Valuation

Question 1

Purpose of ‘The Red Book’

Answer 1

The Red Book is issued by RICS as part of our commitment to promote and support high standards in valuation delivery worldwide.

The publication details mandatory practices for RICS members undertaking valuation services.

Question 2

What is the structure of
The Red Book?

Answer 2

Part 1 - Introduction
Part 2 - Glossary
Part 3 - Professional Standards
Part 4 - Valuation technical and performance standards
Part 5 - Valuation Applications
Part 6 - The International Valuation Standards

Question 3

Three steps to undertake before doing a valuation?

Answer 3

1) Competence (SUK - Skills, Understanding and Knowledge)
2) Conflict of Interest
3) Terms of Engagement:

• Set out in writing full confirmation of instruction
• Confirm competence
• Any limitations of the valuers must inspection must be stated

Question 4

Name three things you should check/consider before carrying out a valuation

Answer 4

• Asbestos Register
• Contamination risks
• EPC rating if available
• Fire Safety Compliance

Question 5

Name the 5 methods of Valuation

Answer 5

1) Comparative Method
2) Investment Method
3) Profits Method
4) Residual Method
5) Contractors Method

Question 6

What are the steps for carrying out the comparable method?

Answer 6

1) Search and select comparables
2) Confirm sale values for comparables
3) Assemble comparable in a schedule
4) Adjust comparables using hierarchy of evidence
5) Analyse comparables to form opinion on value
6) Report value and prepare file note

Question 7

What does RICS Guidance Note ‘Comparable Evidence in Real Estate Valuation’ 1st Edition, 2019 outline?

Answer 7

The document outlines principles to use when:
- compiling comparable evidence, in situations when there is limited availability of evidence setting out a non-prescriptive hierarchy of evidence.

Question 8

Detail the hierarchy set out in Comparable Evidence Guidance Note

Answer 8

Category A - direct comparables
Category B - general market data that can provide guidance
Category C - other sources e.g. interest rates

Question 9

Why must you be careful when it comes to using auction sales when analysing comparables?

Answer 9

There may be special purchaser or insolvency sale.

Question 10

What is the investment method used for?

Answer 10

Used when there is an income stream to value.

Question 11

what valuations are excepted to Red Book 2021?

Answer 11

1. advice provided for negotiations or litigation
2. performing statutory function
3. internal use for a client
4. agency and brokerage work
5. expert witness

Question 12

What are the limitations of Comparable method?

Answer 12

• limited transactional data
• lack of up-to date evidence
• existence of special purchaser
• lack of similar evidence
• limited market transparency

Question 13

What is a ‘comparable’

Answer 13

an item of information used to during the valuation process as evidence to support the valuation of another, similar item

Question 14

When do use the Investment method?

Answer 14

Where there is a income stream to value.

Question 15

How do you carry out an investment method valuation?

Answer 15

You need need to be able to assess rental values to arrive at market rent or use the current income stream, by which you can apply a market based yield to.

The investment method can reflect income streams which are under, rack and over rented.

Question 16

When is profits method used?

Answer 16

The profits method is used for income producing properties, but typically properties that are referred to as being specialist, such as hotels and pubs.

The value of such properties depend on the profitability and trading potential - which introduces the concept of investment value.

Question 17

What is the definition of investment value?

Answer 17

‘measure of the value of the benefits of ownership to the current owner or to a prospective owner, recognising that these may differ from those of a typical market participant’.

Question 18

Briefly explain how to use the profits method?

Answer 18

Answer:
- The profits method involves establishing fair maintainable operating profit (FMOP) capable of being generated by a reasonably efficient operator (REO).
- This is based upon assessment and analysis of fair maintainable turnover (FMT), requiring sound knowledge of accounting principles and market norms for the specific industry sector.
- A market-based profit multiplier is then used to convert FMT into a capital value

Question 19

When is the Contractors method/Depreciated replacement costs method used?

Answer 19

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.

Question 20

What are the basic steps for carrying out the contractors method?

Answer 20

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.

Question 21

When do you use residual method?

Answer 21

The residual method is typically used for property or land with development potential. The output is market value of the land and it requires valuers to make a variety of assumptions around input costs.

Question 22

How do you use residual method?

Answer 22

1. Identify the development potential of the land, i.e. highest value use.
2. Calculate the value of the finished scheme, i.e. gross development value (GDV) based on market comparables
3. Development costs are then deducted from GDV, including developer’s profit and finance costs

Sensitivity analysis can then be used advise client on impact of each input.

Question 23

Please can you walk me through the calculation process for determining premium for a lease extension?

Answer 23

1. I use the comparable method to determine an Extended Lease Value (three quoting positions).
2. I then utilise a capitalisaiton rate (effectively a yield) to determine the Net Present Value (NPV) of the Ground Rent Income. (Term)
3. I then utilise a deferment rate to determine the NPV of the asset. (reversion)
4. if applicable I utilise relativity to determine the marriage value and the compensation payable to the landlord.

Question 24

Statutory Due Diligence for undertaking a valuation?

Answer 24

1. Asbestos register
2. Contamination
3. Equality Act 2010 compliance
4. Environmental matters (high voltage power lines, telecom masts)
5. EPC if available
6. Flooding (check Environmental Agency Website)
7. Fire Safety compliance
8. Health and Safety Compliance
9. Highways (check local highways agency)
10. Legal Tenure and Title
11. Public right of ways
12. Planning history and compliance

Question 25

7 key things to consider before carrying out inspection and writing valuation report?

Answer 25

1. receive instruction from client
2. Check competence (SUK)
3. Check there are no conflict for interest
4. Issues terms of engagement (CIT)
5. Receive terms of engagement
6. Gather required documents - title plans etc.
7. Undertake due dilligence (check there are no matters that can adversely impact on value)

Question 26

What is a yield?

Answer 26

A measure of investment return, expressed as a percentage of capital invested.

Question 28

What is a special assumption

Answer 28

Special Assumptions (Special Assumptions are those things which are not true but have been assumed to be true e.g. vacant possession when the property is in fact occupied, or that planning consent has been obtained, or that building works are completed