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EG Core & Optional > Valuation > Flashcards

Valuation Flashcards

1
Q

What is the RICS Red Book called?

A

RICS Valuation - Global Standards

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2
Q

When was the RICS Red Book (global) published?

A

published November 2021 and effective 31 January 2022

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3
Q

What is the purpose of the Red Book?

A

Consistency, objectivity, transparency

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4
Q

What is the Red Book?

A

Set of global standards which set out procedural rules and guidance for written valuations

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5
Q

What is a VPS?

A

Valuation Technical and Performance Standards and they are mandatory

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6
Q

VPS 1

A

Terms of Engagement

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7
Q

VPS 2

A

Inspections, investigations & records

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8
Q

VPS 3

A

Valuation Reports

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9
Q

VPS 4

A

Bases of value, assumptions and special assumptions

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10
Q

VPS 5

A

Valuation approaches and methods

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11
Q

What is a VPGA?

A

RICS Valuation Practice Guidance Applications

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12
Q

Can you tell me what is covered under VPGA 1

A

Valuation for inclusion in financial statements

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13
Q

Can you tell me what is covered under VPGA 2

A

Valuation for interests for secured lending

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14
Q

Can you tell me what is covered under VPGA 3?

A

Valuation of businesses and business interests

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15
Q

Can you tell me what is covered under VPGA 4?

A

Valuation of individual trade related properties

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16
Q

Can you tell me what is covered under VPGA 5?

A

Valuation of plant and equipment

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17
Q

Can you tell me what is covered under VPGA 6?

A

Valuation of intangible assets

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18
Q

Can you tell me what is covered under VPGA 7?

A

Valuation of personal property, including arts and antiques

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19
Q

Can you tell me what is covered under VPGA 8?

A

Valuation of real property interests

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20
Q

Can you tell me what is covered under VPGA 9?

A

Identification of portfolios, collections and groups of properties

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21
Q

Can you tell me what is covered under VPGA 10?

A

Matters that may give rise to material valuation uncertainty

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22
Q

When might a valuation not be Red Book?

A

Agency (market appraisal)
Expert Witness
Internal purposes
Statutory
Litigation (rent review)

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23
Q

What is a valuation date?

A

Date on which opinion of value applies

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24
Q

What is the date of the valuation report?

A

Date on which the valuer signs the report

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25
Q

What is the difference between an assumption and a special assumption?

A

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)

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26
Q

Are there any RICS guidance notes or professional statements you would have regard to when carrying out valuations?

A

RICS Sustainability and ESG Professional Statement

Comparable Evidence in Real Estate Valuation (professional standard - effective October 2019)

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27
Q

What are the principles/purposes of PII?

A

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.

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28
Q

Does the RICS provide any guidance to assist regulated firms understanding risks and liabilities associated with professional services provided by its members?

A

Risk, liability and insurance - guidance note effective April 2021

29
Q

What is a liability cap?

A

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

30
Q

What are minimum limit of indemnity?

A

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

31
Q

What are the different purposes valuations are undertaken for?

A

Asset
Tax
Loan Security
Pension
Probate

32
Q

Why is due diligence taken?

A

To check there are no material matters which could impact on the valuation

33
Q

What statutory due diligence do you undertake as part of the valuation process?

A

Business Rates; contamination; EPC; flooding; legal title and tenure

34
Q

Why is it important to understand the purpose of a valuation?

A

To consider the appropriate risks

35
Q

How many minimum terms must be included in the ToE and can you name a few?

A

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

36
Q

How many report headings must be included as per VPS 3 and can you name a few?

A

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

37
Q

What is the definition of Market Value?

A

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

38
Q

What is the definition of Market Rent?

A

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

39
Q

What is Investment Value?

A

The value of an asset to the owner or a prospective owner for individual investment or operational objectives

40
Q

What is Fair Value?

A

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

41
Q

What is the process to become a registered valuer?

A

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

42
Q

Which parts of the Red Book apply specifically to loan security?

A

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

43
Q

Are you aware of a recent piece of valuation negligence case law?

A

Hart v Large
Highlights that you must be clear and advise clients on the survey level and scope of inspection, limitations and caveats

44
Q

What is an internal valuer?

A

Employed by company to value internal assets, no third party reliance

45
Q

What is an external valuer?

A

Has no material links with the asset to be valued

46
Q

What are the three steps to undertake prior to commencing with a valuation instruction?

A

Competence
Independence
Terms of engagement

47
Q

What are the 6 steps when undertaking the comparative method?

A
  • Search
  • Verify
  • Schedule
  • Hierarchy
  • Analyse
  • Report
48
Q

What is a yield?

A

A measurement of investment return, expressed as a percentage of capital invested

49
Q

How do you calculate a yield?

A

Income/price x 100

50
Q

What is a years purchase?

A

Number of years required for its income to repay its purchase

51
Q

How do you calculate a Years Purchase?

A

100/Yield

52
Q

What are some key risks that should be considered when arriving at a yield?

A

Quality of covenant
Lease terms
Voids
Security
Use of property
Market sentiment

53
Q

What is a gross yield?

A

Not adjusted for purchasers costs

54
Q

What is a net initial yield?

A

Adjusted for purchasers costs

55
Q

What are the 3 valuation approaches?

A

Market
Income
Cost

56
Q

What are the 5 valuation methods?

A

Comparable
Investment
Profits
Depreciated Replacement Cost
Residual

57
Q

When would you use the investment method and how?

A

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.

58
Q

When would you carry out a hardcore and top slice valuation? And what does the hardcore represent?

A

When the property is over-rented / hardcore represents the market rent

59
Q

When would you use the term and reversion method of valuation?

A

When the property is under-rented

60
Q

When would you use the profits method?

A

For a trading premises

61
Q

Can you explain the methodology behind a profits valuation?

A

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

62
Q

What is the Depreciated Replacement Cost Method?

A

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

63
Q

What is the Residual Method?

A

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

64
Q

What does growth implicit mean?

A

Rental growth is built into the choice of yield and not explicitly modelled within the calculation

65
Q

What is the market approach?

A

An approach which provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available

66
Q

What is the cost approach?

A

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

67
Q

What is the income approach?

A

An approach that provides an indication of value by converting future cash flows to a single current capital value

68
Q

What are the main drivers that can have an impact on a property’s value?

A

Location
Condition
Lease terms
Tenant covenant

69
Q

When might you undertake a desktop valuation?

A

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

EG Core & Optional (4 decks)

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