Valuation Flashcards
What is the purpose of the Red Book?
Consistency, objectivity and transparency are fundamental to building and sustaining public confidence and trust in valuation.
The Red Book applies the latest international valuation standards and supplements them with additional requirements and best practice guidance that, when combined, provide the highest levels of assurance regarding professionalism and quality.
The purpose of the Red Book is to engender confidence, and to provide assurance to clients, that a valuation provided by an RICS-qualified valuer anywhere in the world will be undertaken to the highest professional standards overall.
What criteria determines whether a Red Book valuation is required?
The purpose of the valuation.
What is the UK National Supplement?
The UK national supplement augments the Global Red Book for valuations that are subject to UK jurisdiction.
What are the five methods of valuation?
- Comparable (market).
- Investment.
- Residual (Development appraisal).
- Profits.
- Depreciated Replacement Cost (contractors).
Which methods do you have experience of?
Comparable and Investment.
When would you carry out a profits method?
Profits method would be used to value properties changing hands on the basis of trading potential.
- Get 3 years’ accounts.
- Work out fair maintainable trade.
- Deduct costs and expenses to get FAIR MAINTAINABLE OPERATING PROFIT.
- FMOP X YP = Capital Value.
What is significant about Terms of Engagement when considering valuation?
ToE are the contractual basis of your relationship with the client and an important defence against negligence claims.
- 18 Main Terms:
1. Identification and status of the valuer.
2. Identification of the client.
3. Identification of any other intended users.
4. Identification of the asset (liability) being valued.
5. Valuation currency.
- Purpose of the valuation.
- Basis of value adopted.
- Valuation date.
- Nature and extent of the valuer’s work
- Nature and source of information upon which the valuer will rely.
- Any assumptions and special assumptions to be made.
- Format of the report.
- Restrictions on use, distribution and publication of the report.
- Confirmation that the valuation will be undertaken in accordance with the IVS.
- The basis on which the fee will be calculated.
- Reference to the firm’s CHP and confirmation that a copy will be made available upon request.
- A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations.
- A statement setting out limitations on liability that have been agreed.
Tell me some of the main factors that would impact upon a valuation of say an office?
Location. Size. Age. Condition. Internal Specification. Potential to redevelop. Outside space.
What types of property have you valued?
Office, Retail and Industrial.
What is the typical rent per m2 of say a prime office or a prime shop in your area?
Prime office Wandsworth currently £40 - £45 psf
Prime Retail - £100 - £120 ITZA (Northcote Rd).
Prime Industrial rent - £30 psf. Yield - 4%?
Talk me through the stages of an investment valuation that you carried out at Osiers Point?
- I was asked to value these for marketing guidance purposes, assuming a fitout to CAT A office spec.
- I carried out a conflict of interest and competence check.
- I inspected and measured the property.
- Using the investment method, I capitalised the market rent into perpetuity at a years purchase based on a net initial yield of 6%. (YP = 16.66)
- I also reflected an appropriate void period to arrive at capital values.
What yield did you apply? How did you calculate this?
I applied a yield of 6%.
2 ways of establishing yield:
- Establish the annual rent and divide by the property price (or est. market value) and x 100.
- I sought advice from a valuation consultant as to what yield would be appropriate for this type of building.
How would you value an over-rented property?
Use a hardcore & top slice method
In valuation what is the difference between an assumption and a special assumption?
An ASSUMPTION is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation or verification.
e.g. ‘the market value subject to a lease’
A SPECIAL ASSUMPTION is made where an assumption either assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date.
e.g. ‘the market value on the special assumption that the works had been completed’
Explain to me what you mean by a Net Initial Yield? How does this differ from an All Risks Yield?
Net Initial Yield (NIY) is the current annual rent, net of costs, expressed as a percentage of capital value, after adding notional purchaser’s costs.
An All-Risks Yield (ARY) is often used by valuers of commercial property to provide an indication of the likely risks apparent in a particular investment, and involves a holistic assessment of the condition of the property market.
Covenant strength can have a big impact on value - stronger tenant = lower yield to reflect reduced RISK.
