Valuation Flashcards
What is the Red Book (2022)?
It exists to promote and support high standards of valuation delivery worldwide. It contains mandatory rules and best practice guidance for RICS members who undertake valuations
What do the sections of the red book are mandatory and which are advisory?
PS1-PS2: Mandatory
VPS1-VPS5; Mandatory with exemptions
VPGA1-VPGA10: advisory
Red book exemptions: A L I E S
Agency and brokerage
Litigation/Negotiation
Internal valuations
Expert witness
Statutory function (performing one)
What factors can impact property value?
Type
Age
Supply and demand
Location
Size
Condition of repair
Energy performance and sustainability
What is an internal valuer?
They tend to be an employee of the company seeking the valuation or from the accounting firm that conducts their financial statements. There’s no 3rd party reliance as it is for internal use
What is an external valuer?
An individual (RICS member) with no ties to the client or asset to be valued. They tend to be a member of the values registration scheme
What is the valuer registration scheme?
RICS quality assurance mechanism
Monitors registered members that undertake valuations
Ensures consistency in standards
What is Special Value?
Defined in Red Book (Glossary)
This tends to be the amount above market value that an individual is willing to pay for an asset to reflect the attributes that make it attractive to them
What is a Special Purchaser?
This is an individual who is willing to pay above market rent for an asset to the the advantages/unique attributes it has to them. Other buyers don’t tend to see this same advantage
What is a restricted valuation service?
This is when a valuation is done under certain conditions such as with limited physical inspection. The valuer needs to consider:
Mentioning the nature of the restriction in Terms of Engagement
Implications the restriction may have on the valuation
If the restriction is reasonable
Reference the restriction in the report
What must be included in the Terms of Engagement?
Identification and status of the valuer
Identification of the client and any other intended users
Currency, Fee basis, that CHP is available
Valuation: purpose, basis, date
Information: extent, nature, source
Assumptions and special assumptions
Report format
Restrictions for: use, distribution, publication
Confirm it is red book compliant
Agreement for limitation on liability
What must be included in the valuation report?
Identification and status of valuer
Identification of client and any other intended users
Valuation: basis, purpose, date
Information: extent, nature, source
Assumptions and special assumptions
Restrictions for: use, distribution and publication
Confirm it is red book compliant
Valuation: approach, reasoning, figures, report date
Limitations of liability have been agreed
What are the three categories of comparables?
Cat. A: direct transactional evident
Cat. B: general market data
Cat. C: other sources
What is the hierarchy of rental evidence?
O L’ R I S A
Open Market Rent
Lease renewals
Rent reviews
Independent expert
Sale and leaseback
Asking rent
What is a sensitivity analysis?
Also called “what if” or “simulation analysis”
A financial modelling tool used to determine how different independent variables affect a particular dependant variable under a set of assumptions
What are the bases of value?
Market Value
Market Rent
Investment Value
Fair Value
Define Market Value
Definition can be found in VPS 4 of the Red Book
It is the estimated amount a for which an asset or liability will be sold on the open market on the valuation date after proper marketing between a willing buyer and a willing seller in an arms length transaction. Both parties must act knowledgeably, willingly and prudently
Define Market Rent
Definition can be found in VPS4 of the Red Book
The estimated amount an interest in property should be leased for on the valuation date on appropriate lease terms between a willing lessor and a willing lessee after proper marketing. Both parties must act knowledgeably, prudently and without compulsion
What is the difference between market value and fair value?
Market value is the observed and actual value for which an asset/liability is exchanged
Fair value is often used to gauge the true worth of an asset by looking at factors like potential for growth or the cost to replace it
What is investment value?
This is the value an asset or liability has to a particular investor
What is a statutory valuation?
This is a valuation that is conducted in accordance with specific statues it is usual required for taxation of compulsory purchase. They include:
Comparable rents
Open market
Special purchases
Hypothetical sales
What is a yield?
The earnings that are generated and realised on an investment over a particular period of time
What is net initial yield?
The measure of profitability on an investment after deducting all operational costs
What is All Risk Yield?
The rental revenue of a property as an annual percentage of the property cost
What is equivalent yield?
A weighted average of the net initial yield from current rental income
E.g. 5% hardcore yield + 6% future reversion yield = 5.5% equivalent yield
What is a reversionary yield?
The yield that should be achieved if the passing rent is adjusted to the level of the estimated rental value
What is equated yield?
The yield on an investment property which takes into account future income growth
What are the 5 bases/types of valuation?
Comparable
Residual
Investment
Profits
Contractors (Depreciated Replacement Costs)
When would you use the profits method?
For trade related properties where the value is derived from the business and its trading potential
Annual turnover - costs/purchases = gross profit
Gross profit - working expenses = unadjusted net profit
Unadjusted net profit - tenants share = fair maintainable operating profit (FMOP)
FMOP is capitalised at an appropriate yield to achieve a capital value/determine trading potential
What is trading potential?
The profit a reasonable efficient operator would expect to realise from occupying the property
What is hardcore and layer?
This form of investment method takes the current market rent being received and applies this on a perpetual basis. The different between the current market rent and the expected rent (at renewal) are considered.
An equivalent yield is applied
This can be used for under rented properties
What is hardcore and topslice?
This form of investment method takes the current market rent being received and applies this on a perpetual basis. The different between the current market rent and the expected rent (at renewal) are considered. Individual net initial yields are applied. The topslice gets a higher yield as this method tends to be used for over rented properties
What is term and reversion?
This is a form of investment method that is used when an existing lease is already in place but is about to expire. The current and expected lease terms are considered separately. The term (passing rent) is capitalised until the next lease event at an initial yield. The reversion (to market rent) is valued in perpetuity at a reversionaly yield. This is also used for under rented properties
Why is independence and objectivity important when valuing??
Objectivity ensures the valuation is free from any bias or influence to affect the valuers judgement
Independence ensures the valuer doesn’t have any interference from other departments or stakeholders
Is there a separate UK Red Book?
No. There is the Red Book UK national supplement which was published in October 2023 (Effective May 2024)
What sources of information would you consider when preparing a valuation report?
VPS 2: guidance on the valuation process including inspection, due diligence and verification of information.
*Desktop due diligence: land registry title/register, flood risk, coal mining, any H&S concerns (risk assessment)
*Access arrangements
*Inspection
*Measurement
*VPS3 compliant valuation report using collated due diligence
*Comparable evidence research
*Keep clear file notes
*Valuation calculation
What RICS guidance relates to the use of comparable evidence?
Professional Standard: Comparable Evidence in Real Estate Valuation. Issued in 2019 with 4 main purposes:
1. Outlines principles of use of comps and the hierarchy
2. Encourages consistency the using comps
3. Addresses issues of comps availability (esp. in challenging market conditions)
4. Consider potential source of comps
What are the three categories of comparables?
Cat. A: Direct Transactional evidence
Cat. B: General market data
Cat. C: Other sources
What are the 3 approaches under VPS5?
Market
Income
Cost
What is DCF method and when would you use it?
DCF is a valuation method that estimates the value of an investment using its expected future cashflows.
Can be used when there are no comparable market transactions to estimate MV.
Can also be used if there is expected short term market volatility present within a transaction e.g a tenant is about to terminate their lease
The estimated cashflow is projected over an assumed investment period. Cashflow is discounted back to present day value at a discounted rate. Discount rate is applied to reflect the market and property-specific risks. Specific lease patterns need to be considered to arrive at the estimated revenue cash flow. Exit valuation needs to reflect the rental growth and unexpired terms of the leases at the exit date
What is the difference between a desktop and a full valuation report?
Full valuation:
more detailed report of the property as all the features of the land are closely looked at.
Desktop valuation: a comprehensive report based on the expert’s opinion about the land after looking at available sources.
What is an assumption?
It is made when the valuer accepts something as being true without the need for specific investigation
What is a special assumption?
It is a supposition that something is taken to be true and accepted as fact even though it isn’t true
