Valuation (2025 RB) Flashcards
1
Q
What is the purpose of the Red Book
A
To ensure consistency, transparency, and public trust in valuation practices globally by applying IVS and additional RICS requirements.
2
Q
When does the new Red Book come into effect?
A
31 January 2025.
3
Q
What is the difference between PS/VPS and VPGA?
A
Professional Standards and Valuation Professional Standards are mandatory; VPGAs are advisory.
4
Q
What are the main parts of the Red Book structure?
A
Introduction
Glossary
Professional Standards (PS)
Valuation Technical & Performance Standards (VPS)
VPGAs
Full IVS Text
5
Q
What does PS 1 cover?
A
Compliance with standards when providing written valuations, including the mandatory application of PS 1, PS 2, and VPS 1-6.
6
Q
What are the key principles in PS 2?
A
Ethics, integrity, confidentiality, managing conflicts of interest, and ensuring appropriate qualifications.
7
Q
What does VPS 1 define?
A
The terms of engagement or scope of work, including purpose, basis of value, and assumptions.
8
Q
What bases of value are covered in VPS 2?
A
Market Value, Market Rent, Fair Value, Investment Value, and Special Assumptions.
9
Q
What are the three main valuation approaches in VPS 3?
A
Market Approach, Income Approach, and Cost Approach.
10
Q
What does VPS 4 require regarding inspections and records?
A
Adequate inspection, investigation, and maintenance of detailed records.
11
Q
What is the requirement for valuation models in VPS 5?
A
Must apply professional judgment; AVMs alone are not compliant.
12
Q
What are the key requirements for valuation reports under VPS 6?
A
Reports must be clear, unambiguous, and include all relevant disclosures.
13
Q
What is the focus of VPGA 1?
A
Valuations for financial reporting, including IFRS compliance and fair value.
14
Q
What method is typically applied in VPGA 4?
A
The profits method for trade-related properties.
15
Q
What matters are covered under VPGA 8?
A
Sustainability, ESG, and assumptions for real property interests.
16
Q
When must material valuation uncertainty be declared under VPGA 10?
A
During abnormal market volatility or when there is a lack of comparable evidence.
17
Q
What are exceptions to the VPS 1-6 standards?
A
Litigation, internal-only valuations, and statutory functions.
18
Q
What is required if there is a departure from Red Book standards?
A
Agreed departure. Must be clearly stated, justified, and documented.
19
Q
How does the Red Book treat use of technology like AVMs and AI?
A
Permitted if supported by professional judgment and proper verification.
20
Q
What are the rules on confidentiality and disclosure?
A
Client confidentiality is paramount unless disclosure is legally required or consent is given.
21
Q
What is the role of ESG and sustainability in valuations?
A
Must be considered where relevant, especially in property and investment contexts.
22
Q
What are the key changes in the 2025 Red Book compared to the 2022 version?
A
Revised glossary to better align with IVS
Reordered VPS to match IVS structure
New VPS 5 on valuation models
23
Q
What does VPS stand for?
A
Valuation technical & Performance Standard
24
Q
What does VPGA stand for?
A
Valuation Practice Guidance APPLICATION
25
Tell me about the Global Standards: UK national supplement
Sets out specific requirements, together with supporting guidance, for members on the application of the RICS Valuation – Global Standards (Red Book Global Standards) to valuations undertaken subject to UK jurisdiction. Published 2023, effective May 2024. Reissued Jan 2025 to align with 2025 red book.
26
Where is Fair value defined?
VPS 2 bases of value, assumptions and special assumptions. UK VPGA 1: valuation for Financial Reporting
27
Where is Market value defined?
VPS 2, section 4.
28
Name some key changes to the 2025 red book
Expands ESG considerations, sustainability related risks such as physical climate risks - e.g flooding, storms, etc.
Automated valuation models (AVMS), and advanced technology is acknowledged, but professional judgment remains essential when using these tools.
29
What is special purchaser and where is it defined?
VPS 2 - Where a particular asset has special value to a particular purchaser because of advantages arising from its ownership that would not be available to other buyers in a market.
30
What is an IRR?
a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
31
What is the Red Book
Set of global standards which set out procedural rules and guidance for written valuations.
32
What is the full title of the latest red book?
RICS Valuation – Global Standards 2025
31 January
33
Purpose of the red book
Greater consistency, objectivity and transparency in written valuations
COT
34
Why has the red book been updated?
Red book needed minor updates to stay aligned with IVS 2025. Order of VPS changed to become more closely aligned with IVS. Eg. VPS 2 is Bases of value, IVS 102 is Bases of value.
To increase focus on sustainability and ESG
To address AVMs
35
Professional standard 1 in the red book is about?
Compliance
36
Professional standard 2 in the red book is about?
Ethics, Competency, Objectivity and Disclosures
ECOD
37
Are there any exceptions where the valuer may not follow the VPS’s? (5)
Agency marketing appraisal
Litigation (rent review litigation)
Internal purposes only
Expert witness valuation
Statutory basis
ALIES
38
What are the terms of engagement?
Contract with the client detailing the work assignment, can be used as an important defence against negligence claims.
39
What is market value?
Estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
40
What is market rent?
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.
41
Define investment value
Value of an asset to the owner or prospective owner who has investment objectives.
Often used in conjunction with DCF.
42
What is 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.
Applies only to financial statements.
43
What do understand about synergistic value?
VPS 2 - Synergistic value is the result of a combination of 2 or more assets where the combined value is more than the sum of the separate values.
44
What are the three valuation approaches described in VPS 3?
M - Market
I - Income
C – Cost
MIC
45
What is the market approach as per VPS 3?
Based on comparing the subject asset with identical or similar assets or liabilities, where price information is available, and you can compare similar market transactions within an appropriate time period.
I.e. The comparable method
46
What does VPS 1 relate to?
Terms of Engagement
47
What does VPS 2 relate to?
Bases of value, assumptions, and special assumptions
48
What does VPS 3 relate to?
Valuation approaches and methods
49
What does VPS 4 relate to?
Inspections, investigations, and records
50
What does VPS 5 relate to?
Valuation models
51
What does VPS 6 relate to?
Valuation reports
52
Name at least 10 headings you would expect to find in a terms of engagement
Identification and status of valuer
Identification of client
Identification of any other intended uses
Identification of asset or liability being valued
Valuation currency
Purpose of the valuation
Basis of value adopted
Valuation date
Nature and extent of the valuer’s work, investigations and limitations
Nature and source of information which the valuer will rely
All assumptions and special assumptions to be made
Format of report
Restrictions on use, distribution and publication of report
Confirmation that the valuation will be undertaken in accordance with the IVS.
Basis on which the fee will be calculated.
For RICS regulated firms, reference to complaints handling procedure
A statement that compliance with these standards may be subject to monitoring under RICS conduct and disciplinary regs
Statement setting out agreed limitations
53
Name at least 10 headings you would expect to find in a red book valuation report
Identification and status of valuer
Identification of client and other intended uses
Purpose of valuation
Identification of asset or liability to be valued
Basis of value adopted
Valuation date
Extent of investigation
Nature and source of information relied upon
Assumptions and special assumptions
Restrictions on use, distribution and publication of report
Confirmation the assignment is in accordance with the IVS
Valuation approach and reasoning
Valuation amount
Date of valuation report
Commentary on any material uncertainty in relation to the valuation
Statement setting out any agreed limitations on liability
54
What is the income approach based on?
Capitalisation or conversion of present and future incomes to a single capital value
Two methods: 1.) capitilaisation of a conventional market based income. 2.) discounting a income projections
Deciding by consideration of what is standard in the market.
E.g. investment and profits method
55
What is the cost approach based on?
Gives an indication of value using the economic principle that a buyer would pay no more for an asset than the cost to get an equal asset by construction or purchase. E.G. Residual method and Depreciated replacement cost method.
56
What is the document “RICS Sustainability and ESG in commercial property valuation and strategic advice?
Professional standard released 2023.
Covers definitions of ESG, role of sustainability and the role of the valuer
Explores sustainability characteristics, considerations and risk
57
Have any valuation reviews been conducted recently?
Yes Peter Gray’s independent review of real estate investment valuations in December 2021.
58
Can you name two recommendations commissioned by RICS, standards and regulation board following Gray’s independent review of real estate investments?
Independent review of real estate investments?
I - Independent panel
C - Creation of compliance officer
E- Expectation of culture and behaviours
A.K.A ICE
59
What is the term and revision technique and what are the steps to carry it out?
An Investment method of valuation used for reversionary investments where the subject is under-rented.
1. capitalise passing rent using YP at discounted yield for remaining years
2. capitalise reversion using market rent into perp using YR at full market rate discounted using present value.
3. Add together
4. Stand back and look
60
What is the hardcore and top slice technique?
Investment method of valuation used for investments where the subject is over-rented
61
Talk me through the steps of valuing a over rented shop from start to finish
1. Establish market rent by comparable analysis
2. Establish passing rent by reviewing the lease
3. Establish market yield using comparables and risk analysis
4. capitalise Market rent into perpetuity using market yield
5. capitalise top slice (rental amount above market rent) until next review if rent can go down or lease end if not, using market yield uplifted to reflect risk.
6. Add together hardcore and top slice.
7. Stand back and look
62
Describe how a hardcore and top slice valuation technique graph would look?
Hardcore layer of market rent along whole of x axis
- Horizontal Top slice of amount of excess rent on top that starts from the onset
63
What valuation technique might you use to value a shop that is under-rented?
Term and reversion
64
Name five factors that can affect a yield
Risk
Growth potential
Quality of location
Quality of covenant
Property use
Lease terms
Voids
Liquidity
Obsolescence / Repair
65
Why would a surveyor complete a discounted cash flow?
For a new property where growth is not yet stable
New project where occupancy is not at peak levels
To establish the internal rate of return
To consider each rental growth separately
SORG
Stable. Occupancy. Return. Growth
66
What can a DCF look like, talk me through the different parts it will have.
Time period on left hand side
Net income (rent)
YP @ cap rate (exit rate)
Growth rate £1 @ say 2%
Discount rate PV £1 @ 10%
DCF total
Remark/comment section at end
67
Talk me through the steps of valuing an over rented shop from start to finish
-Establish market rent by comparable analysis
-Establish passing rent by reviewing the lease
- Establish market yield using comparables and risk analysis
-capitalise Market rent into perpetuity -using market yield
capitalise top slice (rental amount above market rent) until next review if rent can go down or lease end if not, using market yield uplifted to reflect risk.
-Add together hardcore and top slice.
-Stand back and look
68
How would you carry out a DRC or contractors?
1. ERC - modern equivalent
2. Depreciate for age and obsolescence (functional, technical + economic) - flat roof
3. Add land value
4. Depreciate at statutory decap rate for rating valuations (4.4% or 2.6% for health)
5. Stand back and look - adjustments if necessary
69
What is YP?
Years purchase is the number of years it would take for the annual income to pay for the value or purchase price of the property.
70
Are you aware of any VPGA’s?
VPGA 1- Valuation for financial reporting
VPGA 4 - Valuation of trade related property
VPGA 8 - Valuation of real property interests
VOGA 10 - Material valuation uncertainty
71
Can you run me through how you would do a profits valuation
Obtain 3 years accounts showing income, purchases, expenses
Determine fair maintainable turnover (for a reasonable occupier)
Deduct costs and expenses to calculate Fair maintainable operating profit FMOP
CAPITAL VALUE = FMOP X YP
RENTAL VALUE = FMOP = Divisible balance (50/50 Landlord and tenant)
72
Why would you multiply the operating profit by the years purchase to calculate capital value?
You have the yearly profit
The YP is the number of years profit it takes to attain the level of value of the property.
So multiplying the two gives you the overall value.
73
What are the principles behind the divisible balance
Represents the amount to be shared between the tenant (tenant’s share) and the landlord (rent, or rateable value).
74
What is marriage value?
The increase in the value of the property following the completion of the lease extension, reflecting the additional market value of the longer lease.
Split 50:50 between landlord and leaseholder
75
What is functional obsolescence?
Looks at property decrease in functionality due to outdated design features. Physical deterioration
76
What is technical obsolescence?
Where the building is inferior to alternative
77
What is economic obsolescence?
Depreciation in the market value of a property due to external factors that cannot be controlled by the owner.
Examples include: traffic pattern changes, zoning changes, flight pattern changes, construction of public nuisance projects like a jail or sewer treatment plant, rising crime, or job loss.
78
What is professional scepticism?
Having a questionable mindset in regard to information and evidence.
PS 2
79
Who signs off Red book report?
An individual (chartered surveyor)
not a firm.
80
Who is to be named in a Red book report?
Anyone with a material supporting role in the valuation
81
Do you follow UKVPGA 15 – valuations for CGT, IHT, SDLT and ATED
Mainly aimed at private agents dealing client side
But we do follow
82
Name the professional standard for comparative valuation methodology
Comparable evidence in Real Estate Valuation (1st edition) 2019
83
What different yields are you aware of? Name and describe at least 3
a
All risks yield - reflects all risks, returns and growth
Initial yield - ARY applied to passing rent
Gross initial yield - yield on investment before deducting expenses
Net initial yield - yield on investment after deducting annual expenses. Expressed as a percentage of capital value plus purchaser costs (used in hardcore and top slice)
Reversionary Yield - applied to the reversion (market rent) to reflect risk. Yield that should be achieved if passing rent adjusts to market rent
Equivalent yield - weighted average between term and reversion (used in hardcore and layer institutional market)
Equated yield - internal rate of return with explicit growth
84
What is a yield
Yield refers to the earnings generated and realised on an investment over a particular period of time and is expressed as a percentage based on the invested amount.
Income/price x 100 = yield
Basically what is the return for the investor after say 1 year
85
What is included within the global Red Book?
Professional standards (PS) 1 & 2 which are MANDATORY
Valuation technical and performance standards (VPS) 1-5 which are MANDATORY
Valuation Practice Guidance (VPGA’s) 1-10 ADVISORY
86
What is a discount rate?
Rate of interest selected when calculating the present value of a future cost or benefit.
87
What is all risks yield
Growth implicit yield used in an investment valuation that reflects all the risks and rewards of the subject property.
88
Name the consultative paper on investment valuation considered by RICS?
Independent review of real estate Investment Valuation 2021
89
What professional fees are considered in a residual valuation
Costs related to the hard construction costs of the scheme
May include environment/planning consultant, architect, QS, Civil engineer, Mechanical and electrical engineer and project managers.
They vary depending on the complexity of the development.
90
What is the difference between gross & net yield?
Gross yield is when the total rental income divided by the capital of the property without accounting for purchaser cost, whilst net yield will include purchaser cost such as SDLT and legal fees
91
Define what a Basis of value is
Set of assumptions that guide how a valuation is done
92
Define what a method of valuation is
The techniques and approach that a valuer will carry out to value a property or land interest.
93
Most recent Red book when is it effective from?
31 January 2025
94
Do you undertake any environmental checks before valuing?
Yes
Ground contamination
Previous site use
Asbestos
Flood risk
Overhead power lines
Invasive species
95
Would your valuation change if the interest was held leasehold as opposed to freehold?
Depends on the situation.
The price difference between a long leasehold vs freehold may not be substantial but the price difference between a short leasehold vs freehold property can be extremely significant.
The same property, in the same location, is likely to be more expensive if it is sold with a freehold title than if it is sold with a leasehold.
96
If you were to value a multi-let office how would you approach that?
Investment method – establish MR and PR and calculate values using term and reversion or hardcore approaches.
Cross-check with comparable method
DCF also good approach as can manipulate different incomes as appropriate
97
What is hope value and how would you reflect in a valuation?
An element of market value in excess of the existing use value, reflecting the prospect of some more valuable future use.
Could be reflected by an uplift in the £ per acre dependant on the likelihood of a new alternative use becoming more certain.
98
What is Estimated realisation price
Estimated Realisation Price”, (“ERP”) a basis of valuation to be used solely for loan valuation purposes.
ERP is identical to OMV in representing an exchange price in the market place, but it differs on a number of points, two of which are fundamental.
‘Reasonably expected’ is retained in the ERP definition but the two fundamental points are:
(i) the marketing period commences on the date of valuation, with the sale completed after a reasonable marketing period to be specified by the valuer.
(ii) the market is dynamic and is not assumed to be static over the marketing period.
99
Criticisms of estimated realisation price
Can be quite subjective. Being asked to forecast value at some point in the future.
100
When can you take account of hope value?
Can be included in OMV if it would have been known to someone in open market.
101
What does SORP stand for?
Statement of recommended practice
102
What does a RICS HomeBuyer Survey include?
Inspection
Concise report based on inspection
Valuation
103
Approaches and methods
MIC
Market. Income. Cost.
CIRPC
Comparable, Investment, Residual, Profits and Contractors
104
Where would you find guidance for uncertainty in valuation?
VGPA 10
105
Hierarchy of comparable evidence?
Cat A - direct
Cat B - general market data
Cat C - other sources and different property types
106
When could you adopt the DCF approach?
When there are multiple income streams and rent reviews.
When you want to show explicit inputs
Can be used for appraisal purposes to calculate worth / INV value
107
Can you explain a typical DCF calculation?
Break the rent into income streams
Apply growth by % to income stream
Capitalise at a YP deferred by amount of years until the income is recievable
Then apply PV multiplier to bring back to valuation date
Total of NPVs is value or worth
108
What are some + and - of DCF
+
more info provided
cross investment analysis
specific cash flow issues can be considered
transparency
-
dont always have info to complete DCF
not widely used yet
109
Guidance on Residual Valuations?
Valuation of development property 2019
- establish facts
- assess development potential
- planning knowledge
110
Why should a property with a shorter unexpired term be adjusted downwards?
Typically the shorter the lease term the lower the value, because it is further departed from owning the freehold or virtual freehold of the property. The lease term refers to the amount of years the property is in your posession so the shorter the lease term the sooner you would lose pocession of the property.
the adjustment reflects the value relative to owning the virtual freehold or a long lease term.
111
Why did you use Savills Analysis of Relativity?
Savills is based on 2015 data which is comparatively up to date, and they specialise in the London locality.
112
Outline how you would conduct a profits method valuation
FMT based on REO expectations
attain gross profit if needed
FMOP
capitalise FMOP
additions / deductions
Value
stand back and look - analyse by per bed etc
113
What docs are there regarding lease extensions?
The Leasehold Reform, Housing and Urban Development Act 1993
but
Leasehold and Freehold Reform Bill - making it easier and cheaper to extend leases, freeholder can only charge a peppercorn rent
114
What extra value may you add to a short leasehold?
Marriage value is the increase in the value of the property following the completion of the lease extension, reflecting the additional market value of the longer lease. In that this potential ‘profit’ only arises from the landlord’s obligation to grant the new lease, the legislation requires that it be shared equally between the parties.
115
What does it mean to be contracted out?
Where the landlord and tenant make an agreement prior to entering into the lease to exclude the statutory rights under the 1954 Act and the tenant therefore loses their automatic right to renew their lease at the end of the lease term.
116
How could contracting out affect value?
Landlord may accept lower rent for lease to be contracted out, conversely the landlord may have greater bargaining power at renewal of a contracted out rent.
117
How would a landlord gain VP from the Act?
s.30 L+T Act 1954
a) breach of repairing covnant
b) Persistent delay in paying rent
c) Breaches of other obligations
d) Availability of alternative accommodation
e) possession required for letting or disposing of whole of property
f) Landlord intends to demolish or reconstruct
g) Landlord intends to occupy the premises themselves
118
Which documents is the Red Book made up of in the UK?
Global Standards
IVS
National Supplement
119
What is AVM and what is the RICS view to it?
Automated Valuation Modelling - due to the detail of inputs it is still considered a written valuation?
120
What is a written valuation?
A valuation provided in all forms of communication but oral - though oral should still follow the same principles
121
Tell me about uncertainty in valuations
VPGA 10 - material uncertainty needs to be reported separately as it is a wider factor which may not have impacted the market yet inherent uncertainty need not reporting
122
What can be found in PS 2?
Ethics, competence, obligation, disclosures
-ability to act
-DOC
-TOE
123
What are assumptions and special assumption?
assumptions are agreed matters taken as fact
special assumptions are matters that are not actual facts - agreed (VP)
124
What is projected value?
a consideration that can be made seperate to basis of value
125
What is EUV?
Market value EUV - market value + special assumption to ignore hope value
126
Four bases of value?
Market Value - amount should exchange on val date, ALT, willing b + s, after marketing, K, P, WC
Market Rent - appropriate lease terms, willing L and L
Investment Value - particular investor with invetsment or operational objectives
Fair Value - orderly transaction between market participants at measurement date
127
Name 5 things you would include inline with VPS 6 that wouldn't be in VPS 1.
Opinion of Value
Market Commentary
Property Description
material uncertainty
sources relied upon
limitations on liability
anyone involved in case
128
What are the 3 steps to consider before a valuation?`
Competence
Independence (COI)
Terms of Engagement
129
What is overage?
Arrangement of sharing any receipts received over and above the profits originally expected as agreed in a pre-agreed formula. Can be shared between vendor/landowner and developer, also known as claw-back.
130
What is WAULT and how is it calculated?
Weighted Average Unexpired Lease Term – total unexpired lease length by the number on tenancies.
131
