Valuation

Question 1

What are the 5 methods of Valuation?

Answer 1

1. Comparative
2. Profit/Revenue
3. Contractors
4. Investment
5. Residual

Question 2

What are the steps of Contractors method?

Answer 2

1. ERC -Estimate reinstatement cost
2. ARC- Adjusted reinstatement cost
3. Land Valuation
4. Decapitalisation
5. Stand back and look.

Question 3

What is a basis of value?

Answer 3

A statement of the fundamental measurement assumptions of a valuation.

Question 4

What is the Name of the Red Book?

Answer 4

RICS Valuation - Global Standards
Effective from 31 Jan 2022

Question 5

What is the purpose of the RED BOOK?

Answer 5

• Consistency
• High level of service
• Trust in the industry

Question 6

What are the 3 categories of comparable evidence?

Answer 6

Direct transactional evidence

General market data

Other sources

Question 7

When is the Profit Method used and how is this undertaken?

Answer 7

• The profits method is derived from trade related properties where the value is derived from the business and its trading potential.
• This trading potential is the profit that a reasonably efficient operator would expect to realise from occupying the property.
• Examples of when the profits method would be used would include for hotels, schools, cinemas and theatres.
• The common characteristics of these properties is where the property has been designed for a specific use and the value is linked to what the owner can generate from the property.
• The value therefore reflects the trading potential of the property and it includes the property interest, business and locational good will and fixtures and fittings all reflected as a single figure.
• The Income and expenditure forecast is based on historical and comparable information.
• This forecast represents the fair maintainable turnover and fair maintainable operating profit that a reasonably efficient operator would hope to achieve.
• This is therefore considered a reasonably accurate forecast of the properties trading potential.
• The actual performance is compared with similar trade properties to determine whether the fair maintainable turnover is realistic based on current market conditions.
• As a final step the fair maintainable operating profit is capitalised at the appropriate rate of return to reflect the risks and rewards of the property to determine its trading potential. Evidence of accurate comparable market data should be analysed and applied.

Question 8

What is the depreciated replacement cost (contractors)method of valuation and how does this work?

Answer 8

• The depreciated replacement cost method provides an indication of value based on the buyer paying no more or no less than the cost to obtain the asset based on the current equivalent.
• The involves calculating the replacement cost of the asset with its modern equivalent including deductions for physical deterioration and all other relevant forms of obsolescence.
• This method is known as the method of last resort and used when it is impractical to use all other valuation methods.
• The cost approach is used to value unusual properties where there is no active market such as mosques, wharfs or refineries.
• Under the cost approach the capital value is determined by calculating the cost of building the equivalent asset and the purchase land value.
• The replacement build cost should be calculating using new and cost effective building materials and techniques.
• The total value of the new property is then adjusted for deterioration using evidential information and recent transaction values to calculate the land purchase cost.

Question 9

What is the comparable method of valuation and how does this work?

Answer 9

• The comparable method primarily uses sales data of properties that have recently been sold focusing on assets that have a similar size, location, condition, features and specifications.
• The comparable method is underpinned by comparable evidence which is identified, analysed and applied to the real estate that is to be valued and is therefore fundamental to producing a sound valuation that can stand scrutiny from the client and market.
• The valuer will compile a schedule of evidence that will contain details about the property such as building age, quality, location, tenure, size, transaction price, date of sale, price per sq.ft - all of which can be used for the purposes of comparison with other similar properties.
• The comparables gathered should be comprehensive that is to say there should be several comparables rather than this being singular, they should be recent and therefore representative of the current market
  conditions, very similar and consistent with local market practice.

Question 10

What are the different Purposes of valuation?

Answer 10

• Valuation for Financial Reporting.
• Valuation for Commercial Secured Lending Purposes.
• Valuation for Residential Mortgage Purposes.
• Valuation for Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax.
• Valuation for Compulsory Purchase and Statutory Compensation

Question 11

What is the Red Book?

Answer 11

• The RICS Red Book contains mandatory rules and best practice guidance for members who undertake asset valuations.
• The Red Book includes:
  o International Valuation Standards
  o Red Book UK – Issued since 2015. New issue Oct 2024 which comes into force jan 2025
• Key Sections of the Red Book include:
  o Introduction.
  o Mandatory Valuation Standards.
  o Advisory Valuations Standards.
  o Valuation for Financial Reporting.
  o Valuation of Charity Assets.
  o Valuation for commercial secured lending purposes.
  o Valuation for compulsory purchase and statutory compensation.

Question 12

What steps would you take following your valuation instruction?

Answer 12

• Obtain details of the property.
• Undertake a conflict of interest check.
• Obtain a signed letter of instruction.
• Confirm the purpose of the valuation.
• Undertake information gathering including confirmation of the purchase price.
• Identify ratings, planning & environmental information.
• Carry out the inspection & measurement of the property.
• Research market values.
• Compile the valuation report.
• Check valuation internally including sign off with any relevant signatories.
• Report to the client and address any queries.
• Submit an invoice.

Question 13

What details would you expect to see covered in a Banks Letter Of Instruction on a valuation for secured lending?

Answer 13

• Borrower.
• Property.
• Purpose.
• Conflicts.
• Details of loan.
• Who the report is to be addressed to.
• Special Assumptions.
• Details on where to get information and how to get access to the property.
• What the report should contain for example areas, condition, tenancies & lease, environmental
  conditions, the market, relevant risks, valuation amount and any fees that are applicable.

Question 14

What are the different methods of valuation?

Answer 14

• Comparable.
• Income method.
• Profits.
• Residual.
• DRC (Depreciated Replacement Cost).

Question 15

What is meant by the term Market Value?

Answer 15

• The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

Question 16

What is the definition of market rent?

Answer 16

• The estimated amount for which a property, or space within a property should lease (let) on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction and after proper marketing wherein the parties had acted knowledgably, prudently and without compulsion.

Question 17

What is Hope Value?

Answer 17

• Hope value is the term used to describe the market value of land based on the expectation of getting planning permission for development on it. This differs from the existing use value which is what the land or property is worth in its current form.

Question 18

What is Marriage Value?

Answer 18

• The extra value that arises from the merger of two physical or legal interests.

Question 19

Definition Of Special Value?

Answer 19

• An extraordinary element of value over and above market value

Question 20

What does TEGOVA stand for?

Answer 20

• The European Group Of Valuer’s Association unites 70,000 national valuer’s associations from 38 countries.
• The organisation seeks to make valuation compatible across the EU.
• TEGOVA aims include:
  o A common European Valuation Report for Residential Property.
  o New Guidance Notes and Information Papers on subjects of real interest to practicing valuers.
  o A comprehensive approach to Valuation Methodology including detailed exposition of key concepts such as income approach and depreciated replacement cost.

Question 21

What is the IVSC?

Answer 21

• The International Valuation Standards Committee.
• It’s principle interest is to publish valuation standards and procedural guides for valuation of assets for financial statements.
• The IVSC recognises two specific International Valuation Standards:
  o IVS1 – Market Value basis of Valuation.
  o IVS2 – Valuation bases other than Market Value.
• The IVSC also recognises two applications:
  o IVA1 – Valuations for Financial Reporting.
  o IVA2 – Valuation for Lending Purposes.

Question 22

What is the difference between specialist properties and specialised properties?

Answer 22

• Specialist – Trading properties such as hotels, cinemas, pubs where the property is designed to perform a specific purpose.
• Specialised – These include chemical plants, places of worship. These types of properties are very rarely sold on the market except being exchanged within the industry or business they are a part of.

Question 23

What is the difference between Market Rent and Estimated Rental Value?

Answer 23

• Market Rent assumes Vacant Possession and is the amount of rent anticipated for the use of the property, in comparison with similar properties in the same area.
• Estimated Rental Value takes into account further considerations about the property assuming the building is occupied. For example there will be due consideration of the specific lease terms

Question 24

When would you use Term & Reversion vs. Hardcore?

Answer 24

• These valuation approaches are utilised when the terms of the lease and incoming rental income are expected to change in the near future:

Question 25

What is the Term & Reversion approach?

Answer 25

• The term and reversion method is used when the property has an existing lease in place that is due to expire.
• The existing lease terms are considered separate from the expected new lease terms within the valuation approach.
• In this instance the property is said to have reversionary potential taking into account the new lease terms.
• In other words the existing term is valued separately from the reversion (new lease terms)

Question 26

What is the Hardcore / Layer approach?

Answer 26

• The layer or hardcore valuation method is used as an alternative to the term and reversion approach.
• It considers the current market rent being received and applies this on a perpetual basis.
• The difference between the current rent being received and expected market rent at the time of the lease renewal is also considered on a perpetual basis.
• The two separate values are then added within the calculation.

Question 27

What is the definition of Equivalent yield?

Answer 27

• The equivalent yield is a weighted average of the net yield from current rental income and all future reversionary income.
• For example if a 5% yield is applied on the hardcore rental income currently being received and a 6% yield is applied on future reversion income the uniform equivalent yield would be weighted to consider both of the individual percentages being applied at 5.5%.
• This approach is often simpler for valuers as they can apply a yield to the entire income stream rather than having to value hardcore and reversionary income separately.

Question 28

What is the definition of Equated Yield?

Answer 28

• The equated yield is the yield on a property investment which takes into account growth in future income.
• This is not applicable to reversionary situations, where the increase in income on reversion is to the market value as estimated at the present time

Question 29

What is Goodwill?

Answer 29

• Goodwill is an intangible asset when property or real estate is being sold or purchased.
• Goodwill is a value within the transaction that is higher than the sum of the net fair value.
• For example the Goodwill portion of the transaction maybe included due to special features of the asset being exchanged which may be associated with brand name, local customer base and excellent reputation.
• The Goodwill element will create a special value over and above the value of the land or building being exchanged

Question 30

What are the different types of Goodwill?

Answer 30

• Purchased Goodwill:
  o Purchased goodwill is created when an asset is exchanged for an amount above the fair market value.
  o It is accounted for on a company’s balance sheet and is shown as an asset.
  o This is the only kind of goodwill that can be recognised on a companies accounts.
• Inherent Goodwill:
  o Inherent Goodwill is created over time as a non measurable asset held by a property or
  company.
  o This can be derived from factors such as favourable location, excellent reputation, solid local customer base, good brand image and brand name.
  o Inherent Goodwill is not recorded on a companies balance sheet as an asset and is only realised financially at the time the property or company in consideration is sold or exchanged.

Question 31

What is the difference between a residual valuation and a development appraisal?

Answer 31

• A Development Appraisal does not form part of a Red Book valuation standard whereas a Residual valuation is.
• Development Appraisals are based on worth where one or more valuations are coupled with professional advice, analysis and opinion.
• Development Appraisals takes into account time (phasing) whereas Residual valuation methods do not.
• Development Appraisals use client & agent input whereas Residual valuations must use market lead inputs.
• Development Appraisals are used to determine whether profit levels are obtained at an acceptable level whereas Residual methods are used to determine market value.

Question 32

When would you use the Discounted Cashflow Valuation Method?

Answer 32

• Where there are no comparable market transactions, the explicit DCF model provides a rational framework for the estimation of Market Value.
• It can also be applied if there is expected short term market volatility present within the transaction for example if a tenant within a rental property is due to terminate their lease.
• It can also be used if multiple investments are being compared side by side to support with long term investment decisions.
• The estimated cash flows are projected over an assumed investment period in addition to an exit value at the end of the investment period.
• The cash flow is then discounted back to the present day value at a discounted rate (also known as the desired rate of return) that reflects the perceived level of risk.
• A discount rate is applied to reflect market and property-specific risks.
• To arrive at the estimated revenue cash flow specific leasing patterns including rent reviews, lease renewals or re-lettings on lease expiry, void costs need to be considered.
• The exit valuation needs to reflect the rental growth and unexpired terms of the leases at the exit date.
• The assumptions and forecasts forming part of the calculation need to be set out clearly

Question 33

How would you value a property where there are no comparables?

Answer 33

• The discounted cashflow method can be used where no comparable market transactions exist.
• The estimated cash flows are projected over an assumed investment period in addition to an exit value at the end of investment period.
• The cash flow is then discounted back to the present day value at a discounted rate (also known as desired rate of return) that reflects the perceived level of risk.
• The assumptions and forecasts forming part of the calculation need to be set out clearly

Question 34

What factors effect yields?

Answer 34

• Covenant.
• Location.
• Specification.
• Rent levels.
• Growth potential.
• Asset management & development value.

Question 35

What is Face Rent & Effective Rent?

Answer 35

• Face rent is a rent figure that excludes any incentives such as rent-free periods or rent reductions or fitout contributions.
• Effective rent takes into consideration any incentives provided to the tenant such as to you as the
  tenant.

Question 36

Define all risks yield

Answer 36

• All risks yield (ARY) presents the rental revenue of a property as an annual percentage of the property cost
• All risks yield is calculated by dividing the annual rental income by the properties value and multiplying this by 100 to give the percentage all risk yield.

Question 37

What are deleterious materials and how do they effect value?

Answer 37

• Deleterious materials are considered as prohibited and have an effect on the structural integrity
  performance and longevity of a property.
• They can result in non-compliance with building regulations and decrease a properties value.

Question 38

What are the main components of a valuation report?

Answer 38

• Tenure.
• Date of valuation.
• Extent of inspection and who inspected.
• Opinion of value in words and figures.
• Allowance for VAT.
• Third party references.
• Clause prohibiting publication.
• External or independent valuer.
• Date of report.
• Statement that the valuer is qualified.

Question 39

How would structural defects be reflected in your valuation report?

Answer 39

• Draw clients attention to them.
• Advise them to have structural survey done.
• Can’t comment on area outside of ones expertise
• Seek and obtain cost input to remediate and include within report.

Question 40

Are you allowed to know the purchase price when valuing?

Answer 40

• The valuer must request this and also verify it.
• If your valuation differs you must state why.
• This must be based on market evidence and bona fide.

Question 41

You are found to be negligent in your valuation, what can your client
do?

Answer 41

• The complainant can demonstrate the losses and pursue the valuer or valuing company through the courts for the losses incurred.
• Merrett vs. Babb case proved that valuers and not firms can be pursued.
• This highlights the importance of having PII and run off cover in place

Question 42

What would you caveat in a valuation report?

Answer 42

• Publication.
• Confidentiality.
• Deleterious Materials.
• Planning.
• Taxation.
• Information supplied.
• Environmental matters.

Question 43

What items are contained within your terms of engagement but not referenced within your Valuation report?

Answer 43

Reference of the professional Fees for undertaking the valuation.

Question 44

What is in your Valuation Report and not in your Terms Of Engagement?

Answer 44

• Opinion of value.
• Valuation approach.

Question 45

Please provide some examples of Conflicts Of Interest?

Answer 45

• Acting for buyer and seller of a property in the same transaction.
• Acting for two or more parties competing for an opportunity.
• Valuing for the lender where advice is also being provided to the borrower.
• Valuing a property previously valued for another client.
• Undertaking a valuation for third party consumption where the valuers firm has other fee earning relationships with the client.
• Valuing both parties interests in a leasehold transaction

Question 46

What is meant by the term passing rent?

Answer 46

• The annual rental income currently generated by a property as recorded on the balance sheet date.
• The passing rent generated by the property on the balance sheet date may be more or less than the estimated rental value.
• Passing rent excludes any rental income when a rent free period is in effect and is based on actual income received.

Question 47

Why did the report include an ‘opinion’ and not an actual valuation?

Answer 47

Case law built up historically has found that providing valuations are in accordance with the RICS Red Book a value based on opinion cannot be wrong.
* Providing that the valuation is found to be within reasonable tolerances the surveyor cannot be considered wrong in their opinion.
* If the valuation was provided based on an actual value this would not necessarily be accurate and may leave surveyors open to be pursued through court action.