RICS APC SEPT 25 (MG) > Valuation > Flashcards

Valuation Flashcards

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1
Q

What are the five methods of valuation?

A
  1. Comparable - Market comparison
  2. Investment - Capitalising income flows
  3. Residual - Working backwards from gross development value deducting costs to find site value
  4. Profits - Capitalising reasonable net profit
  5. DRC - Last resort method - Using costs to work out how much to build a modern equivalent and depreciation reflecting age and obsolescence
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2
Q

What RICS standards/guidance are available for valuation?

A
  1. RICS Valuation Global Standards 2022
    1.1 RICS PS RICS Valuation Global Standards: UK national supplement (Eff May 24)
  2. RICS GN: Discounted cash flow valuations, 2023
  3. RICS PS Comparable Evidence in Real Estate Valuation 2019 (Now PS from April 23)
  4. RICS PS DRC method of valuation for financial reporting Jan 2019
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3
Q

Name statutory due diligence expected when carrying out a valuation?

A
  1. Asbestos Register
    1. Business rates / council tax
    2. Contamination
    3. Equality Act 2010
    4. Environmental matters e.g. high voltage power lines, electricity sub-stations
    5. EPC rating if available
    6. Flooding – check the Environment Agency website
    7. Fire safety compliance
    8. Health and safety compliance
    9. Highways – check local highways agency
    10. Legal title and tenure e.g. boundaries, ownership, rights of way
    11. Public rights of way – from an OS sheet
      Planning history and compliance – check planning conditions, whether the property is in a conservation area / listed and subject to a s.106 agreement or CIL
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4
Q

What is the difference between a TOE and a report?

A

TOE
Fees, CHP and client objectives.

Report -
Commentary on market uncertainty
Valuation figures
Valuation approach and reasoning

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5
Q

Tell me why terms of engagement are important.

A

Terms of engagement are important because they are a mandatory requirement set out the Red Book. They include identification, address, scope and extent of works, valuation dates, restrictions, fees etc.

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6
Q

Describe internal/external valuer?

A

INTERNAL VALUER:
* Employed by a company to value the assets of a company
* Valuation for internal use only
* No third-party reliance
EXTERNAL VALUER:
No material links with the asset to be valued or the client

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7
Q

Talk me through the make up of the RICS red book?

A

P1 - Intro
P2 - Glossary
P3 PS1 Compliance with standards when undertaking written instruction. PS2 ECOD
P4 - Valuation technical and performance standards
VPS 1- TOE
VPS 2 - Bases of value and assumptions
VPS 3 Valuation approach and methods
VPS 4- Inspections, investigation and records
VPS 5 - Valuation modelling
VPS 6 - Valuation report
P5 - VPGA
P6 International valuation standards

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8
Q

What is the historical background of the RICS redbook?

A

Property/banking crash 1974
no valuation rules!
RICS commitee formed 1974
1st ed. in 1976, followed by 2012,14,17,20 and 22

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9
Q

VPS 6 - VENRA CVA DCA

Explain what is included in a rics report

A
  1. id and status of valuer
  2. id of client and other intended report users
  3. report purpose
  4. id of asset(s)/ liabilities to be valued
  5. basis of valuation adopted
  6. Valuation date
  7. extend and scope of investigation
  8. nature of resources relied upon
  9. restrictions on use, publication, distribution
  10. assumptions/special assumptions
  11. Confirmation that valuation is in accordance with IVS
  12. Valuation approach and reasoning
  13. amount of valuation
  14. Date of valuation
  15. Commentary on market uncertainty
  16. Statement setting out any limitations
  17. Concideration for ESG
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10
Q

What is the purpose of RICS Valuer Registration Scheme

A

Form of monitering by RICS on members and firms to esnure compliance with PS1; either desk or site based.

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11
Q

Define what is a basis of value?

A

A Statement of the fundamental measurement assumptions of a Valuation (VPS 2)

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12
Q

Define what is a comparable

A

“item of information used during the valuation process as evidence to support the valuation of another, similar item”

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13
Q

PCAS

What is the main purpose of the RICS comp evidence PS 2019

A

x4 purposes
1) Outlines PRINCIPLES of comp evidence
2) Encourage CONSISTENCY
3) Address issues of AVAILABILITY of evidence
4) Considers potential SOURCES of evidance

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14
Q

Define what is a valuation method?

A

Defined as ‘within a valuation approach, a specific technique
to conclude a value’.

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15
Q

Define MV, FV, IV/worth and MR?

A

Market Value
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and willing seller in an arm’s length transaction after proper marketing and where both parties have acted knowledgeably, prudently and without compulsion

Market Rent
The estimated amount for which an interest in real property should be leased

Fair Value
The price that would be received to sell an asset or paid to transfer a liability on an orderly transaction between market participants at the measurement date (Market to market approach - financial reporting). IFRS 13

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

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16
Q

Name different valuation approaches?

A

Market - comparable method

Income - converting current and future cash flow into a capital value: investment, residual & profits

Cost - cost of an asset whether by purchase or construction: DRC

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17
Q

Define EUV

A

Same as MV+2 stages
1) Assuming vp
2) Do not concider alternative use

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18
Q

ASIA - E

Name 5 exemptions to the RICS RED BOOK

A
  1. Advice prepared for negotiation or litigation
  2. Stat function
  3. Internal purposes
  4. Agency
  5. Expert witness

A valuation for rating is made within a statutory framework, and so is not bound by the Red Book’s valuation technical and performance standards. However, the mandatory requirements of professional standards PS1 (compliance) and PS2 (Ethics) in the RICS Red Book Global Standards 2020 must still be observed.

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19
Q

What is the investment method and when is it used?

A

1.Used when there is an income stream to value
2. Rental income is capitalised to produce a capital value
3. Assumes growth implicit valuation approach
4. An implied growth rate is derived from the market capitalisation rate

CONVENTIONAL INVESTMENT METHOD
Rent received or market rent X years purchase (multiplier) = Market Value*

Used for following
* Advice prepared for negotiation or litigation
* Stat function
* Internal purposes
* Agency
* Expert witness

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20
Q

When is Term and reversion used?

A

Reversionary investments (MARKET RENT HIGHER THAN THE PASSING RENT)

PRINCIPLE:
Term - capitalised until next review OR lease expiry at the initial yield

Reversion - to market rent valued in perpetuity at a reversionary yield (Can be higher yield to reflect risk)

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21
Q

What is included in purchaser costs?

A

SDLT (4%?)
legals (0.5%?)
agency fees (1%?)
misc 0.3%

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22
Q

With T&R why increase the yield for the reversion/ what does this mean to an investor?

A

For e.g you can have MR increasing but simultaneously have market insecurity and you would reflect this is softening the yield/higher yield.
This would mean an investor would expect the YP to take longer to pay back the investment
This is why aside from U/S yields, u really need to U/S the market…

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23
Q

When is the hardcore method used?

A

Over-rented investments (passing rent higher than market rent)

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24
Q

What is a yield and what factors affect a yield?

A

Measure of investment return expressed as a percentage

* Quality of location and covenant 
* Use of the property
* Lease terms
* Obsolescence - what is the likely future rate?
* Voids - what is the risk?
* Security and regularity of income
* Liquidity - ease of sale Prospects for rental and capital growth
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25
Name different kinds of yields?
True Yield Assumes rent is paid in advance and not arrears (traditional valuation practice assumes the rent is paid in arrears Nominal Yield Initial yield assuming the rent is paid in arrears Gross /Net Yield Gross The yield not adjusted for purchasers’ costs e.g. auction result Net The resulting yield adjusted for purchasers’ costs Initial Yield Simple income yield for current income and current price Reversionary Yield Market rent divided by current price on an investment let at a rent below the market rent Running Yield The yield at one moment in time Equivalent yield This is the weighted average between the term and reversion. Equated yield Is the IRR applied to the flow of income expected during the life of the investment so that the total amount of income discounted at this rate equals the capital outlay.
26
What is a DCF , what guidance is available and describe its methodology?
Growth explicit investment method of valuation that calculates an investment's value based on the ability to receive a predicted future cash flow. RICS GN DCF Valuations Nov 2023 METHODOLOGY: 1. Estimate the cash flow (income less expenditure ie net cashflow) 2. Estimate the exit value at the end of the holding period 3. Select the discount rate 4. Discount cash flow at the discount rate 5. Value is the sum of the completed discounted cash flow to provide a net present value (NPV) NPV = Sum of discounted cash flows of the project * Used to determine if an investment gives a positive return against the target rate of return * Positive NPV = investment exceeds investor's target rate of return Negative NPV = not achieved investor's rate of return
27
What are the pros and cons of a DCF
Pros * Used where there is ltd evidance * Useful when comparing with investments * Good for anlysis * Good for varying income streams Cons * requires more information * Higher risk of error
28
Explain the profits method and when it is used?
USED FOR * Trade related properties * Where value of the property depends on the profitability of a business * Pubs, petrol stations, hotels, leisure ad healthcare [VPGA 4] METHODOLOGY: * Annual turnover (income received) * Less costs/purchases * = Gross Profit * Less Reasonable working Expenses * = Unadjusted Net Profit * Less operator's remuneration * = Adjusted Net Profit (KNOWN AS: Fair Maintainable Operating Profit (FMOP) * Can be expressed as EBITDA (Earnings Before, Interest, Tax, Depreciation & Amortisation) * Capitalised at appropriate Yield (Years purchase multiplier) to achieve Market Value * Cross check with comp sales evidence Profits Method * Capital ○ Get 3 years accounts ○ Work out fair maintainable trade ○ Deduct costs and expenses to get to fair maintainable operating profit for a reasonably efficient operator ○ FMOP X YP = Capital value * Rental ○ Fair maintainable Operating Profit = divisible balance 50/50 Landlord and Tenant
29
Talk me through the residual method?
Aims to establish how much a developer should pay for a development site GDV minus development cost and profits = capital value
30
What is an assumption/special assumption?
ASSUMPTION * Reasonable to assume that something is true without the need for specific investigation or verification. * Any such assumption must be reasonable and relevant having regard to the purpose for which the valuation is required. SPECIAL ASSUMPTION * Assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant in a transaction
31
# STC Describe 3 assumptions that are usually made when producing a valuation
1. Title 2. Condition 3. Services
32
Describe 3 Special assumptions that could be made
1. Vacant possesion 2. Anticipated planning consent 3. Property let on defned terms
33
What is a covenant strength?
Covenant strength - tenant's ability to comply with covenants within their lease and ability to pay rent
34
Describe what you would do when obtaining comparable evidence?
PS Comparable Evidence in Real Estate Valuation, 2019 Cat A - Direct comps and data is acurate Cat B - General Mkt data (For e.g supply/demand etc) Cat C - Other Sources Follow 5 steps: 1. Search for comps 2. confirm/verify details 3. assemble comps in table 4. Adjust/analyse comps according to hierarchy of evidence 5. Report value
35
How do you find comps?
PS Comparable Evidence in Real Estate Valuation, 2019 Cat A - Direct comps and data is acurate Cat B - General Mkt data (For e.g supply/demand etc) Cat C - Other Sources Use both internal/external sources
36
What is the hierarchy of evidence
New letting lease renewal rent review third party determinations arbitrations/courts asking rents
37
What are the main drivers of value?
DRIVERS OF VALUE: * Location * Size * Accommodation * Quality * Specification * State of repair * Potential to develop Technology - for example industrial: storage and distribution have a high demand due to online presence of retailers, banking and gambling have become mostly online that there is no need for traditional brick and mortar
38
what is years purchase?
YP = number years repay purchase price = yield/100
39
What is eff/headline rent/Face rent?
Effective rent: income less costs incurred to secure a lease, such as incentives, tenant improvements, stepped rents Headline rent: Gross rent Face rent: Same as headline (Gross)
40
Please explain you're understanding of rotation rules for valuation contained within the RED BOOK UK Supplement?
WEF May 2024 Firms undertaking valuations for regulation purposes will only be able to repeat this service for 10 consecutive years. Will require change to alternative valuation firm to improve transparency and serving in public interest
41
Explain your understanding of the RICS DCF Valuations GN NOV 23?
GN looked to provide clarify around difference between MV and Investment Value definitions set out under VPS 4. Pushes for DCF to be used. IV is value applicable to specific investor as opposed to MV that is applicable to wider market as a whole
42
What is your view of the IPMS updates?
Will allow for more consistency in the general market
43
What is the DRC method?
Indication of value: "based on a buyer paying no more/less than cost to obtain/replace asset with current equivalent" Used as last resort for unusual properties where there is no active method and has no comparables 1. ERC cost 2. ARC - minus cost for obsolescence 3. Plus land value
44
What are the different purposes of valuation?
1. Financial reporting 2. Secured lending 3. Resi mortagge report 4. Stat function
45
What is the RICS Redbook?
Mandatory rules/guidance for members when undertaking asset valuations
46
What steps would you take when receiving a valuation instruction?
1. Obtain details of property 2. COI check 3. letter of instruction/TOE 4. Purpose of valuations 5. Information gathering 6. Stat due diligance 7. Inspection/Measurement 8. Research market 9. Write report 10. Check valuation 11. Report to client
47
What information do you require when asked to do a fee qoutation/valuation
1. Property address 2. client 3. connected parties 4. mode or category 5. purpose of valuation 6. Leases
48
What is hope value?
Describe MV of land based on expectation of obtaining planning permission to develop on it.
49
What is marriage value?
Extra value that arises from the merger of two physical/legal interests.
50
Definition of special purchaser/value?
Value specific to an individual Extraordinary element of value over and above market value.
51
What is the Title of the Redbook? and when is it effective from?
RICS Valuation - Global Standards 31 Jan 2025
52
# ICO What is the purpose of the RICS Redbook?
Ensure valuations are carried out with integrity, clarity and objectivity [ICO] Make sure the valuation are reported in accordance with recognised basis/format
53
What standards must be met prior to taking on an instruction?
RICS professional standards [PS] PS 1 & PS2 VPS 1 - 6
54
What are the requirements of making a special assumption
Special assumptions 1) Either assumes facts that differ from those existing at the valuation date 2) or that would not be made by a typical market participant in a transaction on that valuation date. Where special assumptions are necessary in order to provide the client with the valuation required, **these must be expressly agreed and confirmed in writing to the client** before the report is issued. Special assumptions may only be made if **reasonable/realistic,** relevant and valid for the particular circumstances of the valuation.
55
Where is the definition of MV found?
Redbook VPS 2
56
Under VPS 2, when would you not undertake any assumptions/special assumptions?
Asset Valuations
57
Definiton of Exisiting Use Value (EUV)
Same as MV, but disregarding potential alternative uses and any other characteristics of the asset that would cause its market value to differ from that needed to replace the remaining service potential at least cost
58
Explain what is a rack rent?
Best rent reasonably obtainable on the open market. This is the same as full rental value
59
Explain what is meant by reversion?
LL right to the property when the tenure ends and for the possesion at the end of the lease
60
Ammount of £1 PV of £1?
Ammount of £1 - YP Perp - accounts for compound interest (capitilise over term) PV of £1? - YPSR - Decap to discount decrease in value due to income bieng defered
61
Amount of £1
Used to calculate future investment value accounting for compound interest Formula £1 + i to the power of n (1+i)n I stands for interest N stands for number of periods
62
What are the new RICS redbook 2025 updates?
1) ESG 2) VPS 5 Valuation modeling - AI 3) IFRS S1/S2 sustainability standards 4) VPS 6 - Material valuer uncertainy outside genral parameter of acceptance or expectations
63
What is the differance between a title and a deed
Title: Confirms legal ownership rights and is stored on land registry Deed: Confirms legal ownershiop rights but is not registered with Land registry
64
What is a reversionary investment
Passing rent lower than MR This makes the investment reversionary More risk than investment at rack rent bc the invetment is reliant upon the future market rental value which is uncertain
65
What is material valuer uncertainy?
VPS 6 paragraph 2.2(o) explains ‘material’ as where the degree of uncertainty in a valuation falls outside any parameters that might normally be expected and accepted.
66
Why does a redbook report say 'opinion of value rather than value'
Less likliehood of being sued if its an opinion versus stating this is the value
67
How would you value a property where there are no comparables?
Undertake DCF
68
Can you use post valuation dated evidance?
* Chiffley Holdings 2024 ATED case * 12 Chester Square 5 bedroom house * Yes, can use: Valuer judgement can be relied on, but less wieght applied to post date evidance * Disregard events that could not have been known at valuation date for e.g brexit etc. * RICS "Comparable evidence should only be used if it would have been available to a valuer on the date of valuation" - now have working group to review this in light of this ruling
69
What is discounting?
Same as time value for money: Money in hand now is worth more than expected money in the future due to risk! So we need to discount to reflect risk
70
What is initial and reversion yield
Initial= net income at date of purchase expressed as a %of purchase price Reversion= market rent expressed as a % of purchase price
71
What is the RICS VRS?
* Regulatory monitoring scheme for valuers undertaking redbook valuations from Jan 2012 * Fee - £120 PA * Eligble if completed APC to L3 Valuation * Registration not mandetory for valuations excluded from redbook **Purpose** General CPS!
72
What legislation must be considered when undertaking a valuation
EA 2010 Fire safety act 2021 Control of asbestos regs 2012
73
What covenants in a lease can have an impact on value
* Lease length * RR * Break options * FRI lease * Restrictive user clauses * Service charge * Alieantion - can they sublet
74
What is the purpose of VP or yield up clause?
Provides landlord with mechanism of getting property back at the end of the term
75
How would you respond to a valuation instruction for a pavement assessment only
As long as reasonable, its fine but ensure this is agreed in the toE
76
Name some relevant VPGA's
* VPGA 1 Valuations for financial reporting * VPGA 4 Valuation of trade related properties * VPGA 8 Valuation of real property interests * VPGA 10 Material Valuation Uncertainty
77
What is WAULT?
**Weighted Average Unexpired Lease Term (Weighted against rent PA of each tenant)** * Investors use it to assess investment risk * Shorter WAULT indicates higher risk to upcoming voids/expired terms Example: Two units: Unit A 40k PA 4 years left Unit B 60kpa 8 years left **Stage 1** Multiply each rent by remaining lease term 40kx4=160k 60kx8=480k Total 640k **Stage 2** Divide weighted total by total rent 640k/100k=6.4 years
78
Where would you find the 5 methods of valuation in the redbook?
VPS 3
79
Armegeddon Clause?
Allows healthcare tenant to terminate lease if funding from NHS stops.
80
What is cap and collar rent
Type of RR mechanism used in commercial leases to provide certainty and protection for both landlords and tenants. Cap= Max ammount rent can increase Collar= Min ammount rent can decrease or stay the same at review For e.g if MR rises above cap, RR can only reflect uplift of agreed cap. VV if MR decreases below collar. Rent only dcreaes to agreed collar threshold
81
In terms of a Redbook valuation can you rely on someone elses due dilligance and why?
Per VPS 4 ideally, u need to make ure own investigations to ensure validity of infromation used to inform your valuation However, VPGA 8 does acknowladge sometimes, there are restrictions to a valuers due dilligance and a decision should be made on a case by case basis
82
What is a rent?
Annual/periodic payment for the use of land/buildings
83
If you were using a net intial yield why would you deduct purchaser costs, would this not be a contradiction, the very evidance is supporting a value which is net i.e includes costs?
True. But we need to convert it back to MV and MV does not include purchaser costs. This is why we need to deduct it at the last stage.
84
What does DDA stand for?
Disability Discrimination Act
85
Define GDV
MV of proposed development with special assumption development is complete at the valuation date
86
What is a development property
Development is undertaken to achieve highest and best value
87
What is primary/secondry evidance?
Primary - Direct comparable evidance Secondry - Indirect comparable evidance like askinng prices
88
Prime Secondry Tertiary location
Prime: Prime central/high footfall Secondry: Good but not prime (edge of city centre) Tertiary: Outlying or peripheral areas with low demand, limited amenities, and weaker transport links.

RICS APC SEPT 25 (MG) (23 decks)

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