Valuation Flashcards
- What is the full title of the Red Book?
RICS Valuation Global Standards
- When did the current edition of the Red Book come into force?
31st January 2022
- Who are the International Valuation Standards Council?
Non-profit organisation that set the global standards for valuation
- What editions of the Red Book have been in effect during your APC training period?
Only the current edition
- What is the Purpose of the Red Book?
To ensure consistency, competency and transparency in the valuation process worldwide
It essentially states that to carry out a Red Book valuation - you must be competent, agree terms of engagement, inspect/measure and carry out appropriate investigations, analyse everything and produce your report
Must agree terms of engagement before issuing the report
- What is the purpose of the UK National Supplement?
Supplements the Red Book. Countries often have their own national supplements . This one ensures UK valuations are consistent with UK accounting standards
When was the most recent UK National Supplement published?
October 2023 - Effective May 2024
What changes has the latest UK National Supplement made?
To VPS - Completely overhauled VPS 3:
As an example - As a mandatory requirement, a valuer cannot undertake a regulated purpose valuation if the property or properties were acquired by the client within 12 months of the valuation date and the valuer or their firm received an introductory fee or negotiated the purchase.
In simple terms, for a regulated purpose valuation of one asset:
A single ‘responsible valuer’ can be engaged for up to 5 years (before they must be rotated)
A valuation firm can be engaged for up to 10 years (before they must be rotated)
A valuation firm cannot agree to be engaged for more than 5 years (before they must be rotated)
A minimum 3 year period is required before re-engagement
Overhauled several of the VPGA’s - especially to do with the Existing Use value wording
- To what valuations does the Red Book apply?
Red Book applies to all valuations unless a valuation is listed as an exception
- What valuations are Exceptions to the Red Book?
- If for internal purposes (for client to know market value of their property)
- If for agency work prior to acquisition or disposal instructions (EG advertise at price X and if it does well, we’ll up the price but if it is not getting much interest then we will lower the price)
- If for stautory function (where the Law tells us what to do)
- If acting as expert witness (EG if you can’t agree a rent review or lease renewal, then you would give an expert witness report in court - arbitrator or judge would tell you what to do, not the Red Book)
- If in negotiation or litigation
- Can you name some valuations that are carried out for a Statutory Function?
- Lease renewal EG reporting on rent at lease renewal - see s34 of LL & T Act 1954 to see rent definition (court determines the level of rent)
- Rating EG if giving a rating valuation there will be legislation to follow
- Also compulsory purchase
- Leasehold enfranchisement (for residential) – statutory – Buying the freehold or getting a long leasehold extension
- What is the difference between Valuation Technical and Performance Standards (VPS) and Valuation Practice Guidance – applications (VPGA)?
- Compliance with VPS is mandatory
- Compliance with VPGA is advisory
- What are the possible consequences if a valuer does not comply with a VPS?
- RICS may take disciplinary action (depends on extent of non-compliance / severity of breach)
- EG might have to sign a consent order to say you’ll get this sorted within a month or might get a fine
- Conducts, rules and professional ethics – VPS
- What are the possible consequences if a valuer does not comply with a VPGA?
- VPGA is intended to embody best practice. The industry loses trust in the valuation you undertake as they do not adhere to professional standards
- If the valuation is inaccurate, you can be sued for negligence
- Describe how Departure from the Red Book mandatory requirements may be possible.
The Red Book still applies to the valuation but the valuer details where they may not be able to follow one of the mandatory Red Book requirements.
This would have to be agreed with the client and justified.
As an example, a departure could be undertaking a desktop valuation of a property where it is unsafe to inspect and measure.
- What information would you require from a telephone enquirer who asked: Can you do me a valuation?
- The location
- The type of property (to ensure competence)
- The purpose of the valuation and the client to ensure there isn’t a conflict of interest
- Competency is defined as having the valuation skills and the market knowledge
- What do your Valuation Files contain?
- Conflict of Interest Check (not required for me because I already established this - for internal purposes)
- Agreed Terms of Engagement
- Inspection notes – Enquiries, photos, floor plans, planning permission etc.
- Comparable evidence
- Valuation calculations
- Copy of valuation report
- What are the main contents of the Terms of Engagement for a Valuation?
- Valuer - name
- Client - name
- Property - address
- Purpose of valuation
- Basis of value
- Valuation date
- Nature and extent of the valuer’s work - including investigations - and any limitations thereof - the extent of these
- Assumptions/special assumptions - if you don’t make planning enquiries then you need to make planning assumptions
- The Fee –
How is a fee for a valuation determined?
Usually on fixed fee basis, based on the amount of work required - can be done on an hourly or day rate
- How would you respond to a request to value a property from a Pavement Assessment only?
This can be completed as an external inspection whilst still being red book compliant.
This is often done in cases where you firm has already carried out a valuation and you are doing a reassessment. If there have been no changes and you hold all of the correct documents then this could be done.
If you have enough information to provide a professionally adequate valuation as detailed above – usually requested by lenders or banks
- Please name the Red Book Global Bases of Value.
- Market value
- Market rent
- Investment value
- Fair value
- Please name the UK-Specific Bases of Value.
Existing use value - ‘Assets which are held for their service potential by institutional or government organisations (i.e. operational assets used to deliver either front line services or back office functions) should be measured at their current value in existing use’ Eg value for social housing or hospitals
- What is the difference between a Basis of Value and a Method of Valuation?
- Method of Valuation = the valuation methods used to arrive at a figure eg comparable method, investment method, residual method, profits method and contractors method that we would then express as a Basis of Value, usually market value
- Basis Value = Red Book definition of Value (market value, market rent, investment value and fair value)
- Describe three Assumptions that are usually made in producing a valuation.
- Title - freehold vs leasehold - there could be highly restrictive covenants
- Assume any parts of a property that are covered, are free from defects - ie condition is okay
- Assume property has full planning permission for existing use
- Assume property is free from hazardous substances or deleterious materials
- Assume property is free from contamination
- Assume the property has correct utilities connections
- Assumed good tenure can be shown with no irregular comings and goings
- What is a Special Assumption?
It’s an assumption where the facts differ from those existing at the valuation date
- Give three situations when it would be appropriate to make a Special Assumption.
- If property is vacant, we could assume it is let (and vice versa)
- If property is being developed, we could assume refurb has completed
- If property hasn’t got planning permission, we could assume planning permission has been granted
- Define Market Value in your own words.
The estimated amount for which a property should be bought by a willing buyer from a willing seller following the proper marketing period in an arms length transaction – both parties acting without compulsion
- What do consider Proper Marketing to be in the Market Value definition?
- Selling a property via the most appropriate method of sale (private treaty is most common EG hanging ‘to sale’ sign outside)
- Allowing a property to be on the market for an appropriate period to get market value
- Adveritsing the property to the target market (regionally, nationally or internationally)
- What is an Arm’s Length Transaction?
When there is no connection/relationship at all between parties
- What is Synergistic Value?
The value of two or more merged interests is greater than the sum of the individual interests - say property A is worth 100k and property B is worth 100k, once combined they are worth 250k – This is the synergistic value
- What is Marriage Value?
- Two sites A & B adjoin each other, each have the same value. Once merged, the property is worth more. The marriage value is the increased amount of money the property is now worth.
- Often common to split this value between seller and purchaser, usually 50/50 but can depend on each parties stake in the property
- What is a Special Purchaser?
- Someone who can pay more than market value (EG they can pay the synergistic value) so they can enjoy the marriage value gain
- When is Market Rent not appropriate as a Basis of Value in providing a report on the rental value of a property and why not?
- Rent review - use rent definition in lease so not an open market letting
- Lease renewal – under s34 in LL&T Act - the court determines the market rent and lease terms
- When is Fair Value the appropriate valuation basis?
When valuing for accounting/financial reporting (no different to market value, just used when valuing for inclusion in company accounts) – the value of an asset in companies accounts for example
- What is a Regulated Purpose Valuation?
These valuations are undertaken for a specific legal or regulatory prupose such as determining the value of a property for taxation, insurance or financial reporting as detailed in VPS 3.
For example, if a property owner in the UK needs to calculate their property’s value for tax assessment purposes, they may hire a valuer to perform a Regulated Purpose Valuation (UK VPS 3) to ensure compliance with legal requirements and provide an accurate determination of the property’s worth.
- What is an Asset Valuation?
One undertaken for financial reporting purposes (another name for a regulated purpose valuation)
Found in the balance sheet under the heading of fixed assets
- When is Existing Use Value the valuation basis?
Owner occupied properties used by Local Authority and Central Government owner occupied properties – this is required by CIPFA (Chartered Institute of Public Finance Accountants)
Market value cannot be used because this is the ‘highest and best use’ of a property whereas these properties must be valued on their existing use
- What is the fundamental difference between Market Value and Existing Use Value?
Existing use value is value of building as it is; market value is highest and best use of an asset (can take into account development and re-development potential)
- When is DRC used in Asset Valuations?
For properties where there isn’t enough comparable evidence
For specialised properties EG properties that would not sell other than as part of a sale of the business in occupation such as light houses
Asset valuations for specialised property that would not sell for the same value with vacant possession – for example you wouldn’t sell a football club with vacant possession as the club provided the value
- Name three situations that can adversely affect the Certainty of valuations.
- If there are very few or no comparables – an unusual property or one in a unique location
- If the valuer is unable to make full enquiries or investigations
- When there is market volatility such as during the beginning of the pandemic -
- How many different methods sale are there?
Auction, tender and private treaty (stick a sale board and invite bids)
- Name the conventional methods of valuation.
Comparables Method, Investment Method, Residual Method, Profits Method and contractors Method
When is the comparables method used?
The comparable method is the most widespread valuation method, typically to assess the market rent and market value of both commercial and residential properties. It can also be used to assess the market value of farms, farmland and land with development potential.
Candidates should be familiar with the principles outlined in the RICS guidance note Comparable evidence in real estate valuation 1st edition. Essentially, the comparable method can be used where there is a good body of recent, reliable comparable rental, yield or sales evidence. A comparable is defined as an item of information used during the valuation process as evidence to support the valuation of another, similar item.
When is the investment method used?
The investment method is used where there is an income stream to value, i.e. the property is tenanted. This can include commercial, residential, retail, industrial and agricultural properties.
To use the investment method, candidates will need to be able to assess rental values (market rent) and a market-based yield. A yield can be simply defined as the annual return on investment expressed as a percentage of capital value.
The investment method can reflect income streams which are under-, rack- and over-rented by incorporating risk within the yield choice (i.e. an all risks yield) and by structuring the calculation appropriately, for example a term and reversion for under-rented income streams and a hardcore and topslice for over-rented income streams. This will require the valuer to reflect risk in each element of the calculation, e.g. increasing the yield above the market in the topslice to reflect the added risk of an above market rent being paid for a specified period, or reducing the yield in the term to reflect that a below market rent is being paid until the reversion is due.
When is the residual method used?
The residual method is typically used for property or land with development potential. The output is market value of the land and it requires valuers to make a variety of assumptions around input costs.
Candidates need to understand the difference between a residual land valuation (i.e. output of market value of the land) and a development appraisal (i.e. output of profitability or viability).
Candidates need to understand the difference between a residual land valuation (i.e. output of market value of the land) and a development appraisal (i.e. output of profitability or viability).
To apply the residual method, candidates need to first assess the development potential of the land, i.e. highest value use. They then need to calculate the value of the finished scheme, i.e. gross development value (GDV) based on market comparables. All development costs are then deducted from GDV, including developer’s profit and finance costs
When is the Depreciated replacement cost/contractor’s method used?
The depreciated replacement cost (DRC) method is used for owner-occupied or specialised property that is rarely sold on the open market. It is also known as the method of last resort and should not be used where there are market sales of comparable properties. It could, of course, be used as a check valuation against another method.
he DRC method is based upon the assumption that the market will pay no more for the existing property than the amount it would cost to buy an equivalent site, plus the cost of constructing an equivalent building.
The basic steps involved include assessing the cost to replace the land and the building – with a modern equivalent, including all associated costs – before making appropriate deductions for depreciation and obsolescence.
When is the Profits method used?
The property derives it’s value from it’s use, for example a petrol station on a motorway is valuable because of it’s use, no other type of property would have the same value.
- What are contemporary valuation techniques?
Valuations where discounted cash flow methods are used
How does a Discounted cash flow valuation method work in practice?
This is a growth explicit valuation method. This makes the assumption that the property will be let for a certain amount of time and grow at a predetermined rate for the entire period.
First you would find the net present value. This is the cash flow of the investment for each period eg until each lease event, discounted to present value of £1. You then subtract the sum of the initial investment from the sum of the property’s discounted cash flow.
If the NPV is positive, the investment is likely worthwhile.
The Internal Rate of Return method is then used to calculate at a given discount rate what the minimum of investment the investor requires to break even. The investor can then compare this to the return rate of a another investment to determine which is better.
- What makes a property transaction comparable to the property being valued?
You are looking for similarities with the subject property!
- Similar size/physical characteristics
- Similar use class
- Location
- Tenure should be similar eg freehold with freehold, long leasehold with long leasehold
- Time scale (eg transactions that took place more recently are better comparables)
- How many comparables are needed to produce a valuation?
As many as possible but certainly enough to establish a trend
- What is the longest time period before a valuation date that a transaction could be accepted as being comparable?
The more recent transaction the better. You certainly would try and avoid using comparables from before the pandemic as the shifts in the market have been significant – call this a watershed moment
- What do you understand by the expression weighting of comparable evidence?
Ranking the comparable evidence with the greatest similarities having the most weight. This is subjective to the valuer as long as they can explain their reasoning and comply with the Red Book.
- What do you understand by the expression hierarchy of evidence?
This is ranking the evidence available by transaction type. The best evidence would be ranked in the following order:
- New letting
- Lease renewal
- Rent review
- Independent expert determination
- Arbiters award
Why is a lease renewal better evidence than a rent review?
In a lease renewal the tenant has the ability to walk away from the lease and rent somewhere else. In a rent review, the tenant is still tied into the terms of the lease which is dictated by the lease terms
- What is interpolation of comparable evidence?
Calculating a value between two extreme data points. For example, if one unit was let at a £20 psf basis and the other on a £30 psf basis you could interpolate the rent psf could be £25 psf.
- What is extrapolation of comparable evidence?
Calculating a comparable value outside of the known data – this is statistically uncertain and must only be used if there is evidence the market is rising or falling – using market trends
- What is the purpose of Zoning?
Zoning is used to compare retail units with different sized frontages or different frontages to depth ratios. The value for retail units lies in their frontage. A unit with a
What is the standard Zone depth?
6.1 metres or 20 sq ft. 9.1 metres (30 sq ft) is used on Oxford Street as the units are much bigger
- How would you assess the Market Rent of the first floor of a retail unit?
Zone X/10 when the first floor is in use for retail, if it’s used for storage then you could use an independent rate which is subjective to the valuer -
2nd floor X/20 and basement X/20
How does zoning a unit work in principal?
- Measure the unit to determine it’s square footage.
- Using comparable data, determine the market rent on a psf basis. Eg 1800 sq ft unit at £10 psf is a rent of £18,000 PA.
- Divide the unit into zones at a depth of 20sq ft each.
- Zone A will remain at £10 psf, Zone B will be £5 psf, Zone C £2.50 psf and so on
- If there was first floor retail space this would be valuated at £1 psf. 2nd floor X/20 and basement X/20
- How would you assess the Market Rent of a ground floor unit with a return frontage?
This is quite dependent on the nature of the unit and the opinion of the valuer.
If this is a corner unit with good footfall, you could value this in terms of zone A by adding a 5% uplift to the Zone A rate and a 2.5% uplift to any of the return frontage within Zone B. For example, if zone A is £100 psf, you could add a 5% uplift.
In my case study the retail unit is valued on an NIA basis rather than zoned as the lettings agents have always done it this way and the client requested this.
- How would you assess the Market Rent of a ground floor with frontages on two roads i.e. it is a through unit?
You would Zone back from each frontage. However, one side might use a higher zone A psf rate than the other depending upon footfall.
- How would you determine the Market Value of an investment property let on internal repairing terms?
Read the lease to determine the rent, deduct the outgoings to get the net rent and then capitalise the net rent to get the market value. For an IRI lease, the landlord has to pay for all external repairs, extra management, etc which would be deducted.
