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APC Revision > Valuation > Flashcards

Valuation Flashcards

1
Q

Tell me about VPS 1

A

VPS 1 covers the Terms of Engagement / Scope of work.
Examples of what is included:
Identification of the valuer
The client
The fee
The assets to be valued
Purpose of the valuation
Basis of the valuation
Valuation date
Extent of investigation/inspection
Limitation on Liability
Timescales

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2
Q

What is the difference between an internal and external valuer

A

Internal:
Employed by the company to value the companys assets
Valuations can be used for internal purposes only
No third-party reliance
External:
Has no material links with the assets to be valued or with the client

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3
Q

What three steps do you need to undertake before beginning a valuation instruction?

A

Competence
Independence
Terms of Engagement

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4
Q

What statutory due diligence checks should you undertake for valuations?

A

Asbestos register
Fire Safety Checks
Environmental matters - high voltage power lines, flooding
Health and Safety Compliance
Equality Act 2010 compliance
Legal title and tenure
EPC Ratings
Planning history

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5
Q

What are the 5 methods of valuation?

A

Profits
Depreciated Replacement Cost
Residual
Investment
Comparable

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6
Q

What are the 3 approaches to valuation?

A

Income
Cost
Market

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7
Q

What is included in the Terms of Engagement Letter

A

Identification and status of valuer
Identification of Client
The assets to be valued
Valuation Date
Fee
Currency
Level of liability cap
Bases of valuation
Purpose of valuation
Compliance with RBG/IVS
That a copy of complaints handling procedures is available
Nature and source of information to be relied upon
Assumptions and special assumptions to be made
Format of the report
Restrictions of use, distribution and publication

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8
Q

What is included in the Report

A

Identification of valuer
Identification of client
Assets to be valued
Purpose of valuation
Basis of valuation
Date of valuation and date of valuation report
Approach and reasoning of valuation
Fee
The Valuation Figures
Market Uncertainty comment
Statement regarding the liability cap

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9
Q

What is the methodology for the comparable method?

A
  1. Search and select comparables
    2.Confirm/verify their details
    3.Assemble a schedule of comparable evidence
    4.Adjust according to the hierarchy of evidence
    5.Analyse the comps to form an opinion of value
    6.Report value and prepare file note
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10
Q

What is the hierarchy for comparable evidence?

A

A. Direct Comparables
B. General market data - e.g Land Reg Index
C. Other sources e.g interest rates

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11
Q

What is the RICS document for the comparable method

A

RICS Professional Standard : Comparable Evidence in Real Estate Valuation 2019 (reissued as a Professional Standard in April 2023)

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12
Q

When is the investment method used?

A

Used for income producing properties

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13
Q

What is the conventional investment method?

A

Rent received/market rent x years purchase = MV

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14
Q

What is the term and reversion method?

A

Used for reversionary investments i.e under rented properties
The term until lease expiry/rent review is capitalised at an initial yield
Reversion to Market rent is valued into perpetuity at a reversionary yield

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15
Q

What is the layer/hardcore method?

A

Used for over rented properties
Income stream is divided horizontally
Bottom slice = Market Rent
Top Slice - Passing Rent - Market rent
Higher yield is applied to the top slice to reflect higher risk
Yields are derived from comparables

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16
Q

Talk me through the Discounted Cash Flow Technique

A

DCF projects an estimated cash flow over an assumed investment holding period. It also projects an exit value for the end of the period.
It then discounts the projected cash flow back to present day value, using a discount rate which reflects the perceived level of risk

17
Q

When is the DCF used?

A

Short-leasehold interests
Properties with complex tenures and income voids
Social housing
Over-rented properties
‘Alternative’ Investments
Phased developments

18
Q

Tell me about the Profits Method

A

Value is based off the profitability of the business rather than the physical building or its location

Used for Pubs, restaurants, petrol stations, childrens nurseries, healthcare and leisure facilities, care homes

Must have accurate and audited accounts from the last 3 years if possible

Audited accounts are better than management accounts

19
Q

How would you use the profits method on a NEW business?

A

Use business plans/estimates/forecasts

20
Q

What is the Methodology of the profits method?

A

Annual Turnover
- Costs/purchases
=Gross Profit
- Reasonable working expenses
= Unadjusted Net Profit
- Operator’s remuneration
= Adjusted Net Profit aka Fair Maintainable Operating Value

This would be capitalised at an appropriate yield to achieve market value

This can be expressed as the EBITDA

21
Q

When is the Depreciated Replacement Cost Method used

A

Used for specialised properties when there is limited or no direct comparable evidence
Specialist properties include: schools, submarine basis, oil refineries, docks, sewage works

22
Q

What is the purpose of DRC method?

A

Owner-occupier properties
Accounts valuations
Ratings valuations

23
Q

What is the methodology of the DRC Method?

A
  1. Land value at its existing use (assume planning permission exists)
  2. Plus the cost of building the building again plus fees minus a discount for depreciation and obsolescence (use BCIS and own judgement for obsolescence)
24
Q

What are the 3 types of obsolescence

A
  1. Physical obsolescence - as a result of wear and tear
  2. Functional obsolescence- where the design or specification of the asset no longer fulfils its function
  3. Economic obsolescence - due to market conditions changing for the use of the asset
25
Q

What is the purpose of development appraisals?

A

Used to establish the financial viability of a proposed scheme
Can be used to establish a residual site value
Used to assess the profitability of a scheme and its sensitivity to different inputs i.e different costs or interest rates

26
Q

Tell me about a Development Appraisal

A

Used as a guide as to the viability of a proposed scheme
Series of Calculations to assess the profitability/viability of a proposed scheme based on clients inputs
Can either assume or establish a land value

27
Q

Tell me about a residual site valuation

A

Used to establish the market value of a site for a specific purpose
On a valuation date
Using inputs from that valuation date
Can be based on a simple residual valuation or a DCF
Is a form of Development Appraisal

28
Q

What costs are associated with developments and where do you find them?

A
  1. Site Preparation - Site clearance, demolition, remediation works, levelling
    Source: Costs from contractors estimates
  2. Planning Obligations
29
Q

What is PS1

A

Compliance with standards and practice statements within a written valuation

30
Q

What are the five exceptions to requirement to use the Red Book?

A
  1. Negotiation/Litigation
  2. Expert Witness
  3. Internal purposes with nil reliance and not to be used by a third party
  4. Statutory purposes (apart from statutory returns to a tax authority)
  5. Agency purposes in anticipation of receiving a disposal/acquisition instruction

**Reinstatement costs for insurance purposes are not a written opinion of value so dont count

31
Q

What is PS2 of the Red Book?

A

Ethics, Competence, Objectivity and Disclosures
Must:
- Comply with RICS rules of conduct
-Ensure you’re competent
-Ensure you’re independent and objective and gives guidance on carrying out COI
Ensure you understand clients requirements and comply with the TOE

32
Q

What is an Assumption and a Special Assumption

A

An Assumption is something the valuer can reasonable assume to be true, without the need for specific investigation

A Special Assumption is not true but the valuer values on the basis that it is a fact

E.g - that planning permission has been granted, that a property is vacant / let at the date of the valuation

33
Q

What is the definition of Market Value?

A

The amount for which an asset or liability should be exchanged
On the valuation date
Between a willing buyer and seller
In an arms length transaction
After a proper marketing period
When both parties are knowledgeable, prudent and acting without compulsion

34
Q

What is the definition of Market Rent?

A

The amount for which the interest in a property should be leased
On the valuation date
Between a willing lessor and lessee
After a proper marketing period
Subject to appropriate lease terms
In an arms length transaction
Where both parties are knowledgeable, prudent and acting without compulsion

35
Q

What is the definition of Investment Value

A

The value of an asset to a particular or prospective owner for individual investment or operational objectives.

36
Q

What is Fair Value? and what standard does it relate to

A

The price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

IFRS 13

37
Q

What are the Valuation Technical and Performance Standards (VPS)

A

VPS 1 - TOE
VPS 2 - Inspection, Investigations and Records
VPS 3 Report
VPS 4 - Bases of Value
VPS 5 - Methodology and Approach

38
Q

What are the weaknesses of Argus?

A

Not transparent cause you cant see the cashflow
Subjective to who is doing the job
Assumes 100% debt finance which is not realistic

39
Q
A

APC Revision (7 decks)

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