Valuation Flashcards
What are the 5 methods of valuation?
- Comparable Method – Uses recent sales of similar properties.
- Investment Method – Based on rental income and yields.
- Profits Method – Used for trading businesses (e.g., hotels, pubs).
- Contractor’s (DRC) Method – Cost-based valuation for specialist properties.
- Residual Method – Used for development land valuations.
How do you value a building using the Comparable Method?
Analyse recent transactional evidence of similar properties.
How do you value a building using the Investment Method?
Apply a yield to rental income to derive capital value.
How do you value a building using the Profits Method?
Assess fair maintainable trade (FMT) and deduct operating costs.
How do you value a building using the Contractor’s (DRC) Method?
Estimate replacement cost minus depreciation.
How do you value a building using the Residual Method?
Deduct development costs from Gross Development Value (GDV).
How do valuation methods and approaches differ?
Approach: Market-based, income-based, or cost-based.
Method: The specific calculation technique within an approach.
How do you decide which valuation method to apply?
Based on property type, data availability, and purpose of valuation.
What is a Years’ Purchase (YP) multiplier?
A factor used to convert annual income into capital value.
Give an example of a good covenant and its impact on valuation.
A blue-chip tenant (e.g., Tesco) provides secure income, increasing value and lowering yield.
What is Professional Indemnity Insurance (PII)?
Covers surveyors for negligence claims relating to valuations.
Why do surveyors need PII?
Protects against financial losses from errors.
Mandatory under RICS for all regulated firms.
What are the RICS requirements in relation to PII?
Must comply with RICS Minimum Approved PII Wording.
Includes run-off cover for six years post-practice.
How did the decision in Hart v Large affect PII?
Increased exposure of valuers due to duty of care failures, leading to higher PII premiums.
What level of PII cover does your firm have?
Typically £1m per claim, subject to firm size and risk exposure.
What is the SAAMCO cap?
Limits a valuer’s liability to the overvaluation amount rather than total financial loss.
Is a valuer liable for losses due to a downturn in the market?
No, only losses directly related to negligence.
What would you do if you received a notice of a PII claim?
- Notify insurers immediately.
- Do not admit liability.
- Gather supporting evidence (reports, correspondence, records).
What is the Red Book?
RICS Valuation Global Standards, ensuring consistency, objectivity, and compliance in valuations.
Why does the Red Book exist?
Provides best practice guidance and ensures market transparency.
What factor may impact value of a rented property?
Lease terms (e.g., break clauses can lower investor confidence).
Why is independence and objectivity important when valuing?
Ensures credibility, accuracy, and regulatory compliance.
What is the UK National Supplement?
Additional UK valuation guidance to support the Global Red Book.
When was the Red Book last updated?
2023 – Includes ESG and sustainability considerations.
What type of valuations might be relied upon by a third party?
Secured lending, financial reporting, probate, litigation valuations.
What sources of information would you consider when preparing a valuation report?
Comparable sales, rental data, lease terms, planning restrictions, economic trends.
What is a restricted valuation service?
A valuation with limited scope or assumptions – must be clearly disclosed.
Can you revalue a property without inspecting?
Only if agreed with the client and justified by reliable data.
What RICS guidance relates to the use of comparable evidence?
RICS Comparable Evidence Guidance Note.
What is the definition of Market Rent (MR)?
The estimated amount a property would let for on the open market.
What is the definition of Market Value (MV)?
The price a property would sell for in an open market transaction.
What is an Internal Valuer?
A valuer employed by the company that owns or finances the asset.
What happens if market conditions change between the valuation date and report date?
Disclose significant market changes in the valuation report.
What are the 3 valuation approaches set out in VPS 3?
- Market Approach (Comparable).
- Income Approach (Investment, Profits).
- Cost Approach (Contractor’s).
What is the Valuer Registration Scheme?
RICS regulatory scheme ensuring valuers follow best practice.
What is a Net Initial Yield (NIY)?
Annual net income ÷ purchase price + purchaser’s costs.
What is an Equivalent Yield?
Weighted average of initial and reversionary yields.
What are the typical purchaser’s costs deducted from a valuation?
5-6.8% in the UK, including Stamp Duty Land Tax (SDLT), legal fees, and agent fees.
What is a Discounted Cash Flow (DCF)?
A valuation model forecasting future cash flows, discounted to present value.
What is NPV?
Net Present Value – Compares investment costs to returns over time.
What is IRR?
Internal Rate of Return – The discount rate that makes NPV zero.
What is marriage value?
Additional value generated when two interests are merged (e.g., freehold and leasehold).
What type of properties would you use the Profits Method for?
Hotels, pubs, care homes, golf courses.
What type of properties would you use the DRC (Contractor’s) Method for?
Schools, hospitals, police stations (where comparable evidence is limited).
What is Fair Maintainable Trade (FMT)?
Sustainable business turnover achievable by a Reasonably Efficient Operator (REO).
What is EBITDA?
Earnings Before Interest, Tax, Depreciation, and Amortisation.
What is a Residual Land Value (RLV)?
Land value = GDV – (development costs + developer’s profit).
What are the key inputs into a development appraisal?
GDV, build costs, finance costs, CIL/S106 contributions, contingency, professional fees.
What is CIL?
Community Infrastructure Levy – a development tax for local infrastructure.
What is S106?
Planning obligations for developers (e.g., affordable housing, transport improvements).
What is a Monte Carlo Simulation?
A risk analysis tool using multiple scenario modelling in development appraisals.
What factors influence the decision to use a sensitivity analysis?
Market volatility, cost fluctuations, planning risk.
What is the UK Net Zero Carbon Buildings Standard?
A framework for Net Zero operational and embodied carbon in buildings.
How does the UK Red Book differ from IVS?
IVS provides international valuation standards.
The Red Book follows IVS but adds UK-specific regulations.
How do you carry out a sensitivity analysis?
Adjust key variables (e.g., yields, GDV, build costs) to assess the impact on valuation outcomes.
Helps identify risks and uncertainties in a valuation or development appraisal.
What variables might you change and why?
Gross Development Value (GDV) – Market fluctuations.
Build costs – Inflation or material shortages.
Finance rates – Interest rate changes affecting borrowing.
Sales rates – Demand sensitivity for residential schemes.
What factors affect sensitivity of a development appraisal?
Market volatility – Sales and rental fluctuations.
Planning risk – Potential delays or refusals.
Construction costs – Supply chain inflation.
Interest rates – Affecting development finance costs.
Tell me about your understanding of incorporating affordable housing into development appraisals.
A planning requirement under Section 106 agreements.
Impacts viability as affordable housing is often at below-market value.
Considered using blended sales values and different tenure mixes.
Tell me about software you have used to provide a Residual Land Value (RLV).
Argus Developer, Excel-based models, ProVal.
What RICS guidance relates to the valuation of development property?
RICS Valuation of Development Property Professional Standard (2021).
Give me a limitation of this software.
Over-reliance on automated inputs can overlook site-specific risks.
What is viability?
Determines whether a development is financially feasible considering costs, revenues, and profit margins.
When would a cost approach be used?
When market or income data is unavailable, e.g., for public buildings, hospitals, schools.
What type of buildings would a cost approach be used for?
Specialist assets with no active market, such as fire stations or museums.
What is the supposition that a DRC is based upon?
Theoretical replacement cost for the same function, with depreciation applied.
What are the 3 components of the cost approach?
- Land value.
- Gross Replacement Cost (GRC) (cost to rebuild).
- Depreciation deductions.
How do you assess the value of the land?
Using comparable evidence, considering planning status, location, and potential use.
How do you assess Gross Replacement Cost (GRC)?
Based on construction costs from BCIS or industry benchmarks.
What costs would you consider within GRC?
Materials, labour, fees, statutory costs, contingency.
What would you do if the building could be replaced with a modern equivalent?
Consider a modern equivalent asset (MEA) valuation with lower costs and improved efficiency.
How would you deal with depreciation/obsolescence?
Apply deductions based on:
- Physical obsolescence (wear and tear).
- Functional obsolescence (design inefficiency).
- Economic obsolescence (market changes).
What are the three ways to deal with depreciation?
- Straight-line depreciation over time.
- Observed condition-based adjustment.
- Market-derived obsolescence adjustments.
Is the cost approach a market valuation?
No, as it does not reflect market demand but rather a replacement cost analysis.
How might onerous lease terms impact capital or rental value?
Restrictive user clauses limit tenant demand, reducing rental and capital value.
Break clauses can make an investment less secure, increasing yields.
What liabilities may be created through valuation?
Negligent advice could lead to financial losses and claims.
Overvaluation risk in secured lending valuations.
What is a liability cap and when would one be used?
A contractual limit on a surveyor’s financial liability in ToE.
Used to mitigate risk and define responsibility.
Explain why the RICS is carrying out an Independent Valuation Review.
To assess concerns over potential overvaluation in real estate markets.
Led by Peter Pereira Gray (2022 review).
Explain what you understand by the term ‘margin of error’.
A reasonable range within which a valuation remains professionally acceptable.
What case law relates to margins of error?
K/S Lincoln v CBRE Hotels (2010) – Defined acceptable margin of error as 5-15%.
Explain your understanding of K/S Lincoln v CBRE Hotels (2010).
CBRE was sued for an overvaluation of a hotel; the court upheld a 15% margin of error.
Explain the precedent set in Hyde & Another v Nygate & Another (2021) in relation to the valuation of high-profile development sites.
Emphasised the importance of site-specific risk assessment in complex development valuations.
How can a Net Initial Yield (NIY) of zero be achieved?
If a property has no rental income (e.g., vacant property), NIY would be 0%.
In a scenario where rents are static and the capital value increases, would you expect yields to increase or decrease?
Yields would decrease, as capital value has risen while income remains unchanged.
What does heterogeneous mean in terms of comparable evidence?
Each property is unique, making direct comparability difficult.
What does the term ‘tone of value’ mean to you?
A consistent level of value established from a set of comparables.
What desktop research did you undertake and how did this help with your valuation?
Land Registry – Verified ownership, tenure, and title restrictions.
EPC Register – Checked energy efficiency, affecting marketability.
Planning Authority – Identified restrictions, planning history, and permitted use.
Comparable Evidence (CoStar, EGI, Rightmove, local agents) – Established market rents and capital values.
Flood and Environmental Searches – Assessed risk factors affecting value.
Would your approach to the valuation differ if it was a freehold property?
Yes, freehold values are generally higher due to:
- No lease restrictions impacting marketability.
- Full control over the asset, including redevelopment potential.
- No landlord obligations or ground rent payments.
However on this occasion we already own the freehold of the property.
Provide examples of what clauses would impact value and why.
Break Clause – Reduces investor confidence, leading to higher yield.
Upward-Only Rent Review – More secure income stream, leading to lower yield.
Alienation Clause – Restrictive assignment or subletting clauses may reduce tenant demand.
Repairing Obligation (FRI vs. IRI Lease) – FRI leases enhance value due to tenant liability for repairs.
Why did you use the Comparable Method?
Market-driven approach, widely used for similar retail properties.
Suitable due to availability of transactional evidence.
Recognised as a Red Book-compliant approach for Market Value (MV).
Did you consider any other methods?
Investment Method – If the property was income-producing, I would capitalise rent to derive value.
Residual Method – If there was development potential, I would assess land value after deducting costs.
What attributes did you consider when sourcing comparables?
Location – Proximity and desirability.
Size & Configuration – Similar floor area and layout.
Tenure – Freehold vs leasehold differences.
Lease Terms – Unexpired term, rent review provisions.
Condition & Specification – Fit-out, repairs, and EPC rating.
Where did you source comparables from?
CoStar, EGI, Rightmove, local agent reports, Land Registry sales data.
How did you verify comparables?
Cross-checked data from multiple sources.
Contacted local agents and parties involved in transactions.
Reviewed Land Registry and HMRC sales data for price confirmation.
How do lease terms impact value?
Long leases with secure tenants = higher value (lower yield).
Shorter leases or breaks = higher risk (higher yield).
FRI leases (full repairing and insuring) reduce landlord liability, enhancing investment value.
Stepped rent leases impact valuation due to changes in future income projection.
How do incentives impact value?
Rent-free periods reduce net income and impact yield calculation.
Capital contributions lower net effective rent, reducing capital value.
Turnover-based rent agreements create valuation uncertainty.
What was included in your report?
Executive Summary – Key findings and value conclusion.
Market Overview – Economic conditions, sector performance.
Comparable Evidence – Supporting valuation rationale.
Lease Analysis – Terms affecting yield and risk.
Red Book Compliance Statement – Ensuring best practice adherence even though it was an informal valuation.
Valuation Methodology & Assumptions – Justification for approach used.
What is the profit method?
The profits method is when the value is derived from business and its trading potential.
What is the trading potential in the profit method?
The trading potential is the profit that a reasonably efficient operator would expect from occupying the property.
What types of properties is the profit method good for?
Good for hotels, schools, and cinemas.
How is a profit method valuation undertaken?
It is based on historical and comparable information, compared with similar trading businesses, and capitalised at an appropriate rate of return.
What is the contractors/depreciated replacement cost method of valuation?
This method indicates value based on the buyer paying no more or less than the cost to obtain the asset based on the current equivalent.
How is the contractors/depreciated replacement cost method of valuation undertaken?
Capital value is determined by calculating the cost of the building equivalent asset and purchase value of the land, adjusted for any deterioration.
What is the comparable method?
The comparable method primarily uses sales data of properties that have recently been sold and focuses on similar assets.
How is a comparable method valuation undertaken?
The method creates a schedule of similar assets within the area and makes adjustments for differences with the subject property.
What are the different purposes of valuation?
For financial reporting, for commercial secured lending purposes, and for mortgage purposes.
What is the red book?
The RICS red book contains mandatory rules and best practice guidance for members who undertake asset valuations.
What steps would you take following a valuation instruction?
Collect property details, undertake conflict of interest check, obtain a signed letter of instruction, confirm purpose of the valuation, collect all relevant information, desktop research, carry out inspection and measurement, research market value, compile valuation report, check valuation internally, report to the client, and submit an invoice.
What are the four methods of valuation?
Comparable, Investment method, Contractors or DRC, Profits, and Residual.
What is market value?
The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing.
What is the definition of market rent?
The estimated amount for which a property should lease on the date of the valuation between a willing lessor and a willing lessee.
What is hope value?
Hope value is the term used to describe the market value of land based on the expectation of getting planning permission for development on it.
What is marriage value?
The extra value that arises from the merger of two physical or legal interests.
What is the definition of special value?
An extraordinary element of value over and above market value.
What is tegova?
The European group of valuers association.
What is the IVSC?
The international valuation standards committee, which recognises IVS1 and IVS2.
What is the difference between specialist properties and specialised properties?
Specialist properties are trading properties designed for a specific purpose, while specialised properties can only be sold for the same use.
What is the difference between market rent and estimated rental value?
Market rent assumes vacant possession, while estimated rental value considers further considerations about the property assuming it is occupied.
When would you use term and reversion vs hardcore?
These valuation approaches are utilized when the terms of the lease and incoming rental income are expected to change in the near future.
What is the term and reversion approach?
This approach is for a property with an existing lease due to expire, valuing the existing term separately from the expected new lease terms.
What is the hardcore/layer approach?
This method considers the current market rent on a perpetual basis and adds the difference between current rent and expected market rent.
What is the definition of equivalent yield?
The equivalent yield is a weighted average of the net yield from current rental income and all future reversionary income.
What is the definition of equated yield?
The equated yield is the yield on a property investment which takes into account growth in future income.
What is goodwill?
Goodwill is an intangible asset when property or real estate is being sold or purchased, representing value higher than the sum of the net fair value.
What are the different types of goodwill?
Purchased goodwill is created when an asset is exchanged for an amount above fair market value, while inherent goodwill is created over time as a non-measurable asset.
What is the difference between a residual valuation and a development appraisal?
A development appraisal does not form part of the red book valuation standard, while residual does and focuses on market information.
When would you use the discounted cashflow valuation method?
When there are no comparable market transactions, the explicit DCF model provides a rational framework for estimating market value.
How would you value a property where there are no comparables?
Using the DCF method, projecting estimated cash flows over an investment period and discounting back to present-day value.
What factors affect yields?
Covenant, location, specification, rent levels, growth potential, and asset management & development value.
What is face rent and effective rent?
Face rent excludes incentives, while effective rent considers any incentives provided to the tenant.
Define all risk yields.
All risk yield presents the rental revenue of a property as an annual percentage of the property cost.
What are deleterious materials and how do they affect value?
Deleterious materials are prohibited and can affect structural integrity, compliance with regulations, and decrease property value.
What are the main components of a valuation report?
Tenure, date of valuation, extent of inspection, opinion of value, allowance for VAT, third-party references, and more.
How would structural defects be reflected in your valuation report?
Draw clients’ attention to them, advise a structural survey, and seek cost input for remediation.
Are you allowed to know the purchase price when valuing?
The valuer must request and verify it, stating why if the valuation differs.
What can your client do if you are found negligent in your valuation?
The complainant can demonstrate losses and pursue the valuer or valuing company through the courts.
What would you caveat in a valuation report?
Publication, confidentiality, deleterious materials, planning, taxation, information supplied, and environmental matters.
How would you rentalise the reception of an office building?
50% if a single tenant, not at all if multi-let.
What items are contained within your terms of engagement but not referenced within your valuation report?
Reference of the professional fees for undertaking the valuation.
What is in your valuation report and not in your terms of engagement?
Opinion of value and valuation approach.
Please provide some examples of conflicts of interest.
Acting for the buyer and seller in the same transaction, valuing for the lender while advising the borrower.
What is meant by the term passing rent?
The annual rent income currently generated by a property as recorded on the balance sheet.
Why did the report include an opinion and not an actual valuation?
Providing valuations in accordance with the RICS red book means a value on opinion cannot be wrong.
What is a development appraisal?
An objective financial viability test of the ability of a development project to meet its cost of its planning obligations, whilst ensuring an appropriate site value for the landowner and a market risk adjusted return to the developer in delivering the project.
What is a sensitivity analysis?
Sensitivity analysis is where you re-calculate the appraisal with different assumptions on inputs, for example, an increase in build costs or a decrease in gross development value to identify what effect this has on the potential profit and residual land value.
What was the purpose of the valuation of 14 ms?
Internal valuation to a potential acquisition.
What is the definition of market value?
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing, wherein the parties had each acted knowledgeably, prudently, and without compulsion.
Did the leasehold interest impact on value at 14ms?
Yes – the long leasehold interest impacted value due to its limited market appeal compared to freehold and the need to review the head lease obligations and any restrictive covenants.
When could a leasehold interest impact value?
Short unexpired terms, reducing security of tenure; high ground rents or rising rent reviews; unfavourable covenants or repairing obligations; a weaker legal interest compared to freehold ownership.
What method of valuation did you adopt for 14ms?
I used the comparable method on a capital basis, based on adjusted market evidence for similar high street retail units.
Why did you not use the investment method at 14ms?
The unit was predominantly vacant and not producing income, so there was no investment yield to capitalise.
How did you check that the information from Co-Star was accurate for unit 4a harmony house?
Land Registry records; letting agent websites and speaking to them; internal property records.
How did you apply the hierarchy of evidence at harmony house?
I prioritised: 1. Open market lettings of similar properties (Category 1). 2. Agreed lease renewals or rent reviews (Category 2). 3. Asking rents and older comparables (Category 3).
What factors affect value?
Macro factors – economic; micro factors – lease terms, incentives, property spec and conditions.
Is the Red Book mandatory for all valuations?
No it is not mandatory for internal and marketing valuations as set out in PS2.
What is a years purchase multiplier?
A years purchase (YP) is the inverse of a yield, used to capitalise annual rent into a capital value.
What is an all risks yield?
An all risks yield (ARY) is used to capitalise the net rent, reflecting all property-specific risks, including location, tenant strength, lease terms, and condition.
What is the difference between an assumption and a special assumption?
Assumption: A statement accepted as true without needing to state it – e.g., that the title is good and marketable. Special Assumption: A hypothetical scenario that departs from reality for valuation purposes – e.g., assuming vacant possession when the property is let.
