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RICS APC SCO > Valuation > Flashcards

Valuation Flashcards

1
Q

What are the five methods of valuation?

A
  1. Comparable - Market comparison
  2. Investment - Capitalising income flows
  3. Residual - Working backwards from gross development value deducting costs to find site value
  4. Profits - Capitalising reasonable net profit
  5. DRC - Last resort method - Using costs to work out how much to build a modern equivalent and depreciation reflecting age and obsolescence
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2
Q

What RICS standards/guidance are available for valuation?

A
  1. RICS Valuation Global Standards 2022
    1.1 RICS PS RICS Valuation Global Standards: UK national supplement
  2. RICS GN: Discounted cash flow valuations, 2023
  3. RICS PS Comparable Evidence in Real Estate Valuation 2019 (Now PS from April 23)
  4. RICS PS DRC method of valuation for financial reporting Jan 2019
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3
Q

Name statutory due diligence expected when carrying out a valuation?

A
  1. Asbestos Register
    1. Business rates / council tax
    2. Contamination
    3. Equality Act 2010
    4. Environmental matters e.g. high voltage power lines, electricity sub-stations
    5. EPC rating if available
    6. Flooding – check the Environment Agency website
    7. Fire safety compliance
    8. Health and safety compliance
    9. Highways – check local highways agency
    10. Legal title and tenure e.g. boundaries, ownership, rights of way
    11. Public rights of way – from an OS sheet
      Planning history and compliance – check planning conditions, whether the property is in a conservation area / listed and subject to a s.106 agreement or CIL
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4
Q

What is the difference between a TOE and a report?

A

TOE
Fees, CHP and client objectives.

Report -
Commentary on market uncertainty
Valuation figures
Valuation approach and reasoning

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5
Q

Tell me why terms of engagement are important.

A

Terms of engagement are important because they are a mandatory requirement set out the Red Book. They include identification, address, scope and extent of works, valuation dates, restrictions, fees etc.

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6
Q

Describe internal/external valuer?

A

INTERNAL VALUER:
* Employed by a company to value the assets of a company
* Valuation for internal use only
* No third-party reliance
EXTERNAL VALUER:
No material links with the asset to be valued or the client

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7
Q

Talk me through the make up of the RICS red book?

A

P1 - Glossary

P2 - Intro

P3 PS1 Compliance with standards when undertaking written instruction. PS2 ECOD

P4 - Valuation technical and performance standards
VPS 1- TOE
VPS 2- Inspections, investigation and records
VPS 3 - Valuation report
VPS 4 - Bases of value and assumptions
VPS 5 Valuation approach and methods

P5 - VPGA

P6 International valuation standards

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8
Q

VPS 3 - VENRA CVA DCA

Explain what is included in a rics report

A
  1. id and status of valuer
  2. id of client and other intended report users
  3. report purpose
  4. id of asset(s)/ liabilities to be valued
  5. basis of valuation adopted
  6. Valuation date
  7. extend and scope of investigation
  8. nature of resources relied upon
  9. restrictions on use, publication, distribution
  10. assumptions/special assumptions
  11. Confirmation that valuation is in accordance with IVS
  12. Valuation approach and reasoning
  13. amount of valuation
  14. Date of valuation
  15. Commentary on market uncertainty
  16. Statement setting out any limitations
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9
Q

Under VPS 3 what must a valuation report contain?

A
  • Must clearly set out the conclusions of the valuation
  • Not be ambiguous
  • Comment on any issues affecting certainty
  • Deal with matters agreed in the TOE
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10
Q

Define what is a basis of value?

A

A Statement of the fundamental measurement assumptions of a Valuation (VPS 4)

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11
Q

Define MV, FV, IV and MR?

A

Market Value
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and willing seller in an arm’s length transaction after proper marketing and where both parties have acted knowledgeably, prudently and without compulsion

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

Fair Value
The price that would be received to sell an asset or paid to transfer a liability on an orderly transaction between market participants at the measurement date (Market to market approach - financial reporting).

Investment Value
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives

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12
Q

Name different valuation approaches?

A

Market - comparable method

Income - converting current and future cash flow into a capital value: investment, residual & profits

Cost - cost of an asset whether by purchase or construction: DRC

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13
Q

ASIA - E

Name 5 exemptions to the RICS RED BOOK

A
  1. Advice prepared for negotiation or litigation
  2. Stat function
  3. Internal purposes
  4. Agency
  5. Expert witness

A valuation for rating is made within a statutory framework, and so is not bound by the Red Book’s valuation technical and performance standards. However, the mandatory requirements of professional standards PS1 (compliance) and PS2 (Ethics) in the RICS Red Book Global Standards 2020 must still be observed.

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14
Q

What is the investment method and when is it used?

A

1.Used when there is an income stream to value
2. Rental income is capitalised to produce a capital value
3. Assumes growth implicit valuation approach
4. An implied growth rate is derived from the market capitalisation rate

CONVENTIONAL INVESTMENT METHOD
Rent received or market rent X years purchase (multiplier) = Market Value*

Used for following
* Advice prepared for negotiation or litigation
* Stat function
* Internal purposes
* Agency
* Expert witness

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15
Q

When is Term and reversion used?

A

Reversionary investments (MARKET RENT HIGHER THAN THE PASSING RENT)

PRINCIPLE:
Term - capitalised until next review OR lease expiry at the initial yield

Reversion - to market rent valued in perpetuity at a reversionary yield (Can be higher yield to reflect risk)

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16
Q

What is included in purchaser costs?

A

SDLT
legals
agency fees

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17
Q

When is the hardcore method used?

A

Over-rented investments (passing rent higher than market rent)

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18
Q

What is a yield and what factors affect a yield?

A

Measure of investment return expressed as a percentage

* Quality of location and covenant 
* Use of the property
* Lease terms
* Obsolescence - what is the likely future rate?
* Voids - what is the risk?
* Security and regularity of income
* Liquidity - ease of sale Prospects for rental and capital growth
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19
Q

Name different kinds of yields?

A

True Yield
Assumes rent is paid in advance and not arrears (traditional valuation practice assumes the rent is paid in arrears
Nominal Yield
Initial yield assuming the rent is paid in arrears

Gross /Net Yield
Gross The yield not adjusted for purchasers’ costs e.g. auction result
Net The resulting yield adjusted for purchasers’ costs

Initial Yield
Simple income yield for current income and current price
Reversionary Yield
Market rent divided by current price on an investment let at a rent below the market rent

Running Yield
The yield at one moment in time

Equivalent yield
This is the weighted average between the term and reversion.

Equated yield
Is the IRR applied to the flow of income expected during the life of the investment so that the total amount of income discounted at this rate equals the capital outlay.

20
Q

What is a DCF , what guidance is available and describe its methodology?

A

Growth explicit investment method of valuation that calculates an investment’s value based on the ability to receive a predicted future cash flow.

RICS GN DCF Valuations Nov 2023

METHODOLOGY:
1. Estimate the cash flow (income less expenditure ie net cashflow)
2. Estimate the exit value at the end of the holding period
3. Select the discount rate
4. Discount cash flow at the discount rate
5. Value is the sum of the completed discounted cash flow to provide a net present value (NPV)

NPV = Sum of discounted cash flows of the project
* Used to determine if an investment gives a positive return against the target rate of return
* Positive NPV = investment exceeds investor’s target rate of return
Negative NPV = not achieved investor’s rate of return

21
Q

Explain the profits method and when it is used?

A

USED FOR
* Trade related properties
* Where value of the property depends on the profitability of a business
* Pubs, petrol stations, hotels, leisure ad healthcare [VPGA 4]

METHODOLOGY:
* Annual turnover (income received)
* Less costs/purchases
* = Gross Profit
* Less Reasonable working Expenses
* = Unadjusted Net Profit
* Less operator’s remuneration
* = Adjusted Net Profit (KNOWN AS: Fair Maintainable Operating Profit (FMOP)
* Can be expressed as EBITDA (Earnings Before, Interest, Tax, Depreciation & Amortisation)
* Capitalised at appropriate Yield (Years purchase multiplier) to achieve Market Value
* Cross check with comp sales evidence

Profits Method
* Capital
○ Get 3 years accounts
○ Work out fair maintainable trade
○ Deduct costs and expenses to get to fair maintainable operating profit for a reasonably efficient operator
○ FMOP X YP = Capital value
* Rental
○ Fair maintainable Operating Profit = divisible balance
50/50 Landlord and Tenant

22
Q

Talk me through the residual method?

A

Aims to establish how much a developer should pay for a development site

GDV minus development cost and profits = capital value

23
Q

What is an assumption/special assumption?

A

ASSUMPTION
* Reasonable to assume that something is true without the need for specific investigation or verification.
* Any such assumption must be reasonable and relevant having regard to the purpose for which the valuation is required.

SPECIAL ASSUMPTION
* Assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant in a transaction

24
Q

What is a covenant strength?

A

Covenant strength - tenant’s ability to comply with covenants within their lease and ability to pay rent

25
Q

Describe what you would do when obtaining comparable evidence?

A

PS Comparable Evidence in Real Estate Valuation, 2019

Cat A - Direct comps and data is acurate
Cat B - General Mkt data (For e.g supply/demand etc)
Cat C - Other Sources

Follow 5 steps:
1. Search for comps
2. confirm/verify details
3. assemble comps in table
4. Adjust/analyse comps according to hierarchy of evidence
5. Report value

26
Q

What is the hierarchy of evidence

A

New letting
lease renewal
rent review
third party determinations
arbitrations/courts
asking rents

27
Q

What are the main drivers of value?

A

DRIVERS OF VALUE:
* Location
* Size
* Accommodation
* Quality
* Specification
* State of repair
* Potential to develop
Technology - for example industrial: storage and distribution have a high demand due to online presence of retailers, banking and gambling have become mostly online that there is no need for traditional brick and mortar

28
Q

what is years purchase?

A

YP = number years repay purchase price = yield/100

29
Q

What is eff/headline rent?

A

Effective rent: income less costs incurred to secure a lease, such as incentives, tenant improvements, stepped rents

Headline rent: Gross rent

30
Q

Please explain you’re understanding of rotation rules for valuation contained within the RED BOOK UK Supplement?

A

WEF May 2024
Firms undertaking valuations for regulation purposes will only be able to repeat this service for 10 consecutive years. Will require change to alternative valuation firm to improve transparency and serving in public interest

31
Q

Explain your understanding of the RICS DCF Valuations GN NOV 23?

A

GN looked to provide clarify around difference between MV and Investment Value definitions set out under VPS 4. Pushes for DCF to be used.

IV is value applicable to specific investor as opposed to MV that is applicable to wider market as a whole

32
Q

What is your view of the IPMS updates?

A

Will allow for more consistency in the general market

33
Q

What is the DRC method?

A

Provides indication of value based on a buyer paying no more/less than cost to obtain/replace asset with current equivalent

Used as last resort for unusual properties where there is no active method and has no comparables

  1. ERC cost
  2. ARC - minus cost for obsolescence
  3. Plus land value
34
Q

What are the different purposes of valuation?

A
  1. Financial reporting
  2. Secured lending
  3. Resi mortagge report
  4. Stat function
35
Q

What is the RICS Redbook?

A

Mandatory rules/guidance for members when undertaking asset valuations

36
Q

What steps would you take when receiving a valuation instruction?

A
  1. Obtain details of property
  2. COI check
  3. letter of instruction/TOE
  4. Purpose of valuations
  5. Information gathering
  6. Stat due diligance
  7. Inspection/Measurement
  8. Research market
  9. Write report
  10. Check valuation
  11. Report to client
37
Q

What is hope value?

A

Describe MV of land based on expectation of obtaining planning permission to develop on it.

38
Q

What is marriage value?

A

Extra value that arises from the merger of two physical/legal interests.

39
Q

Definition of special purchaser/value?

A

Value specific to an individual

Extraordinary element of value over and above market value.

40
Q

What is the Title of the Redbook? and when is it effective from?

A

RICS Valuation - Global Standards
31 Jan 2022

41
Q

ICO

What is the purpose of the RICS Redbook?

A

Ensure valuations are carried out with integrity, clarity and objectivity [ICO]
Make sure the valuation are reported in accordance with recognised basis/format

42
Q

What standards must be met prior to taking on an instruction?

A

RICS professional standards [PS]
PS 1 & PS2
VPS 1 - 5

43
Q

What are the requirements of making a special assumption

A

Special assumptions
1) Either assumes facts that differ from those existing at the valuation date
2) or that would not be made by a typical market participant in a transaction on that valuation date.

Where special assumptions are necessary in order to provide the client with the valuation
required, these must be expressly agreed and confirmed in writing to the client before
the report is issued.

Special assumptions may only be made if reasonable/realistic,
relevant and valid for the particular circumstances of the valuation.

44
Q

Where is the definition of MV found?

A

Redbook VPS 4

45
Q

Under VPS 4, when would you not undertake any assumptions/special assumptions?

A

Asset Valuations

46
Q

Definiton of Exisiting Use Value (EUV)

A

Same as MV, but disregarding potential alternative uses and any other characteristics of the asset that would cause its market value to differ from that needed to replace the remaining service potential at least cost

RICS APC SCO (18 decks)

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