Valuation Flashcards
What is the difference between an Internal and External valuer?
Internal: Employed by the company to value an asset of the company. For internal use only. No 3rd party reliance.
External: Has no links with the asset or the client.
What does the Red Book look like?
Grey front page with a red globe on the front
How is the ‘Red Book’ structured?
- Introduction
- Glossary
- Professional Standards
- Valuation Technical and Performance Standards (VPS)
- Valuation Practice and Guidance applications (VPGA’s)
- International Valuation Standards
What is the proper name of the ‘Red Book’?
The RICS Valuation Global Standards
What are the 3 steps to take before undertaking a Valuation instruction?
- Competence
- Independence
- Terms of Engagement
Name 5 areas of Due Diligence that should be carried out before a Valuation instruction?
- Asbestos Register
- Rateable Value
- EPC Register
- Flood Zone
- Legal Title & Tenure
What are the 5 Methods of Valuation?
- Comparable Method
- Residual Method
- Profits Method
- Investment Method
- DRC (Depreciated Replacement Cost) Method
What are the 3 Valuation approaches?
- Income
- Cost
- Market
What Valuation methods would be involved within a Cost Valuation approach?
- DRC Method
What Valuation methods would be involved within a Income Valuation approach?
- Profits Method
- Investment Method
- Residual Method
What Valuation methods would be involved within a Market Valuation approach?
- Comparable Method
What is the main RICS Professional Standard for the Comparable method?
RICS Professional Standard: Comparable Evidence in Real Estate Valuation, 2019
What is the 6 step Comparable Evidence Methodology?
- Search for Comps
- Confirm and verify details
- Assemble comps into a schedule
- Adjust comps using the ‘Hierarchy of evidence’
- Analyse comps to form Opinion of Value
- Report value and prepare file note
Under the RICS Professional Standard: Comparable Evidence in Real Estate Valuation, 2019 how should Comparable evidence be weighted?
Hierarchy of Evidence:
1. Direct Comparable (near-identical properties)
2. General Market Data (historic evidence)
3. Other sources (transactional data for other uses classes etc.)
When would you take an Investment Method approach?
When their is an ‘income stream’ to be valued
What is the basic premises of the Investment Method?
- Rental income is capitalised to produce a Capital Value
- Assumes ‘Growth Impact’ on Capital Value
What are the 3 main Investment Valuation Methods?
- ‘Conventional Method’
- ‘Term & Reversion Method’
- ‘Hardcore Method’
Within an Investment Valuation what is the basic premises of the ‘Conventional Method’?
Applying a Yield to the Passing Rent to give a Capital Value
Within an Investment Valuation what is the basic premises of the ‘Term & Reversion Method’?
- The passing rent is capitalised until the next lease event at a Yield.
- The rent then reverts to Market Rent into perpetuity.
Describe the formal for a term and reversion valuation?
- Current rent: £40,000 per year
- Market rent: £50,000 per year
- Lease expires in 5 years
- Capitalisation rate (yield): 8%
- Present value factor for 5 years at 8%: 0.6806
- Present value of £1 after 5 years at 8%: 0.6806
Step One: Term Value
= £40,000 × 5 × 0.6806 = £136,120
Step Two: Reversionary Value
= £50,000 ÷ 0.08 × 0.6806 = £425,375
Step Three:
- Total Value = £136,120 + £425,375 = £561,495
0.6806 is calculated:
1 over (1+ 0.08) to the power for 5
0.08 = Yield
5 = term remaining
Within an Investment Valuation what is the basic premises of the ‘Hardcore Method’?
- An Income Flow is divided horizontally
- Bottom Slice = Market Rent
- Top Slice = Rent Passing less Market Rent until the next lease event
- A higher Yield is applied to reflect the additional risk
Describe the formal for a term and reversion valuation?
Let’s say:
- Current rent = £40,000
- Market rent (ERV) = £50,000
- Lease expires in 5 years
- Yield (ARY) = 8%
- Discount rate = 8%
- PV factor for 5 years at 8% = 3.9927 (annuity factor)
Step 1: Capitalise Market Rent
£50,000 / 0.08 = £625,000
Step 2: Calculate Shortfall
£10,000 per year (difference) × 3.9927 = £39,927
Step 3: Subtract Shortfall
£625,000 - £39,927 =£585,073
0.39927 is calculated:
PV(annuity)= 1 - (1+0.08) -5 / 0.08
When would a ‘Term & Reversion Method’ be used?
When a property is ‘under-rented’
When would a ‘Hardcore Method’ be used?
When a property is ‘over-rented’
What is NIY stand for?
Net Initial Yield
What does NIY take into account?
Purchaser Costs
What roughly are purchasers costs as a %
6.8%
What is an ‘All Risks Yield’?
- Rate of intertest used for fully let properties at Market Rent.
- Reflects all the risks of the investment
What is a Gross Yield?
Where would a Gross Yield be used?
A ‘flat’ yield, it does not adjust for purchasers costs.
At Auction
What is the basic premise of the Profits Method?
The value of the property depends on the profit generated from the business, not the properties physical location
What would be required to carry out an accurate Profits Method Valuation?
Last 3 years Audited Accounts
What is the basic Profits Method calculation?
= Turnover
- Less costs
= Gives Gross Profit
- Less Working Expenses
= Net Profit
- Less operators remuneration
= Gives FMOP
A ‘multiplier’ is then applied to give Market Value
Then ‘sense checked’ against comparable evidence
Where would the profits method apply?
Where the value of the property depends on the profitability of its business and trading potential
What is EBITDA?
Earnings before Interest Taxation, Depreciation and Amortization
What is FMOP?
Fair Maintainable Operating Profit
Are EBITDA and FMOP the same thing?
Yes
What is the definition of Market Value?
The amount at which an asset or liability can exchange:
- On a Valuation Date
- Between a willing seller and a willing buyer
- In an arms length transaction
- After proper marketing
- Where both parties have acted knowledgably, prudently and without compulsion
What is the definition of Market Rent?
The amount at which a real property can be leased:
- On a Valuation Date
- Between a willing lessor and a willing lessee
- On appropriate lease terms
- In an arms length transaction
- After proper marketing
- Where both parties have acted knowledgably, prudently and without compulsion
What is the definition of ‘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’
- RICS view is that this value is generally consistent with Market Vlaue
What is the definition of ‘Investment Value’?
‘The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives’
- Often used as a measure of worth to reflect the value against the client’s own investment criteria
What is the definition of ‘Hope Value’?
‘The value arising from any expectation that future circumstances affecting the property may change’
- E.g. future hope of securing planning permission
What are the 6 Bases of Value?
- Market Rent
- Market Value
- Fair Value
- Investment Value
- Equitable Value (not used in UK)
- Liquidation Value (not used in UK)
When did the latest version of the ‘Red Book’ come into effect?
31st January 2025
What are the key changes to the ‘Red Book’ effective 31st January 2025?
- Greater focus on ESG and its impact on Valuations
- Comment on the use of AI in Valuations
- Revised VPS’
- VPGA 11 relates to relationship with Auditors
What are PS’s?
RICS Professional Standards
What does PS 1 cover?
Compliance with standards where a written valuation is provided
What are the 5 exemptions under PS1?
- Providing agency or brokerage services in the acquisition of disposal of one or more assets
- Providing valuation advise in preparation of negotiations or litigation
- Acting as an expert witness
- Performing statutory functions
- Providing valuations toa client purely for internal purposes, without communication to a 3rd party
What does PS 2 cover?
RICS Professional and Ethical Standards
What must RICS members do under PS 2?
- Members undertaking Valuations must act in accordance with the RICS Rules of Conduct, 2021
- The Valuer and Firm must act objectively and independently always and not be influenced by any situation which could threaten professional objectively
When reviewing data what must Valuers do?
Apply ‘Professional Scepticism’ before relying on data
What are VPS’s
Valuation technical & Performance Standards
Are Valuation technical & Performance Standards mandatory?
Yes
How many VPS’s are there?
6
What does VPS 1 relate to?
Terms of Engagement
Under VPS 1 how many many minimum matters are there for Terms of Engagement?
19
Name 5 of the 19 minimum matters required under VPS 1 for Terms of Engagement?
- Identification and status of the valuer
- Identification of client
- Identification of any other intended users
- Asset to be valued
- Currency
- Purpose of valuation
- Basis of valuation
- Valuation date
- Extent of investigation
- Nature and source of information
- Assumptions and special assumptions
- Format of the report
- Restrictions for use, distribution and publication
- Confirmation of Red Book Global / IVS compliance
- Fee basis
- Complaints handling procedure to be made available
- Statement that the valuation may be subject to compliance by RICS
- Limitation on liability agreed
- Consideration of any significant environmental, social and governance (ESG) factors
What does VPS 2 relate to?
Bases of Value, Assumptions and Special Assumptions
What does VPS 3 relate to?
Valuation Approaches and Methods
What does VPS 4 relate to?
Inspections, Investigations and Records
What does VPS 5 relate to?
Valuation Models (New in 2024)
What does VPS 6 relate to?
Valuation Reports
How many requirements are there under VPS 6 (Valuation Reports)?
Name 5 requirements.
17
- Identification and status of the responsible valuer
- Client and any other intended users
- Purpose of the valuation
- Identification of the asset(s) to be valued
- Basis of value
What is Marriage Value?
The value in bringing property interests together, it could be physical or tenurial
What is a Ransom Strip?
A piece of land that completely or partially stops the development of another piece of land
What is the Case Law for Ransom Strips?
Stokes vs Cambridge Corporation 1961
What precedent did Stokes vs Cambridge Corporation 1961 set?
That the value of a Ransom Strip is enhanced by 1/3.
What is the definition of Margin of Error?
The permissible range allowed by courts, for example in respect to valuation.
What did Singer & Friedlander Ltd v J D Wood 1977 establish?
Established that the Margin of Error would be narrower for easier for more simple valuations and wider for more complex valuations.
What did K/S Lincoln & Others v CBRE 2010 establish?
Established a Margin of Error of:
- 5% for standard Residential Property
- 10% for ‘one off’ commercial property
- 15% if a property has exceptional features
What are VPGA’s
Valuation Practice Guidance Applications
How many VPGA’s are there?
11
What does VPGA 11 relate to?
Relationship with auditors
What does VPGA 2 cover?
Valuations for secured lending.
Notes that:
- ‘Any previous, current or anticipated involvement with the prospective borrower or the property to be valued must be disclosed to the lender’.
- If involvement creates a Conflict of Interest then the instruction should be declined.
What is an assumption in valuation?
Where it is reasonable for the valuer to accept that something is true without the need for specific investigation
What are special assumptions?
Give an example.
An supposition that is taken to be true and accepted as fact, even though it is note true.
Providing a valuation basaed on getting VP when a tenant was in occupation.
What are the Stamp Duty thresholds for Resi Property as of 1st April 2025?
Up to £125,000 - 0%
£125,001 to £250,000 - 2%
£250,001 to £925,000 - 5%
£925,001 to £1.5m - 10%
Over £1.5m - 12%
What are the Stamp Duty thresholds for Commercial Property as of 1st April 2025?
- £0 - £150,000 = 0% Stamp Duty
- £150,001 - £250,000 = 2% Stamp Duty
- Over £250,000 = 5% Stamp Duty
What does WAULT stand for?
Weighted Average Unexpired Lease Term
What is the basic premise of a WAULT?
Its a calculation used when valuing an asset of multi-occupied investments
Would a rent free period effect headline rent?
Yes
What would the effect of rent free period to headline rent be called?
Net Effective Rent
How do you calculate Net Effective Rent?
A ‘straight line basis’ until the next lease event
What is Secured Lending or Loan Security?
Can a surveyor see the loan terms before doing a Loan Sec Valuation?
Where a lender takes a legal charge over a property as security for a loan, such as a mortgage.
Yes, a surveyor can see the loan terms.
What factors would make a property suitable for loan security?
- Having a ‘clean title’ with could there be any potential ownership disputes?
- Property condition - is the property in good structural repair?
- Local market - high demand areas offer better security
What is Zoning (ITZA)?
A form of Valuation Analysis commonly used to compare retail properties
When would Zoning (ITZA) be used?
When Valuing Retail properties.
What is the basic premise of Zoning (ITZA)?
That the first 20 ft (6.1m) of a retail property are the most valuable. Zone B, C etc. past that are less valuable.
How could natural Zoning occur?
When a retail property is ‘oddly shaped’.
Why would you compare ITZA or Zone A values or measurements?
Using ITZA or Zoning helps to give a standardised value across different shop sizes and layouts
Under what circumstances can a material change be made to the report after the draft is issued?
A report can only be changed if…
- New evidence is found/brought forward
- Can under no circumstances be influenced by the client/borrower
