Valuation Flashcards
What is an internal valuer?
• Employed by a company to value their assets • Valuation for internal use only • No third-party reliance
What is an external valuer?
Has no material links with the asset to be valued or the client
What are the THREE steps you should undertake prior to commencing a valuation?
CCT: 1. Competence - check you have the correct level of skills, understanding and knowledge 2. Conflict of Interest - check you are able to act independently on the instruction 3. Terms of engagement - issue to the client and receive written confirmation
Why do you undertake statutory due diligence for valuations?
Confirm that there are no material matters which could impact on the valuation
What types of statutory due diligence checks would you undertake when valuing a property?
- Asbestos register 2. Business rates / Council tax 3. Contamination 4. Equality Act Compliance 5. Environmental matters (high voltage power lines, electricity sub-stations, telecoms masts etc.) 6. EPC rating if available 7. Flooding 8. Fire safety compliance 9. Health and safety compliance 10. Highways (check roads adopted with the local highways agency) 11. Legal title and tenure (check boundaries, ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves) 12. Public rights of way (from an OS sheet) 13. Planning history and compliance (check any onerous planning conditions, whether the property is in a conservation area / listed and subject to a s. 106 agreement or CIL)
What are the FIVE main methods of valuation?
- Comparable method 2. Investment method 3. Profits method 4. Residual method 5. Depreciated replacement cost method
What are the THREE valuation approaches set out in IVS 105 (Red Book) (MIC)?
- Market approach - (comparable)
- Income approach - converting income/cash into a capital value (investment, residual and profit)
- Cost approach - (DRC)
What are the SIX steps used when collecting comparable evidence?
- Search and select comparables (agent’s boards, online databases) 2. Confirm / verify information with a party directly involved in the transaction 3. Assemble comparables in a schedule 4. Interpret comparables using hierachy of evidence 5. Analyse comaprables to form an opinion of value 6. Report value and prepare file note
What guidance did the RICS recently release on using comparable evidence?
RICS Comparable evidence in real estate valuation, 2019
What are the THREE categories of evidence outlined in RICS Comparable evidence in real estate valuation, 2019?
Category A: direct comparables Category B: general market data Category C: other sources
What is the hierarchy of direct comparable evidence outlined in the RICS Comparable evidence in real estate valuation, 2019?
• Contemporary, completed transactions of near-identical properties for which full and accurate information is available (may include the subject property) • Contemporary, completed transactions of other, similar real estate assets for which full and accurate information is available • Contemporary, completed transactions of similar real estate for which full data may not be available • Similar real estate being marketed where offers have been made but a binding contract has not been completed • Asking prices (with careful analysis)
What is the hierarchy of general market data outlined in the RICS Comparable evidence in real estate valuation, 2019?
• Information from published sources or commercial databases • Other direct evidence (e.g. indices) • Historic evidence • Demand/supply data for rent, owner-occupation or investment
What is the hierarchy of other sources outlined in the RICS Comparable evidence in real estate valuation, 2019?
• Transactional evidence from other real estate type and locations • Other background data (e.g. interest rates, stock market movement and returns which can given an indication for real estate yields)
When would you use the investment method of valuation?
Used when there is an income stream to value
How does the conventional investment method work?
• Rent received (or Market Rent) x Years Purchase = Market Value • Assumes growth implicit valuation approach
When would you use a Term and Reversion method? How does it work?
• Used for reversionary investments i.e. where Market Rent is more than passing rent • Term capitalised until next rent review / lease expiry at an initial yield • Reversion to Market Rent valued into perpetuity at reversionary yield
When would you use the Layer / Hardcore method? How does it work?
• Used for over-rented investment i.e. where passing rent is more than Market Rent • Income flow divided horizontally • Bottom slice = Market Rent • Top slice = passing rent - Market rent until the next lease event • Higher yield applied to the top slice to reflect additional risk • Different yields used depending on comparable investment evidence and relative risk
What is a yield?
• Measure of investment return, expressed as a percentage of capital invested • Calculated as income divided by price x 100
How would you calculate Years Purchase? What does this show?
• Divide 100 by the yield • Number of years required for the income to repay the purchase price
What factors would you considering when determining a yield?
• Prospects for rental and capital growth • Quality of location and covenant • Use of the property • Lease terms • Obsolescence - what is the likely future rate? • Voids - what is the risk? • Security and regularity of income • Liquidity - ease of sale
What is an All Risks yield?
Yield which encompasses all the prospects and risks attached to a particular investment
What is a True yield?
Assumed rent is paid in advance (traditional valuation practice assumes rent is paid in arrears)
What is a Nominal yield?
Initial yield assuming rent is paid in arrears
What is a Gross yield?
Yield based on the net purchase price (i.e. not adjusted for purchasers’ costs)
What is a Net yield?
Yield based on the gross purchase price (i.e adjusted for purchasers’ costs)
What is an Equivalent yield?
Average time weighted yield reversionary property is valued using an initial and reversionary yield
What is an Initial yield?
Simple income yield for current income and current price
What is a Reversionary yield?
Market Rent divided by current price on an investment that is under rented
What is a Running yield?
Yield at one moment in time
When would you use the profits method of valuation?
Used for the valuation of trade related property where the value of the property is directly linked to the profit generated by the business (where there is a ‘monopoly’ position) e.g. pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure, healthcare properties and care homes
What do you require to conduct the profits method of valuation?
Accurate and audited accounts for 3 years
How would you use the profits method of valuation to value a new business?
Use estimates / business plan
What is the methodology for the profits method of valuation?
EBITDA (earnings before interest, taxation, depreciation and amortisation) is capitalised at an appropriate yield
How should you verify a value obtained using the profits method of valuation?
Cross check with comparable sales evidence if possible
When would you use the depreciated replacement cost method of valuation?
Where direct market evidence is limited or not available for specialised properties e.g. sewage works, lighthouses, oil refineries, docks, schools, submarine base etc.
What is the purpose of the depreciated replacement cost method of valuation?
• Used for owner-occupied properties • For accounts purposes for specialist properties • For rating valuations of specialist properties
What are the TWO steps of the depreciated replacement cost method of valuation?
- Value land in its existing use (assume planning permission exists) 2. Add current cost of replacing the building plus fees (used BCIS). Then make a discount for depreciation and obsolesce / deterioration
How do you estimate the amount to depreciate the property by when using the depreciated replacement cost method of valuation?
- Physical obsolescence - result of deterioration / wear and tear over the years 2. Functional obsolescence - where the design or specification of the asset no longer fulfils the function for what it was originally designed 3. Economic obsolescence - due to changing market conditions for the use of the asset
Are valuations using the depreciated replacement cost method of valuation Red Book Global compliant?
• Not suitable to be used for valuations for secured lending purposes • Can only be used for the calculation of Market Value for specialised properties for valuations for financial statements
When reporting a valuation carried out using the depreciated replacement cost method, what must the valuer state with regards to alternative use?
• If higher, the valuer must state the Market Value for any readily identifiable alternative use • If appropriate, they must state that the Market Value must be materially lower on cessation of the business
What guidance has the RICS produced on the depreciated replacement cost method of valuation?
RICS Depreciated replacement cost method of valuation for financial reporting, 2018
When did the new RICS Valuation - Global Standards become effective as of?
31st January 2020
What has changed with regards to the naming convention of the RICS Valuation - Global Standards?
• Date has been dropped form the title • Now referred to as the “Red Book Global” (as opposed to the “Red Book”)
Why was a new version of the RICS Valuation - Global Standards (“Red Book Global”) released?
To reflect updates to the International Valuation Standards
What are the SIX parts of the RICS Valuation - Global Standards (“Red Book Global”)?
- Introduction 2. Glossary 3. Professional Standards (PS) 4. Valuation technical and performance standards (VPS) 5. Valuation applications (VPGA) 6. The International Valuation Standard (IVS)
What are the material changes that have been included in the Red Book Global?
• PS1: “Written” means any valuation conveyed by paper, any electronic or digital means or in the form of recorded media. This could include the output of valuation software e.g. an AVM • PS2: Reinforces that valuers must apply independence and objectivity to their work and “professional scepticism” when reviewing information and data • VPS3: Valuation reports must clearly state the valuation approach and relevant reasoning which led to their findings. Where appropriate, sustainability and environmental matters should form an integral part of the valuation approach • VPS5: Reinforcement of the obligation to ensure that the valuation model is appropriate for the basis of value, that this is recorded and the model’s assumptions are understood (as per new IVS 105) • IVS410: requirement for valuers of development property to apply a minimum of two method of valuation
What does PS1 of the Red Book Global cover?
Requirements on when a valuation has to be Red Book Global Complaint
What are the FIVE exceptions, where a valuation does not have to be Red Book Global compliant?
- Advice is provided in preparation for, or during the course of negotiations or litigation 2. Statutory function except for the provision of a valuation for inclusion in a statutory return to a tax authority 3. Internal purposes, without liability and not communicated to any third party 4. Agency and brokerage work in anticipation of receiving instructions to dispose of or acquire and asset (except where a purchase port is required which includes a valuation) 5. Expert witness
What does PS2 of the Global Red Book cover?
Ethics, competency, objectivity and disclosures
What does PS2 of the Global Red Book state with regards to Professional and Ethical Standards?
All members undertaking valuations must act in accordance with the RICS Global Professional and Ethical Standards, 2015 and be bound by the RICS Rules of Conduct, 2007 (as amended)
What does PS2 of the Global Red Book state with regards to independence, objectivity and the identification and management of conflicts of interest?
• Valuers and firms must act objectively and independently • Should apply “professional skepticism” when reviewing information and data before relying on it • Identify and manage conflicts of interest
What does PS2 of the Global Red Book state with regards to Terms of Engagement?
• Members must understand the client’s requirements and comply with the minimum terms of engagement • Members must be able to demonstrate professional competence
What is the hierarchy of evidence for establishing Market Rent?
- Open market lettings 2. Lease renewals 3. Rent reviews 4. Third party determinations 5. Sale and leasebacks 6. Inter-company transactions
What does VPS 1 of the Red Book Global cover?
Terms of engagement (minimum matters that must be confirmed in writing to the client prior to commencing a valuation)
According to VPS 1, what matters must be confirmed in writing to client prior to the commencement of valuation?
a. Identification and status of the valuer b. Identification of the client c. Identification of any other intended users d. The asset to be valued e. Currency f. Purpose of the valuation g. Basis of value h. Valuation date i. Extent of investigation j. Nature and source of the information to be relied upon k. Assumptions and special assumptions to be made l. Format of the report m. Restrictions for use, distribution and publication n. Confirmation of the Red Book Global / IVS compliance o. Fee basis p. Complaints handling procedure to be made available q. Statement that the valuation may be subject to compliance by the RICS r. Limitation on liability agreed
What is an Assumption, as defined in the Red Book Global?
Supposition taken to be true and accepted as fact without the need for specific investigation
What is a Special Assumption, as defined in the Red Book Global?
Supposition taken to be true and accepted as fact, even though it is not true
What does VPS 2 of the Red Book Global cover?
Inspections, Investigations and Records
According to VPS 2, what does it state with regards to the necessity to inspect properties?
Valuers must take the steps to verify the information being relied upon for a valuation to ensure the information if professionally adequate for its purpose
If a valuer undertakes a desktop valuation, is it still Red Book Global compliant?
Yes, as long as it does not meet any of the criteria outlined in the PS 1
When a valuer conducts a valuation on the basis of restricted information or without a physical inspection, what FOUR factors should they do (RRIN)?
- Nature of the restriction must be agreed in writing in the Terms of Engagement
- Possible valuation implications of the restriction confirmed in writing before the value is reported
- Valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
- The restriction must be referred to in the report
According to VPS 2, is it permitted for a valuer to conduct a revaluation without re-inspecting the property?
Must not be undertaken unless the valuer is satisfied that there has been no material changes to the property or nature of its location since its last inspection (this must be confirmed in the Terms of Engagement and in the valuation report)
What does VPS 2 state with regards to the holding of records?
A proper record must be kept of inspections and investigations, and of other key inputs in an appropriate business format
What does VPS 3 of the Red Book Global cover?
Valuation report minimum requirements
According to VPS 3, what are the minimum requirements to be stated within a valuation report?
a. Identification and status of the valuer b. Client and any other intended users c. Purpose of valuation d. Identification of the asset to be valued e. Basis of value f. Valuation date g. Extent of investigation h. Nature & source of information relied upon i. Assumptions and special assumption j. Restrictions on use, distribution and publication k. Instruction undertaken in accordance with IVS standards l. Valuation approach and reasoning m. Valuation figure(s) n. Date of valuation report o. Comment on market uncertainty p. Statement setting out any limitations on liability that have been agreed
According to VPS 3, is preliminary valuation advice able to be given?
Can be given but must be marked as a draft, for internal purposes only, which cannot be relied upon and on no account, can it be published or disclosed
According to VPS 3, can a draft report be provided to a client?
• Yes, although the valuer is not to be influenced by the client in any way with respect to the final valuation figure stated in the report • A draft report provided to a client must state that it is a draft and it is subject to the completion of the final report • Any changes made to a preliminary valuation must be noted on file and reasons provided
What does VPS 4 of the Red Book Global cover?
Basis of Value, Assumptions and Special Assumptions
What is the definition of Market Value according to VPS 4 of the Red Book Global (OBIAW)?
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 • Where the parties had each acted knowledgeably, prudently and without compulsion
What is the definition of Market Rent according to VPS 4 of the Red Book Global (OBOIAW)?
The estimated amount for which an interest in real property should be lease • On the valuation date • Between a willing lessor and willing lessee • On appropriate lease terms • In an arm’s length transaction • After proper marketing • Where the parties had each acted knowledgeably, prudently and without compulsion
What is the definition of Fair Value (IFRS 13) according to VPS 4 of the Red Book Global (TIBA)?
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
When would you be required to report Fair Value?
Used when undertaking valuations for inclusion in financial statements, if the International Financial Reporting Standards have been adopted by the client
What is the difference between Fair Value and Market Value?
• RICS view that Fair Value is generally consistent with the definition of Market Value • Fair value relates to the actual worth of an asset and would be the mutually beneficial value between the buyer and the seller • Market value is the price which the asset will exchange between parties in the market and is influenced by market forces
What is the definition of Investment Value according to VPS 4 of the Red Book Global (TFO)?
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives i.e. the measure of worth to reflect the value against the client’s own investment criteria
What is the definition of Equitable Value (IVS 104) according to VPS 4 of the Red Book Global?
• 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 • Not used in the UK
What is the definition of Liquidation Value according to VPS 4 of the Red Book Global?
• Used for a group of assets sold on a piecemeal basis considering the cost of getting the assets into a saleable condition • Not used in the UK
What does VPS 5 of the Red Book Global cover?
Valuation Approaches and Methods (IVS 105)
What does VPS 5 of the Global Red Book state with regards to Valuation Approaches and Methods?
• Valuers are responsible for choosing and justifying their valuation approach and use of model • More than one valuation approach may be appropriate in some cases
What do the VPGAs in the Red Book Global cover?
Valuation Applications (Valuation Practice Guidance Applications)
What does VPGA 1 of the Red Book Global cover?
Valuation for inclusion in financial accounts
According to VPGA 1, what must you do when valuing for inclusion in financial accounts?
Where the entity has adopted IFRS, the basis of value will be Fair Value
What does VPGA 2 of the Red Book Global cover?
Valuations for secured lending
What does VPGA 2 state with regards to dealing with conflicts of interest for secured lending valuations (SIR)?
• Any previous, current or anticipated involvement with the prospective borrower or the property to be valued must be disclosed to the lender • “Previous involvement” is defined as normally being within the past two years but under certain circumstances it can be longer • If the valuer or the client considers that any involvement creates a conflict that cannot be avoided, then the instruction should be declined
What examples does VPGA 2 give of involvement that may result in a conflict of interest?
• Having a longstanding professional relationship with the prospective borrower or owner • When the valuer will gain a fee from introducing the transaction to the lender • If there is a financial interest in the property holding or prospective borrower • When the valuer is retained to act in the disposal or letting of the completed development on the subject property
According to VPGA 2, whose responsibility is to decide whether or not to proceed with an instruction? What should they have regard to?
• Valuer’s responsibility to decide whether or not to accept the instruction • Should have regard to RICS Rules of Conduct
According to VPGA 2, if it is agreed that any potential conflict can be avoided by introducing arrangements, what must be done?
The arrangements must be recorded in writing and included in the terms of engagement and valuation report
According to VPGA 2, as well as the minimum requirements of a valuation report, what additional information must the report include?
• Disclosure of any conflict of interest identified in the terms of engagement, or that has been subsequently discovered, including the arrangement that have been made. Alternatively a statement that the valuer is not involved • Valuation methodology adopted, supported where appropriate or requested, with the calculation • Where a recent transaction on the property has occurred or been provisionally agreed, the extent to which that information has been accepted as Market Value • Where the enquiry does not reveal any information, the valuer will make a statement to that effect in the report • Comment on any environmental considerations • Comment on the suitability of the property for mortgage purposes • Any circumstances the valuer is aware of that could affect the price • Any other factor that potentially conflicts with the definition of Market Value or its underlying assumptions
According to VPGA 2, what must you do if your valuation for secured lending purposes is subject to a Special Assumption?
Must be a comment on any material difference between the reported value with and without that special assumption
According to VPGA 2, how should you take account of sustainability factors?
Comment on the maintainability of the income over the life of the loan in a broader sustainability context (e.g. environmental risks, matters of design, accessibility)
According to VPGA 2, what should you comment on in relation to the end of the occupational lease?
Any potential for redevelopment or refurbishment
What does VPGA 8 of the Red Book Global cover?
• Valuation of real property interests • Covers inspections and investigations, with particular emphasis on environmental constraints and sustainability issues
What does VPGA 10 of the Red Book Global cover?
Matters that may give rise to material valuation uncertainty
What does VPGA 10 state that valuation reports must not be?
Misleading
According to VPGA 10, what should a valuer do/not do when it comes to material uncertainty?
• Valuer should clearly draw attention to, and comment on, any issues resulting in material uncertainty in the valuation on the specified date relating to the risk surrounding the valuation of the asset • A standard caveat should not be used
What does part 6 of the RICS Valuation - Global Standards (“Red Book Global”) cover?
• International Valuation Standards, 2020 • “General Standards” addressing matters such as terms of engagement, approaches to, bases and methods of valuation as well as reporting • “Asset Standards” which provide requirements relating to specific types of asset, such as real property and development property
What is the relationship between the Red Book Global and the RICS Valuation - Global Standards (UK National Supplement, 2018)?
• The UK National Supplement augments the Red Book Global requirements for valuations in the UK and is not a substitute for it • Provides requirements for members on the application of the RICS Valuation - Global Standards in the UK jurisdiction
What were the key changes introduced in the UK National Supplement, 2018?
• More user friendly with clear advice on what is and is not mandatory • New UK VPGAs have been included for the valuation of central government assets, local authority assets and registered social housing providers’ assets • For financial reporting valuations, there is greater differentiation between UK GAAP and IFRS requirements • New section on valuation for commercial lending (UK VGPA 10)
What are the FOUR parts of the UK National Supplement, 2018?
- Introduction 2. UK Professional and Valuation Standards (Mandatory) 3. UK Valuation Practice Guidance Applications (Advisory) 4. Summary of changes from Red Book UK, 2014 (revised 2015)
What does UK VPS 3 of the UK National Supplement cover?
Regulated purpose valuations