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APC > Valuation 2 > Flashcards

Valuation 2 Flashcards

1
Q

What is the correct name for the Red Book?

A

RICS Valuation - Global Standards effective January 2022 (November 2021 published)

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2
Q

Is there a supplement document?

A

RICS Valuation - Global Standards 2017: UK national supplement effective January 2019 (published November 2018)

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3
Q

What are the two types of a valuer?

A

Internal - employed by company to value assets of the company for internal use only.

External - has no material links with the asset to be valued or client.

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4
Q

What are the three important steps to take before commencing a valuation?
CIT

A
  1. Competence
  2. Conflicts of Interest
  3. TOE
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5
Q

What are types of statutory due diligence for valuations? (8)

A
  1. Asbestos register
  2. Business rates
  3. Contamination
  4. Equality Act 2010
  5. EPC rating
  6. Flood risk
  7. H&S
  8. Planning
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6
Q

What is the suggested 16 steps for a valuation?

A
  1. receive instructions
  2. Check competence
  3. Conflicts check
  4. TOE
  5. Receive signed TOE
  6. Gather relevant documents
  7. Undertake due diligence
  8. Inspect and measure
  9. Market research
  10. Undertake valuation
  11. Draft report
  12. Another surveyor check report
  13. Finalise report
  14. Report to client
  15. Issue invoice
  16. Ensure valuation file is in good order for archiving
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7
Q

What are the five methods of valuation?

A
  1. Comparative method
  2. Investment
  3. Profits
  4. Residual
  5. Contractors (Depreciated replacement cost)
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8
Q

What are the three valuation approaches?

A
  1. Income approach - converting current and future cash flows into a capital value (i.e. investment, Residual and profits method)
  2. Cost Approach - reference the cost of the asset whether by purchase or construction (DRC method)
  3. Market Approach - using comparable evidence (Comparable method)
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9
Q

When is the Investment method used?

A

When there is an income stream to value

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10
Q

What are the different types of methods under the investment method?

A

Traditional - Rent x YP

T&R - Term capitalised until next review/lease expiry at an initial yield (i.e. for under rented properties)

Hardcore - Bottom slice (market rent) and top slice (passing rent). Higher yield on top slice to reflect risk (i.e. for over rented properties)

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11
Q

How do you calculate years purchase?

A

Divide 100 by yield

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12
Q

What is a yield?

A

A measure of investment return, expressed as a percentage of capital invested.

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13
Q

What is All growth implicit?

A

The yield adopted assumes many of the assumptions made explicit in a DCF approach.

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14
Q

What are the different types of Yields? (8)

A

ARY - rate of interest used in valuation of fully let property at market rent reflecting the risks.

True Yield - Assumes rent paid in advance not in arrears

Nominal Yield - Initial yield assuming rent paid in arrears

Gross Yield - Not adjusted for purchasers costs

Net Yield - Adjusted for purchasers costs

Equivalent yield - Average weighted yield when a reversionary property is valued using an initial and reversionary yield

Initial yield - MR divided by price

Running Yield - Yield at one moment

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15
Q

What is DCF?

A

Involves projecting estimated cash flows over an assumed investment holding period plus an exit value at the end (ARY basis). The cash flow is then discounted back to the present day at a discount rate that reflects risk.

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16
Q

When is DCF used?

A
  • Short leasehold interests
  • Phased development projects
  • non standard investments (say 21 year reviews)
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17
Q

What is NPV?

A

Net present value

The sum of discounted cash flows of the project to determine a positive or negative rate of return.

Positive = exceeds investors target rate of return

Negative = not achieved investors target rate of return

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18
Q

Whats IRR?

A

Internal rate of return

Used to assess the total return from an investment making some assumptions of rental growth, re-letting and exit assumptions.

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19
Q

How do you calculate the IRR?

A
  1. Input MV as a negative cash flow
  2. Input projected rents as a positive value
  3. Input projected exit value
  4. Discount rate (IRR)
  5. If NPV more than 0 then target rate is met
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20
Q

When is the profits method used?

A

Where the property depends upon the profitability i.e. pubs, petrol stations, hotels

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21
Q

How do you calculate the profits method?

A

Annual turnover
Less costs/purchase
= Gross profit
Less reasonable working expenses
= Unadjusted net profit
Less operators costs
= Adjusted net profit known as Fair Maintainable Operating Profit (FMOP)

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22
Q

What is the Residual method?

A

An appraisal to financially assess the viability of the development scheme.

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23
Q

What would you include in a Residual valuation?

A
  • Gross development value
  • Total development costs (site preparation, Planning, Building, Professional fees (10-15%), contingency (5-10%), developers profit, finance (debt and equity).

*Debt finance - lending money from a bank
*Equity finance - selling shares in a company or joint venture

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24
Q

What are the types of sensitivity analysis?

A
  1. Simple - Adjusting yields, GDV, build costs, finance etc
  2. Scenario - Change scenario i.e. timing by phasing the development
  3. Monte Carlo simulation - probability theory, using Crystal Ball software
25
Q

What is contractors (DRC) method?

A

Where market evidence is limited on specialised properties such as schools, museums.

  1. Value of land in its existing use
  2. Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence/deterioration
26
Q

What are the types of obsolescence?

A

Physical
Functional - the design is no longer fit for purpose
Economic - change in market conditions

27
Q

What is the structure of the Red Book?

A
  1. Introduction
  2. Glossary
  3. PS
  4. Valuation technical and performance standards (VPS)
  5. Valuation applications (VPGA)
  6. The International Valuation Standards (IVS)
28
Q

What sections in the Red Book are mandatory?

A

PS1 & PS2.
VPS 1-5 unless unsuitable or inappropriate to comply with:-
- agency or brokerage advice
- acting as an expert witness
- performing statutory functions
- internal valuation
- acting as an advocate

29
Q

What is PS1?

A

Compliance with standards and practice statements

30
Q

What is PS2?

A

Ethics, competency and objectivity

31
Q

What is VPS1?

A

Terms of Engagement

32
Q

What is VPS2?

A

Inspections, investigations and records

33
Q

What should be included in TOE?
(18)

A
  • identification & status of valuer
  • Identification of client
  • identification of any other intended users
  • asset to be valued
  • currency
  • purpose
  • basis of vale
  • valuation date
  • extent of investigation
  • nature and source of information relied on
  • assumptions and special assumptions
  • format of report
  • restrictions on use
  • confirmation of Red Book compliance
  • fee basis
  • complaints handling procedure
  • statement that the valuation may be subject to compliance by RICS
  • limitation on liability
34
Q

What is the difference between an assumption and special assumption?

A

Assumption - reasonable to accept it is true without the need for investigation.

Special assumption - taken to be true even though it is not.

35
Q

What is VPS3?

A

Valuation reports

36
Q

What are the minimum requirements within a report?
(16)

A
  1. identification and status of valuer
  2. client and other intended users
  3. purpose of valuation
  4. the asset to be valued
  5. basis of valuation
  6. valuation date
  7. extent of investigation
  8. nature and source of information
  9. assumptions and special assumptions
  10. restriction on use
  11. in accordance with IVS standards
  12. valuation approach and reasoning
  13. valuation figure
  14. date of report
  15. market uncertainty
  16. statement on limitations
37
Q

What is VPS4?

A

Bases of value, assumptions and special assumptions

38
Q

What are the 4 bases of value?

A
  1. Market value - the estimated amount for which an asset or liability should exchange
  2. Market rent - estimated amount for which an interest in real property should be leased
  3. Investment value (or worth) - the value of an asset to a particular owner, or prospective owner for individual or operational objectives
  4. Equitable value (Was 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.
39
Q

What is VPS5?

A

Valuation approaches and methods

40
Q

Name some types of valuation applications.

A

VPGA1 - for inclusion in financial accounts
VPGA2 - for secured lending
VPGA8 - for real property interests
VPGA10 - matters that give rise to material valuation uncertainty

41
Q

What is the difference between Red Book and UK supplement?

A

UK supplement provides specific requirements for members to valuations undertaken within UK jurisdiction.

42
Q

What is RICS Valuer Registration Scheme (VRS)

A

A regulatory monitoring scheme for all valuers carrying out Red Book valuations. The three aims are:-

  1. to improve quality of valuation and highest professional standards
  2. meet RICS requirements
  3. protect and raise status of the valuation profession
43
Q

Why does the Red Book exist?

A

To promote and support the high standards in valuation delivery

44
Q

What is Hope Value?

A

The term used to describe the market value of land based on the expectation of getting planning permission

45
Q

What are exceptions to the Red Book?

A

Statutory purposes
Agency
Litigation
Expert determination
Expert Witness

46
Q

Example of a special assumption

A

Development value of a project that has not yet been built.

47
Q

What would you consider to be Grade A office space?

A
  • Brand new or undergone complete redevelopment
  • High-specification
  • Prime location
  • State-of-art fixtures and amenities
48
Q

What would you consider to be Grade B office space?

A
  • Secondary locations (i.e. industrial estates)
  • Older than Grade A
  • Previously occupied
49
Q

What would you consider to be Grade C office space?

A
  • More than 20 years old
  • Less desirable locations
  • Outdated specification
50
Q

What should comparable evidence be?(7)

A
  1. Similar
  2. Recent
  3. Arms length
  4. Comprehensive
  5. verifiable
  6. Consistent with local market practice
  7. A result of underlying demand
51
Q

What are gilts?

A

Type of bond issued by UK Government in order to finance public spending.

52
Q

What assumptions are required for DCF method?

A
  • when units are likely to relet
  • costs incurred and timings
  • likely rental levels
  • target/discount rate to be applied
  • terminal/exit price
53
Q

How is a DCF calculated?

A

a) determine the cash flow period
b) prepare the projected income/expenditure
c) determine terminal value
d) appropriate discount rate
e) apply discount rate
f) total each period discounted cash flow

54
Q

How do you arrive at a target rate?

A
  1. WACC - Weighted Average Cost of Capital
    (Cost of equity + Cost of debt)
  2. A single discount rate applied
  3. Different rates to different components
55
Q

Advantages of DCF?

A
  • deal with complex cash flows
  • allows for different inputs to be taken into account
  • allows for specific rental growth to be considered
  • may be used to compare property and other non-property investments
56
Q

What is material uncertainty?

A

Any restrictions of information and/or the ability to inspect must be made clear and agreed with the client.

Mandatory requirement under VPS3 & VPGA10 to provide commentary.

57
Q

Name a specialist valuation.

A

S18 Valuation ( L&T Act 1927)

Damages for a breach of covenant shall not exceed the amount by which the reversion is diminished.

i.e. if a property valued at £100k and requiring repair at a cost of £100k would only be worth £150k once repaired, then the measure of damages would be £50k.

58
Q

What is Supersession under S18?

A

No damage should be recovered… if it is shown that the premises would have been pulled down.

i.e. pointless replastering and painting a wall if the LL intends to remove the wall.

APC (16 decks)

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