Valuation Flashcards
Tell me what the 5 methods of valuation are.
Comparative
Residual
Investment
Profit
Contractors
Tell me about how you would value a building using:
1. Profits
2.Depreciated Replacement Cost
3.Investment
4.comparable
5. residual .
Comparative -
6 step methodology
1. Find comparables
2. Confirm details and analyse incentives etc
3. Create schedule
4. Rank comparables
5. Form opinion of value
6. Report value and prepare file note
Investment -
1. Rent received, conventional method
Rent x Years purchased = value
T&R - when rent below market
Term is capitilised at an initial yield until rent review. Value the reversion to market rent in perpetuity at a reversionary yield
Layer/hardcore method
Over rented
Income flow divided horizontally
Bottom slice = market rent (lower yield reflecting comparables)
Top slice = rent passing less market rent until next review (high yield)
DCF (growth explict) cash flows are explicity estimated over a finite period. Eg Phased development projects
examining its future income
Can be altered in line with discount rate
Discounting the cash flow to determine estimated current value
Residual
Development appraisal purposes to determine whether a development is viable
Profits -
Trade related
Establish FMOP by a Reasonably Efficient Operator based on FMT
Multiplier is used to convert FMT into capital value
Contractors -
1. Value of land in its existing use (assume planning permission exists)
2. Add current cost of replacing the building plus fees less a discount for depreciation and deterioration.
what is DRC
- 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 deterioration.
How do you decide which valuation method to apply?
Comparative - when there are comparables
Residual - Development
Investment - Income stream
Profits - Trade related
Contractors - no comparable evidence, specialised properties
Lambeth - how did you gather your comparable evidence?
I found comparable information on CoStar and spoke with local investment agents.
Lambeth - How easy was it to find comparables for other grade II listed buildings?
This part of Lambeth there were quite a few offices which were Grade II listed.
Talk me through the analysis of your comparable evidence along with any adjustments.
Gathered comparable evidence from CoStar and collated the evidence.
The subject property was a in a good location therefore made adjustments to weaker locations.
The subject property was not in very good condition therefore made an adjustment to reflect this.
With the subject property being listed, this reflects in higher operations costs, restrictions on planning and less modern amenities.
What type of yield did you use?
All Risks Yield
What parts of the Red Book did you comply with?
VPS 1-6
Red Book Structure
Introduction
Glossary
Professional Standards (PS)
Valuation Technical and Performance Standards (VPMS)
Valuation Applications (VPGA)
The International Valuation Standards (IVS)
What parts of the Red Book did you comply with?
VPS 1 - Terms of Engagement
vps 2 - basis of value (Market Value)
VPS 3 - valuation approaches and methods
VPS 4 - Inspections, investigations, records
VPS 5 - Valuation modelling
VPS 6 - Valuation reports
What was the purpose of the Portland Mews valuation
Was for Pension fund purposes
Portland Mews - why did having a SIPP mean the rent was below market rent?
The trustees had not updated the rental value for a long time. Therefore was outdated.
What was your ARY and why?
Initial yield was 3.5% to reflect stablility and low risk
Reversion in perpetuity and a reversionary yield was 4.5%
Talk me through your term and reversion.
Term - Passing rent was capitilised at an initial yield of 3.5% until the next rent review.
Reversion in perpetuity at a reversionary yield of 4.5% to reflect the added risk.
Why did you not use Fair Value
Because the client wanted Market Value.
This was not for Financial purposes. The purpose of this valuation was for tax advice for the client
If it was for financial reporting I would have changed my basis of value to Fair Value IFRS 13
How did you adjust the yield in the reversion and why?
In line with market evidence because I spoke with local investments.
In depth structure of the Red Book 2024
PS 1 Compliance with Standards and Practice Statements where a written valuation is provided
PS 2 Ethics, competency, objectivity and disclosures
VPS 1 - ToE
VPS 2 - Basis of Values, assumptions and special assumtions
VPS 3 - Valuation approaches and Methods
VPS 4 - Inspections, investigations and reports
VPS 5 - Valuation models
VPS 6 - Valuation reports
VPGA 1 - Financial Reporting
VPGA 2 - Secured lending
VPGA 3 - Businesses and Business Interest
VPGA 4 - trade related properties
VPGA 5 - Plant and equipment
VPGA 6 - Intangible assets
VPGA 7 - Arts and Antiques
VPGA 8 - Real property interests
VPGA 9 - Portfolios and group of assets
VPGA 10 - Material valuation uncertainty
VPGA 11 - Relationship with auditors
International valuation standards
What are the three valuation approaches and when to use each one?
Market (Indication of value by comparing the subject with identical or similar assets for which price information is available)
Income (indication of value by converting future cash flow into a current capital value)
Cost (indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility whether by purchase or construction.)
Market Value
Is the estimated amount an asset or liability should exchange on the valuation date between a willing buyer and seller in an arms length transaction.
After property marketing each party had acted knowledgeably, prudently and without compulsion.
Market Rent
Estimated amount of which an interest in real property should have exchanged for between a willing lessor and lessee on the valuation date, on appropriate lease terms and in an arms length transaction.
Fair Value
Price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
Investment Value
Value of an asset to a particular owner, prospective owner for individual investment or operational objectives
What is a years purchase multiplier?
divide 100 by the yield. multiply that by the rent to calculate a market value
Give me an example of a good covenant and how this might impact a valuation.
A blue chip company - long track record / longer leases / predictable
Therefore lower yield = higher value
How did the decision in Hart v Large 2021 affect PII?
Similar to Yianni v Edwin Evans 1981
Valuer has a duty of care not just for valuation purposes
Valuer failed to notice water ingress and damp. Should have advised The Hart Family to instruct a building surveyor.
IMPORTANT - to mention in the TOE the exclusions and limitation to liability
What level of PII cover does your firm have?
T/O above £201k therefore min PII £1m (£3m)
Excess - 2.5% of sum insured (£75k)
How would you distinguish limitations on liability in your valuations?
Clear scope of works
Assumptions & special assumptions
Limitation caps (RICS Guidance - Risk, liability and insurance)
What aspect of Hart v Large allowed the judge to award damages
Reasonable skill and care
Failed to notice serious building defects
What is the SAAMCO cap?
The surveyor is only liable for the damages in which advice was provided
Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?
No in accordance with Hope Capital Ltd v Alexander Reece Thompson 2023
What would you do if you received a notice of a PII claim from a client or their solicitor?
Speak to my insurers immediately and await guidance
This could be:
acknowledging the claim but not admitting negligence
Is there a difference between being negligent when undertaking a survey/valuation and providing negligent advice?
Yes
Negligent when undertaking a survey - failing to meet standard skill and care (not noticing building defects)
Negligent advice - providing misleading advice affecting the clients decision (eg a good investment property)
What is run off cover?
after trading finished min 6 years PII
What is the Red Book?
Details mandatory practices for RICS members when undertaking a valuation.
This ensures consistency and high standards in delivery
Tell me about a factor which may impact value.
Location
What is your duty of care as a surveyor when undertaking a valuation?
SUK
Independence
Providing good quality service, advising the client on seeking specific specialist advice
Why is independence and objectivity important when valuing?
Unbiased, reliable and credible. Ensures accuracy
What is the UK valuation guidance called?
UK National Supplement 2023
What is included in UK Supplement 2023
Major changes:
1. UK VPS 3 - overhauled (regulated purposes, 3 party reliance) Financial reporting, takeovers
Mandatory rotations for UK valuers. Transitional period until 31 March 2026
10 year firms
5 year valuers
VPGAs include
1. Financial Reporting
8. Charity assets
9. Relationship with auditors
10. Secured loaning purposes
Changes to the Red Book
Alignment with the new International Valuation Standards web 31 jan 2024
New content regarding modelling and methods
Adaptation to practice and process changes from evolving areas such as technology and Environmental Social and Governance (ESG).
Hope Value
The expectation of a value in the future eg planning permission
Margin of error for a one off commercial valuation
+/- 10% and exceptional features +/- 15%
Marriage Value
Combination of more than two assets eg combining two office floors into one value
Undertake a before and after and calculate the level of marriage value created
Stamp duty for non domestic properties
£0 - £150,000 = nil
£150,001 - £250,000 = 2%
over £250,000 = 5%
Which do you follow – the latest IVS or the Red Book Global?
Follow both - the Red Book incorporates the IVS
What is the difference between an assumption and a special assumption?
Assumption - a supposition taken to be true without investigation
Special Assumption - An assumption that either assumes facts that differ from the actual facts
(Assuming planning consent) Must be in writing and agreed
two different types of valuers
Internal - Employed by company, no third party reliance, internal use only
External - No material link with asset or client
What must you do before a valuation
Competence (SUK)
Independence (conflicts WHO & WHY?)
ToE
Statutory due diligence checks for valuation
Asbestos Register
EPC rating if available
Floor Plan
Business Rates
Floor risk
Fire safety compliance
H&S Compliance
Legal title and tenure
Valuation timeline
- Receive instructions
- Competent
Independence / conflicts - ToE signed
- Gathering information (leases, rate demands, EPC etc)
- Check that above does not affect valuation
- Inspect and measure
- Comparables
- Draft report
- Reviewed by colleague
- Finalise and sign report
- Report to client
- Invoice
- Archive report
Hierarchy of Evidence
Cat A - direct comparables, contemporary, completed transactions of similar or near identical
Cat B - general market data to provide guidance, commercial databases
CAT C - other sources, from other real estate types and locations
What to do if lack of comparable evidence
RICS Comparable Evidence in Real Estate Valuation, 1st Edition 2019
Use own professional judgement
Case by Case basis
How to find relevant comparbles
Agent boards
Speak to agents
Auction results
In house records
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
Mandatory rotation outlined in the UK National Supplement:
Max 10 years until firm rotation
Max single engagement of 5 years
Minimum three year break after rotating off an engagement
If your firm is too small to have a rotation policy or valuation panel, what else can you do to ensure objectivity?
Full disclosure of previous involvement
Independent peer review
When might a conflict of interest exist in relation to a valuation instruction?
Longstanding professional relation with prospective buyer or owner
Valuer gains a fee for introduction
Valuer has a financial interest in the property
What must be included in your terms of engagement / valuation report?
I dentification of client
I dentification of valuer
I identification of any other 3rd party
C currency
A ssumptions / special assumptions
B asis of value
L limitations cap
E extent of investigations
C CHP
A Asset to be valued
R restirctions for use
S subject to compliance by the RICS
What is a restricted valuation service and can you provide one?
These reports can be called, desktop, drive by valuations
If not possible then the instruction should be declined
It must be stated in the report
How do you deal with limitations on inspection or analysis?
Unable to inspect/access roof, so assumed roof was in good condition.
Can you revalue a property without inspecting?
Yes - but must be made aware in ToE & report. A good justification to why not re inspecting and there have been no material changes. (recently inspected within the last 6 months)
What RICS guidance relates to the use of comparable evidence?
RICS Comparable Evidence in Real Estate Valuation 2019
Can an external valuer provide an internal purposes valuation?
Yes as long as there are no conflicts of interest
What happens if market conditions change between the valuation date and report date?
Must be stated in the report
What is a special purchaser
A particular buyer for whom a particular asset has a special value because of advantages arising from its ownership that would not be available to other buyers in a market.
Is special value from a special purchaser reflected in MV?
An additional element of value over and above Market Value that is only available to a special purchaser due to unique advantages.
Eg Owner buys next door building at a premium to gain extra operational benefits.
eg Tenant buys freehold of building
Where does the definition of fair value come from?
IFRS 13 - fair value for financial reporting
Does FV differ from MV?
RICS generally consider them the same
Fair value is including synergies or investment benefits
What does VPS 5 say about valuation models?
To choose the appropriate model -
it is used for quantitative implementation of a valuation method
What is the Valuer Registration Scheme?
Mandotory registration for Red Book valuations
Monitoring scheme
1. To improve the quality of valuation and ensuring highest professional standards
2. to meet RICS requirement to self regulate effectively
3. To protect and raise the status of a valuer
‘RICS Registered Valuer’
What is the basis of value under UK GAAP FRS 102?
GAAP (General Accepted Accounting Practice) - Fair Value
What is a SORP?
Statement of Recommended Practice - provides guidance on financial reporting
When would you use EUV?
Existing Use Value - financial reporting and statutory purposes
What additional criteria apply to secured lending valuations?
VPGA 2 - Valuations for secured lending
Special asuumptions - development potential (for lending security if loaner defaults)
What is a regulated purpose valuation?
Examples are: for secured lending valuations & financial reporting
What is a yield?
A measure of investment return risk expressed as a %
What is a Initial Yield?
Current income / current value
What is a reversionary yield?
Market Rent divided by current value with low rent
What is an equated yield?
The yield accounts for growth in future income
What is an equivalent yield?
Average weighted yield when a reversionary property is valued using initial yield and reversionary yield
What purchaser’s costs do you deduct from a valuation and when?
Stamp Duty, legal fees and agent fees
Around 6.8%
How would you value a property in uncertain market conditions – does the Red Book give any guidance?
VPGA 10 - Material Valuation uncertainty
Must be disclosed within the valuation report, lack of comparable evidence.
Valuers can include a valuation uncertainty clause
How could you value a long leasehold interest?
Long leasehold - 99+ years
Comparables
Lease terms
Ground rent? Investment method?
What is the difference between a growth explicit and a growth implicit yield?
Implicit yield is from market transactions already reflecting growth expectations (ie ARY)
Explicit Yield - separates the rental growth assumption from the discount rate
Give examples of each of these types of yield for Growth & Explicit
Implicit - ARY
Explicit - Required Rate of Return
What is NPV
Net Present Value - the sum of the Discount Cash Flow
Determines the profitability of an investment
What is IRR?
Is the discount rate to make the NPV zero
What are the advantages of a DCF?
Long term investment strategies
Incorporates time value of money
What are the disadvantages of a DCF?
Sensitive to assumptions
Long term forecasting is unreliable
Can be complex, a lot of data
What is an arms length transaction
When both parties have acted independently
Definition of Income
Indication of value by converting future cash flow into a current capital value.
Definition of Financial Statements
Written statements of the financial position of a person or an entity
Definition of goodwill
Any future economic benefit arising from a business
Definition of intangible assets
A non-monetary asset that manifests itself by its economic properties
Eg a Patent
What is Market Approach
An indication of value by comparing the subject asset with identical or similar assets for which price information is available.
Special Assumption
An assumption that either assumes facts that differ from the actual facts
What is valuation date
The date on which the opinion of value applies
What does worth mean in valuation
Applies to the investment value. The value on an asset for a prospective buyer or owner
Net Initial Yield
A yield adjusted for purchases costs
Gross Yield
A yield not adjusted for purchases costs (auction sale)
Nominal Yield
Initial yield assuming rent paid in arrears (usual valuation practice)
True Yield
Initial yield assuming rent paid in advance
Running yield
The yield at one moment in time
Why did you apply greater weight to the comparative method
There was a vacant posessession sale in the last 6 months which was very similar.
Rear tenant had a short lease. 3 year lease
Other tenant was on a license agreement
What is an accounting purposes valuation
valuing the clients asset for there company financial reporting
How does a retail valuation differ to offices
Zoning
It is a valuation method
What is a listed building
buildings with special architectural or historic interest with legal protection
ZA depths
6.1m
9.14 m (prime)
What is GAAP & IFRS
Generally Accepted Accounting Procedures & International Financial Reporting Standards
Refers to the accounting standards used in financial reporting. Valuers can choose between the two
Lambeth - Tell me how you analysed the comparables
Capital values -
I had direct comparable evidence of an identical building which was grade II listed sold in the last 6 months and within the same street. Also found other similar assets and created a schedule to analyse ranking them to form an opinion of value.
Rental values -
Hierarchy of evidence
Looked at open market lettings
Lease renewals
Rent reviews
but giving the greatest weight to the open market lettings as comparable evidence
Why did you give greater weight to the capital value
Open market recently let
Identical asset, same location, listed building
Lambeth - talk me through your valuation
- Received instructions. Purpose - ongoing tax advice for the client. Wanting a MV valuation report.
- Ensured I had the necessary Skills, Understanding and competence
- Independence
- ToE
- Inspected (Internally / Externally)
- Measured
- Collated rental evidence (hierarchy of evidence, Open market lettings, lease renewals, rent reviews, Independent / Expert Witness, Court determinations under LTA, heresay evidence, sale & leaseback, surrender & renewals)
- Rent was market rent, spoke with local agents and established an appropriate yield and adjusted the yield to reflect the property specifics. Capitalised the rent by yield to form Market Value.
- Cross checked this with the comparative method of vacant possession
- Direct comparable evidence - 6months
- Ranked formed opinion of capital value
- Gave greater weight towards this as had direct evidence
Lambeth - How did you adjust the yield to reflect the property
Negative - Grade II listed, higher operational costs, restrictive permissions
Positive - great location
Portland Mews - was this a red book
What headings did you put in the valuation report
Yes - VPS 1-6
Identification of the client and the valuer
Purpose
Conflict
Basis of value
Valuation date
Extent of investigation
Assumptions and Special Assumptions
Restrictions
