Valuation Definitions

Question 1

When do you require a Redbook Valuation?

Answer 1

Tax planning, probate valuation, secured lending,

Question 2

Why would you undertake a probate valuation?

Answer 2

Probae valuation is undertaken when a person dies. It includes everything the person owned minus debts. It is undertaken to establish the value subject to Inheritance tax or income tax.

Question 3

What are the 4 exemptions from the RICS Redbook Valuation?

Answer 3

Internal purposes;
Marketing appraisal;
Statutory purpose/claims (e.g. arbitrations);
Litigation in court (e.g. expert witness)

Question 4

What is the Net Internal, Net External, and Zone areas?

Answer 4

Net Internal - useable area measured to the internal finish

Net External - enclosed area of the building, minus the thickness of the external walls, but not internal walls/etc

Zone Areas - In commercial terms, Zoning is used to measure retail properties, allocating different values

Question 5

Identify 8 headings you would expect to find in the Terms of Engagement?

Answer 5

Instruction
Purpose of Letter
Scope of work
Assumptions & Special Assumptions
Valuation Date
Identification of Valuer
Conflicts of Interest
Professional Indemity Insurance
Complaints Handling Procedure

Question 6

What is a special assumption?

Answer 6

As assumption that either assumes facts that differ from the actual facts existing, or assumptions that would not be made by a typical market participant. For example special assumption of vacant possession, despite being within a 1991 Act.

Question 7

What is the difference between terms of business and terms of engagement?

Answer 7

Terms of Business relates to your firms overall general conduct, such as confidentiality, payment terms, anti-money laundering, complaints handling, termination.
Terms of Engagement are more job specific outlining the scope of work, instruction, nature of the work.

Question 8

What is the benefit of valuers registration scheme?

Answer 8

To maintain standards of valuation across the board, maintain parity, transparency and enable scrutiny

Question 9

Define Market value?

Answer 9

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 and where the parties had each acted knowledgeably, prudently and without compulsion.

Question 10

Define Market Rent?

Answer 10

The estimated amount for which a property would be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

Question 11

What other bases of valuation other than Market Rent and Market Value could be used in a Valuation?

Answer 11

Detailed in VPS 4: Investment Value, Fair Value (‘equitable’), Marriage value, liquidation value

Question 12

Why do you make assumptions in a valuation?

Answer 12

Assumptions are necessary to estimate a basis of value, and make a fair judgement

Question 13

What is your firms complaints handling procedure?

Answer 13

Procedure handling procedure detailed on the S&P website.

Nick Greene, email provided which is monitored. Option to post hard copy, and will respond within 5 working days to acknowledge receipt.

Investigation involved reviewing S&P files on matter and interviewing associated employees where appropriate.

If not satisfied, advised to approach the Property Redress Scheme.

Question 14

When would you use Term and Reversion Valuation

Answer 14

When you believe the property is let at a greater or lower value than current Market Value, but there is an expectation that the rent will be adjusted to reflect MR in future

Question 15

What is a yield in a Term and Reversion

Answer 15

The yield is the risk associated with achieving the Years Purchase (YP) in Perpetuity

Question 16

How does a rent review and break clause effect Term and reversion

Answer 16

A rent review clause would provide a deadline for the current rent, and would enable the reversionary investment to achieve market rent sooner, reducing the risk/yield

Question 17

Can you explain what is meant by ‘term’ and by the ‘reversion’

Answer 17

The ‘term’ is the initial block of income which we know to be true.

The ‘reversion’ is the income in ‘perpetuity’ following a rent review clause.

e.g. If you know the current income for a leased property is £100k per annum, this is the ‘term.’ If there is a rent review in 2 years time, then the term would be £100k for 2 years.

If we know Market Rent is £150k, then following the RR in 2 years time, your second block of income would be a reversionary rent of £150k in perpetuity.

Question 18

When is a Discounted Cash Flow approach used?

Answer 18

Discounted cash flow finds the net present value of expected future cash flows using a discount rate. It enables investors to determine whether the future cash flow is greater than the initial investment

Question 19

When is the Investment method used?

Answer 19

Investment method is used to value an income stream or rental income to produce capital value

Question 20

What is YP?

Answer 20

‘Years Purchase’
Multiplier giving capital value

Question 21

Define the Net Present Value?

Answer 21

Sum of future discounted cash flows to get present value
When NPV is positive = exceed investors target
When NPV is negative = Not achieved investors target

Question 22

What are some of the minimum requirements (key headings) to include in a Valuation report?

Answer 22

Identification of valuer
Identification of client
Purpose of valuation
Valuation date
Basis of value
Nature and source of information relied upon
Assumptions and Special Assumptions
Restrictions on use and distribution
Amount of the valuation
Valuation approach and reasoning
Date of the report

Question 23

What is the All Risks Yield (ARY)?

Answer 23

Rate of interest used in the valuation of an investment at market rent

It must reflect all the risks, uncertainties and likely beneficial prospects of the investment.

Question 24

What are the Professional Standards (PS) in the RICS red book?

Answer 24

They are mandatory

PS1 - Members and firms who undertake written valuations are required to comply with RICS standards and IVS

PS2 - Members practicing as valuers must have the appropriate experience, skill and judgement and work in an ethical manner

Question 25

What is the difference in Valuation date between secured lending and probate valuation?

Answer 25

Probate = Date of Death
Secured Lending = Date of Inspection or date of report

Question 26

How might you adjust a comparable residential property to march what you are valuing?

Answer 26

Type, relevance, date of sale, market conditions, location

Question 27

You have valued a farm with an SLDT, and you used term and reversion. How did you decide on a suitable discount rate?

Answer 27

You calculate the reversionary yield which takes into account the risk for future income, and possibility of achieving market rent through rent reviews

Question 28

What is an internal and external valuer?

Answer 28

Internal: Employed by a company to value the assets of the company, for internal use
only, no third party reliance

External: No material links with the asset or client

Question 29

Give an approximate timeline of a standard valuation?

Answer 29

Receive written instructions

Check competence and independence

Issue and then receive signed TOE

Gather information – title documents and plans, tenancies, plans, planning information

Due diligence

Inspect and measure

Market research and obtain, verify and analyse comparable evidence

Draft report

Peer review

Finalise and sign

Report to client

Issue invoice

Question 30

Give some examples of Due Dilligence you would undertake before/during a valuation?

Answer 30

Consider the following:
- tenure
-occupation
-electricity lines
-contamination
-radon
-council tax/business rates
-title burdens
-planning history, restrictions (e.g sssi, listed)
Flooding

Question 31

How do you calculate the yield in the investment method?

Answer 31

income/value * 100 = yield
YP in perp = 100/yield

Question 32

What is the Parry’s table and when is it used?

Answer 32

It is a useful tool for more Complex investment method valuations and you need to account for the likes of inflation, taxes. interest rates.

Question 33

What other activities should you apply the RICS red book valuation standards to, other than tax, probate and and loan security?

Answer 33

purchase reports, investment performance, stock exchange, financial reporting

Question 34

Why is ‘present value’ of money more valuable than future value?

Answer 34

Inflation erodes spending
Cost of capital
Investment risk

Question 35

What is the relationship between ARY and Risk?

Answer 35

ARY and Risk are directly proportional. When the risk increases, the ARY increases

Question 36

Which is more secure, the ‘term’ or ‘reversion’ income and why?

Answer 36

The ‘term’ income is more secure/lower risk therefore the ARY is lower

Question 37

How do you calculate the Market value in a term & reversion?

Answer 37

You add up the capital value of the income blocks (i.e. the ‘term’ and also the ‘reversion’ income).

Question 38

What is a Tenants Covenant?