Valuation Cards Flashcards
You say you are familiar with the 5 methods of valuation what are these?
Profits
Comparative
Investment
Residual
Depreciated Replacement Cost
When would the depreciated replacement cost method be used?
Where there is limited to no comparable evidence for specialist properties such as oil refineries, submarine bases or an ancient monument. Also known as “method of last resort”
Can you talk me through the depreciated replacement cost methodology?
- Value of land in its existing use (assuming planning permission exists)
- Add cost of replacing building plus fees
- Make discount for depreciation, deterioration and obsolescence
- Use BCIS then judge level of obsolescence
What can and can’t a DRC be used for?
Not for vals for secured lending but can be used for calculating market value of specialist properties but only for financial statements
What are the international valuation standards?
These are valuation standards published by the International Valuation Standards Council to promote transparency and consistency in valuation exercises which are implemented in the red book.
For example - IVS 105 Refers to valuation approaches such as income, cost and market.
What is the UK National Supplement?
This augments the red book global and sets out requirements for members undertaking valuations subject to the UK jurisdiction.
Tell me 3 types of valuation covered by the national supplement
Valuations for secured lending
Valuations for capital gains tax
Valuation of charity assets
What are the some of the mandatory requirements of the UK National Supplement?
- Compliance with valuation standards in the UK jurisdiction
- clear terms of engagement
- reporting requirements (minimum within valuation report)
How are the IVS and National Supplement linked to the red book
The IVS are published separately but implemented within the Red Book and the National Supplement augments this for members undertaking valuations subject to the UK jurisdiction.
When was the red book last updated?
31 January 2022
What are the some of the changes from the previous red book
- Need for clear unambiguous terms of engagement
- Term ‘non red book’ should not be used in terms of engagement
- Greater focus on ESG and Sustainability
Can you tell me what the hardcore layer method of valuation is?
- Used for over rented properties.
- Split the valuation into two slices effectively
- MR on bottom
- MR - Rent passing on the top and apply higher yield to reflect riskier portion.
What is the term and revision method?
- Used for under rented properties / investments
- Term is capitalised until next review or lease expiry at initial yield
- Reversion to MR valued in perpetuity at reversionary yield
What is the difference between and internal and external valuer?
Internal - employed by company to value their assets / enterprise.
External - no material links to the asset to be valued or the client.
What is the structure of the Red Book
6 parts as follows:
- Introduction
- Glossary
- Professional Standards (PS) Mandatory
- Valuation Performance & Technical Standards (Mandatory)
- Valuation Applications (VPGA)
- International Valuation Standards
What parts of the Red Book are mandatory?
PS 1-2 are mandatory and VPS 1-5 unless otherwise stated for one of the exemptions from red book compliance.
What are the FIVE exemptions from Red Book Global Compliance?
1.Advice in negotiations or litigation
- When provided for internal purposes
- When provided for agency/brokerage work
- Evidence as expert witness
- When valuer performing statutory function
What is Professional Standard 1 and 2?
PS 1 = Compliance with compliance and practice statements where written valuation is provided. (Red book compliance).
PS 2 = Ethics, Competency, objectivity and disclosures (i.e CIT)
What are VPS 1 - 5?
VPS 1 - Terms of Engagement (minimum)
VPS 2 - Inspections, Investigations and Records
VPS 3 - Valuation Reports (minimum)
VPS 4 - Bases of Value, Assumptions + Special Assumptions
VPS 5 - Valuation Approaches and Methods
What Valuation Applications within the Red Book are relevant to your line of work?
VPGA 2 - Valuations for secured lending
VPGA 4 - Valuations of trade related property
VPGA 8 - Valuation of real property interests (inspections and investigations)
VPGA 10 - Matters that give rise to material uncertainty (valuation report not misleading)
What is the structure of the UK National Supplement?
4 parts:
- Intro
- UK professional and valuation standards
- Uk valuation practice guidance applications
- Summary of changes from Red Book 2014
What are some of the UK VPGA
Secured Lending = UK VPGA 10
Capital Gains = UK VPGA 15
Valuation for Charity Assets = UK VPGA 8
Have there been any reviews into valuation at the RICS currently?
PETER GRAY REVIEW
- Independent review of real estate investment valuations (Dec 2021)
- 13 recommendations including
- Implementing a rotation process for valuers
- Use of DCF as the principal method for investment val
- Valuation compliance officer role in firms
- review of post qualification requirements for valuers and regular revalidation of valuers.
What is Margin of error?
Permissible range allowed by court in respect of valuation.
Plus or minus 5% resi
Plus or minus 15% for commercial depending on complexity of asset (usually 10%).
What is hope value?
Value arising from a change in future circumstances affecting the property such as granting of planning permission.
What is marriage value?
Enhanced value created from the merger of two interests (physical or tenural)
What are the SDLT rates?
0 to £150k = Nil
£150k to £250k = 2%
Over £250k = 5%
What is a special purchaser?
Someone who’s ownership of an asset gives them particular advantages that would not be available to other buyers in the market / market participants.
E.g adjoining landowner
Talk me through the investment method of valuation
Rent Received or MR x YP = MV
Comps important for yields and rent
What is a yield and what factors do you consider when establishing a yield?
Yield = A measure of investment return (expressed as a percentage)
- RISK is a major factor when determining a yield
- Quality of location
- Quality of covenant
- Prospects of rental and capital growth
- Use of the property
- Lease terms
- Security and regularity of income
- Liquidity - ease of sale
What is a net initial yield and why did you choose this?
- Based off how comparables analysed
- annualised rent, net of costs, expressed as a percentage of capital value, after adding notional purchasers costs
How do you calculate a yield?
Income \ price x 100
What is a YP multiple and how is it calculated?
100 / Yield = YP
This is the amount of years the income will take to repay the purchase price
What is a Reasonably Efficient Operator (REO) ?
A reasonably efficient operator is an assumption made by the valuer that the market participants are competent operators that operate in an efficient manner.
What is adjusted net profit?
Valuers assessment of actual net profit of a currently trading property.
What is Fair Maintainable Operating Profit (FMOP).
Level of profit stated prior to depreciation and finance costs relating to the asset itself
What is Fair Maintainable Trade / Turnover (FMT)
Level of trade expected by REO on the assumption that the property is fully operational, equipped and maintained.
Can you talk me through the profits method of valuation and how would you go about doing this?
Establish level of turnover (wet / dry trade and any machine income)
Less costs / purchases = Gross profit
Less reasonable working expenses
= Unadjusted net profit
Less directors remuneration
= Unadjusted net profit
X YP multiple gathered by comparable evidence = Value
What is the Peter Gray review?
Independent review into real estate investment valuations:
13 key reccomend such as:
- compliance role specific to valuation
- rotation of valuers
- increased diversity within the valuation profession
- raising any concern about ethical conduct
Also stated the 13 recommendations come as a package and must be implemented together
Where does the hierarchy of evidence come from?
Guidance Note ‘Comparable Evidence in Real Estate Valuation’ 1st edition 2019
What is the hierarchy of evidence?
CATEGORY A - Direct comparables of:
- completed transactions of near identical properties
- completed transactions of other similar real estate full data avail
- completed transactions of similar real estate where enough data avail
- similar real estate where offers received but no contract
- asking prices (careful consideration)
CATEGORY B - General market data
- historic data, other indirect evidence (indices), demand / supply data.
- published sources or commercial database
CATEGORY C - other sources
- transactional evidence from other real estate types and locations
- other background data (interests rates and stock market movements and returns which give an indication of real estate yields)
What is growth implicit?
Reflects all prospects of rental / capital growth in the yield
What is growth explicit ?
Assumptions can be seen throughout the calculation such as a DCF - in comparison to growth implicit.
What is an all risks yield?
Remunerative rate of interest used in the valuation of a fully let property at market rent reflecting all prospects and risks attached to the particular investment.
What is a true yield?
Assumes rent is paid in advance
What Is a nominal yield?
Initial yield assuming rent paid in arrears
What is a gross yield?
Yield not adjusted for purchasers costs e.g auction result
What is an equivalent yield?
Average weighted yield when a reversionary property is valued using an initial and reversionary yield.
What is an initial yield
Simple income yield for current income and current price
What is a reversionary yield
MR / Current price on an investment let at below MR
What is a running yield
Yield at one moment in time
What do purchasers costs consist of?
Stamp duty at the prevailing rate
Agents fees 1%
Legal fees 0.5%
What is Net Present Value
Sum of the discounted cash flows of a project
Can be used to determine if an investment give a positive return against a target rate of return.
What is IRR?
Internal Rate of Return - the rate of return at which all future cash flows must be discounted to produce a NPV of zero.
What is market value?
The estimated amount for which an asset or liability should exchange:
On the valuation date
Between a willing buyer and willing seller
In an arm’s length transaction
After proper marketing
Where the parties had acted knowledgeably, prudently and without compulsion
What is market rent?
Estimated amount for which an interest in real property should be leased:
on the valuation date
between a willing lessor and willing lessee
On appropriate lease terms
In an arms length transaction
After proper marketing
When the parties had acted knowledgeably, prudently and without compulsion
What is investment value?
Value of an asset to a particular owner or prospective owner for an individual investment or operational objectives.
What is fair value?
Considered to be the same as market value but in regard to IFRS 13 this is the value stated for financial reporting.
Fair value - 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.