VALUATION Flashcards
In terms of valuation, do you know what the red book is?
The Red book contains mandatory rules, best practice and guidance for valuations for members of the RICS. The latest edition came into affect, 31st January 2022.
What documents does the Red book cover?
RICS Global standards, international valuation standards, RICS national supplement
Can you tell me some key sections of the Red Book?
Introduction, mandatory valuation standards, advisory valuations standards
What are the recent changes to the red book?
Implementation of Valuation Review recommendations
Alignment with development in other relevant global standards and regulations such as the new IVS
Adaption to evolving practices and processes for issues ESG and technological advancements
When will the changes to the Red Book Global Standards become effective?
31 January 2025
What are the basis’s of value under the red book?
Market value, market rent, investment value, fair value
What is 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 and where the parties had each acted knowledgeably, prudently and without compulsion
What is 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 and where the parties had each acted knowledgeably, prudently and without compulsion.
What is investment value?
The value of an asset to the owner or a prospective owner for individual investment or operational objectives.
Investment value is an estimate of value of a property to a particular owner or purchaser who may wish to analyse the potential performance against certain investment criteria, for example, a target rate of return, as opposed to those prevailing in the market. Often used in conjunction with DCF
What is fair value?
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.
What is synergistic value?
Not defined in VPS 4. defined in IVS 2022.
The result of combination of two or more assets or interests where the combined value is more than the sum of the separate values. If the synergies are only available to one specific buyer, then synergistic value will differ from market value, as the synergetic value will reflect particular attributes of an asse that are only of value to a specific purchaser. The added value above the aggregate of the respective interests is often referred to as marriage value.
Could you tell me what the 5 methods of valuation are?
Comparable, depreciated replacement cost, residual, profits, investment
Can you talk me through the comparable method of valuation?
Look at the attributes of the subject property, search and select comparables based on factors of comparability, confirm and verify details and analyse, assemble the comparables in a schedule, adjust them using the hierarchy of evidence, analyse them to form an opinion of value, report value.
Is there any guidance to follow when considering comparable evidence?
RICS Guidance Note, Comparable evidence in real estate valuation, 1st edition 2019
This outlines the principles in the use of comparable evidence.
How many categories are there in the hierarchy of comparable evidence?
3– A to C
What are Category A comparables?
Direct comparables:
Completed transaction of near identical properties for which full and accurate information is available, this may include data from the subject property itself
Completed transactions of similar real estate for which full data may not be available, but for which enough reliable data can be obtained to use as evidence
Similar real estate being marketed where offers may have been made but a binding contract has not been completed
Asking prices (only with careful analysis)
What are category B comparables?
General market data that can provide guidance:
Information from published sources or commercial databases; its relative importance will depend on relevance, authority and verifiability
Other indirect evidence (e.g. indices)
Historic evidence
Demand/supply data for rent, owner occupation or investment
What are category C comparables?
Other sources:
Transactional evidence from other real estate types and locations
Other background data e.g. interest rates, stock market movements and returns which can give an indication for real estate yields
How did you find relevant comparables?
Inspection of an area to find recent market activity by seeking agents boards
Visit/speak to local agents
Auction results (these are gross prices) – take care as can be special purchaser or insolvency sale
In house records/databases and websites such as EGI
Market sentiment when lack of transactional evidence
Date of evidence is crucial
What is the hierarchy of rental evidence?
New Letting, Lease renewal, rent review (market rent basis), independent expert, opinion, arbitration, asking rents
Can you talk me through the depreciated replacement cost method?
Establish replacement cost – modern equivalent
Adjust replacement cost for age and obsolescence
Add in any site value
= cap value
Depreciate at statutory decapitalisation rate for rating
= annual equivalent/ trental value
What is obsolescence?
The process of becoming outdated and no longer used.
What are the different types of obsolescence?
Physical obsolescence is the result of deterioration/wear and tear over the years
Functional obsolescence is where the design or specification of the asset no longer fulfils the function for what it was originally designed
Economic obsolescence is due to changing market conditions for the use of the asset
Can you talk me though the residual method?
Aim is to establish how much a purchaser should pay for a site. Establish GDV and deduct all costs associated with undertaking the development. Deduct profit and this leave residual land value