Valuation Flashcards
1
Q
Internal Valuer
A
- employed by company to value there assets.
- Internal only
- No third party reliance
2
Q
External Valuer
A
- Has no material links with the asset to be valued or the client.
3
Q
3 first steps to first undertake
A
- Competence, can you do it?
- Independence, THINK first and then check for any conflicts.
- Terms of Engagement, set out in writing, confirm competence, extent of the limitation inspection.
4
Q
Why do you do Statutory due diligence?
A
- Checks that there are no material matters which could impact the valuation.
5
Q
What are some Due diligence checks?
A
- Asbestos register
- Business rates/council tax
- Contamination
- Equailty Act 2010 compliance
- Environmental matters
- EPC rating
- Flooding
- Rights of way
- Planning history
-etc
6
Q
Valuation timeline (16 steps)
A
- Receive instruction
- Check competence
- Check independence, so no COI.
- Issues terms of engagement
- Signed Terms
- Gather information
- Due diligence
- Inspect and measure
- research market for comps
- undertake valuation
-Draft report - Auditing
- Finalise
-Report to client - invoice
- archive report.
7
Q
5 Methods of Valuation
A
- Comparables
- Investment
- Profits
- Residual
- Contractors method (DRC)
8
Q
IVS 105
A
Valuation Approaches and Methods
1. Income approach, coveting current and future cash flow into capital value. (Investment and Profits)
2. Cost Approach, reference to the cost of the asset by purchase or construction (DRC and Residual)
3. Market Approach, using comps
9
Q
Comparable Methodology steps (6)
A
- Search and select
- Confirm and Verify
- Assemble Schedule
- Adjust
- Analyse to get value
- Report value
10
Q
RICS Professional Statement: ‘Comparables Evidence in Real Estate Valuation’, 1st edition 2019 (reissued in April 2023)
A
- Outlines the use of comparables evidence.
- provides advise where comps are limited and sets out a hierarchy.
- “The valuer should use professional judgment to assess the relative importance on evidence on a case-by-case basis”
10
Q
Hierarchy of evidence.
A
A. Direct comparables (transaction, offers and asking price [care]).
B. General Market data (publication, supply/demand, historic comps).
C. Other sources (transactions from other property types, other background data [intrest rates]).
11
Q
How to find comps.
A
- Local area for boards
- Auction sites
- Inhouse records
- Speak to agents
- Online markets
12
Q
what is the investment method?
A
- Used when there is an income stream.
- rental income is capitalized to produce a capital value.
13
Q
Basic investment method equation ?
A
CV = MR X YP
14
Q
When is a term and reversion used? And how to use it?
A
- Used for reversionary investments (market rent more than passing)
- Term, is capitalized till a review at an initial yield.
- Reversion, is at current market rent valued to perpetuity at a reversionary yield (higher).
15
Q
When is hardcore and layer used? And how to do it ?
A
- Used for over rented investments (passing more than market rent).
- Bottom slice, is market rent.
- Top slice, is rent passing less Market rent unit next lease event.
- Higher yield on top slice to reflect additional risk.
16
Q
All risk yield
A
Remunerative rate of interest used in the valuation of fully let property let at market rent reflecting all the prospects and risk attached to the particular investment
17
Q
True Yield
A
Assumes rent is paid in advance instead of arrears.
18
Q
Nominal Yield
A
Initial yield assuming rent is paid in arrears.
19
Q
Gross Yield
A
Yield that isn’t adjusted for purchasers costs.
20
Q
Net Yield
A
Yield that is adjusted for purchasers costs.
21
Q
Equivalent Yield
A
Average weighted yield between an initial yield and a reversionary yield.
22
Q
Initial Yield
A
Current income / current price.
23
Q
Reversionary Yield
A
Market Rent / current price on investment let at a below the market rent.
24
Running Yield
The yield at one moment in time.
25
How does a DCF work? (Think of Phills spreadsheet)
- Uses projected cash flows over the holding period
- subtract cost of exit.
- Then depreciated over to the present day
26
what is the Profits methods and how does it work?
- Trade related properties where there is a 'monopoly' position.
- the value depends upon the profitability of its business and its trading potential.
- Value is associated with the profit generated not physical characteristics or location.
27
What is needed for the profits method?
- 3 years' worth of Audits accounts if possible.
- Audited accounts are superior to management accounts.
- business plan (new business)
- consider business maturity and unacceptable or exceptional items of expenditure.
28
Profits Basic Methodology?
- Annual turnover - direct costs = Gross profit
- Gross profits - indirect costs = Unadjusted Net profit
- Unadjusted Net Profit - operators take = Adjusted Net Profit or Fair Maintainable Operating Profit (FMOP)
Capitalise FMOP at an appropriate yield and then cross-reference with sale evidence if possible.
29
What is a residual valuation and how does it work?
- Used when a property has development potential.
- The market value is determined after an assumed range of costs that are taken off the final development.
- Its a form of development appraisal.
30
What's a Development Appraisal?
- A series of calculations to establish the viability of a proposed development.
- It can assume a site value or calculate one.
31
Methodology for a Residual?
GDV - Development Cost = Residual
32
How to get to GDV?
- Use plans for the finished development.
- Values at current date assuming present values and market conditions
- Comparable method used to establish rent and yields.
- All risk yield used.
33
What's in Development Costs?
- Site preparation.
- Planning costs
- Building costs
- Contingency
- Developers profit
- Professional Fees
- Marketing costs& agent fees
- Cost of finance.
34
How do you calculate build cost?
- We use BCIS
- Can get more accurate results from QS or BS estimates.
35
Whats in Planning costs?
- Section 106 payments (affordable housing, infrastructure costs, new schools etc).
- CIL
- Open space provisions.
- Section 278, Highway works.
- Planning applications and building regs.
- Specific reports (environmental reports, bat surveys, etc)
36
How are professional fees calculated on a residual?
% of construction costs (10-15%)
37
What is contingency?
- it allowed for a future unprediciable event (build cost increase)
- 5-10%
38
Whats in marketing costs?
- Marketing budget.
- Warranty
- Rent free periods and tenant incentives.
- Sale fee (1-2%)
- Letting fees (10%)
39
How much is developers profit?
15-20% of GDV
- It changes depending on the risk of the development.
40
What 3 elements of finance do developers borrow on?
1. Site purchase
2. Build costs and associated costs
3. Holding costs until disposal (business rates, service charge and interest charges)
41
Finance calculations how to caluate?
- use annual intrest rates (bank of england +)
- 100% loan
- Period of loan
42
Limitation of the Residual valuation
- Importance of accurate data
- Sensitive to minor adjustments
- doesn't consider timing of cash flows
43
3 forms of sensitivity analysis on a residual
- Simple sensitivity, look at changes to yields, GDV, Build costs and finance rates.
- Scenario analysis, changes of time or situation (planning consent, timings and costs, changes to design)
- Monte Carlo simulation, using profitability to offer a range of outcomes (software programs).
44
what came into effect on the 1st of May 2024? and name one update?
- The Red Book UK National Supplement (published 19 October 2023)
VPGA 10 Sustianbilty commentyary need to be added for secured lending
Rotation of portfolia valuations (every 10 years)
45
what can CGT be dated from?
- 31st March 1982
46
What are the 5 stages of set up within the Red Book? (VPS)
1. Terms of Engagement
2. Inspection, investigation and records
3. Valuation reports
4. Bases of value, assumptions and special assumptions
5. Valuation approaches and methods
47
What are the minimum requirements need in Terms of Engagement for a Red Book vals? (VPS1)
- 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
- CHP
- PII
- monitored by the RICS
48
What's the difference between special assumptions and standard assumptions?
- Assumptions are made where it is reasonable for the valuer to accept that something is true without the need for specific investigation.
- Special assumption is a supposition that is taken to be true and accepted as fact , even though its not.
- SA must be agreed in writing beforehand.
49
When should the DRC method be used?
- Method of last resort.
- Only used when there are no direct comparable.
- Not compliance for the Red Book nor Bank valuations.
50
Purpose of the DRC method?
- Used for owner-occupier
- Specialist internal accounting supposes only.
51
DRC simple methodogly?
- Value of the Land (assuming planning permission exists)
- add the current cost of construction + fees to do so then decapitate this figure.
52
What factors do you account for in the depreciation?
-Physical obsolescence, the result of wear and tear over the years
-Economic obsolescence, due to changes in the market condition for this asset.
-Functional obsolescence, where the design of the property no longer fills its needs.
53
what guidance is there for the DRC method?
- RICS Guidance Note on Depreciated replacement cost method of valuation for finical reporting, 2018
54
What is the Red Book Compliance for the DRC method?
-Should be accompanied by statement that is subject to adequate profitability of business. (private sector)
-Should be accompanied by statement that is subject to prospect and viability for occupation (public sector)
-Must state value for any alternative use, if higher or if appropriate, a statement that the on cessation (stopping of) the business would be materially lower.
55
When was the latest version of the International Valaution Standards (IVS) published? and what was the update for?
- 31 January 2024
- focus on ESG
56
Where to get help for portfolio vals?
VPGA 9 Red Book
57
What is the Red books name and when did it come into effective?
- RICS Valuation - Global Standards (‘Red Book Global Standards’)
- 31st January 2022
58
What is the RICS Red Book Supplement UK and when did the lastest version come into force?
- 1st May 2024
- Supplements the Red Book of global standards to offer guidance within UK jurisdiction.
59
Is a Replacement Cost valuation for insurance a written opinion of value?
- For assets other than Personal Property.
- it’s not a written opinion of value
60
In a regulated RIC firm, do none RICS members have to comply with the Red Book?
- yes, all members within the firm must ensure they comply with mandatory requirements of the Red Book.
61
What elements can be done to depart from the Redbook? (3)
-be satisfied that non-compliance doesn’t lead to being mislead.
- identified in TOE (VPS 1) and the report (VPS 3)
- comply with all other standards in the Global Standards.
62
Is there any exceptions from the Redbook?
- no, all advise is subject to requirements.
63
What are exceptions in relation to VPS1-5?
- Agency advise on disposal and acquisition
- Expert witness
- Statutory functions
- internal accounting
- negations
64
What’a the act for Charities valuation?
Charities act 2011 (section 119 for disposals)
Charities act 2022 Makes changes
65
Heads of Term of a Letter of Engagement? VPS 1
- 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
- CHP
- PII
- monitored by the RICS
66
Inspection on 1 meadow view, what was the issues with the boundary?
- The parcel was in an unregistered area.
- We raised with the solicitors to check the legal access.
- Used the RCIS academy guide on valuing unregistered land.
67
RICS Guidance of Tax Valuation?
VPGA 15 UK National Supplement 2023
(Valuations for
Capital Gains Tax, Inheritance
Tax, Stamp Duty Land Tax,
the Annual Tax on Enveloped
Dwellings and Residential
Property Developer Tax)
68
Red Book Global Standards 6 parts?
1. Into
2. Glossary
3. Professional Standards (PS)
4. Valuation technical and performance standards (VPS)
5. Valuations Practical Gudiance Applications (VPGA)
6. The International Valuations Standards (IVS)
69
Name a change in the last Red Book Update?
Focus on ESG
- integral, part for Loan security valuations now (VPGA 2)
70
Revalaution, should you re inspect?
- if you are satisfied that there has been no material change
71
VP3, mimums things to incluse in a report ? (14)
1. Valuer
2. Client
3. Purpose
4. Asset
5. Basis of value
6. Extent of inspection
7. source of information
8. Assumptions
9. Restrictions
10. Approach
11. Figures
12. Date of valuation
13. Comment on market
14. statement of limitations
72
What is VPS 4 ?
Basis of Value
73
VPS 5 ?
Valuation approach
74
What is Hope Value?
- Value arising from an expectation of a future circumstance.
75
What is a build cost reinstatement?
- cost to rebuild a property
- take into consideration; VAT, Demolition, Fees and planning
76
What are purchasers costs?
Costs associated with the purchaser of a property?
- SDLT
- Agents fees
- Solicitors Fees
77
Section that relates to Valuation for Tax?
VPGA 15 UK National Suppliment 2023
78
CGT Market Value definition?
Section 272 - Taxation for Chargable Gains Act 1992
'the price which [the] assets might reasonably be expected to fetch on a sale in the open market. In estimated the market value of any assets, no reduction shall be made in the estimate on the account of the estimate being made on the assumption that the whole of the assets is to be placed on the market at one and the same time.’
79
IHT Market Value definition?
Section 160, Inheritance Tax Act 1984
'The 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.’
80
For Tax valuations should you consider Special Purchasers? and what is the case?
Yes
Wight and Moss v CIR (1983)
81
Case study for 'one bid over' ?
Greenbank v Pickles (2001)
- Doesn't value the willingness
82
2 factors to ensure Special value?
- Able and willing
- Known to the market.
83
AHA acts are? and when can you conuct rent reviews ?
Intern successional, rent reviews every 3 years (12 month notice)
84
VPS?
Valuation Performance Standards
85
Whats the VPGA for Secured Lending?
VPGA 2 Red book
86
Whats the VPGA for Portfolies?
VPGA 9 Red Book
87
How do you qualify for Register value status?
- APC L3
- APC L2 with evidence of valuation work post qualification
88
Information required to Register for Valuation?
- Types of valuation
- Purpose
- Number of Vals
- Firms income from Red Book vals
- History of Neg claims
89
Wood House Farm, Why did you use the investment Method?
Stables were being used for commerical use.
90
What purposes are exempt?
S tatuartoy
L itigation
I nternal Account
M arket Appriasel
E xpert Whitness
91
Whats the AHA act?
AHA 1986
92
Definition of Market Value?
IVS 104 Para 30.1
'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.’
93
Name a UK supplement update?
VP3 Rotations
- 10 years by a firm
- 5 years by same valuer
- 3 year break
- 2 year transition period.
94
Rough Hays, Whys did you state separate values?
CGT considers Lotting
95
Land at Lane End, what do you mean by an 1982 valuation?
CGT Vals Rebase year
96
Land at Lane End, where can you get comps from?
historic in house comps
- VOA have a data base
97
What is the case law for IHT Hope value?
Palliser v HMRC [2018]
98
Whats an AHA act 1984?
its an intersucceioninal tenancy agreement relatioing to ag property.
Later revised by 1986 act.
99
AHA 1984 or 1986?
The AHA 1986
100
Prior wood, when did the agreement start? how many successions? how old were the occupants?
OG -1970s
1 succession
Father - 55
Daughter - 20
101
Priory wood, what's the test for succession?
BOTH
1. Close relative test
2. Livelyhood Test
102
Priory wood, when does the OG succession have to be before?
12th July 1984
103
Whats the definition of market rent?
paragraph 40.1 IVS 104
'The estimated amount for which an interest in real property should
be leased on the valuation date between a willing lessor and 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'
104
what's the date that succional AHAs may not be granted after?
12th July 1984
105
Whats a pre Let?
Office Let before built
