Valuation Flashcards
What are the five methods of valuation?
Comparable method Investment method Residual method Profits method Depreciated Replacement Cost method
Give examples of the different types of properties that would be valued by the different methods of valuation?
Comparable - residential housing
Investment - offices (anything) with a rental income
Profits - pubs, hotels, leisure
Residual - development opportunities
DRC - owner-occupied properties or properties with no direct comparables i.e. specialised properties such as sewage works, lighthouses etc.
What are the approaches to valuation?
Income approach
Cost approach
Market approach
How would you use the income approach? And what methods of valuation rely on the income approach?
I would convert current and future cashflows into a capital value. This covers the Investment, Residual and Profits Method.
How would you use the cost approach?
The cost approach looks at the value of the land in its existing use and then adds the cost of replacing the building, plus fees and less a discount for depreciation and obsolescence/deterioration.
What is the market approach?
The market approach looks at using comparable evidence.
When do you not have to follow the RICS Valuation Global Standards 2020?
A.L.I.E.S
PS1 says that all written valuations must be written in accordance with the Red Book unless there are for one of five exceptions:
1. The valuation is provided in connection with certain agency/brokerage work
2. For litigation and negotiation e.g., divorce, rent reviews
3. For client’s internal purposes – exclusion of liability and without communication to a 3rd party
4. Acting as an expert witness
5. Performing statutory functions
However, it does also say that you should try where possible to follow VPS1-5
What would be included in Terms of Engagement for a valuation instruction?
I would include: Identification and status of valuer Identification of client Identification of intended users The asset to be valued The currency The purpose of the valuation The basis of value The valuation date Extent of investigation Nature and source of the info to be relied upon Assumptions and Special Assumptions Format of the report Restrictions of use, distributions and publication Confirmation of Red Book compliance Fee basis Complaint Handling Procedure Statment that the valuation may be subject to compliance by the RICS Limitation on liability agreed.
What is the definition for Market Value for Inheritance Tax purposes?
“The value at any time of any property shall for the purposes of this act be the price which the property might reasonably be expected to fetch if sold in the open market at that time; but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time”.
You say you valued a residential property in Gilston using the comparable method, what were your comparables like and why did you need to expand your search?
I undertook my analysis in accordance with Comparable evidence in Real Estate Valuation 2019. I established my hierarchy of evidence (contemporary & similar property). My initial evidence I collated was historic (category B) so I expanded my search to source CAT A evidence. I was aware of a nearby scheme which was directly comparable. The evidence sourced reflected current values.
What is the difference between Freehold and Leasehold?
Freehold means that you own the building and the land it stands on outright, in perpetuity. It is your name in the land registry as “freeholder”, owning the “title absolute”.
Leasehold means that you just have a lease from the freeholder (sometimes called the landlord) to use the home for a number of years. The leases are usually long term.
What is the definition of an internal and external valuer?
Set out in RICS Valuation – Professional Standards 2018 (Red Book)
Internal Valuer – A valuer who is in the employ of either the enterprise that owns the assets, or the accounting firm responsible for preparing the enterprise’s financial records and/or reports. An internal valuer is generally capable of
meeting the requirements of independence and professional objectivity in accordance with PS 2 section 3, but may not always be able to satisfy additional criteria for independence specific to certain types of assignment.
External Valuer – A valuer who, together with any associates, has no material links with the client, an agent acting on behalf of the client or the subject of the
assignment.
Before commencing a valuation instruction, what three steps must you first undertake?
CIT.
- Competence – do you have correct levels of skills, understanding and knowledge? (SUK). If not, refer to RICS Find a Surveyor tool
- Independence – check for any conflicts or personal interests
- Terms of Engagement – set out in writing full confirmation of instructions prior to starting work, confirm competence of valuer the extent and limitations of valuer’s inspections must be stated.
What would be the timeline of a valuation instruction? (16 Steps)
- Receive instructions from client
- Competence (Skill, Understanding, Knowledge)
- Independence - COI/personal
- Terms of engagement to the client (CIT)
- Receive terms of engagement signed by client
- Gather information – leases, title documents, planning information, OS plans etc.
- Undertake due diligence – check information for any adverse material matters
- Inspect and measure
- Research market and assemble, verify and analyse comparables
- Undertake valuation
- Draft report
- Have valuation and report considered by another surveyor for checking purposes
- Finalise and sign report
- Report to client
- Issue invoice
- Ensure valuation file in good order for archiving
What statutory due diligence are you required to carry out when undertaking a valuation, and why?
To check that there are no material matters which could impact the valuation.
Asbestos register, business rates/council tax, contamination, Equality Act compliance, environmental matters (high voltage power lines, electricity sub-stations, telecom masts etc), flooding, H&S compliance, fire safety compliance, highways (check roads adopted), legal title and tenure (check boundaries, ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves), public rights of way (from an OS sheet), planning history and compliance (check any onerous planning conditions, conservation area, listed, whether subject to s.106/CIL)
What is the methodology of the Comparable method of valuation?
- Identify comparables
- Verify details, analyse headline rent to give net effective rent
- Assemble comparables in a schedule; matrix with weighting
- Adjust comparables
- Analyse comparables to form an opinion of value, stand back and look
- Report value
What RICS guidance would you have regard to when using the comparable method?
New Guidance Note (Comparable Evidence in Real Estate Valuation 2019) published in October 2019.
Scope:
1. principles of the use of comparable evidence
2. encourage consistency
3. issues of availability of comparable evidence
4. potential sources
RICS Information Paper on Comparable Evidence in Property Valuation 2012 (ARCHIVED in 2018, but still useful)
Cat A - direct comparables - completed, asking
Cat B - general market data - historic, indirect
Cat C - other sources -
How do you find relevant comparables?
Inspection of an area to find agent’s boards
Visit/speak to local agents
Auction results (beware that these are gross prices, and may also be special purchaser/insolvency sale)
In house records
Databases and websites, such as Rightmove, Landinsight, land registry.
What is the investment method of valuation?
Used when there is an income stream to value. The income is capitalised using a yield to produce a capital value
Conventional method assumes growth implicit approach – implied growth rate is derived from the market capitalisation rate (yield).
What are the different types of methodologies you would use with the investment method?
Conventional method Term and Reversion Hardcore and layer method Hardcore and top slice method DCF
Tell us about the conventional method
Rent received or Market Rent x Years Purchase = Market Value (rent/yield comparables important)
Growth is implicit in the yield
Years Purchase = (1-PV)/i
What is the All Risks Yield (ARY) and what does it reflect?
The remunerative rate of interest used in valuation of fully let property let at Market Rent reflecting all the prospects and risks attached to particular investment.
It is an implicit method of valuing, as risk and rental growth is wrapped up in the yield.
Prospects/Risks include: obsolescence, voids, etc.
Can be used to value reversionary properties – just apply same ARY to the term and reversion.
Tell us about the DCF method
Usually used for worth calculations for a specific investor. They have a target rate of return.
A growth explicit investment method of valuation.
Project the assumed cashflows over the assumed holding period to exit, enter an exit value using ARY, then discount the cashflow back to today at an investor’s target rate of return.
For what valuations is DCF method typically used?
Used for a number of valuations where the projected cash flows are explicitly estimated over a finite period e.g.
- Short leasehold interests
- Properties with income voids
- Phased development projects
- Non-standard investments (say with 21 year rent reviews)
- Over-rented properties
Why do we discount in a DCF?
To reflect the time value of money. The discount rate will always reflect the investor’s perception of risk. Also known as the capitalisation rate.
What is the PV of £1 formula?
PV of £1 = 1
÷
(1+i)n
‘i’ is the yield that the valuer thinks is appropriate.
‘n’ is the term in years (to next rent review)
When was the Red Book’s UK National supplement effective from?
Issued November 2018, effective from 14 January 2019
What is the Red Book’s purpose?
COT.
Consistency, objectivity, transparency
- Consistency in approach
- Credible and consistent valuation opinions
- Independence, objectivity, transparency
- Clarity regarding TOEs
- Clarity regarding Basis of Value
- Clarity in reporting relevant matter in the report
Reduce the risk of negligence claims - “Framework for best practice”
What does the Red Book NOT do?
Instruct members on how to value in individual cases
Prescribe a format for reports
Override standards specific to jurisdictions
Who does the Red Book apply to?
All members and regulated firms MUST comply with Parts 3 and 4 of the global Red Book.
Part 3 – PS 1 and 2
Part 4 – VPS 1-5
What are the RICS Professional Standards (PS) in the Red Book?
They are Part 3 of the Red Book.
PS 1: Compliance with standards and practice statements where a written valuation is provided
PS 2: Ethics, competency, objectivity and disclosures
No departure is permitted from PS 1, where a written valuation is provided, or PS 2 in these global standards, which are mandatory in all circumstances.
What are the RICS Global Valuation Practice Statements (VPS)?
They are Part 4 of the Red Book.
VPS 1: Terms of engagement (scope of work)
VPS 2: Inspections, investigations and records
VPS 3: Valuation reports
VPS 4: Bases of value, assumptions and special assumptions
VPS 5: Valuation approaches and methods
What does VPS 2 (Red Book) say about inspections?
They must always be carried out to the extent necessary to produce a professionally adequate valuation. Limitations must be recorded in TOE (VPS 1) and the report (VPS 3). A proper record of the inspection and investigations must be kept.
