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Rural APC 2024 > Valuation > Flashcards

Valuation Flashcards

1
Q

What are the five methods of valuation?

A

Depreciated replacement cost, profits, investment, residual and comparable.

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2
Q

When would you use a profits method?

A

Method for specialist trade related property. Value is dependent on business profitability and trading potential. E.g. Hotel.

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3
Q

When would you use the investment method?

A

Used when there is an income stream to value, e.g. rent.

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4
Q

When would you use the residual method?

A

Used when there is a development potential.

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5
Q

When would you use the depreciated replacement costs method?

A

Method of last resort used for specialist properties where the value is based on the cost of buying the site and cost of building less discount for depreciation and deterioration. E.g. lighthouse or church.

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6
Q

When would you use the comparable method?

A

Most common method that estimate value through analysis and adjustment of recent market transactions of similar properties.

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7
Q

What makes a good comparable?

A

Hierarchy of evidence. Category A are direct comparables, Category B relies on general market data that provides guidance not direct indication of value. Category C is other sources which relies on wider data that offers an indication of value.

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8
Q

What is a hierarchy of evidence?

A

A hierarchy of evidence provides the ability to weigh or rank evidence collected in accordance with its relevance to the property being valued. The valuer would need to use a wide range of sources of comparable evidence. The best quality comparable evidence is sales evidence from the exact property taken from the Land Registry (good source), down to similar properties nearby and then transactional evidence from properties further afield.

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9
Q

What other considerations are required in the hierarchy of evidence that may impact value?

A

Location, date sold, type of property, size, condition, tenure, energy efficiency.

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10
Q

What are the basis of value?

A

Market value, market rent, investment value and fair value.

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11
Q

What are the types of sale?

A

Private treaty, informal tender, formal tender and auction.

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12
Q

How would you estimate the life expectancy for a tenant?

A

Parry’s tables.

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13
Q

How would you undertake a leasehold valuation?

A

Use the investment method (term and reversion).

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14
Q

What is definition of Market Value/Market Rent?

A

Market Value is the estimated amount for which an asset would exchange on the valuation date between a willing buyer and willing seller, in an arm’s length transaction after proper marketing, where parties acted knowledgeable, prudently and without compulsion.
Market Rent is the estimated amount for which an interest in real property should lease on the valuation date between a willing buyer and willing seller, in an arm’s length transaction, after proper marketing, where parties acted knowledgeably, prudently and without compulsion.

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15
Q

What is the definition of investment value?

A

The value of an asset to a particular owner or prospective owner for individual investment or operational objectives.

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16
Q

What is Fair Value?

A

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. It is primarily used for accounting purposes

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17
Q

What are the 3 approaches to valuation?

A

Income, cost and market.

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18
Q

What is the income approach?

A

Converting current and future cash flows into capital value (investment, residual and profits methods)

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19
Q

What is the cost approach?

A

Refers to the cost the asset whether by purchase or construction (DRC method)

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20
Q

What is the market approach?

A

Uses comparable evidence available.

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21
Q

What are the main headings of the Red Book?

A

Introduction, glossary, Professional Standards, Valuation Technical and Performance Standards, Valuation Practice Guidance Application and International Valuation Standards.
PS1 – compliance with Standards
PS2 – ethics, competency, objectivity and disclosures
VPS1 – Terms of Engagement
VPS2 - Inspection, Investigation and records
VPS3 – Valuation Reports
VPS4 – Bases of value, assumptions and special assumptions
VPS 5 – valuation approaches and methods.

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22
Q

What is the purpose of the Red Book?

A

Promote and support high standards in valuation delivery worldwide.

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23
Q

What is the role of the International Valuation Standards?

A

To improve valuations standards globally and maintain cohesiveness for all member bodies.

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24
Q

When is the next UK Supplement due to be published?

A

1st May 2024

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25
Q

What is the role of the Red Book?

A

To promote globally recognised standards and guidelines for all valuations undertaken to follow, to reassure clients.

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26
Q

What was the premium derived from your client being special purchaser of the land?

A

There was no actual premium derived beyond the total value of the land, given that a third party retained a right of access through the land and that it was land locked in nature and would therefore not appeal to any other potential purchasers.

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27
Q

What is lotting and why might it be undertaken?

A

Lotting is the process of dividing land into several individual parcels to arrive at separate values which may derive a higher value, if sold on the open market. Often, larger, bulkier properties are of less desirability in the market and so would face difficulty when coming to sale.

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28
Q

Are there any extra requirements to include in a report for secured lending purposes?

A

The valuer would need to disclose their opinion on the suitability of the property for secured lending purposes and circumstances the valuer is aware of that could impact on price. The valuer would also need to disclose any factor that conflicts with the definition of Market Value or its underlying assumptions.

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29
Q

What is a restrictive covenant?

A

Restriction placed over a property that prohibit certain activity from taking place. They will be found in the title register for that property and may have been placed on there by a previous owner.

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30
Q

What is the full name of the Red Book?

A

RICS Valuation – Global Standards 2021

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31
Q

Who is a special purchaser?

A

A special purchaser is a particular buyer for whom an asset has a special value due to advantages from its ownership that would not be available to other buyers in the market.

32
Q

What valuation purposes fall under the Red Book?

A

Secured lending, tax valuations, accounting and investment performance.

33
Q

What types of valuation fall outside the Red Book?

A

Expert witness, valuations for agency/market appraisal, valuations used in negotiations/litigation, internal valuations, valuations for statutory use.

34
Q

How would you define Investment Value?

A

Investment value (worth) is the value of an asset to the owner or prospective owner for individual investment or operational objectives.

35
Q

How would you define Gross Development Value?

A

Market Value of the proposed development assessed on the special assumption that the development is complete as at the date of valuation in the market conditions prevailing at that date.

36
Q

What is the purpose of RICS BCIS?

A

BCIS stands for Building Cost Information Service and provides cost and price information for the UK construction industry. It offers a reinstatement calculator and schedule of rates, which is updated regularly, to allow developers and valuers to obtain accurate estimates of build costs for a project.

37
Q

What is hope value?

A

Hope value is the value arising from the expectation that circumstances affecting the property may change in the future.

38
Q

Do you include VAT in a reinstatement cost valuation?

A

The RICS recommend including VAT in a reinstatement cost valuation, however this depends on the VAT status of the company/property.

39
Q

What is a yield?

A

A return on investment.

40
Q

How would you calculate a yield?

A

Annual income/capital value x100

41
Q

How would you arrive at an appropriate yield for valuing an asset under the investment method?

A

A yield is the amount earned on a security over time. You would need to consider the amount of risk involved, for example something of high risk would generate a higher yield.

42
Q

Is an accounting valuation Red Book compliant?

A

Yes.

43
Q

What is synergistic value?

A

Synergistic (marriage) value is the additional element of value created by the combination of two or more assets or interests where the combined value is more than the value of the two separates.

44
Q

What is an assumption?

A

An assumption is a matter reasonable to accept as fact in a valuation, without specific investigation or verification. (A supposition taken to be true).
e.g. service occupancy, contamination

45
Q

What is a special assumption?

A

A special assumption is an assumption that requires a valuation to be based on facts that differ from those that exist at the date of valuation.
e.g. Vacant possession, planning permission, extension already built.

46
Q

What are the main headings in Terms of Engagement?

A

Valuer, Client, purpose of valuation, currency, CHP, assumptions or special assumptions, fee basis, report format.

47
Q

What are the main headings in a valuation report?

A

Purpose of valuation, client, intended uses, valuer, property, date of valuation, basis of value, assumptions and special assumptions etc.

48
Q

Do you think the Tenant Fees Act 2019 will impact rental values for residential leases?

A

This is possible, due to the fact that Landlords will now want to recover the fees that they are having to cover the costs of, through rent.

49
Q

Does a Market Appraisal valuation need to be in accordance with the Red Book?

A

Yes, PS1 and PS2.

50
Q

What yields would you use for an AHA and FBT valuation, using the investment method?

A

AHA valuation – 0.5% (depending on the successions remaining)
FBT valuation – 1-1.5%

51
Q

How would you value a property under an AHA Tenancy?

A

If the tenant had a right to succession you would capitalise the rent into perpetuity.
If there was no succession you would use the Term and Reversion method through calculating the NPV of the right to receive the income over the term using life tables to calculate the likely remaining term. You would then use an appropriate multiplier to capitalise income an apply a reversion using PV £1.

52
Q

What relevant designations would you note in a valuation report?

A

NVZ, listed buildings, conservation areas, SSSI, TPOs, AONBs, National Parks, PROW.

53
Q

Who else can carry out a Charities Act report?

A

RICS, CAAV, NAEA Property Mark qualified people.

54
Q

What changed between the 2011 and 2022 legislation?

A

The new legislation simplified the requirements for the report and widened the categories for potential advisors.

55
Q

Do you need to be a registered valuer to carry out the report?

A

No but you still need to comply with PS1 and PS2 of the Red Book.

56
Q

What are the five matters outlined in Section 4(1) of the 2023 regulations?

A

The report must identify the following matters:
Value of the relevant land, steps taken to enhance value, whether and how land should be marketed, anything else to make terms best for the charity, any other matters the charity should be aware of.

57
Q

How you did you find your comparable evidence?

A

I initially used Rightmove Plus software to identify any recent renewals or new leases then I phoned up local agents and other estates.

58
Q

What are the registered valuer requirements?

A

Apply to the valuer registration scheme, pay the annual fee of £120 per annum, take valuation to L3 APC, complete an annual return describing properties and value of properties valued in that year.

59
Q

What VPS covers reporting requirements and what does it state with regards to using a draft report?

A

VPS3
In providing a client with preliminary advice, or a draft report or valuation in advance of its completion, the member must state that:
- the opinion is provisional and subject to completion of the final report
- the advice is provided for the client’s internal purposes only and
- any draft is on no account to be published or disclosed.
- If any matters of fundamental importance are not reflected, their omission must be declared.

60
Q

What practice guidance applications covers valuation for loan security purposes and provide an overview of the guidance offered?

A

RICS Professional Standard: Bank Lending Valuations and Mortgage Lending Value 2018

61
Q

What RICS guidance do you consider when undertaking comparable valuations?

A

RICS Professional Standard: Comparable Evidence in Real Estate Valuation 2019

62
Q

Can you provide me with 3 examples of Category C data?

A

Background data such as:
Interest rates, transactional evidence from other real estate types, stock market movements

63
Q

Please could you explain one way in which a report for a charity might differ to that of a private individual?

A

The report must outline and confirm that the acquisition or disposal of a property are the terms most reasonable obtained for the charity.

64
Q

What discount did you apply to the properties subject to an AST in Hambledon?

A

No discount was applied as the tenant’s could be removed in 2 months by serving a s.21 notice.

65
Q

What is a special purchaser?

A

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

66
Q

What is special value?

A

Amount that reflects particular attributes of an asset that are only of value to a special purchaser.

67
Q

What part of the Red Book relates to secured lending?

A

VPGA 2

68
Q

Give an example of a conflict that might arise during a valuation and how would you manage this?

A

If the valuer has had previous or current involvement with the borrower or property. Let the lender know in writing as they may wish to instruct someone else. However if both parties are happy to proceed with acknowledgement of the conflict then this must be disclosed in advance to the lender and highlighted in the report.

69
Q

I see that you’ve used the comparable method, could you explain to me how you apply this in practice?

A

Consult RICS documents and red book, look for similar properties to the subject property, consider hierarchy of evidence, analyse and adjust comparables, estimate value, draft report.

70
Q

What about another valuation method, could you briefly tell me about the investment method?

A

Used where there is an income stream to value.

71
Q

You mentioned yields, can you explain to me what you mean by yield?

A

A yield is a rate of return on an investment

72
Q

Can you give me an example of different yields?

A

PCL – 3%

73
Q

You mention that you understand how synergistic value can affect value, can you explain this to me?

A

Synergistic or marriage value is when the value of two or more interests together is higher than the value would be individually, for example with the valuation in Hambledon, the value of the indoor and outdoor schools with the gallop would be more than the value of each asset individually.

74
Q

Please could you tell me the four basis of value?

A

Market value, investment value, fair value, market rent

75
Q

Can you give me the definition of one of your choice?

A

Market Value is the amount an asset exchanges on the valuation date between a willing buying and willing selling in an arm’s length transaction, after proper marketing where the parties have acted knowledge, prudently and without compulsion.

76
Q

You mention the latest Red Book – can you give me the minimum standards requirement for a red book report?

A

Must be done by a registered valuer, must be in accordance with PS1, PS2 and VPS 1-5.

77
Q

Are there any valuations exempt?

A

Valuations exempt from VPS 1-5 include: agency, internal purposes, supporting expert witness, litigation and statutory purposes. These valuations must however be in accordance with PS1 and PS2.

Rural APC 2024 (6 decks)

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