Valuation Flashcards
What is the Red Book? (L1)
A comprehensive set of valuation standards and guidance notes to provide guidance when undertaking valuations
Current edition: RICS Valuation - Global Standards (took effect January 2022)
Why do we need the Red Book? (L1)
Provides guidance when undertaking valuation work
Impose mandatory obligations for competence, objectivity and transparency
Helps to support and achieve high standards of integrity and clarity
Establishes a framework for uniformity and best practice
Does not: instruct on how to value
What is the structure of the Red Book? (L1)
- Introduction
- Glossary
- Professional Standards (PS)
(mandatory) - Valuation Technical and Performance Standards (VPS) (mandatory)
- Valuation Applications (VGPA) (advisory)
- International Valuation Standards
What is the purpose of the Red Book? (L1)
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Purpose of the Red Book:
- Assure global valuation consistency, objectivity, and transparency.
- Adherence to the highest professional standards worldwide.
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Standards Provide:
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Mandatory Obligations:
- Competency
- Objectivity
- Transparency
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Framework for:
- Uniformity
- Best practice
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Compliance with:
- RICS Rules of Conduct
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Mandatory Obligations:
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Standards Do Not:
- Instruct on valuation methods.
- Prescribe a specific report format.
- Override local mandatory standards.
What are the 5 Conventional Methods of Valuation?
Investment
Comparable
Profit
Residual
Cost (Depreciated Cost Replacement - DRC)
What is the difference between an implicit and explicit investment valuation technique?
Implicit valuation methods employ all-risks yields as input yields with most real-life complications wrapped up into/implied in the input yield(s) chosen. An alternative approach is to make all the cash-flow assumptions explicit. This requires the investor and valuer to articulate all cash-flow assumptions and attitudes to risk. Such an approach tends to be more applicable to complex investments or markets in which sophisticated investors operate.
This methodology is usually referred to as a discounted cash-flow (DCF) method.
ARY reflects implicitly all future benefits and disadvantages of an investment.
What should you do before undertaking/accepting a valuation?
Check competency. Do I have the necessary skills, knowledge and experience to deal with this valuation
After confirming whether you are competent to undertake a valuation, what are the file contents?
After meeting the competency requirements, a Red Book Valuation and file contents are:
- Conflicts of Interest check
- Terms of Engagement
- Inspection notes etc.
- Planning, rating and environmental searches
- Comparables and analysis
- Valuation calculations with rationale
- Report
As per PS1, the Red Book applies to all valuations unless the purpose is specifically listed as an Exception. What are they?
- Agency or brokerage work in anticipation of disposal or acquisition instructions
- Acting or preparing to act as an expert witness (members must follow specific rules and procedures of the court, tribunal or other judicial body & must be impartial and objective)
- Performing statutory functions (for tax or rating purposes)
- Purely for internal purposes (not used by third party)
- Advice provided during negotiations or litigation
What are the Valuation Technical and Performance Standards? (VPS)
VPS 1 Terms of engagement (scope of work)
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
What are the main contents of the Terms of Engagement (VPS 1)
The Client
The Property or Asset
The Valuer
The Purpose of the Valuation
The Basis of the Value
The Method of Valuation
Currency
Valuation Date
Assumptions and Special Assumptions
Extent and Limitations of Inspection and Investigations
The Fee
Insurance
Complaints handling procedure
What is the Valuation Report section? (VPS 3)
This corresponds with the Terms of Engagement plus:
- Valuation approach and reasoning
- Amount of the valuation or valuations
- Date of the valuation report
- Commentary on any material uncertainty
What are matters that may give rise to material valuation uncertainty? (VPGA 10)
- Asset or liability specific characteristics
- Limited or restricted information
- Disrupted markets
What are the Bases of Value? (VPS 4)
- Market Value
- Market Rent
- Investment Value (or worth)
- Fair Value (IFRS definition)
What is Market Value? (VPS 4 Bases of Value)
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion
What is an arm’s length transaction?
An arm’s length transaction refers to a business deal in which buyers and sellers act independently without one party influencing the other
What is Market Rent? (VPS 4 Bases of Value)
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
What is Investment Value? (VPS 4 Bases of Value)
The worth of a property to a particular investor, or class of investors, for identified investment objectives
What is an Assumption?
Something that is likely to be true - although you may not be able to prove it. Include:
- Clean title
- Condition of buildings
- Services
- Planning (zoning)
- Contamination and hazardous substances
- Environmental matters
What is a Special Assumption?
Where an assumption assumes facts that differ from those existing at the valuation date. Includes:
- Planning consent has or will be granted
- Development completed in accordance with defined plan and specification
- Property changed in a defined way
- Property is vacant (when occupied)
- Property is let on defined terms (when vacant)
- Synergistic value is created
What are the Conventional Valuation Methods?
- Profits / Income / Account
- Investment
- Comparable / Comparative
- Residual
- Depreciated Replacement Cost
Contemporary techniques: DCF
What is the Hierarchy of Evidence?
For lease renewals and rent reviews:
- Open market lettings
- Lease renewals (above a rent review as rent can go up or down)
- Rent reviews
- Independent expert’s determination
- Arbitrator’s awards
Can you explain how only 3 years remaining on a lease can affect investment value?
- Increase Risk: Uncertainty about tenant renewal or re-letting.
- Lower Capital Value: Investors may demand a higher yield, reducing value.
- Potential Void Periods: Risk of vacancy and additional re-letting costs.
- Reduced Income Security: Less attractive to investors seeking stable, long-term income.
Is it better to have a higher rent let to a lower covenant or better covenant with lower rent?
Depends on the extremities of each and requirements of the client