Valuation Flashcards
What is the RICS Valuation – Global Standards (Red Book)
The RICS Red Book UK is a set of professional standards and guidance published by the Royal Institution of Chartered Surveyors (RICS) for valuation professionals.
It ensures consistency, transparency, and quality in valuations for various purposes.
You mentioned the Red Book Global Standards have recently been updated, what updates have been made?
A) Alignment with developments in other relevant global standards and regulations such as the new International Valuation Standards (IVS), published 31 January 2024
B) The addition of new content relating to modelling and methods
C) Adaptation to practice and process changes from evolving areas such as technology and Environmental Social and Governance (ESG).
What is The International Valuations Standards (IVS)
Developed by the International Valuation Standards Council (IVSC)
IVS provides a globally recognised framework for valuation practices. It aims to establish consistency and transparency in valuations worldwide.
What is the difference between the International Valuations Standards (IVS) and the RICS Valuation – Global Standards (Red Book)?
IVS: Published by the International Valuation Standards Council (IVSC), IVS provides a globally recognised framework for valuation practices. It aims to establish consistency and transparency in valuations worldwide.
RICS Red Book: Published by the Royal Institution of Chartered Surveyors (RICS), it builds upon IVS but includes additional requirements to ensure compliance with RICS-specific ethical and professional standards.
In summary, the RICS Red Book adopts and aligns with IVS but adds extra layers of detail, ethics, and practical application for RICS professionals.
What is the Red Book UK National Supplement
Sits alongside the global Red Book to provide UK-specific guidance, ensuring valuations comply with local laws, regulations, and practices.
Ensures that valuations by RICS professionals in the UK meet local legal and regulatory requirements, such as:
1) UK tax and accounting standards.
2) Landlord and tenant laws.
3) Compulsory purchase and compensation assessments.
4) Compliance with UK-specific valuation frameworks like the Charities Act or insolvency requirements.
When should you follow and when should you deviate from the RICS Red Book?
Follow:
A)Valuations for regulated purposes: Such as secured lending, financial reporting, tax purposes
B)Client agreement
C)Professional integrity
D)Legal or contractual requirements
Deviate:
A) When it is explicitly agreed with the client
B) Non-regulated valuations: For example, informal valuations, advice on asset sales, or internal use appraisals
C) Legal or jurisdictional conflicts, Red Book contradicts local laws
D) Special assumptions or methodologies
What are the minimum requirements for terms of engagement for a Red Book Valuation?
As per VPS 1 of the Red Book Global:
a) Identification and status of the valuer
b) Identification of the client(s)
c) Identification of any other intended users
d) Identification of the asset being valued
e) currency
f) Purpose of the valuation
g) Basis of value adopted
h) Valuation date
i) Extent of the valuer’s work and limitations
j) Source(s) of info the valuer will rely
k) All assumptions and special assumptions
l) Format of the report
m) Restrictions on use
n) Confirmation in accordance with the IVS and Red Book
o) Fee basis
p) Where the firm is registered for regulation by RICS, reference to the firm’s complaints handling procedure.
q) A statement that compliance with these standards may be subject to monitoring
r) A statement setting out any limitations on liability
s) Consideration of any significant environmental, social and governance (ESG) factors
What are the three main valuation categories?
The market approach is based on comparing the subject asset with identical or similar assets (or liabilities) for which price information is available, such as a comparison with market transactions in the same, or closely similar, type of asset (or liability) within an appropriate time horizon.
The income approach is based on capitalisation or conversion of present and predicted income (cash flows), which may take a number of different forms, to produce a single current capital value.
The cost approach is based on the economic principle that a purchaser will pay no more for an asset than the cost to obtain one of equal utility whether by purchase or construction.
What are the different valuation methods?
1) Comparable - The most widespread valuation method
2) Investment - used where there is an income stream to value, i.e. the property is tenanted.
3) Residual - Typically used for property or land with development potential.
4) Profit - Typically referred to as being specialist properties, such as hotels, golf courses, petrol stations, care homes and some restaurants.
5) Depreciated replacement cost/contractors method - The DRC method is based upon the assumption that the market will pay no more for the existing property than the amount it would cost to buy an equivalent site.
What is the RICS publication relating to the comparable method of transactions?
Comparable evidence in real estate valuation (1st edition) Professional Standard
Principals:
Comprehensive
Similar
Recent
Transaction in the Market
Verifiable
consistent with the local market
You say you are aware of the RICS publication Discounted cash flow
valuations, what is it?
An RICS Practice Information Document, guidance on The Discounted Cash Flow (DCF) method.
A valuation approach that estimates the present value of an asset, business, or investment based on its expected future cash flows. These cash flows are discounted to their present value using a discount rate, typically reflecting the required rate of return or cost of capital.
What are the key drivers effecting property value?
Physical restrictions
location
dimensions
condition
economic factors (interest rates)
supply and demand
What are the different definitions or basis of value
1) Market value
2) Market rent
3) Investment value
4) Fair/Equitable value
5) Synergistic value
6)Liquidation value.
what is the definition of Market Value?
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 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 a 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 definition of Investment Value?
The value of an asset to the owner or a prospective owner for
individual investment or operational objectives.
What is the definition of synergistic value?
An additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values.
Usually shared 50/50 uplift
What is the definition of Liquidation Value?
Liquidation value is the amount that would be realised when an asset or group of assets are sold on a piecemeal basis. Liquidation value should take into account the costs of getting the assets into saleable condition as well as those of the disposal activity. Liquidation value can be determined under two different premises of value:
(a) an orderly transaction with a typical marketing period
or
(b) a forced transaction with a shortened marketing period.
What is the definition of equitable value?
The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties
Define assumption
A supposition taken to be true. It involves facts, conditions or situations affecting the subject of, or approach to, a valuation that, by agreement, do not need to be verified by the valuer as part of the valuation process. Typically, an assumption is made where specific investigation by the valuer is not required in order to prove that something is true.
What’s included in the RICS Red Book Global Standards?
Part 1 = Introduction
Part 2 = Glossary
Part 3 = Professional Standards
PS 1 - Compliance with standards where a written valuation is provided
PS 2 - Ethics, Competency, Objectivity and Disclosures
Part 4 = Valuation technical Standards and performance standards
VPS 1 - Terms of Engagement
VPS 2 - Bases of Value, assumptions and special assumptions
VPS 3 - Valuation approaches and methods
VPS 4 - Inspections, investigations and records
VPS 5 - Valuation models
VPS 6 - Valuation reports
Part 5
VPGA 1 - Valuations for financial reporting
VPGA 2 - Valuations for secured lending
VPGA 3 - Valuation of business and business and business interests
VPGA 4 - Valuation of trade related properties
VPGA 5 - Valuation of plant and equipment
VPGA 6 - Valuation of intangible assets
VPGA 7 - Valuation of arts and antiques
VPGA 8 - Valuation of real property interests
VPGA 9 - Valuation portfolios and group assets
VPGA 10 - Material Valuation uncertainty
VPGA 11 - Relationship with auditors
Part 6 = International Valuation Standards
What the the purpose of your Valuation Report for Pine Trees Business Park?
Probate Valuation
What the the basis of valuation for Pine Trees Business Park?
Market Value (on the date that the owner died)
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 the the purpose of your Valuation Report for St Martin Lane Norwich
Internal Purposes (Pension Fund)
What the the basis of valuation for St Martin Lane, Norwich?
Market Value
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 was the purpose of your valuation at Downham Grove, Wymondham
To market the property for sale
What valuation method did you use for your valuation at Downham Grove, Wymondham
Investment method
What advise did you give your client at Downham Grove, Wymondham
A) current market conditions
B) Rational behind my valuation
C) Interested parties
D) level at which we should enter the market
E) Surveys required prior to sale
What was the purpose of your valuation at The Old Hatchery?
open market value for the purpose of a sale of development themselves
What valuation method did you use for your valuation at The Old Hatchery?
Residual method
What advise did you give your client at The Old Hatchery?
Value of the property with various options including the number of units in order the the development to be viable.
Options
A) Obtain planning and sell
B) Obtain planning and develop
C) Sell as is
C) sell with overage
Define fair value?
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 Statutory due diligence should you carry out for Valuation?
Asbestos
Business Rates
Contamination
Environmental
EPC
Flooding
Fire Safety
Heath and Safety
Highways
Legal Title
Planning History
What is the process/timeline of an valuation instruction?
Receive instruction
Check competence and conflicts
Terms of engagement
site due diligence
inspect / measure
undertake valuation
draft report, peer review
finalise and sign report
report to client
issue invoice
file in good order
What is the RICS valuations registration scheme?
Valuer Registration is a risk monitoring and quality assurance programme which checks compliance with the RICS Red Book.
What is the term and reversion investment method?
Applies different capitalisation rates to current (term) and future (reversion) income flows to reflect the relative security of these income flows.
What is the hardcore and top slice investment method?
The hardcore (MR) is valued into perpetuity at a net initial yield. The top slice (PR-MR) is capitalised to next lease event at a net initial yield with a risk adjustment. There is a yield differential; top slice at an inflated yield to reflect higher risk of over-renting.
What is the discounted cash flow (DCF) investment approach?
A valuation model that seeks to determine the value of real estate investment property by examining its future net income or projected cash flow from the investment and then discounting that cash flow to arrive at an estimated current value of the investment.
What is the hierarchy of evidence?
Category A – direct transactional evidence
Category B – general market data providing guidance rather than a direct indication of value, such as evidence from published sources, commercial databases, indices, historic evidence and demand/supply data
Category C – other sources, such as transactional evidence from other property types and locations and other relevant background data
what is the profits method of valuation?
Used for valuations on trades related properties, where value depends on profitability (petrol stations, pubs, hotels etc)
Refer to VPGA3 Valuation of business interests
What is the Depreciated replacement cost/contractors method (The DRC method) ?
The current cost of replacing an asset with its modern equivalent asset less deductions for physical deterioration and all relevant forms of obsolescence and optimisation.’
E.g.
A property that is rarely, if ever, sold in the market, except by way of a sale of the
business or entity of which it is part, due to the uniqueness arising from its specialised
nature and design, its configuration, size, location or otherwise.’
What is Gross yield, net yield, equivalent yield and initial yield?
Gross Yield = not adjusted for purchasers costs (Stamp duty, agents fees, legal fees)
Net Yield = Adjusted for purchasers costs
Initial Yield = The current income level obtained from the asset at the date of valuation expressed as an annual percentage return of the capital
value.
What is Rack rented?
Rack rented is the term used to describe when the contracted rent is in line with the estimated rental value, implying nil reversion.
What is a special assumption?
A special assumption is made by the valuer where an assumption either 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 on that valuation date
What are purchasers costs?
Stamp Duty
Agents fees
legal fees
VAT on fees
What’s the margin for error in a valuation?
Generally, case law precedent refers to a margin of between 10% and 15% depending upon the facts.
What are the contents of the International valuation standards?
Aims to build confidence and public trust in valuation by producing transparent and consistent standards and securing their universal adoption and implementation for the valuation of assets across the world.
Foreword
Glossary
General Standards
Asset Standards
IVS 100 Valuation Framework
IVS 101 Scope of Work
IVS 102 Bases of Value
IVS 103 Valuation Approach
IVS 104 Data and Input
IVS 105 Valuation Models
IVS 106 Documentation and reports
Asset Standards
IVS 200 Businesses and Business interests
IVS 210 Intangible assets
IVS 220 Non financial Liabilities
IVS 230 Inventory
IVS 300 Plant and, Equipment and Infrastructure (we dont use)
IVS 400 Real Property Interests (standard vals)
IVS 410 Development Property (Dev Apps)
IVS 500 Financial Instruments (finance, tax etc)
When would you use Fair Value?
For financial reporting.
Fair value is required for the valuation of assets and liabilities in accordance with accounting standards like IFRS (International Financial Reporting Standards) or US GAAP, often for balance sheet purposes.
When would you use Market Value?
Inheritance (defined under S160 of Inheritance Act 1984)
Loan security (defined VPS2)
Finance (Defined defined under s118 of the Finance Act 2003)
Taxation (Defined under S272 of the Taxation of chargeable Gains Act 1992
