Valuation Flashcards
What are the five methods of valuation?
Comparable
Residual
Investment
Profit
Cost (Depreciated Replace Cost method)
What is a yield?
A yield can be simply defined as the annual return on investment expressed as a percentage of capital value.
What is the RICS red book?
The RICS Red Book Global Standards sets out the mandatory standards valuers must adhere to when undertaking an external valuation that must be carried out in accordance with PS 1 and 2 and VPS 1-5 of the Red Book.
The Red Book seeks to uphold the highest standards and provide consistency across valuations.
What is the difference between an in-house appraisal and a red book valuation?
An-inhouse appraisal is used for the internal purposes of a firm or individual. A red book valuation however is used for external purposes such as lending or funding purposes.
To comply with red book requirements, what is required in the terms of engagement of a commission?
Identification and status of the valuer
Client details
Other intended uses of the valuation
Detail of the asset or liability being valued
Currency
Purpose of the valuation
Basis of value adopted
Valuation date
Nature and extent of the valuer’s work
All assumptions and special assumptions to be made
Format of the report
Restrictions on use, distribution and publication of the report
Confirmation that the valuation will be undertaken in accordance with the international valuation standards
Basis of how the fee will be calculated
Reference to the firms CHP with a copy available on request
Are you aware of an RICS professional standard relating to sustainability and valuation?
RICS Professional Standard - Sustainability and ESG in commercial property valuation and strategic advice (2022)
How do you decide which valuation method to apply?
Comparable - typically used to assess the market rent and market value of properties.
Investment - when there is an income stream to value
Residual - used for land or property with development potential. Output is market value of the land
Profits - also for income generating assets but for more specialist uses (hotels, golf course, petrol, care homes)
Depreciated Replacement Cost - used for specialised property that is rarely sold on the open market. Lack of comparable properties to use.
5 methods - When and why would you use one of these methods?
Comparable - to value floorspace (residential, commercial etc) and when there are many comparable transactions to draw evidence from. Use hierarchy of evidence. Cat A (direct like for like) Cat B (General market data (indices/historic evidence) Cat C (Other comps from other property type and locations)
Residual - for market value of land. Estimate GDV using comparable method, and make cost assumptions (BCIS/QS) and deduct developer fees and profit to obtain market value of the land
Income - Used when there is an income stream to value. Assess rental values and a market-based yield. Yield used needs to account for terms (rack rented or under rented until reversion. If growth explicit valuation is needed, an use DCF which reflects risk free rate plus a property risk premium.
Profits method - income method also used for income producing properties, however these are for more specialist types. Need to establish Fair Maintainable Operating Profit (FMOP) by a reasonably efficient operator(REO). This is based on assessment and analysis of Fair Maintainable Turnover (FMT). A market based profit multiplier is then used to convert FMT into a capital value.
DRC Method - The DRC method is based upon the assumption that the market will pay no more for the existing property than the amount it would cost to buy an equivalent site, plus the cost of constructing an equivalent building - used when there is no comparable date (oil refineries and airports. DRC. The basic steps involved include 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 a years purchase multiplier?
A YP multiplier is calculated by dividing 100 by the Yield of the property - demonstrates the number of years required for the income received to repay the purchase price
Give me an example of a good covenant and how this might impact a valuation.
Long tenancy term from a large multi-national covenant with strong financials - could apply a sharper yield to the valuation to reflect certainty of trade and income
What is PI Insurance (PII)?
Professional Indemnity Insurance - covers you against negligence claims made when a duty of care has been breached
Why do surveyors need PII?
Need to meet the RICS requirements for PII
This cover gives you protection in the event that you are accused of providing incorrect or faulty advice which causes financial loss to your client.
How did the decision in Hart v Large affect PII?
The High Court held that Mr Large was negligent because his inspection and report failed to identify the significant issues relating to damp. Mr Large also failed to advise, both within his report and during subsequent correspondence, to advise that Mr & Mrs Hart obtained a Professional Consultant’s Certificate (PCC) prior to purchase.
What level of PII cover does your firm have?
-
How would you distinguish limitations on liability in your valuations?
Surveyors should ensure that the terms of engagement that apply to their valuation reports include, where possible, a financial cap on liability
Clearly setting out in the retainer letter what the surveyor has agreed to do and what they have not agreed to do will help the surveyor to confine their liability to errors made in carrying out those specific tasks which they have agreed form part of their retainer.
Check
Where in your valuation report do you state any limitations on liability?
Red Book Global Standards requires valuers to include a statement in their terms of engagement and within the valuation report, setting out any limitations on liability that have been agreed
What is the SAAMCO cap?
The key concept behind the SAAMCO cap is that the liability of a professional advisor is limited to the specific loss that can be attributed directly to their professional negligence, rather than the entire loss suffered by the client. In other words, the professional advisor is only liable for the losses that were caused by their incorrect advice or negligence, and not for any losses that would have occurred even without their negligence.
Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?
No
Under the SAAMCO cap, is a valuer’s liability usually limited to the overvaluation on the valuation date?
Yes - The valuer’s liability typically doesn’t cover losses occurring after the valuation date, unrelated to their negligence, such as market-driven declines in property value.
What would you do if you received a notice of a PII claim from a client or their solicitor?
Notify your insurer
Gather documentation and evidence relevant to the claim
Consult legal counsel
Communicate with the client
Operate with insurers investigation
Is there a difference between being negligent when undertaking a survey/valuation and providing negligent advice?
Survey/valuation negligence - occurs in the process of the valuation/survey itself. Negligence will arise linked to accuracy and thoroughness of the work performed
Advice - negligence pertains to errors or omissions in the advice provided to the client based on the survey or valuation results. Liability is associated with the quality and accuracy of the guidance given to the client.
Why does the Red Book exist?
Set of global valuation standards created to achieve high standards of integrity, clarity and objectivity in ensuring valuation best practice.
To ensure consistency, objectivity and transparency in valuation.
Tell me about a factor which may impact value.
Site condition. Contamination/ topography?
What is your duty of care as a surveyor when undertaking a valuation?
Valuers owe a duty of care towards their clients, both in contract and in tort (for negligence). They may also owe a duty of care towards third parties, in certain circumstances.
In a claim (for breach of contract or negligence), the Court will ask whether the ‘valuation given was one that no reasonable valuer in the actual valuer’s position could have given’ (RICS).
A claim for breach of contract can only be brought by a party to the contract, i.e. the client. However, if the valuer expressly accepts a duty of care (or is assumed to have done so) then they may also be liable to third parties (who were not party to the valuation contract or Terms of Engagement).
To whom do you owe this duty of care in valuation?
My client. And potentially third parties should the valuer expressly accept a duty of care (or is assumed to have done so)
Why is independence and objectivity important when valuing?
Need to provide valuations that are accurate and credible. Independence and objectivity are at risk when there is a conflict of interest. This may result in an incorrect valuation that could breach a duty of care to the client who may act off of a wrong valuation
Is there a separate UK Red Book?
No - UK National Supplement
What is the UK valuation guidance called?
RICS Valuation UK National Supplement (2019)- Updating to 2023.
Why does the UK guidance exist?
The Red Book Global Standards - gives advice for members and firms across the globe. The UK National Supplement is required to ensure advice is tailored to our jurisdiction
When was the Red Book last updated?
31 January 2022. Effective
When was IVS last updated
January 2022
What changes were made to IVS?
New Chapter IVS 230 Inventory - intangible assets standard
Which do you follow - the latest IVS or the Red Book Global?
The Red Book - as the RB adopts and applies standards set out within IVS
Which sections of the Red Book are mandatory and which are advisory?
PS 1 & 2 - Mandatory
VPS 1-5 - Mandatory except when its for negotiations, internal purposes, agency work
VPGAs - Advisory
What does PS1-2/VPS1-5/VPGAs relate to?
PS1 - Compliance with standards where a written valuation is provided
PS2 - Ethics, competency, objectivity and disclosures
VPS 1 - Terms of engagement
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 Practice Guidance Applications - VPGA 1-10 - these are advisory and provide guidance on best practice. They typically relate to valuations for specific purposes or of specific asset types, e.g. financial statements, secured lending, trade related property and portfolios
VGA 1 - Valuation for inclusion in financial statements
VPA 10 - Matters that may give rise to material valuation uncertainty
What type of advice does the Red Book cover?
The Red Book applies to written valuations,
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
- 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?
Generally - Only those where the valuer has permitted third party reliance in the terms of the contract
However Certain types of valuation may be relied on by parties. This includes valuations for:
- a published financial statement
- a stock exchange, or similar body
- publication, prospectus or circular
- investment schemes (in the Americas, where applicable: investment programs), which may
take a number of forms in individual jurisdictions - takeovers or mergers.
Tell me what the definition of MR?
‘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
Tell me what 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 seller in an arm’s length transaction, after proper marketing and where the parties have each acted knowledgably, prudently and without compulsion
Tell me what the definition of investment value?
The value of an asset to the owner or a prospective owner given individual investment objectives
Tell me what 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.
FV may include a special purchaser which is excluded from MV. Definition from the IFRS
What is the difference between an assumption and a special assumption?
Assumption - An assumption is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation. To be agreed
Special assumption - Assumed facts that differ from those existing at date of valuation. (when a site has planning when it doesn’t)
What would you include in a valuation report?
Valuer informer
Client details
Purpose of the valuation
Property details
Basis of value adopted
Valuation Date
Extent of valuation
Nature of sources of information relied upon
Assumptions and Special assumpiotns
Restrictions of valuation use
Confirmation of accordance with IVS
Valuation Approach
Amount of the valuation
Commentary on any uncertainty
What sources of information would you consider when preparing a valuation report?
Local agents
Molior, Landinsight, Rightmove
CoStar
Land registry
EPC register
Planning portal
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
PS 2 -
Where you’ve previously valued an asset. The following disclosures must be made in the ToE, in the report and any published reference to the report:
- the relationship with the client and previous involvement
- rotation policy
- time as signatory (how long you’ve been involved acting as signatory)
- proportion of fees (proportion of total fees paid by the client during the precedent year)
If your firm is too small to have a rotation policy or valuation panel, what else can you do to ensure objectivity?
An arrangement to comply with the standards of the principle should be adopted:
e.g. arrangement 1for the valuation to be periodically reviewed at intervals not greater than 7 years 0 would assist in showing the member is taking steps to maintain objectivity.
When might a conflict of interest exist in relation to a valuation instruction?
When the valuation is of a property adjacent to where you live, or someone you have a relationship with owns the propert
What must be included in your terms of engagement / valuation report?
Valuer details
Client Details
Purpose of the report
Identification of use of the report
Identification of the asset
Valuation currency
Scope of the report (extent of investigation)
Limitation of liability
Fee
Assumptions / Special Assumptions
Valuation date
Basis of value adopted
Sources of information upon which the valuer may rely
Format
Restrictions on use
Confirmation of accordance with IVS
Reference to CHP
Where is this covered in the Red Book? (ToE)
VPS 1
What is a restricted valuation service and can you provide one?
E.g. short time scales might make it impossible to undertaken a site inspection.
Such restrictions need to be identified and recorded in the ToE.
The valuer should consider if the restriction is reasonable, with regard to the purpose
for which the valuation is required.
If the valuer considers that it is not possible to provide a valuation, even on a restricted
basis, the instruction should be declined.
Be clear that restrictions and any resulting assumptions and the subsequent impact on valuation will be referred to in the report
How do you deal with limitations on inspection or analysis?
Agree limitations/restrictions in ToE and consider whether to accept or decline instruction, taking into account the purpose of the valuation/how it will be used, and the significance/impact of the restriction
Can you revalue a property without inspecting?
Red Book - VPS 2 Inspections
No - unless the valuer is satisfied that there are no material changes to the property and the area it is situated within. ToE - must state that this assumption has been made
What RICS guidance relates to the use of comparable evidence?
RICS Guidance Note Comparable Evidence in Real Estate Valuation
Published 2019
Re-Published 2023
What is an internal valuer?
In-house (employee) employed by the enterprise
Can an external valuer provide an internal purposes valuation?
It is therefore possible for an external
valuer to provide an ‘internal purposes’ valuation, though where that is done, the need for the
terms of engagement and written advice to be absolutely clear about non-disclosure to third
parties, and about the exclusion of liability, becomes even more crucial.
What happens if market conditions change between the valuation date and report date?
Checking
What is a Special Purchaser?
One to whom the property being valued has a particular attraction which it does not have for the market in general.
Is special value from a special purchaser reflected in MV?
Excluded from MV, but included in FV
