Valuation Flashcards
What is an internal valuer
Employed by company to value the assets of the company
Valuation for internal use only
What is an external valuer
Has no material links with the asset to be valued or the client
What are three important steps to take when accepting a instruction
Check competence
Independence - COI or personal interest
Terms of engagement
What are some examples of statutory due diligence
Asbestos register
Business ratees
Contamination
EPC rating
Flooding
Legal title and tenure
Planning history
What is the sixteen step process of a valuation instruction
Receive instruction from client
Check competence
Check independence - no COI
Issue terms of engagement
Receive signed terms of engagement
Gather information - lease, title documents
Undertake due diligence
Inspect and measure
Research market and assemble, verify and analyse comparables
Undertake valuation
Draft report
Have valuation and report considered by another surveyor
Finalise and sign report
Report to client
Issue invoice
Ensure valuation file in good order for archiving
What are the five methods of valuation
Comparative method
Investment method
Profits method
Residual method
Contractor’s method
What document sets out the valuation approaches
IVS 105 Valuation Approaches and Methods
What are the three approaches of valuation
Income approach
Cost approach
Market approach
What is the income approach
The income approach is used to value real estate that produces an income for the investor
What is the cost approach
Reference to the cost of the asset whether by purchase of construction - contractors method
What is the Market approach
Using comparable evidence - comparative method
What are the 6 steps of the methodology of the comparative method
Search and select comparables
Confirm/verify details and analyse headline rent to give a net effective rent
Assemble comparables in schedule
Adjust comparables using the hierarchy of evidence
Analyse comparables to form opinion of value
Report value and prepare file note
What is the professional standard in relation to comparable evidence
RICS professional standard: Comparable evidence in Real Estate Valuation, 2019
What is the hierarchy of evidence
The relative weight attached to different types of evidence
What are the three categories within the hierarchy of evidence
Category A - Direct comparables of contemporary
Category B - General market data that can provide guidance
Category C - Other sourcesW
How do you find relevant comparables
Inspection of the area to find recent market activity through agents boards
Visit/speak to local agents
Auction results
In house records/ databases and websites
What is the investment method of valuation
Used when there is an income stream to value
How do you calculate the investment method of valuation
The rental income is capitalised to produce a capital value
What is the investment method
The investment method is used where there is an income stream to value, i.e. the property is tenanted.
What is the term and reversion method
Used for reversionary investments (market rent more than passing rent) i.e under rented
Term capitalised until next review/lease expiry at an initial yield
Reversion to market rent valued in perpetuity at a reversionary yield
What is the layer/hardcore method
Used for over rented investments (passing rent more than the market rent)
Income flow divided horizontally
Bottom slice = market rent
Top slice = rent passing less market rent until next lease event
Higher yield applied to top slice to reflect additional risk
What is a yield
A measure of investment return, expressed as a percentage of capital invested
How do you calculate a yield
Income divided by price x 100
What are the risk factors when determining a yield
Prospects for rental and capital growth
Quality of location and covenant
Use of property
lease terms
obsolescence
Voids
What is the definition of return
Used to describe the performance of a property
Measured retrospectively
use a contractors calculation to find the internal rate of return
What is an all risks yield
the remunerative rate of interest used in the valuation of fully elt property let at market rent reflecting all of the prospects and risks attached to the particular investment
What is a true yield
Assuems rent is paid in advcance not in arrears
What is a nominal yield
Initial yield asusming rent is paid in arrears
What is gross yield
The yield is not adjusted for purchasers costs
What is a net yield
The resulting yield adjusted for purchasers costs
What is an equivalent yield
Average weighted yield when a reversionary property is valued using an initial and reversionary yield
What is a initial yield
Simple income yield for current income and current price
What is a reversionary yield
Market rent divided by current price on an investment let at a rent below the market rent
What is a running yield
The yield at one moment in time
What is the discounted cash flow technique
Growth explicit investment method of valuation
Form of income approach valuation
seeks to determine the value of a property by examining its future net income and then discounting the cash flow to arrive at an estimated current value of the property
What types of property is a DCF used for
Short leasehold interests
Phased development projects
Non standard investments
Social housing
What is the method to working out the market value
Estimate the cash flow for an agreed holding period
Estimate the exit value at the end of the holding period
Select the discount rate
Discount cash flow at discount rate
Value is the sum of the completed discounted cash flow to provided the net present value
What is the net present value
The sum of the discounted cash flows of the project
What is in the internal rate of return
The rate of return at which all future cashflows must be discounted to produce a NPV of zero
How do you calculate the IRR
Input current market value as a negative cash flow
Input projected rents over holding period as a positive value
Input projected exit value at the end of the term assumed as a positive value
Discount rate is the rate chosen which provides an NPV of zero
If the NPV is more than zero then the target rate of return is met
What is the global guidance on DCF
RICS practice information: discounted cash flow valuations, November 2023
What is the purpose of the profits method of valuation
Used for valuations of trade related property
Used for pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure and healthcare properties
What is the methodology of the profits method of valuation
Annual turnover
less costs/purchases = gross profit
less reasonable working expenses = unadjusted net profit
less operators remuneration = adjusted net profit
Capitalized at appropriate yield to achieve market value - cross check with comps
What is the purpose of residual method of valuation and development appraisal
A development appraisal is a tool to financially assess the viability of a development scheme
what is a development appriasal
A calculator or series of calculations to establish the viability of a proposed development based upon the clients inputs
What is a residual site valuation
Most common purpose is for a specific valuation of a property holding to find the market value of the site based on market inputs
form of development appraisal
What is the methodology for a Residual site valuation
Gross development value
Market value of completed proposed development at todays date
Use plans if needed and measure
Valued at current date assuming present values and market conditions
Comparable method of valuation used to establish rents and yields
All risks yield used
What is the purpose of depreciated replacement cost method of valuation
Used for owner-occupied property
For accounts purposesW
What is the methodology of DRC
Value of the land in its existing use
Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence
What is physical obsolescence
Result of deterioration and wear and tear over the years
What is functional obsolescence
Where the design or spec of the asset no longer fulfils the function for what it was originally designed for
What is economic obsolescence
Due to the chaning market conditions for the use of the asset
Is the DRC method suitable for Red Book Global compliance
It is not suitable for secured lending purposes
What can DRC be used for
The calculation of market value for specialised properties only for valuations for financial statements
What is the guidance note in relation to DRC
RICS Guidance Note: depreciated replacement cost method valuation for financial reporting 2018
What is the structure of the RICS valuation - Global Standards 2021
Part 1 - introduction
Part 2 - Glossary
Part 3 - Professional Standards
Part 4 - Valuation technical and performance standards
Part 5 - Valuation applications
Part 6 - The international valuation standards
What is professional standards 1
Compliance with standards and practice statements where a written valuation is provided
When do you apply PS 1
When does a valuation have to be red book global compliant?
Under what circumstances is PS 1 not applicable
Mandatory for all valuations apart from:
- advice is provided in preperation for or during course of negotiations
- The valuer is performing a statutory function except for the provision of a valuation for inclusions in a statutory return to a tax authority
- The valuation is purely for internal purposes for the client
- The valuation is provided as part of agency and brokerage work
- The valuation advice is provided in anticipation of giving evidence as an expert witness
What is PS2
Ethics, competency, objectivity and disclosures
What are the key points in PS2
Professional and ethical standards
Independence, objectivity and the identification and management of conflicts of interest
Terms of engagement
What is part 4
Valuation technical and performance standards
What is VPS 1
Terms of engagement
What are some of the minimum matters to be included in ToE prior to commencing a Red Book valuation
- Identification and status of valuer
- Identification of the client
- Identification of any other intended users
- The asset to be valued
- Currency
- Purpose of valuation
- Basis of value
- Valuation date
- Extent of investigation
- nature and source of the information to be relied upon
- Assumptions and special assumptions to be made
- Format of the report
- Restrictions for use
- Confirmation of red book global compliance
- Fee basis
- Complaints handling procedure
- Statement that the valuation may be subject to compliance
- Limitation on liability agreed
What is an assumption
Assumptions are made where it is reasonable for the valuer to accept that something is true without the need for specific investigation
What is a special assumption
Is a supposition that is taken to be true and accepted as fact even though it is not true
What needs to be done before assumptions and special assumptions can be factored in to a valuation
Agreed with client in writing at the commencement of the instruction
What is VPS 2
Inspections, investigations and records
What does it mean by inspections
Valuers must take the steps to verify the necessary information being relied upon for a valuation to ensure the information is professionally adequate for its purpose
What are restricted information valuations
Desk top - no inspection
This is a red book global valuation unless for one of the specific purposes set out in PS1
What should the valuer consider when valuing without having inspected the property
- the nature of the inspection must be agreed in writing in the terms of engagement
- the possible valuation implications of the restriction confirmed in writing before the value is reported
- the valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
- the restriction must be referred to in the report
What is a revaluation without inspection
A revulation without a reinspection of the property previously valued must not be undertaken unless the valuer is satisfied that there have been no material changes to the property
Must be confirmed in the terms of engagement and report
What does it mean in terms of records in VPS2
Proper records must be held of the inspections and investigations and of other key inputs in an appropriate business format
Note the importance given to ESG and sustainability
What is VPS 3
Valuation reports
What are the minimum requirements in VPS 3
- Identification and status of the valuer
- Client and any other intended users
- Purpose of the valuation
- Identification of the asset to be valued
- Basis of value
- Valuation date
- Extent of investigation
- Nature and source of information relied upon
- Assumptions and special assumptions
- Restrictions on use, distribution and publication
- Instruction undertaken in accordance with IVS standards
- Valuation approach and reasoning
- Valuation figures
- Date of valuation report
- Comment on market uncertainty
- Statement setting out any limitations on liability that have been agreed
Can preliminary valuation advice be given
Yes but it must be marked as a draft, for internal purposes and cannot be relied upon and on no account can it be published
What is VPS 4
Bases of value
What does it mean by bases of value
The valuer must determine the basis of value that is appropriate for every valuation to be reported
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 arms length transaction
- After proper marketing
- Where the parties have acted knowledgably, 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 lease terms
- In an arms length transaction
- After proper marketing
- Where the parties have acted knowledgably, prudently and without compulsion
What is the definition of fair value
The price that would be recieved to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
What is the definition of investment value
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives
What is equitable value
The estimated price for the transfer of an asset or liability between identified knowledgable and willing parties that relfects the repsctive interests of those parties
Not used in the UK
What is liquidation value
This basis of value can be used for a group of assets sold in a piecemeal basis considering the costs of getting the assets into a saleable condition
Not used in the UK
What is VPS 5
Valuation approaches and methods
What is Part 5
Valuation practice guidance applications
What is VPGA 1
Valuation for inclusion in financial accountsW
What is VPGA 2
Valuations for secured lending
What is VPGA 2 refer to
Dealing with conflicts of interest for secured lending valuations
What is previous involvement defined as
Being within the past two years but under certain circumstances it can be longer
What are the reporting procedures listed in VPGA 2
As well as the minimum requirements of a valuation report, additional information must be reported such as:
Disclosure of any involvement identified in the terms of engagement
Valuation method adopted
Where a recent transaction on the property has occurred and the extent to which that information ahs been accepted as market value
Comment on any environmental consideration
Comment on the suitability of the property for mortgage purposes
Any circumstances of which the valuer is aware that could affect the price
What is VPGA 8
Valuation of real property interests
What does VPGA 8 cover
Covers inspections and investigations with emphasis on ESG and environmental constraints
Identifies ESG and sustainability issues that could affect the valuation
What is VPGA 10
Matters that may give rise to material valuation uncertainty
What does VPGA 10 cover
The overriding requirement is that a valuation report must not be misleading
What is Part 6
International valuation standards 2017
What is the professional standard in relation to ESG
Professional Standard: Sustainability and ESG in commercial property valuation and strategic advice 2021
When did this professional standard come in to effect
Jan 2022
What does the professional standard: Sustainability and ESG provide?
A glossary of terms which valuers should incorporate into their valuation approaches
Also provides advice on relevant sustainability characteristics, considerations and risks which should be taken in to consideration when analysing comps
What is hope value
The value arising from any expectations that future circumstances affecting the property may change
e.g. future prospect of securing planning permission
What is Marriage value
Created a merger of interests - can be physical or tenurial
What is stamp duty land tax
The current rate of tax payable by the purchaser in respect of the transfer of land and buildings
What is the current stamp duty land tax for non residential buildings
£0 - £150,000 - nil
£150,001 - £250,000 - 2%
Over £250,000 - 5%
What is a party wall
A wall is a party wall if it stands astride the boundary of land belonging to two or more different land ownerts
What does the Party wall act provide
A framework for resolving disputes in relations to party walls, boundary walls and excavations near neighboring buildings
What is the guidance note on rights of light
RICS Guidance note; Rights of light 2016
What is UK VPS 3
Regulated purpose valuations
What are regulated purpose valuations
Valuations relied on by third parties who have not commissioned the valuation and they subject to valuation monitoring
Who are regulated purpose valuations used by?
Financial accounts
Stock exchange listings
Takeovers and mergers
Collective investment schemes
Unregulated property unit trusts
What is margin of error
The permissible range allowed by courts in respect of a valuation of +/- 10%
What is the stamp duty land tax for residential properties
£0 - £250,000 - 0
£250,001 - £925,000 - 5%
£925,000 - £1,500,000 - 10%
Over £1,500,000 - 12%
What does it mean by surrender and renewal valuations
When the landlord/tenant wants a surrender of the existing lease and agrees to grant a new lease
calculation of a premium to reflect the change in the value of the leasehold interest
What does the Red Book Global define a special buyer as
A particular buyer for whom a particular asset has special valuer beause of advantages arising from its ownership which would not be availble to other buyers
What does special value mean
An amount that reflects particular attributes of an asset that are only of value to a special purchaser
What are building cost reinstatement valuations
For building insurance purposes
Use of RICS building cost information services adopting a gross internal floor are for commercial properties
What are valuations of long leasehold interests
The ground rent is deducted from the gross income to calculate the net rent received
This is capitalised at a yield for the length of the lease to create a market value
What is the methodology when valuing long leasehold interests
Rent received less ground rent (=net rental income)
Capitalised at an appropriate yield for the remaining length of the lease = market value of leasehold interest
What is a premium
A premium is a capital payment made by one party to another.
e.g. key money paid by an in-going tenant of a retail property to secure a prime shop
What are purchasers costs
Valuation practice to deduct the likely costs of purchase from the gross market value to provide a net market value of a property as a purchaser will have to pay these costs
e.g. SDLT, agents fees
What is WAULT
Weighted average unexpired lease term remaining to the first break or expiry of a lease across asset weighted by the contracted rent
How do you produce a net effective rent
Devalue a headline rent with a rent free period
What are the three approaches to calculating net effective rent
Straight line method
Straight line method assuming time value of cash flow using a yield
Use a DCF
What is Zoning
A valuation technique used for the comparison of retail properties
the rental value of the property reduces away from the street
What is the halving back principle
The front 6.1m of a retail shop is most valuable
The market value then halves the next 6.1 m of the shop and so on
What is the RICS valuer registration scheme
To improve the quality of valuation and ensure the highest possible professional standards
to meet the RICS’ requirements to self-regulate
To protect and raise the status of the valuation profession
What is your understanding of a freehold and leasehold
Freehold is a property that you own with no fixed time limit
A leasehold property is one that you own for a fixed length of time
What is due diligence and why do you do it
Due diligence is checking key points of a building such as flood risk, EPC, planning applications and Business rates
You conduct due diligence to assess the risks attached to the building as this could affect value
What is the current state of the industrial market in Chelmsford
What is a conflict and why do you do a conflict of interest check
A conflict is where your impartiality is compromised
You would conduct this on the borrower and the property
You do this to ensure your impartiality is not compromised
What is a special assumption
A special assumption is where you know something to be untrue but for the purpose of the valuation, you assume it to be true
Why would you value on vacant possession
Because th
