Valuation Flashcards
What is the Red Book?
Set of global standards which sets out standards and guidance for valuations
What is the full title of the latest Red Book?
RICS Valuation - Global Standards 2025 31 January
Previous - RICS Valuation - Global Standards 2022 31 January
What is the purpose of the Red Book?
Greater consistency, objectivity and transparency
What does IVS stand for?
International Valuation Standards
Why has the Red Book been updated?
IVS are updated every 2 years so Red Book gets updated to align with that
Who creates the IVS?
International Valuation Standards Council (IVSC) - includes members such as RICS
Professional standard 1 in the red book is about?
Compliance with standards where a written valuation is provided
Professional standard 2 in the red book is about?
– Ethics, competency, objectivity and disclosures
What does ESG stand for?
Environmental, social and governance
What are terms of engagement?
Agreement with the client detailing the work assignment, can be used as an important defence against negligence claims.
What are the headings you would expect on a TOE?
Identification and status of valuer
Identification of client
Identification of any other intended uses
Identification of asset or liability being valued
Valuation currency
Purpose of the valuation
Basis of value adopted
Valuation date
Nature and extent of the valuer’s work
Nature and source of information relied upon
All assumptions to be made
Format of the report
Restrictions on use, distribution and publication of report
Confirmation that the valuation will be undertaken in accordance with the IVS.
Basis on which the fee will be calculated.
Reference to complaints handling procedure
A statement that compliance with these standards may be subject to monitoring
Statement setting out any limitations on liability
What are the headings you would expect on a red book valuation report?
Identification and status of the valuer
Identification of the client/
Purpose of valuation
Identification of the asset
Basis of value
Valuation date
Extent of investigation
Nature and source of information relied upon
All assumptions to be made
Restrictions on use, distribution and publication of the report
Confirmation the valuation complies with IVS
Valuation approach and reasoning
Amount of the valuation
Date of the valuation report
Commentary on any material uncertainty
Statement on any limitations
What is market value?
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 the parties had each acted knowledgeably, prudently and without compulsion.
VPS 2 basis of value
What is market rent?
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 investment value?
The value of an asset to a particular owner for individual investment or operational objectives.
What is 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 is synergistic value?
The result of a combination of 2 or more assets where the combined value is more than the sum of the separate values.
What does VPS stand for?
Valuation technical performance standards
What are the proposed changes to VPS?
VPS 1 remains as VPS 1 (Terms of engagement), with some additional items and entries
- VPS 2 becomes VPS 4 (Inspections, investigations and records)
- VPS 3 becomes VPS 6 (Valuation reports), including some additional items and entries
- VPS 4 becomes VPS 2 (Bases of value, assumptions and special assumptions)
- VPS 5 splits into VPS 3 (Valuation approaches and methods) and VPS 5 (Valuation models)
What do the VPS refer to in the 2022 Red Book?
VPS1 - Terms of engagement
VPS2 - Inspections, investigations and records
VPS3 - Valuation reporting and methods
VPS4 - Bases of value, assumptions and special assumptions
VPS5 - Valuation approaches and methods
What do the VPS refer to in the 2025 Red Book?
VPS1 - Terms of engagement
VPS2 - Bases of value, assumptions and special assumptions
VPS3 - Valuation approaches and methods
VPS4 - Inspections, investigations and records
VPS5 - Valuation models
VPS6 - Valuation reports
What are the three valuation approaches?
Market
Income
Cost
What are the five methods of valuation?
Comparable
Investment
Residual
Depreciated replacement cost
Profits
What guidance is there for comparable valuations?
RICS comparable evidence in real estate valuation 2019
What should comparable evidence be?
Comprehensive
Very similar or identical
Recent
Arm’s length transaction
Verifiable
Consistent with local market practice
Result of underlying demand
Sources of comparable evidence?
Direct transactions
Publicly available information
Published databases
Asking prices
Historic evidence
What is the hierarchy of evidence?
Category A - direct comparables (sales and asking prices)
Category B - General market data (indices, historic evidence, demand and supply data)
Category C - Other sources (transactions on other types, stock market movements)
What steps would you take when carrying out a comparable method valuation?
- Look at the subject property
- Select comparables
- Analyse comparables
- Display in matrix/table
- Value the subject property
- Stand back and look
What is a yield?
Yield refers to the earnings generated and realised on an investment over a particular period of time and is expressed as a percentage based on the invested amount.
Income/price x 100 = yield
What is included within the global red book?
Professional standards, Valuation technical and performance standards, Valuation practice guidance applications - advisory
What are the 3 steps for undertaking valuation?
- Competence – Do I have Skills, Understanding, and Knowledge (SUK)?
- Independence – Think first and then check for conflicts and personal interests.
- Terms of Engagement – Set out full instructions to client and receive written confirmation, and confirm competence of valuer and extent and limitations of inspection.
What is Statutory Due Diligence for Valuations?
Required to check no material matters that could impact valuation, including:
- Asbestos register
- Environmental matters (contamination, high power lines, flooding)
- EPC – MEES compliance
- Fire safety and health and safety
- Legal title and tenure
- Public rights of way
- Planning history and compliance.
What are the 3 valuation approaches?
- Income – converting current and future cash flows into capital value (investment, profits).
- Cost – reference to the cost of an asset whether by purchase or construction (DRC).
- Market – using comparable evidence.
What are the 5 valuation methods?
- Comparable
- Investment
- Depreciated Replacement Cost
- Profits
- Residual.
What are Category A, B, and C sources in RICS Guidance note ‘Comparable evidence in Real Estate Valuation’?
Category A - direct comparables of contemporary:
- Completed transactions of near identical with full and accurate details.
- Completed transactions of similar with full and accurate details.
- Completed transactions of similar but without full but enough details.
- Similar properties being marketed with offers but no binding contract.
- Asking prices (with careful analysis).
Category B – general market data that can provide guidance:
- Information from published sources / commercial databases.
- Other indirect evidence such as indices.
- Historic evidence.
Category C – other sources:
- Transactional evidence from other real estate types and locations.
- Other background data, such as interest rates and stock markets, which can give an indication of real estate yields.
When do we use the Investment method?
Used when there is an income producing property. Rental income is capitalised to produce a capital value. Implied growth rate is derived from market capitalisation rate (yield).
Explain Term and Reversion.
Used for reversionary investments (when market rent is more than passing rent).
Term capitalised until next lease event.
Reversion to market rent in perpetuity at a reversionary yield.
Explain Layer/Hardcore.
Used for over rented properties.
Income flow divided horizontally with bottom slice being market rent, and top slice rent passing less market rent until next lease event.
Higher yield applied to top slice.
What risks do yields reflect?
- Prospects for rental and capital growth.
- Quality of location and covenant – consider credit reference agencies such as FAME.
- Use of property.
- Lease terms.
- Obsolescence.
- Voids.
- Security and regularity of income.
- Liquidity.
Define All risk yield.
Yield of fully let property reflecting all prospects and risks attached to particular investment.
Define True yield.
Assumes rent is paid in advance not in arrears (traditional valuation practice assumes rent is paid in arrears).
Define Nominal yield.
Initial yield assuming rent is paid in arrears.
Define Gross yield.
The yield not adjusted for purchaser’s costs (such as an auction result).
Define Net yield.
The resulting yield adjusted for purchaser’s cost.
Define Equivalent yield.
Average weighted yield when a reversionary property is valued using an initial and reversionary yield.
Define initial yield.
Simple income yield for current income and current price.
Define Reversionary yield.
Market Rent divided by current price on an investment let at a rent below the Market Rent.
Define Running yield.
The yield at one moment in time.
When do we use DCF method of valuation?
Growth explicit method of valuation, involving projecting estimated cash flows over a holding period with an exit value, usually arrived at on a all-risks yield basis. Used when:
- Phased development opportunities.
- Complicated tenures or leaseholds with income voids.
- Non-standard investments – such as 21 year rent reviews.
- Over rented properties and social housing.
Talk me through DCF process.
- Estimate cash flow (income less expenditure).
- Estimate the exit value at the end of holding period.
- Select discount rate.
- Discount cash flow at discount rate (reflects perceived level or risk).
- Value is sum of completed discounted cash flows to provide Net Present Value.
Net Present Value:
- Sum of discounted cash flows.
- NPV can determine if project could give positive return against target rate of return.
- If NPV is positive, it has exceeded investor’s target rate of return.
- If NPV is negative, it has not exceeded investor’s target rate of return.
Internal rate of return:
- Rate of return at which all future cashflows must be discounted to produce a NPV of zero.
- IRR is used to assess total return from an investment making assumptions on growth, re-letting and exit value.
- If NPV is more than zero, the target rate of return is met.
When do we use Profits method of Valuation?
Used for valuations of trade related properties where value of property relates to its trading profitability and potential. Establishes the Fair Maintainable Operating Profit (FMOP) capable of being generated by a reasonably Efficient Operator (REO). Examples include:
- Pubs
- Hotels
- Petrol stations
- Children’s nurseries
- Leisure and healthcare
- Care homes.
Must use audited accounts, preferably over three years.
Talk me through methodology for Profits method.
- Annual turnover over 3 years (FMT).
- 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).
- Capitalised at appropriate all risks yield to achieve market value.
- Cross check with comparable sales if possible.
When do we use Residual method?
Most common purpose is to find the market value of a development site based on market inputs. At one moment in time, at the valuation date, for a particular purpose. Form of development appraisal – simple residual method or DCF. All inputs are to be taken at valuation.
Talk me through residual method of valuation.
- Calculate Gross Development Value (GDV) – market value of completed development.
- Less Total Development Costs (TDC) – site preparation, planning costs, building costs, professional fees (10-15%), contingency (5-10%), marketing costs and fees (1-2% of GDV), finance costs (assume 100% debt finance on a straight-line basis using compound interest over length of development at 5% or assume s-curve).
- Deduct TDC from GDV to establish site value.
- Cross check site value against value of comparable sites if possible.
When do we use Depreciated Replacement Cost valuation method?
Used for owner-occupied property for accounting and rating valuations. Should only be used where direct market evidence is limited or unavailable for specialised properties such as:
- Sewerage works
- Docks
- Oil refineries
- Schools.
Talk me through the steps for Depreciated Replacement Cost.
- Value of land in its existing use (assume planning permission exists).
- Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence / deterioration (use BCIS and then judge level of obsolescence).
When does physical obsolescence occur?
Result of deterioration / wear and tear over the years.
When does functional obsolescence happen?
Where the design or specification of the asset no longer fulfils the function of what was originally designed.
When does economic obsolescence occur?
Due to changing market conditions for the use of the asset.
What is the full title of the Red Book?
RICS Valuation Global Standards. Red Book Global
What does the Red Book provide valuers with?
The Red Book sets out the professional standards that valuers should follow.
Are the UK sections of the Red Book issued separately to the global sections?
Yes. Most recent UK national supplement is effective from 1 May 2024.
Why has a new edition of the Red Book Global been published?
Red Book Global Standards are updated as part of RICS commitment to support high standards in valuation delivery worldwide and future-proof practices in the public interest.
What are the changes from the ‘old’ Red Book?
The changes reflect:
• Implementation of Valuation Review recommendations
• Alignment with developments in other relevant global standards and regulations
• Adoption of evolving practices for issues including ESG and technological advancements
Restructuring of VPS’s includes changes to VPS 1-5.
When did the changes take effect?
31st January 2025
What does IVS stand for?
International Valuation Standards
What type of valuations fall under the scope of the Red Book?
A Red Book valuation is a comprehensive assessment conducted by a RICS Registered Valuer following strict professional guidelines.
What does PS stand for? And how many are there?
Professional Standards. There are 2 of them.
What does PS1 relate to?
PS1 - Compliance with standards where a written valuation is provided. Mandatory for all valuations.
What are PS1 exceptions?
• Valuations for statutory purposes
• Valuations for internal purposes, not to be relied upon by third parties
• Valuations for the purposes of acting as advocate
• Valuations for the purposes of acting as expert witness
• Valuations for the agency or brokerage
What does PS2 relate to?
PS2 - Ethics, competency, objectivity, and disclosure.
What does VPS stand for? And how many are there?
Valuation technical and performance standards. Currently there are 6 of them.
What is the core principle of VPS 2?
If it is not written down it didn’t happen.
What does VPGA stand for? And how many are there?
Valuation Practice Guidance Applications. There are 11 of them.
Which sections of the Red Book are mandatory?
Professional statements – PS1-2 – these are mandatory for all members providing written valuations.
Which section of the Red Book relates to terms of engagement?
VPS 1 – minimum requirements for terms of engagement.
Where would you find out about the bases of value?
Bases of value – VPS 2.
What does VPS 5 cover?
VPS 5 – valuation models.
What is RICS Guidance Note?
An RICS guidance note is a professional or personal standard for the purposes of RICS Rules of Conduct.
What is an assumption?
Assumption – when reasonable for valuer to accept something is reasonably true without need for specific investigation.
What is an internal valuer?
RICS defines internal valuer as a valuer who is employed by either the entity that owns the assets or a related company.
What is the definition of fair value and where would you find it?
Fair value (IFRS financial reporting) – the price that would be received to sell an asset or transfer a liability in an orderly transaction.
What is the definition of worth and where would you find it?
Investment or worth value is defined by IVS and Global Red Book as the value of an asset to a particular owner for individual investment or operational objectives.
What is equitable value and where would you find it?
It is assessment of price that is fair between two specific, identified parties.
What is hope value?
Value arising from expectation of future circumstances.
What is marriage value?
The combined value of two or more assets is more than the sum of the separate values
What is the definition of a Special buyer/Special value?
A special value reflects particular attributes of an asset that are only of value to a special buyer.
What is a special assumption?
Special assumption – supposition that is taken to be true and accepted as fact, even though it is known to be untrue.
Best practice when tackling assumptions?
RICS recommends that for each matter, you should state:
• What you will not do
• Define the scope and depth of what you will do
• State what your assumption on the matter will be.
What is RICS Valuer Registration scheme?
RICS introduced regulatory monitoring scheme for all valuers carrying out Red Book valuations from October 2011.
What are the aims of this scheme?
• Improve quality of valuation and ensure highest professional standards.
• Protect and raise status of the valuation profession.
What does IFRS stand for?
International Financial Reporting Standards
What is RICS advice for risk reduction?
• Create an audit trail in every file.
• Note everything from first contact to report.
What headings are in a Red Book valuation report that aren’t in the Terms of Engagement?
Opinion of value, valuation approach.
What is the RICS guidance document for the comparable method?
Comparable evidence in real estate valuation, 1st edition (Professional Standard).
What is the hierarchy of evidence in this document?
Cat A - Direct Comps
Cat B - Market Data
Cat C - Other sources
What is the RICS guidance document for the residual method?
Valuation of development property. (2019)
What review promoted increased use of DCF?
Independent Review of Real Estate Investment Valuations – Peter Pereira Gray 2021.
What is the VPS4 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”
Why is it important to know the purpose of your valuation?
Affects how you carry out your valuation and the assumptions you make.
What is an all-risks yield?
A growth-implicit yield comprising all risks, derived from a rack-rented investment.
What came out of UK supplement of the red book?
Mandatory valuation rotations - every 3 years
public sector does not require to do this
Professional standard 1
VPS 3
VPGAs 17
UK Supplement relating to asset valuation
VPGA1 Valuation for financial reporting: general matters
VPGA 4 Valuation of local authority assets for accounting purposes
What is valuation?
Opinion of value of an asset or liability on a stated basis on a stated date
What is an asset valuation?
Determining the fair market value of an organisations assets for financial reporting purposes
What is 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.’
