Valuation Flashcards
5 Methods of valuation
- Profit 2. Residual 3. Investment 4. Contractors / Replacement cost 5. Comparable
part 4: Valuation technical and performance standards
VPS 1 - Terms of engagement (scope of work) VPS 2 - Inspections, investigations and records VPS 3 - Valuations reports VPS4 - Bases of value, assumptions and special assumptions VPS 5 - Valuation approaches and methods
what is in a terms of engagement
1) Identification of the Client 2) Identification of any other intended users 3) Purpose of the valuation 4) Identification of the asset or liability to be valued 5) Identification and status of the Valuer 6)Basis of value adopted 7)Valuation currency 8)Valuation Date 9)Conflict of Interest 10)Assumptions to be made 11)Limitations 12)Special Assumptions 13)Nature and sources of information upon which the valuer will rely 14)Restrictions on use, intended users, third parties’ liabilities, distribution and publication of the report 15)Format of the Report 16)Fees and basis on which the fee will be calculated 17)Confirmation of compliance 18)Complaints handling 19)Professional Indemnity Insurance 20Limitations of liability
3 type of approaches
Market approach Income approach cost approach
Bases of value
Market value Market rent Investment value Fair value
Market value
the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.’
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 and where the parties had each acted knowledgeably, prudently and without compulsion.’
Investment value
‘the value of an asset to a particular owner or prospective owner for individual investment or operational objectives.’
Fair value
The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties’
Special assumption
When an assumption assumes facts that differ from those existing at the valuation date. They are assumptions being made about a future state or event. e.g. Property being vacant but occupied on valuation date or Planning permission being granted.
Assumption
The Valuer accepts something is true without the need for specific investigation or verification e.g. Title Boundaries, Conditions of buildings, services, contamination and hazardous substances, environmental matters, sustainability
Comparable method
use by reviewing evidence of recent sale of similar properties size age condition location quality
Profit
Used for property valuation where the major value component is driven by the profitability of the business that occupy the building (hotels, pubs, cinemas, petrol station)
Residual
Used for valuing developments to establish the viability/profitability. o Method: Gross Development Value (GDV) minus Total Development Cost minus Profit and Purchaser’s Costs = Site Value (NOT market value) (Gross development value less Development costs less Development profit)
Investment
Used to value properties held as investments, when there is an income stream to value e.g. Tenanted Farms There are 2 methods to calculate the Present Value (PV)of a property investment–All Risk Yields (AYR) or Discounted Cash Flow (DCF).
Contractors method
Help to identify the value of unusual or very specialist properties that rarely come to the market
Factors that should be noted during inspection
o Characteristics of surrounding area o Characteristics of the property o Dimensions and areas of the land and buildings o Construction and age of buildings o Use of land and buildings o Nature of accommodation o Nature of the installations, amenities and services o Fixtures, fittings and improvements o Plant/equipment that forms an important part of a building o State repair and condition o Natural hazards e.g. ground instability, mining, radon gas, flooding etc o Non-natural hazards e.g. Contamination o Other hazardous material e.g. asbestos o Physical restrictions o Also look at: Improvements (leasehold properties), Planning controls, Local or State property taxes, Substantial outgoings and running costs.
what are the heading found in a Valuation report
The headings included in the terms of engagement plus o Valuation approach and reasoning o Amount of the valuation(s) o Date of valuation report
Personal identity insurance
100,00 or less - 250,00 100,001 to 200,000 - £500,000 200,001 and above £1m Up to and including 2.5% - greater of 2.5% of the sum insured, or £10,000 over 500,000 - 2.5% of the sum insured 6 years run off cover For valuation D&R have cover up to 10 million
Changes to the RICS valuation - global standards 2020 from global red book 2017
Minor changes ps1 - clarify a written valuation as being both paper and electronic formats ps2 - introduces the concept of applying professional septicemic when considering evidence. changes to reference to rent book global, rather than just the Red Book.
Hope value
An element of market value in excess of the existing use value, reflecting the possibility of some more valuable future use.
special purchaser
A particular buyer for whom a particular asset has a special value because of advantages arising from its ownership that would not be available to other buyers in a market.
Marriage value
marriage value, arises from the combination of two or more assets to create a new asset that has a higher value than the sum of the individual assets.
comparable into three categories, forming a hierarchy of evidence:
•Category A – direct transactional evidence •Category B – general market data providing guidance rather than a direct indication of value, such as evidence from published sources, commercial databases, indices, historic evidence and demand/supply data •Category C – other sources, such as transactional evidence from other property types and locations and other relevant background data
Material uncertainty due to Covid
Our valuation(s) is / are therefore reported on the basis of ‘material valuation uncertainty’ as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty – and a higher degree of caution – should be attached to our valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of the Property under frequent review.
RICS VALUATION - Global standards part 3 - Professional standards
PS 1 - Compliance with standars where a written valuation provided PS 2 - Ethics, competency, objectivity and disclosures
Income approach
An approach that provides an indication of value by converting future cash flows to a single current capital value. ( Mast sites)
market approach
An approach that provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available.
cost approach
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when can it not be a Red book valuation
When not relied upon by a third party:
internal purposes
expert witness
Agency or brokerage
Performing statutory functions
Preparation for negotiations or litigation
when was the latest aaddition of the red book come into effect
31st January 2022
what updates have they made to the red book global?
Emphasising the need to agree clear and unambiguous terms of engagement, even when valuations are undertaken for excepted purposes
Requiring more detailed commentary on sustainability/resilience and environmental, social and governance (ESG) matters in VPGA 8 Valuation of Real Property Interests.
The term non Red Book should not be used in terms of engagement or reporting. Instead, the exception should be specifically stated and explained in the terms of engagement and valuation report.
What is the name given to the red book
RiCS valuations global standards
When do you required a red book?
when relied upon by a third party, ofent requested by solictior or accountant for securded lending, tax planning , probate, accounts pruposes, business planning, caplital gains
what are the relevent standard of measurement
RICS Property Measurement (2nd Edition, January 2018), incorporating the International Property Measurement Standards (IPMS)
do you have to use IPMS
IPMS is currently in transition within the industry and will eventually apply to all property assets in the future. However, the RICS recognises that the IPMS are not yet considered a suitable basis of measurement in all circumstances and we are bound to state our departure from these Standards, where it is deemed reasonable to do so.
majority of comparable transactions continuing to be measured on a Gross Internal Area basis, in accordance with the former bases of measurement stated within the COMP. For the specific purposes of valuing the subject Property, we have therefore assumed that our departure from the new Standards is suitably justified and have carried out our measurements on the basis of the recognised core definitions contained within COMP,
what is the difrance between DCF and T&R
dcf is based on cleint date rather than market and reprensent investment vlaue rather than market vlaue.
