Valuation Flashcards
What is the RICS Red Book called?
RICS Valuation - Global Standards
When was the RICS Red Book (global) published?
published December 2024 and effective 31 January 2025
What is the purpose of the Red Book?
Consistency, objectivity, transparency
What is the Red Book?
Set of global standards which set out procedural rules and guidance for written valuations
What is a VPS?
Valuation Technical and Performance Standards and they are mandatory
VPS 1
Terms of Engagement
VPS 2
Inspections, investigations & records
VPS 3
Valuation Reports
VPS 4
Bases of value, assumptions and special assumptions
VPS 5
Valuation approaches and methods
What is a VPGA?
RICS Valuation Practice Guidance Applications
Can you tell me what is covered under VPGA 1
Valuation for inclusion in financial statements
Can you tell me what is covered under VPGA 2
Valuation for interests for secured lending
Can you tell me what is covered under VPGA 3?
Valuation of businesses and business interests
Can you tell me what is covered under VPGA 4?
Valuation of individual trade related properties
Can you tell me what is covered under VPGA 5?
Valuation of plant and equipment
Can you tell me what is covered under VPGA 6?
Valuation of intangible assets
Can you tell me what is covered under VPGA 7?
Valuation of personal property, including arts and antiques
Can you tell me what is covered under VPGA 8?
Valuation of real property interests
Can you tell me what is covered under VPGA 9?
Identification of portfolios, collections and groups of properties
Can you tell me what is covered under VPGA 10?
Matters that may give rise to material valuation uncertainty
When might a valuation not be Red Book?
Agency (market appraisal)
Expert Witness
Internal purposes
Statutory
Litigation (rent review)
What is a valuation date?
Date on which opinion of value applies
What is the date of the valuation report?
Date on which the valuer signs the report
What is the difference between an assumption and a special assumption?
An assumption is something that is taken to be true without the valuer needing to verify (e.g., we have assumed the services at the property are in working order). A special assumption is something that is known not to be true, but is taken as true for the purpose of the valuation (e.g., vacant possession when property is occupied)
Are there any RICS guidance notes or professional statements you would have regard to when carrying out valuations?
RICS Sustainability and ESG Professional Statement
Comparable Evidence in Real Estate Valuation (professional standard - effective October 2019)
What are the principles/purposes of PII?
The purpose of professional indemnity insurance is to ensure that if a firm faces a claim it is protected from financial loss that it cannot meet from its own resources.
Does the RICS provide any guidance to assist regulated firms understanding risks and liabilities associated with professional services provided by its members?
Risk, liability and insurance - guidance note effective April 2021
What is a liability cap?
Contractual agreement a client can only claim damages up to the amount agreed, even if the law would otherwise award a greater sum in damages
What are minimum limit of indemnity?
Firms turnover in proceeding year £100,000 or less = minimum limit of indemnity £250,000
Firms turnover in proceeding year £100,001 to £200,000 = minimum limit of indemnity £500,000
Firms turnover in proceeding year £201,000 or above= minimum limit of indemnity £1,000,000
What are the different purposes valuations are undertaken for?
Asset
Tax
Loan Security
Pension
Probate
Why is due diligence taken?
To check there are no material matters which could impact on the valuation
What statutory due diligence do you undertake as part of the valuation process?
Business Rates; contamination; EPC; flooding; legal title and tenure
Why is it important to understand the purpose of a valuation?
To consider the appropriate risks
How many minimum terms must be included in the ToE and can you name a few?
18 minimum terms:
o Identification and status of valuer
o Identification of client
o Identification of any other intended users
o identification of the assets/liability being valued
o purpose
o basis of value
How many report headings must be included as per VPS 3 and can you name a few?
16 minimum headings:
o Identification and status of valuer
o Identification of client and other intended users
o Purpose
o Identification of asset/liability
o Basis of value
o Valuation date
What is the definition of 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 where parties acted knowledgeably, prudently and without compulsion
What is the definition of Market Rent?
The 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 market terms, in an arm’s length transaction, after proper marketing where parties acted knowledgeably, prudently and without compulsion
What is Investment Value?
The value of an asset to the owner or a prospective owner for individual investment or operational objectives
What is Fair Value?
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
Used for IFRS 13 for accounts purposes
What is the process to become a registered valuer?
Valuation to L3 at APC
Valuer Registration Application Form
Renewed annually by firm
Alternative route requires an assessment, 100 days valuation experience signed off by registered valuer, case study submission and CPD
Which parts of the Red Book apply specifically to loan security?
VPS 1-5
VPGA 2 – valuation of interests for secured lending
VPGA 8 – valuation of real property interests
VPGA 10 – matters that may give rise to valuation uncertainty
Are you aware of a recent piece of valuation negligence case law?
Hart v Large
Highlights that you must be clear and advise clients on the survey level and scope of inspection, limitations and caveats
What is an internal valuer?
Employed by company to value internal assets, no third party reliance
What is an external valuer?
Has no material links with the asset to be valued
What are the three steps to undertake prior to commencing with a valuation instruction?
Competence
Independence
Terms of engagement
What are the 6 steps when undertaking the comparative method?
- Search
- Verify
- Schedule
- Hierarchy
- Analyse
- Report
What is a yield?
A measurement of investment return, expressed as a percentage of capital invested
How do you calculate a yield?
Income/price x 100
What is a years purchase?
Number of years required for its income to repay its purchase
How do you calculate a Years Purchase?
100/Yield
What are some key risks that should be considered when arriving at a yield?
Quality of covenant
Lease terms
Voids
Security
Use of property
Market sentiment
What is a gross yield?
Not adjusted for purchasers costs
What is a net initial yield?
Adjusted for purchasers costs
What are the 3 valuation approaches?
Market
Income
Cost
What are the 5 valuation methods?
Comparable
Investment
Profits
Depreciated Replacement Cost
Residual
When would you use the investment method and how?
When there is an income stream to value. The conventional method assumes growth implicit valaution approach. The rental income is capitalised to produce a capital valuation.
When would you carry out a hardcore and top slice valuation? And what does the hardcore represent?
When the property is over-rented / hardcore represents the market rent
When would you use the term and reversion method of valuation?
When the property is under-rented
When would you use the profits method?
For a trading premises
Can you explain the methodology behind a profits valuation?
The value is dependent on business profitability. It is derived from an assessment of the FMT (fair maintainable turnover) and deducting costs, reasonable working expenses and operators remuneration to establish the FMOP (fair maintainable operating profit) capable of being achieved by a REO (reasonable efficient operator) and is then capitalised at a yield to achieve a market value
What is the Depreciated Replacement Cost Method?
The current cost of replacing an asset with its modern equivalent asset less any deductions for physical deterioration and all relevant forms of obsolescence and optimisation
What is the Residual Method?
The purpose is to calculate what a developer should be paying for a development site. This is done by working out the GDV and deducting all associated costs in completing the development (i.e., site prep, marketing, contingency) and deducting developers profit which leaves a surplus (residual) which is the amount a developer can be expected to pay for the development site
What does growth implicit mean?
Rental growth is built into the choice of yield and not explicitly modelled within the calculation
What is the market approach?
An approach which provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available
What is the cost approach?
An approach that provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or construction
What is the income approach?
An approach that provides an indication of value by converting future cash flows to a single current capital value
What are the main drivers that can have an impact on a property’s value?
Location
Condition
Lease terms
Tenant covenant
When might you undertake a desktop valuation?
Where the property has been previously inspected by the valuer/firm
When following discussion with the client, they have confirmed that there have been no material changes to the physical attributes/location of the property
Any assumptions made to this affect must be set out in the ToE
Guidance is within VPS 2
What changes did the new Red Book introduce?
- Alignment with developments in other relevant global standards and regulations such as the new International Valuation Standards (IVS)
- The addition of new content relating to modelling and methods
- Adaptation to practice and process changes from evolving areas such as technology and ESG
