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APC > Valuation > Flashcards

Valuation Flashcards

1
Q

When does the Red Book not apply to valuations?

A

There are no exemptions from compliance with PS 1-2 when providing valuation advice.

There are 5 specific circumstances where VPS 1-5 may be unsuitable or inappropriate to comply with:
* Providing agency or brokerage advice for an acquisition or disposal
* Acting as an expert witness
* Performing statutory functions
* Providing a valuation purely for internal purposes, without liability and without communication to a third party
* Providing valuation advice in the course of negotiations or litigation where the valuer is acting as an advocate.

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2
Q

What are some of the key changes to the UK National Supplement, 2023 edition?

A

UK VPS 3 (valuations for regulated purposes, where there is 3rd party reliance) has been completely overhauled. A major change relates to UK VPS 3.3, which introduces a mandatory valuer rotation policy.

Major amendments have been made to VPGAs 2, 4, 6, 8, 11, 17 and 18

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3
Q

What are the five methods of valuation?

A
  • Comparable method
  • Investment method
  • Profits method
  • Depreciated Replacement Cost (DRC) method
  • Residual method
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4
Q

When would you use the comparable method?

A

Residential, agricultural and some commercial properties, mostly owner occupied.

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5
Q

When would you use the investment method?

A

When there is an income stream to value, i.e. the property is tenanted

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6
Q

When would you use the profits method?

A

Used for income producing properties, typically referred to as being specialist properties, such as hotels, golf courses, petrol stations, care homes and some restaurants.

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7
Q

When would you use the DRC method?

A

Used for owner-occupied or specialised property that is rarely sold on the open market, e.g. wastewater treatment works.

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8
Q

When would you use the residual method?

A

Used for property or land with development potential

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9
Q

What is the no-scheme principle and what legislation applies?

A

Valuing the property as if the scheme was not proposed. Section 6A of the Land Compensation Act 1961

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10
Q

What are the different bases of value in VPS4?

A
  • Market Value
  • Market Rent
  • Investment Value
  • Equitable Value
  • Synergistic Value
  • Liquidation Value
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11
Q

What is the definition of Market Value?

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 and where the parties had each acted knowledgeably, prudently and without compulsion.’

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12
Q

What is the definition of Market Rent?

A

‘the estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.’

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13
Q

What section of the Red Book covers secured lending purposes?

A

VPGA 2

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14
Q

What additional things do you need to consider regarding conflicts of interest for secured lending?

A

There may also be a connection to the borrower, therefore this should be considered in addition to whether there is a conflict with the client.

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15
Q

How did you measure 3 High Street?

A

Net Internal Area

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16
Q

Why did you use the investment method at 3 High Street?

A

The property was income producing

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17
Q

Was the rent paid at 3 High Street the market rent?

A

No, the property was overrented. It had an index linked rent reviews which may have been the reason. (£89k vs £67.5k)

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18
Q

How would break clauses and whether the lease being contracted out of the LTA 54 effect your valuation?

A

When valuing the term, can only rely on rental income up to break/end of term.

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19
Q

Did you value 3 High Street with any special assumptions?

A

Freehold with the Special Assumption of vacant possession - £860,000 rather than £1,120,000

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20
Q

What evidence did you use to value 3 High Street?

A

I reviewed evidence of other convenience stores, as well as other retail stores in the local area to find market rents and yields.

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21
Q

What was the market rent at 3 High Street?

A

£18.50 psf, therefore £67,500

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22
Q

What was the initial yield at 3 High Street?

A

6.25% NIY

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23
Q

What was the reversionary yield at 3 High Street?

A

5.5%

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24
Q

At Castle Street, how would you have dealt with voids?

A

I would use evidence of surrounding transactions to understand how long it would likely take to find a tenant (6 months), then apply a 3 month rent free period for a new letting to understand the void period. I would then capitalise the market rent with the yield being used for the reversion

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25
Q

At Castle Street, what was the rental income and the Market Rent?

A

Net passing rent of £35,899 vs £38,630 - bills included.

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26
Q

When the passing rent is less than market rent, what do you do?

A

Value the term at the passing rent up to the next lease event, then capitalise the market rent for the reversion

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27
Q

At Castle Street, what was the initial yield used?

A

6%

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28
Q

At Castle Street, what was the nominal equivalent yield?

A

8%

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29
Q

At Castle Street, what was the Market Value?

A

£565,000

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30
Q

At Station Approach, did the expected value and loan amount influence your valuation?

A

I disregarded this when undertaking the valuation to ensure it was independent, but used it to advise whether the property was appropriate for secured lending.

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31
Q

On what basis did you measure Station Approach?

A

Gross Internal Area (GIA)

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32
Q

What is included in GIA?

A

The area of a building measured to the internal face of the perimeter walls

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33
Q

Were there any mezzanines at Station Approach? What values would you have put on these and why?

A

No, but I would have valued the mezzanine at 50% (25% for a covered canopy)

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34
Q

What was the capital value per square foot at Station Approach?

A

£73 psf

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35
Q

What was the market rent at Station Approach?

A

£47,500

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36
Q

What yield did you use when using the investment method at Station Approach?

A

8.25%

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37
Q

At Aldermaston Road, what was the Market Value per acre?

A

£22,500/acre due to being fairly small, therefore £8,325, but discounted to £5,000 due to access issues

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38
Q

How did you discount the Market Value due to the access issues?

A

Discount rate of 35% due to no formal access, used historical comparable evidence to understand appropriate discount

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39
Q

What does VPS stand for and are they mandatory?

A

Valuation technical and performance standards, they are mandatory

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40
Q

What is VPS 1?

A

Terms of engagement

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41
Q

What is VPS 2?

A

Inspections, investigations and records

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42
Q

What is VPS 3?

A

Valuation reports

43
Q

What is VPS 4?

A

Bases of value, assumptions and special assumptions

44
Q

What is VPS 5?

A

Valuation approaches and methods

45
Q

What does VPGA stand for and are they mandatory?

A

Valuation Practice Guidance - Applications. Not mandatory

46
Q

What is VPGA 1?

A

Valuation for inclusion in financial statements

47
Q

What is VPGA 2?

A

Valuation of interests for secured lending

48
Q

What is VPGA 8?

A

Valuation of real property interests

49
Q

What is VPGA 9?

A

Identification of portfolios, collections and groups of properties

50
Q

What is VPGA 10?

A

Matters that may give rise to material valuation uncertainty

51
Q

What is PS 1?

A

Compliance with standards where a written valuation is provided

52
Q

What is PS 2?

A

Ethics, competency, objectivity and disclosures

53
Q

When the passing rent is more than the market rent, what do you do?

A

If the property is over rented, I use the core and top slice method. The hardcore (MR) is valued into perpetuity at a net initial yield.
The top slice (PR-MR) is capitalised to next lease event at a net initial yield with a risk adjustment.
There is a yield differential; top slice at an inflated yield to reflect higher risk of over-renting.
Different yield type can be used based on market comparable evidence.
NO PV of £1 needed as both layers of income are being received NOW.

54
Q

How did you value the yard space at Station Approach?

A

As the building was more than 45% of the site coverage, the yard space was included. If above this, I would apply an open storage £psf rate

55
Q

How would break clauses effect your valuation?

A

Value to the next lease event/break date, then factor in a void

56
Q

What are the parts of the Red Book?

A
  1. Introduction
  2. Glossary
  3. Professional Standards (PS)
  4. Valuation Technical Performance Standards (VPS)
  5. Valuation Practice Guidance - Applications (VPGAs)
  6. International Valuation Standard (IVS)
57
Q

What are the minimum standards to be included in a report, as per VPS 3?

A
  • Identification: of valuer, client, any other intended users of the report, and the asset
  • Purpose: of the valuation
  • Basis: of value
  • Approach: and reasoning
  • Dates: of the valuation and the report
  • Extent: of investigations, nature and source of information being relied upon
  • Assumptions: and special assumptions
  • Restrictions: on use, distribution and publication
  • Limitations: on liability
  • Complains: Handling Procedure
  • Fee
  • Statement: confirming report undertaken in accordance with IVS and Red Book
  • Valuation: figures
58
Q

What would you include in terms of engagement for a valuation?

A
  • identification and status of the valuer
  • identification of the client(s)
  • identification of any other intended users
  • identification of the asset(s) or liability(ies) being valued
  • valuation (financial) currency
  • purpose of the valuation
  • basis(es) of value adopted
  • valuation date
  • nature and extent of the valuer’s work - including investigations - and any limitations thereon
  • nature and source(s) of information upon which the valuer will rely
  • all assumptions and special assumptions to be made
  • format of the report
  • restrictions on use, distribution and publication of the report
  • confirmation that the valuation will be undertaken in accordance with the IVS
  • the basis on which the fee will be calculated
  • where the firm is registered for regulation by RICS, reference to the firm’s complaints handling procedure, with a copy available on request
  • a statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations
  • a statement setting out any limitations on liability that have been agreed
59
Q

What is a Special Assumption?

A

A supposition taken to be true and accepted as fact, even though it is not true

60
Q

What is an assumption?

A

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

61
Q

What is fair value?

A

Defined under IFRS 13 - 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

62
Q

For a secured lending valuation, what additional info must the report include?

A
  • suitability for loan security
  • conflict disclosure
  • valuation method adopted / calculation
  • lifespan of the building
  • is the property let at a suitable rent
  • where a recent transaction of the property has been agreed/occurred, the extent that info has been accepted as MV
  • statement confirming the check where no such info revealed
  • environmental considerations
  • sustainability considerations
  • other factors which may affect price
  • any other factor which conflicts with MV / underlying assumptions
63
Q

What should you comment on in relation to the end of an occupational lease?

A

Any potential for redevelopment / refurbishment

64
Q

What is the purpose of the UK Supplement?

A

It augments the Red Book, it doesn’t replace it. It provides requirements for members in the UK jurisdiction.

65
Q

What are the five regulated purpose valuations in UK VPS 3?

A
  • Financial reporting
  • Stock exchange
  • Takeovers
  • Collective investment schemes
  • Unregulated property unit trusts
66
Q

What are the 3 valuation approaches under VPS 3 / IVS 105?

A
  1. Income
  2. Cost
  3. Market
67
Q

What RICS documents would you refer to when using comparable evidence?

A

Guidance note: Comparable evidence in real estate valuation (1st edition), October 2019

68
Q

What is the hierarchy of evidence?

A

Ranking comparable evidence in different categories based on their usefulness:
- Category A - direct comparables
- Category B - general market data
- Category C - other sources

69
Q

What is included in Category A in the hierarchy of evidence?

A

Direct comparables - relates to all types of relevant transactional comparable evidence including:
- contemporary, completed transactions of near-identical properties for which full and accurate information is available; this may include data from the subject property itself
- contemporary, completed transactions of other, similar real estate for which full and accurate information is available
- contemporary completed transactions of similar real estate for which full data may not be available, but for which enough reliable data can be obtained to use as evidence
- similar real estate being marketed where offers may have been made but a binding contract has not been completed and
- asking prices

70
Q

What is included in Category B in the hierarchy of evidence?

A

General market data - relates to data that can provide guidance rather than a direct indication of value including:
- information from published sources or commercial databases; its relative importance will depend on relevance, authority and verifiability
- other indirect evidence (e.g. indices)
- historic evidence and
- demand/supply data for rent, owner-occupation or investment

71
Q

What is included in Category C in the hierarchy of evidence?

A

Other sources - a wide range of data that might provide broad indications of value including:
- transactional evidence from other real estate types and locations and
- other background data (e.g. interest rates, stock market movements and returns which can give an indication of real estate yields)

72
Q

What is a net yield?

A
  • Yield based on the gross purchase price
  • Adjusted for purchaser’s costs
73
Q

What is an initial yield?

A
  • Simple income yield
  • Based on current income and current yield
74
Q

What is a nominal yield?

A

Initial yield assuming rent is paid in arrears

75
Q

What is an equivalent yield?

A
  • Average time weighted yield
  • Reversionary property is valued using an initial yield and a reversionary yield
76
Q

What is a true yield?

A

Assumes rent is paid in advance (i.e. true, but val methodology usually assumes in arrears)

77
Q

What is a running yield?

A

Yield at one moment in time

78
Q

What is a reversionary yield?

A

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

79
Q

What is an external valuer?

A

Where the valuer has no connections / material links to the client or the asset being valued

80
Q

What is hope value?

A

The element of value over and above the existing use values i.e. which reflects the prospect of potential development or alternative use

81
Q

Where might hope value arise?

A
  • Future prospect of securing planning permission for the development of land, where no such permission currently exists
  • Realisation of marriage value, whereby the interests of two or more interests in land are merged
82
Q

What is an internal valuer?

A
  • Employed by the company to value their assets
  • For internal purposes only
  • No third party reliance
83
Q

How does the Red Book define a special purchaser?

A

A particular 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 in a market.

84
Q

Why is Statutory Due Diligence done?

A

Check material matters which may impact value

85
Q

What could Statutory Due Diligence include?

A
  • Asbestos register
  • Business rates / council tax
  • Contamination
  • Equality Act compliance
  • Environmental matters
  • EPC
  • Flooding
  • Fire safety
  • H&S
  • Highways
  • Legal matters (and title)
  • Public rights of way
  • Planning
86
Q

Please talk me through how the residual method of valuation works

A

Used for assessing the value of development land and development projects. Establish most valuable use of land. Value is the potential projected value of the completed project, less development costs, including the cost of construction, professional fees, finance costs and the developer’s profit.

87
Q

Please talk me through how the profits method of valuation works

A

Applies an all-risk years’ purchase/multiplier to the fair maintainable operating profit to provide a capital value. This value includes the property interest, business or locational goodwill, and fixtures and fittings, all as a single figure.

88
Q

Please talk me through how the DRC method of valuation works

A

Requires the valuer to consider the cost or value of an equivalent parcel of land, the cost of constructing a replica or simple substitute building or a modern equivalent building and an allowance for depreciation. The gross replacement cost is calculated using current cost figures, added to related costs such as site works, architect’s fees, building permit costs and interest.

89
Q

What is marriage value?

A

The increase in the value of the property following the completion of a lease extension, reflecting the additional market value of a longer lease

90
Q

What is years purchase?

A

The capital sum required to be invested in order to receive an annuity of £1 at a certain rate of interest

91
Q

Why do financial statement valuations require particular care?

A
  • They must comply strictly with the financial reporting statements adopted by the entity
  • They may be relied upon by third parties
92
Q

What additional criteria apply to secured lending valuations?

A

That the valuer has had no previous, current or anticipated involvement with the borrower, or prospective borrower, the asset to be valued or any other party connected with a transaction for which the lending is required (for 24 months, or longer if requested)

93
Q

What is the general principle when dealing with a portfolio valuation?

A

The valuation purpose and your client’s instructions will dictate the approach you take to lotting

94
Q

What additional disclosures must you make in a regulated purpose valuation?

A
  • The total fees paid by the client proportionate to the turnover of the valuation firm (in the preceding 12 months), effectively stated within a 5% range
  • A statement disclosing the nature and duration of the client relationship and previous work undertaken (and if there is no prior relationship, then this should be clearly stated)
95
Q

What is the statutory basis of market value (defined in the relevant tax legislation)? e.g. s.160 of the Inheritance Act 1984

A

Price which the property might reasonably be expected to fetch if sold in the open market at that time, but that price must not be assumed to be reduced on the grounds that the whole property is to be placed on the market at one and the same time

96
Q

How do you calculate years purchase?

A

1/interest rate

97
Q

What is UK PS 1?

A

Compliance with valuation standards in the UK

98
Q

What is UK VPS 1 and 2?

A

Terms of engagement and reporting

99
Q

What is UK VPS 3?

A

Regulated purpose valuations

100
Q

Can a valuer undertake a regulated purpose valuation if the property was acquired within 12 months and the valuer or their firm received an introductory fee or negotiated the purchase?

A

No, unless an unrelated firm has valued the property for the same client after the acquisition completed?

101
Q

Please tell me more about the mandatory valuer rotation?

A
  • A single ‘responsible valuer’ can be engaged for up to 5 years before they must be rotated
  • A valuation firm can be engaged for up to 10 years before they must be rotated
  • A valuation firm cannot agree to be engaged for more than 5 years before they must be rotated
  • A minimum 3 year period is required before re-engagement
102
Q

What is an impartial viewpoint?

A

Remaining impartial and independent when providing valuation advice

103
Q

What is the IVSC?

A

International Valuations Standards Council - develops and sets the international technical and ethical standards for valuations

APC (20 decks)

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