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APC Commercial Real Estate 2021 - Core > valuation > Flashcards

valuation Flashcards

1
Q
  1. What should you consider if you are instructed to value a property ?
A

Competence Independence Terms of engagement

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2
Q
  1. Who is a registered valuer ?
A

A registered valuer is a valuer who: • adheres to the Red Book valuation standards• is committed to openness and transparency• are experts in their field, delivering credible and high-quality reports.

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3
Q
  1. What is a valuation registration scheme ?
A

Valuer Registration is a risk monitoring and quality assurance programme which checks compliance with the RICS Red Book. RICS Valuer Registration is an independent system of regulatory monitoring, which includes a register of valuers. Monitoring by RICS Regulation begins as soon as members sign up to Valuer Registration.

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4
Q
  1. What are the aims of the valuation scheme
A

A- To improve the quality of valuation and ensure the highest possible professional standards. B- To meet the RICS requirements to self regulate effectively C- To protect and raise the status of the valuation profession as the leading expertise in valuation.

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5
Q
  1. How do you become a registered valuer ?
A

Application form, which sets out how you met the competency requirements for Valuer Registration.A period of valuation-based experience (maximum of 100 days), signed off by a Registered Valuer.A single case study submission using work-based evidence.CPD record.

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6
Q
  1. What is yield
A

Yield is a return measure for an investment over a set period of time, expressed as a percentage.

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7
Q
  1. How do you calculate using term and reversion
A

Term: (1) PV= 1/(1-i)^N (2) Term Rental value x PVReversion: (1) YP= 1/yield (2) YP 2 year=1/(1+i)^n (3) Deferred YP: YP x Yp 2 year (4) Capital value: Deferred YP x rental valueGenerally used when asked to value an interest with rent renewals and under rented properties.

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8
Q
  1. Define all risk yield
A

The rate used on fully let out building at market rent reflecting all the prospects and risks to a particular investment

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9
Q
  1. What are the main changes to the new Red book ?
A

PS1- written means paper, electronic or digital means or Automated Valuation ModelPS2- Reinforces independence and objectivity. Professional scepticism VPS3- Reinforces the need for valuation reports to state clearly/ understandably what the valuation approach was and the relevant reasoning. Include details on sustainabilityVPGA1- Sets out that performance standards are required when valuing for financial statementsIVS410- apply a minimum of two approaches and recognized methods to value development propertyVPGA 8- Only where existing market evidence would support this, or where in the valuer’s judgement market participants would expressly reflect such matters in their bids, should sustainability characteristics directly influence value(s) reported.AVM considered written valuation

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10
Q
  1. Please explain the structure of the red book ?
A

1, Introduction 2, Glossary 3, Professional standards 4, Valuation technical performance standards 5 Valuation practice guidance applications 5 International valuation standards

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11
Q
  1. When inspecting the site in Kingston did you have regard for any guidance
A

VPS 2 and PS2

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12
Q
  1. What is effective date of the most up to date Red book ?
A

Jan-20

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13
Q
  1. What is the difference between a red book valuation and a non red book ?
A

One has more liability than the other.

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14
Q
  1. Can a desktop valuation be a red book valuation ?
A

Yes For revaluation without re-inspection. Valuer to make sure there isn’t a material change.If agreed with the Client and set out within the terms of engagement and valuation report.

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15
Q
  1. What due diligence do you need to undertake when carrying out a valuation ?
A

a. Asbestos register b. Business rates c. Contamination d. Equality act compliance e. Environmental matters f. EPC rating g. Flooding h. Fire safety compliance i. Health and safety compliance j. Highways k. Legal title and tenure l. Public rights of way m. Planning history

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16
Q
  1. In what circumstance shall a red book not be used ?
A

In all circumstances except for the exceptions

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17
Q
  1. What are the exceptions of the Red book ?
A

a. Advice provided in preparation for and during negotiations or litigation b. Valuer performing a statutory function except for the provision of a valuation for inclusion in a statutory return to a tax authority.c. Valuation is provided for internal purposes without liability and not communicated to 3rd partyd. Valuation is provided as part of agency or brokerage in anticipation for receiving instructions. e. Valuation advice is provided in anticipation of giving evidence as an expert witness

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18
Q
  1. Please define Investment value
A

The value of an asset to a particular owner for individual investment or operational objectives

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19
Q
  1. Please define market value
A

The estimated amount of which an asset or liability should exchange for on a valuation date between Willing buyer and seller In an arms length transaction After proper marketing Both parties have acted knowledgeably, prudently and without compulsion.

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20
Q
  1. Please define fair value
A

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

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21
Q
  1. Please define market rent ?
A

The estimated amount in which an interest in a property should lease for between A- a willing lessee or lessorB- On appropriate lease terms C- In an arms length transaction D- After proper marketing E- Both parties have acted knowledgeably, prudently and without compulsion.

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22
Q
  1. What method would you use to value a cinema ?
A

Profits method

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23
Q
  1. What are the key headings within a valuation report ?
A

a Identification and status of the valuerb Identification of the client and any other intended usersc Purpose of the valuationd Identification of the asset(s) or liability(ies) valuede Basis(es) of value adoptedf Valuation dateg Extent of investigationh Nature and source(s) of the information relied uponi Assumptions and special assumptionsj Restrictions on use, distribution and publication of the reportk Confirmation that the valuation has been undertaken in accordance with the IVSl Valuation approach and reasoningm Amount of the valuation or valuationsn Date of the valuation reporto Commentary on any material uncertainty in relation to the valuation where it is es-sential to ensure clarity on the part of the valuation user. A statement setting out any limitations on liability that have been agreed.

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24
Q
  1. What are the key headings with terms
A

a Identification and status of the valuerb Identification of the client(s)c Identification of any other intended usersd Identification of the asset(s) or liability(ies) being valuede Valuation (financial) currencyf Purpose of the valuationg Basis(es) of value adoptedh Valuation datei Nature and extent of the valuer’s work – including investigations – and anylimitations thereonj Nature and source(s) of information upon which the valuer will relyk All assumptions and special assumptions to be madel Format of the reportm Restrictions on use, distribution and publication of the reportn Confirmation that the valuation will be undertaken in accordance with the IVSo The basis on which the fee will be calculatedp Where the firm is registered for regulation by RICS, reference to the firm’s complaints handling procedure, with a copy available on requestq A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulationsr A statement setting out any limitations on liability that have been agreed.

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25
Q
  1. What part of the RED book relates to terms of engagement ?
A

VPS1

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26
Q
  1. What part of the red book relates to market uncertainty ?
A

VPGA10Material uncertainty must be explicitly stated.

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27
Q
  1. What does VPS stand for ?
A

Valuation Technical Performance standards

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28
Q
  1. What does VPGA
A

Valuation Practice Guidance Applications

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29
Q
  1. What methods did you utilise in Kington ?
A

Comparative and Residual

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30
Q
  1. How do you calculate a residual valuation ?
A

GDV-TDC-Profit= site value using market inputs

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31
Q
  1. How do you come to a capital value using the Investment method ?
A

Work out the year purchase and then multiply this with the rental value

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32
Q
  1. How did you carry out a valuation ?
A

a. Receive instructions from the client b. Check competence. Skills, understanding and knowledge c. Check independence d. Issue terms- Competence, Independence, Terms e. Receive signed terms of engagement f. Gather due diligence info and carry it out. Check no matters that could adversely impact g. Inspect and measure h. Research market and assemble, verify and analyse comparable i. Undertake valuation j. Draft report k. Get senior surveyor to review l. Finalise and sign report m. Send report to client n. Issue invoice

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33
Q
  1. If I was selling a bowling alley what method would you use ?
A

Profits

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34
Q
  1. What dictates the amount of profit you put on a scheme?
A

It depends on the level of risk

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35
Q
  1. How do you value affordable housing units?*
A

Using a discounted cashflow factoring rental value, a discount rate and management costs

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36
Q
  1. What makes a valuation Red Book?*
A

Compliance with the Professional Standards and the Valuation Technical Performance Standards

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37
Q
  1. What does VPS 1 contain in the Red Book ?
A

Terms of Engagement

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38
Q
  1. How do you define true yield ?
A

Assumes rent is paid in advance in advance and not in arrears

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39
Q
  1. How do you define gross yield
A

The yield not adjusted for purchasers cost (Such as an auction result)

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40
Q
  1. How do you define net yield ?
A

The resulting yield adjusted for purchaser costs

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41
Q
  1. How do you define equivalent yield
A

Average weighted yield when a reversionary property is valued using an initial and reversionary yield.

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42
Q
  1. How would you define reversionary yield ?
A

Market rent divided by current price on an investment let at a rent below market rent

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43
Q
  1. How do you define initial yield
A

Simple income yield for current income and current price

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44
Q
  1. How do you define running yield ?
A

The yield at a moment in time

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45
Q
  1. How would you value an affordable rent unit ?
A

The capitalised net annual rents (for a given time period at a given discount rate) from the social rented, affordable rented and intermediate rent, and the rental element of the shared ownership units

46
Q
  1. What is the timeline of a valuation
A

Receive InstructionsCheck CompetenceCheck that there are no conflicts of interestIssue terms of engagementReceive signed terms of engagementGather informationUndertake due diligence Inspect and measureResearch market and assemble, verify and analyse information. Undertake valuationDraft reportCheck by another surveyorFinalise and sign reportReport to client Issue invoiceArchive file.

47
Q
  1. What method of valuation would you use to establish rents and yields ?
A

Comparable

48
Q
  1. Why was the valuation scheme was brought in ?
A

Brought in as a result as the 2008 crash and brought in more accountability.

49
Q
  1. Why would you use profits to sell a bowling alley ?
A

It is used when the physical buildings are normally only sold as part of a business.

50
Q
  1. What are the different purposes of valuation?*
A

Internal and secured lending

51
Q
  1. How do you calculate using the hardcore method ?
A

Calculate Hardcore- (1) Years purchase x Existing rentCalculate incremental rent= (1) work out deferred YP (2)Difference in existing rent and market rent (3) Deferred YP x difference in rent Capital value= Hardcore + incremental

52
Q
  1. How do you evaluate your comparable evidence? [Hierarchy of evidence]
A

Category A- Direct comparable- completed transactions of identical properties Category B- general market data than can provide guidance- DatabasesCategory C- other sources

53
Q
  1. What are the five methods of valuation ?
A

Residual Investment Depreciated replacement costs Profits Comparison

54
Q
  1. What is a residual method of valuation ?
A

Is a method of valuation used to establish a market value of a site based on market inputs at a particular moment in time and on a valuation date. GDV-TDC-Profit = Site value

55
Q
  1. What is a DRC method of valuation
A

Method used to value public and specialist buildings. i.e. school, churches, town halls, airports, oil refinery, town centers etc. Modern equivalent - obsolescence + value of site = value. DO not guess the percentage on Obsolescence and this comes with experience.

56
Q
  1. What is the profits method of valuation
A

Not competent etc Profits method is based on the profit produced by the business operating in a premises. Gross earnings- Expenses = profit Profit @ 50% = Annual rental value Annual rental value x yield = Capital valueStand back and look. Need to have knowledge of particular property.

57
Q
  1. Is there a UK Variant of the red book
A

RICS Valuation - Global Standards 2017: UK national supplement effective 14 January 2019

58
Q
  1. What does the UK supplemental to the red book include if so what does it include ?
A

a. Introduction b. Professional standards c. Valuation Technical Performance Standards d. Valuation practice Guidance Applications e. Summary of changes

59
Q
  1. When would you use the profits method:
A

Used for income-producing properties that, due to location or some other factor, enjoy a monopoly. It is used when the physical buildings are normally only sold as part of a business. Examples would be:• hotels;• golf courses and other purpose-built sport and leisure centers;• petrol stations; and• some restaurants.

60
Q
  1. What are the three valuation approaches ?
A

a. Income (Investment, profits and DCF) b. Cost approach (DRC and residual) c. Market approach (Comparable)

61
Q
  1. What is the full name of the Red book
A

RICS professional standards and guidance, globalRICS Valuation – Global StandardsEffective from 31 January 2020

62
Q
  1. What is PS1
A

Compliance with standards where a written valuation is provided

63
Q
  1. What is PS2
A

Ethics, competency, objectivity and disclosures

64
Q

Where do you source evidence of comparable land sales, what would you do if these could not be sourced?

A

Land regsitry, agents or our internal land team. Planning portal to identify developers.

65
Q

When was the VRS scheme implemented?

A

30-Apr-11

66
Q

How do you allow for material uncentainty

A

VPGA 10 - Matters that may give rise to material valuation uncertainty.Normally provided in qualtitative terms. Planning, market, socio economic factors etc.

67
Q

What are the most sensitive inputs to a residual valuation?

A

Intrest rates GDV Build costs

68
Q

What are the key parts of the Red book ?

A

PS1- Complaince where written vals is providedPS2- Ethics, competency, objectivity and disclosures VPS 1- Terms VPS 2- Inspection, records and investigations VPS 3- Valuation report VPS 4- Bases of value, assumptions and special assumptionsVPS 5- Methods of valuation and approachesInternational Valuation Standards

69
Q

What are the key works wehn there is market uncertainty ?

A

The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a “Global Pandemic” on 11 March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries. Market activity is being impacted in many sectors. As at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement.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 [this property] under frequent review.

70
Q

What is obsolescence

A

the process of becoming obsolete or outdated and no longer used.

71
Q

What are the three types of obsolescence

A

Functional ObsolescenceEconomic ObsolescencePhysical obsolescence

72
Q

What is a Functional Obsolescence

A

Functional obsolescence occurs when a property loses value due to its architectural design, building style, size, outdated amenities, local economic conditions and changing technology

73
Q

What is Economic Obsolescence

A

Economic obsolescence occurs when a property loses value because of external factors such as local traffic pattern changes or the construction of public nuisance type properties and utilities such as county jails and sewer treatment plants on adjoining property.

74
Q

What is Physical obsolescence

A

Physical obsolescence occurs when a property loses value due to gross mismanagement and physical neglect resulting in deferred maintenance that’s usually too costly to repair.

75
Q

What makes a good comparable

A

A property that is similar in terms of location, size, condition, tenure, incentive and covenant. A property that has the same or very similar characteristics to the property you are valuing.In land it will be a site that was similar in terms of location, condition, (greenfield or brownfield), affordable housing, s106 requirements and similar site.

76
Q

On Kingston, you visited site and completed a checklist of key features. What were those elements and how would they influence the residual land valuation?

A

Ground conditions EPC Access Restrictive covenants

77
Q

What is the name of the full name of the Red book ?

A

RICS professional standards and guidance, globalRICS Valuation – Global StandardsEffective from 31 January 2020

78
Q

What is the correct name for the red book

A

RICS Valuation – Global Standards

79
Q

Why would you use Term and Reversion ?

A

When the property is under rented

80
Q

When would you use the profits methods ?

A

Caravan Park Petrol stattions Car Parks Care Homes Pubs Hotels and leisure centres

81
Q

What is the process of valuing using the profits method ?

A
  1. Establish the fair maintainable trade based upon the Reasonable efficient operator expectations2. Arrive at gross and net profit3. Establish the Fair Maintainable Operating Profit based upon the Reasonable efficient operators profit. 4. Capitalise the Fair Maintainable Operating Profit5. Consider additions or deductions6. Arrive at a valuation
82
Q

How do you establish Gross Profit ?

A

Turnover less costs of saleDirect costs such as food & beverage for a hotel, staff costs for a care home, petrol for a petrol filling station

83
Q

What is net profit ?

A

Gross profit less indirect costsIndirect costs such as marketing, utilities, maintenance & property taxation

84
Q

How would you value using the profits method ?

A

Three year’s of accounts to establish fair Maintainable trade Deducted costs such as food, wages, utilities and maintenance costs to establish an opinion of the FMOPResearch comps to establish YP and then times the FMOP by the YP to reach a cpital value.

85
Q

What should comparable evidence be ?

A

Comprehensive – ideally several cases• Very similar – ideally identical• Recent – reflecting the current market• At arm’s length in the open market• Verifiable – as far as practicable• Reflecting demand – i.e. an active market

86
Q

What are market Transactions ?

A

Market transactions– Direct transactional evidence, sale prices– Publicly available information (Land Registry)– Published databases– Asking prices– Historic evidence

87
Q

What does land registry house prices exclude

A

Sales that have not been lodged with HM Land RegistrySales that were not for valuetransfers, conveyances, assignments or leases at a premium with nominal rent, which are:‘Right to buy’ sales at a discountsubject to an existing mortgageto effect the sale of a share in a property, for example, a transfer between parties on divorceby way of a giftunder a compulsory purchase orderunder a court orderto Trustees appointed under Deed of appointmentVesting Deeds Transmissions or Assents of more than one property

88
Q

What is Category A- Direct Comparable

A

Category A: direct comparables• Recently completed, nearidentical, with full information• Recent, similar, withincomplete but adequate info• Similar, under offer, but notyet completed• Asking prices

89
Q

Category B: general market data that can provide guidance

A

Published sources, databasesOther indirect evidence, e.gIndicesHistoric evidenceDemand/supply data for rent, occupation , investment

90
Q

What is category C ?

A

• Evidence from other real estate types and locations• Other background data e.g. interest rates, stock market

91
Q

What is the process of establishing comparative information ?

A

Search Assemble comparable in schedule Adjust using a hierarchy of evidence Analyse comparable evidence Report value and keep file note

92
Q

How do you record comparable evidence ?

A

Address, property type, location• Nature of asset being compared (F/h, L/h)• Legal details (lease liabilities, etc)• Property description, accommodation• Transaction type, date, financial details• Parties involved• Sources of information• Comments on reliability, quality of data

93
Q

How do you analyse comparable evidence ?

A

Converts raw data into supporting evidence• Establish points of comparison– Measurement standards, (e.g. IPMS)– Compare like with like• Adjusting comparable evidence1. Quantitative (size, condition , lease liabilities)2. Qualitative (location, view, market dependent)3. Use professional judgement and experience

94
Q

What happens if you have a shortage of comparable evidence ?

A

Look further afield; valuer’s expertise to the fore• Warn clients of uncertainty – NB. Not a sign ofweakness, Red Book requires it if appropriate• Enables valuation user to make better decisionsRequired by VPS 3 and VPGA10

95
Q

How to find comparable evidence ?

A

Drive through area to see demand- boards Speak to local agents Auction results DatabasesMarket sentiment Date of evidence

96
Q

What is a special purchaser

A

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.

97
Q

What is marriage value ?

A

An additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values.

98
Q

What is a special Assumption ?

A

An assumption that either assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date.

99
Q

What is the difference between value and worth ?

A

Value is based on comparable evidence and using the 5 methods of valuation Worth is the value of an asset to a particular owner or prospective owner for individual investment or operational objective. As per the red book

100
Q

What are the 10 VPGA’s ?

A

VPGA 1 Valuation for inclusion in financial statementsVPGA 2 Valuation of interests for secured lendingVPGA 3 Valuation of businesses and business interestsVPGA 4 Valuation of individual trade related propertiesVPGA 5 Valuation of plant and equipmentVPGA 6 Valuation of intangible assetsVPGA 7 Valuation of personal property, including arts and antiquesVPGA 8 Valuation of real property interestsVPGA 9 Identification of portfolios, collections and groups of propertiesVPGA 10 Matters that may give rise to material valuation uncertainty

101
Q

How Covid will impact property values ?

A

Material uncertaintyRICS published wording.

102
Q

How would you value over rented property using the investment method

A

Hardcore method Capitalise higher rent with higher yield. Lower rent at lower yield.

103
Q

When would you use the profits method ?

A

The Profits method could be applied when no comparable rental/sale transactions are available, and it’s often used for pubs, hotels, nursing homes (typically a business property with an element of a monopoly, with results in lack of comparable variables).

104
Q

Tell me of another way that you could calculate term and reversion

A

Term- use discounted cashflow to work out term Reversion Deffered Yp % x years perpetuity = new yp New YP x market rent = capital valueUsed for under rented property

105
Q

Tell me if another way to calculate hardcore and layer

A

Standard calculation of investment method for the under rented part at yield low yield Deffered yield calculation with higher cap rate due to uncertainty to calculate new YP. Then times the new YP by the difference between the under rented and market rent.Used for overented

106
Q

What are the 5 exceptions

A

Providing an agency or brokerage service Acting it preparing to act as an expert witness Performing statutory functions Valuations for internal purposes Valuation for negotiation

107
Q

What are the characteristics of a Grade A Building?

A
  • High quality finishes- Flagship building- Good accessibility- Good location- Tend to be newer or refurbished- Well maintained by a professional firm- Sufficient amount of lifts - Air conditioning- International occupiers- Sustainable certification- Built by a reputable developer- Sufficient parking- Strong amenities (f&b, gyms, parks, conference centers)
108
Q

How would you calculate an exit value in a DCF?

A

Apply a YP into perpetuity (NIY) rather than use an equated yield

109
Q

How would you choose a discount rate for a DCF?

A
  1. CAPM - Risk free rake + risk premium (market and property specific risk)2. Investors target discount rate
110
Q

How would you value a pub?

A

I do not have the experience to effectively value a pub however the profits method would be appropriate.

111
Q

How would you value a ransom strip?

A

Stokes v Cambridge (1961) - the value is one third of the uplift in value from the development - however, it is down to the court’s discretion.

APC Commercial Real Estate 2021 - Core (17 decks)

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