Valuation Flashcards
Explain your understanding of the rotation rules for valuation
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
What is the residual method and how is it applied
The residual method establishes how much a purchaser should pay for a development site.
GDV - Costs= Residual
On a set date!
What is the profit method and how is it undertaken?
Talk me through the steps before a valuation instruction
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
Examples of due diligence undertaken for valuation?
Business Rates
EPC
Flood Risk
Legal title and Tenue
Planning Hisotry
Why undertake due diligence for valuation?
To check there are no material matters which could impact upon the valuation
Timeline of a valuation instruction
5 Main Methods of Valuation
Comparable
Profits
Residual
DRC
Investment
Three Valuation Approaches and which document states them
IVS105
Income e.g Investment, Residual and Profits
Cost e.g DRC
Market e.g Comparable
What is the RICS document you use when undertaking comparable valuations?
RICS Professional Standard: Comparable Evidence in Real Estate Valuation, 1st Edition 2019 - set out the hierarchy of evidence
This is being updated !!
What is the Hierarchy of evidence?
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
Steps of collecting comparable evidence ( 5 Points)
1) Collect
2) Verify
3) Assemble
4) Adjust and analyse
5) Report and record
What is the Term and Reversion Method
Under-rented properties
Capitalise rent till the end of the term
Reversion to MR, valued into perpetuity at RY
What is the Hardcore/Layer Method
Over rented
Slice the income horizontally
Higher yield top slice
Lower yield bottom slice
What is the conventional investment method
MR X YP
How do you calculate YP
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
What is a Yield
The measure of investment return. as a % of capital invested
How do you determine a yield
Assess the level of risks i.e rental and capital growth, location, use, voids and comprables
What is a return? (VALS)
Used to describe the performance of a property
DCF calcs find the IRR
What is a NIY
Resulting yield adjusted for purchasers cost
What is an equivalent yield
Average weight yield for a reversionary property
What is a reversionary yield
MR/ Current Price
What is a running yield
A yield at one moment in time
What is an All Risks Yield
Rate of interest in a valuation assuming fully let reflecting all risk of the investment
What are the current yields in Birmingham
What is a DCF
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
When might you use a DCF?
Phased developments, Long rent review, social housing
Methodology of a DCF
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
What is NPV and what does a positive or negative NPV MEAN
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
What is IRR and what does it tell us?
Internal Rate of Return - a rate of return at which all future cashflow must be discounted to arrive at an NPV of 0
Talk me through the profits method and when it might be used?
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
What is the contractor’s method/ DRC
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
What is the purpose of the red book?
Sets out the professional and & technical standards for valuation to ensure consistency, objectivity and transparency
What does the RICS Comprable evidence Profess Statement do ( 4 Points) - note that it’s being updated!
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
What is the full definition of the red book and when is it effective?
RICS Valuation- Global Standards 2021 effective 31 January 2025
UK supplemented 1st May 2024
5 Exemptions to the red book and relevant Red Book Rerenece
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
What is PS 2
PS 2 refers to Ethics, Competency, Objectivity and Disclosures
Mandatory for valuations and discussed TOE, Rules of Conduct, COI
What is VPS1& what are the 18 principles?
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.
What is included in terms of engagement
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
Is there a difference between red book and IVS
No- Red Book Incorporates IVS
What is the residual method of valuation?
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
Can you talk me through the methodology of a residual site valuation?
Gross development value (GDV) - Total development costs (TDC) = Gross site value
Gross site value - purchasers’ costs = Residual site value
What yield is used in Residual Method?
All Risks Yield
The All Risks Yield (ARY) in property valuation refers to the rate of return an investor would expect to receive on a property, considering both its income-generating potential and the associated risks. It’s commonly used to assess the value of commercial real estate by calculating the ratio between the net operating income (NOI) of a property and its market value. Essentially, it reflects the overall risk of the property market, including factors like location, tenant stability, and economic conditions. A higher ARY suggests higher risk and potentially higher returns, while a lower ARY indicates lower risk and returns.
What are the limitations of the residual valuation methodology?
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)
What guidance did the RICS release on valuing development property?
RICS Valuation of development property, 2019
How is development property defined in RICS Valuation of development property, 2019?
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
According to RICS Valuation of development property, 2019, what should Market Value for a development property assume?
Optimum development i.e. the development which yields the highest value, taking into account the perspective economic and planning conditions
In what 2 ways can you value land that is in the course of development according to RICS Valuation of development property, 2019
- Value of the land + costs expended at the valuation date
and/or
- Completed development value - costs remaining to be expended at the valuation date
What does RICS Valuation of development property, 2019 state about the use of multiple valuation approaches?
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)
What is the purpose of the comparable evidence guidance by RICS
- Outlines principle Use
- Encourages consistency
- Potential sources
What is the difference between Assumption and Special Assumptn
Ass- Reasonable to be true
Spe- Not known to be true
e.g Vacant Possession
If it was for accounting purposes what bases would you value and define them
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
When would you be required to use Fair Value
If the client adopts International Financial Reporting Standards ( accounting standards )
Difference between Market Value and Fair Value
Fair Value
No market forces
Measurement date vs Valuation Date
What is the WAULT and how do you calculate?
Weighted Average Unexpired Lease Term = Sum of all contracted rent divided by annual rent, expressed in years
When might you use an equivalent yield?
- Short Term
- Vacant Property
- instead of applying specific yield to term and reversion which can be hard to justify can apply one equiv yield from market comps
What is a special purchaser?
A particular buyer for whom an asset has special value
What is Stamp Duty
Tax paid by purchaser for transfer of land/building
What are current stamp duty levels for commercial property ?
Property or lease premium or transfer value
Up to £150,000 - Zero
The next £100,000 (the portion from £150,001 to £250,000) - 2%
The remaining amount (the portion above £250,000) - 5%
What is VPS 2
Inspections, investigations and records
What is VPS 3
Valuation Reports
What is VPS 4
Basis of value, assum/special
What is VPS 5
Valuation approaches and method
What part of the red book does secured lending come under?
VPGA 2
What is Market Value
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
What is Market Rent
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
What is a nominal yield?
Assume rent paid in arrears
Structure of the Red Book?
Man
PS1- Compliance
PS2- Ethics
VPS 1 - TOE
VPS 2- Bases of value
VPS 3- Valuation approaches & method
VPS 4 - Inspections
VPS 5- Valuation models
VPS 6 - Valuation Reports
Advisotry
VPGA 2- Valuation of Interest for Secured Lending
VPGA 8 - Valuation of real property interests (Inspection and Sustainability)
VPGA 9 - Portfolios
Hierarchy of comparable evidence
1) Direct-Identical or Similar
2) General Market- Indicies or Costar
3) Other Source - Yields, Interest
Simply what is a yield & how can it be expressed
a yield is simply the annual return on an investment expressed as a percentage. It can be calculated by dividing the rental income by the purchase price (and multiplying this by 100).
What is an assumption and a special assumption according to rics red book ? Give example of each
valuation technical and performance standard (VPS) 4 in Red Book Global Standards discusses the use of assumptions and special assumptions.
An assumption is defined as something that is reasonable for the valuer to accept without the need for specific investigation or verification – for example, an assumption about tenure, property condition or services.
In contrast, a special assumption is where the valuer bases their work on factors that do not apply at the valuation date, or that would not be considered by a typical market participant at that time. For example, they may make a valuation based on a plot having planning consent when none has been granted, or they could value a development site based on the works being completed.
What is appendix a of rics comparable evidence
Key comparative elements applicable to most types e.g location
What is appendix a of rics comparable evidence
Key comparative elements applicable to most types e.g location
What is appendix b of rics comparable statement
Facits affecting value and comparability by sector eg offices - layout and flexibility
Explain what a YP is
A YP is a capitalising factor which converts a future stream of income to a present capital sum
It is the present value of an income of £1 per annum discounted in a year to year basis at a yield rate
What is the formula for YP in perp for a freehold and how would you calculate the capital value
YP in perp = 1/i where i is yield
Cap val - net rental income x YP in perp( the multiplier)
What is the definition of MV?
The amount that an asset or liability will exchange for at the valuation date on the assumption that it is an arms length transaction between a willing buyer and a willing seller where parties have acted prudently, knowledgeably and without compulsion.
What is fair value
The price would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the MEASUREMENT date
What is investment value
The value of an asset to the owner or prospective owner for individual investment or operational objective
What has changed as part of the red book restructuring
VPs 2 is now vps 4
VPs 3 is now VPs 6
VPs 4 is now VPs 2
