Valuation Flashcards
What is the title of the key RICS document on Valuation?
RICS Valuation Global Standards (Issued November 2019, Effective 31 January 2020)
What is the structure of the Redbook Global?
It is in 6 parts:
- Introduction
- Glossary
- Professional Standards (MANDATORY)
- Valuation technical and performance standards (MANDATORY)
- Valuation Applications
- International Valuation Standards
What are the 2 professional Standards and what do they cover (PS)?
- PS1 - Compliance with standards where a written valuation is provided (including the 5 exceptions)
- PS2 - Ethics, competency, objectivity and disclosures (including conflict of interests)
What are the 5 sections of the Valuation technical and performance standards (VPSs)?
- VPS1 - Terms of Engagement (Scope of Work)
- VPS2 - Inspections, Investigations and Records
- VPS3 - Valuation Reports
4, VPS4 - Bases of Value, Assumptions, and Special Assumptions
- VPS5 - Valuation Approaches and Methods.
What are the 10 Valuation Applications (VPGAs) ?
- VPGA1 - Valuation for Inclusion in Financial Statements
- VPGA2 - Valuation of Interests for Secured Lending
- VPGA3 - Valuation of Businesses and Business Interests
- VPGA4 - Valuation of Individual Trade Related Properties
- VPGA5 - Valuation of Plant and Equipment
- VPGA6 - Valuation of Intangible Assets
- VPGA7 - Valuation of Personal Property, Including arts and Antiques
- VPGA8 - Valuation of Real Property Interests
- VPGA9 - Identification of Portfolios, collections and groups of properties.
- VPGA10 - Matters that may give rise to material valuation uncertainty.
RICS Global Standards gives 2 definitions of a valuer what are they?
Internal Valuer - A valuer employed by a company to value the assets of the company. The valuations are for internal use only and cannot be relied upon by third parties.
External Valuer - A valuer that has no material links with the asset or client.
What are the 3 first steps when undertaking a valuation instruction?
1, Competence - Are you competent to undertake the valuation. Do you have the necessary Skills, Understanding and Knowledge. If not refer the person to the Find a Surveyor service. (PS2)
2, Independence - THINK FIRST and then check for any conflict of interests or personal interests. (PS2)
- Terms of Engagement - Set out in writing your full confirmation of instructions to the client before starting and receive written confirmation. Confirm the competence of the valuer and extent and limitations of the inspection, (VPS1)
What are some examples of required Statutory Due Diligence?
- Asbestos Register
- Business Rates/Council Tax
- Contamination
- Equality Act Compliance
- Environmental Matters
- EPC Rating
- Flooding
- Fire Safety Compliance
- Health and Safety Compliance
- Highways
- Legal Title and Tenure
- Public Rights of Way
- Planning History and Compliance
Give an example timeline of a Valuation Instruction
- Receive Instructions
- Check Competence (SUK)
3, Check Independence - Issue ToE to Client
- Receive signed ToE
- Gather Information (Leases/Title Documents etc)
- Due Diligence
- Inspect and Measure
- Research Market
- Undertake Valuation
- Draft the Report
- Valuation to another Surveyor for Checking
- Finalise and Sign Report
- Report to Client
- Issue Invoice
- Ensure valuation file in good order for archiving
What are the 5 Methods of Valuation?
- Comparable Method
- Investment Method
- Residual Method
- Profits Method
5, Discount Replacement Cost (DRC)
Describe a simple methodology for valuation using the comparable method
- Search for and select comparable transactions
- Confirm and Verify details and adjust the Headline rent to arrive at the Net Effective Rent
- Place into a schedule
4,. Adjust the rents according to the Hierarchy of evidence
5, Analyse the rents and form an opinion of value - Report value and prepare a file note
Describe the 6 elements of the Hierarchy of Rental Evidence
- Open Market Lettings
- Lease Renewals
- Rent Reviews
- Third Party Determinations
- Sale and Leasebacks
- inter Company Transactions
How might you go about finding relevant comparable evidence?
Inspection of the local area for sale boards
Visit/speak with local agents
Auction results (EiG) (Beware as prices are Gross)
In House Records/Databases
Publicly available data sources
What guidance is available from the RICS on Comparable evidence?
RICS Guidance Note- Comparable evidence in real estate valuation 1st Edition (2019) which contains:
Principles of comparable evidence
Sources of comparable evidence
Recording comparable evidence
Analysis of comparable evidence
Dealing with a shortage of comparable evidence
Relevant Standards
When would you use the Investment Method of Valuation?
When there is an income stream to value.
How does an investment method valuation work?
Rental income is capitalised to produce a capital value.
What is the basic formula for a Conventional investment method valuation?
Rent/Market rent x Year’s purchase = Market Value
Why is comparable evidence important in an investment valuation?
Comparable evidence is essential to identify Market Rental Value and Yields
When would you use the Term and Reversion Method?
Used for reversionary investments where the market rent is more than the passing rent (Under Rented)
How is the Term and Reversion Method Calculated (Broadly Speaking)?
The rent for the term is capitalised to the next review/lease event at an INITIAL YIELD. Reversion to market rent is valued in perpetuity at a REVERSIONARY YIELD.
When would you use the Layer/Hardcore Method?
For Over Rented investments
How is the Layer/Hardcore Method Calculated (Broadly Speaking)?
Income flow is divided horizontally. The BOTTOM SLICE = Market Rent and the TOP SLICE = Passing Rent less Market Rent (PROFIT RENT). A Higher Yield is applied to the top slice to reflect the additional risk. Different Yields will be used depending on Comparable Investment Evidence and Relative Risk.
What is a Yield?
A Yield is a measure of investment return expressed as a percentage of capital invested.
How is a yield calculated?
(Income / Price) x 100 = The Yield
How would you calculate the YP from the Yield?
100 / Yield = Year’s Purchase (Years required for the income to repay the capital invested)
What are the current yields in Cardiff for the 3 main sectors?
OFFICE - 8.7% (General) 6.6% (Prime)
INDUSTRIAL - 8.8% (General)
RETAIL - 7.7% (General)
What are the factors of risk that should be considered when determining an appropriate yield?
Quality of the Location Quality of the Covenant Use of the property Lease Terms Obsolescence Voids (likely future risk) Security and Regularity of Income Liquidity (Ease of Sale) Prospects for rental and capital growth
Define an All Risks Yield
The remunerative rate of interest used to value fully let property, let at market rent, reflecting all prospects and risks associated with the investment
Define a True Yield
A yield calculated assuming rent paid in Advance
Define a Nominal Yield
Initial Yield, assuming rent paid in arrears
Define the Gross Yield
Yield which is NOT adjusted for purchaser’s costs
Define the Net Yield
Yield which has been adjusted for purchasers costs
Define the Equivalent Yield
The average of the INITIAL and REVERSIONARY yields.
Describe a simple methodology to find the Market Value using the DCF Method
- Estimate the CASHFLOW (Income less expenditure)
- Estimate the EXIT VALUE at the end of the holding period
- Select the DISCOUNT RATE
- Discount the Cashflow at the Discount Rate
- Value is the sum of the completed DCF to provide the Net Present Value (NPV)
