valuation Flashcards
What is the difference between development and residual valuation?
Residual – red book valuation – market value
- Calculates residual land value
- Market facing inputs
- At one moment in time for partivular purpose
Residual = GDV – Costs – Profit = residual land value
Dev A: GDV – costs – land cost = profit
Dev appraisal:
- Assessment of development viability
- Calculates profitability based on varying inputs
- Fixed site specific inputs from client e.g. land value
- Measured against client KPIS
What is a development appraisal and what is it used for?
- dev consultancy - to establish which scheme to most profit
- valuation of site for sale/acquisition
- dev appraisals use client provided assumptions
What are the five different methods of valuation?
Comparative, profits, residual, investment and depreciated replacement costs.
Assumption vs special assumption
- Fact
- Assumption that assumes facts differ from actual facts existing at valuation date
Can you give some Special assumption examples?
- MV on special assn of Vacant Possession
- MV on Sassn of loan maturity
- MV on sp assn of completion of refurb works
Residual valuation - You said you allowed for planning costs, site clearance costs and construction costs. Can you tell me about where you got the data from?
BCIS
Redbook 2025:
Where does the new Red Book apply?
When does the new Red Book apply from?
Why has the Red Book been updated?
31 January 2025.
RICS have updated the Red Book to:
Reflect the changes to the latest version of IVS
Incorporate changes from the RICS Valuation Review
Future proof valuation practice, e.g., updates relating to technology and ESG
Help valuers to provide the highest standard of service
Simply and clarify guidance for valuers
Build public trust in valuations provided by RICS Registered Valuers
To align with new IVS
what are the main changes in Red book 25?
The VPS have been re-mapped to the new IVS:
* VPS 1 – Terms of engagement (scope of work) – no change in title
* VPS 2 – Bases of value, assumptions and special assumptions – this is similar to the former VPS 4. Transaction costs are now dealt with in VPS 2.
* VPS 3 – Valuation approaches and methods – this is similar to the former VPS 5, but includes methods, as well as approaches
* VPS 4 – Inspections, investigations and records – this is similar to the former VPS 2
* VPS 5 – Valuation models – new in 2025, building on the former VPS 5
* VPS 6 – Valuation reports – this is similar to the former VPS 3
What is years purchase?
The relationship between the income (a constant income) and its capital value is traditionally known as the years’ purchase (YP)
YP = (1-PV) / i
where ‘i’ is the discount rate and ‘PV’ is the present value of £1 in ‘n’ years at ‘i’%.
What is reversionary rent, , rack rent , over rent?
Reversionary or underrented means passing rent < market rent
Rack rented – MR = passing
Overrented : MR< passing
What is term and reversion?
for reversionary leases - vertical slice
why don’t we use T&R in real life?
does not apportion risk appropriately ie in reversion risk can be too high
What is hardcore/ layer?
Yield applied to hardcore and then to froth element
What is present value and how to calculate?
PV = 1/1+i
What are the other measures of profit?
What is IRR?
Internal Rate of Return - where NPV = 0
Rental valuation – why did you look for comparables over the last 12 months?
Had the market changed over this time
hierarchy of evidence - Category A is best B would be historical data
What is the Red Book?
It is Professional Statement from the RICS for best practice valuations.
What are the main sections of the Red Book?
Introduction
Glossary
PS –
VPS –
VPGA –
IVS –
How would you adjust the yield for a term and reversion investment valuation?
Would depend on the level of rent and the level of risk.
For a bigger rental difference, the yield may be higher due to a higher level of risk associated with it, whereas for a smaller lift in rent the yield may be less high.
When is a term and reversion valuation used?
Under rented (reversionary)
What yields would you apply to the term and the reversion?
Net Initial Yield for the Term
Reversionary Yield into perpetuity for the reversion
What is a net initial yield?
(income/ property value ) * 1/1.068 (purchaser costs)
What is a reversionary yield?
the yield that should be achieved if the passing rent adjusts to the level of the estimated rental value.