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APC > Valuation > Flashcards

Valuation Flashcards

1
Q

Explain your understanding of the rotation rules for valuation

A

RICS release an UK supplement of the Red Book wef 1st May 2024

Firms- no more than 10 consecutive years
Single Engagement- 5 Years
Individual- 5 Years
Break- 3 Years after rotating off

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2
Q

What is the residual method and how is it applied

A

The residual method establishes how much a purchaser should pay for a development site.

GDV - Costs= Residual

On a set date!

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3
Q

What is the profit method and how is it undertaken?

A
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4
Q

Talk me through the steps before a valuation instruction

A

1) Ensure I was Competent to undertake the work - if not RICS find a surveyor or refer them internally
2) Conflict of Interest
3) Terms of Engagement

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5
Q

Examples of due diligence undertaken for valuation?

A

Business Rates
EPC
Flood Risk
Legal title and Tenue
Planning Hisotry

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6
Q

Why undertake due diligence for valuation?

A

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

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7
Q

Timeline of a valuation instruction

A
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8
Q

5 Main Methods of Valuation

A

Comparable
Profits
Residual
DRC
Investment

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9
Q

Three Valuation Approaches and which document states them

A

IVS105
Income e.g Investment, Residual and Profits
Cost e.g DRC
Market e.g Comparable

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10
Q

What is the RICS document you use when undertaking comparable valuations?

A

RICS Professional Standard: Comparable Evidence in Real Estate Valuation, 1st Edition 2019 - set out the hierarchy of evidence

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11
Q

What is the Hierarchy of evidence?

A

Category A- Direct e.g near- identical properties, heads of terms, asking price
Category B- General Market e.g HPI, historical evidence
Category C- Other sources e.g other locations or yield market data

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12
Q

Steps of collecting comparable evidence ( 5 Points)

A

1) Collect
2) Verify
3) Assemble
4) Adjust and analyse
5) Report and record

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13
Q

What is the Term and Reversion Method

A

Under-rented properties
Capitalise rent till the end of the term
Reversion to MR, valued into perpetuity at RY

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14
Q

What is the Hardcore/Layer Method

A

Over rented
Slice the income horizontally
Higher yield top slice
Lower yield bottom slice

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15
Q

What is the conventional investment method

A

MR X YP

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16
Q

How do you calculate YP

A

If Under or Over rented
Years Purchase is 1 - (1+ yeild)− years divided by yield

E.g a property 3 years to lease expiry, the yield is 5%, the YP is a multiplier ( 0.8524)

The next step is to times the MR x multiplier to get Capital Value

Rack Rented
YP = 100/ yeild

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17
Q

What is a Yield

A

The measure of investment return. as a % of capital invested

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18
Q

How do you determine a yield

A

Assess the level of risks i.e rental and capital growth, location, use, voids and comprables

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19
Q

What is a return? (VALS)

A

Used to describe the performance of a property
DCF calcs find the IRR

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20
Q

What is a NIY

A

Resulting yield adjusted for purchasers cost

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21
Q

What is an equivalent yield

A

Average weight yield for a reversionary property

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22
Q

What is a reversionary yield

A

MR/ Current Price

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23
Q

What is a running yield

A

A yield at one moment in time

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24
Q

What is an All Risks Yield

A

Rate of interest in a valuation assuming fully let reflecting all risk of the investment

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25
Q

What are the current yields in Birmingham

A
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26
Q

What is a DCF

A

A discounted cash flow is an income approach valuation, whereby you look at the net future income or cashflow of a property and discount that back to the present current value

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27
Q

When might you use a DCF?

A

Phased developments, Long rent review, social housing

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28
Q

Methodology of a DCF

A

1) Cash flow ( Income- Expenditure ) for a agreed period
2) Exisit value at the end of agreed period
3) Discount the cash flow
4) VOila = NPV

29
Q

What is NPV and what does it tell us?

A

Net Present Value- The sum of discounted cash flows
Positive- Investment exceeds the investor’s target rate of return
Negative- Not achieving target rate of return

30
Q

What is IRR and what does it tell us?

A

Internal Rate of Return - a rate of return at which all future cashflow must be discounted to arrive at an NPV of 0

31
Q

Talk me through the profits method and when it might be used?

A

Annual Turnover(Income) less costs = Gross Profit
Less reasonable working expenses Unadjusted Net Profit
Less operators remuneration = Adjsut Net Profit i.e Fair Maintainable Operating Profit or EBITA

which you would then capitalised at an appropriate yield to achieve market value

For Trade Related Properties i.e Pubs

32
Q

What is the contractor’s method/ DRC

A

Value the land of existing use
Cost of replacing the building plus fess
Minus the discount for depreciation

Used for specialist properties i.e lighthouse

Not red book complaint for secured lending

33
Q

What is the purpose of the red book?

A

Sets out the professional and & technical standards for valuation to ensure consistency, objectivity and transparency

34
Q

What does the RICS Comprable evidence Profess Statement do ( 4 Points)

A

It sets out the use of comparable evidence in the valuation process
- it outlines the principle use of comp evidence
- encourages consistency in the use of comps
- addresses issues with availability and use of comps
- considers the potential source of comps

35
Q

What is the full definition of the red book and when is it effective?

A

RICS Valuation- Global Standards 2021 effective 31st Jan 2022 but supplemented 1st May 2024

36
Q

5 Exemptions to the red book and relevant Red Book Rerenece

A

PS 1 - Mandatory
1) For Litigation purposes or negotiations
2) Statutory function except for statutory tax turn
3) Internal purposes without liability
4) Agency or brokerage work
5) expert witness

37
Q

What is PS 2

A

PS 2 refers to Ethics, Competency, Objectivity and Disclosures

Mandatory for valuations and discussed TOE, Rules of Conduct, COI

38
Q

What is VPS1& what are the 18 principles?

A

Terms of Engagement (IVS 101 Scope of Works)

a identification and status of the valuer
b Identification of the client(s)
c Identification of any other intended users
d Identification of the asset(s) or liability(ies) being valued
e Valuation (financial) currency
f Purpose of the valuation
g Basis(es) of value adopted
h Valuation date
i Nature and extent of the valuer’s work – including investigations – and any limitations
thereon
j Nature and source(s) of information upon which the valuer will rely
k All assumptions and special assumptions to be made
l Format of the report
m Restrictions on use, distribution and publication of the report
n Confirmation that the valuation will be undertaken in accordance with the IVS
o The basis on which the fee will be calculated
p Where the firm is registered for regulation by RICS, reference to the firm’s complaints
handling procedure, with a copy available on request
IP36
RICS VALUATION – GLOBAL STANDARDS
q A statement that compliance with these standards may be subject to monitoring
under RICS’ conduct and disciplinary regulations
r A statement setting out any limitations on liability that have been agreed.

39
Q

What is included in terms of engagement

A

identification of client, valuer, and any third party
The property
purpose of the valuation
Date of the valuation
Assumptions and special assumptions
Fee basis
Complaints handling procedure
Insurance - any limitations on liability and PI cover

40
Q

Is there a difference between red book and IVS

A

No- Red Book Incorporates IVS

41
Q

What is the residual method of valuation?

A

Approach used to find the Value of the site base on market inputs, as at the valuation date

It is a form of development appraisal- dev app used to form residual

42
Q

Can you talk me through the methodology of a residual site valuation?

A

Gross development value (GDV) - Total development costs (TDC) = Gross site value

Gross site value - purchasers’ costs = Residual site value

43
Q

What yiild is used in Residual Method?

A

All Risks Yield

44
Q

What are the limitations of the residual valuation methodology?

A

Dependent on accurate information and inputs
Does not consider timing of cash inflows
Very sensitive to minor adjustments
Implicit assumptions hidden and not explicit (Unlike DCF)

45
Q

What guidance did the RICS release on valuing development property?

A

RICS Valuation of development property, 2019

46
Q

How is development property defined in RICS Valuation of development property, 2019?

A

Interests where redevelopment is required to achieve the highest and best use or where improvements are either being contemplated or are in progress at the valuation date

47
Q

According to RICS Valuation of development property, 2019, what should Market Value for a development property assume?

A

Optimum development i.e. the development which yields the highest value, taking into account the perspective economic and planning conditions

48
Q

How should you value land that is in the course of development according to RICS Valuation of development property, 2019

A
  • Value of the land + costs expended at the valuation date

and/or

  • Completed development value - costs remaining to be expended at the valuation date
49
Q

What does RICS Valuation of development property, 2019 state about the use of multiple valuation approaches?

A

Best practice avoids reliance on a single approach or method of assessing the value of development property

Output should always be cross-checked using another method (market comparison approach, residual method)

50
Q

What is the purpose of the comparable evidence guidance by RICS

A
  • Outlines principle Use
  • Encourages consistency
  • Potential sources
51
Q

What is the difference between Assumption and Special Assumptn

A

Ass- Reasonable to be true
Spe- Not known to be true
e.g Vacant Possession

52
Q

If it was for accounting purposes what bases would you value and define them

A

Fair Value IFRS 12
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

53
Q

When would you be required to use Fair Value

A

If the client adopts International Financial Reporting Standards

54
Q

Difference between Market Value and Fair Value

A

Fair Value
No market forces
Measurement date vs Valuation Date

55
Q

What is the WAULT and how do you calculate?

A

Weighted Average Unexpired Lease Term = Sum of all contracted rent divided by annual rent, expressed in years

56
Q

When might you use an equivalent yield?

A
  • Short Term
  • Vacant Property
57
Q

What is a special purchaser?

A

A particular buyer for whom an asset has special value

58
Q

What is Stamp Duty

A

Tax paid by purchaser for transfer of land/building

59
Q

What are current stamp duty levels?

A
60
Q

What is VPS 2

A

Inspections, investigations and records

61
Q

What is VPS 3

A

Valuation Reports

62
Q

What is VPS 4

A

Basis of value, assum/special

63
Q

What is VPS 5

A

Valuation approaches and method

64
Q

What part of the red book does secured lending come under?

A

VPGA 2

65
Q

What is Market Value

A

The estimated amount for which an asset should exchange:
- On Valuation Date
- Between Willing Buyer/Seller
- Arms Length Transaction
- After Proper Marketing
- Parties act knowledgably ,prudently and without compulsion

66
Q

What is Market Rent

A

The estimated amount for which an interest in real property should be leased:
- Valuation Date
- Between Willing Buyer/Seller
- Arms Length Transaction
- After Proper Marketing
- Parties act knowledgably ,prudently and without compulsion

67
Q

What is a nominal yield?

A

Assume rent paid in arrears

68
Q

Structure of the Red Book?

A

Man
PS1- Compliance
PS2- Ethics
VPS 1 - TOE
VPS 2- Inspections
VPS 3- Report
VPS 4 - Basis of Value
VPS 5- Method of Value
Advisotry
VPGA 2- Valuation of Interest for Secured Lending
VPGA 8 - Valuation of real property interests (Inspection and Sustainability)
VPGA 9 - Portfolios

69
Q

Hierarchy of comparable evidence

A

1) Direct-Identical or Similar
2) General Market- Indicies or Costar
3) Other Source - Yields, Interest

APC (33 decks)

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