Valuation Flashcards
What is the Red Book Global (RICS Valuation - Global Standards 2021) effective from 31st Jan 2022 (ICO)
Set of global valuation standards created to achieve high standards of integrity, clarity and objectivity in adopting valuation best practice
How is the Red Book structured? (IGP TAI)
“Part 1 - Introduction
Part 2 - Glossary
Part 3 - Professional Standards (mandatory) [PS1 - 5 exceptions, PS2 - Ethics]
Part 4 - Valuation Technical & Performance Standards (mandatory) [VPS1 - ToE, VPS2 - Inspection, VPS3 - Report req, VPS4 - SA, VPS5 - Approach]
Part 5 - Valuation Applications (VPGA - advisory) [VPGA1 - Financial Acc, VPGA2 - Loan Sec, VPGA8 - ESG, VPGA10 - Uncertainty]
Part 6 - The International Valuation Standards (IVS)
“
What is included in Part 3 - RICS Professional Standards (PS)? [mandatory] 5 exceptions (NS IAE)
“PS1 - Compliance with standards and practice statements
Exception of 5 purposes (not red book complaint) [Negotiation Statutory F Internal Agency Expert]
1. Advice is provided in preparation or during a negotiation or litigation
2. The valuer is performing a statutory function except for a valuation for a statutory return to a tax authority (complusary purchase, lease ext)
3. Valuation provided for a client for internal purposes - no liability or communicated to third party
4. Valuation is provided as part of agency work in anticipation to receiving an instruction to dispose or acquire an asset (except when a purchase report is required
5. Valuation advice is provided in anticipation of giving evidence as an expert witness
PS2 - Ethics, Competency, Objectivity and Disclosure
* Undertake valuations in accordance with Rules of Conduct
* Manage conflicts
* Comply with ToE”
What is included in Part 4 - Valuation Technical & Performance Standards (VPS)? [mandatory]
“VPS 1 – Terms of Engagement – must be confirmed in writing prior
(Status of valuer, Client, Asset, Currency, Purpose of valuation, Basis of value, Valuation date, Assumptions / SA, Conformation of Red Book compliance, Fee basis)
VPS 2 – Inspection, Investigation and Records – extent necessary to produce valuation. Desktop vals / re-vals / restricted info should consider:
1. Restriction must be agreed in ToE
2. Implication in value due to the restriction in writing before value reported
3. If restriction is reasonable with regard to the purpose of valuation
4. Restriction referred to in report
VPS 3 – Valuation reports – min. requirements
Valuer status
Client
Purpose of valuation
Asset
Basis of valuation
Valuation date
Assumption / SA
Valuation approach
Valuation figures
Date of report
Market commentary
VPS 4 – Basis of Value, Assumptions and SA’s – MV, MR, Fair Value, Investment Value
VPS 5 – Valuation Approaches and Methods
(valuers are responsible for choosing and justifying their valuation approach and use of model, some cases more than one approach may be appropriate)
“
What is included in Part 5 - Valuation Practice Guidance Applications (VPGA) ? [advisory]
“VPGA 1 – Valuation for inclusion in financial accounts
* Fair Value adopted in all IFRS accounts
VPGA 2 – Valuation for secured lending
* Should know the terms of the loan and comment on suitability
* Conflicts – previous involvement – normally 2 yrs
VPGA 8 – Valuation of real property interests
* Emphasis on ESG, environmental constraints and sustainability issues that have a direct / indirect impact on value e.g. storm/flood, carbon emissions, wildfire, regulatory changes
VPGA 10 – Mattress that may give rise to material valuation uncertainty (e.g COVID)
* Main requirement is a valuation report must not be misleading
* Valuer should highlight any issues resulting in material uncertainty, standard caveats should not be used”
What is included in Part 6 - International Valuation Standards 2017 ?
“General standards - ToE, approaches / bases / methods of value
Asset standards - requirements relating to specific types of assets, such as real property and development property”
What are some key changes to the updated Red Book Global?
”* Increased focus on sustainability
* Valuation for financial reporting
* Reference to use the profits method for self-storage, purpose built student housing and flexible work space”
What is the RICS Valuation - Global Standards (UK National Supplement, 2018)
A document which augments the Red Book Global and provides specific requirements for valuations undertaken in the UK, it contains 18 Valuation Practice Guidance Applications (UK VP GAs)
How is the UK Red Book Global UK National Supplement structured?
“Part 1 - Introduction
Part 2 - UK Professional and Valuations Standards - (mandatory)
* UK VPS 3 - Regulated purpose valuations (RICS valuation monitoring) -
Valuations relied on by a third party and are subject to valuation monitoring, applies to valuations for 5 purposes:
1. Financial reporting (company accounts)
2. Stock Exchange listings
3. Takeovers and mergers
4. Collective investment schemes
5. Unregulated property unit trusts
Part 3 - UK Valuation Practice Guidance Applications - (advisory)
Key UK VPGA’s Include:
* UK VPGA 1 - Valuation for financial reporting
* UK VPGA 7 - Valuation of registered social housing providers’ assets for financial statements
* UK VPGA 8 - Valuation for charity assets
* UK VPGA 10 - Valuation for commercial secured lending purposes
* UK VPGA 11 - Valuation for residential mortgage purposes
* UK VPGA 14 - Valuation of registered social housing for loan security purposes
* UK VPGA 15 - Valuation for CGT, Inheritance Tax, SDLT and ATED
Part 4 - Summary of changes from BredBook UK 2014 (revised 2015)”
Key changes to the RICS Valuation - Global Standards (UK National Supplement, 2018) ?
NEW UPDATES FROM SEMINAR!
”* Easy to read more user friendly with clear advice on what is mandatory
* Not a substitute to the Red Book Global
* New UK VPGAs include the valuation of central government assets, local authority assets and registered social housing
* New section on valuation for commercial lending
* Emphasis on need for clear ToE which make it clear it is red book compliant”
What are the 5 methods of valuation; which have you used? Tell me how you would apply the P&L (or DRC) method? (I’d ask on one you haven’t used to check you understand the theory)
“1. Comparable - Find comps, verify / analyse, create schedule, adjust using hierarchy of evidence, analyse to form opinion of value
- Investment - Used when there is an income stream, rent capitalised by yield produces capital value (conventional) [Reversionary - T&R / Over - Hardcore Top Slice]
- Residual - Find MV of site based on market inputs = GDV - (Site prep, Planning costs, Build costs, Prof fees, Contingency, Marketing / fees, Finance, Profit)
- Profits = Annual turnover - costs / purchases = Gross profit - reasonable working expenses = unadjusted net profit - operators remuneration = Adjusted net profit
(used when the value of the property depends on the profitability of the business e.g. pub / hotel / petrol station) - Depreciated Replacement Cost (DRC) [LRF - D] - Value of land in its existing use plus the current cost of replacing the building, plus fees, less a discount for the depreciation
(used when direct market evidence is limited on a lighthouse / submarine base / school) “
How does the Hardcore top slide method work?
”* Used on over rented properties
* Apply a higher yield to over rented income and lower yield to rack rented income
* Considered more risky because above market rent and it’s more likely for tenant default as paying above market, only for a finite period of time.
Bottom layer market rent, top layer = rent passing, less market rent until next lease event.
“
How does the Term and Reversion method work?
”* Used on under rented properties (reversionary)
- Term capitalised using initial yield until break or expiry, reversion to market rent value in to perpetuity at a reversionary yield (0.5%-1% higher than term)”
What is a Discounted Cash Flow (DCF)?
“Growth explicit investment method of valuation
DCF is done by projecting cash flows over an assumed investment holding period, plus an exit value at the end of that period, usually arrived at on a ARY basis. The cashflow is then discounted back to the present day at a discounted rate (known as the desired rate of return) which reflects the perceived level of risk
Method to find Market Value
1. Estimate the cash flow (income less expenditure)
2. Estimate the exit value at the end of the holding period
3. Select the discount rate
4. Discount cash flow at discount rate
5. Value is the sum of the completed discounted cash flow to provide NPV”
When would you use a DCF?
”* Short leaseholds
* Phased development projects
* When you wanted to know the explicit growth inputs
* Non-standard investments (e.g. 21 year rent review patterns)
”
What is NPV?
“Net Present Value
* The sum of the discounted cash flows of the project
* A NPV can be used to determine if an investment gives a positive return against a target rate of return
* When the NPV is positive, the investment exceeded the investors target rate of return
* When the NPV is negative, it has not achieved the investor target rate of return”
What is IRR?
“Internal Rate of Return
* The rate of return at which all future cash flows must be discounted to produce a NPV of zero
* Used to assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions”
How do you calculate IRR?
“1. Input the current market value as a negative cash flow
2. Input projected rents over holding period as a positive value
3. Input projected exit value at the term assumed as a positive value
4. Discounted rate (IRR) is the rate chosen which provides a NPV of Zero
5. If the NPV is more than 0, then the target rate of return is met
“
What is an Initial Yield?
Simple income yield for current income and current price
What is a Net Yield?
The resulting yield adjusted for purchaser’s costs
What is a Reversionary Yield?
Market rent divided by current price on an investment let at a rent below MR
What is a Nominal Yield?
Initial yield assuming the rent is paid in arrears
What is an Equivalent Yield?
Average weighted yield when a reversionary property is valued using an initial and reversionary yield
What is a True Yield?
Assumes rent is paid in advance and not in arrears
What is a Running Yield?
The yield at one moment in time
