Valuation Flashcards
1
Q
What is an internal valuer?
A
- Employed by a company to value the assets of the company
- Valuation for internal use only
- No 3rd party reliance
2
Q
What is an external valuer?
A
Has no material links with the asset to be valued or the client
3
Q
What are the first steps you need to take before undertaking a valuation?
A
CIT
- Check competence - do you have the skills, understanding and knowledge to undertake the work? If not, refer the client to Find A Surveyor on the RICS website
- Independence - Think first and then check for any conflicts or personal interests
- Ensure Terms of Engagement are issued and signed
4
Q
Why is statutory due diligence done?
A
To check there are no material matters which could impact upon the valuation
5
Q
What would you check for when doing statutory due diligence?
A
- Asbestos register
- EPC rating
- Legal title and tenure
- Planning history
- Contamination
- Environmental matters
6
Q
What is the timeline of a valuation instruction?
A
- Receive instructions from the client
- Check competence
- Check conflicts
- Issue TOE
- Receive signed TOE
- Gather info from borrower - t/s, leases, title docs etc
- Undertake DD - check no matters that could adversely impact value
- Inspect and measure
- Research market and put together and analyse comparables
- Undertake valuation
- Draft report
- Have valuation and report checked by other surveyor
- Finalise and sign report
- Report to client
- Issue invoice
- Ensure valuation file in good order for archiving
7
Q
What are the 5 methods of valuation?
A
- Comparative method
- Investment method
- Profits method
- Residual method
- Contractors method (DRC)
8
Q
What does IVS 105 detail?
A
Valuation Approaches and Methods
9
Q
What are the valuation approaches?
A
- Income approach
- Cost approach
- Market approach
10
Q
What is the income approach and what valuation methods fall under this approach?
A
Converting current and future cash flows into a capital value
Investment, residual and profits methods
11
Q
What is the cost approach and what valuation methods fall under this approach?
A
Reference to the cost of the asset whether by purchase or construction
Contractors method
12
Q
What is the market approach and what valuation methods fall under this approach?
A
Using comparable evidence available
Comparable method
13
Q
When would you use the comparable method?
A
Used in residential valuations and when establishing MR and capitalisation rate in the investment method.
14
Q
What guidance would you refer to when using the comparable method?
A
RICS Guidance note on Comparable Evidence in Real Estate Valuation
15
Q
Talk me through how you would conduct the comparable method
A
- Search and select comparables
- Confirm/verify details and analyse headline rent to give a net effective rent
- Assemble comps in schedule
- Adjust comps using hierarchy of evidence
- Analyse comps to form opinion of value
- Report value and prepare file note
16
Q
What is the hierarchy of evidence?
A
A tool to help weight comparable evidence
Category A – direct comparables
- All types of relevant transactional comparable evidence
o Open market lettings
o Lease renewals and rent reviews
o Third party determinations
o Sales and leasebacks
o Inter-company transfers
Category B – general market data
- Data that can provide guidance rather than a direct indication of value
Category C – other sources
- Wide range of data that might provide broad indications of value
- Other real estate assets & other background data
17
Q
How do you find relevant comparables?
A
- Inspection of an area to find recent market activity by seeking agent boards
- Internal and external databases
- Speak to local agents
18
Q
What is the investment method of valuation?
A
The investment method of valuation is used when there is an income stream to value. The rent is capitalised at an appropriate all risks yield, which implies a growth rate.
19
Q
What is the conventional investment method?
A
Used for rack rented property - in line with in market
Rent received/market rent multiplied by the years purchase
20
Q
What is the term and reversion method?
A
Used when a property is reversionary (market rent is more than the passing rent). The property is under rented.
The term is capitalised until the next lease event at a yield sought from comparable evidence.
The reversion is capitalised by an ARY into perpetuity at a reversionary yield
21
Q
What is the layer and hardcore method?
A
Used when a property is over rented and under rented
Under rented:
The income flow is divided horizontally, and a higher cap rate is placed on the top slice to reflect the higher risk of rents increasing to MR after a rent review.
The bottom slice reflects the passing rent and is valued at a lower cap rate into perp.
Over rented:
The income flow is divided horizontally, and a higher cap rate is placed on the top slice to reflect the higher risk of tenant default up until lease expiry.
The bottom slice reflects the passing rent and is valued at an ARY in to perpetuity
22
Q
What is the net initial yield?
A
A calculation of the net current rent divided by the value
23
Q
What is the reversionary yield?
A
A calculation of the gross rental value divided by the value (reverts to the market)
24
Q
What is the equivalent yield?
A
A calculation of the time weighted average of the income stream
25
What risk factors would you consider when determining a yield?
- Prospects for rental & capital growth
- Quality of location & covenant
- Use of the property
- Lease terms
- Obsolescence
- Voids
- Security and regularity of income
- Liquidity - ease of sale
26
What is the discounted cash flow technique?
Growth explicit investment method of valuation
DCF valuation involves projecting estimated cash flows over an assumed investment holding period plus an exit value at the end of that period, usually arrived at on a ARY basis. The cash flow is then discounted back to the present day at a discount rate that reflects the perceived level of risk
27
What are DCFs used for?
- Over-rented properties
- Some 'Alternative' investments
- Phased development projects
28
What is the method of a DCF? How do you find the MV?
1. Estimate the cash flow (income minus expenditure)
2. Estimate the exit value at the end of the holding period
3. Select the discount rate
4. Discount cash flow at the discount rate
5. Value is the sum of the completed discounted cash flow to provide the NPV
29
What is the NPV?
Net present value
It is the sum of the discounted cash flows of the project
30
What can an NPV be used for?
To determine if an investment gives a positive return against a target rate of return
31
What happens when the NPV is positive?
The investment has exceeded the investor's target rate of return
32
What happens when the NPV is negative?
It has not achieved the investor's rate of return
33
What is the internal rate of return (IRR)?
The rate of return at which all future cashflows must be discounted to produce a NPV of zero
34
What is the IRR used for?
Used to assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions
35
When do you use the profits method?
It's used for the valuations of trade related property
- Pubs, petrol stations, hotels, care homes, nurseries etc
36
What is the basic principle of the profits method?
The value of the property depends on the profit generated from the business, not the physical building or location
37
What must you have to conduct the profits method?
Accurate and audited accounts for 3 years. Audited accounts are superior to management accounts
38
What is the methodology for the profits method?
Annual turnover (income received)
Less costs/purchases
= Gross profit
Less reasonable working expenses
= Unadjusted net profit
Less operator's remuneration
= Adjusted net profit., This is the EDITDA
This is capitalised at an appropriate yield (YP) to achieve MV
You cross check with comparable sales evidence is possible.
39
What is the EBITDA
Earnings before interest taxation depreciation and amortisation
40
What is a development appraisal?
A tool to financially assess the viability of a development scheme.
It establishes the value/viability/profitably of a scheme based upon the client's inputs.
It can assume a site value or calculate a site value
41
How would you do a development appraisal?
To calculate the developer's profit (where we know the cost of land already)
Gross Development Value
less total development costs INCLUDING land
= Developer's profit
42
What is the purpose of a residual site valuation?
The most common purpose is for a specific valuation of a property holding to find the MV of the site based on market inputs on the valuation date
It is a form of development appraisal.
Inputs are taken at the date of valuation
43
How do you calculate land value (residual valuation)?
To calculate land value
Gross or Net Development Value
less developer's profit
less total development costs (e.g. professional fees, marketing costs etc)
= Land value
44
What are the different types of costs?
Planning costs: Section 106 payments, Community Infrastructure Levy (CIL), Planning consultant fees
Building costs: Total cost of building works (can use BCIS)
Professional fees
Marketing costs & fees
Calculation of finance
45
What are the types of development finance?
Debt finance - lending money from a bank
Equity finance - selling shares in a company or JV partnership or own money used
46
What is a sensitivity analysis?
It is required for key variables such as GDV, build costs and the finance rate, to show range of values
47
What are the free forms of sensitivity analysis?
Simple sensitivity analysis
Scenario analysis
Monte Carlo simulation
48
What is the RICS guidance on development property valuations?
RICS Professional Standard: Valuation of Development Property 2019
49
When should you use the contractor's method of valuation?
This should only be used where direct market evidence is limited or unavailable for specialised properties.
Could include: sewages, lighthouses, oil refineries etc.
50
For what purposes would you use the contactor's method?
- For owner-occupied property
- Accounting purposes for specialised properties
- Rating valuations of specialised properties
51
How would you undertake a valuation using the DRC method?
1. Value of the land in its current use (assume planning permission exists)
2. Add current cost of replacing the building, plus fees, less a discount for depreciation and obsolescence/deterioration
52
Is the contractor's method suitable for Red Book Global valuations?
It is not suitable for Red Book compliance for secured lending purposes
It can be used to calculate MV for valuations for financial statements
53
What RICS guidance would you refer to for the contractor's method
RICS Professional Standard on Depreciated replacement cost method of valuation for financial reporting, 2018
54
What are the different forms of obsolescence?
Physical - wear and tear, deterioration
Economic - changing market for the use of the asset
Functionality - if the spec/design of the asset no longer fulfils the function for what it was originally designed
55
What is the official name for the Red Book?
RICS Valuation – Global Standards 2021 – effective 31st Jan 2022
56
What recent changes were introduced to the Red book?
- Sustainability and ESG factors - valuers should have regard to the relevance and significance of sustainability and ESG which should form part of the valuation approach and reasoning
- Reference to the use of the profits method: specific properties have been mentioned to use it for including self-storage, flexible workspace etc
57
What is the Red Book's structure?
1. Introduction
2. Glossary
3. Professional Standards (PS)
4. Valuation technical and performance standards (VPS)
5. Valuation applications (VPGA)
6. The International Valuation Standards (IVS)
58
What is the difference between the UK and Global Version?
The global version is applicable worldwide
UK version supplements the global version and provides guidance relative to UK legislation
59
What recent changes has the UK Supplement undergone?
VPS 3.3 - Mandatory rotation policy - valuers were becoming used to assets/a bit softer when it came to valuing assets.
Max period of 10 years before the rotation of a valuation firm
Max 5 years for an individual valuer
Minimum 3 year break after rotating off an engagement
60
When does the new UK Supplement come into effect?
May 2024
61
Are any types of valuations are excluded from the Red Book?
As outlined in PS 1:
1. Provided in prep for negotiations/litigation
2. Statutory function
3. Internal purposes
4. Part of agency and brokerage work
5. Provided as evidence as expert witness
62
What must you do before accepting a valuation instruction?
With regard to PS 2, I would ensure I can act independently and manage conflicts of interests appropriately. I would also ensure I understand the client’s requirements and comply with the minimum terms of engagement.
63
What would you typically include in the terms of engagement?
As outlined by VPS1:
- ID/status of valuer
- ID of client & any other intended user
- Asset
- Currency
- Purpose of valuation
- Basis of valuation
- Valuation date
- Extent of investigation
- Nature & source of info being relied upon
- Assumptions & special assumptions
- Report format
- Restrictions of use
- Fee basis
- Complaints handling procedure
- Statement on RICS compliance
- Liability limitation
64
What is the difference between assumptions and special assumptions?
Assumptions are made where it is reasonable for the valuer to accept that something is true.
Special assumption is a supposition that is taken to be true and accepted
65
What is the fee for a valuation based on?
The scope of the work required and the cap on your PI liability.
66
How would you ensure the information being relied upon is correct?
PS 2 – professional scepticism
Validate info from external sources
VPS 2 – inspection of site, Keep proper records of inspections & investigations – clear audit trail
67
Do you always need to inspect a property for a Red Book valuation?
As outlined in VPS 2 – no, but it is recommended and best practice.
If I am not inspecting a property, I ensure:
1. This is agreed in Heads of Terms
2. I confirm the possible valuation implications in writing prior to reporting
3. Consider whether the restriction is reasonable
4. Refer to the restriction in the report
68
Can you re-value a property without inspection?
As outlined in VPS 2, only if I am satisfied there have been no material changes to the property or the nature of its location – confirmed in Terms of Engagement and Report.
JLL policy – a property must be inspected at least once every 2 years.
69
What would you include in a valuation report?
As outlined in VPS 3:
- ID/status of valuer
- Client and other intended users
- Purpose of valuation
- Asset to be valued
- Basis of valuation
- Valuation date
- Extend of investigation
- Nature & source of info relied upon
- Assumptions & special assumptions
- Restrictions on use & distribution
- Valuation approach and reasoning
- Valuation figure(s)
- Date of valuation
- Comment on market uncertainty (VPGA 10)
- Limitation on liability
70
What would you do if a client asked you to provide the valuation figure prior to the reporting date?
As outlined in VPS 3: I can provide preliminary valuation advice, but must be marked as draft, for internal purposes only – cannot be relied upon, published and disclosed.
Any changes must be noted on file and provide the reasons.
State any additional evidence provided by the client must be stated in the report.
71
What is Market Value?
- The estimated amount for which an asset or liability should exchange
- On the valuation date
- Between a willing buyer/seller
- In an arm’s length transaction
- Where the parties have acted knowledgably/prudently and without compulsion.
72
What is Market Rent?
- The estimated amount for which an interest in real property should be leased
- On the valuation date
- Between a willing lessee/lessor
- In an arm’s length transaction
- Where the parties have acted knowledgably/prudently
73
What is Fair Value?
The price to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measured date.
74
What is Investment Value?
The value of an asset to a particular/prospective owner for individual investment or operational objectives.
75
What would you use when valuing for financial accounts?
Fair Value – VPS 4 and VPGA 1
76
What would you have regard to when undertaking a valuation for loan security?
I would ensure I carefully deal with any conflicts of interest and that my report matches the guidance in VPGA 2.
77
Conflicts of interest in loan security valuations?
- Any involvement with the borrow or property must be disclosed to the lender (generally 2 years)
- If the valuer/client considers any involvement as a conflict, the valuation should be declined.
- Record any conflicts of interest management in Terms of Engagement and the report.
78
What would you include in your report for the loan security valuation?
Additional info required to advise whether to agree to the loan or in the case the borrower defaults.
- Disclose any involvement
- Valuation method adopted, reasoning and calculation
- State any enquiries which did not reveal any info
- Comment on environmental consideration
- Suitability for loan security
- Circumstances which could affect the price
If a special assumption is used – the material difference of the special assumption
Increasing importance of sustainability – have regard in the valuation.
79
How would you comment on any uncertainty?
With regard to VPGA 10, I would draw attention to and comment on any issues resulting to material uncertainty, relating it to any risk surrounding the valuation of the asset.
I would not use a standard caveat.
80
How would you calculate building cost reinstatement valuations?
Use costs as provided by BCIS on the GIA of a property.
Add VAT, demolition costs, professional fees and planning/building reg fees.
81
Is a building cost reinstatement valuation a red book valuation?
This is not a written opinion of value so no.
82
Why might you calculate a building cost reinstatement valuation?
For building insurance purposes.
83
What is hope value?
The value arising from any expectation that future circumstances affecting the property may change.
84
What is marriage value?
Created by a merger of interests – can be physical or tenurial
85
How would you value for charities?
I would have regard to UK VPGA 8 – Charities Act S119 – valuation
Need to comment if the sale/purchase is in the charities best interest and if the terms are the best that can be reasonably obtained for the charity.
86
How would you value long leasehold interests?
Can use a DCF calculation
-deduct ground rent from the gross income and capitalise at a yield for the length of the lease to create a market value.
Sinking funds can be used in theory.
87
What is a premium?
A capital payment made by one party to another.
88
How would you calculate WAULT?
Weighted average unexpired lease term – weighted by contracted rent.
89
What is a ransom strip?
A piece of land which controls the access to another piece of land.
Could affect value of 15-50% of the development value.
90
What purchaser’s costs would you add to a valuation?
3 elements:
1. Stamp Duty Land Tax – at the prevailing rate
2. Agents fees – 1% of purchase price, plus VAT
3. Solicitors fees – 0.5% of the purchase price plus VAT
91
How much SDLT would you apply?
For commercial properties – charged on an incremental basis
£0 - £150,000 – nil
£150,001- £250,000 – 2%
Over £250,001 – 5%
Varies for residential and can also be paid on the grant of new leases - based on NPV of lease
Calculator on HMRC website
92
How would you value a retail unit?
I would use zoning if applicable – halving back principle with 20 feet zones (6.1m)
If valuing in some prime London, Belfast and Scottish retail - 30 feet zones
Basement/first floor areas are usually treated as A/10 approx
93
What is the principle behind zoning?
The rental value of the property reduces away from the street
94
How would you treat return frontages?
Add 10% uplift
95
What technique would you use for retail with two main frontages?
Mirror zoning
96
Who is considered a special buyer?
A particular buyer for whom the asset has special value – advantages arising from ownership to other buyers.
97
What is special value?
The amount that reflects particular attributes of an asset that are only of value to a special purchaser.
98
How do you deal with rent free periods?
Devalue a headline rent to produce a net effective rent – straight line basis until end of lease or next rent review.
Normally a 3 month rent free period is included for fitting out.
99
What is a party wall?
A wall that stands astride the boundary of land belonging to two or more different land owners.
100
What are rights to light?
Arises after 20 years interrupted enjoyment of light without the consent of a third part by the way of an easement with a prescriptive right.
101
What is the RICS Valuer Registration Scheme (VRS)?
Regulatory monitoring scheme for all valuers carrying out Red Book Global Valuations from October 2011
102
What are the aims?
1. Improve the quality of valuation
2. Meet the RICS requirements to self-regulate effectively
3. Protect and raise the status of valuation profession
103
What are the implications?
- Monitors values through the submission of their firm’s annual return
- Additional monitoring with Risk Based Reviews
104
What makes a property suitable for loan security valuation?
Should the borrower default on the loan, the bank must be confident that the property will sell, fully knowing the market, any conditions affecting value etc.
105
What is a yield?
It's the annual rate of return of an investment expressed as a percentage.
It's the relationship between income and capital value.
106
What does a yield comprise of?
The risk free rate (if there was no risk) and risk.
Examples of risk - covenant strength, sector risk, tenure/restrictive covenants, condition etc.
107
How do you calculate a yield?
Passing Rent/Value = Yield
108
How do you calculate capital value?
Passing Rent/Yield = Capital Value
109
How do you calculate passing rent?
Yield x Capital Value = Passing Rent
110
What's the difference between the cap rate and a yield?
Cap rate = input into a valuation
Yield = output of a valuation
They are different.
111
What affects the cap rate?
You can apply different cap rates on different tenants.
Cap rate can be affected by covenant strength, condition etc.
112
What are the four approaches of the investment method?
Term and reversion
Hardcore and layer
Equivalent
Initial
113
What is years purchase?
It's the yield expressed as a multiplier. How much annual income you need in order to offset the price of the property.
Higher yield = lower years purchase
114
What is present value?
The current worth of a future sum of money.
115
What is the equivalent yield method?
Commonly used in private practice.
Captures key lease events
In this method, an equivalent yield is applied to both rent passing and market rent.
116
What does the front cover of the Red Book look like?
It's called the Red Book
It has a red circle on it, it says that it's effective 31st January 2022
117
What is the Red Book?
- Incorporated since 1974
- Ensures that valuations are undertaken in compliance with the highest professional standards
- It doesn't tell people how to value
- Standards of valuations should be the same internationally.
118
What are mandatory in the Red Book?
Professional Standards and Valuation technical and performance standards
119
What is PS1?
It's compliance with standards where a written valuation is provided
Exceptions to red book valuations - statutory functions, agency or brokerage service, evidence as an expert witness, internal purposes and negotiations/ligitgation.
120
What is PS2?
Members must act in accordance with the Rules of Conduct
Valuer must be competent and act objectively and independently - not be influences
Valuer must apply professional sceptiscism when reviewing information before relying on it
Conflicts of interest - detailed advice on dealing with any
ToE must be complied with and valuer must be competent to take instruction
121
What is VPS 1?
Terms of engagement
122
What is an assumption?
Matters that are reasonable to accept as fact.
123
What is a special assumption?
An assumption that is known not to be true but taken as fact for the valuation. They must be reasonable and agreed with the client.
124
What is VPS 2?
Inspections and investigations must always be carried out to the extent necessary.
Inspections are always required.
Revaluation of any property - if you don't re-inspect, there must be no material changes. Must be in the ToE and report.
Valuation records must be kept
125
What is VPS 3?
Valuation reports
126
What is VPS 4?
Bases of value - market value, fair value, market rent and investment value (worth)
127
What is VPS 5?
Valuers are responsible for ensuring that the correct valuation approach is used for the property they're valuing.
128
What is VGPA 1?
Fair Value must be used for IFRS adopted accounts - in accordance with IFRS 13.
129
What is VGPA 9?
Valuation of every single asset in the portfolio must be stated and an aggregate figure is reported.
130
What UK VGPAs are applicable?
UK VGPA 1 - Valuation for financial reporting (if we're reporting under IFRS or UK GAAP and Fair value)
UK VGPA 2 - Valuations for other regulated purposes
UK VPGA 10 - Valuation of commercial secured lending
131
If you're valuing something for a local authority or central government, how would you do it?
Always value under existing use value. No hope value unless there is a special assumption.
UK VGPA 6
132
Could you tell me where in the Red Book refers to inspections?
VPS 2 and VPGA 8
133
loan security
134
what is stat function
135
If there was a previous use, what would you look for
contamination
136
toe - sold within 12 months
137
zoning
138
What are the key components of a lease?
Who - the Parties
What - the demise and rights
When - date of lease, start of term
Rent
Covenant
Obligations
139
What is covenant strength?
Important relationship between the quality of the tenant's covenent & the investment value of a property
Can add to quality of covennat by requesting guarantor/parent company guarentee/rent deposit
Assignment - AGA can be used.
140
How to assess covenant strength?
1. Bank, accountant and 2 trade references
2. Previous/existing landlord's reference
3. 3 years audited accounts/business plan/credit rating
141
How would you assess the covenant strength of a small firm?
Profits test
net profit - 3 x rent
net asset value x 5 rent
Guarantor/rental deposit for start up
142
What's the difference between Market Rent and ERV
ERV - rent applied at rent review and is determined by the lease mechanics, rather than common assumptions in the market.
Market Rent - what is being paid on the market.
