Valuation Flashcards
What are the five main methods of valuation?
⦁ Comparable method
⦁ Investment method
⦁ Profits method
⦁ Depreciated replacement cost method
⦁ Residual method
What is the comparable method of valuation?
- Source and verify details of recent transactions of comparable properties.
- Compare the characteristics of the comparable properties to that of the subject property.
- Adjust the values of the comparable properties and asses the market information available to apply a rate to be adopted to the subject property to arrive at a value.
What is the investment method of valuation?
- Used where there is an income stream to value, i.e. the property is tenanted.
- Details of market rents and market-based yields.
- can adopt an ARY or adjust the yield to reflect a change in rent expected to be received during the tenancy e.g. a term and reversion
What is the profits method of valuation?
- The profits method is the preferred approach when valuing a business, for example a restaurant.
- The profits method firstly takes into account the gross operating income of the business. The working expenses are then deducted to create the net cashflow.
- The net cashflow over a period of time is then converted into present value by selecting an appropriate risk yield for the business.
What is the depreciated replacement cost method of valuation?
- used for owner-occupied or specialised property that is rarely sold on the open market
- assessing the cost to replace the land and the building – with a modern equivalent, including all associated costs – before making appropriate deductions for depreciation and obsolescence
What is the residual method of valuation?
- typically used for property or land with development potential
- assess the development potential of the land, i.e. highest value use. They then need to calculate the value of the finished scheme, i.e. gross development value (GDV) based on market comparables. All development costs are then deducted from GDV, including developer’s profit and finance costs.
When was the RICS Red Book effective?
31st January 2022
What’s included in both the report and terms of engagement?
- Identification and status of the valuer
- Identification of the client(s) and any other intended users
- Identification of the asset(s) or liability(ies) valued
- Purpose of the valuation
- Basis(es) of value adopted
- Valuation date
- A statement setting out any limitations on liability that have been agreed.
- Restrictions on use, distribution and publication of the report
- Nature and source(s) of the information (relied upon in the report and to be relied upon in TOE)
- Confirmation that the valuation will be (TOE) / has been (report) undertaken in accordance with the IVS
- Assumptions and special assumptions made (report) to be made (TOE)
- Extent of investigation (report) Nature and extent of the valuer’s work – including investigations – and any limitations thereon (TOE)
What’s included in a report but not the terms of engagement?
- Date of the valuation report
- Amount of the valuation or valuations
- Valuation approach and reasoning
- Commentary on any material uncertainty in relation to the valuation where it is essential to ensure clarity on the part of the valuation user
What are the mandatory requirements of the RICS Valuation Global Standards?
Professional standards – mandatory
- PS 1 – Compliance with standards where a written valuation is provided
- PS 2 – Ethics, competency, objectivity and disclosures.
- Valuation technical and performance standards – mandatory
- 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.
What are the advisory global valuation practice guidance applications?
Valuation practice guidance 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.
How would you decide on a yield?
Review of sales of comparable transactions and the yields achieved in respect of those. Make an appropriate adjustment to the yield if necessary to reflect the level of risk.
What is the difference between a gross yield and a net yield?
Gross yield does not take into consideration costs and void costs whereas a net yield does.
What details would you obtain when sourcing comparable evidence?
- Address.
- Location details.
- Real estate type, e.g. office, shop, industrial, residential, agricultural.
- Type of transaction, e.g. sale, letting.
- Freehold or leasehold interest.
- Lease terms and conditions.
- Financial information, e.g. rent or sale price and details of any incentives.
- Size and method of measurement
- Analysis per sq.ft.
- Date of transaction.
- Brief description, specification, condition and any other relevant attributes (e.g. energy efficiency, which may be a material issue in some sectors or markets).
- Whether the party was represented
- Source of information, e.g. name, organisation, contact details.
- Any comments on the reliability of data employed.
- Date of confirmation of information.
How would you address disparities between comparables?
- Make an adjustment for quantum.
- Make an allowance for the different terms.
- Prioritise evidence in order of relevance.
