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.
What is the speculative investor approach?
When you use the speculative investor approach – what costs would you include in the void?
What is the NPV?
Net Present Value – shows the sum of discounted cash flows
If positive shows that they have exceeded their rate of return
If negative fallen under rate of return
What are the limitations of the residual method of valuation?
Sensitivity to inputs
Importance of accurate information
Do you get rates relief for vacant buildings? What are these levels?
3 months rates relief
6 months for industrial
Listed building – no rates if vacant
When you are valuing the LLH interest of something what should you have regard to?
That it is a wasting asset, so a sinking fund may need to apply throughout the interest to recover the cost of buying it over the term.
Gearing
What is profit rent?
Difference between market rent and contracted rent
- Can you give an example of when your valuation advice influenced a client’s decision-making in a significant way?
Strategic example -
- How do you ensure that your valuations comply with the Red Book and other relevant professional standards?
follow Red Book - TOE, Inspections, etc
- Have you ever had to defend your valuation in front of a third party, such as a client, auditor, or court? How did you approach it?
Client – 15-25 Artillery lane
unhappy with the high EY applied - argued that it was due to it being on a long leasehold, and provided comparables of other Long lease hold, spoke with our investment teams to give a view on current market
- Describe a situation where you had to value a multi-tenanted building. How did you account for the various lease structures?
all risk yield - cap rates adjusted for shorter leases, weaker covenants
- Can you give an example of a DCF (Discounted Cash Flow) valuation you have carried out? What were the main assumptions?
- How would you adjust comparable evidence to reflect the differences between properties?
Example: Jelson homes leicestershire
- Can you describe the steps you take to inspect a commercial property before carrying out a valuation?
can you explain the hierarchy of evidence?
Category A – direct comparables
This category relates to all types of relevant transactional comparable evidence
contemporary, completed transactions of near-identical properties for which full and
accurate information is available; this may include data from the subject property
itself
* contemporary, completed transactions of other, similar real estate assets for which
full and accurate information is available
* contemporary, completed transactions of similar real estate for which full data may
not be available, but for which enough reliable data can be obtained to use as
evidence
* similar real estate being marketed where offers may have been made but a binding
contract has not been completed and
* asking prices (see 4.1.4 above).
Category B
Category B – general market data
This category relates to data that can provide guidance rather than a direct indication of value
information from published sources or commercial databases; its relative importance
will depend on relevance, authority and verifiability
* other indirect evidence (e.g. indices)
* historic evidence and
* demand/supply data for rent, owner-occupation or investment
Category C – other sources
There is also a wide range of data that might provide broad indications of value
including:
* transactional evidence from other real estate types and locations, and
* other background data (e.g. interest rates, stock market movements and returns
which can give an indication for real estate yields).
- Explain the difference between Market Value and Fair value
MV: The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion.
FV: IVS 105 : ‘The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
- What are the key factors that influence the value of a commercial property?
- location
- condition
- demand
- What are the different methods of valuation, and when would you apply each method?
- Can you explain the principles of valuation in commercial property?
- How would you advise a client about the long-term impact of inflation or rising interest rates on the value of their commercial property investments?
rising rates - borrowing more expensive - fewer buyers
inflation - reduced spending power
- You are instructed to value a commercial property that is partially vacant. How would you adjust your approach to reflect this, and what impact would it have on your valuation?
Vacant possession
assumptions on re-letting, for example speak with local agents
- Your client owns an industrial property with a long-term tenant. The tenant is requesting a rent reduction due to market conditions. How would this affect your valuation advice, and how would you recommend the client proceed?
if rent reduction is carried out, a reduction in value of property is expected, however would also depend on market rent
- A client is considering purchasing a multi-let office building. How would you advise them regarding the value and potential future income? What factors would you highlight?
- How have you advised a client on a valuation for secured lending purposes? What factors did you emphasize in your report?
- Can you describe a time when you provided advice on a sensitive valuation issue, such as a compulsory purchase or insolvency?
- Have you had to recommend a method of valuation that differed from the client’s expectations? How did you manage their expectations?
- How have you provided strategic valuation advice in relation to a client’s portfolio management?
- How would you value a property subject to planning restrictions or environmental issues?
- Can you provide an example of when you advised a client on the valuation of a leasehold interest? What were the challenges involved?
- How do you incorporate capital expenditure (CAPEX) into your valuation calculations for a commercial property?
- How would you calculate the equivalent yield in an investment valuation, and what does it represent?
Equivalent yield is weighted average of initial and reversionary yield
- How do you approach the valuation of a specialist commercial property (e.g., a hotel or a care home)?
Profits method or DCF
- Can you walk me through the process of valuing a retail unit in a prime city centre location?
- What are the implications of a property having a short lease term on its value?
- What is the role of uncertainty and risk in valuation, and how do you account for them?
all risk yield - adjust up
- Can you explain the term “over-rented” property, and how does it affect the valuation?
- How does the Rent Review clause in a commercial lease impact the valuation of a property?
explain the different Approaches to valuation
- Can you explain the concept of the All Risks Yield (ARY) and how it is applied in commercial property valuations?
- What does VPS and PS stand for in reference to the Red Book?
Professional Statements
Valuation Technical and Performance Standards
Both are mandatory
- Which VPS from the Red Book deals with bases of valuation?
VPS 2
What are the different bases of value?
fair value, market value are main ones
- Tell me about the Perreira Gray Review.
Independent Review of Real Estate Investment Valuations
13 recommendations: Key 3 were:
The creation of a dedicated, independently-led valuation regulatory quality assurance panel, under the jurisdiction of the RICS Standards and Regulation Board.
The creation of a formal Valuation Compliance Officer role within regulated valuation providers to ensure services are delivered appropriately, objectively, and to the standards observed across today’s financial services industry. This role is envisioned to provide a robust foundation for full accountability and responsibility of valuation firms to their clients and to the valuation regulatory quality assurance panel, particularly where multidisciplinary services are provided to clients.
The need for further specific RICS guidance to clarify RICS’ expectations around the culture and behaviours expected of RICS professionals in the pursuance of valuation activities.
- What yield did you adopt for your term? What yield did you adopt for your reversion? Why?
- What is the matrix technique of the comparable method of valuation?
- What is the definition of market rent?
The estimated amount for which an interest in real property
should be leased on the valuation date between a willing lessor
and willing lessee on appropriate lease terms in an arm’s length
transaction, after proper marketing and where the parties had
each acted knowledgeably, prudently and without compulsion (
- What is the difference between the simple method and hardcore method of the investment method?
- What measurement basis did you use for your office valuation?
- Talk me through you discussion with your investment agent colleague. How did your recommendation affect your clients investment value?
- Talk me through your investment method of valuation?
- Talk to me about the market for business parks in Oxford.
Beyond the Red Book what other RICS guidance is in place for valuations? Has there been any changes to this guidance recently?
National Supplements - UK 2024
What is the definition of Market Value?
Market value is defined in IVS 102 Bases of Value: Appendix A10.01 as: ‘the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s-length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.’
What area of the Red Book would you have consideration to for loan security valuations?
VPGA 3?
What area of the Red Book would you have consideration to for the process of a valuation?
How would you have approached a valuation is it was over rented?
hardcore method and froth
- how has Perreira Gray affected the industry?
- why discount reception area at 50%
general rule of thumb - as only used for the one tenant - if it was multi-let would not value
- hardcore method how did you apply?
- when would you apply value to mezzanine?
- how do service charge caps affect a valuation?
lower valuation as landlord picksup the shortfall
- how short you consider to be short enough to be explicitly factored into the valuation. For example a new 999 year lease compared to a lease with 75 years UXT.
Generally, alarm bells start ringing (and pricing affected) around the 100 year mark.
What is an assumption
supposition taken to be true - involves facts, conditions or situations affecting the subject of or approach to a valuation that by agreement do not need to be verified
Assumptions are matters that are reasonable to accept as fact in the context of the valuation assignment without specific investigation or verification. They are matters that, once stated, are to be accepted in understanding the valuation or other advice provided
what is special assumption
Not true, but assumed to be true - must be grounded by something realistic
A special assumption is an assumption that either assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date
Examples of assumptions and special assumptions
Assumption:an assumption about tenure, property condition or services
Special assumption: planning consent given
a reduced marketing period for
selling the property
what are the 3 approaches to valuation?
Market (comparable)
Income (traditional, DCF) - based on capitalising cashflows
Cost (DRC)
When can exceptions be made to VPS 1 - 6
- Providing agency or brokerage wrt acquisition or dispisal of assets
- Valuation for litigation
- Expert Witness
- Performing statutory functions
5 . Valuations purely for internal purposes (not seen or communicated to third party)
South London Retail Park – L3
- How were you sure the capex was not tenant responsibility?
Checked Lease- roof was not tenant responsibility
capex of £260k for roof repairs - provided in the building survey and confirmed with client
South London RP:
Did you speak to agents about the occupational market?
Yes - spoke to my leasing colleagues who are experts in the field to get a view on rental tones
South London RP:
- How many units were at the scheme? What sizes?
-
5 units, between 10 k and 25k sqft - MR between £30-£32.50
WAULT 5.19 years
South London RP:
- Did you differentiate the rents? How did you do this?
-
Rents by size – larger units assigned lower rent
Fully let
it was reversionary
South London RP:
- My understanding is that retail parks can vary in terms of quality and rental value, even in a short distance from property to property. How did you account for this when comparing comps?
- drivers of demand
- footfall
-demographics - local area
- access
- South London RP:
- What was the value of the property?
£33M / 4.8% NIY/ 5.3% EY/ £500 psf capval
- South London RP:
- What was the yield profile?
£33M / 4.8% NIY/ 5.3% EY/ £500 psf capval
- S London RP
- Why did you differentiate the yields?
To account for differing WAULT / expiries
- Split between 3 different rates
- S London RPDid you speak to the agents who were selling the property?
Yes to get an idea of rough sales bids
- Did you include any costs?
- capex for roof
- opex for service charge caps, vacant rates (fully let), letting fees
City of London office – L3
- What was the leasehold term? What was the ground rent? Any uplifts in the lease?
86 years
peppercorn rent with no uplifts in the lease
City of London office – L3-
What does INCANS tell you about a covenant? Are we qualified to evaluate a covenant?
- D&B rating, 3 years financial statements, equivalent bond rating, probabiliy of company failure i.e. bankruptcy
City of London office – L3
What was the WAULT on the lease to the tenant? WAULTC?
5.21 years , WAULTC = WAULT in this case no breaks
City of London office – L3-
Was the lease to the tenant inside the Act?
within the 1954 Act therefore will be more difficult to change tenants
City of London office – L3
How did you compare the leasehold terms to the comparable leasehold terms? What were you looking at when comparing?
City of London office – L3
Tell me about the rental tone of the property? Was it under-rented, overrented?
- expiries of leaseholds
- gearing
- any restrictions on lease
City of London office – L3
What EY did you apply?
9.5%
City of London office - when did tenant move in?
2016 / 2015 - 15 year lease
COL office - under over rented?
was underrented given comparables e.g. office block across the road
City of London office – L3
What did you analyse when considering if the final valuation figure was appropriate?
NIY, Capval
-City of London office – L3
Did you include any costs?
no additional costs were added due to it being longer lease
Brentwood Office – L2
- Why did you use the hardcore method of valuation?
-
-
Overrented
Brentwood Office – L2
What yield did you apply to the hardcore element and what did you apply to the froth?
-
Brentwood Office – L2
Why did you review the previous valuation report?
Sense check of the valuation - if it was far away from the valuation - if yes then why
Oxford business park
What void and RF did you include in first scenario? Did you use headline of net effective rent?
headline rent as this is the way that we make comparison on a like for like basis
City of London L3
What were the conditions of the long lease? Head rent?
Remaining term?
Any covenants?
Rent Reviews to consider?
How did these impact your valuation?
What was the unexpired term to the tenant?
Was it under-rented, rack-rented or over-rented?
Was the lease inside the Act or could the landlord get rid of them upon expiry and get a tenant who provides better covenant?
How did you approach this?
What EY did you use? What would it be if freehold and strong covenant?
86 years
Peppercorn rent
unexpired term to tenant: 5.21 years to expiry; no breaks
under-rented - opposite was a newly refurbished building mix of CAT A and CAT A+ and CAT B floors renting at approx 80 psf - taking into account of refurb costs, I adjusted MR to 70 psf; rent at 60psf
NIY 9.5% / EY 9.75% / RY 9.71% / £550 PSF capval / 10M valuation
inside the Act therefore this was a consideration in the all-risk yield
EY used was 9.75% - 7% if freehold and strong covenant had a similar property on FH with strong covenant
how to calculate WAULT?
weighted income (passing * years remaining) divided by total passing income = years . same but to break date - will always be lower
