Valuation Flashcards
Explain Special Purchaser
VPS 4 - Where a particular asset has special value to a particular purchaser because of advantages arising from its ownership that would not be available to other buyers in a market.
What is an IRR?
a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
What is the Red Book
Set of global standards which set out procedural rules and guidance for written valuations.
what is the full title of the latest red book?
RICS Valuation – Global Standards 2022
31 January
Purpose of the red book
Greater consistency, objectivity and transparency in written valuations
COT
why has the red book been updated?
- Because the IVS (international Valuation standards) are updated on a rolling program every 2 years new IVS 2022.
- Red book needed minor updates to stay aligned with IVS 2022
- To increase focus on sustainability and ESG.
What does ESG stand for?
Environmental, social and governance
who creates the International valuation standards?
Valuation professional organisations such as RICS and the American Society of Appraisers.
Professional standard 1 in the red book is about?
Compliance
Professional standard 2 in the red book is about?
ECOD
are there any exceptions where the valuer may not follow the VPS’s? (5)
Agency marketing appraisal Litigation (rent review litigation) Internal purposes only Expert witness valuation Statutory basis
ALIES
Professional Standard 1 changes
- It must be clear and unambiguous within the terms of engagement if members are to apply any exceptions to VPS 1-5 under PS 1.
- Red book compliance is binary. Valuation is either a Red Book valuation or it is not. No more partial red book.
what are the terms of engagement?
Contract with the client detailing the work assignment, can be used as an important defence against negligence claims.
what is market value?
Estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
what is market rent?
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.
define investment value
Value of an asset to the owner or prospective owner who has investment objectives.
Often used in conjunction with DCF.
What is fair value?
- IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
- Applies only to financial statements.
what do understand about synergistic value
- Defined in VPS 4
- Synergistic value is the result of a combination of 2 or more assets where the combined value is more than the sum of the separate values.
what are the three valuation approaches described in VPS 5?
M - Market
I - Income
C – Cost
MIC
what is the market approach as per VPS 5
Based on comparing the subject asset with identical or similar assets or liabilities, where price information is available, and you can compare similar market transactions within an appropriate time period.
I.e. The comparable method
what does VPS 1 relate to?
Terms of engagement
what does VPS 2 relate to?
Inspections, investigations and records
what does VPS 3 relate to?
Valuation reporting and methods
what does VPS 4 relate to?
Basis of valuation
what does VPS 5 relate to?
Valuation approach
name at least 10 headings you would expect to find in a terms of engagement
- Identification and status of valuer
- Identification of client
- Identification of any other intended uses
- Identification of asset or liability being valued
- Valuation currency
- Purpose of the valuation
- Basis of value adopted
- Valuation date
- Nature and extent of the valuer’s work, investigations and limitations
- Nature and source of information which the valuer will rely
- All assumptions and special assumptions to be made
- Format of report
- Restrictions on use, distribution and publication of report
- Confirmation that the valuation will be undertaken in accordance with the IVS.
- Basis on which the fee will be calculated.
- For RICS regulated firms, reference to complaints handling procedure
- A statement that compliance with these standards may be subject to monitoring under RICS conduct and disciplinary regs
- Statement setting out agreed limitations
name at least 10 headings you would expect to find in a red book valuation report
- Identification and status of valuer
- Identification of client and other intended uses
- Purpose of valuation
- Identification of asset or liability to be valued
- Basis of value adopted
- Valuation date
- Extent of investigation
- Nature and source of information relied upon
- Assumptions and special assumptions
- Restrictions on use, distribution and publication of report
- Confirmation the assignment is in accordance with the IVS
- Valuation approach and reasoning
- Valuation amount
- Date of valuation report
- Commentary on any material uncertainty in relation to the valuation
- Statement setting out any agreed limitations on liability
what is the income approach based on?
Capitalisation or conversion of present and future incomes to a single capital value
Two methods: 1.) capitilaisation of a conventional market based income. 2.) discounting a income projections
Deciding by consideration of what is standard in the market.
E.g. investment and profits method
What is the cost approach based on?
Gives an indication of value using the economic principle that a buyer would pay no more for an asset than the cost to get an equal asset by construction or purchase. E.G. Residual method and Depreciated replacement cost method.
what is the document “RICS Sustainability and ESG in commercial property valuation and strategic advice?
professional standard released 2023.
Covers definitions of ESG, role of sustainability and the role of the valuer
Explores sustainability characteristics, considerations and risk
have any valuation reviews been conducted recently?
Yes Peter Gray’s independent review of real estate investment valuations in December 2021.
Can you name two recommendations commissioned by RICS, standards and regulation board following Gray’s independent review of real estate investments?
I - Independent panel
C - Creation of compliance officer
E- Expectation of culture and behaviours
A.K.A ICE
Not including the red book are there any other RICS documents on valuation standards?
RICS valuation – global standards UK national supplement
- The UK national supplements the Global Red Book for valuations subject to UK jurisdiction.
Talk me through your valuation of the Industrial in Wimbledon.
- Property – purpose built warehouse
- Location - industrial estate with good transport links
- Purpose of valuation – IHT
- Basis of Valuation – market value as per IHT Act s160
- Terms of engagement – as per VPS 1
- Method used – comp, investment
- Technique – term and reversion, comparables
- key points: sourced market rent and yield, used Parrys investment tables
Talk me through your valuation of the flat in St Leonards and the advice you gave?
- Property – 1 bed purpose retirement flat
- Purpose of valuation – Red Book - disposal
- Basis of Valuation – market value
- Terms of engagement – as per VPS 1
- Method used – comparables
- Advice to client – Through a red book report i advised the client of an opinion of market value and its purpose
How do you execute a valuation using the comparable method?
- Look at subject property (sale and letting evidence)
- Select comps (verify info)
- Analyse comps
- Display comps and subject in summary matrix
- Value property
- Stand back and look
LSA-DVS
Why do we make adjustments to comparables when valuing using the comparable method?
- To express the comparable in like terms to the subject.
- e.g. if the comparable has a poorer location the valuer attempts to estimate how much more the property would have sold for had it been in the same position as the subject property.
How do you analyse comparables?
Review price per area rate
Display key findings in a table
Research if the transaction is open market, transaction amount, size, location, date of transaction, specification, condition and layout
What was the valuation date for the bungalow in Redhill?
Date of death for IHT
did you provision affordable housing in your Residual valuation?
No
The Affordable Housing contribution threshold for residential development sites is for residential sites of 11 units or more
What was the GDV of the bungalow appraisal
£1,200,000 (2x 3bed semis)
What costs did you deduct for the bungalow valuation?
- Construction costs with BCIS median quartile figures.
- Externals price per structure
- Fees at 7%
- assumed self financed
- Developers profit and risk @15% of GDV
Tell me about the profits method of valuation
- Used for valuing trade related properties in markets where there is a monopoly position
- Used where the value of the property depends on the profitability of the business and trading potential
- Used for pubs, petrol stations, hotels, day nurseries, leisure and healthcare properties.
- Basic principle is the value of the property depends on the profit generated from the business not the building or location.
- Need accurate accounts for 3 years if possible
tell me about the investment method of valuation
Used when there is an income stream to value.
4 techniques: term and reversion, hardcore and layer, hardcore and top slice and DCF
why didn’t you use the profits method to value the police station in Folkstone?
It is not a trade related property
What is the term and revision technique and what are the steps to carry it out?
- An Investment method of valuation used for reversionary investments where the subject is under-rented.
- capitalise passing rent using YP at discounted yield for remaining years
- capitalise reversion using market rent into perp using YR at full market rate discounted using present value.
- Add together
- Stand back and look
what is the hardcore and top slice technique?
Investment method of valuation used for investments where the subject is over-rented
Talk me through the steps of valuing a over rented shop from start to finish
- Establish market rent by comparable analysis
- Establish passing rent by reviewing the lease
- Establish market yield using comparables and risk analysis
- capitalise Market rent into perpetuity using market yield
- capitalise top slice (rental amount above market rent) until next review if rent can go down or lease end if not, using market yield uplifted to reflect risk.
- Add together hardcore and top slice.
- Stand back and look
In the hardcore and top slice technique what is the top slice?
The amount of rent above market rent
Describe how a hardcore and top slice valuation technique graph would look?
- Hardcore layer of market rent along whole of x axis
- Horizontal Top slice of amount of excess rent on top that starts from the onset
what yield would you commonly use for valuing a shop that is over rented?
Net initial Yield
what valuation technique might you use to value a shop that is under-rented?
Term and reversion
name five factors that can affect a yield
Risk Growth potential Quality of location Quality of covenant Property use Lease terms Voids Liquidity Obsolescence / Repair
Why would a surveyor complete a discounted cash flow?
- For a new property where growth is not yet stable
- New project where occupancy is not at peak levels
- To establish the internal rate of return
- To consider each rental growth separately
SORG
Stable. Occupancy. Return. Growth
What can a DCF look like, talk me through the different parts it will have.
- Time period on left hand side
- Net income (rent)
- YP @ cap rate (exit rate)
- Growth rate £1 @ say 2%
- Discount rate PV £1 @ 10%
- DCF total
- Remark/comment section at end
Talk me through the steps of valuing an over rented shop from start to finish
-Establish market rent by comparable analysis
-Establish passing rent by reviewing the lease
- Establish market yield using comparables and risk analysis
-capitalise Market rent into perpetuity -using market yield
capitalise top slice (rental amount above market rent) until next review if rent can go down or lease end if not, using market yield uplifted to reflect risk.
-Add together hardcore and top slice.
-Stand back and look
How would you carry out a DRC or contractors?
- ERC - modern equivalent
- Depreciate for age and obsolescence (functional, technical + economic) - flat roof
- Add land value
- Depreciate at statutory decap rate for rating valuations (4.4% or 2.6% for health)
- Stand back and look - adjustments if necessary
how would you carry out an investment method of valuation?
- Establish if property is over or under rented
- If it is under rented complete a term and reversion
- Capitalise passing rent using YP at discounted yield to end of term
- Capitalise market rent into perpetuity using yp at market ratee
- Add together
- Stand back and look
CCAS
What is YP?
Years purchase is the number of years it would take for the annual income to pay for the value or purchase price of the property.
What does VPGA stand for?
Valuation practice guidance applications
Are you aware of any VPGA’s
VPGA 1 – Financial account valuations VPGA 2 – Valuations for loan security VPGA 3 Valuation of whole businesses VPGA 4 Profits valuations VPGA 10 Material uncertainty VPGA 8 - Real property interests
can you run me through how you would do a profits valuation
- Obtain 3 years accounts showing income, purchases, expenses
- Determine fair maintainable turnover (for a reasonable occupier)
- Deduct costs and expenses to calculate Fair maintainable operating profit FMOP
- CAPITAL VALUE = FMOP X YP
- RENTAL VALUE = FMOP = Divisible balance (50/50 Landlord and tenant)
why would you multiply the operating profit by the years purchase to calculate capital value?
- You have the yearly profit
- The YP is the number of years profit it takes to attain the level of value of the property.
- So multiplying the two gives you the overall value.
what are the principles behind the divisible balance
represents the amount to be shared between the tenant (tenant’s share) and the landlord (rent, or rateable value).
What is fair value
Amount which would be paid for an asset or to transfer a liability in an orderly transaction between market participants at the measurement date.
What is marriage value?
the increase in the value of the property following the completion of the lease extension, reflecting the additional market value of the longer lease.
Difference between old value and new value is split 50:50 between landlord and leaseholder
What is functional obsolescence?
Looks at property decrease in functionality due to outdated design features pr physical deterioration
What is technical obsolescence?
Where the building is inferior to alternative
What is economic obsolescence?
depreciation in the market value of a property due to external factors that cannot be controlled by the owner.
Examples include: traffic pattern changes, zoning changes, flight pattern changes, construction of public nuisance projects like a jail or sewer treatment plant, rising crime, or job loss.
what advice did you provide on values reflecting development potential the bungalow?
I envisaged 2 x 3 bed semi-detached properties as a sale price of £600,000
what advice did you provide on the developers profit for the bungalow valuation
i advised 15% for profit and risk, this is a mid range value representing an development in high demand however having a large investment cost relative for the size of the plot.
What is professional scepticism?
Having a questionable mindset in regard to information and evidence.
PS 2
Who signs off Red book report?
An individual (chartered surveyor)
not a firm.
Who is to be named in a Red book report?
Anyone with a material supporting role in the valuation
Do you follow VPGA 15 – valuations for CGT, IHT, SDLT and ATED
Mainly aimed at private agents dealing client side
But we do follow
name the guidance note for comparative valuation methodology
Comparable evidence in Real Estate Valuation (1st edition) 2019
What different yields are you aware of? Name and describe at least 3
All risks yield - reflects all risks, returns and growth
Initial yield - ARY applied to passing rent
Gross initial yield - yield on investment before deducting expenses
Net initial yield - yield on investment after deducting annual expenses. Expressed as a percentage of capital value plus purchaser costs (used in hardcore and top slice)
Reversionary Yield - applied to the reversion (market rent) to reflect risk. Yield that should be achieved if passing rent adjusts to market rent
Equivalent yield - weighted average between term and reversion (used in hardcore and layer institutional market)
Equated yield - internal rate of return with explicit growth
what is a yield
Yield refers to the earnings generated and realised on an investment over a particular period of time and is expressed asa percentage based on the invested amount.
Income/price x 100 = yield
Basically what is the return for the investor after say 1 year
What is included within the global Red Book?
Professional standards (PS) 1 & 2 which are MANDATORY
Valuation technical and performance standards (VPS) 1-5 which are MANDATORY
Valuation Practice Guidance (VPGA’s) 1-10 ADVISORY
what is a discount rate?
Rate of interest selected when calculating the present value of a future cost or benefit.
what is all risks yield
Growth implicit yield used in an investment valuation that reflects all the risks and rewards of the subject property.
Name the consultative paper on investment valuation considered by RICS?
Independent review of real estate Investment Valuation
Why is there a need for UK guidance as well of global standards (Red Book)?
Global Valuation Standard is to enable consistence and transparency globally, whilst UK guidance is specifically for the UK market, align with the UK jurisdiction and practice
- to incorporate VPGA’s on aspects specific to the UK such as Inheritance tax and CGT.
What professional fees are considered in a residual valuation
Costs related to the hard construction costs of the scheme
May include environment/planning consultant, architect, QS, Civil engineer, Mechanical and electrical engineer and project managers.
They vary depending on the complexity of the development.
What is the difference between gross & net yield?
Gross yield is when the total rental income divided by the capital of the property without accounting for purchaser cost, whilst net yield will include purchaser cost such as SDLT and legal fees
what is a discount rate?
Rate of interest selected when calculating the present value of a future cost or benefit.
Define what a Basis of value is
Set of assumptions that guide how a valuation is done
Define what a method of valuation is
The techniques and approach that a valuer will carry out to value a property or land interest.
Most recent Red book when is it effective from?
31 January 2022
Do you undertake any environmental checks before valuing?
Yes Ground contamination Previous site use Asbestos Flood risk Overhead power lines Invasive species
If you were to value a multi-let office how would you approach that?
Investment method – establish MR and PR and calculate values using term and reversion or hardcore approaches.
Cross-check with comparable method
DCF also good approach as can manipulate different icnomes as appropriate
Would your valuation change if the interest was held leasehold as apposed to freehold?
Depends on the situation.
The price difference between a long leasehold vs freehold may not be substantial but the price difference between a short leasehold vs freehold property can be extremely significant.
The same property, in the same location, is likely to be more expensive if it is sold with a freehold title than if it is sold with a leasehold.
What is hope value and how would you reflect in a valuation?
An element of market value in excess of the existing use value, reflecting the prospect of some more valuable future use.
Could be reflected by an uplift in the £ per acre dependant on the likelihood of a new alternative use becoming more certain.
What is Estimated realisation price
Estimated Realisation Price”, (“ERP”) a basis of valuation to be used solely for loan valuation purposes.
ERP is identical to OMV in representing an exchange price in the market place, but it differs on a number of points, two of which are fundamental.
‘Reasonably expected’ is retained in the ERP definition but the two fundamental points are:
(i) the marketing period commences on the date of valuation, with the sale completed after a reasonable marketing period to be specified by the valuer.
(ii) the market is dynamic and is not assumed to be static over the marketing period.
Criticisms of estimated realisation price
Can be quite subjective. Being asked to forecast value at some point in the future.
When can you take account of hope value?
Can be included in OMV if it would have been known to someone in open market.
What does SORP stand for?
Statement of recommended practice
What does a RICS HomeBuyer Survey include?
Inspection
Concise report based on inspection
Valuation
Approaches and methods
MIC
CIRPC
Where would you find guidance for uncertainty in valuation?
UK VPGA 10
Hierarchy of comparable evidence?
Cat A - direct
Cat B - general market data
Cat C - other sources and different property types
What guidance is there on DCF?
RICS DCF information papers (2023)
- RICS aim to support use of DCF but traditional still used
With the industrial in Wimbledon how would you approach the valuation it it was over rented?
I could adopt the hardcore method whereby a MR is taken into perpetuity with ARY then the top slide is valued by capitalising additional rent at YP years to leave event at an increased yield
When could you adopt the DCF approach?
When there are multiple income streams and rent reviews.
when you want to show explicit inputs
Can be used for appraisal purposes to calculate worth / INV value
Can you explain a typical DCF calculation?
- Break the rent into income streams
- apply growth by % to income stream
- capitalise at a YP deferred by amount of years until the income is recievable
- then apply PV multiplier to bring back to valuation date
- total of NPVs is value or worth
What are some + and - of DCF
+
more info provided
cross investment analysis
specific cash flow issues can be considered
transparency
-
dont always have info to complete DCF
not widely used yet
Guidance on Residual Valuations?
Red Book IVS 410
- establish facts
- assess development potential
- planning knowledge
Tell me about the residual valuation you conducted on the Bungalow in Redhill.
When conducting a valuation for IHT purposes. i determined that there was development potential on a site with a dilpodated bungalow and therefore decided to adopt the residual method of valuation.
I took a GDV and removed a number of costs such as construction, demolition and site costs, i also deducted fees at 7% of build costs, cost of aquisition, and profit and risk at 15% of GDV. This left the residual land value which i checked with comparable development land values.
I then advised the client of my opinion of value along with the reasoning behind my approach. i advised of the limitations to my valuation in relation to its purpose.
Tell me about the valuation you did on the flat in Highgate.
I conducted a IHT valuation on a three bed flat in Highgate. After assessing the subjects lease terms i determined that it had a low unexpired term, i therefore decided it should be valued on a short lease basis.
to calculate this i used the comparables method of valuation to determine the market value of a similar flat with a long unexpired term. This was then adjusted at 93.2% using the Savills Leasehold Enfranchisement Analysis of Relativity to determine a short lease value. i used this as the current market value for the subject.
Why should a property with a shorter unexpired term be adjusted downwards?
Typically the shorter the lease term the lower the value, because it is further departed from owning the freehold or virtual freehold of the property. The lease term refers to the amount of years the property is in your posession so the shorter the lease term the sooner you would lose pocession of the property.
the adjustment reflects the value relative to owning the virtual freehold or a long lease term.
Why did you use Savills Analysis of Relativity?
Savills is based on 2015 data which is comparatively up to date, and they specialise in the London locality.
What advice did you give regarding the Industrial properties for Revaluation 2023.
I employed the comparables method of valuation to advise a senior colleague of the £/m2 to adopt for groups of Industrial properties in Kent, based on age, size and location. My advice allowed for the setting of Rateable values for the 2023 Rating List.
RICS DRC Method
CALS
Outline how you would conduct a profits method valuation
- FMT based on REO expectations
- attain gross profit if needed
- FMOP
- capitalise FMOP
- additions / deductions
- Value
- stand back and look - analyse by per bed etc
What docs are there regarding lease extensions?
The Leasehold Reform, Housing and Urban Development Act 1993
but
Leasehold and Freehold Reform Bill - making it easier and cheaper to extend leases, currently in HOL- freeholder can only charge a peppercorn rent
What extra value may you add to a short leasehold?
Marriage value is the increase in the value of the property following the completion of the lease extension, reflecting the additional market value of the longer lease. In that this potential ‘profit’ only arises from the landlord’s obligation to grant the new lease, the legislation requires that it be shared equally between the parties.
Why did you not adjust for Marriage Value for your flat in Highgate?
I valued the property with a short lease as this was the situation a moment before death, as this is the valuation date. Because of the short unexpired term it would attract a lower value than a newly renewed lease.
What does it mean to be contracted out?
where the landlord and tenant make an agreement prior to entering into the lease to exclude the statutory rights under the 1954 Act and the tenant therefore loses their automatic right to renew their lease at the end of the lease term.
How could contracting out affect value?
Landlord may accept lower rent for lease to be contracted out, conversely the landlord may have greater bargaining power at renewal of a contracted out rent.
How would a landlord gain VP from the Act?
s.30 L+T Act 1954
a) breach of repairing covnant
b) Persistent delay in paying rent
c) Breaches of other obligations
d) Availability of alternative accommodation
e) possession required for letting or disposing of whole of property
f) Landlord intends to demolish or reconstruct
g) Landlord intends to occupy the premises themselves
Tell me about the lease on the Industrial in Wimbledon?
NL on 10yr term
FRI
3 years to next review
yield of 6% and 7%
passing £40,000pa
Which doucments is the Red Book made up of in the UK?
Global Standards
IVS
National Supplement
What is the Registered Valuer scheme?
international mark of valuation expertise (mandatory in UK)
What can you find in the UK supplement?
From May 2024
PS 1
VPS 1-3
17 VPGA (18 in 2019 version)
Name 2 recommendations from the Independant review of REI valuations
R3 - rotation of firms (not applied to DVS)
R8 - DCF to be adopted where appropriate
- Sustainability and ESG
- EUV for public sector IFRS vals not fair value
What is AVM and what is the RICS view to it?
Automated Valuation Modelling - due to the detail of inputs it is still considered a written valuation?
What is a written valuation?
A valuation provided in all forms of communication but oral - though oral should still follow the same principles
Tell me about uncertainty in valuations
guidance in VPGA 10
material incertainty needs to be reported seperately as it is a wider factor which may not have impacted the market yet
inherent uncertainty need not reporting
What can be found in PS 2?
Ethics, competence, obligation, disclosures
-ability to act
-DOC
-TOE
What are assumptions and special assumption?
assumptions are agreed matters taken as fact
special assumptions are matters that are not actual facts - agreed (VP)
What is projected value?
a consideration that can be made seperate to basis of value
What is EUV?
Existing use value - for FR of owner occupier business - HM Treasury DVS work
Market value EUV - market value + special assumption to ignore hope value
Four bases of value?
Market Value - amount should exchange on val date, ALT, willing b + s, after marketing, K, P, WC
Market Rent - appropriate lease terms, willing L and L
Investment Value - particular investor with invetsment or operational objectives
Fair Value - orderly transaction between market participants at measurement date
Name 5 things you would include inline with VPS 3 that wouldnt be in VPS 1.
- Opinion of Value
- Market Commentary
- Property Description
- material uncertainty
- sources relied upon
- limitations on liability
- anyone involved in case
What are the 3 steps to consider before a valuation?
Competence
Independence
Terms of Engagement
What is overage?
Arrangement of sharing any receipts received over and above the profits originally expected as agreed in a pre-agreed formula. Can be shared between vendor/landowner and developer, also known as claw-back.
What is WAULT and how is it calculated?
Weighted Average Unexpired Lease Term – total unexpired lease length by the number on tenancies.
What advice did you give for the flat in St Leonards? And why?
I used the comparables method of valuation to advise my client of a market value via a Red Book Compliant Valuation Report. I gave this advice because the interest was a long leasehold therefore i used sales of similar style leasehold properties to determine the market value.
What advice did you give for the bungalow in Redhill? and why?
I adopted the residual method of valuation to advise HMRC of a market value at date of death and the reasons behind my approach.
What advice did you give senior management on Reval 2023 and why?
Using the the comparables method of valuation i advised a senior colleague of a £/m2 to apply to a group of industrial properties in Kent based on factors such as age size location, by analysing rentla comparable evidence i was able to advise on the pressence of quantum within the locality.
Steps before undertaking a valuation
1 - competence check
2 - independance check (COI)
3 - TOE
