Valuation Flashcards
Explain Special Purchaser
VPS 4 - Where a particular asset has special value to a particular purchaser because of advantages arising from its ownership that would not be available to other buyers in a market.
What is an IRR?
a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
What is the Red Book
Set of global standards which set out procedural rules and guidance for written valuations.
what is the full title of the latest red book?
RICS Valuation – Global Standards 2022
31 January
Purpose of the red book
Greater consistency, objectivity and transparency in written valuations
COT
why has the red book been updated?
- Because the IVS (international Valuation standards) are updated on a rolling program every 2 years new IVS 2022.
- Red book needed minor updates to stay aligned with IVS 2022
- To increase focus on sustainability and ESG.
What does ESG stand for?
Environmental, social and governance
who creates the International valuation standards?
Valuation professional organisations such as RICS and the American Society of Appraisers.
Professional standard 1 in the red book is about?
Compliance
Professional standard 2 in the red book is about?
ECOD
are there any exceptions where the valuer may not follow the VPS’s? (5)
Agency marketing appraisal Litigation (rent review litigation) Internal purposes only Expert witness valuation Statutory basis
ALIES
Professional Standard 1 changes
- It must be clear and unambiguous within the terms of engagement if members are to apply any exceptions to VPS 1-5 under PS 1.
- Red book compliance is binary. Valuation is either a Red Book valuation or it is not. No more partial red book.
what are the terms of engagement?
Contract with the client detailing the work assignment, can be used as an important defence against negligence claims.
what is market value?
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.
what is market rent?
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.
define investment value
Value of an asset to the owner or prospective owner who has investment objectives.
Often used in conjunction with DCF.
What is fair value?
- IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
- Applies only to financial statements.
what do understand about synergistic value
- Defined in VPS 4
- Synergistic value is the result of a combination of 2 or more assets where the combined value is more than the sum of the separate values.
what are the three valuation approaches described in VPS 5?
M - Market
I - Income
C – Cost
MIC
what is the market approach as per VPS 5
Based on comparing the subject asset with identical or similar assets or liabilities, where price information is available, and you can compare similar market transactions within an appropriate time period.
I.e. The comparable method
what does VPS 1 relate to?
Terms of engagement
what does VPS 2 relate to?
Inspections, investigations and records
what does VPS 3 relate to?
Valuation reporting and methods
what does VPS 4 relate to?
Basis of valuation
what does VPS 5 relate to?
Valuation approach
name at least 10 headings you would expect to find in a terms of engagement
- 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, investigations and limitations
- Nature and source of information which the valuer will rely
- All assumptions and special assumptions to be made
- Format of 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.
- For RICS regulated firms, reference to complaints handling procedure
- A statement that compliance with these standards may be subject to monitoring under RICS conduct and disciplinary regs
- Statement setting out agreed limitations
name at least 10 headings you would expect to find in a red book valuation report
- Identification and status of valuer
- Identification of client and other intended uses
- Purpose of valuation
- Identification of asset or liability to be valued
- Basis of value adopted
- Valuation date
- Extent of investigation
- Nature and source of information relied upon
- Assumptions and special assumptions
- Restrictions on use, distribution and publication of report
- Confirmation the assignment is in accordance with the IVS
- Valuation approach and reasoning
- Valuation amount
- Date of valuation report
- Commentary on any material uncertainty in relation to the valuation
- Statement setting out any agreed limitations on liability
what is the income approach based on?
Capitalisation or conversion of present and future incomes to a single capital value
Two methods: 1.) capitilaisation of a conventional market based income. 2.) discounting a income projections
Deciding by consideration of what is standard in the market.
E.g. investment and profits method
What is the cost approach based on?
Gives an indication of value using the economic principle that a buyer would pay no more for an asset than the cost to get an equal asset by construction or purchase. E.G. Residual method and Depreciated replacement cost method.
what is the document “RICS Sustainability and ESG in commercial property valuation and strategic advice?
professional standard released 2023.
Covers definitions of ESG, role of sustainability and the role of the valuer
Explores sustainability characteristics, considerations and risk
have any valuation reviews been conducted recently?
Yes Peter Gray’s independent review of real estate investment valuations in December 2021.
Can you name two recommendations commissioned by RICS, standards and regulation board following Gray’s independent review of real estate investments?
I - Independent panel
C - Creation of compliance officer
E- Expectation of culture and behaviours
A.K.A ICE
Not including the red book are there any other RICS documents on valuation standards?
RICS valuation – global standards UK national supplement
- The UK national supplements the Global Red Book for valuations subject to UK jurisdiction.
Talk me through your valuation of the Industrial in Wimbledon.
- Property – purpose built warehouse
- Location - industrial estate with good transport links
- Purpose of valuation – IHT
- Basis of Valuation – market value as per IHT Act s160
- Terms of engagement – as per VPS 1
- Method used – comp, investment
- Technique – term and reversion, comparables
- key points: sourced market rent and yield, used Parrys investment tables
Talk me through your valuation of the flat in St Leonards and the advice you gave?
- Property – 1 bed purpose retirement flat
- Purpose of valuation – Red Book - disposal
- Basis of Valuation – market value
- Terms of engagement – as per VPS 1
- Method used – comparables
- Advice to client – Through a red book report i advised the client of an opinion of market value and its purpose
How do you execute a valuation using the comparable method?
- Look at subject property (sale and letting evidence)
- Select comps (verify info)
- Analyse comps
- Display comps and subject in summary matrix
- Value property
- Stand back and look
LSA-DVS
Why do we make adjustments to comparables when valuing using the comparable method?
- To express the comparable in like terms to the subject.
- e.g. if the comparable has a poorer location the valuer attempts to estimate how much more the property would have sold for had it been in the same position as the subject property.
How do you analyse comparables?
Review price per area rate
Display key findings in a table
Research if the transaction is open market, transaction amount, size, location, date of transaction, specification, condition and layout
What was the valuation date for the bungalow in Redhill?
Date of death for IHT
did you provision affordable housing in your Residual valuation?
No
The Affordable Housing contribution threshold for residential development sites is for residential sites of 11 units or more
What was the GDV of the bungalow appraisal
£1,200,000 (2x 3bed semis)
What costs did you deduct for the bungalow valuation?
- Construction costs with BCIS median quartile figures.
- Externals price per structure
- Fees at 7%
- assumed self financed
- Developers profit and risk @15% of GDV
Tell me about the profits method of valuation
- Used for valuing trade related properties in markets where there is a monopoly position
- Used where the value of the property depends on the profitability of the business and trading potential
- Used for pubs, petrol stations, hotels, day nurseries, leisure and healthcare properties.
- Basic principle is the value of the property depends on the profit generated from the business not the building or location.
- Need accurate accounts for 3 years if possible
tell me about the investment method of valuation
Used when there is an income stream to value.
4 techniques: term and reversion, hardcore and layer, hardcore and top slice and DCF
why didn’t you use the profits method to value the police station in Folkstone?
It is not a trade related property
What is the term and revision technique and what are the steps to carry it out?
- An Investment method of valuation used for reversionary investments where the subject is under-rented.
- capitalise passing rent using YP at discounted yield for remaining years
- capitalise reversion using market rent into perp using YR at full market rate discounted using present value.
- Add together
- Stand back and look
what is the hardcore and top slice technique?
Investment method of valuation used for investments where the subject is over-rented
Talk me through the steps of valuing a over rented shop from start to finish
- Establish market rent by comparable analysis
- Establish passing rent by reviewing the lease
- Establish market yield using comparables and risk analysis
- capitalise Market rent into perpetuity using market yield
- 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.
- Add together hardcore and top slice.
- Stand back and look
In the hardcore and top slice technique what is the top slice?
The amount of rent above market rent
Describe how a hardcore and top slice valuation technique graph would look?
- Hardcore layer of market rent along whole of x axis
- Horizontal Top slice of amount of excess rent on top that starts from the onset
what yield would you commonly use for valuing a shop that is over rented?
Net initial Yield
what valuation technique might you use to value a shop that is under-rented?
Term and reversion
name five factors that can affect a yield
Risk Growth potential Quality of location Quality of covenant Property use Lease terms Voids Liquidity Obsolescence / Repair
Why would a surveyor complete a discounted cash flow?
- For a new property where growth is not yet stable
- New project where occupancy is not at peak levels
- To establish the internal rate of return
- To consider each rental growth separately
SORG
Stable. Occupancy. Return. Growth
What can a DCF look like, talk me through the different parts it will have.
- Time period on left hand side
- Net income (rent)
- YP @ cap rate (exit rate)
- Growth rate £1 @ say 2%
- Discount rate PV £1 @ 10%
- DCF total
- Remark/comment section at end
Talk me through the steps of valuing an over rented shop from start to finish
-Establish market rent by comparable analysis
-Establish passing rent by reviewing the lease
- Establish market yield using comparables and risk analysis
-capitalise Market rent into perpetuity -using market yield
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.
-Add together hardcore and top slice.
-Stand back and look
