Valuation Flashcards
Steps to take prior to commencing a valuation instruction?
- Check competence? Using SUK (Skills, Understanding and Knowledge)
- Check for any COI
- Terms of Engagement
What is the definition of a valuer? Difference between internal and external valuers?
Someone who estimates the price that a property would achieve on the open market.
Internal valuer = undertakes valuations for their employer
External valuer = valuation for a third party
What are different reasons why a valuation might be required?
- In order to value someone’s estate for IHT purposes.
- Probate reasons
- Independent expert
- Internal valuation of assets
What are the 5 methods of valuation?
- Comparable
- Residual
- Investment
- Profits
- Depreciated Replacement Cost/ Cost based method
Why is the Red Book needed, what is the latest updated and how often updated?
MANDATORY INTERNATIONAL STANDARDS that allow for consistency and transparency in valuations. Promotes high standards of valuation delivery worldwide.
Latest updated = Valuation Global Standards 2022.
Updated every 2-3 years.
MOCK QUESTION
What is the format of the Red Book Global?
- Introduction
- Glossary
- Professional Standards PS (e.g. understanding when a valuation has to be Red Book compliant)
- Valuation technical and performance standards VPS
- Valuation applications (VPGA) (Guidance)
- The International Valuation Standards (IVS)
Within the Red Book, what Valuation Technical and Performance standards (VPS’s) are you aware of?
Valuation Performance Standards are mandatory. These are:
1. VPS 1 = Terms of engagement
2. VPS 2 = Inspection
3. VPS 3 = Contents of the report
4. VPS 4 = Basis of Value
5. VPS 5 = Valuation Methods
When can a valuation not be Red Book compliant?
- When advice is provided solely for negotiations.
- Providing valuations to a client for internal purposes.
- In agency in prior to recieving an instruction to dispose of a property.
- Valuation prior to giving evidence as an expert witness.
Can you depart from the Red Book standards + example?
Yes it must be stated in writing in the terms of engagement and the reasons for it. Client must agree in writing.
E.g. if providing advice for a vendors personal family dispute.
What does the Red Book say about Terms of Engagement? & what does it require to be included?
- If a firms process means they can’t comply with an aspect of the global standards of valuation it must be identified in the TOE.
- Identification + status of the valuer
- Idenfification of the client
- Identification of the asset being valued
- Purpose of the valuation
- Basis of Value
- Valuation date
- Assumptions
- Fee basis
- Confirmation of Red Book Global compliance
What were the main changes to the RICS Valuation - Global Standards 2021 (“Red Book Global”)?
- Greater Emphasis on ESG and Sustainability: including the potential impact of climate change on property values
- The role of technology and data in valuations, with guidance on the responsible use of automated valuation models (AVMs) and big data, stressing the importance of the valuer’s judgment in interpreting results.
Why are registered valuers required?
Ensures quality assurance and helps to ensure consistent standards of ‘Red Book’ valuations. They apply through the RICS
Are there any material uncertainty clauses you would include in a report today?
Regulatory Changes:
* Rapid changes in environmental regulations or sustainability standards could impact valuations, especially if the future costs of compliance or the effects on property values are unclear.
What is Market Value?
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a 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 an arms length transaction?
act in their own self-interest and are not subject to pressure from the other party.
What are the assumptions made when determining Market Value?
Some of these are:
1. Property is sold by a willing seller and willing buyer in the open market at an arms length basis.
2. That Valuation Practice is available.
3. That there are no restrictions affecting the property.
What is Market Rent?
The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and 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.
What is an Investment Value?
The value of an asset to the owner or a prospective owner for individual investment.
What did the Brackley comparable valuation report include?
This included:
- Appointment/ client
- Status of the valuer
- Valuation Date (date of the report).
- Basis of Value
- Procedure (such what had been received by the parties, clarifying appointment as an independant expert not an Arbitrator and inspection procedure).
- Property Description
- Market Comments (including comments about the absence of market evidence to reflect inprecedented COVID-19 market)
- Valuation approach (including comparable table & the fact we made a deduction to reflect the property condition but a saving because of the SDLT holiday)
- Value determination
How did you come to your valuation in Wooburn Green?
- Search and selected suitable comps
- Confirm/ verified details with agents
- Assembled comps in a table
- Adjust comps using the hierarchy of evidence
- Analysised the comps to form my opinion, this resulted in me making acounting for new build premiums
- Reported value
What did you look out for in your inspection of Kirton
- what components would have to be demolised including the buildings, concreate floor
- Boundaries
- Access
What is a yield?
The measure of invested return and is measured as a percentage. It is determined using comparables. It reflects the risk of an investment. Higher yield = higher risk.
Can you name some of the risks are reflected in a yield?
- Tenant risk:
* Covenant strength, Void, Lease terms, Service change, Transaction cost - Building risk:
* Undesirability, Planning risks, Climate Change, Flooding - Capital market risk:
* Financial Movement, The economy, Liquidity, Inflation
How would you calculate the yield?
Market value/ rent * 100
What is years purchased?
The number of years required for income to repay the purchase price
What is the initial yield & how to calculate?
A simple income yield calculated by dividing passing rent by the gross purchase price.
MOCK QUESTION
What is a gross yield?
This is the yield which encompasses fees (stamp duty, agents fee 6%). It may be used to assess the relative returns on assets.
What is a net yield?
This is the yield of the asset once you have removed the associated costs. This is the ‘real’ return to the investor.
What is a reversionary yield & how to calc?
Anticipated yield, which the initial yield will rise to once the rent reaches the Est Rental Value and when the property is fully let.
1. Calculated by doing Market rent/ Market Value.
2. Or you can look at comps and make the yield slightly higher to account for the added risk
MOCK QUESTIONS
Can you give me an idea of market yields for offices, industrial and retail?
Prime west end = circa 4%
South east office = circa 6.5%
Prime industrial = circa 5%
Prime retail london = circa 4% more like 3% for Bond Street
Other prime retail town and cities = circa 7%
guidance note
Are there any other standards to be aware of when valuing Property?
Guidance Note: Comparable Evidence in Real Estate Valuation (2019)
What is Hope Value?
Value arising from the expectation of an increase in the value of a property e.g. by gaining planning permission.
What is Fair Value and market value difference?
They are similar.
1. Fair value is the value on the measurement/ inspection date, whereas
2. market value is the value on the valuation date.
Market Value is subject to market forces such as supply and demand.
Whereas fair value is purely dependent on the assets true value.
What are the current SDLT levels for land and residential property?
Land
£0 to £150,000 = 0%
£150,000 to £250,000 = 2%
Over £250,000 = 5%
Resi I would refer to the Governments SDLT calculator.
When would you use a Discounted Replacement Cost (DRC) method of valuation?
- Used when valuing a niche/ specialist asset.
- There is no useful or relevant evidence of recent sales transactions due to the specialised nature of the asset (e.g. library, lighthouse, school etc)
How do you undertake a DRC/ contractors method of valuation?
- Value of the sites existing use value
- Add current cost of replacing the building plus fees
- Less a discount for depreciation and deterioration i.e. cost of restoring the building
- = capital value
What is meant by existing use value?
The value of the land in its current form.
What is a freehold?
This is the nearest to absolute ownership of land and buildings that is possible in English Law.
A freeholder has the right to retain possession of the property in perpetuity and dispose of the property at their will.
When would you use the investment method?
When there is an income stream to be valued.
When might you use Term & Reversion or Hardcore methods of investment valuation?
Term and Reversion when a property is under-rented.
Hardcore when a property is over-rented.
How would you undertake an term and reversion valuation?
Term and reversion method. Used for valuing under rented properties:
Term = capitalised using an initial yield until next lease event
Reversion = market rent valued into perpetuity (capitalised using reversionary yield). The reversionary yield is typically higher than the initial yield to reflect further risk/ uncertainty as you might not achieve market rent or might not get a good covenant.
How would you undertake a hardcore and topslice valuation?
Hardcore method is used for valuing over rented properties:
Hardcore = market rent is capitalised into perpetuity using a yield taken from comparable evidence.
Top slice = this is the rent passing less market rent, capitalised until the end of the lease. A higher yield is applied to top slice to reflect additional risk.
The sum of these two ‘slices’ is the capital value.
APC QUESTION 2023 SITTING
Describe what a DIscounted Cashflow is?
How does it look?
What are the inputs you would need to consider?
A DCF estimates the value (Net Present Value) of an investment today, using its expected future returns.
It typically would be set out in an excel sheet which shows the projects estimated cashflow over the time period (monthly/quarterly).
Inputs = GDV, Build Costs, Finance Costs, Land Value, Discount Rate
When would you use a DCF?
Within the investment method for valuations where the projected cash flows are estimated over an assumed investment holding period.
These are then discounted back to tell you the Net Present Value of an investment today based on future return. e.g. can be used for phased development projects.
Difference between a Residual Valuation and a Development Appraisal?
Residual method is used for developments to find the land value.
Development appraisal is used to calculate the profitability of a proposed scheme.
How do you work out a residual value?
GDV - COST - PROFIT = SITE VALUE
Gross development value – total development cost – profit = site value (residual value)
What is the hierarchy of comparable evidence?
In terms of the RICS Guidance Note ‘Comparable Evidence in Real Estate Valuation’ (2019) there are three sections;
A = Direct comparables (e.g. complete transaction near property)
B = Wider comparables (e.g. indirect evidence like indicies)
C = Other market evidence (e.g. transactional evidence from other uses)
How many sqft in sqm?
10.7639
What is the ONS
Office for National Statistics
Uk’s largest independent producer of official statistics relationg to economu, population and society
Please can you talk me through how you would go about undertaking a profits method of valuation? + example of an asset to be valued?
The profits method is used to value trade-related/ niche assets and the principle of the profits method is that the VALUE OF THE PROPERTY DEPENDS ON THE PROFIT GENERATED FROM A BUSINESS, not the physical building or location. E.g. valuing a cinema
Methodology
1. Annual turnover
2. Less costs
3. = gross profit
4. less overheads
5. = unadjusted net profit
6. less tenants remuneration
7. = adjusted net profit
8. adjusted net profit capitalised by the appropriate yield
9. = capital value
Cross-check with comparable sales evidence if possible.
Difference between gross profit and net profit?
Gross profit = Profit - cost of sales
Net profit = Gross profit - overheads (such as staff costs/ running of a business)
What type of properties would you use the profits methods?
Trade-related properties e.g. a pub
What makes a good comparable?
The most similair factors of comparable evidence in comparison to the subject property.
- location
- condition
- specification
- type of property
- size
- amenity space
How would you value a ransom strip?
- Subject to specific circumstances
- Starting point is STOKES V CAMBRIDGE. Judge took the view that 1/3 of the uplift in the value of the subject site (ie the site’s development value) should be awarded to the owner.
- Subject to negotiation
MOCK QUESTION
What would you do if you were asked to value an asset which you were unsure how to value?
I would assess my level of experience prior to advising. As I have not valued this before, I would recommend someone who is competent to advise.
If you were just qualified, would you take on a valuation for a cinema asset?
No as I only undertook valuation to level 2 and I’m not competent in the profits method
What is Japanese Knotweed?
Invasive plant that can damage hard surfaces such as walls. Not easy to control and costly to eradicate.
Why was the Pereira Gray review required?
Following concerns of the performance of the professions valuers, the Standards and Regulatory Board appointed Pereira Gray review to ensure that RICS valuation remain relevant and trusted.
What did the Pereira Gray review find?
The review made 13 core recommendations. These included:
- A new Valuation Compliance Officer role = to specifically cover the valuation processes
- A rotation requirement for valuers undertaking valuations
- More focus on the use of Discounted Cash Flows
- New indepedent valuation quality assurance panel with lay members to report to the Standards and Regulatory Board.
What are the limitations of a residual appraisal?
- Relies upon market information for inputs
- Doesn’t consider timing of cash flows
- Very sensitive to minor adjustments
- Implicit assumptions hidden and not explicit adjustments
- Always cross check with a comparable site valuation if possible
What would you do when valuing a site with contamination?
- Advise the instruction of a specialist to undertake a contamination survey
- Caveat all advise disclaiming the issue
- Deduct any remediation costs from the site value
What is the importance of terms of engagement?
- Set out the basic facts of the instruction so there is no confusion about what you have been asked to do
- Define the scope and depth of the service you will provide and boundaries of your liability
What is overage?
- Also known ask clawback or uplift
- Sum a vendor may benefit from any subsequent increase in the lands value after having sold it
- Over a finite period
What would inputs would you use for a scenario sensitivity analysis?
- Use class
- Timing
- Planning permission
What is the margin of error allowed in valuation?
10/15%
