Valuation

Question 1

What are the THREE steps you should undertake prior to commencing a valuation?

Answer 1

CCT:

Competence - check you have the correct level of skills, understanding and knowledge
Conflict of Interest - check you are able to act independently on the instruction
Terms of engagement - issue to the client and receive written confirmation

Question 2

Why do you undertake statutory due diligence for valuations?

Answer 2

Confirm that there are no material matters which could impact on the valuation

Question 3

What types of statutory due diligence checks would you undertake when valuing a property?

Answer 3

Asbestos register
Business rates / Council tax
Contamination
Equality Act Compliance
Environmental matters (high voltage power lines, electricity sub-stations, telecoms masts etc.)
EPC rating if available
Flooding
Fire safety compliance
Health and safety compliance
Highways (check roads adopted with the local highways agency)
Legal title and tenure (check boundaries, ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves)
Public rights of way (from an OS sheet)
Planning history and compliance (check any onerous planning conditions, whether the property is in a conservation area / listed and subject to a s. 106 agreement or CIL)

Question 4

What are the FIVE main methods of valuation?

Answer 4

Comparable method
Investment method
Profits method
Residual method
Depreciated replacement cost method

Question 5

What are the SIX steps used when collecting comparable evidence?

Answer 5

Search and select comparables (agent’s boards, online databases)
Confirm / verify information with a party directly involved in the transaction
Assemble comparables in a schedule
Interpret comparables using hierachy of evidence
Analyse comaprables to form an opinion of value
Report value and prepare file note

Question 6

What is the hierarchy of direct comparable evidence outlined in the RICS Comparable evidence in real estate valuation, 2019?

Answer 6

Contemporary, completed transactions of near-identical properties for which full and accurate information is available (may include the subject property)
Contemporary, completed transactions of other, similar real estate assets for which full and accurate information is available
Contemporary, completed transactions of similar real estate for which full data may not be available
Similar real estate being marketed where offers have been made but a binding contract has not been completed
Asking prices (with careful analysis)

Question 7

What are the THREE categories of evidence outlined in RICS Comparable evidence in real estate valuation, 2019?

Answer 7

Category A: direct comparables
Category B: general market data
Category C: other sources

Question 8

What is the hierarchy of general market data outlined in the RICS Comparable evidence in real estate valuation, 2019?

Answer 8

Information from published sources or commercial databases
Other direct evidence (e.g. indices)
Historic evidence
Demand/supply data for rent, owner-occupation or investment

Question 9

What is the hierarchy of other sources outlined in the RICS Comparable evidence in real estate valuation, 2019?

Answer 9

Transactional evidence from other real estate type and locations
Other background data (e.g. interest rates, stock market movement and returns which can given an indication for real estate yields)

Question 10

When would you use the investment method of valuation?

Answer 10

Used when there is an income stream to value

Question 11

How does the conventional investment method work?

Answer 11

Rent received (or Market Rent) x Years Purchase = Market Value
Assumes growth implicit valuation approach

Question 12

When would you use a Term and Reversion method? How does it work?

Answer 12

Used for reversionary investments i.e. where Market Rent is more than passing rent
Term capitalised until next rent review / lease expiry at an initial yield
Reversion to Market Rent valued into perpetuity at reversionary yield

Question 13

What is a yield?

Answer 13

Measure of investment return, expressed as a percentage of capital invested
Calculated as income divided by price x 100

Question 13

When would you use the Layer / Hardcore method? How does it work?

Answer 13

Used for over-rented investment i.e. where passing rent is more than Market Rent
Income flow divided horizontally
Bottom slice = Market Rent
Top slice = passing rent - Market rent until the next lease event
Higher yield applied to the top slice to reflect additional risk
Different yields used depending on comparable investment evidence and relative risk

Question 14

What are the different types of ground rent?

Answer 14

• Fixed ground rent
  The amount of ground rent remains the same throughout the lease term. However, the freeholder can renegotiate the cost if a request is made for an extension.
• Escalating ground rent
  The amount of ground rent increases over the lease term in set amounts over a set period.

Question 15

When would you use the profits method of valuation?

Answer 15

Used for the valuation of trade related property where the value of the property is directly linked to the profit generated by the business e.g. pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure, healthcare properties and care homes

Question 16

When would you use the depreciated replacement cost method of valuation?

Answer 16

Where direct market evidence is limited or not available for specialised properties e.g. sewage works, lighthouses, oil refineries, docks, schools, submarine base etc.

Question 17

What is the purpose of the depreciated replacement cost method of valuation?

Answer 17

Used for owner-occupied properties
For accounts purposes for specialist properties
For rating valuations of specialist properties

Question 18

What are the TWO steps of the depreciated replacement cost method of valuation?

Answer 18

Value land in its existing use (assume planning permission exists)
Add current cost of replacing the building plus fees (used BCIS). Then make a discount for depreciation and obsolesce / deterioration

Question 19

How do you estimate the amount to depreciate the property by when using the depreciated replacement cost (DRC) method of valuation?

Answer 19

Physical obsolescence - result of deterioration / wear and tear over the years
Functional obsolescence - where the design or specification of the asset no longer fulfils the function for what it was originally designed
Economic obsolescence - due to changing market conditions for the use of the asset

Question 20

When did the new RICS Valuation - Global Standards become effective as of?

Answer 20

The latest edition of the RICS Valuation - Global Standards, also known as the Red Book, came into effect on January 31, 2022. This was the same day as the latest edition of the International Valuation Standards (IVS), which the Red Book adopts and applies