Valuation Flashcards
What is the process of establishing comparative information?
Search
Assemble comparable in schedule
Adjust using a hierarchy of evidence
Analyse comparable evidence
Report value and keep file note
What are the main changes to the new Red book?
PS1- AVM - the output of an automated valuation model is explicitly included for the first time
PS2- Reinforces Professional scepticism - the valuer should have a questioning mind
VPS3- reporting. You must mention sustainability where relevant.
New timeline - The red book will not automatically be updated with IVS but as appropriate.
What method of valuation would you use to establish rents and yields?
Comparable
What should you consider if you are instructed to value a property?
- Competence - do I have the required skills & knowledge
- Independence - are there any conflicts of interest
- ToE - Issue ToE’s and receive written confirmation of instruction
What are purchasers costs?
- SDLT
- Agents fees
- Legal fees
- Non recoverable VAT on fees
Provide some examples of special assumptions
- vacant possession (when the property is actually occupied)
- planning permission has or will granted
- development completed in accordance with defined spec and plan
- property is let on defined terms (when it is actually vacant)
What is effective date of the most up to date Red book ?
31st January 2020
What does VPS 1 contain in the Red Book?
Terms of Engagement
What is net profit?
Gross profit less indirect costs
Indirect costs such as marketing, utilities, maintenance & property taxation
Please define market value
The estimated amount of which an asset or liability should exchange for on a valuation date between
Willing buyer and seller
In an arms length transaction
After proper marketing
Both parties have acted knowledgeably, prudently and without compulsion.
What is a residual method of valuation?
It is a method of valuation used to establish a market value of a site based on market inputs at a particular moment in time and on a valuation date.
GDV-TDC-Profit = Site/residual land value
What statutory due diligence did you undertake?
Planning, rating and environmental searches
How do you analyse comparable evidence?
Converts raw data into supporting evidence
• Establish points of comparison
– Measurement standards, (e.g. IPMS)
– Compare like with like
• Adjusting comparable evidence
1. Quantitative (size, condition , lease liabilities)
2. Qualitative (location, view, market dependent)
3. Use professional judgement and experience
Please define Investment value
The value of an asset to a particular owner for individual investment or operational objectives
What is the full name of the Red book
RICS Valuation - Global Standards
When is the investment method used?
Used to value shops, offices, industrial and warehouses that are:
- let as investments
- owner occupied
- vacant
- where the majority of comparables are rents (lettings , rent reviews, lease renewals)
- investment transactions
The basic form is:
Market rent (net of outgoings)
X Years purchase (YP)
= Market value
What are the key headings within a valuation report?
a. Identification and status of the valuer
b. Identification of the client and any other intended users
c. Purpose of the valuation
d. Identification of the asset(s) or liability(ies) valued
e. Basis(es) of value adopted
f. Valuation date
g. Extent of investigation
h. Nature and source(s) of the information relied upon
i. Assumptions and special assumptions
j. Restrictions on use, distribution and publication of the report
k. Confirmation that the valuation has been undertaken in accordance with the IVS
l. Valuation approach and reasoning
m. Amount of the valuation or valuations
n. Date of the valuation report
o. Commentary on any material uncertainty in relation to the valuation where it is essential to ensure clarity on the part of the valuation user.
p. A statement setting out any limitations on liability that have been agreed.
What does VPS stand for?
Valuation Technical Performance standards
What are the main changes to the new Red book?
PS1- AVM - written means paper, electronic or digital means or Automated Valuation Model
PS2- Reinforces independence and objectivity. Professional scepticism
VPS3- Reinforces the need for valuation reports to state clearly/ understandably what the valuation approach was and the relevant reasoning. Include details on sustainability
VPGA1- Sets out that performance standards are required when valuing for financial statements
IVS410- apply a minimum of two approaches and recognized methods to value development property
VPGA 8- Only where existing market evidence would support this, or where in the valuer’s judgement market participants would expressly reflect such matters in their bids, should sustainability characteristics directly influence value(s) reported.
AVM considered written valuation
Why was the valuation scheme brought in?
Brought in as a result of the 2008 crash and brought in more accountability.
When is the residual method used?
To value properties that have development, re-development or refurbishment potential
- When it is not possible to value by comparison
What is category C ?
- Evidence from other real estate types and locations
* Other background data e.g. interest rates, stock market
What are the 3 most common circumstances where material uncertainty may arise?
- The asset or liability is unusual, or even unique, type
- Where the information available to the valuer is limited or restricted.
- Dirsupted markets as a result of unforeseen financial, macro-economic, legal, political or even natural events.
What is Economic Obsolescence?
Economic obsolescence occurs when a property loses value because of external factors such as local traffic pattern changes or the construction of public nuisance type properties and utilities such as county jails and sewer treatment plants on adjoining property.
What does the UK supplement to the red book include?
a. Introduction
b. Professional standards
c. Valuation Technical Performance Standards
d. Valuation practice Guidance Applications
e. Summary of changes
What are the aims of the valuation scheme?
A- To improve the quality of valuation and ensure the highest possible professional standards.
B- To meet the RICS requirements to self regulate effectively
C- To protect and raise the status of the valuation profession as the leading expertise in valuation.
What should comparable evidence be?
Comprehensive – ideally several cases • Very similar – ideally identical • Recent – reflecting the current market • At arm’s length in the open market • Verifiable – as far as practicable • Reflecting demand – i.e. an active market
How do you allow for material uncertainty?
VPGA 10 - Matters that may give rise to material valuation uncertainty.
Normally provided in qualtitative terms. Planning, market, socio economic factors etc.
If the retail units were over rented, how would you have calculated your market value and can you talk me through that calculation?
Using the hard core top slice:
- Deduct market rent from passing rent = top slice
- Capitalise the passing rent (core income) into perpetuity
- Capitalised the top slice until reversion at a YP based on the uplifted yield.
- Add together
In what circumstance shall a red book not be used ?
It should be used in all circumstances except for the exceptions
What is the hierarchy of rental evidence?
- open market lettings
- lease renewals
- rent reviews
- independent experts determination
- arbitrators award
6 intercompany transactions
What similarities should a property have to make it a good comparable?
physical characteristics such as size
- location
- TIMESCALE (date of the transaction)
- Use
- Tenure
What part of the red book relates to market uncertainty?
VPGA10
Material uncertainty must be explicitly stated.
What is the purpose of the UK Supplement?
It accounts for particular nuances we have in the UK
Can a desktop valuation be a red book valuation ?
Yes for revaluation without re-inspection. Valuer to make sure there isn’t a material change.
If agreed with the Client and set out within the terms of engagement and valuation report.
How do you define running yield?
The yield at a moment in time
When was the VRS scheme implemented?
30 April 2011
How would you carry out a valuation using the hardcore method?
Investment market - Hardcore & Layer
used for institutional investment market such as prime offices or when the reversion is close in time.
1. Capitalise the term into perpetuity at an equivalent yield
2. Capitalise the reversionary top slice at an equivalent yield, deferred until reversion
3. add together
What is the timeline of a valuation?
Receive Instructions Check Competence Check that there are no conflicts of interest Issue terms of engagement Receive signed terms of engagement Gather information Undertake due diligence Inspect and measure Research market and assemble, verify and analyse information. Undertake valuation Draft report Check by another surveyor Finalise and sign report Report to client Issue invoice Archive file.
Please define market rent?
The estimated amount in which an interest in a property should lease for between
A- a willing lessee or lessor
B- On appropriate lease terms
C- In an arms length transaction
D- After proper marketing
E- Both parties have acted knowledgeably, prudently and without compulsion.
What is the profits method of valuation
Not competent etc
Profits method is based on the profit produced by the business operating in a premises.
Gross earnings- Expenses = profit
Profit @ 50% = Annual rental value
Annual rental value x yield = Capital value
Stand back and look.
Need to have knowledge of particular property.
Define all risk yield?
The rate used on a fully let out building at market rent reflecting all the prospects and risks to a particular investment
Who is a registered valuer?
A registered valuer is a valuer who:
• adheres to the Red Book valuation standards
• is committed to openess and transparency
• are experts in their field, delivering credible and high-quality reports.
How do you define gross yield?
The yield not adjusted for purchasers cost (Such as an auction result)
When would you use the profits methods?
Caravan Park Petrol stattions Car Parks Care Homes Pubs Hotels and leisure centres
If I was selling a bowling alley what method would you use?
Profits
How do you define equivalent yield?
Average weighted yield when a reversionary property is valued using an initial and reversionary yield.
What are the different purposes of valuation?
- Loan security
- Rating
- Accounts
- Landlord and Tenant functions
- Tax - inheritance tax
- Corporate real estate advice.
What is yield?
Yield is a return measure for an investment over a set period of time, expressed as a percentage.
What are some of the onerous clauses, specifically within railway leases that could impact the market rent?
- inspection clause - tenant to allow full inspections and maintenance including removal at their cost of any fixtures and fittings to enable the inspection
- Termination right - Superior LL reserves the right to terminate the lease if there are operations reasons to do so
- outside the Act
What is Physical obsolescence?
Physical obsolescence occurs when a property loses value due to gross mismanagement and physical neglect resulting in deferred maintenance that’s usually too costly to repair.
What is the process of valuing using the profits method ?
- Establish the fair maintainable trade based upon the Reasonable efficient operator expectations
- Arrive at gross and net profit
- Establish the Fair Maintainable Operating Profit based upon the Reasonable efficient operators profit.
- Capitalise the Fair Maintainable Operating Profit
- Consider additions or deductions
- Arrive at a valuation
When would you use the profits method:
Used for income-producing properties that, due to location or some other factor, enjoy a monopoly. It is used when the physical buildings are normally only sold as part of a business.
Examples would be:
• hotels;
• golf courses and other purpose-built sport and leisure centers;
• petrol stations; and
• some restaurants.
What is Category A- Direct Comparable
Category A: direct comparables • Recently completed, near identical, with full information • Recent, similar, with incomplete but adequate info • Similar, under offer, but not yet completed • Asking prices
What is yield?
Yield is a return measure for an investment over a set period of time, expressed as a percentage.
How to find comparable evidence?
Drive through area to see demand- boards Speak to local agents Auction results Databases Market sentiment Date of evidence
What should you consider if you are instructed to value a property?
Competence
Independence
Terms of engagement
What dictates the amount of profit you put on a scheme?
It depends on the level of risk
How do you come to a capital value using the Investment method?
Rent received or market rent multiplied by the years purchase = market value
What is a Functional Obsolescence?
Functional obsolescence occurs when a property loses value due to its architectural design, building style, size, outdated amenities, local economic conditions and changing technology
What is a DRC (contractors method )of valuation
Method used to value public and specialist buildings. i.e. school, churches, town halls, airports, oil refinery, town centers etc.
Modern equivalent - obsolescence + value of site = value.
DO not guess the percentage on Obsolescence and this comes with experience.
How did you establish covenant strength for the retail units?
By doing due diligence and checking the last three years audited accounts to examine profitability and net assets
What is PS1
Compliance with standards where a written valuation is provided
What additional criteria apply to secured lending valuations?
That the valuer has had no previous, current or anticipated involvement with the borrower, or prospective borrower, the asset to be valued or any other party connected with a transaction for which the lending is required (for 24 months, or longer if requested)
What are the 10 VPGA’s ?
VPGA 1 Valuation for inclusion in financial statements
VPGA 2 Valuation of interests for secured lending
VPGA 3 Valuation of businesses and business interests
VPGA 4 Valuation of individual trade related properties
VPGA 5 Valuation of plant and equipment
VPGA 6 Valuation of intangible assets
VPGA 7 Valuation of personal property, including arts and antiques
VPGA 8 Valuation of real property interests
VPGA 9 Identification of portfolios, collections and groups of properties
VPGA 10 Matters that may give rise to material valuation uncertainty
How do you define true yield?
Assumes rent is paid in advance and not in arrears
How do you evaluate your comparable evidence? [Hierarchy of evidence]
Category A- Direct comparable- completed transactions of identical properties
Category B- general market data than can provide guidance- Databases
Category C- other sources
What are the key parts of the Red book?
PS1- Complaince where written vals is provided
PS2- Ethics, competency, objectivity and disclosures
VPS 1- Terms
VPS 2- Inspection, records and investigations
VPS 3- Valuation report
VPS 4- Bases of value, assumptions and special assumptions
VPS 5- Methods of valuation and approaches
International Valuation Standards
Please explain the structure of the red book ?
1, Introduction
2, Glossary
3, Professional standards
4, Valuation technical performance standards
5 Valuation practice guidance applications
5 International valuation standards
How would you value using the profits method ?
Three year’s of accounts to establish fair Maintainable trade
Deducted costs such as food, wages, utilities and maintenance costs to establish an opinion of the FMOP
Research comps to establish YP and then times the FMOP by the YP to reach a cpital value.
What part of the RED book relates to terms of engagement?
VPS1
What are the three valuation approaches?
a. Income (Investment, profits and DCF)
b. Cost approach (DRC and residual)
c. Market approach (Comparable)
How did you establish the net effective rents?
By using the straight line method
- I worked out the rent equivalent to the rent free period (minus 3 months assumed for the fitting out)
- minused this from the total rent payable up to the term certain
- divided that figure by the term to get the annual rent
- divided that figure by the floor area to get the rate per sq ft which is the net effective rent
Why would you use Term and Reversion?
When the property is under rented
When is the profits method used?
To value leisure property, for example:
- Amusement and theme parks
- Camping and caravan parks
- Golf courses
- Nursing and Care Homes
- Squash and tennis clubs
- Theatres
What is PS2
Ethics, competency, objectivity and disclosures
What is a valuation registration scheme?
Valuer Registration is a risk monitoring and quality assurance programme which checks compliance with the RICS Red Book.
What are the most sensitive inputs to a residual valuation?
Intrest rates
GDV
Build costs
How Covid will impact property values?
Material uncertainty
RICS published wording.
Define all risk yield
The rate used on fully let out building at market rent reflecting all the prospects and risks to a particular investment
Please define fair value
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
Talk me through a valuation you did
I firstly I did a check to make sure I was competent, did a conflicts of interest check, prepared my terms of engagement, carried out my inspection and measurement, did my statutory due diligence, carried out comparable analysis, carried out valuation calculations and noted rationale and prepared a draft report for sign off.
What happens if you have a shortage of comparable evidence?
Look further afield; valuer’s expertise to the fore
• Warn clients of uncertainty – NB. Not a sign of
weakness, Red Book requires it if appropriate
• Enables valuation user to make better decisions
Required by VPS 3 and VPGA10
What makes a valuation Red Book?
Compliance with the Professional Standards and the Valuation Technical Performance Standards
What is an assumption and a special assumption?
- An assumption is something is likely to be the case, e.g assuming the building is fit for immediate occupation and use or assuming it is not on a flood plain.
- A special assumption is when you make an assumption when you know that something is not true, e.g vacant possession when you know there is a tenant in occupation or planning permission
How would you define reversionary yield?
Market rent divided by current market value on an investment let at a rent below market rent, and expressed as a percentage.
How do you establish Gross Profit?
Turnover less costs of sale
Direct costs such as food & beverage for a hotel, staff costs for a care home, petrol for a petrol filling station
How do you carry out a term and reversion valuation?
- Capitalise passing rent using YP at a yield discounted from market rate
- Capitalise the reversion using the market rent into perpetuity using YP from the market rate
- discount the reversion using present value £1
- Add them together
- Deduct purchasers costs if required.
Generally used when asked to value an interest with rent renewals and under rented properties.
What are the key headings within the terms of engagement?
a. Identification and status of the valuer
b. Identification of the client(s)
c. Identification of any other intended users
d. Identification of the asset(s) or liability(ies) being valued
e. Valuation (financial) currency
f. Purpose of the valuation
g. Basis(es) of value adopted
h. Valuation date
i. Nature and extent of the valuer’s work – including investigations – and any
limitations thereon
j. Nature and source(s) of information upon which the valuer will rely
k. All assumptions and special assumptions to be made
l. Format of the report
m. Restrictions on use, distribution and publication of the report
n. Confirmation that the valuation will be undertaken in accordance with the IVS
o. The basis on which the fee will be calculated
p. Where the firm is registered for regulation by RICS, reference to the firm’s complaints handling procedure, with a copy available on request
q. A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations
r. A statement setting out any limitations on liability that have been agreed.
Tell me if another way to calculate hardcore and layer
Standard calculation of investment method for the under rented part at yield low yield
Deffered yield calculation with higher cap rate due to uncertainty to calculate new YP. Then times the new YP by the difference between the under rented and market rent.
Used for overented
Where do you source evidence of comparable land sales, what would you do if these could not be sourced?
Land regsitry, agents or our internal land team. Planning portal to identify developers.
What are the 5 valuation and technical performance standards?
VPS 1 - Terms of engagement (scope of work)
VPS 2 - Inspections, investigations and records
VPS 3 - Valuation reports
VPS 4 - Bases of value, assumptions and special assumptions
VPS 5 - Valuation approaches and method
What methods did you utilise in your valuation of xxx street?
Comparative and investment methods
What is obsolescence?
the process of becoming obsolete or outdated and no longer used.
How do you record comparable evidence?
Address, property type, location
• Nature of asset being compared (F/h, L/h)
• Legal details (lease liabilities, etc)
• Property description, accommodation
• Transaction type, date, financial details
• Parties involved
• Sources of information
• Comments on reliability, quality of data
Tell me of another way that you could calculate term and reversion
Term- use discounted cashflow to work out term
Reversion
Deffered Yp % x years perpetuity = new yp
New YP x market rent = capital value
Used for under rented property
What method would you use to value a cinema?
Profits method
What is the difference between value and worth ?
Value is based on comparable evidence and using the 5 methods of valuation
Worth is the value of an asset to a particular owner or prospective owner for individual investment or operational objective. As per the red book
How would you value over rented property using the investment method
Hardcore method
Capitalise higher rent with higher yield.
Lower rent at lower yield.
What are the exceptions of the Red book?
- Statutory basis - where carried out by a statutory officer
- Agency - marketing appraisal
- Negotiation or litigation - e.g rent review
- Internal purposes only
5 Expert Witness Valuation - duty to court
What does VPGA stand for?
Valuation Practice Guidance Applications
What is the difference between a red book valuation and a non red book ?
One has more liability than the other.
Why would you use profits to sell a bowling alley?
It is used when the physical buildings are normally only sold as part of a business.
What does VPGA 8 relate to?
Valuation of real property interests
What are the main contents of the terms of engagement (scope of work
- The Client
- The property
- The valuer
- The purpose
- The basis of value
- Valuation date
- Assumptions and special assumptions
- Extent and limitations of inspection & investigations
- The Fee
How do you calculate a residual valuation?
GDV-TDC-Profit = site value
What does VPGA 2 relate to?
Valuation of interests for secured lending
How do you define net yield?
The resulting yield adjusted for purchaser costs
What makes a good comparable?
A property that is similar in terms of location, size, condition, tenure, incentive and covenant. A property that has the same or very similar characteristics to the property you are valuing.
In land it will be a site that was similar in terms of location, condition, (greenfield or brownfield), affordable housing, s106 requirements and similar site.
What is marriage value?
An additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values.
Are there any additional requirements when undertaking a valuation in which the public has an interest or third parties may rely?
Yes, the valuer must disclose in the terms of engagement, the report and any published references:
- the relationship with the client
- rotation policy
- time as signatory
- proportion of fees
How did you carry out a valuation?
- Receive instructions from the client
- Check competence. Skills, understanding and knowledge
- Check independence
- Issue terms- Competence, Independence, Terms
- Receive signed terms of engagement
- Carried out due diligence. Check no matters that could adversely impact
- Inspect and measure
- Research market and assemble, verify and analyse comparable
- Undertake valuation
- Draft report
- Get senior surveyor to review
- Finalise and sign report
- Send report to client
- Issue invoice
How do you define initial yield?
Simple income yield for current income and current price
What due diligence do you need to undertake when carrying out a valuation ?
a. Asbestos register
b. Business rates
c. Contamination
d. Equality act compliance
e. Environmental matters
f. EPC rating
g. Flooding
h. Fire safety compliance
i. Health and safety compliance
j. Highways
k. Legal title and tenure
l. Public rights of way
m. Planning history
What are the five methods of valuation?
Comparable Residual Investment Depreciated replacement costs Profits
Is there a UK Variant of the red book
RICS Valuation - Global Standards 2017: UK national supplement effective 14 January 2019
What are market Transactions?
Market transactions
– Direct transactional evidence, sale prices
– Publicly available information (Land Registry)
– Published databases
– Asking prices
– Historic evidence
What are the three types of obsolescence?
Functional Obsolescence
Economic Obsolescence
Physical obsolescence
What is the gross initial yield?
The rent expressed as a percentage of the purchase price
What is a special purchaser?
A particular buyer for whom a particular asset has a special value because of advantages arising from its ownership that would not be available to other buyers in a market.
