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APC Valuation Pathway > Valuation > Flashcards

Valuation Flashcards

1
Q

What is a special purchaser?

A

Special value to particular purchaser arises due to advantages to owning that property where other buyers wouldn’t benefit from the advantages.

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2
Q

What is IRR?

A

a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

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3
Q

What is NPV?

A

is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

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4
Q

What is the Red Book?

A

Set of global standards which sets out standards and guidance for valuations

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5
Q

What is the full title of the latest Red Book?

A

RICS Valuation - Global Standards 2022 31 January

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6
Q

What is the purpose of the Red Book?

A

Greater consistency, objectivity and transparency

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7
Q

Why has the Red Book been updated?

A

IVS are updated every 2 years so Red Book gets updated to align with that

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8
Q

What does ESG stand for?

A

Environmental, social and governance

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9
Q

Who creates the IVS?

A

International Valuation Standards Council (IVSC) - includes members such as RICS

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10
Q

Professional standard 1 in the red book is about?

A

Compliance

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11
Q

Professional standard 2 in the red book is about?

A

Ethics and conflicts

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12
Q

What are the exemptions to not follow the VPS’s?

A

Agency marketing appraisal
Litigation (rent review litigation)
Internal purposes only
Expert witness valuation
Statutory basis

ALIES

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13
Q

What are terms of engagement?

A

Agreement with the client detailing the work assignment, can be used as an important defence against negligence claims.

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14
Q

What is market value?

A

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

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15
Q

What is market rent?

A

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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16
Q

What is investment value?

A

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

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17
Q

What is fair value?

A

The price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.

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18
Q

What is synergistic value?

A

The result of a combination of 2 or more assets where the combined value is more than the sum of the separate values.

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19
Q

What are the three valuation approaches described in VPS 5?

A

Market
Income
Cost

MIC

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20
Q

What is the market approach as per VPS 5?

A

Like for like - comparable method

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21
Q

What does VPS 1 relate to?

A

Terms of engagement

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22
Q

What does VPS 2 relate to?

A

Inspections, investigations and records

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23
Q

What does VPS 3 relate to?

A

Valuation reporting and methods

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24
Q

What does VPS 4 relate to?

A

Bases of value, assumptions and special assumptions

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25
Q

What does VPS 5 relate to?

A

Valuation approaches and methods

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26
Q

What are the proposed changes to VPS?

A

VPS 1 will remain as VPS 1 (TOE)
VPS 2 will become VPS 4 (Inspections…)
VPS 3 will become VPS 6 (Valuation reports)
VPS 4 will become VPS 2 (Bases of value…)
VPS 5 will split into VPS 3 (Valuation approaches…) and VPS 5 (Valuation models)

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27
Q

What are the headings you would expect on a TOE?

A
  • Identification and status of valuer
  • Identification of client
  • Identification of any other intended uses
  • Identification of asset or liability being valued
  • Valuation currency
  • Purpose of the valuation
  • Basis of value adopted
  • Valuation date
  • Nature and extent of the valuer’s work
  • Nature and source of information relied upon
  • All assumptions to be made
  • Format of the report
  • Restrictions on use, distribution and publication of report
  • Confirmation that the valuation will be undertaken in accordance with the IVS.
  • Basis on which the fee will be calculated.
  • Reference to complaints handling procedure
  • A statement that compliance with these standards may be subject to monitoring
  • Statement setting out any limitations on liability
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28
Q

What are the headings you would expect on a red book valuation report?

A
  • Identification and status of the valuer
  • Identification of the client/
  • Purpose of valuation
  • Identification of the asset
  • Basis of value
  • Valuation date
  • Extent of investigation
  • Nature and source of information relied upon
  • All assumptions to be made
  • Restrictions on use, distribution and publication of the report
  • Confirmation the valuation complies with IVS
  • Valuation approach and reasoning
  • Amount of the valuation
  • Date of the valuation report
  • Commentary on any material uncertainty
  • Statement on any limitations
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29
Q

What is the income approach as per VPS 5?

A

Capitalisation of present and predicted income - Investment and profits methods

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30
Q

What is the cost approach as per VPS 5?

A

Purchaser will pay no more than what it costs to build the property - DRC and residual methods

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31
Q

what is the document “RICS Sustainability and ESG in commercial property valuation and strategic advice”?

A

Global professional standard released in 2021
Covers definitions of ESG, role of sustainability and the role of the valuer
Explores sustainability characteristics, considerations and risk

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32
Q

Have any valuation reviews been conducted recently?

A

Peter Gray’s independent review of real estate investment valuations in December 2021.

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33
Q

Can you name some recommendations commissioned by RICS following Gray’s review of investment valuations?

A

I - Independent panel
C - Creation of compliance officer
E- Expectation of culture and behaviours

ICE

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34
Q

Not including the red book are there any other RICS documents on valuation standards?

A

RICS valuation – global standards UK national supplement 2023

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35
Q

How do you do a comparable valuation?

A
  1. Look at subject property (sale and letting evidence)
  2. Select comps (verify info)
  3. Analyse comps
  4. Display comps and subject in summary matrix
  5. Value property
  6. Stand back and look

LSA-DVS

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36
Q

How do you analyse comparables?

A

Research if the transaction is open market, transaction amount, size, location, date of transaction, specification, condition and layout

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37
Q

What is the profits method of valuation?

A

Used for valuing trade related properties

Used where the value of the property depends on trading potential

Basic principle is the value of the property depends on the profit generated from the business not the building or location.

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38
Q

What is the investment method of valuation?

A

Used when there is an income stream.

4 techniques: term and reversion, hardcore and layer, hardcore and top slice and DCF

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39
Q

What is the term and revision technique and what are the steps to carry it out?

A

Investment method used when property is under rented.

  1. Capitalise passing rent using YP at discounted yield for remaining years
  2. Capitalise reversion using market rent into perpetuity using YP at market rate using present value
  3. Add together
40
Q

What is the hardcore and layer technique and what are the steps?

A

Investment method of valuation.

  1. Capitalise term into perpetuity at equivalent yield
  2. Capitalise top slice at equivalent yield deferred until reversion
  3. add together
41
Q

What yield is used with hardcore and layer valuation technique?

A

Equivalent yield

42
Q

What is the hardcore and top slice technique?

A

Investment method of valuation used for investments where the subject is over-rented

43
Q

In the hardcore and top slice technique what is the top slice?

A

The amount of rent above the market rent.

44
Q

Talk me through the steps of valuing a over rented shop from start to finish

A
  1. Establish market rent by comparable analysis
  2. Establish passing rent by reviewing the lease
  3. Establish market yield using comparables and risk analysis
  4. capitalise Market rent into perpetuity using market yield
  5. capitalise top slice (rental amount above market rent) until next review if rent can go down or lease end if not, using market yield uplifted to reflect risk.
  6. Add together hardcore and top slice.
  7. Stand back and look
45
Q

what yield would you commonly use for valuing a shop that is over rented?

A

Net initial Yield

46
Q

What are some factors that can affect a yield?

A

Risk
Growth potential
Location
Quality of covenant
Property use
Lease terms
Voids
Liquidity
Repair

47
Q

How would you carry out a DRC?

A

Establish replacement cost of modern equivalent property

Depreciate for age and obsolescence (functional, technical + economic)

Add land value
= Capital Value

Depreciate at statutory decap rate for rating valuations (4.4% or 2.6% for health)

= Annual Rental Value

48
Q

What is YP?

A

Years purchase is the number of years it would take for the annual income to pay for the value or purchase price of the property.

49
Q

What does VPGA stand for?

A

Valuation practice global applications

50
Q

What is marriage value?

A

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

Difference between old value and new value is split 50:50 between landlord and leaseholder

51
Q

Who signs off Red book report?

A

An individual (chartered surveyor) not a firm.

52
Q

Who is to be named in a Red book report?

A

Anyone with a material supporting role in the valuation

53
Q

what is a yield?

A

Yield refers to the earnings generated and realised on an investment over a particular period of time and is expressed as a percentage based on the invested amount.

Income/price x 100 = yield

Basically what is the return for the investor after say 1 year

54
Q

What is included within the global red book?

A

Professional standards
Valuation technical and performance standards
Valuation practice guidance - advisory

55
Q

What is a discount rate?

A

Rate of interest selected when calculating the present value of a future cost or benefit.

56
Q

What is all risks yield?

A

Growth implicit yield used in an investment valuation that reflects all the risks and rewards of the subject property.

57
Q

Why is there a need for UK guidance as well of global standards (Red Book)?

A

Global Valuation Standard is to enable consistence and transparency globally, whilst UK guidance is specifically for the UK market, align with the UK jurisdiction and practice

58
Q

If you were to value a multi-let office how would you approach that?

A

Investment method – establish MR and PR and calculate values using term and reversion or hardcore approaches.
Cross-check with comparable method

59
Q

What are the five methods of valuation?

A

Comparable
Investment
Residual
Depreciated replacement cost
Profits

60
Q

What is DCF?

A

A valuation model which determines the current value of a property based on its future income. Rental growth explicit

61
Q

How did you know the house you valued in Leeds was victorian?

A

Bay windows, tall chimneys, barge boards

62
Q

Talk me through the valuation of the Victorian house in Leeds.

A

This was a desk top valuation as provided by DWP.

I firstly established the facts of the property such as size, bedrooms and rooms.

Using this information I looked for comparable properties which had sold close to the valuation date. There were a few properties in the same terraced that sold close to the valuation date.

I weighed the evidence to reflect how close they sold to the valuation date and similarities to the subject. From this evidence I arrived at a value for the subject at the valuation date.

Then I took a stand back and look approach to sense check my valuation.

63
Q

Why did you choose to use the investment method for the Office in Leeds?

A

I used the investment method as the property was currently let, doing so enabled to reflect the value of the current lease on the property.

64
Q

Why did you use a term and reversion method of valuation for the office in Leeds?

A

I used a term and reversion as the property was currently under rented.

As the property was let as a whole I determined a traditional method was appropriate.

65
Q

What yield did you use for the office in Leeds?

A

All risks yield determined from market comparables in the local area.

They were net of purchasers cost so as part of my valuation I adjusted these by 5.8% to get back to gross initial yield

66
Q

Why did you use a lower yield for the term on the office in Leeds?

A

I used a lower yield to reflect the current security of the term, therefore, less risk.

67
Q

Why did you do a residual valuation for the land in Hull?

A

This was because the land had development potential.

The value of land with development potential is derived from the premise that its worth would be the value of the completed development minus the costs of completing the scheme.

68
Q

How did you arrive at GDV for the residual in hull?

A

For this valuation there was no scheme in place. I looked at the Hull City Plan and also nearby schemes to determine an appropriate unit density. I arrived at 30 units per hectare which resulted in 45 units.

Hull city council required 10% affordable which translates to 5 units.

I then looked at comparable sales across Hull of new build units and weighted them depending on location and date of sale.

I used these comparable schemes to arrive at both the planned type of units and also the value to apply to them.

I then totalled them up and discounted the affordable units.

69
Q

Where did you get build costs from for the residual valuation in Hull?

A

BCIS (build cost information service)

I filtered this to reflect Hull construction costs. I applied the lower percentile costs as most schemes in Hull were of standard builds and I expected a similar developer to do the same here.

*also advised that a lot of homebuilders actually have lower costs than lower percentile

70
Q

What about other costs for the residual valuation in Hull?

A

Construction costs - lower quartile from BCIS

Profit - 17.5% for MH 6% for AH to reflect lower risk

Finance - 7%

Professional fees - 7%

Marketing - 1% - smaller site

Agent - 1% smaller scale

Legal costs - £600 per unit

Externals - 12% adjusted down to reflect services already on site

contingency - 5%

CIL - £60/m2 of additional space created (not including AH)

Value = £730,000

71
Q

Why did you measure the house and outbuildings in North Cave to GIA?

A

Agreed with the client to measure to this at their request to be able to better comparable with other properties which had also been measured this way.

Under RICS code of measuring practice the standard measuring method for industrials is GIA. there is no set standard for residential valuations so I adopted GIA to better compare with other properties using EPC sizes.

72
Q

Did you consider other methods of valuation for the outbuildings in north cave?

A

Yes did consider depreciated replacement cost but as direct market comparables were available I considered the comparable approach to be the best.

73
Q

What advice did you provide in the north cave valuation?

A

My advice was the market value of the farm house and outbuildings. This was in part by talking them through my valuation approach but also but walking them through my drafted report.

The outcome of this was that they agreed with the valuation, made some minor changes to the report. Signed the report and sent it to the client.

74
Q

You measured the Masham GP practice following GN60 to NIA? what differences are there between this and NIA?

A

GN60 based measurement includes spaces usually taken out for NIA such as disabled toilets and pram stores.

75
Q

You mentioned the overall compliance for the GP practice in Masham, what is this compliance to?

A

Equality Act 2010 and NHS health building notes.

76
Q

What advice did you provide for the GP practice in Masham?

A

I advised the senior surveyor who was responsible for the report of the Current Market Rent of the property after valuing it using the comparable method of valuation.

The outcome of this was they signed the CMR report and sent it to the client?

77
Q

How were you able to advise the client as well for the GP practice in masham?

A

I did not sign the report as I am not a registered valuer, however the client had a query regarding the value as it was previously abated I advised that this was over 10 years ago and no longer relevant to the valuation.

78
Q

What guidance is there for comparable valuations?

A

RICS comparable evidence in real estate valuation 2019

79
Q

What should comparable evidence be?

A

Comprehensive
Very similar or identical
Recent
Arm’s length transaction
Verifiable
Consistent with local market practice
Result of underlying demand

80
Q

Sources of comparable evidence?

A

Direct transactions
Publicly available information
Published databases
Asking prices
Historic evidence

81
Q

What is the hierarchy of evidence?

A

Category A - direct comparables (sales and asking prices)
Category B - General market data (indices, historic evidence, demand and supply data)
Category C - Other sources (transactions on other types, stock market movements)

82
Q

What does VPS stand for?

A

Valuation technical performance standards

83
Q

Why has DCF been proposed as the primary method of investment valuations?

A

To be more transparent and explicit with valuations

84
Q

Is DCF now mandatory?

A

No it is the valuer’s decision. Some occasions such as single let properties are more appropriate with traditional methods.

85
Q

Why is GN60 being updated?

A

Currently in consultation:

Reflective NHS framework

ESG

Guidance on top up rents

Measurement practice

Signpost updated RICS valuation guidance

reference to updated DCF guidance

86
Q

What is the current prime rent for an office in Leeds?

A

£38/sf

87
Q

What is the current vacancy rate for offices in Leeds?

A

14%

88
Q

Current prime yields for offices in Leeds?

A

6.5%

89
Q

Retail vacancy in Leeds?

A

18.8%

90
Q

Prime retail rent in Leeds?

A

£2,000psm ITZA

91
Q

Prime retail yield in Leeds?

A

7%

92
Q

Industrial vacancy in Leeds?

A

4.5%

93
Q

Prime industrial rent in Leeds?

A

£8.75/sf

94
Q

Industrial yield in Leeds?

A

5%

95
Q

What is an assumption?

A

something that is reasonable for the valuer to accept without the need for specific investigation or verification.

96
Q

What is a special assumption?

A

An assumption that either differs from facts at the valuation date or would not be made by a typical market participant.

APC Valuation Pathway (10 decks)

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