Valuation Flashcards
What are the THREE steps you should undertake prior to commencing a valuation?
CCT:
- Competence - check you have the correct level of skills, understanding and knowledge
- Conflict of Interest - check you are able to act independently on the instruction
- Terms of engagement - issue to the client and receive written confirmation
Why do you undertake statutory due diligence for valuations?
Confirm that there are no material matters which could impact on the valuation
What types of statutory due diligence checks would you undertake when valuing a property?
Beep chaff help
BEEP CHAFF HELP
Business Rates
EPC
Environmental matters
Planning History
Contamination
Health & Safety
Asbestos
Flooding
Fire Safety compliance
Highways
Equality Act 2010
Legal Title
Public Rights of way
How do you calculate WAULT? (weighted average unexpired lease term)
Adding up all the contracted rental income on the portfolio between now and the time the leases expire, and dividing it by the sum of the contracted annual rent.
It is expressed in number of years
Describe the timeline to a typical valuation instruction?
Preamble:
- Receive instruction from the client
- Check competence
- Check independence / conflicts
- Issue terms of engagement (inc. Scope of works, fee, PII, CHP)
- Receive Countersigned terms
Due Diligence:
- Gather information – leases, title, planning doc, OS plans etc.
- Undertake statutory due diligence (listed previously)
- Inspect and measure
- Research market / analyse comps
Valuation & Reporting
- Undertake the Valuation
- Draft Report
- Have another Surveyor review your work
- Finalise and sign report
- Report your valuation to the client
Completion
- Issue invoice
- Ensure filing in good order for audit.
What are the FIVE main methods of valuation?
Drip C
- Comparable method
- Investment method
- Profits method
- Residual method
- Depreciated replacement cost method
What are the Three Valuation Approaches and Methods According to International Valuation Standards (IVS) 105 (Published by the International Valuation Standards Council, not RICS)
MIC
- Market approach - using available comparable evidence
- Income approach - converting current and future cash flows into a capital value
- Cost approach - a reference to the cost of the asset whether by purchase or construction
What are the SIX steps used when collecting comparable evidence?
- Search and select comparables (agent’s boards, online databases)
- Confirm/verify information with a party directly involved in the transaction
- Assemble comparables in a schedule
- Interpret comparables using a hierarchy of evidence
- Analyse comparables to form an opinion of value
- Report value and prepare file note
What guidance did the RICS recently release on using comparable evidence?
RICS guidance note Comparable evidence in real estate valuation, 2019
What is the Hierarchy of Evidence when Considering Leasing Deals?
- Open Market Lettings
- Lease Renewals
- Rent Reviews
- Third Party Determinations
- Sale and Leasebacks
- Inter-company transactions.
Why is lease renewal better?
RR often upwards only, and the tenant has no ability to leave so less negotiation, also other terms not negotiable within RR.
Describe the Traditional Investment Method of Valuation
A rent capitalised at a yield (or multiplied by a year’s purchase). Growth is implicit
What is a term and reversion valuation, when is it used, and can you draw it?
Term and reversion methodology is used for reversionary assets (ERV>Passing).
The term is valued until break/review at the initial yield, the reversion capitalised into perp at the reversionary yield.
Under rented
What method of valuation do you use when a property is over-rented?
You use the Layer / Hardcore Method. Apply a froth rate to the over-rented section.
A higher yield reflects a greater risk on rent.
Define Equivalent Yield
The weighted average yield between the initial and reversionary yields.
Define Nominal Yield
Initial yield assuming rent is paid in arrears
Define True Yield
Assumes rent is paid in advance, most traditional valuation assumes that rent is paid in arrears.
What is an All Risks yield?
Yield which encompasses all the prospects and risks attached to a particular investment
What is a Gross yield?
Yield based on the net purchase price (i.e. not adjusted for purchasers’ costs)
What is a Net yield?
Yield based on the gross purchase price (i.e adjusted for purchasers’ costs)
What is an Initial yield?
Simple income yield for current income and current price
What is a Reversionary yield?
Market Rent divided by current price on an investment that is under rented
Define NPV
Net Present Value = sum of all the discounted cash flows of the project. Can be used to determine the viability of an investment given a certain level of desired return.
Define IRR
Internal rate of Return,
“The rate at which all future cash flows must be discounted to produce an NPV of 0”
When is the Profits Method of Valuation Used and How does it Work?
Used to value property on the basis of a business/trading potential. Used commonly for the valuation of pubs, petrol stations, hotels, and healthcare properties. Value is determined by the profitability of the operation within the asset.
It uses the EBITDA (Earnings Before Interest Tax Depreciation and Amortization).
How Many Years of Audited Accounts would you ideally like to see for a Profits Method Valuation?
3 years
What is the difference between a development appraisal and residual valuation?
A development appraisal assesses the viability of a project for a specific developer. It can assume site value or calculate it for a given developers profit requirements.
A residual valuation looks to the market for assumptions to appraise the value of a piece of development land. A residual valuation is a one moment in time valuation for a specific purpose.
When should you use the depreciated replacement cost method of valuation? And how is it calculated?
It should be used when there is limited availability of market evidence. It is calculated:
(1) Value of land, with existing use planning permission in place.
+
(2) Cost of replacing the building, with an allowance for depreciation. (BCIS)
What are the three types of obsolescence?
Physical, Functional, Economical.
What does the Red Book say about the DRC Method of Valuation?
The Red Book says that the method should not be used for loan security valuations, but may be used for valuations to form part of a financial statement.
What must a valuer include when reporting a DRC valuation?
They must state the value for any readily identifiable alternative use if it is higher than the current use if appropriate, or if appropriate a statement that the market value would be lower on cessation of the business use.
What is the Red Book Called?
RICS Valuation Global Standards (2022)
What is the reason for the RICS Valuation- Global Standards 2022 update?
RICS have confirmed that this is only an update to the Red Book Global 2020, rather than a full new edition.
The aim of the update is to reflect changes to the International Valuation Standards 2022, as well as to clarify certain sections of the existing Red Book Global.
What are the key changes in the RICS Valuation- Global Standards 2022 update?
- Emphasising the need to agree on clear and unambiguous terms of engagement.
- The terms quasi, partial or non-Red Book should not be used in terms of engagement or reporting.
- Requiring more detailed commentary on sustainability/resilience and environmental, social and governance (ESG) matters in VPGA 8 Valuation of Real Property Interests. engagement
What is the Structure of the Red Book (Parts 1-6)?
Part 1 - Introduction
Part 2 – Glossary
Part 3 – Professional Standards (PS)
Part 4 – Valuation Technical and Performance Standards (VPS)
Part 5 – Valuation Applications (VPGA)
Part 6 – The International Valuation Standards, 2020, (IVS)
Part 3 – Professional Standards (PS)
PS1 – Compliance with standards where a written valuation is required.
PS2 – Ethics, Competency, Objectivity, Disclosures.
TIVBV
What are the: Part 4 – Valuation Technical and Performance Standards (VPS)
VPS1 – Terms of Engagement
VPS2 – Inspections, Investigations and Records
VPS3 – Valuation Reports
VPS4 – Bases of Value, Assumptions and Special Assumptions
VPS5 – Valuation Approaches and Methods
What are the: Part 5 - Valuation Practice Guidance Applications (VPGA)
IIB IPIP RIM
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