Valuation Flashcards

1
Q

What is an internal valuer?

A

• Employed by a company to value their assets • Valuation for internal use only • No third-party reliance

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2
Q

What is an external valuer?

A

Has no material links with the asset to be valued or the client

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3
Q

What are the THREE steps you should undertake prior to commencing a valuation?

A

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

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4
Q

Why do you undertake statutory due diligence for valuations?

A

Confirm that there are no material matters which could impact on the valuation

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5
Q

What types of statutory due diligence checks would you undertake when valuing a property?

A
  1. 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)
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6
Q

What are the FIVE main methods of valuation?

A
  1. Comparable method 2. Investment method 3. Profits method 4. Residual method 5. Depreciated replacement cost method
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7
Q

What are the THREE valuation approaches set out in IVS 105 (Red Book) (MIC)?

A
  1. Market approach - (comparable)
  2. Income approach - converting income/cash into a capital value (investment, residual and profit)
  3. Cost approach - (DRC)
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8
Q

What are the SIX steps used when collecting comparable evidence?

A
  1. 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
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9
Q

What guidance did the RICS recently release on using comparable evidence?

A

RICS Comparable evidence in real estate valuation, 2019

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10
Q

What are the THREE categories of evidence outlined in RICS Comparable evidence in real estate valuation, 2019?

A

Category A: direct comparables Category B: general market data Category C: other sources

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11
Q

What is the hierarchy of direct comparable evidence outlined in the RICS Comparable evidence in real estate valuation, 2019?

A

• 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)

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12
Q

What is the hierarchy of general market data outlined in the RICS Comparable evidence in real estate valuation, 2019?

A

• Information from published sources or commercial databases • Other direct evidence (e.g. indices) • Historic evidence • Demand/supply data for rent, owner-occupation or investment

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13
Q

What is the hierarchy of other sources outlined in the RICS Comparable evidence in real estate valuation, 2019?

A

• 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)

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14
Q

When would you use the investment method of valuation?

A

Used when there is an income stream to value

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15
Q

How does the conventional investment method work?

A

• Rent received (or Market Rent) x Years Purchase = Market Value • Assumes growth implicit valuation approach

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16
Q

When would you use a Term and Reversion method? How does it work?

A

• 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

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17
Q

When would you use the Layer / Hardcore method? How does it work?

A

• 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

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18
Q

What is a yield?

A

• Measure of investment return, expressed as a percentage of capital invested • Calculated as income divided by price x 100

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19
Q

How would you calculate Years Purchase? What does this show?

A

• Divide 100 by the yield • Number of years required for the income to repay the purchase price

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20
Q

What factors would you considering when determining a yield?

A

• 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

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21
Q

What is an All Risks yield?

A

Yield which encompasses all the prospects and risks attached to a particular investment

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22
Q

What is a True yield?

A

Assumed rent is paid in advance (traditional valuation practice assumes rent is paid in arrears)

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23
Q

What is a Nominal yield?

A

Initial yield assuming rent is paid in arrears

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24
Q

What is a Gross yield?

A

Yield based on the net purchase price (i.e. not adjusted for purchasers’ costs)

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25
Q

What is a Net yield?

A

Yield based on the gross purchase price (i.e adjusted for purchasers’ costs)

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26
Q

What is an Equivalent yield?

A

Average time weighted yield reversionary property is valued using an initial and reversionary yield

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27
Q

What is an Initial yield?

A

Simple income yield for current income and current price

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28
Q

What is a Reversionary yield?

A

Market Rent divided by current price on an investment that is under rented

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29
Q

What is a Running yield?

A

Yield at one moment in time

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30
Q

When would you use the profits method of valuation?

A

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

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31
Q

What do you require to conduct the profits method of valuation?

A

Accurate and audited accounts for 3 years

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32
Q

How would you use the profits method of valuation to value a new business?

A

Use estimates / business plan

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33
Q

What is the methodology for the profits method of valuation?

A

EBITDA (earnings before interest, taxation, depreciation and amortisation) is capitalised at an appropriate yield

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34
Q

How should you verify a value obtained using the profits method of valuation?

A

Cross check with comparable sales evidence if possible

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35
Q

When would you use the depreciated replacement cost method of valuation?

A

Where direct market evidence is limited or not available for specialised properties e.g. sewage works, lighthouses, oil refineries, docks, schools, submarine base etc.

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36
Q

What is the purpose of the depreciated replacement cost method of valuation?

A

• Used for owner-occupied properties • For accounts purposes for specialist properties • For rating valuations of specialist properties

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37
Q

What are the TWO steps of the depreciated replacement cost method of valuation?

A
  1. 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
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38
Q

How do you estimate the amount to depreciate the property by when using the depreciated replacement cost method of valuation?

A
  1. 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
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39
Q

Are valuations using the depreciated replacement cost method of valuation Red Book Global compliant?

A

• 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

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40
Q

When reporting a valuation carried out using the depreciated replacement cost method, what must the valuer state with regards to alternative use?

A

• 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

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41
Q

What guidance has the RICS produced on the depreciated replacement cost method of valuation?

A

RICS Depreciated replacement cost method of valuation for financial reporting, 2018

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42
Q

When did the new RICS Valuation - Global Standards become effective as of?

A

31st January 2020

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43
Q

What has changed with regards to the naming convention of the RICS Valuation - Global Standards?

A

• Date has been dropped form the title • Now referred to as the “Red Book Global” (as opposed to the “Red Book”)

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44
Q

Why was a new version of the RICS Valuation - Global Standards (“Red Book Global”) released?

A

To reflect updates to the International Valuation Standards

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45
Q

What are the SIX parts of the RICS Valuation - Global Standards (“Red Book Global”)?

A
  1. Introduction 2. Glossary 3. Professional Standards (PS) 4. Valuation technical and performance standards (VPS) 5. Valuation applications (VPGA) 6. The International Valuation Standard (IVS)
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46
Q

What are the material changes that have been included in the Red Book Global?

A

• 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

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47
Q

What does PS1 of the Red Book Global cover?

A

Requirements on when a valuation has to be Red Book Global Complaint

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48
Q

What are the FIVE exceptions, where a valuation does not have to be Red Book Global compliant?

A
  1. 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
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49
Q

What does PS2 of the Global Red Book cover?

A

Ethics, competency, objectivity and disclosures

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50
Q

What does PS2 of the Global Red Book state with regards to Professional and Ethical Standards?

A

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)

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51
Q

What does PS2 of the Global Red Book state with regards to independence, objectivity and the identification and management of conflicts of interest?

A

• 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

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52
Q

What does PS2 of the Global Red Book state with regards to Terms of Engagement?

A

• Members must understand the client’s requirements and comply with the minimum terms of engagement • Members must be able to demonstrate professional competence

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53
Q

What is the hierarchy of evidence for establishing Market Rent?

A
  1. Open market lettings 2. Lease renewals 3. Rent reviews 4. Third party determinations 5. Sale and leasebacks 6. Inter-company transactions
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54
Q

What does VPS 1 of the Red Book Global cover?

A

Terms of engagement (minimum matters that must be confirmed in writing to the client prior to commencing a valuation)

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55
Q

According to VPS 1, what matters must be confirmed in writing to client prior to the commencement of valuation?

A

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

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56
Q

What is an Assumption, as defined in the Red Book Global?

A

Supposition taken to be true and accepted as fact without the need for specific investigation

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57
Q

What is a Special Assumption, as defined in the Red Book Global?

A

Supposition taken to be true and accepted as fact, even though it is not true

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58
Q

What does VPS 2 of the Red Book Global cover?

A

Inspections, Investigations and Records

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59
Q

According to VPS 2, what does it state with regards to the necessity to inspect properties?

A

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

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60
Q

If a valuer undertakes a desktop valuation, is it still Red Book Global compliant?

A

Yes, as long as it does not meet any of the criteria outlined in the PS 1

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61
Q

When a valuer conducts a valuation on the basis of restricted information or without a physical inspection, what FOUR factors should they do (RRIN)?

A
  1. Nature of the restriction must be agreed in writing in the Terms of Engagement
  2. Possible valuation implications of the restriction confirmed in writing before the value is reported
  3. Valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
  4. The restriction must be referred to in the report
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62
Q

According to VPS 2, is it permitted for a valuer to conduct a revaluation without re-inspecting the property?

A

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)

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63
Q

What does VPS 2 state with regards to the holding of records?

A

A proper record must be kept of inspections and investigations, and of other key inputs in an appropriate business format

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64
Q

What does VPS 3 of the Red Book Global cover?

A

Valuation report minimum requirements

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65
Q

According to VPS 3, what are the minimum requirements to be stated within a valuation report?

A

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

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66
Q

According to VPS 3, is preliminary valuation advice able to be given?

A

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

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67
Q

According to VPS 3, can a draft report be provided to a client?

A

• 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

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68
Q

What does VPS 4 of the Red Book Global cover?

A

Basis of Value, Assumptions and Special Assumptions

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69
Q

What is the definition of Market Value according to VPS 4 of the Red Book Global (OBIAW)?

A

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

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70
Q

What is the definition of Market Rent according to VPS 4 of the Red Book Global (OBOIAW)?

A

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

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71
Q

What is the definition of Fair Value (IFRS 13) according to VPS 4 of the Red Book Global (TIBA)?

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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72
Q

When would you be required to report Fair Value?

A

Used when undertaking valuations for inclusion in financial statements, if the International Financial Reporting Standards have been adopted by the client

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73
Q

What is the difference between Fair Value and Market Value?

A

• 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

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74
Q

What is the definition of Investment Value according to VPS 4 of the Red Book Global (TFO)?

A

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

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75
Q

What is the definition of Equitable Value (IVS 104) according to VPS 4 of the Red Book Global?

A

• 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

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76
Q

What is the definition of Liquidation Value according to VPS 4 of the Red Book Global?

A

• 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

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77
Q

What does VPS 5 of the Red Book Global cover?

A

Valuation Approaches and Methods (IVS 105)

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78
Q

What does VPS 5 of the Global Red Book state with regards to Valuation Approaches and Methods?

A

• 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

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79
Q

What do the VPGAs in the Red Book Global cover?

A

Valuation Applications (Valuation Practice Guidance Applications)

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80
Q

What does VPGA 1 of the Red Book Global cover?

A

Valuation for inclusion in financial accounts

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81
Q

According to VPGA 1, what must you do when valuing for inclusion in financial accounts?

A

Where the entity has adopted IFRS, the basis of value will be Fair Value

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82
Q

What does VPGA 2 of the Red Book Global cover?

A

Valuations for secured lending

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83
Q

What does VPGA 2 state with regards to dealing with conflicts of interest for secured lending valuations (SIR)?

A

• 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

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84
Q

What examples does VPGA 2 give of involvement that may result in a conflict of interest?

A

• 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

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85
Q

According to VPGA 2, whose responsibility is to decide whether or not to proceed with an instruction? What should they have regard to?

A

• Valuer’s responsibility to decide whether or not to accept the instruction • Should have regard to RICS Rules of Conduct

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86
Q

According to VPGA 2, if it is agreed that any potential conflict can be avoided by introducing arrangements, what must be done?

A

The arrangements must be recorded in writing and included in the terms of engagement and valuation report

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87
Q

According to VPGA 2, as well as the minimum requirements of a valuation report, what additional information must the report include?

A

• 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

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88
Q

According to VPGA 2, what must you do if your valuation for secured lending purposes is subject to a Special Assumption?

A

Must be a comment on any material difference between the reported value with and without that special assumption

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89
Q

According to VPGA 2, how should you take account of sustainability factors?

A

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)

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90
Q

According to VPGA 2, what should you comment on in relation to the end of the occupational lease?

A

Any potential for redevelopment or refurbishment

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91
Q

What does VPGA 8 of the Red Book Global cover?

A

• Valuation of real property interests • Covers inspections and investigations, with particular emphasis on environmental constraints and sustainability issues

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92
Q

What does VPGA 10 of the Red Book Global cover?

A

Matters that may give rise to material valuation uncertainty

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93
Q

What does VPGA 10 state that valuation reports must not be?

A

Misleading

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94
Q

According to VPGA 10, what should a valuer do/not do when it comes to material uncertainty?

A

• 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

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95
Q

What does part 6 of the RICS Valuation - Global Standards (“Red Book Global”) cover?

A

• 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

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96
Q

What is the relationship between the Red Book Global and the RICS Valuation - Global Standards (UK National Supplement, 2018)?

A

• 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

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97
Q

What were the key changes introduced in the UK National Supplement, 2018?

A

• 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)

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98
Q

What are the FOUR parts of the UK National Supplement, 2018?

A
  1. 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)
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99
Q

What does UK VPS 3 of the UK National Supplement cover?

A

Regulated purpose valuations

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100
Q

According to UK VPS 3, what are regulated purpose valuations?

A

Valuations relied on by third parties who have not commission the valuation and are subject to valuation monitoring

101
Q

According to UK VPS 3, what are the FIVE regulated purpose valuations (FCUTS)?

A
  1. Financial statements (company accounts)
  2. Collective investment schemes
  3. Unregulated property unit trusts
  4. Takeovers and mergers
  5. Stock Exchange listings
102
Q

According to UK VPS 3, are valuations for secured lending purposes considered a regulated purpose valuation?

A

No

103
Q

According to UK VPS 3, how does the RICS monitor regulated purpose valuations?

A

• Inspections by RICS professional regulation team • Members must declare the length of time the valuer has acted for the client for regulated valuation purposes and the extent and duration of the firm’s relationship with the client • Whether in the last financial year, the percentage of the fee income from the client is more or less than 5% of the total fee income • Whether this has changed since the end of the last financial year or will likely change

104
Q

According to UK VPS 3, what does the RICS recommend with regards to valuer selection for regulated purpose valuations?

A

• Should be a policy in place on the rotation of valuers when the asset is regularly valued • RICS recommends a 7-year maximum rotation policy

105
Q

According to VPS 3, when is a valuer unable to act on behalf of a client in relation to regulated purpose valuations?

A

Where the property was acquired by the client within the last 12 months and the valuer’s firm received an introductory fee or negotiated the purchase on behalf of the client

106
Q

Why are building cost reinstatement valuations/estimations required?

A

Building insurance purposes

107
Q

What do building cost reinstatement valuations/estimation show? What would they be based on?

A

• Cost of the reinstatement of the building without a profit • Use of RICS Building Cost Information Service (BCIS) adopting GIA for commercial properties and GEA for residential • Add VAT, demolition costs, professional fees, planning and building regulation fees and inflation allowance if applicable

108
Q

Why does a replacement cost figure provided for insurance purposes, whether separately or within a valuation report, not have to be Red Book Global compliant?

A

It is not a “written opinion of value”

109
Q

What is hope value?

A

The value arising form any expectation that future circumstances affecting the property may change

110
Q

Provide some examples of where hope value may arise.

A

• Future prospect of securing planning permission for the development of land, where no planning permission exists at the present time • The realisation of marriage value arising from the merger of two interests in land

111
Q

What must charities do when seeking to buy or sell property?

A

Obtain a Section 119 of the Charities Act 2011 valuation

112
Q

What must a valuer do when conducting a valuation on behalf of a charity?

A

• Follow guidance contained in UK VPGA 8 • Comment whether the purchase or sale is in the charity’s best interest • State whether the terms agreed are the best that can be reasonably obtained • Basis of valuation must be Market Value or Market Rent • Valuer must follow Section 119 of the Charities Act 2011

113
Q

What are the typical purchasers costs deducted from the gross market value?

A

• Stamp Duty Land Tax: at prevailing rate • Agent’s fees: 1% of purchase price (+ VAT) • Legal fees: 0.5% of purchase price (+ VAT)

114
Q

What is marriage value? How do you calculate the level of marriage value?

A

• Created by the merger of interest - can be physical or tenurial • Undertake a before and after valuation and calculate the level of marriage value created

115
Q

How is marriage value typically split between parties?

A

Typically split the marriage value create 50:50 or on a pro-rata basis using the value of the individual interests

116
Q

How would you value a long leasehold interest?

A

Deduct ground rent from the gross rent to calculate the net rent received. Then can either: • Capitalise at a yield for the remaining length of the lease • Use a dual rate to adjust the valuation to set up a sinking fund, so it is comparable to freehold investments • Discounted cash flow (DCF) • Capitalise into perpetuity at an adjusted yield to reflect the additional element of risk for the wasting asset

117
Q

What is the significance of rent received and rent receivable when calculating the value of a leasehold interest?

A

• Ground rent can be calculated on a geared basis, using the rent from the leasehold interest • Rent “received” will be where ground rent is payable on rent actually received by the leaseholder • Rent “receivable” will be where the ground rent payable is based on the potential return as opposed to the actual return i.e. the tenant takes on the risk of voids

118
Q

What is a premium in relation to a transaction?

A

A capital payment made by one party to another

119
Q

In what instances do premiums commonly arise?

A

• Key money paid by an in-going tenant of a retail property to secure a prime shop • Sum of money to represent fixtures and fittings within a building, paid by an in-going tenant • Sum of money paid by an in-going tenant for a leasehold interest, to represent the positive difference between the passing rent and the market rent of the property. This is the profit rent • In the event that there is a negative difference, a reverse premium may be paid by the out-going tenant to the new tenant • The sum of money paid by a landlord to a tenant for the surrender of a leasehold interest and the granting of a new lease

120
Q

What is the WAULT?

A

Weighted average unexpired lease term remaining to the first break or expiry of a lease Weighted by the contracted rent

121
Q

What is a ransom strip?

A

Piece of land which controls the access to another piece of land

122
Q

What is the generally accepted valuation for ransom strips?

A

• 15-50% of the development value unlocked by the inclusion of the ransom strip within the proposed development scheme • In some cases a fixed sum has been awarded • Upper Tribunal (Lands Chamber) assesses each case on its own facts

123
Q

What is the rate of stamp duty for the transfer of non-residential and mixed-use property?

A

Up to £150,000: Zero £150,001 - £250,000: 2% + £250,000: 5%

124
Q

What is ATED? What does it aim to stop?

A

Annual Tax on Enveloped Dwellings (ATED) Aims to stop on-shore and offshore individuals using companies to avoid SDLT for residential property. Current threshold is £500,000

125
Q

How is SDLT calculated on the granting of new leases and premiums payable?

A

The total across the term is NPV’d at RPI (as a discount rate)

NPV up to £150,000 = 0%
NPV over £150,000 = 1%
NPV over £5,00,000 = 2%

126
Q

How are break clauses accounted for in SDLT calculations for the transfer or leasehold properties?

A

They are excluded from the calculations

127
Q

Explain the principle of Zoning?

A

• Used for retail properties to create a unit of comparison for different sized buildings • Rationale – the rental value of the property reduces away from the street i.e. the area at the front of the shop is most valuable to a retailer as it will generate most sales • Zone A closest to the window is most valuable with the value deceasing with distance from the frontage. • Halving back principle with 6.1m (20 ft) zones

128
Q

On which retail pitches are 30ft zones used?

A

Some London retail streets (e.g. Oxford Street, Regent Street and Bond Street) and certain prime shopping streets in Scotland

129
Q

How are basement and first floor areas usually treated in retail properties?

A

A/10 depending upon the comparable evidence

130
Q

What types of unit will allowances typically be made for when zoning?

A

Those with split levels, excessive front to depth ratio and hard frontages (e.g. banks) depending on the comparable evidence

131
Q

How are return frontages typically dealt with?

A

• 2.5-10% uplift depending on the comparable evidence and footfall • Use mirror zoning i.e. zone from both frontages

132
Q

What is natural zoning?

A

When the property zones reflect physical changes in the building such as steps

133
Q

What is masking?

A

The valuation of ‘hidden’ / obscured areas

134
Q

How does the Red Book Global define a Special Purchaser?

A

A particular buyer for who a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market

135
Q

How does the Red Book Global define Special Value?

A

An amount that reflects particular attributes of an asset that are only of value to a special purchaser

136
Q

Provide examples of when a Special Purchaser would arise?

A

• Tenant purchasing the freehold interest • Association with the property e.g. owning an adjacent property

137
Q

How does Market Value reflect Special Value?

A

Ignores any price distortions caused by Special Value

138
Q

What is a net effective rent?

A

This is the rent that would be agreed between the parties for a letting of the premises on the relevant terms and conditions, but without incentives forming part of the transaction Calculated as post fit-out, pre-incentive i.e. the difference between an allowance for tenant fit-out (usually 3 months) and the rent free period

139
Q

What are the THREE approaches used for calculating net effective rent?

A
  1. Straight line method 2. Straight line method assuming time value of cash flow using a yield 3. Use of DCF
140
Q

What is a party wall?

A

Stands astride the boundary of land belonging to two or more different land owners

141
Q

What is included in the Party Wall Act 1996?

A

• Provides a framework for resolving disputes relating to party walls, boundary walls and excavations near neighbouring buildings • Provides a building owner who wishes to carry out various sorts of work to an existing party wall with additional rights • Must inform all adjoining owners of your intentions to undertake works on the party wall

142
Q

What is a right of light? When does it arise?

A

• Arises after twenty years uninterrupted enjoyment of light without the consent of a third party by way of an easement with a prescriptive right • If a right to light infringed, an injunction can be granted or damages awarded

143
Q

What schemed did the RICS introduce in October 2011 for the regulatory monitoring of all valuers carrying out Red Book valuations?

A

RICS Valuer Registration Scheme (VRS)

144
Q

What are the THREE aims of the RICS Valuer Registration Scheme (VRS)?

A
  1. Improve the quality of valuation and ensure the highest possible professional standards 2. To meet the RICS requirement to self-regulate effectively 3. To protect and raise the status of the valuation profession as the leading expertise in valuation
145
Q

What should clients be able to expect from a RICS valuation following the introduction of the RICS Valuer Registration Scheme (VRS)?

A

• Openness and transparency • RICS protection and international valuation standards • Expertise and clear reporting • World class regulations

146
Q

Which newly qualified members are eligible to apply for the RICS Valuer Registration Scheme (VRS)?

A

• Those who have completed the APC valuation competency to Level 3 qualify for registration • There is an alternative route post qualification to be a Registered Valuer for candidates who have taken Valuation to only Level 2. This includes undertaking more valuation experience (up to 100 days) and a case study submission

147
Q

Who is registration mandatory for under the RICS Valuer Registration Scheme (VRS)?

A

• Those undertaking valuation work in compliance with the Red Book Global • Registration is not mandatory for work excluded from the Red Book Global

148
Q

What information must be provided under the RICS Valuer Registration Scheme (VRS)?

A

• Type of valuations • Purpose of valuations • Number of valuations • Firm’s total fee income from Red Book Global valuations in the last year • What data sources used • Quality assurance audit procedures in place • History of any negligence claims and notifications

149
Q

How do the RICS monitor those signed up to the Valuer Registration Scheme (VRS)?

A

• Publishes a register of registered valuers • Monitor valuers through the submissions of their firms annual return • Risk based reviews, ranging from desktop investigations to site based Regulatory Review Visits (RRVs), dependent on the risk identified • Head of Regulation has the power to remove a valuer from the scheme

150
Q

What are the different types of ground rent?

A

• Fixed • Geared (rent received/receivable)

151
Q

What would a lender be concerned about with regards to the valuation of an over rented property?

A

The quantum of the over-rent i.e. how much the rent would decrease by at the next break option or lease expiry

152
Q

What is the generally acceptable upper limit for ground rent when it is calculated on a rent received or receivable basis?

A

10-15% of the passing rent or market rent

153
Q

What are the issues associated with the layer / hardcore method of valuation, and how could you improve these issues?

A

• Subjective yield selection - based on received tenant covenant strength and length of the over rent. Has to be done intuitively • Double-counting - as the ARY applied to the bottom layer will be growth implicit, the size of the over rent will reduce over time • Unrealistic split of income - risk of non-receipt is attached to the whole income • You can actually work out at what time the over renting will cease by finding breakthrough through integrating a rental growth rate. Otherwise you are assuming the overage will last until lease end.

154
Q

Are you qualified to comment on covenant strength?

A

No, I am able to comment on how the market would likely perceive the tenant covenant

155
Q

When making a discount to the rent for masking in a property, how much discount would you generally apply?

A

Would generally discount at the rate between the zone the floorspace is in and the rate of the zone behind i.e. if in the second zone, would discount at A/3 or if in the third zone, would discount at A/6

156
Q

Can you undertake valuation work on behalf of a lender that you are already instructed by on other loan security work? In what instances might you be conflicted due to a relationship with the lender?

A

Yes, it is permitted to undertake multiple loan security valuations on behalf of the same lender. You may, however, be conflicted if your firm had open litigation with that lender or were involved in their corporate restructuring, for example.

157
Q

What is a material uncertainty clause?

A

• Used when the degree of uncertainty falls outside any parameters that might normally be accepted • Does not mean to suggest that the valuation cannot be relied upon • Less certainty can be attached to the valuation that would otherwise be the case

158
Q

What is a return, and how could you find the IRR?

A

Used to describe the performance of a property, measured retrospectively. Use a DCF calculation to find the internal rate of return.

159
Q

What type of accounts are more preferable for conducting a profits method valuation?

A

Audited accounts are superior to management accounts

160
Q

What is the basic principle of the profits method of valuation, and what do you adjust for?

A

• Basic principle is that the value of the property depends on the profit generated from the business, not the physical building or location o Adjust for maturity of business and any unacceptable or exceptional item of expenditure

161
Q

What is the simple profits method methodology?

A
  1. Calculate the EBITDA (annual turnover LESS costs/purchases) = GROSS profit.
  2. Less reasonable working expenses = Unadjusted net profit
  3. Less operator’s remuneration (deduct costs and expenses to get an FMOP for a reasonably efficient operator). Adjusted net profit known as the Fair Maintainable Operating Profit (FMOP).
  4. FMOP x YP (from benchmarks) = Capital Value
162
Q

What valuation cross-check is advised for profits method valuation?

A

Cross-check with comparables sales evidence if possible

163
Q

What is a surrender/renewal valuation, and how do you value a premium for a surrender and renewal?

A

• When the landlord/tenant wants a surrender of the existing lease and agreed to grant a new lease- usually longer or on different lease terms simultaneously. • Calculation of a premium to reflect the change in the value of the leasehold interest • Need to value the before and after leasehold interests

164
Q

What yield do you use with the Term and Reversion method, and what consequence does that have?

A

• ARY: this means this method is growth implicit i.e. everything is expressed through the ARY (therefore you don’t ever put costs in T&R) • The all-risks yield is an (annual) IRR of a non-growth cashflow. Rental growth, obsolescence and the resale price are reflected implicitly.

165
Q

In what 2 circumstances would you typically use the hardcore/layer method, and what yield is used?

A

• Valuations for institutional investment market (e.g. prime offices), and also useful when reversion is close in time. Uses equivalent yield i.e. same yield applied.

166
Q

When would you use the hardcore/topslice method, and what yield is typically used?

A

• Hardcore/topslice: overrented, usually used with a net initial yield and risk premium.

167
Q

In a hardcore/topslice, what 3 factors are taken into account for the top slice yield applied, what type of yield is typically used, and when might the yields be the same?

A

The % uplift from the market rent rate is a function of: o The amount of overrenting o The time period until reversion to the MR o The quality of the tenants covenant • Different yields used depending on comparable investment evidence and relative risk (usually Net Initial Yield) If the tenant is a first class covenant there could be no additional risk attached to the receipt of the term rent (therefore capitalise at same %)

168
Q

How does the equivalent yield differ from the equated yield?

A

Equivalent yield is not inflated for growth. Thus the calculation of the equivalent yield differs from the equated yield in this respect.

169
Q

How can you find the equivalent yield (2 ways)?

A

○ The Equivalent yield can be found by: ■ a) Calculating a positive Net Present Value ■ b) Calculating a negative Net Present Value ■ c) Using linear interpolation ○ The Equivalent yield can be calculated by Parry’s IRR with NO projected rental growth

170
Q

What does the Red Book say about how you should adjust and document comparable evidence analysis?

A

IVS 105 states that comparables must be adjusted on a qualitative and quantitative basis
- Also states the valuer should document the reasons for the adjustments and how they were quantified

171
Q

What is a years purchase?

A

The number of years it takes for a property’s income to repay its purchase price.

172
Q

How do you calculate Years Purchase from a yield and vice versa?

A

Years Purchase = 100/yield
Yield = 100/years purchase

173
Q

What is a conventional/initial yield method?

A
  • It is used for properties let at market rent, on long leases.
  • Current rent (market rent) is capitalised into perpetuity
174
Q

What is the EBITDA and how do you calculate it?

A
  • Earnings before interest, taxation, depreciation and amortisation.
  • Annual turnover less costs, working expenses and operators remuneration.
175
Q

What is amortisation?

A

Similar to depreciation but for non-tangible asset - e.g. a business’ copyright, or their franchise agreements.

176
Q

What are the Red Book UK Professional and Valuation Standards - mandatory?

A

UK VPS 1: Terms of engagement (scope of work) and reporting: Red Book compliance
UK VPS 2: Terms of engagement (scope of work): supplementary provisions in Scotland.
UK VPS 3: Regulated purpose valuations: supplementary requirements

177
Q

What is SDLT for residential?

A

Up to £125,000 = 0%
£125,001 - £250,000 = 2%
£250,001 - £925,000 = 5%
£925,001 - £1,500,000 = 10%
Over £1,500,000 = 12%

178
Q

Whats the difference between market value and fair value?

A

Market value is in an arms length transaction after proper marketing.

179
Q

What UK VPGA is commercial secured lending valuations?

A

UKVPGA 7 – Valuation for commercial secured lending purposes

180
Q

What is the PV of £1 formula?

A

PV of £1 = 1
÷
(1+i)n
‘i’ is the yield that the valuer thinks is appropriate.
‘n’ is the term in years (to next rent review)

181
Q

What is the Years Purchase?

A

The relationship between the income and the capital value.
The number of years it will take for the annual income to add up to the capital value, when taking into account the time value of money (i.e. that it’s decreasing). i.e. the right to receive £10,000pa for 4 years won’t = £40,000 payment today.

182
Q

What is the Years Purchase formula?

A

Work out the PV of £1 first.
YP =
(1-PV of £1)
÷
i

‘i’ is the yield that the valuer thinks is appropriate.

183
Q

What is the Years Purchase into perpetuity formula?

A

Used for valuing the reversionary rent into perpetuity.
100 ÷ i
Will need to work out the PV of £1 in X number of years when the reversion begins and multiple by the above YP.

184
Q

How would you value a football stadium?

A

A: depends on the purpose. Could use Profits if selling or DRC for financial reporting. Montlake vs LSH Case – valuation of wasps training ground. Valued on DRC and not residual. Developer eventually bought and turned into resi so LSH sued.

185
Q

What inputs do you need to work out your eq yield?

A

Average of Initial yield and reversionary yield. Time period before reversion commences.

186
Q

What do you look for in covenant?

A

Company turnover

187
Q

What is meant by proper marketing?

A

1) Reasonable time period.
2) Appropriate method of disposal
3) Appropriate marketing technique

188
Q

What is a yield?

A

Outward looking measure of investment return.

189
Q

What effect does inflation have on interest rates?

A

Interest rates increase with inflation to discourage spending and inflation then decreases.

190
Q

The Red Book talks about Disclosure – what does this refer to?

A

Disclosure of competence and skill, disclosure of any personal interest or any conflict.

191
Q

What is the definition between the two Fair Value definitions?

A

The IVS definition can include special value

  1. (IFRS) “the price that would be received to sell and asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date”
  2. (IVS) “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.
192
Q

Are there circumstance where a net initial yield could be a negative figure?

A

I have not come across this in practice but it is possible where there is no passing rent and there are landlord’s costs such as service charge or rates.

193
Q

Describe how departure from the Red Book mandatory requirements may be possible.

A

Can depart from the Red Book if there are time or inspection constraint reasons. The departure must be agreed in terms of engagement giving reasons for the departure. The report would also need to state increased uncertainty.

194
Q

What are the possible consequences if a Valuer does not comply with VPGA’s?

A

: They are intended to embody best practice. It could be a major factor in any professional negligence claim. Should only depart from guidance notes for good reason.

195
Q

How would you respond to a request to value a property from a pavement assessment only?

A

Need enough information to adequately understand the property (floorplans, lease, trading information)

196
Q

Describe 3 assumptions that are usually made in producing a valuation?

A

Title – assumed good and clean title can be shown. Condition – assumed no material defect. Services – assumed in good working order. Free from contamination.

197
Q

What is an arm’s length transaction?

A

A transaction between unconnected parties – with no business or family connection

198
Q

How many comparables are needed to produce a similar valuation?

A

As many as possible, all of them.

199
Q

What is the longest time period before a val date a transaction could be accepted as being comparable?

A

Depends in the market and market conditions.

200
Q

What do you understand the expression Weighting of Comparable Evidence to be?

A

We attach weight to it by determining its compatibility to the subject property. Surveyors will have different opinion of evidence weighting.

201
Q

What do you understand by the expression Hierarchy of Evidence?

A

The nature of the transaction and the amount of weight attached to it. All things being equal, we attach the most rent to open market.

202
Q

What is Interpolation of comparable evidence?

A

Working between 2 known points. A range of values we know it falls within. Considered statistically safe

203
Q

What is Extrapolation of comparable evidence?

A

Working outside of known data. Making subjective adjustments. Considered to have additional risk.

204
Q

How would you value a shop unit for rent review with frontages on 2 roads e.g. it is a through unit.

A

Zone back from both frontages with the respective area In Terms Of Zone A.

205
Q

How would you determine the Market Value of an investment property let on Internal Repairing Terms?

A

I would Net the rent down, making allowances for the insurance and repairs. I would then determine if the net rent IS the market rent. If so, I would capitalise the Market Rent at an All Risks Yield (found by analysis of the market transactions) to reach Market Value.

206
Q

What is compounding?

A

When you add interest to the capital and interest on interest accrued. Growth relates to Compound – Amount of £1

207
Q

What is the name in Parry’s table that calculates to which a single sum invested will accumulated to at compound interest?

A

Amount of £1

208
Q

What is discounting?

A

Calculating the Present Value of a future sum of money

209
Q

What is the name of the table in Parry’s that Discounts a Single Sum?

A

PV of £1

210
Q

What is the other name for the YP Single Rate Table?

A

PV of £1 per Annum

211
Q

Why is the YP Single Rate table also known as the Present Value of £1 per Annum?

A

Because it gives you the Present Value of a Static income flow for a given number of years.

212
Q

What do you understand by the expression Investment Qualities?

A

The risk and difficulties associated with an investment.

213
Q

What are the 3 principle investment opportunities?

A

Gilts, Equities and Property.

214
Q

What is a Bond investment?

A

Where you have fixed capital and fixed return.

215
Q

What is the major attraction of property over the other 2 major investment opportunities?

A

By proactive positive management you can improve its performance

216
Q

What are the major disadvantages of property over the other 2 major investment opportunities?

A

Liquidity – takes time to get in and time to get out of property. Management costs. Transfer (acquisition) costs. Surveyor fees.

217
Q

What is the Yield Gap?

A

The margin above gilts that property investors will require (in a non-inflationary market)

218
Q

What is the Reverse Yield Gap?

A

Where inflation pushes gilts upwards.

219
Q

Quantify purchaser’s costs in percentage terms?

A

For a property over £500,000: Stamp Duty 4%, Agents Fees 1%, Legal Fees 0.5%, Non-recoverable VAT 0.3%.

220
Q

How is Rental and Capital Growth accounted for in a conventional investment valuation?

A

It is implicit in the cap rate. Built into the rate. The higher the yield, the lower the growth opportunity

221
Q

What techniques can be used to value an under-rented reversionary investment?

A

Either the term & reversion or the hardcore method.

222
Q

What is the Renumerative Rate?

A

One part of the YP Dual Rate

223
Q

What is the Accumulative Rate?

A

One part of the YP Dual Rate – the Sinking Fund Part

224
Q

What do you understand Top Slice Income to be?

A

The additional rent you expect to receive at reversion when the property is under-rented or the Overage/Froth when a property is over-rented.

225
Q

Is it correct to value property investments where rent is received Quarterly in Advance on the basis that rent is received annually in Arrears?

A

Yes, as we are analysing nominal Yields and capitalising on the same basis. We are providing same answer

226
Q

What effect does rent received quarterly in advance have on the yield?

A

It pushes it up.

227
Q

What is the difference between conventional investment valuation techniques and DCF techniques?

A

In conventional, rent & capital growth is not made explicit, it is implicit within the calculation. In DCF growth is made explicit. We discount at the investors true target of return - appropriate for low yield investments.

228
Q

When are DCF techniques essential?

A

In a period of high rental growth and inflation. Therefore, we would need to make the growth explicit (as the all risks yield can mask too much).

229
Q

What do you understand by the expression yield construction?

A

We can build up a yield from quilt edged securities then add on property risks to create a yield.

230
Q

What do you understand by the expression Risk Premium?

A

The Yield amount over and above Gilts to compensate for the additional complexities and difficulties

231
Q

Why do property investors require a Risk Premium?

A

As investing in Property is more risky than investing in Gilts.

232
Q

What is the definition of an existing use valuation and when is it undertaken?

A

EUV is used for owner-occupied properties for local authorities and for central Government.

233
Q

Can you discuss a draft valuation report with your client?

A

Yes I can verbally provide informal advice but would not provide written advice as this could be a valuation.

234
Q

How do you analyse a rent free period or capital contribution when determining a net equivalent rent?

A

I would consider the rent incorporating the rent free period to result in a net equivalent rent for the term.

235
Q

What is a tangible asset?

A

A fixed property you can see, touch and feel

236
Q

What is an intangible asset?

A

Something you cannot see, touch or feel such as goodwill

237
Q

What would the process be for valuing goodwill?

A

Goodwill is apportioned from the business and property from the profitability of the property and business.

238
Q

Provide an example of how you have used financial models to provide detailed reasoned advice to a client on the performance of investment and/or development scenarios?

A

Although I have not had the opportunity to use a DCF method, we do use financial modelling as a method to project and model costs. Where we use spreadsheets to calculate a financial model, I would place a caveat into the report addressing potential human error. Also to avoid this we ensure all valuation models are cross-checked by a suitably qualified surveyor.

239
Q

What are the shortcomings/limitations of financial modelling?

A

The build-up of a cash flow with money in and money out which is then discounted back to Present Value. The limitations is the availability of data to project the financial model where a market is not transparent.

240
Q

When was the COVID Valuation practice alert last updated?

What does it advise re. inspections?

And what 4 things does RICS highlight you should consider re. having the full and credible facts available?

A
  • Ordinarily, inspections and investigations should always be carried out, however, the RICS recognises that dispensing with an inspection in the current circumstances is not voluntary and therefore valuation work undertaken in these circumstances without an inspection will still be fully compliant with the RB requirements. This means a desktop is:
    • not a departure from the RB as long as
    • you are sure the valuation can be completed on a restricted basis.
  • In order for an external or desktop valuation to be RB compliant a valuer must have full and credible facts available. RICS highlights several factors that you must also consider:
    • obvious restrictions remain i.e. cannot advise on presence of invasive species etc.
    • there must be sufficient comparable evidence, even if it is more limited currently
    • you must consider whether any rental information provided has/may be affected by COVID
    • you should reflect upon structural and behavioural effects on markets either caused/heightened by COVID-19.
241
Q

Does PII cover desktop valuations, and what do insurers expect to see?

A
  • PII covers desktop valuations, but insurers will expect to see some risk management control and a well-considered valuation file note as to how the value was arrived at and the factors influencing the valuation.
242
Q

Is the COVID material uncertainty clause obligatory, and what wording does RICS currently provide?

A
  • In some circumstances the material uncertainty clause may not be necessary - no longer ‘an unprecedented set of circumstances on which to base a judgement’ VPGA 10, as long as further ‘waves’ have not changed this situation.
  • If there is material uncertainty, you could use the wording output from the RICS Material Valuation Uncertainty Leaders Forum (UK), which provides a general explanatory note of current market conditions and includes either:
    • ‘However, now there is enough data/markets functioning (no val uncertainty)’,
    • or ‘still uncertain…’.
243
Q

Example: hardcore/topslice - £30,000 for 8 years remaining (10%), £10,000 overrented (7%). Show the calculation

A

See attached image.

244
Q

Example: hardcore/topslice - £35,000 for 3 years (8%), £15,000 overrented (11%). Show the calculation (THIS DIFFERS TO MARKS)

A

See attached image.

245
Q

Example: hardcore/layer - £40,000 for 2 years, £10,000 underrented, 7.305% equivalent(?) yield

A

See attached image.

246
Q

Example: term/reversion - £40,000 for 2 years @ 6%, £50,000 MR, ARY(?) of 7%.

A

See attached image.

247
Q

What are the 3 common circumstances (VPGA 10, RB) RICS put forward where material uncertainty could arise?

A
  • Asset has very particular characteristics that present challenges forming opinion of value, regardless of approach/method used (typically a very unusual or unique property)
  • Where information available to valuer is limited/restricted, either by client or valuation circumstances, and the matter cannot be sufficiently addressed by adopting one or more reasonable assumptions.
  • Market disruptions: unforeseen financial, macro-economic, legal, political or even natural events. Inconsistent, or an absence of empirical data, or value being faced with an unprecedented set of circumstances on which to base a judgement.
248
Q

How does RICS advise material uncertainty is expressed in a report?

A
  • Be related to both commentary on general risk of future market movements/inherent risk involved in forecasting cash flows, and risk surrounding the valuation of the specific asset.
  • Expressed in qualitative terms, indicating the valuer’s confidence in the valuation opinion offered by use of a suitable form of words (this is only realistic, as the uncertainty itself arises from a lack of data)
  • In most cases it is either inappropriate/impractical to reflect uncertainty quantatively, and could appear contradictory. If a mathematical measure is included, it is essential that the method/model is adequately explained, with any limitations appropriately highlighted.
  • In some limited circumstances a sensitivity anaylsis may be judged appropriate in order to illustrate the effect that clearly stated changes to specified variables could have on the reported valuation, which should be accompanied by suitable explanatory comment. Be mindful the inherent risk that quantification of any sort can convey a misleading impression of precision.
  • Unless specifically requested, the expression of values within a stated range is not good practice and would not normally be regarded as an acceptable form of disclosure (or ‘in the region of’). Where different values may arise under different circumstances it is preferable to provide them on stated special assumptions.