Valuation Flashcards
What does the the RICS Valuation Global Standards effective from 31st January 2025 set out?
A framework that sets out mandatory practices for RICS members undertaking valuation services worldwide
How would you define market rent in accordance with VPS4 of the RICS Red Book (Now VPS2)
Market Rent is the estimated amount for which a property or premises could be let in the open market, on the date of the valuation, and under normal market conditions.
From VPS2 section 5 ‘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’
Tell me about comparable evidence
Comparable evidence is used when valuing a property - it derives a value from recent transactional evidence of comparable properties within a similar location, similar characteristic etc
Can you name some key points of the rics red book update
Alignment with the IVS (International valuation standards)
Reinforcement of the importance of an audit trail
Esg reporting mandatory
Esg – needed in terms of engagement
Record any relevant esg data
What is ESG and why is it important
Environmental, Social Governance
Environmental - Focuses on how an organisation manages its environmental impact and addresses issues such as climate change etc
Social - Examines the organisation’s relationships with stakeholders, including employees, customers, communities, and suppliers e.g employee welfare
Governance - Evaluates the organisation’s leadership, decision-making, and ethical practices e.g Anti corruption policies
ESG criteria help investors, regulators, and stakeholders assess how well a company manages risks and opportunities related to these three areas. Organizations with strong ESG practices are often seen as more sustainable and resilient over time.
Can you describe the different purposes for which valuations are commonly required?
Taxation - Valuations for taxation purposes (e.g., inheritance tax or capital gains tax) require an accurate and fair market value to ensure compliance with tax laws.
Asset performance - Asset Performance: Valuations for asset performance (e.g., portfolio monitoring or financial reporting.
Secured Lending: Valuations for secured lending are critical to assess the collateral value of an asset to ensure that the lender is protected in the event of default.
What steps do you take to ensure that you maintain objectivity and impartiality when conducting valuations?
Conflict of Interest Checks: Before accepting any instruction, I conduct thorough conflict checks to ensure that there are no conflicts of interest that could compromise my impartiality.
Adherence to RICS Standards: I follow the RICS Valuation Global Standards (The Red Book) closely, as they provide a framework for maintaining ethical practice, including detailed procedures for ensuring impartiality.
Transparent Methodology: I always document and explain my valuation methodology and assumptions, making my approach transparent and defendable. This helps to maintain objectivity by providing clarity on how I arrived at the final value.
Question: Can you explain how you applied the comparable method of valuation to the Crosby Warren site?
For the Crosby Warren site, I utilized the comparable method of valuation by researching and analyzing productivity data from other similar onshore oil wells. This included reviewing the North Sea Transition Authority (NSTA)’s monthly production reports, which provided insight into the production levels of comparable wells. I then compared their rental values (Explain how you got these) and calculated a £ per cubic meter value which i then applied to the well i was valuing
What challenges did you face in applying the comparable method to this type of asset, and how did you overcome them?
A key challenge in applying the comparable method to an onshore oil well was the scarcity of direct market data, as such properties are relatively unique.
What is VPS 1 within the Red Book
Terms of engagement e.g general principles and scope of work
What is VPS 2 within the Red Book
Bases of value e.g market rent/value, assumptions/special assumptions
What is VPS 3 within the Red Book
Valuation approaches and methods
What is VPS 4 within the Red Book
Inspections, investigations and records
What is VPS 5 within the Red Book
Valuation models
What is VPS 6 within the Red Book
Valuation reports
What is PS 1 within the Red Book
Compliance with standards where a written valuation is provided
What is PS 2 within the Red Book
Ethics, Competency, objectivity and disclosures
What VPGA may be relevant to an oil well?
VPGA 5 - valuation of plant and equipment (Including infrastructure)
Was Crosby warren val report red book?
No. It was an informal valuation report to highlight what we believed to be the market rent for the for the purpose of an upcoming lease renewal
Can you walk us through the residual method of valuation you used for the Dove Valley site?
For the Dove Valley site, I employed the residual method of valuation to determine the land value with planning consent for industrial/logistic units. First, I conducted a detailed due diligence process, considering key factors such as the site’s location, proximity to transport links, industrial market rents, and build costs. Using this data, I compiled a gross development value (GDV) using the expected income from the developed units. I then deducted the associated costs, including build costs, financing, and the developer’s profit, to arrive at the residual land value. I used the Argus Developer program to run this residual valuation model.
How did you incorporate the overage clause into your valuation of the Dove Valley site?
he overage clause required me to account for 50% of the uplift in value between the agricultural land value and the value of the site once planning consent was granted for industrial/logistic units. To calculate this, I first determined the agricultural land value using the comparable method of valuation. Then, I calculated the residual land value assuming planning consent. The uplift was the difference between these two values. I applied the overage clause by subtracting the agricultural land value from the residual value and dividing the difference by two, giving me the overage payment my client was entitled to.
What specific factors did you consider when conducting the due diligence for the residual valuation, and why were these important?
Location and transport links: Accessibility is crucial for industrial/logistic units, and proximity to major transport routes significantly impacts rental demand and development viability.
Planning applications: Understanding the potential for planning consent and any challenges related to this was essential in determining the highest and best use of the site.
Industrial market yields and rents: These provided insights into the potential income that could be generated from the development, directly affecting the gross development value.
Local industrial build costs: These were necessary to estimate the costs involved in bringing the development to completion.
What were the figures for your residual valuation
- Residual land cost only (Profit on GDV)
- Contingency at 5%
- Abnormals at £500,000
- Prof fees at 10%
- Agent fee 1% (Acquisition and disposal)
- Legal fee 0.5% (Acquisition and disposal)
- Stamp duty – 4.78% - UK non resi from 17/03/2016
- Developers profit at 15%
- £80 psf cost
- £150 psf sale price
- Debit rate 7%
What is a residual valuation, and how does it differ from other property valuation methods?
A residual valuation is a method used to determine the value of land (or property) by considering the potential value after development. It involves subtracting the total development costs (including construction, fees, and financing) from the projected Gross Development Value (GDV) of the finished property
In what scenarios is residual valuation most commonly used?
Residual valuation is commonly used for properties that are to be developed or redeveloped. e.g land with planning permission
What are the key components of a residual valuation model?
- GDV
- Development costs
- Developers profit margin
- Residual land value - he difference between GDV and the total development costs (including profit).
How does the timeframe of a development affect its profitability
The duration of the project, affecting financing costs
What was the timeframe of the dove valley project
40 months
- 1 for purchase
- 3 for pre-construction
- 24 for construction
- 12 for sale
How do financing costs (such as interest on loans) factor into a residual valuation?
Financing costs are factored into the residual valuation by including interest payments on loans in the development costs.
Interest is typically calculated based on the amount of debt used to finance the development and the duration of the project.
What is the importance of assessing market comparables when performing a residual valuation, and how do you adjust for different property types or locations
Market comparables are essential in estimating the GDV. When using comparables, valuers adjust for differences in property types, locations, and market conditions to make the estimates more accurate. Adjustments may include factors like location premium, property size, amenities, or design.
What is sensitivity analysis, and why is it important in residual valuation?
Sensitivity analysis tests how changes in key assumptions (e.g., GDV, construction costs, profit margin, discount rate) affect the residual value. It is important because it helps assess the risks and uncertainties in the valuation and provides a range of possible outcomes, helping investors understand the potential variability in the project’s success.
What factors could lead to a significant change in the residual value of a property?
actors include changes in market conditions, increases in construction costs, delays in obtaining planning permission, changes in interest rates, or shifts in demand for the property type.
