Valuation Flashcards
5 methods of valuation
- Comparative
- Investment method
- Profits method
- Residual method
- Depreciated replacement cost
Market value definition
The estimated amount for which an asset should exchange
- at an arms length transaction
- between a willing buyer and seller
- after proper marketing
Market rent
The estimated amount for which a property should be leased:
-between a willing lessor and willing lessee
- in an arms length transaction
- after proper marketing
Fair value
The price that would be received to sell a property in an orderly transaction between market participants at the measurement date
Investment value
The value of an asset to particular owner
All risks yield
ARY comprises both gross and net yields
True yield
Assumes rent is paid in advance not in arrears
Nominal yield
Initial yield assuming rent is paid in arrears
Initial yield
Initial Yield is the annualised rents of a property expressed as a percentage of the property value
When does a valuation have to be Red Book Global compliant
All valuations except:
- Advice is expressly provided in preparation for negotiations or litigation
- The valued is performing a statutory function
- The valuation is provided for a client purely for internal purposes
- The valuation is provided as part of agency and brokerage work in anticipation of instruction
- The valuation advice is provided in anticipation of giving evidence as an expert witness
What should be included in a Terms of Engagement
- Identification of the values
- Identification of the client
- Identification of intended users
- The asset to be valued
- Currency
- Purpose of valuation
- Basis of value
- Valuation date
- Extent of investigation
- Nature and source of information relied upon
- Format of the report
- Restrictions for use
- Confirmation of red book compliance
- Fee basis
- Complaints handling procedure
- Statement that the valuation may be subject to compliance
- Limitation on liability
Four stages to undertaking a valuation
Preliminary questions
Terms of engagement
Valuation preparation
Reporting
Preliminary questions to ask before a valuation
- Purpose of valuation
- Is this for a written valuation
- Is the valuer suitably qualified/experienced
- Conflicts of interest
- Any specific national or other overriding requirements eg taxation legislation
- Any 3rd parties have an interest in the valuation
- Does the valuation have to comply with the Red book
- Does the firm have sufficient PI insurance to undertake the work
What law relates to valuing a property for probate?
S.160 inheritance tax act 1984
What date do you value the property for probate ?
The date of death
Code for Valuation
Red Book Global Standards, 2024 version, effective from January 2025
Case study?
Lvl 2 Valuation - Industrial 18 Farnborough Road for a SIPP
Measured on GIA including mezzanine
Evidence was sparse for recent sales
Found recent Rent reviews and lettings
Rent comparables £8.90 - £13, applied £8.00 psf to ground floor only poor condition mezzanine
Market value evidence £150-180 psf, applied £90 considering condition
Lvl 2 Valuation - Industrial 138 Oyster Lane, Westbyfleet for probate (S.160 inheritance Tax Act 1984)
Measured on GIA
(TPO on front tree restrict redevelopment) low ceiling height
Evidence was sparse for recent sales
Comparable 1: Let two months prior for £9.39 psf but had a roller shutter door and was in a much-improved condition.
Comparable 2: Let nine months prior for £14.64 psf, but had 5m eaves height, loading door and superior size and specification.
Comparable 3: Sale 18 months prior for £183 psf but had a superior specification.
Comparable 4: Sale 6 years prior for £178 psf and was located directly opposite the subject property. Although it had front and rear parking and was a purpose-built car sales unit.
Industrial rents at £15.00 - £17.50 psf, however, these were grade A spaces.
I recommended a market rent of £9.30 psf and freehold sales value of £150 psf, to reflect the property’s condition and specification
Hierarchy of evidence (comparable evidence)
Category A - Direct comparables
Category B - General market data (demand and supply)
Category C - Other sources (interest rates)
What is a yield?
Valuation capitalisation rate
Initial Yield Formula
Passing rent / Capital Value x100
Net Initial Yield Formula
Net Passing Rent / Capital Value x100
Hierarchy of evidence?
A - Direct Comparables
B - General Market Data
C - Other Sources
Red book exemptions
- Internal Valuations
- Agency
- Statutory Functions
- Litigation
What does VPGA stand for?
Valuation Practice Guidance Application
Tell me about VPGA?
Forms part of the RICS Valuation - Global Standards “Red Book Standards”
Guidance on valuations for specific purposes
10 VPGAs
VPGA 8 Valuation of real property interests
VPGA 9 Identification of portfolios/groups of properties
What does VPS stand for?
Valuation technical and performance standards
Tell me about VPS?
Forms part of the RICS Valuation - Global Standards “Red Book Standards”
Mandatory requirements
VPS 1 - Terms of engagement
VPS 2 - Inspections
VPS 3 - Valuation Reports
VPS 4 - Bases of value
VPS 5 - Valuation approaches
Difference between a professional statement and guidance note?
Guidance note is advisory and a professional statement is mandatory
When do you need a red book valuation?
When it is a formal valuation
Explain the investment method of valuation?
Uses the market rent of the property to obtain a market value
Rent received or Market Rent x YP = Market Value (rent/yield comparables important)
Explain the profits method of valuation?
Used for income producing properties, which may have little comparables and are based on their location e.g. pubs and hotels
Operating income is converted into present value by selecting a yield.
Explain the Residual method of valuation?
used for land with development value
start backwards
value the end development value then minus costs
Explain the DRC method of valuation?
Used for specialised properties e.g. nuclear power plant
Assessing the cost to replace the land and building with a modern equivalent before making appropriate deductions for depreciation
