Valuation

Question 1

Define an Internal Valuer

Answer 1

Values assets within company ownership

Internal purposes only

Not to be relied upon by third parties

Question 2

Define an External Valuer

Answer 2

Person with no material connections to asset or client

Question 3

What three important first steps must you undertaken when commencing a valuation instruction ? CIT

Answer 3

Competence - Do you have the skills/experience to undertake the job, if not refer to the RICS Find a Surveyor service on the RICS Website

Independence - After competence are their any personal interests or conflicts

Terms of Engagement - Set out in writing confirmation of instructions, and receive signed copy, confirm competence and note any inspection limitations

Question 4

Why do you undertake due diligence for Valuations ?

Answer 4

Required to check that there are not material maters which could impact upon the Valuation

Question 5

Can you name forms of due diligence for Valuations ?

Answer 5

Asbestos Register
Council Tax/Business Rates
Contamination
EPC rating (if available)
Flooding
Fire Safety compliance
Planning History

Question 6

What are the 5 methods of Valuation ?

Answer 6

1. Comparative Method
2. Investment Method
3. Residual Method
4. Profit Method
5. DRC (Depreciated Replacement Cost) Method / Contractor’s Method

Question 7

According to the IVS 105 Valuation Approaches and Methods what are the 3 valuation approaches ?

Answer 7

1. Income Approach (Investment, Residual and Profit)
2. Cost Approach (DRC Method)
3. Market Approach (Comparative Method)

Question 8

Comparative method - 6 steps

Answer 8

1. Search and Select Comparables
2. Confirm and Verify details
3. Create a schedule of evidence
4. Adjust comparables based on Hierarchy of evidence
5. Analyse comps to form opinion of value
6. Report value

Question 9

Summaries the RICS Professional Standard: “Comparable Evidence in Real Estate Valuation”

Answer 9

Outlines principles in the use of comparable evidence.

Provides advice in dealing with limited evidence.

Question 10

Quote the RICS Professional Standard: “Comparable Evidence in Real Estate Valuation”

Answer 10

“The Valuer should use professional judgement to assess the relevant importance of evidence on a case-by-case basis.”

Question 11

How to find relevant comparables (6)

Answer 11

• Inspection of local area finding recent activity or agent boards
• Speaking with local agents
• Auction results (being mindful these are gross prices)
• In-house records

Question 12

When do you use the Investment Method of Valuation ?

Answer 12

When there is an income stream to value

Question 13

What does the Investment Method do with rental income ?

Answer 13

The rental income is capitalised to produce a capital value

Question 14

What does the conventional Investment Method assume ?

Answer 14

Conventional method assumes growth implicit valuation approach

Question 15

What does the Investment Method produce ?

Answer 15

An implied growth rate is derived from the market capitalisation rate (yeild)

Question 16

Describe the Conventional Investment method

Answer 16

Market Rent multiplied by the years purchase to calculate market value.

Years purchase, 100 divided by yield.

Yield identified through comparables

Question 17

Investment Method: Describe the Term and Reversion Method

Answer 17

Used when property is reversionary / under-rented

Term capitalised until the next lease event at an initial yield using the passing rent.

Reversion using Market Rent valued into perpetuity at a reversionary yield

Outcomes are then added together to identify the Gross Capital Value, by removing purchasers cost, you identify the Net Capital Value

Question 18

Investment Method: Layer/Hardcore Method - used and method ?

Answer 18

Used for over-rented investments

Approached laterally, you value the bottom slice into perpetuity at market rent using an all risk yield. (MR X YP in perp = CV)

Top slice of passing rent multiplied by an initial yield. A higher yield is applied to the top slice to reflect additional risk, different yields used depending on comparable investment evidence and relative risk.
(PR x YP for number of years remaining/until lease event = CV)

Add both together to get Capital Value

Question 19

Risk is the major factor when determining yield, relating to what factors ?

Answer 19

• Prospects for rental and capital growth
• Quality of location and covenant
• Use of property
• Lease Terms
• Obsolescence - which is the likely future rate ?
• Voids - What is the risk ?
• Security and regularity of income
• Liquidity - ease of sale

Question 20

What is return, how is it measured and how do you calculate it ?

Answer 20

A term used to describe the performance of a property

Measured retrospectively

Calculated using DCF to find the internal rate of return

Question 21

What are secondary yields ?

Answer 21

Yields that are higher than prime to reflect additional risk for whatever reason (Property type/Security/Lease terms etc)

Question 22

What is a growth implicit yield ?

Answer 22

Growth Implicit Yields build the expectation of growth into the yield rather than explicitly modeling it in the calculation - e.g All Risk Yield

This method is appropriate when there is consistent market evidence and the valuation scenario is simple.

The yield adopted assumes many of the assumptions that are made explicit in a DCF approach and the risks are hidden in the selected yield.

Question 23

What is a growth explicit yield ?

Answer 23

Growth explicit yields allow for the expectation of growth in the cash flow which is then discounted at a required rate of return.

This method is more complex, but it can be used to model a wider variety of scenarios and assumptions.

Question 24

When would you use the RICS Red Book ?