Valuation Flashcards
Full Title of the Red Book
RICS Valuation Global Standards
There is also the UK National Supplement
When did current edition of Red Book come into force?
Effective from 31st Jan 2025
Who are International Valuations Standards Council?
🌍 Non-profit organisation setting global valuation standards
🏢 Dominated by major firms (e.g., PWC, KPMG, etc.)
📜 RICS is a member and sponsor → IVSC decisions influence the Red Book
What editions of the Red Book have been in effect during APC training?
2022 and 2025 Editions of the RICS Valuation Global Standards
What is the Purpose of the Red Book?
📌 Ensures valuation consistency worldwide
📌 Outlines the process for Red Book valuations:
1️⃣ Competence required
2️⃣ Agree Terms of Engagement
3️⃣ Inspect & measure
4️⃣ Conduct investigations & analysis
5️⃣ Produce report
To What Valuations Does the Red Book Apply?
Red Book applies to all valuations unless a valuation is listed as an exception
What Valuations are Exceptions to the Red Book? (Common Question)
🚫 Internal valuations (for client use only)
🚫 Agency valuations (pre-acquisition/disposal pricing)
🚫 Statutory function valuations (e.g., rent reviews, compulsory purchase)
🚫 Expert witness reports (court/arbitration decides, not Red Book)
🚫 Valuations for negotiation or litigation
Examples of Statutory Function Valuations?
📜 Lease renewal valuations (s34 of LL&T Act 1954)
🏛 Rating valuations (based on legislative rules)
🏗 Compulsory purchase valuations
Difference Between VPS & VPGA?
📌 VPS (Valuation Technical & Performance Standards) – Mandatory
📌 VPGA (Valuation Practice Guidance – Applications) – Advisory
Consequences of Non-Compliance with VPS and VPGA?
⚠️ Failure to follow VPS:
RICS disciplinary action (warnings, fines, consent orders)
⚠️ Failure to follow VPGA:
Potential negligence claims (clients may sue for losses)
(Even full Red Book compliance doesn’t prevent negligence claims!)
Difference Between a Red Book Exception & Departure?
🚫 Exception = Red Book doesn’t apply
⚠️ Departure = Red Book applies, but valuer omits mandatory steps
📌 Departure must be justified by special circumstances & agreed with the client
How is departure from the Red Book mandatory requirements possible?
if there are special circumstances where it is inappropriate to comply with VPS 1 - VPS 5 and client agrees.
Can only depart if there are circumstances that justify departure
Key Information Required for a Valuation Request
📍 Location
🏢 Property type (ensure competence)
📌 Purpose of valuation (avoid conflicts of interest)
📜 First two questions: WHAT is it? WHERE is it?
What is Included in a Valuation File?
📌 Conflict of interest check
📜 Agreed Terms of Engagement
📷 Inspection notes (photos, floor plans, planning permissions)
📊 Comparable evidence
📈 Valuation calculations
📄 Final valuation report
Key Contents of Terms of Engagement
Entering into a contract you would need:
Valuer - name
Client - name
Property - address
Purpose of valuation
Basis of value
Valuation date
Nature and extent of the valuer’s work - including investigations - and any limitations thereof
Assumptions/special assumptions
The Fee
How would you respond to a request to value property for a Pavement Assessment (same as a Drive By assessment) only?
🚗 Yes, if properly justified
📌 Usually used for revaluations (previously inspected, no changes)
📌 Acceptable if:
Prior dealings exist (e.g., firm previously inspected property)
Sufficient plans & lease data available
Red Book Global Bases of Value (Common Question)
📌 Market Value
📌 Market Rent
📌 Investment Value
📌 Fair Value
UK-Specific Bases of Value?
🏢 Existing Use Value (EUV)
🏠 EUV for Social Housing
🏡 Projected Market Value for residential properties
Difference Between Basis of Value & Method of Valuation?
Method of Valuation = the techniques used to arrive at a figure that we would describe with a Basis of Value
Basis Value = Red Book definition of Value (market value, market rent, investment value and fair value)
Describe three assumptions made in producing a valuation
📜 Title assumed correct (freehold/leasehold as stated)
🏚 Building free from major defects
🏗 Planning permission assumed valid
🚫 No contamination/hazardous substances
⚡ Utilities connections assumed correct
What is a Special Assumption?
An assumption that assumes facts that differ from those existing at the valuation date
Examples of Special Assumptions?
🏢 Vacant property assumed to be let
🏗 Development assumed completed
📜 Planning permission assumed granted
Definition of Market Value?
“The estimated amount for which a property should exchange between a willing buyer and a willing seller after proper marketing in an arm’s length transaction.”
What Constitutes Proper Marketing?
📌 Selling via the appropriate method (e.g., private treaty, auction)
📌 Allowing a reasonable marketing period
📌 Advertising to the right audience (regional, national, international)
What is an Arm’s Length Transaction?
When there is no connection/relationship at all between parties
What is Synergistic Value?
📌 The combined value of two properties is greater than their separate values.
What is Marriage Value?
📌 The additional value created from merging properties.
📌 Often split 50/50 between buyer & seller.
What is a Special Purchaser?
📌 A buyer willing to pay above Market Value due to strategic interest.
When is Market Rent NOT Appropriate?
📌 Rent Review – Use rent definition lease definition
📌 Lease Renewal – Use s34 LL&T Act 1954
When is Fair Value Used?
When valuing for accounting/financial reporting (no different to market value, just used when valuing for inclusion in company accounts)
What is a regulated purpose valuation?
When accounts are regulated, where third parties will have an interest
What is an asset valuation?
One undertaken for financial reporting purposes (another name for a regulated purpose valuation)
When is existing use value the valuation basis?
Used for Local Authority and Central Governemnt owner occupied properties - CIPFA (Chartered Institute of Public Finance Accountants)
Difference between market value and existing use value?
Existing use value is value of building as it is; market value is highest and best use of an asset (can take into account development and re-development potential)
When is DRC used in asset valuations?
For properties where there isn’t enough comparable evidence
For specialised properties EG properties that would not sell other than as part of a sale of the business in occupation
Name three situations that can adversely affect the certainty of valuations
📌 Unusual property (e.g., high-spec office in industrial zone)
📌 Market volatility (e.g., COVID disruptions)
📌 Limited property access (e.g., no internal inspection, missing lease data)
Five Conventional Valuation Methods?
Five Conventional Valuation Methods?
📌 Comparative
📌 Investment
📌 Residual
📌 Profits (Accounts)
📌 Contractor’s Method (DRC)
What are contemporary valuation techniques
Valuation methods where discounted cash flow techniques are used
What makes a property transaction comparable to the property being valued?
📌 Similarities in:
Physical characteristics
Location
Tenure
Use
Transaction timing
How many comparables are needed to produce a valuation?
We need all the available comparable evidence, so that there is enough to establish a trend
What is the longest time period that a transaction could be accepted as being a comparable?
The most recent comparables tend to hold the most weight
What is weighting of comparable evidence?
Ranking comparables with the greatest similarities so that they have the most weight
This is subjective depending on what the valuer thinks
Greatest weight attached to comparables with greatest similarities
What is the hierarchy of evidence?
🏆 Ranking by transaction type:
1️⃣ Open market lettings (most weight)
2️⃣ Lease renewals
3️⃣ Rent reviews
4️⃣ Independent expert determination
5️⃣ Arbitrator award (least weight)
What is interpolation of comparable evidence?
Calculating a value between two extreme points
What is extrapolation of comparable evidence?
Calculating a value outside of known data
What is the purpose of zoning?
Used to compare retail units with different shapes / different frontage to depth ratios
What is the standard zone depth
6.10m (20ft)
How would you assess the market rent of the first floor of a retail unit?
📌 Standard approach: Zone A / 10
If first floor is non-retail purposes (EG accommodation or storage) then it is sometimes acceptable to take a rate independent of X
How would you assess the market rent of a ground floor unit with a return frontage?
📌 If both frontages have equal footfall → Whole unit = Zone A
📌 If footfall differs: Apply an uplift (e.g., +5% Zone A, +2.5% Zone B).
How would you assess the market rent of a ground floor with frontages on two roads (ie it is a through unit)
📌 Zone back from both frontages.
📌 Use different Zone A rates based on footfall differences.
📌 Example: £200/psf from one side, £150/psf from the other.
How would you determine the market value of an investment property let on internal repairing terms?
📌 Investment method
📌 Net rent = Gross rent - outgoings (repairs, insurance, extra management).
📌 Capitalise the net rent using the market yield.
What is the market capitalisation rate?
Another name for the all risks yield
It is the rate at which the market capitalises the income
What Factors Make Up the All Risks Yield? (Common Question)
🏗 Building characteristics
📜 Lease terms (unexpired term, break options, etc.)
💰 Tenant covenant strength
📊 Market rent position (under/over-rented)
📈 Anticipated rental growth
How would you value a green-field site with planning permission for residential development?
Assuming there are no appropriate comparables, should use the residual method
How would you carry out a residual valuation?
Take market value of completed development, and deduct development cost and developers profit, to get the land value
What costs did you deduct in your residual valuation?
Demolition / site clean up fees
Cost of construction (building cost)
Fees for construction (architects, engineers etc)
Finance costs
Contigency to allow for fluctuations in these costs
Agent and Legal fees on disposal
Agent and Legal fees on acquisition
Fees and stamp duty land tax on aquisition when you buy the site
How to Calculate Developer’s Profit?
📌 Two methods:
1️⃣ % of total costs (e.g., 25%)
2️⃣ % of gross development value (GDV) (e.g., 15%)
📌 Higher risk → Higher profit margin required.
Usual Acquisition Costs for a Development Site?
📌 Purchase price
📌 Stamp duty land tax (SDLT)
📌 Agent fees
📌 Legal fees
📌 VAT on professional fees
What is a Ransom Strip?
📌 Small strip of land controlling access to a development site.
📌 Owner can “hold” landowner to ransom.
What is ransom value?
The value attributable to the ransom strip
How would you value a ransom strip?
Would be valued at a percentage of the uplift in value resulting from the owner of the land having access over the ransom strip
What does the Stokes v Cambridge case mean to you?
Compulsory purchase case in 1961
It was held that the value of the ransom strip was 1/3 of the uplift in the value of the development land
Since then, 1/3 of the uplift in value for the ransom strip has been accepted as an industry stanard (there is a 1/3 - 2/3 split)
What is the profits method also known as?
The accounts method
Name property types that would be valued by the profits method
🏨 Hotels
🍻 Pubs
🎭 Theatres & Cinemas
⛳ Golf Courses
🎰 Casinos
Why are certain properties valued by the profits method?
📌 When property is tied to its business use.
📌 Comparable method not applicable.
📌 Not Red Book ‘specialist property’ but still highly specific to a business type.
Profits Method Approach?
📌 (1) Estimate annual turnover (net of VAT).
📌 (2) Deduct costs of generating turnover.
📌 (3) Capitalise net operating profit.
What valuation checks can be carried out on a valuation produced by the profits method?
📌 Per seat (theatres, cinemas)
📌 Per bed (hotels, care homes)
When is the contractor’s method used?
Method of last resort
Used when no other methods can be used
What is another name for the contractor’s method?
Depreciated replacement cost
Explain the basic approach to Depreciated Replacement Cost Method
Gross replacement cost (cost of modern substitute building) minus depreciation, to get net replacement cost, then add site value to get DRC
Explain what is included in a Reinstatement/Replacement Cost for Insurance Purposes?
🔥 Demolition costs
🏗 Shoring/weatherproofing adjacent buildings
🏢 Rebuild costs
📜 Professional fees
How would you value a property where there are no comparables?
You would use the Contractor’s Method after analysing whatever evidence there was
Why is YP Single Rate Table Called Present Value of £1 p.a.?
📌 It tells us the PV of £1 received annually over time.
📌 Further into future → Lower present value.
(£1 today is worth more than £1 in the future!)
What are the principle sources of investment?
Guilts, equities and properties
What is a bond investment?
📌 Fixed capital investment with a fixed return for a set period.
📌 Government or corporate bonds.
What is the major attraction of property over the other two major investment opportunities?
With proactive positive management, you can improve performance. With a guilt or a company you have shares in - you can’t improve it’s performance easily
EG refurbish units, regear leases etc.
Major Disadvantages of Property Investment?
📉 Low liquidity (slow to buy/sell vs. stocks/bonds)
🏗 Requires active management
💰 High transfer costs (agency & legal fees)
🏢 Indivisible (can’t sell part of a shopping centre)
How did the all risks yield get its name?
Takes into account all the risks of the investment
What is a gross yield? COMMON QUESTION
The rent expressed as a percentage of the purchase price/ market value
What is a net yield? COMMON QUESTION
The rent expressed as a percentage of the gross acquisition cost
Name the costs that a purchaser must incur with acquiring a property investment
Stamp Duty Land Tax
Agents Fees
Legal Fees
Non-recoverable VAT on Fees
Quantify purchaser’s costs in percentage terms
Stamp Duty Land Tax is 0% if under £150,000, 2% on the next £100,000 and 5% on anything over £250,000
Agents Fees - 1%
Legal Fees - 0.5%
VAT on Fees - 20% (of the 1.5% which is 0.3%)
Total for fees (inc VAT) is 1.8%
What If No Evidence of Yields for Investment Valuation?
📌 Construct a yield by:
1️⃣ Using gilts (risk-free investment benchmark)
2️⃣ Adding risk premium (market & property risks)
3️⃣ Deducting growth expectations (if applicable)
How is rental and capital growth accounted for in a conventional investment valuation?
It’s included in the all risks yield
The greater the growth opportunity, the lower the yield
What is a reversionary investment?
An investment that is let at a rent other than the market rent (EG over-rented or under-rented)
What is meant by rack rented?
a property that is currently let at market rent
What techniques can be used to value an under-rented reversionary investment?
📌 Two methods:
1️⃣ Term & reversion method
2️⃣ Hardcore/layer method
Explain the process of the term and reversion technique? COMMON QUESTION
Firstly
- Conflict of Interest Check
- Check you are competent
- Set out terms of engagement
- Inspection
- Measurement
- Carry out statutory due diligence
- Collect comparables
Then
📌 Step 1: Capitalise the passing rent for the term using the YP multiplier at a reduced ARY up to the reversion.
📌 Step 2: Capitalise market rent at reversion into perpetuity (using YP multiplier at a higher ARY).
📌 Step 3: Discount the reversionary value back to present value using PV of £1.
Add these together to get the value.
Explain the process of the hardcore/layer technique? COMMON QUESTION
Firstly
- Conflict of Interest Check
- Check you are competent
- Set out terms of engagement
- Inspection
- Measurement
- Carry out statutory due diligence
- Collect comparables
Then
📌 Step 1: Capitalise passing rent YP into perpetuity multiplier (bottom slice).
📌 Step 2: Capitalise the additional rent above the market rent expected at reversion up to reversion using the YP multiplier (top slice).
📌 Step 3: Discount the top slice for the term period.
📌 Step 4: Apply a higher yield to top slice due to increased risk.
How to Value an Over-Rented Investment?
📌 Use Term & Reversion OR Hardcore/Layer method.
📌 Capitalise both blocks of income at above-market yields.
What is an initial yield?
the net income (or passing rent) at the date of purchase expressed as a percentage of the Purchase Price
What is a reversionary yield?
the Market Rent expressed as a percentage of the Market Value (or Purchase Price)
What is an equivalent yield?
Weighted average of initial & reversionary yield
It can also be described as the internal rate of return from an investment disregarding any rental or capital growth
What is an equated yield?
It is the overall rate of return, taking into account the growth
It is the true investment yield
It is the discount rate at which the DCF equals the purchase price of the investment
What is a true equivalent yield?
It is the yield, when taking into account that rent is receieved quarterly in advance
What is nominal yield?
The yield generated when rent is received annually in advance?
What is Top-Slice Income? (Classic on Referral Reports)
📌 Additional income over passing rent, such as:
1️⃣ Rent increase at review/reversion
2️⃣ Overage/froth
3️⃣ Leasehold profit rent
📌 Capitalised at a higher rate due to increased risk.
What is overage?
an agreement where a buyer pays the seller extra if the property’s value increases in the future
How would you value a leasehold interest / ascertain if a premium can be charged for the assignment of a lease? CLASSIC ON REFERRAL REPORTS
I would capitalise the profit rent (the market rent less the rent paid) for the remaining term.
What are the names of the two yields in the YP dual rate? CAN COME UP WHEN DISCUSSING ASSIGNMENTS
📌 Accumulation rate (sinking fund rate)
📌 Remunerative rate
What effect does rent received quarterly in advance have on the yield?
It increases it (becomes the true equivalent yield rather than the nominal yield)
What is the fundamental difference between conventional investment valuation techniques and discounted cash flow techniques?
📌 Conventional: Growth is implicit in the all risks yield.
📌 DCF: Growth is explicit, calculated into future rent & capital values.
📌 RICS recommends shifting towards DCF for investment valuations.
How is growth calculated in a discounted cash flow?
We compound it using (1+i)^n or Parrys Amount of £1 Table
How would you arrive at a discount rate when carrying out a discounted cash flow? COMMON ON REFERRAL REPORTS
What is a Risk-Free Rate?
📌 Yield on UK gilts (government bonds).
What is a Risk Premium?
📌 Extra return required above gilts to compensate for property investment risk.
Why do property investors require a risk premium?
📌 Higher risk than gilts (e.g., illiquidity, management costs, tenant risk).
Define Yield
A measure of investment return expressed as a percentage of capital invested.
