Valuation Flashcards
What are the definitions of an internal and external valuer?
Internal - employed by company to value assets for internal use only.
External - Has no material links with the asset or client
What 3 steps should you take before commencing with a valuation?
- Competence - Do you have the skills, understanding and knowledge? if not, refer to RICS Find a surveyor service
- Independence - are their conflicts or personal interests?
- Terms of engagement - Set out in writing full confirmation of instructions to client. Confirm competence of the valuer. Outline extent and limitations.
What due diligence might you do before a valuation? (for the property)
Check asbestos register
Business rates/council tax
EPC Rating
Flooding
Health and Safety compliance
Highways - check road are adopted
Legal title and tenure - restrictive covenants, ownership etc
Public rights of way
Planning history - listed, conservation area.
What are the 5 main methods of valuation?
- Comparative
- Investment
- Profits
- Residual/ discounted cash flow
- Contractors
What are the 3 valuation approaches?
Income - converting cash flows into capital value (Investment, residual and profits methods)
Cost - Reference to cost of the asset whether by purchase or construction
Market approach - using comparable method.
What is the methodology for the comparative method?
- Search and select comparables
- Confirm/verify details and analyse headline rent
- Assemble comparables in schedule
- Adjust comparables using hierarchy of evidence
- Analyse comparables to form opinion of value
- Report value and prepare file note.
What is category A in the hierarchy of evidence?
Direct comparables of subject.
Completed transactions of near identical properties
Completed transactions of similar properties
Completed transactions of similar properties without full data
Similar real estate marketed where offers have been made
Asking prices
What is category B of hierarchy of evidence?
General market data providing guidance
Information from sources or databases
Indirect evidence (indices)
Historic evidence
Demand/supply data
How do you find relevant comparables?
Visit/speak to agents
Inspect area to find market activity by seeking agent boards
Auction results
Inhouse records/databases like EGI
What is category C in the hierarchy of evidence?
Other sources
Transactional data from other real estate types and locations
Background data like interest rates, stock market movements that can give an indication of market.
Why does care need to be taken when using auction results?
There may be a special purchaser or an insolvency sale. The sale price is gross of costs.
What is the investment method of valuation?
It is used when there is an income stream to value. Can include all types of property where it is tenanted.
The rental income is capitalised, often by the years purchase to produce a capital value
What is years purchase?
Years purchase is the number of years it would take for the annual income of a property to equal its purchase price.
How is yield calculated?
Yield is income divided by price x 100 to give a percentage.
What is the conventional investment method?
It is the rent x years purchase=market value.
It is reliant on accurate comparables for rent and yield.
What are yields?
Yields are a measure of investment return, expressed as a percentage of capital invested. It is calculated by income/pricex100.
A higher yield shows a better annual return. It also reflects the risk of an investment, riskier requires a higher yield.
What are current yields in Manchester?
Residential rental yields are around 6.5% on average but can vary between areas
Industrial prime yields 5%.
Offices prime 6%.
Retail 6.25%
Why are different yields used for different properties?
To reflect the different values and what rent can be achieved. Some like offices require more fit out works. Industrial relatively cheap to build.
What are the risk factors when determining a yield?
Expected rental and capital growth
Quality of location
Property use
Lease terms
Security of income
Voids
Liquidity - ease of sale
What are the reasons for the yield gap between prime and secondary yields?
Secondary yields are generally higher reflecting greater risk, lower demand and less rental growth prospects.
What are different types of yield?
All risks yield - reflects all prospects and risks
True yield - assumes rent paid in advance
Nominal yield - assumes rent paid in arrears
What is discounted cash flow technique?
Requires projecting estimated cash flows over an assumed investment holding period, plus an exit value at the end of the period. Accounts for when cash flow likely to vary over period of the holding period. Cash flow is then discounted back to what it would be worth in present day at a discount rate that reflects risk. Subtract initial investment. If positive, investment is good.
When is DCF Used?
Used for valuations where projected cash flows are explicitly estimated over a finite period.
Short leasehold interests
Phased development projects
Over rented properties and social housing
What is the DCF methodology?
- Estimate cash flow
- Estimate exit value
- Select discount rate
- Discount cash flow at discount rate
- Value is the sum of the completed cash flow (NPV)
What is Net Present Value?
The sum of the DCF of the project. Used to determine if it gives a positive return against a target rate of return. Is NPV positive it exceeds target rate.
What is internal rate of return?
Used to assess the total return from an investment opportunity making assumptions regarding rental growth, re-letting and exit.
What is profits method of valuation and when is it used?
Used where the value of property depends on the profitability of its business.
Such as pubs, petrol stations, hotels, nurseries, leisure and healthcare.
Value depends on profit generated, not condition or location so need accurate and audited accounts or estimates if new business.
What is the methodology for profits method?
Annual turnover less costs, purchases, working expenses, operator remuneration. Capitalise at yield to achieve market value.
What is depreciated replacement cost method of valuation and when is it used?
Also known as contractors method. Used where direct market evidence is limited for specialised properties. E.g lighthouse, schools, oil refineries.
used for owner occupied properties, accounts and rating purposes. Essentially what would be the cost to replace property.
Not suitable for red book valuations.
How is depreciated replacement cost method calculated (contractors method)?
Value of the land in its existing use
Plus costs of replacing the building plus fees
less a discount for depreciation/deterioration.
What is the key RICS documentation on valuation?
Global Standards 2025 (red book)
When is the red book global used?
Every valuation except for 5 exceptions.
What does the red book say about sustainability and ESG?
Need to consider ESG and sustainability issues in valuations e.g flood risk, wildfire, carbon emissions, risks from regulatory changes
What does red book say about terms of engagement?
TOE need to include:
Identity of valuer and client
Asset to be valued
Currency
Purpose of valuation
Valuation date
Fee basis
Assumptions
Confirmation of red book compliance
What does the red book say needs to be included in valuation reports?
Identity of client and valuer
Purpose of valuation
Asset to be valued
Valuation date
Report date
Assumptions and special assumptions
Valuation figure
Valuation reasoning
What are the definitions of the bases of value in the red book?
Market value
Market rent
Fair value - similar to market
Investment value - value of asset for investment or operational objectives
Equitable value - Not used in UK
Liquidation value - Not used in UK
What does the red book say about secured lending valuations?
Valuation to determine value of an asset being used as collateral for lending. e.g mortgage.
Need to ensure no conflict of interest.
Requires additional information in reports e.g comment on suitability for mortgage purposes
What are the 5 exceptions to doing a red book compliant valuation?
Used for all valuations except:
1. Advice for negotiations/litigation
2. Statutory function
3. Internal purposes
4. Agency or brokerage work in anticipation of receiving instruction
5. Valuation advice for giving evidence as expert witness.
What does the red book say about ethics?
Valuer must act in accordance with RICS rules of conduct
Must act objectively and independently
Identify and manage conflict of interest
Must be competent
Comply with terms of engagement
What are assumptions and special assumptions?
Assumptions are made where it is reasonable for valuer to accept something as true without investigation
Special assumption is taken to be true and accepted as fact even if not. e.g assuming planning permission is granted, or property vacant
Must be agreed with client in TOE and outlined in report
What is the definition of market value?
Estimated amount for which an asset should exchange on the valuation date between a willing buyer and seller in an arms length transaction after proper marketing where parties have acted knowledgeably and without compulsion
What is the definition of market rent?
Estimated amount for which an interest in property should be leased on the valuation date between a willing lessor and lessee on appropriate lease terms in an arms length transaction after proper marketing when parties had acted knowledgeably and without compulsion
What is RICS Valuation - Global Standards 2018?
Offers mostly advisory guidance for members to augment the red book. Includes some mandatory statements and advice on what is and is not mandatory and how to apply standards. Advice for valuing for different purposes and property types.
What recommendations were made in the review of real estate investment valuations?
Establishing a valuation quality assurance panel
Processes to raise concerns about ethical conduct
Continue to ensure a diverse and inclusive profession
What is the permissible margin of error?
Dependent on complexity of valuation. 5% for standard residential property, 10% for one off commercial property, 15% for properties with exceptional features.
What is Hope Value?
Value arising from expectations that future circumstances effecting the property may change. e.g securing planning permission
What is marriage value?
Created by merger of interests. Undertake a before and after valuation to calculate level of marriage value created. Split the marriage value created 50/50 or based on the individual interest.
What is Stamp Duty Land Tax?
0% up to £125k (£300k first time buyers)
2% £125-250k
5% £250k-£925k
10% £925k-£1.5m
12% £1.5m+
It is charged on an incremental basis at different rates depending on the portion of the purchase that falls into each rate band.
Is SDLT also payable on new leases?
Yes it is payable on new leases and premiums payable, calculated on the Net present Value of the lease, discounted at RPI
How do you value surrender and renewals?
Usually done when LL or tenant want to surrender lease and agree a new lease with longer or different terms. Calculate a premium to be paid by valuing the leasehold interest before and after.
What is a particular buyer/special value?
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 others buyers in the market. e.g adjoining property, tenant purchasing FH,
What are building cost reinstatement valuations?
For building insurance purposes. Cost of reinstating building without profit. Use BCIS plus demo costs, fees, VAT.
How do you value variations of long leasehold interests?
Rent received minus ground rent=net rent net rent capitalised using yield for remaining length of lease= market value of leasehold interest
What are premiums?
A capital payment from one party to another. Can be used to pay for fixtures and fittings or to secure a prime shop
What purchasers costs needs to be deducted from the gross market value?
Stamp duty
Agents fees 1%
Solicitors fees 0.5%
What is WAULT?
Weighted Average Unexpired Lease Term
used to calculate yield for multi occupied properties
What is net effective rent?
It when rent free periods are subtracted from headline rent. Usually 3 months but can vary.
What is the headline rent?
The rent stated in the lease agreement without discounts for rent free periods or other incentives.
What is a random strip and how is it valued?
A piece of land that controls access to another piece of land. Can be between 15%-50% of the development value.
What is zoning?
A valuation technique used for retail properties. Rental value decreases away from the street.
Halves every 6.1m.
Mirror zoning used when 2 main frontages.
What is a party wall?
A wall on the boundary of land belonging to two different landowners. Must inform all adjoining owners of intention to undertake works to party wall.
What are rights to light?
Right to light for a building arises after 20 years uninterrupted enjoyment of light. Damages or injunction can be awarded if right infringed.
What changes have been made in the 2025 red book from previous versions?
Includes additional information and guidance on the use of AI in valuation and alignment with other international standards like IVS. Additional guidance around ESG.
