in your valuations?
Where in your valuation report do you state any limitations on liability?
in a prominent position within the body of the report
What relevance does Hart v Large have on your valuation practice?
To protect a prospective purchaser of a renovated property, a surveyor should:
spell out any limitation on the advice given and, if necessary, recommend further investigation
be particularly alert to any signs of inadequate design or faulty workmanship
draw attention in appropriate terms to protections available to the purchaser, including a PCC.
What aspect of Hart v Large allowed the judge to award damages without applying the
SAAMCO cap?
Mr Large’s legal team sought also to rely on the principles in SAAMCO and Hughes-Holland. They argued that Mr Large was not an “advisor” in the sense of these authorities and that a surveyor in a house purchase could never be considered to be the advisor. Further, they argued that the “advice”/”information” categories were binary and there could never be any sort of hybrid situation. Coulson LJ reviewed the authorities that explain the difference between ‘information’ and ‘advice’, before firmly rejecting these arguments and finding that the “advice”/”information” categories are not rigid and could overlap. In particular, he referred to the cases that draw a distinction between the role of someone providing information for the purposes of enabling a third party to decide upon a particular course of action (an ‘information’ case); and the role of someone providing advice as to what course of action that third party should take (an ‘advice’ case). Having reviewed the authorities, he reasserted the factual findings of the High Court which concluded that this was not a mere “information” case. He concluded that, while this could be considered a hybrid case, it was in fact much closer to an advice case, because Mr Large had failed to advise the Harts to take the course of action of requesting a PCC.
What is the SAAMCO cap?
SAAMCO established that a valuer’s liability for providing a negligent valuation is limited to the consequences of that valuation being wrong
Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?
In SAAMCO, the House of Lords effectively held that losses attributable to a subsequent fall in the property market fell outside the scope of duty of care owed
Under the SAAMCO cap, is a valuer’s liability usually limited to the overvaluation on the
valuation date?
The damages would be limited to the difference between the negligent valuation and the true valuation at the time
What would you do if you received a notice of a PII claim from a client or their
solicitor?
you may have only 48 hours in which to notify the claim or your insurers may reject it. In any event, you should notify your insurers as soon as reasonably practicable
Is there a difference between being negligent when undertaking a survey/valuation
and providing negligent advice?
yes,, the difference is between information and advice, and the liability cap associated with information but not advice
What is run off cover?
Run-off cover is insurance for claims made against a law firm after it has stopped doing business.
What is the Red Book?
contains mandatory rules, best practice guidance and related commentary for valuers
Why does the Red Book exist?
Promote and support high standards in valuation work and offers useful resource for valuation users, gives mandatory practices for registered valuers and ensures a consistent approach
Tell me about a factor which may impact value.
supply and demand
Use
Restrictive covenants
What is your duty of care as a surveyor when undertaking a valuation?
A valuer owes a duty to use reasonable care and skill in valuing property
To whom do you owe this duty of care?
to my client and anyone relying on my report
Why is independence and objectivity important when valuing?
to be able to provide unbiased advice - It is important that my opinion and advice is free from bias due to the impact on clients, the wider market and trust in the profession plus it is used for financial decision making
Is there a separate UK Red Book?
there is a UK supplement
What is the UK valuation guidance called?
RICS Valuation - Global Standards
2017: UK national supplement
Why does the UK guidance exist?
as it is subject to UK jurisdiction
When was the Red Book last updated?
January 2022
was the red book updated differ from when IVS were last updated?
no, this is also january 2022
What changes were made to the IVS?
it reflects changes to the IVS and measurment rules, adds more detail on Terms of Engagement when exceptions are used, adds more detail on sustainability, sample report wording was removed and make it clearer and easier to use.
Which do you follow - the latest IVS or the Red Book Global?
They are incorporated in the red book
Which sections of the Red Book are mandatory and which are advisory?
The VPS 1-5 & PS 1-2 are mandatory, the VPG-A’s 1-10 are advisory
What does PS1-2/VPS1-5/VPGAs relate to?
Professional stndards
PS 1 Compliance with standards where a written valuation is provided
PS 2 Ethics, competency, objectivity and disclosures
Valuation technical and performance standards:
VPS 1 Terms of engagement (scope of work)
VPS 2 Inspections, investigations and records
VPS 3 Valuation reports
VPS 4 Bases of value, assumptions and special assumptions
VPS 5 Valuation approaches and methods
Valuation applications:
VPGA 1 Valuation for inclusion in financial statements
VPGA 2 Valuation of interests for secured lending
VPGA 3 Valuation of businesses and business interests
VPGA 4 Valuation of individual trade related properties
VPGA 5 Valuation of plant and equipment
VPGA 6 Valuation of intangible assets
VPGA 7 Valuation of personal property, including arts and antiques
VPGA 8 Valuation of real property interests
VPGA 9 Identification of portfolios, collections and groups of properties
VPGA 10 Matters that may give rise to material valuation uncertainty
What type of advice does the Red Book cover?
VPG-A offer advice on the practical application of the standards in specific contexts
If you provide preliminary advice / draft valuation report, what should you state in
writing to your client?
You must state the opinion is provisional and subject to completion of the final report, provided for the clients internal purposes only and it is not to be published or disclosed.
What type of valuations might be relied upon by a third party?
Mortgage valuations
Tell me what the definition of MR/MV/investment value/fair value?
MV/MR 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
IV The value of an asset to the owner or a prospective owner for individual investment or operational objectives
FV 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?
An assumption is a fact that is true at the date of valuation
A special assumption is something that is not fact at the time of the valuation but could reasonably be so at a future date
What sources of information would you consider when preparing a valuation report?
The inspection, online research, documents provided by the vendor, market data
If you have previously valued an asset, do you need to make any additional disclosures
and what might they be?
Yes, need to disclose to all parties and obtain prior consent to continue, you need to disclose the nature of the relationship with the previous client and previous involvement, rotation policy, time as signatory and any proportion of fees
If your firm is too small to have a rotation policy or valuation panel, what else can you
do to ensure objectivity?
Arrange for a valuation to be reviewed by another member at periods of no greater than seven years when the same asset is being valued on a regular basis to demonstrate that objectivity is being followed
When might a conflict of interest exist in relation to a valuation instruction?
Where there is a pre-existing relationship with either party, where you have acted for the client within the past 12 months, where a referral fee has been payable, has a financial interest in the asset etc
What must be included in your terms of engagement / valuation report?
Covered in VPS 1, must state, who the valuer is and their status, the valuation date, identify the asset to be valued, valuation currency, purpose of the valuation, who the users of the report are and if it can be shared, basis of value, any investigations, basis of fee
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). Note that the provision of an AVM-derived output would be regarded as the provision of a written valuation for the purpose of these standards. Accordingly valuers should be alert to, and aware of, the implications of either accepting or manually modifying an AVM output. A restricted service will also include any limitations on assumptions made in accordance with VPS 2.
How do you deal with limitations on inspection or analysis?
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. If the valuer considers that it is not possible to provide a valuation, even on a restricted basis, the instruction should be declined. The valuer must make it clear when confirming acceptance of such instructions that the nature of the restrictions and any resulting assumptions, and the impact on the accuracy of the valuation, will be referred to in the report.
How do you deal with limitations on inspection or analysis?
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. If the valuer considers that it is not possible to provide a valuation, even on a restricted basis, the instruction should be declined. The valuer must make it clear when confirming acceptance of such instructions that the nature of the restrictions and any resulting assumptions, and the impact on the accuracy of the valuation, will be referred to in the report.
Can you revalue a property without inspecting?
Yes but only when you are satisfied that there have been no material changes to the property , that you have previously inspected it and that this assumption is included in the report
What RICS guidance relates to the use of comparable evidence?
Guidance Note: RICS Comparable evidence in real estate valuation October 2019
What is an internal valuer?
Valuer that is in the employ of the firm that owns the subject asset or accounting firm compiling the firms financial records/reports
Can an external valuer provide an internal purposes valuation?
Yes, but there will need to be clear Terms of Engagement and clear instructions about non disclosure to third parties
What happens if market conditions change between the valuation date and report
date?
This should be mentioned in the report and brought to the attention of the client that markets are subject to change
Is special value from a special purchaser reflected in MV?
No, because the special value reflects a purchaser where the asset holds value above that of the rest of the market
Where does the definition of fair value come from?
IFRS 13- International Financial Reporting Standards
Does fair value differ from MV?
Yes, fair value is a measure of an assets worth and does not normally account for market forces but market value is the price of an asset in the marketplace but both figures will normally be the same
When is fair value used?
Usually used in financial reporting
What are the 3 approaches under VPS5?
Market approach - comparing against other or similar assets
Income approach - capitalisation or conversion of future income
Cost approach - purchaser will pay no more than the cost of obtaining one of equal equity
What is the Valuer Registration Scheme?
RICS scheme, which is a quality assurance mechanism that monitors RICS registered members who carry out valuations within the scope of the Red Book
Are there any instances where certain sections of the Red Book may not apply?
Yes, PS 1-2 will always apply but VPS 1-5 may not in certain circumstances, for example when providing advice on insurance re-instatements or for internal purposes only where no third parties will see the result, when acting as an expert witness, when providing agency or brokerage advice or during negotiations or litigation where the valuer is acting as an advocate
What is the basis of value under UK GAAP FRS 102?
Fair Value, the amount at which an asset could be exchanged on that date between 2 knowledgable, willing parties
What is a SORP?
Statement of Recommended Practice
When would you use EUV?
Existing use value (EUV) is to be used only for valuing property that is owneroccupied by an entity for inclusion in financial statements.
What is the definition of EUV?
describes what a property is worth in it’s current form and it being continued to be used in it’s current purpose
What additional criteria apply to secured lending valuations?
VPGA 2 applies in this case, additional criteria may be dependant on the lender, market value is the usual methods, it identifies the price at that particular time. Must include a report date, inspection date and valuation date as well as a statement on conflict of interest and a statement on PII
What information should you specifically request for a secured lending valuation?
Any alternative requirements of the lender, identity of the lender, any recent transaction on the property or agreed price, extent of marketing, any incentives, what lending facilities there are.
What is a regulated purpose valuation?
Valuations for inclusion in this such as prospectuses, financial reports, takeovers and mergers etc. Found in the Red Book UK supplement
What additional disclosures must be made for a regulated purpose valuation?
Fees paid to the valuer from the client in the preceeding financial year and if it is likely if this figure will increase in the next year
What is the basis of value for a statutory valuation?
hey are for capital taxation purposes and will usually use market value
What might a statutory valuation relate to?
Capital gains tax, inheritance tax, stamp duty
What is the definition of the statutory basis of valuation?
Price it would fetch if sold in the open market at that time based on the whole of the asset is to be sold
What is a yield?
It is a rate of annual return you are likely to get on your investment, it is calculated by expressing a years rental income as a percentage of how much the property cost.
What is a Net Initial Yield?
It is the ratio of net rental income and gross purchase price of a property
What is a reversionary yield?
The yield that should be achieved if the passing rent adjusts to the level of the estimated rental value
What is an equated yield?
Yield on a property investment which takes into account growth in future income
What is an equivalent yield?
Equivalent Yield (true and nominal) is a weighted average of the Net Initial Yield and Reversionary Yield and represents the return a property will produce based upon the timing of the income received. The true equivalent yield assumes rents are received quarterly in advance.
How would a yield reported from auction differ from a Net Initial Yield?
Taxation or pruchase price affecting the yield figures? Not included the purchase fees?
What purchaser’s costs do you deduct from a valuation?
Stamp duty, legal fees, agency fees
How would you value a property in uncertain market conditions - does the Red Book
give any guidance?
Yes, VPGA 10 covers market uncertainty, you would provide a valuation but comment on the uncertainty and your level of confidence in it
How could you value a long leasehold interest?
Usually on the basis of fair value for a lease over 50 years
How does a term and reversion differ to a DCF?
DCF is discounted cash flow, in DCF the forecasted cash flow is discounted back to the valuation date to give a present value based on it’s future economic benefits.
Term & Reversion is a variation of DCF and is used when existing lease periods are due to expire, the new lease will have new contract terms so the current rate will probably differ from the market rate, if that’s the case it’s said to have revisionary potential. So the term rate is separated from the revisionary rate.
T&R will use different capitalisation rates
What is the difference between a growth explicit and a growth implicit yield?
An ‘implicit method’ of valuation consists of using a capitalisation rate and current market rent based on comparable evidence. The capitalisation rate is often referred to as an ‘all risks yield’, with all risks hidden in the selected yield.
Explicit method - the expected cash flows are determined and discounted at a target rate of return.
Give examples of explicit and implicit types of yield.
Not something I have done, I would refer to RICS practise standards note on Discounted Cash Flow for commerical property investments
Give examples of explicit and implicit types of yield.
Not something I have done, I would refer to RICS practise standards note on Discounted Cash Flow for commerical property investments
How would you value an under/over rented investment property?
I would use hardcore and layering/top slice
When would you use a dual rate investment calculation?
When you are looking at an investment for a leasehold property and want to set aside some of the annual rent in a sinking fund to account for the reduction in the length of the lease.
Where can you find yield evidence from?
Market comparables
What is the hierarchy of evidence?
Weight given to the evidence used, with A being direct comparables, B being market data and C is other sources such as other background date like interest rates
What would you do if comparable evidence was limited?
Widen the search area, make adjustments to available data and expand info to other property types, include it in your report
What is NPV?
Net Present Value -Net present value is the present value of the cash flows at the required rate of return of your project compared to your initial investment
What is IRR?
The internal rate of return (IRR) isa metric used in financial analysis to estimate the profitability of potential investments.
It is calculated by taking the difference between the current or expected future value and the original beginning value, divided by the original value and multiplied by 100
What is a term and reversion?
The term-and-reversion approach is a method to value real estate for which the existing lease contracts are expected to expire
What is a hardcore and topslice?
The theory with the layer method of valuation is:It capitalises present rent (hardcore rent) into perpetuity.Then it capitalises the top slice rent (difference between the market rent and the hardcore rent) that will start from reversion into perpetuity, this defers it as is appropriate
What is a Discounted Cash Flow (DCF)?
Discounted cash flow (DCF) isa valuation method used to estimate the value of an investment based on its expected future cash flows. DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future.
What is a short-cut DCF?
The Short-cut DCF is an adaptation to property valuation of the DCF method, which is widely used in finance
When would you use a DCF?
Discounted cash flow DCF analysisdetermines the present value of a company or asset based on the value of money it can make in the future so is used mostly when valuing property for investments.
The assumption is that the company or asset is expected to generate cash flows. In finance, it is used to describe the amount of cash (currency) in this time frame.
What are the advantages of a DCF?
It’s detailed, gives a good comparision of differing assets with differing timeframes by giving a comparsion at a set moment in time
What are the disadvantages of a DCF?
It can be very sensitive to small changes and adjustments and can be quite complicated
What is a YP/PV/YP in perpetuity?
Years Purchase (YP), single rate or the Present Value (PV) of £1 per annum receivable at the end of each year after accounting for a sinking fund to accumulate at the same rate of interest as that which is required on the invested capital and ignoring the effect of income tax on that part of the income used to provide the annual sinking fund instalment
What is marriage value?
The value created by combining one or more assets which are worth more together than when sold separately. It is also used in Leasehold enfranchisement as the property becomes more valuable with an extension of the lease when the existing lease being extended is less than 80 years. Usually then 50% if the increase in value is paid to the freeholder, however Government consultation makes it look like this payment requirement might be scrapped
When would you include an element of hope value in a valuation?
When looking at a property where improvement is likely but planning approval has not yet been granted
Can you include hope value in a secured lending / mortgage valuation?
How would you value a ransom strip?
It’s a small piece of land that’s been retained once a larger piece has been sold and can prevent access for developers etc. Set by the Stokes Vs. Cambridge case. The owner is entilted to 1 third the increase in value of the adjacent land.
How does market value differ to investment value/fair value?
Fair value refers to the actual worth of an asset, which is derived fundamentally and is not determined by the factors of any market forces. Market value is solely determined by the factors of the demand and supply, and it is the value that is not determined by the fundamental of an asset.
What is a dual capitalisation rate and when would you use one?
Putting asside some of the income into a sinking fund to account for the loss of value of the diminishing leasehold, the sinking fund will attract an interest rate of it’s own, which is the second rate on top of the leasehold income.
Is the profits/DRC method used for specialised or specialist property?
Profits is used for specialist property like hotels and cinemas, DRC is commonly used for property which may not regularly be on the market, or where there is no income associated with it such as churches or libraries.
What type of properties would you use the profits method for?
Specialist ones like hotels, petrol stations and cinemas where their worth is closely linked to their trading potential and have been designed for a specific use
What type of properties would you use the DRC method for?
where there is no market evidence such as for libraries
When would you use the profits method?
When valuing a hotel or cinema where spacing/zoning wouldn’t work
What is intangible goodwill?
It is an excess in the value, above the total of the value of the assets and liabilities
What is turnover / gross profit / net profit?
The total of the income made by a business
Total of sales, less cost of sales before tax
Total left over after cost of sales and tax is removed from turnover
What are the steps to providing a profits valuation?
Work out the fair maintainable turnover and fair maintainable profit, look at future operating potential while ignoring the skill of the current occupier, the FMOP is then capitalised at an appropriate rate of return reflecting the risk and reward of the property and it’s future earnings potential, taking into account comparable evidence
What is Fair Maintainable Turnover?
It is the level of trade an asset/business is expected to achieve if it is operated in a reasonably efficient way. It assumes the property is well equiped and in good repair
What is a Reasonably Efficient Operator?
a valuer should disregard any impact on turnover and profit attributed solely to the personal skill, reputation, and expertise of the existing owner.
Does the assessment of the REO include personal goodwill and trading potential?
No, it removes elements related to one individual from the equation
What is personal goodwill?
Personal goodwill isan asset that is owned by an individual, not the business itself. It is generated from the personal expertise or business relationships of an individual employee or shareholder.
What is trading potential?
It is the trade that could be achieved at an optimum output, assuming the business is well run
How do you calculate the tenant’s proportion of rent in a profits valuation?
It can typically be done by calculating the net profit then dividing that figure by 50% to give a rental figure
What is EBITDA?
Earnings before interest, tax, depreciation, Amortization
What is Fair Maintainable Operating Profit?
It is the level of profit an asset/business is expected to achieve if it is operated in a reasonably efficient way. It assumes the property is well equiped and in good repair
How do you calculate the divisible balance?
It is Gross Profit minus the operating expenses
What accounts information would you want to review for a profits valuation?
The financial audited accounts for at least the last 3 years
Do RICS provide any guidance on RLVs or valuing development property?
Yes, the Guidance Note, Valuation of development property 2019
What is an RLV?
Residual Land valuation, finding the value of a piece of property or land with potential for development. It works out the value by removing the builders costs and profit from the estimated sales achieved by selling the end properties
What is a development appraisal?
A development appraisal assesses the ability of a scheme to make sure it is financially viable, the RLV is a method to set the value of the land to be developed
How else can you value development land?
The comparable method if there are suitably similar sales to base your calculations on
What is the basic process of undertaking a RLV/development appraisal?
Assess land and project, work out GDV, work out expenses and profit required then take the development costs from the GDV to leave a value for the land
What does a development appraisal show?
an objective financial viability test of the ability of a development project to meet its costs including the cost of planning obligations, whilst ensuring an appropriate site value for the landowner and a market risk adjusted return to the developer in delivering the project
What are the key things you need to consider when appraising / inspecting a
development site?
Characteristics of the site and surrounding area, likely demand for any development and if its likely to obtain planning, plus any restrictions such as access, slopes etc
What else should you consider in appraising a development site?
Safety for inspection, what was the past use of the site and likihood of contamination, waste management, rights of access, mineral extraction rights
Tell me about your due diligence when undertaking a development appraisal.
You want to look at things such as rights of way, contamination, planning restrictions, site restictions, access, TPO’s, site address, right to light etc
What sources of information do you use when undertaking a development appraisal?
How can you assess development potential?
You can look if the scheme is profitable or at least to cover its costs, is there demand for the finished project, is the site suitable for development or do restrictions make it unviable
What is GDV/NDV?
Gross development value is the value achieved by selling the houses at the end of the project, Net development value is the figure left over after selling the houses and deducting the builders costs and profit
How do you calculate GDV?
Find a value for the finished properties, usally by comparable method to find the market value
What do development costs include?
Site clearance, labour and material costs, purchase price of the land, builders profit
When do you apply VAT when assessing development costs?
Where can you source build costs from?
BCIS can be a useful tool to check accuracy, as can schedules of rates or information from a QS
What are typical finance costs?
Loans and interests on them, plus fees for arranging the finance
What would you apply finance costs to and on what basis?
Mostly through discounted cash flow calculations, you’d want to include it in fees and expenses in a residual appraisal for an accurate outcome
What is an S curve?
A way of showing costs through the lifecycle of a project, as they are unlikely to come in on a straight line basis as costs are likely to be lower in the early stages of a project but increase as construction progresses
What do holding costs typically include?
They are the costs of owning the site and might include interest on finance, maintenance costs, security and taxes payable
How do you typically calculate developer’s profit?
It is typically worked out as a percentage of the development costs, usually around 20%
What are some typical inputs (and %/£) in a RLV?
Costs of labour and materials, selling fees, design costs, builders profits. Selling fees can often be between 1-2%
What other criteria might be assessed in terms of performance measurement for a
RLV?
How quickly the property could sell, it’s ability to cover it’s costs, cash on cash returns
What are the advantages/disadvantages of a RLV?
Advantages are that it is an effective way of determining a value of a piece of land or property, especially when there are no comparables available, it can also be a way of determining likely build costs to see if the scheme is worth it. The disadvantage is that they can be very sensitive to small changes in the inputs which can give very different results
What is included in the development programme?
Programmesdescribe the sequence in which tasks must be carried out so that a project (or part of a project) can be completed on time. Programmes will often identify: Dates and durations allocated to tasks. A critical path (the sequence of critical tasks upon which the overall duration of the programme is dependent).
What is CIL?
The Community Infrastructure Levy (CIL) isa levy that local planning authorities can charge on certain types of new development in their area. It can fund roads, parks, new schools etc
What is S106?
It is a legal agreement between developers and the local authority during developments. When the developments are deemed to have a big impact on the local area the local authority will place obligations on the developer to include improvements to the local areas as part of any approvals. This typically includes social or affordable housing in the development, improvements to roads, town centres or education
What are the differences between CIL and S106?
A CIL is a community infastructure levy, it is a charge that the authority will then use to spend on local infastructure. The 106 usually places the emphasis on the developer doing the work themselves
What is CIL charged on?
A
Community Infrastructure Levy
On developments of new houses, for extensions over 100m2 and new retail buildings over 100m2
What is a Monte Carlo simulation?
It is a mathmatical simulation that generates random variables to model risk and uncertainty
What is a sensitivity analysis?
It is a look at how costs in the project can be subject to change to see what impact they will have on the project to see if it is still worth it or if changes need to be accounted for or made
How do you carry out a sensitivity analysis?
You can alter the costs or finished prices to see what change they have to the viability of the project. I have done this by using an excell spreadsheet to allow easy analysis that these changes can have on the project finances
What variables might you change on a sensitivity analysis and why?
You might change the projected costs as material and labour prices and be subject to change based on supply and demand. The likely selling price could be subject to change as well on a longer project so these changes need to be assessed to ensure the project is still viable if things do change
What factors affect sensitivity of a development appraisal?
Cost of finance, building material and labour costs, availability of either, likely prices for the finished product
Tell me about your understanding of incorporating affordable housing into
development appraisals.
Under local planning regulations and depending on the size of the project there may be a requirement for an element of affordable housing needed in order to obtain planning permission. This can vary between authorities and it can include lower cost housing, housing reserved for social housing or schemes with restrictions on who can buy them such as those with local connections or certain public sector jobs
Tell me about software you have used to provide a RLV.
MS excel & BCIS (Building Cost Information Service) to confirm estimated build costs.
What RICS guidance relates to the valuation of development property?
Valuation of development property, guidance note October 2019
Give me a limitation of the BCIS software.
It can be venerable to human error in the data that is input into it
BCIS may be behind the times if material and labour prices are rapidly changing
What is viability?
It is a check to see if the development can meet the requirements of the project, typically if it is profitable but it can be other things
When would a cost approach be used?
Cost approach is a way of caluculating value based on the cost of building a replacement, plus the cost of the land, less the cost of depreciation. It may be used with the valuation of a new building where there are no or very few comparables. It can also be used for things such as Churches, libraries, schools where there is no income and they are rarely sold
What type of buildings would a cost approach be used for?
Usually either something new where there are no comparables or where they are rarely sold and there is no income associated with them such as schools, churches, libraries etc
What is the supposition that a DRC is based upon?
The underlying theory is that the potential buyer in the exchange would not pay any more to acquire the asset being valued than the cost of acquiring an equivalent new one. The technique involves assessing all the costs of providing a modern equivalent asset using pricing at the valuation date
What are the 3 components of the cost approach?
Cost of buying the land, cost of building the property, cost of depreciation
How do you assess the value of the land?
Direct comparison where possible assuming that there are land sale values to base this on. It can also be computed as a residual value using the cost approach equation for a newly constructed property where the cost new and sales price are both known.
How do you assess Gross Replacement Cost?
This comprises the cost of replacing the land plus the cost of replacing the improvements to the land. For the latter, the approach is to assess the cost of their replacement with a
modern equivalent and then make valuation depreciation adjustments to reflect the differences between it and the actual asset when compared with a modern equivalent.
What costs would you consider within GRC?
What would you do if the building could be replaced with a modern equivalent?
How would you deal with depreciation/obsolescence?
What types of obsolescence are there?
a. Physical deterioration is the result of wear and tear over the years, which may be combined with a lack of maintenance. The valuer compares the decline in value of
an asset of a similar age with the value of new assets in the same market.
b. Functional obsolescence arises where the design
or specification of the asset no longer fulfils the function for which it was originally designed.
c. economic obsolescence the impact of changing economic conditions on the demand for goods or services produced
by the asset.
What are the three ways to deal with depreciation?
The straight line method is a good option if you know how long an asset will last and what it will be worth at its end of life. It provides a way to take a set amount of depreciation for the life of the asset
Double declining balance (s curve) is an accelerated depreciation method. Depreciation expense is larger in earlier years and smaller in later years, making it a variable depreciation amount each year.
Units of production ties depreciation to the output of an asset
Is the cost approach a market valuation?
no
How might onerous lease terms, e.g. restrictive user, break clause, impact upon capital or rental value?
they have a negative impact on the values
What liabilities may be created through valuation?
What is a liability cap and when would one be used?
A liability cap is a clause in a contractual agreement that limits the amount that a party is liable for in the event of a breach of contract or any sort of negligence
Explain why the RICS are carrying out an Independent Valuation Review.
they recognise there are structural shifts occurring in investor and occupier demand for real estate – many accelerated by the impacts of COVID-19 – resulting in changing market, public and regulatory expectations of valuers. A review is therefore needed to ensure that RICS valuation standards remain a foundation for confident markets within this context.
Who is leading the independant valuation review
Peter Pereira Gray, BSc (Hons) DipPropInvest FRICS
FRSA
Explain what you understand by the term, margin of error.
the margin of error can be 10% either side of a figure that can be said to be the right figure that a competent careful and experienced valuer arrives at after making all the necessary enquiries and paying property regard to the state of the market.
What caselaw relates to margins of error?
Singer and Friedlander v John D Wood & Co [1977]
Explain your understanding of K/S Lincoln v CBRE Hotels (2010).
the Claimants seek in excess of £4 million in damages against the Defendants for professional negligence arising out of the Defendants’ valuation reports of April 2005 relating to the four budget hotels now owned by the four individual Claimants. Although this case has a number of unusual features, it is, at its heart, a straightforward dispute about whether or not the valuations produced by the Defendants in their reports were within or outside a reasonable bracket/margin of error. Similar claims in respect of four other hotels were compromised shortly before the trial.
The court held that the valuers owed the usual duty of care in respect of the valuation but also in respect of the projected yield. It would be artificial to find that the valuer owed a duty of care in respect of the core aspects of the valuation but not with respect to other statements volunteered in the report and intended to be relied upon. Where relevant and significant statements are made and relied upon a duty of care will arise as to their accuracy. However, C had not relied on the projected investment yield data when deciding whether to invest in the hotel chain, but merely the overall valuation. Its loss therefore could not be causally related to any inaccuracy of those findings. Restating the rule set out in Merivale Moore Plc v Strutt & Parker (and as applied in Dennard v PricewaterhouseCoopers LLP) it followed that D would only be liable if the valuation fell outside the permissible bracket of reasonable valuations. On the facts it did not.
Explain the precent set in Hyde and another v Nygate and another (2021) in relation to
the valuation of high-profile development sites.
In considering whether an administrator had acted properly and independently in connection with the sale of a valuable development site in central London, the High Court determined the scope of an administrator’s duties.
How can a NIY of zero be achieved?
In a scenario where rents are static and the capital value increases, would you expect
yields to increase or decrease?
decrease as it is a lower risk
What does heterogenous mean in terms of comparable evidence?
the differences
What does the term ‘tone of value’ mean to you?
After analysing all the rents available, we can determine a ‘tone of value’ for a group of similarly sized shops in a similar location. This is more than just an average; it gives greater weight to rents agreed closest to the valuation date. We can then apply that ‘tone’ at the valuation stage.
Tell me why terms of engagement are important.
Terms of engagement are primarily a memorandum of what has been agreed between the valuer and client for the avoidance of doubt and confusion.
What checks do you undertake before accepting a valuation instruction?
identity check
conflict of interest
How do you ensure you know who your client is when undertaking a valuation
instruction?
Ask for photogrpahic id and address confirmation dated within the last three months
Are there any additional requirements when undertaking a valuation in which the
public has an interest or third parties may rely?
Are there any additional requirements for loan security valuations?
Talk me through an example of when you have agreed terms of engagement with a
client.
What are the key elements included within terms of engagement?
Identification of the valuer
Client name and address
property address
Purpose of valuation
Basis of valuation
Assumptions
Liability cap
Fee basis
What does the Red Book say about terms of engagement?
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.
What does the Red Book say about inspections?
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.
What does the Red Book say about reporting requirements?
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) (see VPS 1).
What are the differences between a desktop and a full valuation report?
A desktop valuation does not involve any inspection and relies solely on information provided, a full valuation includes and inspection, measurement etc
Tell me about how you ensure that information relied upon in your valuation is
appropriate and reliable?
I call up local estate agents to confirm the details
