Valuation L1 Flashcards
Tell me what the 5 methods of valuation are.
Investment, Profits, Comparable, Residual, and DRC
How do you decide which valuation method to apply?
Based on the nature of the building, its use and occupier.
When and why would you use one of these methods?
I would use the investment method to value commercial retail property.
What is a year’s purchase multiplier?
A way of capitalizing annual income by using a multiplier equivalent a an investment yield return. The rationale is the number of years it would take to pay of the purchase value based on the annual income.
Give me an example of a good covenant and how this might impact a valuation.
Covenant represents the risk associated with the tenant compling with their lease covenants, but typically their ability to pay the rent. The best covenants therefore are companies with very strong histric business performance. Good examples would be McDonalds, or Tesco.
What is PI Insurance (PII) and why is it need?
Professional indemnity insurance provides insurance cover to protect clients against professionals that suffer loss as a result of professional negligence.
Tell me about the RICS requirements in relation to PII.
It is a pre-requisite to starting a regulated firm.
The requisite cover levels are determined by the firms previous years turn over:
£100k = £250k of cover
Up to £200k = £500k of cover
£200k+ = £1m minimum
How did the decision in Hart v Large affect PII?
There was a much broader allowance for damages, determined by the MV of the property sold with the damp defect compared to the MV of the property with no damages.
This is a departure from simply deducting remediation costs as damages.
The precedent means that surveyors could face larger damages liability for negligence.
What level of PII cover does your firm have?
£2,500,000 million
How would you distinguish limitations on liability in your valuations?
Set out in terms of engagement as well as again clearly in the report. Typically ours limit liability to 30% of the properties Market Value as determined by the report.
Where in your valuation report do you state any limitations on liability?
At the end of the report.
What relevance does Hart v Large have on your valuation practice?
Emphasises the need for thorough inspection.
Emphasises the need to provide reasonable advice about further investigation or in that case Professional Consultant’s Certificate (PCC) priort to purchase.
Increases the potential scope for damages to
What aspect of Hart v Large allowed the judge to award damages without applying the SAAMCO cap?
- Large’s correct advice would have prompted the claimants to obtain
the PCC and conduct further investigation. - This would have protected them from losses, making Large
responsible for their damages. - Broader damages, including inconvenience and distress, stemmed
from Large’s negligence. - These damages were not covered by SAAMCO.
What is the SAAMCO cap?
South Australia Asset Management Corporation v York Montague Ltd [1997]
Limits damages to the value of direct cost of negligent advice rather than other consequential damages.
Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?
No
Under the SAAMCO cap, is a valuer’s liability usually limited to the overvaluation on the valuation date?
Yes
What would you do if you received a notice of a PII claim from a client or their solicitor?
Do not admit fault or make any offers of compensation.
Inform the Senior Partner in the firm immediately.
Review the Notice carefully. Note the details of the claim, including the alleged negligent act, the date it occurred, and the claimed losses.
Gather all relevant documents. This includes your surveying reports, project files, emails, and any other communication with the client related to the project in question.
Is there a difference between being negligent when undertaking a survey/valuation and providing negligent advice?
Yes, in valuation your liability is much narrower usually confined to the difference between your value and the actual.
With advice (Purchase the property or not) your liability could extend to all foreseeable losses relating to the advice.
What is run off cover?
PII cover typically of 6 years to cover the period from when a surveyor or firm is no longer practicing and the end of their liability for negligence claims.
If pushed, defined by the Negligence Act 1980
What is the Red Book?
RICS Global Valuation Standards
What is Redbook Vlauation
A formal opinion of value which can be relied upon by the instructing party conducted in line with the standards set out in Global Valuation Standards.
Why does the Red Book exist?
To provide a high quality, consistent and professional way of conducting property valuations.
Tell me about a factor which may impact value.
Location.
In my day to day it relates typically to retail, and the importance of location on footfall, ability to trade, desirability, demand and price.
What is your duty of care as a surveyor when undertaking a valuation?
Duty of Skill and Care to the client.
Why is independence and objectivity important when valuing?
The nature of Market Value requires it. Open market, willing buyer in an armaments transaction.
Is there a separate UK National Supplement?
Yes
What is the UK valuation guidance called?
RICS Global Valuation Standard UK National Supplement
Why does the UK guidance exist?
To tailor the advice to the UK market rather than the broader standard which applies globally.
How should this be applied in relation to the Global Red Book?
Red Book is Bible, UK Supplement is the Sermon.
What was changed in the last update to the UK National Supplement?
A major change relates to UK VPS 3.3, which introduces a mandatory valuer rotation policy for regulated valuations.
UK VPGA 8 – substantial changes reflecting the Charities Act 2022
Explain one UK VPS or UK VPGA that relates to your work as a valuer.
VPS - Global valuation technical and performance standards
VPGA - Valuation practice guidance – applications
VPS 1 - Terms of Engagement
VPGA 8 - Valuation of Real Property Assets
When was the Red Book last updated?
2022
Does this differ from when IVS were last updated?
Yes IVS were updated in 2024
What changes were made?
Redbook 2022 - Lots of inclusions on Sustainability and ESG
IVS 2024 - more suited to practical application and broad userbase.
Which do you follow - the latest IVS or the Red Book Global?
Red Book as it’s in lock step with IVS they should be the same.
Which sections of the Red Book are mandatory and which are advisory?
VPS - mANDATORY
VPGA - offers guidance and best practice in valuing certain asset types.
What does PS1-2/VPS1-5/VPGAs relate to?
PS 1 & PS 2: (Always mandatory).
PS 1 Compliance with standards
PS 2 Ethics and competency
VPGA 1-5: Mandatory; exceptions require clear justification and explanation.
VPS 1 - Terms
VPS 2 - Inspection
VPS 3 - Reports
VPS 4 - Bases of Value
VPS 5 - Approaches
What type of advice does the Red Book cover?
Rules on the essential components of a valuation report and how they should be agreed and composed as well as guidance on how the individual valuation should be conducted.
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
Can provide report in draft. However, must make sure pre-liminary status of the report is conveyed to the client pending issue of final report.
What type of valuations might be relied upon by a third party?
Valuations for financial reporting, “Regulated Purpose Valuations”
Definition of Market Rent
- estimated amount
- interest in real property should be leased
- valuation date
- willing lessor and a willing lessee
- appropriate lease terms
- arm’s length transaction,
- proper marketing
- acted knowledgeably, prudently and without compulsion.’
Tell me what the definition of Market Value
- estimated amount
- asset or liability
- should exchange on the valuation date
- willing buyer and a willing seller
- arm’s length transaction
- proper marketing
- knowledgeably, prudently and without compulsion.
Definition of investment value
‘the value of an asset to a particular owner or prospective owner for individual investment or operational objectives.’
Definition of 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.’
Typically for financial accounting based on the fundamental features of value rather than supply and demand.
What is the difference between an assumption and a special assumption?
A special assumption is not true at the time of writing the report.
An assumption could be true, also may not be made by a typical market participant. (The property is being sold with vacant possession when it isn’t).
An assumption could be true but is accepted as fact within the report once stated. Likely to be made by normal market participant. (The property has the appropriate planning permissions)
What sources of information would you consider when preparing a valuation report?
Client provided data
Market data
Index data
Environmental data
Planning and other statutory inquiries
Map data
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
Disclose this to the client and make sure that the new valuation does not give rise to a conflict, ie
Does completing this valuation require me to disclose information that is confidential to another client. If so the instruction should be declined.
If your firm is too small to have a rotation policy or valuation panel, what else can you do to ensure objectivity?
Having another member review the valuation.
When might a conflict of interest exist in relation to a valuation instruction?
If you have previously provided valuation advice to another client which relied on confidential and material information.
What must be included in your terms of engagement / valuation report?
Critical Question - Very common
Limits of liability
That the firm’s work is subject to monitoring
Confirmation that the firm is regulated and the CHP
Fee Calculation
Compliance with IVS
Restrictions on use
Format
Assumptions and special assumptions
Nature of sources of information relied on
Extent of inspection
Date of valuation
Bases of value
Purpose
Currency
Property/Asset
Identify any other users
Client
Status of the valuer
Where is this covered in the Red Book?
VPS1 (Valuation Performance Standard)
What is a restricted valuation service and can you provide one?
A valuation that would not benefit from the typical level of due diligence required of Redbook. Shortened timescales or drive by valuation.
Only to be conducted where it is suitable for the purpose.
Necessarily will need to include a number of assumptions to make the client clear about limitations.
Should be declined if uncertain.
How do you deal with limitations on inspection or analysis?
Clearly state it in the report, the advice provided outside the report, and the terms if know before hand.
In the report it should be in within the report as well as in general comments and possibly in material uncertainty.
Can you revalue a property without inspecting?
Only if you are satisfied that there has been no material change to the property and the client accepts and this is reflected in terms and the report.
Done with extreme caution.
What RICS guidance relates to the use of comparable evidence?
Comparable evidence in real estate valuation 1st edition, October 2019 (Guidance Note)
What is an internal valuer?
An RICS member working within an organisation to report on company assets.