Valuation L1 Flashcards
What are the five methods of valuation?
Profit (Income)
Residual (Income)
Investment (Income)
Comparable (Market)
Depreciated Replacement Cost (Cost)
What 3 things should you consider before undertaking a valuation?
- Competence
- Independence
- Terms of engagement
Why might a valuation need to be carried out?
Valuations may be carried out for the following purposes:
- Loan security
- Accounts
- Tax (CGT/IHT)
When would you use the Investment Method?
- When valuing an income stream
- Capitalise the rental income to produce a capital value
What is your liability in a valuation?
33% or 75m
When would you use the profit method?
- Valuing a property that depends of the profitability of the business?
- Operating profit capitalised as a yield
When would you use the residual method?
- Find market value of site based on market inputs
- Inputs taken at time of valuation
- GDV-COSTS = LAND VALUE
When would you use the depreciated replacement cost method?
When valuing specialist properties. e.g lighthouse
Value of land in existing use and cost of replacing the building
When would you use the comparable method?
- Most common valuation e.g lone security
- search or comp
-Adjust comps using hierarchy of evidence - Form opinion of value
- Report value
What is the purpose of the Global red book?
Consistency, Objectivity, Transparency
What is the latest Redbook?
Global Standards 2021
What are the key points of IVS?
- Promote transparency and consistency in global valuation practice
- Terms of engagement
What is the definition of market value?
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.
What is the definition of Market Rent?
The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee
On appropriate market terms, in an arms length transaction,
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.’
What elements of the redbook are most relevant to the work you carry out?
- Ethics
- Valuation performance standards (VPS)
What are some of the ethical considerations from the Red Book (2021)
-Conflict of Interest
- Terms of engagement
- Accuracy of valuation
What is enfranchisement?
Cost of increasing Lease
What valuations are exempt from the Red Book?
- internal purposes,
- Agency,
- Expert Witness
How many minimum terms must be included in the TOE and can you name a few?
18 minimum terms
- Identification and status of valuer
- Identification of client
- Identification of any other intended users
- Identification of the asset/liability being valued
- Purpose
- Basis of value
What are the principles of the comparable method?
- Multiple comps
- Similar as possible
- Recent
- Verifiable
Challenges
- Challenging market
- no comps
What is the RICS Guidance note on Comparable evidence in Real Estate (2019)
- Advice on how to use comps
- Encourage consistency in the use of comparable evidence globally
- Address issues of availability and use of comparable evidence, especially in challenging
- Hierarchy of evidence
What is the time line of a valuation?
- Instruction
- Terms of Engagement
- Inspection
- Comparable evidence
- Value - Methods
6 Draft Report - Report to Client
What does VPGA stand for?
Valuation Practice Guidance Application
Name a few VPGA’s
VPGA 2 - Valuation for secured lending. ESG V important
VPGA 10 -
What is VPGA 10
Matters that may
give rise to material valuation
uncertainty
What does VPS stand for?
Valuation Performance Standards
What are some important VPS?
VPS1 = Terms of engagement
VPS 2 = Inspections
VPS 3 = Valuation Reports
What is a yield?
Measure of annual return expressed as a percentage
reflects risk
What is an all risks yield?
Shows the rental revenue of an investment as an annual percentage of the property cost.
What is a true yield?
Assumes rents are paid in advance not in arears
Nominal Yield?
Initial yield assuming rent is paid in arrears
Equivalent yield?
Is a weighted average of the Net Initial Yield and Reversionary Yield
Running Yield?
The yield at one moment in time
What is the IRR?
Initial rate of return
The annual rate of growth that an investment is expected to generate
What are the proposed changes to the Investment methods?
More focus on Discounted Cash Flow which is more growth explicit
What are the 5 VPs?
VPS1 - Terms of engagement
VPS2 - Inspection
VPS3 - Reports
VPS4 - Bases of value
VPS5 - Valuation method
What types of statutory due diligence checks would you undertake when valuing a property?
Asbestos register, council tax, EPC, Flooding, Planning
