Valuation Flashcards
1
Q
What is the full title of the Red Book?
A
RICS Valuation Global Standards plus UK Supplement
2
Q
When did the current edition of the Red Book come into force?
A
January 2020.
3
Q
Who are the International Valuation Standards Council?
A
global independent body overseeing valuation standards – not for profit. RICS & big 4 accountants.
4
Q
What editions of the Red Book have been in effect during your APC training period?
A
2017 and 2020. UK Supplement 2019.
5
Q
What is the purpose of the Red Book?
A
to provide a framework for uniformity and best practice.
6
Q
What is the purpose of the UK National Supplement?
A
provides supplementary information and guidance for valuers in the UK in accordance with UK law and accountancy practice.
7
Q
To what valuations does the Red Book apply?
A
all valuations with the exceptions of those listed in Professional Standard 1.
8
Q
What valuations are exceptions to the Red Book?
A
Agency, Litigation, Internal, Expert Witness, Statutory
9
Q
Can you name some valuations that are carried out for a statutory function?
A
rating, s18 diminution, CPO, 1954 renewals.
10
Q
What is the difference between Valuation Technical and Performance Standards (VPS) and Valuation Practice Guidance – applications (VPGA)?
A
VPS mandatory, VPGA advisory/guidance.
11
Q
What are the possible consequences if a valuer does not comply with VPS?
A
member may face sanctions from RICS in accordance with Rules of Conduct.
12
Q
What are the possible consequences if a valuer does not comply with VPGA?
A
may be used in court as best practice and count against valuer in case of negligence claim.
13
Q
Describe how departure from the Red Book mandatory requirements may be possible.
A
if requested by client and agreed in Terms of Engagement and referenced in report. May impact accuracy of valuation.
14
Q
What information would you require from a telephone enquier who asked ‘can you do me a valuation?’?
A
contact details (COI), property information, purpose of valuation, access details. Am I competent to undertake this?
15
Q
What do your valuation files contain?
A
COI check, TOE, inspection notes, evidence used to support valuation (comparables) and analysis, valuation rationale, report.
16
Q
What are the main contents of the Terms of Engagement for a valuation?
A
VPS 1 (TOE / Scope of Work) – 18 headings. Main ones arguably identification of client, identification of surveyor, identification of property, valuation date, fee basis, complaints handling procedure, nature and extent of work, assumptions/special assumptions, purpose of valuation, basis of valuation.
17
Q
How would you respond to a request to value a property from a pavement assessment only?
A
request all information possible (plans, up to date internal photographs etc.). Agree limitations on inspection in TOE and resport.
18
Q
Please name the Red Book bases of value.
A
market value, market rent, fair value, investment value.
19
Q
Please name the UK-specific bases of value.
A
Existing Use Value (and two for residential)
20
Q
What is the difference between a basis of value and a method of valuation?
A
basis = Red Book definition of value; method = process undertaken to arrive at value.
21
Q
Describe three assumptions that are usually made in producing a valuation. –
A
good title, all necessary planning permissions and building regulations, no hidden defects, services all in good working order.
22
Q
Give three situations when it would be appropriate to make a special assumption
A
valuing on the basis of a future planning permission, valuing on the basis of restricted marketing period, valuing on the basis of an occupier / VP (if otherwise); valuing on the basis of future improvements.
23
Q
Define market value in your own words.
A
the price that a property should exchange on a given date between a willing buyer and willing seller, after a proper marketing campaign, at arms length when all of the parties have acted knowledgeably, prudently and without compulsion.
24
Q
What do you consider Proper Marketing to be in the market value definition?
A
depends on the asset, but whatever exposure to the market is normative for that asset class in that location.
25
What is an arm’s length transaction?
the parties have not been previously connected or have special interests already in the property.
26
What is synergistic value?
the value of two purchases to a special purchaser, where the combination of them produce a greater value than the sum of their parts.
27
What is a special purchaser?
– a purchaser for whom the property gives special advantages and will therefore pay more than market value.
28
When is market rent not appropriate as a basis of value in providing a report on the rental value of a property, and why not?
lease renewals (s34); rent review (definition of rent governed by the lease).
29
When is fair value the most appropriate valuation basis?
valuation for financial accounts
30
What is a regulated purpose valuation?
used in the UK for company accounts.
31
What is an asset valuation?
valuation for accounting purposes.
32
When is existing use value the valuation basis?
for owner occupied, non specialised government purposes.
33
What is the fundamental difference between market value and existing use value?
– market value is the highest and best use.
34
When is DRC used in asset valuations?
– if there are no comps, no profits and no lease.
35
Name three situations that can adversely affect the certainly of valuations.
– unique features that impede comparability, limited information (restricted inspection, no lease), significant/disruptive events in the market.
36
Name the conventional methods of valuation.
– comparison, profits, DRC, investment, residual.
37
What are contemporary valuation methods?
DCF
38
What makes a property transaction comparable to the property being valued?
– similarity in one or more ways.
39
How many comparables are needed to produce a valuation?
– as many as possible
40
What is the longest time period before a valuation date that a transaction could be accepted as being comparable?
– depends on how quickly the market for that asset class / location moves, but generally 12 months.
41
What do you understand by the expression ‘weighting of comparable evidence’?
– different pieces of evidence may have more similarities to the subject property, so will be given more emphasis.
42
What do you understand by the expression ‘hierarchy of evidence’?
– attaching weight/importance to different transaction types.
43
What is ‘interpolation’ of comparable evidence?
– working within existing evidence.
44
What is ‘extrapolation’ of comparable evidence?
– working outside of existing evidence (high level of uncertainty)
45
What is the purpose of ‘zoning’?
to compare retail premises based on their frontage to depth ratios (it is a valuation technique, not a method).
46
What is the standard ‘zone depth’?
– 6.1m (in my experience).
47
How would you arrive at the market rent of the first floor of a retail unit?
– usually A/10 of ground floor. Comparables may also guide this.
48
How would you arrive at the market rent of a retail unit with a return frontage?
– apply a small increase to the Zone A (10% depending on the size of the return frontage) to account for the greater visibility to the high street.
49
How would you value a shop unit for rent review with frontages on two roads (ie, it is a through unit)?
– zone back from both frontages.
50
How would you determine the market value of an investment property let on internal repairing terms?
– apply a higher yield to account for landlord’s responsibility for external repair, insurance and management.
51
What factors make up the all risks yield?
– all factors are implicit in the ARY, but include repair, covenant strength, lease terms, unexpired period, under/over/market rented
52
What is the market capitalisation rate?
– 100 / ARY. The rate at which the market capitalises income.
53
How would you value a greenfield site with planning permission for residential development?
– residual valuation. Search for comparable evidence to see if that supports it.
54
Describe how you have carried out (or would carry out) a residual valuation?
– GDV – costs – fees - profit = land value
55
What costs did you deduct (or are deducted) in your residual valuation?
– demolition/clearance, build costs (from BCIS), contingency, costs of finance, agency fees.
56
How did you calculate developers profit in your residual valuation?
– (DON’T MENTION A NUMBER ON THIS QUESTION). Usually a % of GDV.
57
What are the usual acquisition costs of a development site?
– agent fees, solicitor fees, VAT on both, SDLT.
58
What is a ransom strip?
– strip of land which is integral to a development site (access, etc.) but which is separately owned.
59
What is ransom value?
– value of ransom strip.
60
How would you value a ransom strip?
- % of added value to the main development site.
61
What does the case of Stokes v Cambridge mean to you?
– case law on ransom value
62
What is the profits method also known as?
– accounts method
63
Name three property types that might be valued using the profits method?
– hotels, cinemas, golf courses
64
Why are certain properties valued by the profits method?
– have a monopoly on the local market and no comparables, so are valued based on their trading history and potential. The use cannot be separated from the building / site.
65
Explain a basic approach to the profits method
– estimate of annual turnover (net of VAT) by reasonably efficient owner, deduct operating costs to give net profit which is then capitalised.
66
What valuation checks can be carried out on a valuation produced by the profits method?
– sensitivity analysis
67
When is the contractors method used in practice?
– as a last resort. For buildings where there are no comparables and no income to capitalise.
68
Why is the contractors method also known as the contractors test?
– test for valuing comparables with big adjustments.
69
What is another name for the contractors method / test?
Depreciated Replacement Cost
70
Explain the basic approach to the DRC.
– cost of producing functionally equivalent building (use BCIS), discount for depreciation, add the cost of the existing land for it's specific use, add the two. Step back and double check.
71
How would you value a property for which there are no comparables?
Find some and make adjustments. Try and double check using investment method/depreciated replacement cost/profits if able.
72
Why is the YP single rate table also known as the Present Value of £1 per annum?
Because it gives the present value of £1 per annum.
73
What are the three principle investment opportunities?
Gilts, equities, property.
74
What is a bond investment?
Fixed capital with a fixed return.
75
What is the major attraction of property over the other two major investment opportunities?
It can give a higher return with proactive, positive management.
76
What are the major disadvantages of property over the other two major investment opportunities?
Property is less liquid, requires management, often non-divisible and has high transfer costs.
77
How did the all risk yield get its name?
It is named the ARY because it incorporates all of the risks.
78
What is another name for the all risks yield?
The market capitalisation rate.
79
What is an initial yield?
Rent as a percentage of capital invested.
80
What is a net initial yield?
Rent as a percentage of gross capital invested, including acquisition costs and tax.
81
What are the costs that a purchaser must incur when acquiring a property investment?
Agent's fees, solicitor's fees, SDLT and non-recoverable VAT.
82
What are the current SDLT rates?
From March 2016: 0% on the first £150,000; 2% on the next £100,000 and 5% on everything above £250,000.
83
How is rental and capital growth accounted for in a conventional investment valuation?
They are implicit in the ARY.
84
What is a reversionary investment?
Where the rent is likely to change (currently under or over rented) at a specified time (renewal, rent review etc.).
85
What techniques can be used to value an under-rented reversionary investment?
Term & Reversion or Hardcore & Layer
86
Explain the process of the term and reversion technqiue.
Capitalise the passing rent under the term until the review or reversion with an appropriate yield; capitalise the reversionary rent into perpetuity at an appropriate yield (to reflect different risk), deferred for the term period.
87
Explain the process of the hardcore and layer technique.
Capitalise the passing rent into perpetuity. Capitalise the topslice (additional) into perpetuity and defer for a period of time. Different yields to reflect different risk.
88
How would you value an over-rented investment?
Hardcore and layer (block and froth).
89
What is a reversionary yield?
Market rent expressed as a percentage of purchase price where the property is currently under-rented. (The yield appropriate at the reversion).
90
What is an equivalent yield?
The weighted average of the initial and reversionary yields.
91
What is an equated yield?
The internal rate of return without growth.
92
What is a true equivalent yield?
The yield where the rent is received quarterly in advance.
93
What do you understand the topslice to be?
a) additional rent at reversion when the property is currently under-rented;
b) overage when over-rented;
c) a leasehold profit rent.
94
How is topslice income valued?
At a higher rate than the core to reflect the higher risk.
95
What is compounding?
The process of valuing when values rise year on year.
96
What is discounting?
Calculating what investment needs to be made today to provide a certain future amount over a time period at a rate of interest.
97
Where would you find the Present Value?
Parry's Valuation and Investment Tables
98
How is growth taken into account in a conventional investment calculation?
Implicitly - the greater the growth, the lower the yield
99
What is a reversionary freehold?
An investment let at something other than market rent
100
What is the margin of error for a valuation?
Depends on the complexity but perhaps 10%?
101
What are some of the drivers of value of offices?
Location, transport links, specification (inc AC), services (and cost of), layout
102
What are some of the drivers of value for retail?
Pedestrian flow, frontage/prominence, adjacent occupiers, local catchment
103
What are some of the drivers of value for industrial?
Access to transport route, loading, height, yard size, floor loading, power supply
104
What are some of the main drivers of value for investments?
Good fundamentals for the asset, covenant strength, lease terms, underpinning
105
What changes were made to the 2020 Red Book from the 2017?
Aligns with IVS, mentions professional scepticism for comparable evidence PS2.
106
What is the structure of the Red Book?
Professional Standards 1 & 2 – compliance & ethics. Valuation Technical and Performance Standards 1-5 – mandatory. TOE, inspection, reports, bases of value & approaches/methods. Valuation Applications (VGPA) – 1-10 – best practice. VGPA 8 – valuation of real property interests.
107
What is VPS 2?
Inspection – proper records must be kept. Due diligence might include business rates, EPC, title, planning history, highways.
108
When would you adopt the comparable method?
When valuing leasehold property or freehold property if the market is dominated by owner occupiers.
109
When would you adopt the investment method?
If valuing freehold and the available comparables are leases. If the property is being sold with income.
110
When would you adopt the profits method?
If the property has a monopoly on the local market and the use of the property cannot be extracted from the property itself (say a cinema, hotel, golf course..).
111
When would you adopt the residual method?
When valuing land that is suitable for development.
112
When would you adopt the depreciated replacement cost method?
When there are no comparables at all and no trade/income.
113
What is the format of the residual method?
Simplified version is Gross Development Value, less build costs, less developer’s profit equal cost of land. Build costs include professional fees (architect, QS etc), cost of finance, demolition and clearance).
114
What is the difference between a residual valuation and a development valuation?
A residual valuation seeks to find the value of the land where the developer’s profit is already known; a development valuation seeks to find the profit available where the price of the land is known.
115
What is the format of the profits method?
Turnover, less costs of generating turnover = net operating profit which is then capitalised.
116
What is the format of the DRC?
Gross replacement cost (cost of constructing/purchasing functional equivalent building) less depreciation equals net replacement cost. Add the value of the site to give valuation.
117
What factors affect a property’s value?
Age, specification, location, size, covenant strength, unexpired term, the market.
118
How did the height of the industrial premises at Hazel Grove affect the valuation?
Eaves height was c.5m – considered normal for secondary/tertiary property but institutional spec c.8m.
119
What factors affected your valuation at Hazel Grove?
Location – at the end of a cul-de-sac industrial estate without particularly good major road access. Site cover – potential to extend in future. Office fitout – high specification but approx. 28% ratio which is high. Freehold title. Lack of similar stock in the market.
120
How many comparables did you have for Hazel Grove?
4 – best was in Bredbury. Better location for motorway access but bigger so element of quantum. Required adjustment.
121
Where did you get your comparables?
EGI, Place North West, other agents.
122
How did you adjust your comparables for Hazel Grove?
Deducted 10% against Bredbury to account for location; added 5% for quantum. Similar site cover and office ratio.
123
What is Market Value?
The price at which a property is expected to exchange on a given date between willing parties at arm’s length, after proper marketing and where the parties have acted knowledgeably, prudently and without compulsion.
124
What else does VPS 4 say?
Bases of value – market rent, investment value (value of an asset for specific investment objectives), fair value (for company accounts/financial reporting – transfer of the asset between specified parties to reflect their respective interests).
125
What yield did you use for the portfolio in Stockport? Why?
All risks yield (gross). Comparables suggested 8% for industrial local covenants and 10% for offices – required considerable modernisation and very cellular.
126
What other yields are you aware of (other than gross/NI)?
Reversionary yield. Equivalent yield (weighted average of initial and reversionary yield).
127
What information did you have given that you could not inspect the portfolio at Stockport?
Tenancy schedules and floor areas from the property manager. Assumptions that the properties were in repair unless property manager confirmed otherwise in TOE. Business rates, EPCs.
128
What were the risks for the Stockport portfolio?
Offices would be hard to re-let without substantial modernisation. When lease ended, redevelopment to residential might be considered (s30 & compensation possibly).
129
What were the covenant strengths like for Stockport?
All local covenants except for one industrial occupier (GAP). Applied an appropriate yield.
130
Talk about valuing a leasehold interest.
Establish difference between market rent and passing rent (= profit rent). Capitalise up to reversion (RR, LR, break).
Dual rate = YP single rate plus sinking fund.
131
What yield would you apply to a leasehold interest?
Depends on comparables, but add 1% to ARY for freeholds?
132
What is a sinking fund in valuation terms?
Recoups capital spent on purchase of wasting asset.
133
Why is it hard to undertake valuations during Covid?
Lack of transactions generally, hard to set a tone. Some transactions forced - need to sell due to insolvency etc.
