Valuation Flashcards
What steps would you undertake prior to a valuation?
- Competence (are you competent (Skills, Understanding and Knowledge SUK)
- Independence (check for conflicts of interest)
- Terms of Engagement (set instruction out in writing, stating extent and limitations)
What due-diligence would you undertake prior to a valuation?
- Asbestos
- Business rates/Council tax
- Contamination
- Equality Act 2010
- Environmental matters
- EPC
- Flooding
- Fire Safety
- Health and Safety compliance
- Highways
- Legal title and tenure
- Public rights of way
- Planning
How would flooding, for example, impact a valuation?
Flooding presents risk. Risk negatively impacts valuations.
Run me through a timeline of a valuation you have undertaken
- Receive instruction
- Check competence
- Check independence (conflicts of interest)
- Issues Terms of Engagement
- Receive signed ToEs
- Gather information (read lease and further associated documents)
- Undertake DD
- Inspect and measure
- Research market and assemble comparables
- Undertake valuation
- Draft report
- Review and have signed off
- Finalise and sign report
- Issue invoice
What are the IVS 105 valuation methods?
- Income approach (converting cashflows into capital value i.e investment method)
- Cost approach (reference to cost of asset at purchase or construction)
- Market approach (using comparable evidence)
Talk me through how you would undertake a valuation using the comparative method?
- Search and select comparables
- Confirm and verify details. Analyse to give a NER.
- Assemble comps in schedule
- Adjust comps using HoE
- Analyse comps to form opinion of value
- Report on value
What is the hierarchy of evidence as per RICS Guidance Note ‘Comparable Evidence in Real Estate Valuation, 2019?
- Category A – direct comps of contemporary transactions
o Completed transactions of near-identical properties for which full info is available
o Completed transactions of similar properties where full info is available
o Similar real estate being marketed where offers have been made
o Asking prices - Category B – general market data that can provide guidance
o Information from published sources or commercial databases
o Indices
o Historic evidence
o Supply/demand data - Category C – other sources
o Transactional evidence from other real estate types and locations
o Interest rates, stock market movements which imply yield or value
When would you use the investment method?
- Used when there is an income stream to value (rent)
- Rental income is capitalised to produce a capital value
What is the conventional investment method?
- Rent received, or market rent x YP = market value
- Comp method used for rent & yield
If a property was under-rented, which method would you use?
- Term and reversion
- Term capitalised until next lease event at an initial yield
- Reversion to market rent valued in perpetuity at a reversionary yield
If a property was over-rented, which method would you use?
Layer / Hardcore method
- Used for over-rented investments
- Bottom slice = Market rent
- Top slice = passing rent – market rent until next lease event
- Higher yield used to reflect risk
What is a yield?
- A measure of investment return, expressed as a percentage of capital invested
- Calculated by: income / price x 100
What impacts yields?
- Risk impacts yields due to following factors:
o Prospects for rental and capital growth
o Quality of location and covenant
o Use of property
o Lease terms
o Voids
o Security of income
o Liquidity
Talk me through the profits method of valuation
- Used for valuations of trad related properties
- Used where value of property depends on the profitability of the business
- Used for:
o Pubs
o Petrol stations
o Hotels
o Leisure
o Healthcare - Requires accurate and audited accounts for 3 years (if possible)
- Adjust for maturity of business
Methodology
- Annual turnover (income received) – Costs/Purchases = Gross Profit
- Less reasonable working expenses = Unadjusted net profit
- Less operators renumeration = Adjusted net profit (FMOP)
- Then capitalised at an appropriate yield to deliver market value
- Expressed as EBITDA
What is the DRC / contractors method?
- Only used when direct market evidence is limited or unavailable for specialised properties:
- Used for:
o Lighthouses
o Oil refineries
o Docks
o Schools
Purpose: - Used for owner-occupied property
- For accounts purposes for specialised properties
- Also used for rating valuations of specialised properties
Simple methodology:
Value of land in its existing use + current cost of replacing the building (less a discounted for depreciation and obsolescence)
What is the Red Book?
Contains mandatory rules, best practice guidance for members undertaking valuations to ensure professionalism and quality of valuations
When was the latest Red Book effective from?
Effective from 31st January 2022
What is the structure of the red book?
- 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 (IVS)
What are the main changes from the previous versionof the Red Book?
- The need for compliance with the RBG and the terms of reference (must be clear and unambiguous)
- Valuation for financial reporting purposes (emphasis on the need to provide reasonable possible fair value measurements)
- Reference to the use of profit method for non-trade related properties:
o A list of properties includes self-storage, flexible workspace and PBSA - Sustainability and ESG factors, including:
o Definitions
o Inspections and reporting
o Impact of sustainability of valuation
What are PS1 and PS2?
Professional Standards for Valuations
PS1 refers to compliance with standards and practice statements where a written valuation is provided
PS2 refer to ethics, competency, objectivity and disclosures
- States members must act in accordance with the Rules of Conduct
- Must act objectively and manage conflicts of interest, whilst demonstrating professional scepticism
- Must comply with minimum terms of engagement (CIT)
Talk me through VPS 1-5
VPS1 refers to terms of engagement and the minimum matters that must be confirmed prior to undertaking a valuation
VPS2 refers to inspection, investigations and records. States valuers must verify information being relied on for the valuation. Valuers must note any restrictions within the report and be agreed within Terms of Engagement.
VPS3 refer to the minimum requirements stated within a report
VPS4 refers to bases of value, assumptions and special assumptions
VPS5 refers to the valuation approaches and methods employed by the valuer
What are the three aims of the RICS Valuer Registration Scheme?
IQ.SR.PRS
RICS introduced a regulatory monitoring scheme for all valuers carrying out Red Book Global valuations from October 2011
Aims:
1. To improve the quality of valuation and ensure highest possible standards
2. To meet the RICS requirement to self-regulate effectively
3. To protect and raise the status of the valuation profession
What is the definition of market value?
The estimated amount for which an asset should exchange
o On the valuation date
o Between a willing buyer and seller
o In an arms length transaction
o After proper marketing
o Where each party acted knowledgeably, prudently and without compulsion
What is the definition of market rent?
- ‘Market rent’: The estimated amount for which an interest in real property should be leased
o On the valuation date
o Between a willing lessor and lessee
o In an arms length transaction
o After proper marketing
o Where each party acted knowledgeably, prudently and without compulsion
What is fair value?
The price received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date
What is investment value?
The value of an asset to a particular owner, or prospective owner for individual investment or occupational objectives
Name some VPGAs
VPGA 1 - Valuation for inclusion in financial accounts
VPGA 2 - Valuations for secured lending
VPGA 8 - Valuation of real property interests
VPGA 10 - Maters that may rise to give material valuation uncertainty
What was introduced with the UK Supplement in 2018?
- Augments the Red Book requirements
- Provides specific requirements for members in the UK
- Introduced 18 VPGAs to make them more user-friendly
What were the key changes with the UK supplement from 2018?
Easy to read and more user friendly
Provides mandatory guidance for the UK
What are the SDLT rates?
£0-£150k - Nil
£150-250k - 2%
Over £250k - 5%
What are purchasers costs?
SDLT at the prevailing rate
- Agents fees at 1% + VAT
- Solicitors fees at 0.5% + VAT
