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HATTIE RICS APC NOTES > Valuation > Flashcards

Valuation Flashcards

1
Q

What is an internal valuer?

A
  • Employed by a company to value their assets
  • Valuation for internal use only
  • No third-party reliance
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2
Q

What is an external valuer?

A

Has no material links with the asset to be valued or the client

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3
Q

What are the THREE steps you should undertake prior to commencing a valuation?

A

CCT:

  1. Competence - check you have the correct level of skills, understanding and knowledge
  2. Conflict of Interest - check you are able to act independently on the instruction
  3. Terms of engagement - issue to the client and receive written confirmation
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4
Q

Why do you undertake statutory due diligence for valuations?

A

Confirm that there are no material matters which could impact on the valuation

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5
Q

What types of statutory due diligence checks would you undertake when valuing a property?

A
  1. Asbestos register
  2. Business rates / Council tax
  3. Contamination
  4. Equality Act Compliance
  5. Environmental matters (high voltage power lines, electricity sub-stations, telecoms masts etc.)
  6. EPC rating if available
  7. Flooding
  8. Fire safety compliance
  9. Health and safety compliance
  10. Highways (check roads adopted with the local highways agency)
  11. Legal title and tenure (check boundaries, ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves)
  12. Public rights of way (from an OS sheet)
  13. Planning history and compliance (check any onerous planning conditions, whether the property is in a conservation area / listed and subject to a s. 106 agreement or CIL)
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6
Q

What are the FIVE main methods of valuation?

A
  1. Comparable method
  2. Investment method
  3. Profits method
  4. Residual method
  5. Depreciated replacement cost method
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7
Q

What are the THREE valuation approaches set out in IVS 105?

A
  1. Income approach - converting current and future cash flows into a capital value
  2. Cost approach - reference to the cost of the asset whether by purchase or construction
  3. Market approach - using available comparable evidence
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8
Q

What are the SIX steps used when collecting comparable evidence?

A
  1. Search and select comparables (agent’s boards, online databases)
  2. Confirm / verify information with a party directly involved in the transaction
  3. Assemble comparables in a schedule
  4. Interpret comparables using hierachy of evidence
  5. Analyse comaprables to form an opinion of value
  6. Report value and prepare file note
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9
Q

What guidance did the RICS recently release on using comparable evidence?

A

RICS Comparable evidence in real estate valuation, 2019

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10
Q

What are the THREE categories of evidence outlined in RICS Comparable evidence in real estate valuation, 2019?

A

Category A: direct comparables
Category B: general market data
Category C: other sources

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11
Q

What is the hierarchy of direct comparable evidence outlined in the RICS Comparable evidence in real estate valuation, 2019?

A
  • Contemporary, completed transactions of near-identical properties for which full and accurate information is available (may include the subject property)
  • Contemporary, completed transactions of other, similar real estate assets for which full and accurate information is available
  • Contemporary, completed transactions of similar real estate for which full data may not be available
  • Similar real estate being marketed where offers have been made but a binding contract has not been completed
  • Asking prices (with careful analysis)
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12
Q

What is the hierarchy of general market data outlined in the RICS Comparable evidence in real estate valuation, 2019?

A
  • Information from published sources or commercial databases
  • Other direct evidence (e.g. indices)
  • Historic evidence
  • Demand/supply data for rent, owner-occupation or investment
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13
Q

What is the hierarchy of other sources outlined in the RICS Comparable evidence in real estate valuation, 2019?

A
  • Transactional evidence from other real estate type and locations
  • Other background data (e.g. interest rates, stock market movement and returns which can given an indication for real estate yields)
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14
Q

When would you use the investment method of valuation?

A

Used when there is an income stream to value

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15
Q

How does the conventional investment method work?

A
  • Rent received (or Market Rent) x Years Purchase = Market Value
  • Assumes growth implicit valuation approach
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16
Q

When would you use a Term and Reversion method? How does it work?

A
  • Used for reversionary investments i.e. where Market Rent is more than passing rent
  • Term capitalised until next rent review / lease expiry at an initial yield
  • Reversion to Market Rent valued into perpetuity at reversionary yield
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17
Q

When would you use the Layer / Hardcore method? How does it work?

A
  • Used for over-rented investment i.e. where passing rent is more than Market Rent
  • Income flow divided horizontally
  • Bottom slice = Market Rent
  • Top slice = passing rent - Market rent until the next lease event
  • Higher yield applied to the top slice to reflect additional risk
  • Different yields used depending on comparable investment evidence and relative risk
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18
Q

What is a yield?

A

Yield is a return measure for an investment over a set period of time, expressed as a percentage.

Calculated (income / price) x 100

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19
Q

How would you calculate Years Purchase? What does this show?

A
  • Divide 100 by the yield

* Number of years required for the income to repay the purchase price

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20
Q

What factors would you considering when determining a yield?

A
  • Quality of location
  • Covenant
  • Property
  • Lease terms
  • Voids
  • Security of income
  • Liquidity (ease of sale)
  • prospects for rental and capital growth
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21
Q

What is an All Risks yield?

A

Yield which encompasses all the future risks and benefits attached to a particular investment

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22
Q

What is a True yield?

A

Assumed rent is paid in advance (traditional valuation practice assumes rent is paid in arrears)

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23
Q

What is a Nominal yield?

A

Initial yield assuming rent is paid in arrears

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24
Q

What is a Gross yield?

A

Yield based on the net purchase price (i.e. not adjusted for purchasers’ costs)

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25
Q

What is a Net yield?

A

Yield based on the gross purchase price (i.e adjusted for purchasers’ costs)

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26
Q

What is an Equivalent yield?

A

Average time weighted yield reversionary property is valued using an initial and reversionary yield

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27
Q

What is an Initial yield?

A

Simple income yield for current income and current price

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28
Q

What is a Reversionary yield?

A

Reversionary yield is a term used in the property market to describe the yield that should be achieved if the passing rent adjusts to the level of the estimated rental value.

Market Rent divided by current price on an investment that is under rented

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29
Q

What is a Running yield?

A

Yield at one moment in time

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30
Q

When would you use the profits method of valuation?

A

Used for the valuation of trade related property where the value of the property is directly linked to the profit generated by the business e.g. pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure, healthcare properties and care homes

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31
Q

What do you require to conduct the profits method of valuation?

A

Accurate and audited accounts for 3 years

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32
Q

How would you use the profits method of valuation to value a new business?

A

Use estimates / business plan

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33
Q

What is the methodology for the profits method of valuation?

A

EBITDA (earnings before interest, taxation, depreciation and amortisation) is capitalised at an appropriate yield

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34
Q

How should you verify a value obtained using the profits method of valuation?

A

Cross check with comparable sales evidence if possible

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35
Q

When would you use the depreciated replacement cost method of valuation?

A

Where direct market evidence is limited or not available for specialised properties e.g. sewage works, lighthouses, oil refineries, docks, schools, submarine base etc.

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36
Q

What is the purpose of the depreciated replacement cost method of valuation?

A
  • Used for owner-occupied properties
  • For accounts purposes for specialist properties
  • For rating valuations of specialist properties
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37
Q

What are the TWO steps of the depreciated replacement cost method of valuation?

A
  1. Value land in its existing use (assume planning permission exists)
  2. Add current cost of replacing the building plus fees (used BCIS). Then make a discount for depreciation and obsolesce / deterioration
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38
Q

How do you estimate the amount to depreciate the property by when using the depreciated replacement cost method of valuation?

A
  1. Physical obsolescence - result of deterioration / wear and tear over the years
  2. Functional obsolescence - where the design or specification of the asset no longer fulfils the function for what it was originally designed
  3. Economic obsolescence - due to changing market conditions for the use of the asset
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39
Q

Are valuations using the depreciated replacement cost method of valuation Red Book Global compliant?

A
  • Not suitable to be used for valuations for secured lending purposes
  • Can only be used for the calculation of Market Value for specialised properties for valuations for financial statements
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40
Q

When reporting a valuation carried out using the depreciated replacement cost method, what must the valuer state with regards to alternative use?

A
  • If higher, the valuer must state the Market Value for any readily identifiable alternative use
  • If appropriate, they must state that the Market Value must be materially lower on cessation of the business
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41
Q

What guidance has the RICS produced on the depreciated replacement cost method of valuation?

A

RICS Depreciated replacement cost method of valuation for financial reporting, 2018

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42
Q

When was the RICS Valuation - Global Standards published and when did it become effective as of?

A

Published in November 2021 and become effective on 31st January 2022

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43
Q

What does PS1 of the Red Book Global cover?

A

Sets out the mandatory compliance with standards required where a written valuation is provided.

  1. Mandatory application - All members who are providing written valuations must comply with the professional and valuation and technical performance standards (denoted PS and VPS) within parts 3 and 4 of the RICS Valuation Global Standards 2022.

RICS bye-law B5.2.1(b) Liability of Members and RICS bye-law B5.3.1 Liability of Firms, these global standards are therefore of mandatory application to any member of RICS or RICS-regulated firm involved in undertaking or supervising valuation services by the provision of written valuation advice.

  1. Compliance with Firms

Firms regulated by RICS. Firm and RICS Members within the must ensure that all processes and valuations are fully compliant with the mandatory requirements in these global standards. Includes valuations that are a not a responsbility of a RICS member.

Firms not regulated by RICS: While such firms may have their own corporate processes over which RICS cannot exert control, individual members in these firms who are responsible for valuations must comply with the mandatory requirements in these global standards

  1. Compliance with international standards

International Valuation Standards - published by the International Valuation Standards Council which compromise internationally accepted valuation principles and definitions.

International Ethics Standards - RICS is a member of the international coalition of professional organisations stablished
to develop and implement the first set of globally recognised ethics standards for property and related professional services.

International Property Measurement Standards - international coalition of professional organisations established to develop and implement consistent and transparent property (i.e. real estate)
measurement standards.

  1. Compliance with jurisdictional or other valuation standards

Regcognises that a member may be requested to provide a report that complies with standards other than the standards set out in Red Book Global Standards. Needs to be clear what standards are being adopted. Set out within terms of engagement and report.

  1. VPS 1-5 exceptions
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44
Q

What are the FIVE exceptions, where a valuation does not have to be Red Book Global compliant?

A
  1. Agency and brokerage work in anticipation of receiving instructions to dispose of or acquire and asset (except where a purchase port is required which includes a valuation)
  2. Acting / preparing to act as an expert witness
  3. Performing statutory function except for the provision of a valuation for inclusion in a statutory return to a tax authority
  4. Internal purposes, without liability and not communicated to any third party
  5. Advice is provided in preparation for, or during the course of negotiations or litigation
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45
Q

What does PS2 of the Global Red Book cover?

A

Ethics, competency, objectivity and disclosures

All members practicing as valuers must have the appropriate experience, skill and judgment for the task in question and must always act in a professional and ethical manner free from any undue influence, bias or conflict of interest

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46
Q

What does PS2 of the Global Red Book state with regards to independence, objectivity and the identification and management of conflicts of interest?

A
  • Valuers and firms must act objectively and independently
  • Should apply “professional skepticism” when reviewing information and data before relying on it
  • Identify and manage conflicts of interest
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47
Q

What does PS2 of the Global Red Book state with regards to Terms of Engagement?

A
  • Members must understand the client’s requirements and comply with the minimum terms of engagement
  • Members must be able to demonstrate professional competence
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48
Q

What is the hierarchy of evidence for establishing Market Rent?

A
  1. Open market lettings
  2. Lease renewals
  3. Rent reviews
  4. Third party determinations
  5. Sale and leasebacks
  6. Inter-company transactions
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49
Q

What does VPS 1 of the Red Book Global cover?

A

Terms of Engagement - sets out the minimum matters that must be confirmed in writing to the client prior to commencing a valuation

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50
Q

According to VPS 1, what matters must be confirmed in writing to client prior to the commencement of valuation?

A

a. Identification and status of the valuer
b. Identification of the client
c. Identification of any other intended users
d. The asset to be valued
e. Currency
f. Purpose of the valuation
g. Basis of value
h. Valuation date
i. Extent of investigation
j. Nature and source of the information to be relied upon
k. Assumptions and special assumptions to be made
l. Format of the report
m. Restrictions for use, distribution and publication
n. Confirmation of the Red Book Global / IVS compliance
o. Fee basis
p. Complaints handling procedure to be made available
q. Statement that the valuation may be subject to compliance by the RICS
r. Limitation on liability agreed

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51
Q

What is an Assumption, as defined in the Red Book Global?

A

Supposition taken to be true and accepted as fact without the need for specific investigation

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52
Q

What is a Special Assumption, as defined in the Red Book Global?

A

would not be made by a typical market participant in a transaction on that valuation date but expected to be taken as true

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53
Q

What does VPS 2 of the Red Book Global cover?

A

Inspections, Investigations and Records

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54
Q

According to VPS 2, what does it state with regards to the necessity to inspect properties?

A

Valuers must take the steps to verify the information being relied upon for a valuation to ensure the information if professionally adequate for its purpose

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55
Q

If a valuer undertakes a desktop valuation, is it still Red Book Global compliant?

A

Yes
For revaluation without re-inspection. Valuer to make sure there isn’t a material change.
If agreed with the Client and set out within the terms of engagement (PS1) and valuation report.

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56
Q

When a valuer conducts a valuation on the basis of restricted information or without a physical inspection, what FOUR factors should they do?

A
  1. Nature of the restriction must be agreed in writing in the Terms of Engagement
  2. Possible valuation implications of the restriction confirmed in writing before the value is reported
  3. Valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
  4. The restriction must be referred to in the report
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57
Q

According to VPS 2, is it permitted for a valuer to conduct a revaluation without re-inspecting the property?

A

Must not be undertaken unless the valuer is satisfied that there has been no material changes to the property or nature of its location since its last inspection (this must be confirmed in the Terms of Engagement and in the valuation report)

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58
Q

What does VPS 2 state with regards to the holding of records?

A

A proper record must be kept of inspections and investigations, and of other key inputs in an appropriate business format

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59
Q

What does VPS 3 of the Red Book Global cover? and what are the general principles?

A

Valuation Reports - sets out the minimum requirements to be stated within a valuation report.

General principles:
1. Report must clearly and accurately set out the conclusions of the valuation. Cannot be ambiguous or misleading.

  1. If appropriate, the valuer should draw attention to, and comment on, any issues affecting the degree of certainty, or uncertainty, of the valuation under item (o) below.
  2. The report should deal with all the matters agreed between the client and the valuer in the terms of engagement (scope of work) (see VPS 1)
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60
Q

According to VPS 3, what are the minimum requirements to be stated within a valuation report?

A

a. Identification and status of the valuer
b. Client and any other intended users
c. Purpose of valuation
d. Identification of the asset to be valued
e. Basis of value
f. Valuation date
g. Extent of investigation
h. Nature & source of information relied upon
i. Assumptions and special assumption
j. Restrictions on use, distribution and publication
k. Instruction undertaken in accordance with IVS standards
l. Valuation approach and reasoning
m. Valuation figure(s)
n. Date of valuation report
o. Comment on market uncertainty
p. Statement setting out any limitations on liability that have been agreed

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61
Q

According to VPS 3, is preliminary valuation advice able to be given?

A

Can be given but must be marked as a draft, for internal purposes only, which cannot be relied upon and on no account, can it be published or disclosed

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62
Q

According to VPS 3, can a draft report be provided to a client?

A
  • Yes, although the valuer is not to be influenced by the client in any way with respect to the final valuation figure stated in the report
  • A draft report provided to a client must state that it is a draft and it is subject to the completion of the final report
  • Any changes made to a preliminary valuation must be noted on file and reasons provided
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63
Q

What does VPS 4 of the Red Book Global cover?

A

Basis of Value, Assumptions and Special Assumptions

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64
Q

What is the definition of Market Value according to VPS 4 of the Red Book Global?

A

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

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65
Q

What is the definition of Market Rent according to VPS 4 of the Red Book Global?

A

The estimated amount for which an interest in real property should be lease
• On the valuation date
• Between a willing lessor and willing lessee
• On appropriate lease terms
• In an arm’s length transaction
• After proper marketing
• Where the parties had each acted knowledgeably, prudently and without compulsion

66
Q

What is the definition of Fair Value (IFRS 13) according to VPS 4 of the Red Book Global?

A

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

67
Q

When would you be required to report Fair Value?

A

Used when undertaking valuations for inclusion in financial statements, if the International Financial Reporting Standards have been adopted by the client

68
Q

What is the difference between Fair Value and Market Value?

A
  • RICS view that Fair Value is generally consistent with the definition of Market Value
  • Fair value relates to the actual worth of an asset and would be the mutually beneficial value between the buyer and the seller
  • Market value is the price which the asset will exchange between parties in the market and is influenced by market forces
69
Q

What is the definition of Investment Value according to VPS 4 of the Red Book Global?

A

The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives i.e. the measure of worth to reflect the value against the client’s own investment criteria

70
Q

What does VPS 5 of the Red Book Global cover?

A

Valuation Approaches and Methods

71
Q

What does VPS 5 of the Global Red Book state with regards to Valuation Approaches and Methods?

A

Valuers are responsible for adopting, and as necessary justifying, the valuation approach(es) and the valuation methods used to fulfil individual valuation assignments. These must always have regard to:

  • the nature of the asset (or liability)
  • the purpose, intended use and context of the particular assignment and
  • any statutory or other mandatory requirements applicable in the jurisdiction concerned

More than one valuation approach may be appropriate in some cases

72
Q

What do the VPGAs in the Red Book Global cover?

A

Valuation Applications (Valuation Practice Guidance Applications)

73
Q

What does VPGA 1 of the Red Book Global cover?

A

Valuation for inclusion in financial accounts

74
Q

What does VPGA 2 of the Red Book Global cover?

A

Valuations for secured lending

75
Q

What does VPGA 8 of the Red Book Global cover?

A
  • Valuation of real property interests

* Covers inspections and investigations, with particular emphasis on environmental constraints and sustainability issues

76
Q

What is the relationship between the Red Book Global and the RICS Valuation - Global Standards (UK National Supplement, 2023?

A
  • The UK National Supplement augments the Red Book Global requirements for valuations in the UK and is not a substitute for it
  • Provides requirements for members on the application of the RICS Valuation - Global Standards in the UK jurisdiction
77
Q

What were the key changes introduced in the RICS Valuation – Global Standards: UK National Supplement, 2023?

A

Glossary: Replicated from RICS Valuation – Global Standards (‘Red Book’) with some additional UK-specific terms included. Draft IVS 2023 ESG definition adopted.

Minor changes to the VPGA to align which updates to new and updated professional standards, guidance and regulations. For example, UK VPGA 8 Valuation of charity assets: Major amends in conjunction with major updates made to the Charities Act 2022.

78
Q

What are the Three parts of the RICS Valuation –
Global Standards: UK National Supplement, 2023?

A

Introduction
Glossary of technical terms
1. UK Professional Professional Standards (UK PS) (Mandatory)
2. UK Technical and Performance Standards(UK VPSs) (Mandatory)
* UK VPS 1 - Terms of engagement and reporting - Red Book compliance
* UK VPS 2 - Terms of engagement and reporting - supplementary provisions in Scotland
-* UK VPS 3 - Regulated purpose valuations: supplementary
governance requirements
3. UK Valuation Practice Guidance Applications (UK VPGA) (Advisory) - 17 different UK VPGA

79
Q

According to UK VPS 3, what are regulated purpose valuations?

A

Valuations relied on by third parties who have not commission the valuation and are subject to valuation monitoring

80
Q

According to UK VPS 3, what are the FIVE regulated purpose valuations?

A
  1. Financial reporting (company accounts)
  2. Stock Exchange listings / inclusion in prospectuses and circulars
  3. Takeovers and mergers
  4. Collective investment schemes
  5. Unauthorised and unregulated collective investment schemes
81
Q

According to UK VPS 3, are valuations for secured lending purposes considered a regulated purpose valuation?

A

No

82
Q

According to UK VPS 3, how does the RICS monitor regulated purpose valuations?

A
  • Inspections by RICS professional regulation team
  • Members must declare the length of time the valuer has acted for the client for regulated valuation purposes and the extent and duration of the firm’s relationship with the client
  • Whether in the last financial year, the percentage of the fee income from the client is more or less than 5% of the total fee income
  • Whether this has changed since the end of the last financial year or will likely change
83
Q

According to UK VPS 3, what does the RICS recommend with regards to valuer selection for regulated purpose valuations?

A
  • Should be a policy in place on the rotation of valuers when the asset is regularly valued
  • RICS recommends a 7-year maximum rotation policy
84
Q

According to VPS 3, when is a valuer unable to act on behalf of a client in relation to regulated purpose valuations?

A

Where the property was acquired by the client within the last 12 months and the valuer’s firm received an introductory fee or negotiated the purchase on behalf of the client

85
Q

Why are building cost reinstatement valuations/estimations required?

A

Building insurance purposes

86
Q

What do building cost reinstatement valuations/estimation show? What would they be based on?

A
  • Cost of the reinstatement of the building without a profit
  • Use of RICS Building Cost Information Service (BCIS) adopting GIA for commercial properties and GEA for residential
  • Add VAT, demolition costs, professional fees, planning and building regulation fees and inflation allowance if applicable
87
Q

Why does a replacement cost figure provided for insurance purposes, whether separately or within a valuation report, not have to be Red Book Global compliant?

A

It is not a “written opinion of value”

88
Q

What is hope value?

A

The value arising form any expectation that future circumstances affecting the property may change

89
Q

Provide some examples of where hope value may arise.

A
  • Future prospect of securing planning permission for the development of land, where no planning permission exists at the present time
  • The realisation of marriage value arising from the merger of two interests in land
90
Q

What must a valuer do when conducting a valuation on behalf of a charity?

A
  • Follow guidance contained in UK VPGA 8
  • Comment whether the purchase or sale is in the charity’s best interest
  • State whether the terms agreed are the best that can be reasonably obtained
  • Basis of valuation must be Market Value or Market Rent
  • Valuer must follow Section 119 of the Charities Act 2011
91
Q

What are the typical purchasers costs deducted from the gross market value?

A
  • Stamp Duty Land Tax: at prevailing rate
  • Agent’s fees: 1% of purchase price (+ VAT)
  • Legal fees: 0.5% of purchase price (+ VAT)
92
Q

What is marriage value? How do you calculate the level of marriage value?

A
  • Created by the merger of interest - can be physical or tenurial
  • Undertake a before and after valuation and calculate the level of marriage value created
93
Q

How is marriage value typically split between parties?

A

Typically split the marriage value create 50:50 or on a pro-rata basis using the value of the individual interests

94
Q

How would you value a long leasehold interest?

A

Deduct ground rent from the gross rent to calculate the net rent received. Then can either:
• Capitalise at a yield for the remaining length of the lease
• Use a dual rate to adjust the valuation to set up a sinking fund, so it is comparable to freehold investments
• Discounted cash flow (DCF)
• Capitalise into perpetuity at an adjusted yield to reflect the additional element of risk for the wasting asset

95
Q

What is the significance of rent received and rent receivable when calculating the value of a leasehold interest?

A
  • Ground rent can be calculated on a geared basis, using the rent from the leasehold interest
  • Rent “received” will be where ground rent is payable on rent actually received by the leaseholder
  • Rent “receivable” will be where the ground rent payable is based on the potential return as opposed to the actual return i.e. the tenant takes on the risk of voids
96
Q

What is a premium in relation to a transaction?

A

A capital payment made by one party to another

97
Q

How does the Red Book Global define a Special Purchaser?

A

A particular buyer for who a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market

98
Q

How does the Red Book Global define Special Value?

A

An amount that reflects particular attributes of an asset that are only of value to a special purchaser

99
Q

Provide examples of when a Special Purchaser would arise?

A
  • Tenant purchasing the freehold interest

* Association with the property e.g. owning an adjacent property

100
Q

How does Market Value reflect Special Value?

A

Ignores any price distortions caused by Special Value

101
Q

What is a right of light? When does it arise?

A
  • Arises after twenty years uninterrupted enjoyment of light without the consent of a third party by way of an easement with a prescriptive right
  • If a right to light infringed, an injunction can be granted or damages awarded
102
Q

What schemed did the RICS introduce in October 2011 for the regulatory monitoring of all valuers carrying out Red Book valuations?

A

RICS Valuer Registration Scheme (VRS)

103
Q

What are the THREE aims of the RICS Valuer Registration Scheme (VRS)?

A
  1. Improve the quality of valuation and ensure the highest possible professional standards
  2. To meet the RICS requirement to self-regulate effectively
  3. To protect and raise the status of the valuation profession as the leading expertise in valuation
104
Q

What should clients be able to expect from a RICS valuation following the introduction of the RICS Valuer Registration Scheme (VRS)?

A
  • Openness and transparency
  • RICS protection and international valuation standards
  • Expertise and clear reporting
  • World class regulations
105
Q

Which newly qualified members are eligible to apply for the RICS Valuer Registration Scheme (VRS)?

A
  • Those who have completed the APC valuation competency to Level 3 qualify for registration
  • There is an alternative route post qualification to be a Registered Valuer for candidates who have taken Valuation to only Level 2. This includes undertaking more valuation experience (up to 100 days) and a case study submission
106
Q

Who is registration mandatory for under the RICS Valuer Registration Scheme (VRS)?

A
  • Those undertaking valuation work in compliance with the Red Book Global
  • Registration is not mandatory for work excluded from the Red Book Global
107
Q

What information must be provided under the RICS Valuer Registration Scheme (VRS)?

A
  • Type of valuations
  • Purpose of valuations
  • Number of valuations
  • Firm’s total fee income from Red Book Global valuations in the last year
  • What data sources used
  • Quality assurance audit procedures in place
  • History of any negligence claims and notifications
108
Q

How do the RICS monitor those signed up to the Valuer Registration Scheme (VRS)?

A
  • Publishes a register of registered valuers
  • Monitor valuers through the submissions of their firms annual return
  • Risk based reviews, ranging from desktop investigations to site based Regulatory Review Visits (RRVs), dependent on the risk identified
  • Head of Regulation has the power to remove a valuer from the scheme
109
Q

What are the different types of ground rent?

A
  • Fixed

* Geared (rent received/receivable)

110
Q

What would a lender be concerned about with regards to the valuation of an over rented property?

A

The quantum of the over-rent i.e. how much the rent would decrease by at the next break option or lease expiry

111
Q

What is the generally acceptable upper limit for ground rent when it is calculated on a rent received or receivable basis?

A

10-15% of the passing rent or market rent

112
Q

What are the issues associated with the layer / hardcore method of valaution

A
  • Subjective yield selection - based on received tenant covenant strength and length of the over rent. Has to be done intuitively
  • Double-counting - as the ARY applied to the bottom layer will be growth implicit, the size of the over rent will reduce over time
  • Unrealistic split of income - risk of non-receipt is attached tot he whole income
113
Q

Are you qualified to comment on covenant strength?

A

No, I am able to comment on how the market would likely perceive the tenant covenant

114
Q

When making a discount to the rent for masking in a property, how much discount would you generally apply?

A

Would generally discount at the rate between the zone the floorspace is in and the rate of the zone behind i.e. if in the second zone, would discount at A/3 or if in the third zone, would discount at A/6

115
Q

Can you undertake valuation work on behalf of a lender that you are already instructed by on other loan security work? In what instances might you be conflicted due to a relationship with the lender?

A

Yes, it is permitted to undertake multiple loan security valuations on behalf of the same lender. You may, however, be conflicted if your firm had open litigation with that lender or were involved in their corporate restructuring, for example.

116
Q

How would you carry out a valuation differently if you were instructed today as a result of Covid-19?

A

Impact of Covid-19 on valuation:
• Would be unable to inspect the property so would have to make this restriction on information clear in the ToE and the report
• Include a material uncertainty clause in accordance with VPGA 10. Use wording recommended by the RICS
• Increase length of void periods as reletting is likely to take longer, particularly for retail and leisure uses
• Market rent and yield selection would be impacted, although unlikely to be the transactional evidence to support this. Would judge market sentiment from agents
• Ensure I had the correct PII in place that would cover valuation practice in the current environment and that I had capped liability

117
Q

What is a material uncertainty clause?

A
  • Used when the degree of uncertainty falls outside any parameters that might normally be accepted
  • Does not mean to suggest that the valuation cannot be relied upon
  • Less certainty can be attached to the valuation that would otherwise be the case
118
Q

What are the 8 sections within PS2 of the RICS Valuation Global Standards?

A
  1. Professional and ethical standards
  2. Member qualification
  3. Independence, objectivity, confidentiality and the identification and management of conflicts of interest
  4. Maintaining strict separation between advisers
  5. Disclosures where the public has an interest or upon which third parties may rely
  6. Reviewing another valuer’s valuation
  7. Terms of engagement (scope of work)
  8. Responsibility for the valuation
119
Q

What are the professional standards you must adhere to as part of a Red Book Valuation?

A

PS 1) Compliance with standards where a written valuation is provided
PS 2) Ethics Competency, objectivity and disclosure

120
Q

What are the 5 VPS?

A

VPS 1) Terms of Engagement
VPS 2) Inspections, Investigations and record
VPS 3) Valuation Report
VPS 4) Base of Value, assumptions and special assumptions
VPS 5) Valuation approaches and method

121
Q

Can you name any of the VPGAs?

A

1) Inclusion in financial statements
2)Secured lending
3) Valuation of businesses and business’ interests
4)trade related properties
5)plant and equipment
6)intangible assets
7) personal property
8) Real Property Interest
9)portfolios
10) Matters that may give rise to material uncertainty

122
Q

How is valuation defined?

A

Valuation is defined as a opinion of an asset or liability on a stated basis on a specified date

123
Q

What are the basis of Value?

A

Market Value
Market Rent
Investment Value
Fair Value

124
Q

Who is a registered valuer?

A

A registered valuer is a valuer who:
* adheres to the Red Book valuation standards
* is committed to openness and transparency
* are experts in their field, delivering credible and high-quality reports.

125
Q

What is a valuation registration scheme?

A

Valuer Registration is a risk monitoring and quality assurance programme which checks compliance with the RICS Red Book.

RICS Valuer Registration is an independent system of regulatory monitoring, which includes a register of valuers. Monitoring by RICS Regulation begins as soon as members sign up to Valuer Registration.

126
Q

What is a valuation registration scheme?

A

A- To improve the quality of valuation and ensure the highest possible professional standards.
B- To meet the RICS requirements to self regulate effectively
C- To protect and raise the status of the valuation profession as the leading expertise in valuation.

127
Q

How do you become a registered valuer?

A

Application form, which sets out how you met the competency requirements for Valuer Registration.

A period of valuation-based experience (maximum of 100 days), signed off by a Registered Valuer.

A single case study submission using work-based evidence.

CPD record.

128
Q

Please explain the structure of the red book ?

A

1, Introduction
2, Glossary
3, Professional standards
4, Valuation technical performance standards
5 Valuation practice guidance applications
5 International valuation standards

129
Q

In what circumstance shall a red book not be used?

A

In all circumstances except for the exceptions

130
Q

How do you value affordable housing units?

A

Using a discounted cashflow factoring rental value, a discount rate and management costs

131
Q

What dictates the amount of profit you put on a scheme?

A

The risk profile

132
Q

What is the timeline of a valuation

A

Receive Instructions
Check Competence
Check that there are no conflicts of interest
Issue terms of engagement
Receive signed terms of engagement
Gather information
Undertake due diligence
Inspect and measure
Research market and assemble, verify and analyse information.
Undertake valuation
Draft report
Check by another surveyor
Finalise and sign report
Report to client
Issue invoice
Archive file.

133
Q

What method of valuation would you use to establish rents and yields?

A

Comparable

134
Q

What is a residual method of valuation ?

A

Is a method of valuation used to establish a market value of a site based on market inputs at a particular moment in time and on a valuation date.

GDV-TDC-Profit = Site value

135
Q

What is a DRC method of valuation

A

Method used to value public and specialist buildings. i.e. school, churches, town halls, airports, oil refinery, town centers etc.

Modern equivalent - obsolescence + value of site = value.

DO not guess the percentage on Obsolescence and this comes with experience.

136
Q

What is the profits method of valuation

A

Not competent etc

Profits method is based on the profit produced by the business operating in a premises.

Gross earnings- Expenses = profit

Profit @ 50% = Annual rental value

Annual rental value x yield = Capital value

Stand back and look.

Need to have knowledge of particular property.

137
Q

What are the three valuation approaches ?

A

a. Income (Investment, profits and DCF)
b. Cost approach (DRC and residual)
c. Market approach (Comparable)

138
Q

When would you use the profits method:

A

Used for income-producing properties that, due to location or some other factor, enjoy a monopoly. It is used when the physical buildings are normally only sold as part of a business.
Examples would be:
* hotels;
* golf courses and other purpose-built sport and leisure centers;
* petrol stations; and
* some restaurants.

139
Q

What is gross profit?

A

Total revenue minus the cost of making a product or providing a service.

Gross profit = Total revenue – Cost of goods sold (COGS)

Calculating gross profit does not take additional expenses into account.

140
Q

What is net profit?

A

A business’s total revenue after subtracting all interest; income and payroll taxes; and mortgage, utility or rent expenses. Net profit is the gross profit minus all other expenses.

Net profit = Gross profit – Total expenses

141
Q

Tell me of another way that you could calculate term and reversion

A

Term- use discounted cashflow to work out term

Reversion
Deffered Yp % x years perpetuity = new yp
New YP x market rent = capital value

Used for under rented property

142
Q

Tell me if another way to calculate hardcore and layer

A

Standard calculation of investment method for the under rented part at yield low yield

Deffered yield calculation with higher cap rate due to uncertainty to calculate new YP. Then times the new YP by the difference between the under rented and market rent.

Used for overented

143
Q

What elements of the Red Book are Mandatory and which are advisory?

A

PS (Professional Standards) and VPS (Valuation Technical and Performance Standards) are mandatory

VPGA (Valuation Practice Guidance Applications) are advisory

144
Q

Have there been any supplements to the Red Book?

A
145
Q

What did the RICS Valuation -Global Standards 2022: UK National Supplement include?

A
146
Q

Q
What have been the key changes in the last update of the Red Book?

A

Reflect changes to the International Valuation Standards 2022

Updated to reflect latest Rules of Conduct

Emphasising the need to agree clear and unambiguous terms of engagement, even when valuations are undertaken for excepted purposes (i.e., VPS 1-5 do not apply) under PS 1 Section 5.
The terms quasi, partial or non Red Book should not be used in terms of engagement or reporting. Instead, the exception should be specifically stated and explained in the terms of engagement and valuation report.
More detailed commentary on sustainability/resilience and environmental, social and governance (ESG)matters in VPGA 8 Valuation of Real Property Interests. These terms are defined in Part 2: Glossary. There is also a reference to the proposed RICS Guidance Note Sustainability and ESG in Commercial Property Valuation and Strategic Advice 3rd Edition, also due to be published in 2022.
Various amendments are made to the VPGAs, in particular VPGA 4 Individual Trade Related Properties and the reference to IVS 230 Inventory.
Valuers must refer to the latest RICS valuation guidance, as well as being aware of the changes and how they affect their valuation work -amending any valuation templates or proformas used, including reports and terms of engagement.

147
Q

What are the different types of yield?

A

Initial Yield -The relation between current income and price (usually allowing for the cost of Purchase) = Current Income / Price

Reversionary Yield -The relation between the rent receivable at a future date, such as when re-letting takes place, and the price of property = Market rent / price

Equivalent Yield -Is the weighted average between initial and reversionary yield.

Equated Yield -Is the internal rate of return given certain growth assumptions.

All Risk Yield -Is a yield figure which reflects within it the future benefits and risks to which the investment is subject.

148
Q

Name a time you utilised the comparable method?

A
149
Q

Name a time you utilised the investment method?

A

Town Centre, Camberley – I was asked to appraise the site following it being marketed on the Homes England Dynamic Purchasing System.

Following discussion with the Local Planning Authority it was determined that there was a not a need for retail anymore, however there was still a need for Office space.

To value this I reviewed various rental comparables for office uses and discussed with local commercial agents regarding expected yields and rental levels in the area.

Using the information gathered I utilized the investment valuation to determine capital values for the various uses and included these within my overall residual valuation for the scheme.

150
Q

What rental value and yield did you use at Camberley?

A
151
Q

How do you calculate IRR

A
152
Q

What is IRR

A
153
Q

What is NPV

A
154
Q

How do you calculate NPV

A
155
Q

What does the RICS Guidance Note Comparable Evidence in Real Estate Valuation say?

A

Outlines the Hierarchy of Comparable Evidence:

Category A Evidence - Direct Comparables:
Completed transactions of near-identical properties for which full and accurate information is available; may include information from the subject property itself.
Completed transactions of near-identical properties for which some information is available.
Where offers have been made but there is no binding contract.
Asking Prices
Category B Evidence - General Market Data that can provide evidence:
Historic evidence/ demand and supply data from renta, owner occupier or investment data,
Category C evidence -
Transactional evidence from other real estate types and locations
other background data, i.e. interest rates

156
Q

Is there any RICS Guidance on the comparable method?

A

Yes - RICS Guidance Note Comparable Evidence in Property Valuation, 2019

157
Q

What is a years purchase?

A

The number of years it will take for a property to repay its purchase price

158
Q

What are the Valuation Technical and Performance Standards?

A

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.

159
Q

Where are the definitions in the Red Book?

A

VPS 4 - Basis of value, assumption and special assumptions.

160
Q

VPS 4 - how many bases of value are there?

A

Market Value
Market Rent
Fair Value
Investment Value
Equitable Value
Liquidation Value

161
Q

Name a time you utilised the comparable method?

A
162
Q

When was the Red Book UK National Supplement published?

A

Published on 19 October 2023 and will become effective 1 May 2024.

HATTIE RICS APC NOTES (20 decks)

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