Valuation Flashcards
What is an internal valuer?
employed by a company to value own assets
internal use only
no 3rd party reliance
What is an external valuer?
no material links to asset or client
What must you do before commencing a valuation?
Consider CIT
1. Competence
2. Idependence - conflicts
3. Terms of engagement - in writing
Why is statutory due diligience done?
to check no material matters which could impact on the valuation
What checks are part of statutory DD?
Abestos register
business rates/ council tax
Contamination
Equality Act 2010 complicance
Environmental matters
EPC
Flood risk
Fire safety compliant
H&S compliant
Highways
Title and Tenure
Planning history
Public rights of way
What is the timeline of a valuation?
- CIT check
- Signed ToE
- Gather info and DD
- Inspect and Measure
- Research comps, verify
- Undertake valuation
- Draft report
- Report reviewed by another surveyor
- Finalise and sign
- Issue invoice and file
What are the 5 methods of valuation?
- Comparative
- Investment
- Profits
- Residual
- Contractors (Depreciated Replacement Costs)
What 3 methods are set out in IVS 105?
- Income (Inv, resid, profit)
- Cost Approach (DRC)
- Market Approach (Comparable)
What are the 6 steps of the comparable method?
- Search and select comps
- Verify & analyse HL rents to give NER
- Assemble comp schedule
- Adjust comps using HoE
- Analyse comps to form opinion of value
- Report and file
What PS relates to comparable method?
Comparable Evidence in RE Valuation 2019
What is outlined in Comparable Evidence in RE Valuation 2019?
Advice for when limited evidence
Valuers should use professional judgement
What is the Heirarchy of Evidence?
- Cat A - Direct
- Cat B - General Market Data
- Cat C - other sources
Rank evidence types for Cat A? (best to worst)
- Complete, near identicle
- similar with full, accurate info
- similar under offer, not binding
- Asking prices
How to find comparable evidence?
inspection
local agents
auction results
in house databases
market sentiment
date of evidence is important
When is the investment method used?
When there is an income stream
How does the investment method work?
rental income capitalised to produce a capital value
What are the 3 types of investment methodologies?
- Conventional
- Term & Reversion
- Layer / Hardcore Method
Expalin the conventional investment method?
Rent received x YP
Comps used to determin rent and yield
Growth implicit
Explain Term & Reversion?
For reversionary investments, under rented
current rent capitalised till next Review/event at NIY
Reversion to market rent valued into perpetuity at RY
Explain Layer / Hardcore method
for overrented properties
income divided horizontally
Top slice = rent passing - MR capitalised till expiry
Bottom slice = MR into perp.
What is a yield?
Measure of investment return as a % of capital invested
How to calculate yield?
Income / Price x 100
What is Years Purchase?
100/yield
no. of years required for income to cover purchase price
What is a major factor in determining Yield?
RISK
What factors influence yield?
rental growth
Location
Covenant
Use
Lease Term
Capital growth
Voids
Security/ Regularity of income
Liquidity
Obsolescence
What is meant by Return?
Describes performance of a property
Retrospective
Use DCF to find IRR
What is All Growth Implicit?
Assumptions that are explicit in DCF
Use comps to determin
What is the All Risks Yield?
Remuneration rate of interest used for a fully let, rack rented, reflecting all prospects and risks
True yield?
Rent paid in advance not in arrears
Nominal Yield?
Initial yield
Rent in arrears
Gross yield?
Yield NOT adjusted for purchasers costs
Net yield?
Gross yield adjusted for purchasers costs
Equivalent yield?
Weighted average yield of initial and reversionary yield for valuing reversionary property
Initial yield?
Simple income yield for current income and price
Reversionary yield
Market rent/ current price
for an investment let below market rent
Running yield
yield at a moment in time
What is the Discounted Cash Flow (DCF) technique?
Growth explicit investment method, form of income approach
Examins future net income or projected cashflow and then discount the cashflow to provide an estimate of current value (reflects the time value of money)
What is DCF used for?
Where the projected cash flow is explicitly estimated over a finite period of time eg. short leasholds, phased developments, over-rented assets
How does DCF treat growth?
Explicitly identifies growth assumptions rather than a ARY
What is the DCF methodology?
- Estimate cash flow for agreed holding period
- Estimate exit value at end of holding period
- Select discount rate
- Discount cash flow
- Value = sum of DCF to provide NPV
What is NPV?
Net present value
Sum of DCF
Used to determin if an investment gives positive return against target
+ exceeded target
- not achieved
What is the Internal rate of return?
IRR
rate at which all future cashflows discountd to produce an NPV of 0
assesses return from an investment
How to calculate IRR?
- Current MV input as -ve
- Input projected rents
- input exit value
- discount rate chosen
- if +ve IRR has been met
What is the RICS DCF guidance?
RICS PS: DCF Valuations 2023
practical guide to explicit DCF vs implicit
context and differing inputs
What is the purpose of the profits method?
for trade related properties where value depends on profitability of its business and trading potential eg. pubs, petrol stations, hotels, nuseries
What is needed for profits method?
acurrate and audited accounts for 3 years (estimates can be used for new businesses)
Profits method methodology?
Annual Turnover - costs = Gross profit
Gross profit - expenses = Net profit
Net profit - operators remuneration = Fair Maintainable Operating Profit (FMOP)
FMOP Capitalised at appropriate yield
When is the depreciated replacement costs (DRC) method used?
for specialist properties where direct market evidence is limited eg. sewage works, lighthouses, oil refineries
What is the purpose of DRC method?
for owner occupiers, accounts purposes and for rating valuations
DRC methodology?
- Value land in existing use
- add current cost of replacing the building + fees - depreciation
Is DRC red book compliant?
NO
What is the RICS DRC guidance?
RICS PS: DRC method of valuation for financial reporting 2018
What is the structure of the RICS Global Standards 2024?
- intro
- Glossary
- Professional Standards
- Valuation Technical & Performance Standards
- Valuation Practice Guidance Applications
- International valuation standards
What are changes from previous red book?
alignment with developments in other global standards
addition of VPS 5: Valuation Modelling
adaption to practice and process changes from evolving areas eg. technology (AI) and ESG
What is PS1 in the red book?
Complicance with stanards where written valuation provided
Is PS1 mandatory?
Yes but 5 exceptions
What is in PS1 - 1.4? (NEW)
Artificial intelligence - use not prohibted but subject to professional judgement, ToE etc.
What is PS2 in the red book?
Ethics, competency, objectivity & disclosure
Members must act in accordance with rules, with ‘professional scepticism’, TOE and COI advice
How many VPS are there?
6
What is VPS 1?
Terms of engagement
What should be included in ToE?
Identify valuer & client
intended users
asset/liability being valued
currency
purpose
basis of value
valuation date
nature of work
sources of info
all assumptions (& special)
format of report
restrictions on use
confirm if red book compliant
fee basis
CHP
Subject to compliance with RICS
Limitation on liability
any significant ESG considerations (NEW)
What is VPS 2?
Bases of Value, assumptions and special assumptions
What is an 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 is a special assumption
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.
What is VPS 3?
Valuation Approaches and methods
What is VPS 4?
Inspection, Investigation & Records
What are is new relating to valuation records?
Keep copy of report for period stipulated
Details of inspection to be clearly and accurately recordsed
request and seek appropriate and sufficient sustainability ESG data for valuation
What is VPS 5?
Valuation Models
What is a valuation model?
a quantitative implementation of a method in part of whole that converts inputs into outputs used to develop a value
What must valuers do when selecting a model?
make sure its suitable
apply professional judgement
understand how it works
What is VPS 6?
Valuation reports
What is Part 5 of the red book?
Valuation Practice Guidance Application (VP
GA)
How many VPGAs?
11
What is part 6?
International Valuation Standards
How many IVSs?
7 general
8 asset
What is included in IVS 2024?
global concepts developed by the IVS council
latest follows revised structure
increase focus on ESG, data and modelling
What is the UK National Supplement 2024?
reflects outcome of the pereira grey review
specific requirements for the UK
reissued in Jan 25 to align with new red book
What are the key changes to the UK national supplement?
Mandatory valuer rotation in UK VPS3: regulated purpose valuations
What was the RICS Independent review of real estate investment valuations, 2021?
Produced following rapidly changing market dynamics
Review commissioned in public interest to futureproof valuation services
Accepted recommendations of Pereira grey reviee
What’s set out in the RICS PS: sustainability & esg in commercial property valuation & strategic advice, 2021
Glossary
Factors valuers should consider
What is the margin of error?
The permissible range allowed by courts
Varies
Narrower for more straightforward valuations eg. Resi 5%, commercial 10%, exceptional features 15%
What is hope value?
Value arising from future expectation that the property will change circumstances eg. Secure planning permission
What is marriage value?
Created by a merger of interests
50:50 or pro rata
Synergistic value
What is WAULT
Weighted average unexpired lease term
What is current stamp duty for commercial property? Eng
Up to £150,000 0%
150-250,000 2%
Over £250,000 5%
What’s changing for SDLT for resi in April?
Lower threshold
125 - 250,000 2%
What additional SDLT is there?
On 2nd homes or buy to let
What is 1st time buyer relief SDLT?
0% up to £425,000
What is ATED?
Annual Tax on Enveloped Dwellings
To stop on& off shore companies avoiding sdlt
What are party walls?
Where wall a strides a boundary of 2 or more ownerships
Often cause disputes
What are rights to light?
Arise after 20 years of uninterrupted enjoyment of light without the consent of a 3rd party by way of an easement with a prescriptive right
What is the valuation for charities act 2011 (updated 2022)?
Charities are required to obtain valuation prior to disposal of an asset and report must confirm charity has obtained best possible terms for a transaction
What is a particular buyer / special purchaser?
For whom an asset has a special value because of advantages its ownership would not bring another buyer eg. Physical, functional or economic
What are building cost reinstatement valuations?
For insurance purposes
Cost of reinstatement without profit
Not red book
How do you value a long leasehold interest?
Ground rent - gross income = net rent which is capitalised at a yield for length of lease
What are purchases costs?
SDLT
Agents fees (1%)
Solicitors fees (0.5%)
What is a ransom strip?
A piece of land which controls another
value can be 15-20% of the development value
What is a net effective rent?
The devalue of a headline rent accounting for the rent free period
3 approaches to establishing net effective rent?
- Straight line
- Straight line assuming time value of cash flow using yield
- DCF
How would you measure and value a retail unit?
Zoning (a technique not method)
Halving back principle
What is a the RICS valued registration scheme?
Introduced 2011
A regulatory monitoring system for all valuers carrying out red book valuations aiming to increase quality, meet RICS requirement to self-regulate, to raise status of valuation professional
How do you register as an RICS valuer?
Provide info on:
Type of valuations
Firms total fees from red book valuations last year
Data sources
Quality Audit procedures
History of an negligence claims
Who has power to remove a valuer?
Head of regulation
