Valuation Flashcards
What statutory due diligence would you undertake for a valuation?
Check for any material matters which could impact the valuation.
- Asbestos Register
- Business Rates
- Contamination
- Environmental matters
- EPC
- Flooding
- Fire safety
- Health and safety compliance
- Highways
- Legal title and tenure
- Public rights of way
- Planning history and compliance
What steps should you take prior to commencing a valuation instruction?
Do I have the skills, understanding and knowledge? (Competence)
Are there any conflicts? (Independence)
Set out in writing instructions and receive written confirmation of instructions from the client. Confirm competence and extent and limitations of values inspection. (Terms of Engagement)
What steps are involved in undertaking a valuation?
16 Steps
- Receive instructions
- Check competence (SUK)
- Check independence
- Issue terms of engagement
- Receive signed terms of engagement
- Gather information (Leases, title docs, planning info etc)
- ## Undertake statutory due diligence
Why is Japanese Knotweed so important in the context of Valuations?
Because you cannot secure lending for properties with Japanese Knotweed.
What is an all risks yield?
This is a yield accounting for risk, return and growth.
What is an initial yield?
Current income divided by current price
What is equivalent yield?
The weighted average yield of the initial and reversionary yields.
What is a nominal yield?
The initial yield assuming rent is paid annually in arrears.
What is a reversionary yield?
The market rent divided by current price. (When under rented)
What is a running yield?
The yield at one moment in time.
What is a true yield?
The yield assuming rent is paid in advance.
Can you tell me what valuation approaches you’re aware of?
(IVSC, 2013)
Three approaches!!!
- Income approach
Future cash flow -> capital value (i.e. investment, residual and profits method.)
- Cost approach
Reference to cost (DRC/contractors method)
- Market approach
Using comparables (Comparable method)
Name me six checks you would undertake during Valuation due diligence?
Asbestos register
Environmental matters
EPC
Health and safety compliance
Equality act compliance
Legal title and Tenure
Can you name any other checks you would undertake during due diligence for a valuation?
Business rates
Contamination
Flooding
Highways
Public rights-of-way
Planning
Fire safety compliance
Can you tell me the structure of the RICS valuation – global standards, 2017 (the Redbook)
Six parts!!!
- Introduction
- Glossary
- RICS professional status (PS)
- RICS valuation technical and performance standards (VPS)
- RICS global valuation practice guidance applications (VPGA)
- The international valuation standards (IVS)
What does the Redbook consist of?
- Introduction
- Glossary
- PS (PS 1 and PS 2)
- VPS (VPS 1 – 5)
- VPGA (VPGA 1 – 10)
- IVS
Explain term and reversion to me?
The term and reversion method is an investment method of valuation.
It is used to value reversionary or ‘under rented’ investments.
First you capitalise the income for a term until the next lease event at an initial yield.
Then you capitalise the market rent into perpetuity at a reversionary yield.
Add together.
Can you explain the conventional investment method to me.
This is simply the rent received multiplied by the years purchase.
Years Purchase = 1/i (1/yield)
What method would you use if the investment was over rented?
The hardcore method (Layer method)
Explain the hardcore/layer method to me.
Hard-core method is used for over rented investments, where the passing rent is higher than market.
This is calculated by adding the bottom and top slice together.
The bottom slice being the market rent capitalised at an initial yield.
The top slice being the rent passing less the market rent, capitalised at a higher yield to reflect risk.
What is a yield?
It is a measure of investment return, expressed as a percentage of capital invested.
How do you calculate a yield?
Income/price X 100
When determining your yield what factors would you take into account?
I would take into account risk looking at factors such as:
Location
Covenant
Lease terms
Voids
What is the hierarchy of evidence?
Open market lettings (new leases) Lease renewals Rent reviews Third-party determinations Sale and leasebacks Opinion
Can you tell me about the methodology of the profits method?
This used for valuations of trade related property such as pubs.
It is calculated by capitalising the fair maintainable operating profit (FMOP) by an appropriate yield.
What is the fair maintainable operating profit (FMOP)?
How is fair maintainable operating profit calculated?
Turnover - Costs = gross profit
Gross profit - expenses = Unadjusted net profit
Unadjusted net profit - remuneration = FMOP
Can you tell me some of the key changes in the new Redbook?
Exemptions are now known as exceptions.
It incorporates recent developments in international measurement standards. (IPMS)
It includes changes and new advice regarding conflicts of interest.
Oral valuation advice is now covered by the Redbook.
VPS 1 includes 3 additional requirements for terms of engagement.
VPS 4 only has one definition of fair value as per IFRS 13.
Can you tell me why the Redbook has been updated?
To take into account significant changes to the international valuation standards (IVS) introduced this year.
To make it clear that professional standards (PS) and valuation technical and performance standards (VPS) or mandatory, and Valuation practice guidance applications (VPGA) or advisory.
Can you tell me the methodology of the comparable method?
SIX steps
- Source Comps
- Verify Comps
- Assemble Comps
- Adjust Comps (hierarchy of evidence)
- Analyse Comps (form opinion on value)
- Report value – prepare file note
Define Market Rent
The 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
Where the parties had each acted knowledgeably, prudently and without compulsion.
Define Market Value
The estimated amount for which an asset or liability should exchange
On the valuation date
Between a willing purchaser and a willing seller
In an arm’s-length transaction
After proper marketing
When the parties had each acted knowledgeably, prudently and without compulsion.
For what purposes are valuations undertaken?
Agency and Brokerage purposes
Internal purposes
Loan security purposes
Accounts purposes
Define fair value
(As defined by the International Accountancy Standards Board)
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
Define investment value
The value of an asset to the owner or prospective owner
For individual investment or operational objectives
In your own words define market value
Market value is the estimated price at which an asset will transact on the open market between two willing parties having been properly marketed.
Define market rent in your own words
Market rent is the price at which a lease can be agreed on the open market between two willing parties.
Define fair value in your own words
Fair value is the price at which an asset could be transacted between two parties but doesn’t assume the property has been tested on the open market.
Find investment value in your own words
Investment value is what an asset is worth to an individual.
Not necessarily market value.
What is PS 1 in the Redbook?
This refers to compliance with standards were written valuation is provided.
All members who provide written valuation advice are required to comply with the standards.
What is PS 2 in the Redbook?
This refers to ethics, competency, objectivity and disclosures.
– Professional and ethical standards
– Independence objectivity and conflict of interest
– Terms of engagement
– Disclosure requirements
What is VPS 1 in the Redbook?
This refers to the minimum terms of engagement that must be confirmed in writing prior to commencing redbook valuation.
What are the minimum terms of engagement?
Set out in VPS 1
- Identification/status of valuer
- Identification of client
- Identify other intended users
- Identification of asset being valued
- Valuation currency
- Purpose of valuation
- Basis of value
- Valuation date
- Extent of investigations
- Nature/source of info being relied upon
- Assumptions/special assumptions
- Format of report
- Restrictions for use/distribution/publication
- Confirmation of IVS compliance
- Fee basis
- Complaints handling procedure
- Statement – Valuation may be investigated by RICS
- Statement - setting out limitations on liability
What is an assumption?
An assumption is made when it is reasonable to accept something is true without specific investigation.
What is a special assumption?
Special assumption is when something is taken to be true even though it is not.
i.e. assuming planning permission.
Must be clearly stated in terms of engagement!
What is VPS 2 in the Redbook?
This refers to inspections and investigations.
Inspections must be carried out to extent necessary to produce a valuation adequate for purpose.
Can you undertake a valuation without inspection?
Yes:
- Restricted information valuations
- Revaluations
What is VPS 3 in the Redbook?
VPS 3 refers to the minimum requirements to be stated within valuation reports.