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Valuation Flashcards

1
Q

What 3 things must you do prior to accepting a valuation instruction?

A
  1. Check competence
  2. Independence (CoI)
  3. ToE (signed before starting work)
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2
Q

What statutory due diligence must be done for valuations?

A
  1. Asbestos register
  2. Flood info
  3. Planning history
  4. Environmental credentials (EPC)
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3
Q

What is the timeline of a valuation instruction?

A
  1. Check competence
  2. CoI and CDD
  3. ToE
  4. Due diligence on property
  5. Inspect and measure
  6. Draft report
  7. Issue to client
  8. Issue invoice
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4
Q

What are the 5 methods of valuation?

A
  1. Profits
  2. Residual
  3. Income
  4. Comparative
  5. Contractors (DRC)
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5
Q

What are the 3 valuation approaches under IVS 105

A
  1. Income - residual, investment, profits
  2. Cost - contractors
  3. Market - comparative
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6
Q

What are the categories of the hierarchy of evidence?

A

Category A - direct comparables
Category B - general market data
Category C - other sources (stock market, interest rates etc)

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7
Q

When is the investment method used?

A

When there is an income stream to value.

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8
Q

Is the growth implicit of explicit in the investment method of valuation?

A

Implicit - an implied growth rate is derived from the market capitalisation rate (yield)

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9
Q

What is the term and reversion method?

A

Used for reversionary investments (passing rent is lower than MR)

Term capitalised until review / expiry, and reversion to MR valued into perpetuity at reversionary yield (higher to reflect increased risk of not being able to achieve reversion)

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10
Q

Used for over- rented investments (passing rents higher than MR)

Income flow divided horizontally.

Bottom slice = passing rent upto MR
Top slice = passing rent above MR

Higher yield applied to top slice to reflect additional risk.

A
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11
Q

What is the profits method?

A

Used for valuations of trade related property where the property is an inherent part of the business

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12
Q

What is the residual method?

A

Values development land

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13
Q

What is the depreciated replacement cost?

A

Method of last resort
Not suitable for loan security purposes

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14
Q

How do you calculate Years Purchase?

A

Dividing 100 by the yield - the number of years to recoup the purchase price

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15
Q

What is the all risks yield?

A

Used in a valuation of a fully let property let at a market rent reflecting all the prospects and risks attached to an investment.

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16
Q

What is the true yield?

A

Assumes rent paid in advance

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17
Q

What is the nominal yield?

A

Assumes rent is paid in arrears (usual in valuation)

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18
Q

What is the gross yield?

A

Yield not adjusted for purchases costs

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19
Q

What is an initial yield?

A

Current passing rent divided by a purchase price

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20
Q

What is an equivalent yield?

A

Average weighted yield between the net initial yield and reversionary yield.

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21
Q

What is the running yield?

A

The yield at one moment in time

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22
Q

What are the key aspects of a DCF?

A
  1. Growth explicit
  2. Form of income approach valuation
  3. Determines value through examining future net income or projected cash flow and then discounting the cash flow to arrive at the current value.
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23
Q

What is the internal rate of return

A

The rate of return at which all future cash flows must be discounted to produce a NPV of zero.

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24
Q

What is a DCF?

A

Growth explicit model of valuation

Form of income approach

Determines value by examining its projected cash flow and discounting the cash flow to arrive at current value

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25
Q

What is simple method undertaking a DCF?

A
  1. Estimate cash flow
  2. Estimate exit value
  3. Select discount rate (IRR)
  4. Discount the cash flow at this rate
  5. Value is the sum of the discounted cash flow to provide the NPV
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26
Q

What is the IRR?

A

Rate at which all future cash flows must be discounted to produce a NPV of zero

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27
Q

What is the net present value

A

Value of all future cash flows (positive and negative) over life of the investment

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28
Q

What is the structure of the RICS Valuation - Global Standards (2021) “global red book”

A
  1. Introduction
  2. Glossary
  3. Professional standards (PS)
  4. Valuation technical and performance standards (VPS)
  5. Valuation applications (VPGAs)
  6. International Valuation Standards (IVS)
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29
Q

What are the key changes to the updated Red Book?

A

Terms must provide clarity as towards whether red book compliant or not

Reference to IFRS 13 and IFRS 16 in VPGA1

Increased weighting towards sustainability

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30
Q

What are the RICS Professional Standards?

A

PS 1 - compliance with standards and practise statements (where a valuation has to be red book compliant)

PS 2 - ethics (members must comply with rules of conduct when valuing)

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31
Q

What are the 5 exemptions to red book valuation?

A
  1. Advice in course of litigation
  2. For statutory functions (except for tax return)
  3. For internal purposes without liability
  4. Part of agency or brokerage
  5. Giving evidence as expert witness
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32
Q

Are the contents of PS 1 and PS 2 mandatory for all valuations?

A

Yes

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33
Q

What are the valuation technical and performance standards (VPS)?

A

VPS 1 - Terms of engagement
VPS 2 - inspections
VPS 3 - Valuation reports (IVS 103 reporting)
VPS 4 - Bases of value
VPS 5 - valuation approaches and method

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34
Q

What is included in VPS 1? (Terms of engagement)

A

Identification of values
Identification of client
Asset
Currency
Basis of value
Valuation date
Assumptions and special assumptions
Few basis
CHP made available

35
Q

If a desk top valuation is undertaken, what must be considered?

A
  1. Nature of restriction must be agreed in ToE
  2. Possible valuation implications confirmed in writing
  3. Whether the restriction is reasonable with regard to purpose of valuation
  4. Restriction must be referred to in report
36
Q

can a desk top valuation be a red book valuation?

A

Yes unless for one of the specified reasons set out in PS 1

37
Q

When does a valuer not have to inspect the property?

A

When they are satisfied there has been no material change since previously valuing the property

38
Q

What is required under VPS 3 (IVS 103 Reporting)?

A
  1. Identification of valuer
  2. Client
  3. Basis of value
  4. Valuation date
  5. Assumptions and special assumptions
  6. Valuation figures
  7. Date of valuation
  8. Nature and source of information
39
Q

Under what circumstances can a draft valuation be issued?

A

Marked as draft
For internal purposes only
Cannot be relied upon
Must not be influenced by client with regard to final valuation figure
Any changes must be made clear with reasons why

40
Q

What are the 6 bases of value (VPS 4)

A
  1. Market value
  2. Market rent
  3. Fair value (IFRS 13)
  4. Investment value
  5. Equitable value (IVS 104)
  6. Liquidation value
41
Q

What is market value?

A

Estimated amount for which an asset of liability should exchange:

  1. On the valuation date
  2. Between willing buyer and seller
  3. In arms length transaction
  4. After proper marketing
  5. Where parties acted knowledgeably, prudently and without compulsion
42
Q

What is market rent?

A

The estimated amount for which an interest in real property should be leased:

  1. On the valuation date
  2. Between willing lesser and lesser
  3. On appropriate lease terms
  4. In arms length transaction
  5. After proper marketing
  6. Where parties acted knowledgeably, prudently, and without compulsion
43
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

44
Q

Under what circumstance is fair value required?

A

If the International Financial Reporting Standards have been adopted by the client

45
Q

What is investment value?

A

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

May differ from MV

46
Q

What is equitable value? (IVS 104)

A

Estimated price for the transfer of an asset or liability between identified knowledgable and willing parties that reflects their respective interests of those parties - not used in uk

47
Q

What is liquidation value?

A

This can be used for a group of assets sold in a piecemeal basis considering the costs of getting the assets in a saleable position - not used in uk

48
Q

What is the basis of VPS 5 (Valuation approaches and methods)?

A

Valuers are responsible for choosing and justifying their valuation approach. In some cases more than 1 approach may be applicable

49
Q

What are the Valuation Practise Guidance Applications? - VPGAs?

A

VPGA 1 - valuations for financial accounts
VPGA 2 - valuations for secured lending
VPGA 8 - valuations of real property interests (with emphasis on ESG)
VPGA 10 - matters giving rise to material uncertainty

50
Q

Fair value will be adopted for what type of accounts?

A

IFRS adopted

51
Q

What are the key points associated with conflicts of interest for secured lending?

A
  1. Any previous, current, or anticipated involvement with prospective borrower or property must be disclosed to lender
  2. Previous involvement is defined as during the past 2 years
  3. Instruction should be declined if valuer or client considers any involvement creates a conflict that cannot be avoided
52
Q

What are some examples of conflict of interest associated with secured lending?

A
  1. Long standing relationship with borrower
  2. Financial interest in the property holding
  3. Valuer is retained to act in the disposal or letting of the completed development of the subject property
53
Q

Where must any arrangements to avoid potential conflicts of interest be stated?

A
  1. Terms of engagement
  2. Valuation report
54
Q

What is the key message of VPGA 8?

A

Covers inspections and investigations
Identifies ESG and Sustainability issues - flood risk etc

55
Q

What is the key message of VPGA 10?

A

Overriding requirement is that valuation report must not be misleading

Valuer must draw attention to any issues which result in material uncertainty

56
Q

What is included in the RICS Valuation - Global Standards (U.K. National Supplement, 2023)

A

Provides additional guidance to the Red Book, and doesn’t replace it

Aimed to reduce CoI in val reports.

  1. U.K. VPS 3 - supplementary governance requirements
  2. U.K. VPGA 8 - valuation of charity assets (reference to Charities Act 2022)
  3. U.K. VPGA 10 - new ESG principles in commercial secured lending
57
Q

What is U.K. VPS 3 Regulated Purpose Valuations?

A

Valuations relied upon by 3rd parties who have not commissioned the valuation

58
Q

What are the 5 valuation purposes under U.K. VPS 3?

A
  1. Financial reporting (company accounts)
  2. Stock exchange listings
  3. Takeovers and mergers
  4. Collective investment schemes
  5. Unregulated property unit trusts
59
Q

What are the 5 valuation purposes under U.K. VPS 3?

A
  1. Financial reporting (company accounts)
  2. Stock exchange listings
  3. Takeovers and mergers
  4. Collective investment schemes
  5. Unregulated property unit trusts
60
Q

Are secured lending valuations regulated purpose valuations?

A

No as they are not replied upon by 3rd parties

61
Q

What are current valuation monitoring requirements?

A
  1. Declaration of length of time valuer has acted for the client
  2. Whether the % fee income from the client is more or less then 5% of total fee income
62
Q

What is the rule associated with valuing a property purchased or introduced by the valuer’s firm?

A

Cannot be valued for 12 months

63
Q

What are the mandatory rotation timelines for valuers?

A
  1. Max period of 10 years before firm rotation
  2. Max single engagement period of 5 years
  3. Max period of 5 years before individual valuers roll off
  4. Min 3 year break following roll off an instruction
64
Q

What are the key aspects of the RICS Independnt Review of Real Estate Investment Valuations?

A

Aimed to future proof valuation practises

  1. Rotation of valuers
  2. Incorporation of DCF
  3. Valuation audit trails
65
Q

What is a permissible margin for error in valuations?

A

10% for a one off commercial property
5% for residential property

66
Q

What is hope value?

A

Value arising from any expectation that future circumstances affecting the property may change. E.g.

  1. Future prospect of planning permission
67
Q

What is marriage value

A

Created by a merger of interest (physical or tenurial)

Undertake a before and after valuation to calculate it.

68
Q

What is the SDLT for non- dom or mixed use property?

A

£0 - £150,000: Nil
£150,001 - £250,000: 2%
Over £250,000: 5%

69
Q

What is the SDLT for residential?

A

£0 - £250,00: Nil
£250,001 - £925,000: 5%
£925,001 - £1.5M: 10%
Over 1.5M - 12%

70
Q

When are higher SDLT payable

A
  1. Second homes (3% above)
  2. Buy to let (3%)
71
Q

what are party walls?

A

A wall that stands astride the boundary of land belonging to more than 1 land owner.

72
Q

When does right of light apply?

A

After a building has 20 years of interrupted enjoyment of light - damages can be awarded or building scale reduced

73
Q

How is a lease surrender and renewal calculated?

A

Calculation of a premium to reflect the change in the value of the leasehold interest.

74
Q

What are the special requirements for the valuation of charities?

A
  1. Charities Act 2011 - trustees must obtain valuation prior to disposal
  2. Report must confirm the charity has obtained the best terms for the transaction
75
Q

What is a special purchaser?

A

A buyer for whom a particular asset has special value because of the advantages arising from its ownership of which would not be available to other buyers

76
Q

What is building reinstatement costs?

A

For building insurance purposes
Cost of reinstating the building without a profit
Can be done using BCIS
Not a written opinion of value and so Red Book not compliant

77
Q

What is the single method of valuing long leasholds?

A

Rent received less ground rent = net rental income

Capitalise this at approaches yield for remaining lease length

78
Q

What is WAULT

A

Weighted average unexpired lease term

Weighted by the contracted rent

79
Q

What are the 3 approaches to calculating net effective rent?

A
  1. Straight line
  2. Straight line assuming time value of cash flow using a yield
  3. Use of DCF
80
Q

How do you calculate net effective rent?

A

E.g. 1 year rent free on 10 year term:

Take 90% of total rent roll and divide this By the total lease length (10 years in this case). This can then be divided by the sq ft to work out the net effective £psf

81
Q

What is zoning?

A

A valuation technique, not a method
Used to compare retail property
Rationale is retail property is less valuable further from the street
Halving back principle with 6.1M zones

82
Q

What is a ransom strip?

A

This is a piece of land which controls the access to develop another piece of land

83
Q

What is the value of a ransom strip?

A

Could be 15-50% of developable value

84
Q

What is the RICS valuer registration scheme (VRS)

A

Regulatory monitoring scheme for all valuers carrying out Red Book Global valuations from 2011

Aims to :

  1. Improve quality of valuation
  2. Meet rics requirements for self retaliation
  3. Protect and raise status of valuation profession

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