Valuation (L2) Flashcards
What do you check prior to undertaking a valuation?
Check:
Competence
Independence (COO)
TOE signed
What statutory due diligence do you research prior to undertaking a valuation?
Check no material matters affect the valuation.
Council tax, EPC,H&S, PROW, planning
What is a lease event?
Event review, break clause or other notable change to the lease.
16 steps of a valuation.
Instruction
Competence/COI/TOE/SIGNING
Info gathering/DD/inspect or measure
Comparables
VALUATION
Draft report / peer review / sign off
Issue to Client
Issue invoice
Archive folder
What is the RBG and what is it’s purpose?
RICS Global Valuation Standards 2021 (effective 31.01.22)
- objectivity
- consistency
-transparency
What are the contents of the RBG?
PART 1 Introduction
PART 2 Glossary
PART 3 Professional Standards
PART 4 Valuation Technical and Performance Standards
PART 5 Valuation Practise Guidance Applications
PART 6 International Valuation Standards
What are the updates that were made to the RBG in 2021
Requirement to comply
All parts are mandatory (expect P5 VPGAs)
Valuation is compliant or not (no QUASI)
ESG & Sustainability (VPGA 8 emphasises ESG) is integral to a valuation.
RISKS include Direct, Indirect, Transitional, Physical.
Explain Part 3 of the RBG to me.
P3- RICS Professional Standards
PS 1 - compliance to the RBG (exceptions)
PS 2 - ethics competency objectivity and disclosures
What is PS1 in the RBG?
Compliance to the RBG.
Outlines a valuer must comply to the mandatory info in the RBG except for the following exclusions:
ALIES
Agency
Litigation advocate
Internal Val
Expert witness evidence
Statutory function (EG tax)
What is PS 2 in the RBG?
Ethics, competency, objectivity, disclosures
Must act in acc. With the ROC
Employ professional skepticism (don’t just rely on data)
State required disclosures
COI/Competence/TOE.
What is part 4 of the RBG?
Valuation Technical and Performance standards
VPS 1 - TOE
VPS 2 - inspections, investigation, records
VPS 3 - Valuation reports
VPS 4 - Bases of Value
VPS 5 - Valuation Approaches & Methods
What is VPS 1?
TERMS OF ENGAGEMENT
Minimum requirements:
Identify Asset, Valuer & Client
Purpose / Use
Date
Extent of investigation
Sources of information
Assumptions/Special Ass.
Bases of value
RBG/IVS compliance
RICS compliance
Currency
Liability
Fee basis
CHP
What is VPS 3?
VALUATION REPORTS
Minimum requirements
Identify Asset, Valuer, Client
Date
Purpose/Use of Valuation
Bases of Value
Market uncertainty
Assumptions/Special Assumptions
Extent of investigation
Sources of information
Limitations
Restrictions in use
Compliance to standards
Valuation approach and figures
What is the difference between VPS 1 and VPS 3?
VPS 1 is TOE
VPS 3 is Valuation Reports
A report has everything in the TOE except fee basis, RICS compliance statement, liability and CHP.
The report has additional items such as Market uncertainty
Limitations
Restrictions in use
Can you give preliminary advice during a valuation?
You may, for internal purposes. May not be relied upon or change the outcome of the valuation.
What is VPS 4?
BASES OF VALUE
ASSUMPTIONS/SPECIAL ASSUMPT.
Market Value
Fair Value
Market Rent
Investment Value
Assumption
Special Assumption
What is Market Value
The estimated amount in which an asset should exchange for on the valuation date between a willing seller and buyer in an arms length transaction, following the correct marketing process with all parties acting knowledgeably, prudently and without compulsion.
What is Market Rent
The estimated amount a real estate interest should be leased at on the valuation date between a willing leasor and leasee in an arms length transaction, following the correct marketing process with all parties acting knowledgeably, prudently and without compulsion.
What is fair value
The fair price to sell an asset in an orderly transaction between market participants on the measurement date.
The RICS generally accept this as MV and is REQUIRED BY THE IFRS and IASB.
What is the difference between market value and fair value.
Fair value is at measurement date/ Market value is at valuation date.
Market value requires proper marketing, therefor EIA not appropriate for any off market sale or exclusive sale.
What is investment Value?
The value of an asset to a particular owner/prospective owner for investment objectives.
Measures the worth to reflect the value against a clients investment criteria
What is as assumption?
Information reasonable to accept without further investigation.
What is a special assumption?
Assumption assumed to be fact even if it is not (planning permission).
Always agreed in writing.
What is Part 5 of the RBG?
VALUATION PRACTISE GUIDANCE APPLICATIONS
X10
Relevant to me:
VPGA 1 - Valuation for inclusion in Financial Accounts
VPGA 8 - Valuation of Real Property Interests
VPGA 10 - Matters that may give rise to Material Valuation Uncertainty
What is VPGA 1
VALUATION FOR INCLUSION IN FINANCIAL ACCOUNTS
Must adhere to PS 3
Must adopt Fair Value for IFRS accounts
What is VPGA 8?
VALUATION OF REAL PROPERTY INTERESTS
Covers inspection and investigation.
Emphasis on ESG and sustainability
Risks to Val:
Indirect/Direct/Transitional/Physical
What is VPGA 10?
MATTERS THAT GIVE RISE TO MATERIAL UNCERTAINTY
overriding idea that a valuation report cannot be misleading.
Draws attention to any uncertainty at the valuation date.
Cannot use standard caveats
What is part 6 of the RBG
INTERNATIONAL VALUATION STANDARDS (2017, 2022)
The current basis for the RBG.
General Standards:
IVS 101-IVS 105
Asset Standards: (relate to specific asset types)
IVS 410 - Development Property
What updates were made to the IVS 2022?
Key changes include:
Framework of standard compliance and permitted departures.
Addition of core principles
Internal Valuer - employed Valuer
External Valuer - engaged Valuer
What are the General Standards of the IVS?
IVS 101- Scope of Works
IVS 102 - Investigations and Compliance
IVS 103 - Reporting
IVS 104 - Bases of Value
IVS 105 - Valuation Approaches and Methods
What is an Asset standard in the IVS relevant to your line of work?
IVS 410 - Development Property
IVS 101-105 apply to IVS 410.
Development Asset standard includes any modification and additional requirement and specific examples.
What is VPS 5?
Valuation APPROACHES and METHODS
Approaches:
Cost
Income
Market
Method:
cost - DRC
income - profit, investment, residual
Market - comparable
Who’s responsibility is it to choose a method of Val.?
The values responsibility. >1 approach is best practise as per the RICS PS valuation of dev property.
Must choose and justify.
What is the Market Rent * Years Purchase?
Market value
What is the Years Purchase?
As a multiplier, it is the yield to achieve Market Value.
It is the inverse ratio of income yield.
The PV of £1 received annually in perpetuity and discounted at the initial yield rate.
How do you calculate years purchase from a yield?
1 / % yield = years
Years * net income = capitalised property value.
What does implicit mean when using the investment valuation method?
Implied growth rate is derived from a market capitalisation rate: YIELD.
What is a yield
Annual Return on Investment expressed as a % of capital value.
What is the ALL RISKS YIELD?
Interest rate on a property let st Market Rent.
Reflects a holistic Assessment of market risks and opportunities.
What is the gross yield vs the net yield ?
Gross is not adjusted for purchase costs.
Net is adjusted for purchase costs.
What is the reversionary yield?
Market Rent/current price. Yield used when reverting a lease event to the market rent.
What is the equivalent yield?
Average weighted yield when reversionary property is valued using a balance of the Initial and Reversionary yield.
What is the initial yield?
A simple income yield (reflects current income and current price)
What is the hierarchy when choosing lease comparables? Out of a new lease, lease renewal or rent review?
New Lease - most market facing
Lease renewal - opportunity to renegotiate (revert to MV) but could be inflated if occupant wanted to stay
Rent review - least market facing as the terms/mechanisms within the lease are unknown. Ie if reviews are based on fixed increases or follows inflation.
Explain the investment method of valuation
Used to value income flows such as rental income.
Rent is capitalised at an appropriate yield to deduce a Market Value.
Aware of the implicit assumption for Term and Reversion and the Hardcore approaches.
Also aware of the explicit technique in the Discounted Cashflow technique, using cash flows for a finite period to find the present value of cash flows.
What are the 5 methods of valuation?
Profit
Investment
DRC
Comparable
Residual
What are the valuation approaches and what part of the RBG do these step from?
Cost
Income
Market
VPS 5
Explain which technique refers to an under rented property? (Is passing rent is less than market rent)
TERM AND REVERSION
Passing rent (the term) is capitalised at the initial yield which is a low risk yield) until the lease event/ rent review.
The rent then increases to Market rent (via comparable) in perpetuity whereby the rent is capitalised using the reversionary yield (higher).
Capitalised rents then added together= MV.
Explain the hardcore/layer approach in investment valuation??
Used for over rented properties (passing rent > market rent).
Income flow is divided horizontally. The top slice reflects the passing rent, which is capitalised at a higher yield bc the income is not guaranteed therefore riskier.
The bottom slice is capitalised with an initial (lower) yield throughout the full rental term, as the income is guaranteed in perpetuity.
What is the DCF technique?
Technique that is used when the income is set over a finite period. Therefore CF’s are explicit.
Shows the time value of money.
The sun of all net CF’s (income-expenditure) and the exit value discounted back to Present value using an appropriate discount rate (ARY) to find the desired rate of return:
NET PRESENT VALUE. If >0 the investment meets the the target ROR.
What is the IRR?
Internal rate of return.
Rate of return at which all future CF’s are discounted to a NPV = 0.
Calculated using linear interpolation (using software).
What is the profits method of Val?
Using 3 years of full trading accounts.
TURNOVER
- costs and purchases
GROSS REVENUE
- reasonable expenses
FMOP
* years Purchase
= capital value.
When is the profits method appropriate?
When is the profits method appropriate?
Valuing a business based on its trading profits (not building!)
Pub/Gym/Petrol station. Where income is key to valuation.
:) Good cross check of comparison
:( Must adjust for exceptional purchases
What is the depreciated replacement cost method?
‘Contractors method’
Method of Val used when there is little/no direct market evidence or not generally exchanged on the open market. Ie for specialised properties such as a sewage works or lighthouse.
Methodology of the DRC method of valuation?
The property must be owner occupied for accounting purposes and fit for current purposes.
2 step methodology:
1. Value land (land only) using comps for the land
- Add current cost of replacing building (as a modern equivalent)
-any discount for depreciation, deterioration, obsolescence.
Valuer should state the MV of any readily available alternative use for the building
What is obsolescence ?
Physical (wear and tear)
Functional (design no longer fulfils the asset)
Economic (changing market conditions for the assets use)
What is Hope Value?
Arises from future expectation eg planning permission.
What is marriage value?
Created through a merger of interests. In that the sum of both is greater than the individual.
What is a margin of error.
The permissible range of a valuations’ innaccuaracy allowed for in courts.
Typically 10%
Singer & Wood allowed up to 5% in resi vals
What are purchasers costs?
Costs to deduct from the gross MV.
SDLT, Agentsfee, solicitors fee.
Between 0.5-1%
WAULT?
Weighted average unexpired lease term (left until expiry)!
What is a rent free period
The period which is for a new lease whereby rent isn’t paid.
Headline rent -> net effective rent.
Done on a DCF or straight line basis.
Not the same as a fit out period.
What is a random strip and how do you value one?
Controls access to another peice of land.
Stokes V Cambridge - up to 1/3 of land value.
What are rights to light and party walls?
RTL: 20 years of uninterrupted light. Damages paid.
Party Wall:astride the boundary for 2+ owners. PW Act 1996 is the framework to resolve disputes.
What is SDLT and what are the thresholds?
SDLT is a progressive tax paid on the gross land value.
Payable by purchaser.
Non resi (commericial SDLT)
£0-150k = 0% SDLT
£150-250k = 2% SDLT
>£250k = 5% SDLT
Explain resi SDLT rates
£0-£250k = 0% SDLT
£250-925k = 5% SDLT
£925k- £1.5m = 10% SDLT
>£1.5m = 12% SDLT
FTB pay 0% up to £425k
2nd homes are 3% more than current rate threshold.
What was in the independent review of investment valuations 2021?
SRB appointed Peter Gray to assess global investment Val standards. 13 reccomendations whcih the RICS accepted in full.
Sept 2022 RBG UK supplement updated to ensure Valuer rotations for transparency following the review.
Where is ESG guidance found in literature?
Sustainability and ESG Guidance in commercial property valuation 2021.
RBG VPGA 8
What update to the RBG was made in October 2023?
Encompassed transparency in the valuation profession by requiring Valuer rotations (for a client) every 10 years. Follows independant review of real estate investment valuations 2021.
What is a prime yield versus a secondary yield?
Prime yield is the highest quality of comparable, ie with the lowest risk.
Secondary yield is a lower quality of comparable, and incurs a higher risk.
What is the hierarchy of valuation methods?
Comparable
Investment
Residual
Profits
DRC
What RICS document outlines guidance in valuing new build properties consistently?
RICS Professional Standard Valuation of Individual New Build Homes 2019
What is the RICS VRS?
A risk monitoring and quality assurance programme to check compliance to the RBG (audited) .
It is MANDATORY for RBG vals.
To retain high quality, standards and self regulating function of the RICS.
Profit on cost is higher or lower than profit on GDV?
Profit on cost is < Profit on GDV.
What is the definition of GDV as per the RICS Professional Std Valuation of Development Property?
The aggregate MV of the proposed development, assessed on the special assumption that the development is complete on the date of valuation, considering the prevailing market conditions.
What is the current base rate and inflation rate?
5.25% base rate
6.7% inflation.
Ave 3 year fixed mortgage (60% OMV) is c. 4.7%-5%
What is the professional standard that relates to Financial Viability Assesments?
RICS Prof. Std Financial Viability in planning: conduct and reporting 2019.
What are the principles behind the RICS Porf. std Valuation of Development Property 2019?
Supplement to the IVS 410-Development Property.
Use of assumptions and special assumptions
Best practise to use two methods of valuation COMPARABLE and RESIDUAL.
What is the definition of PROPERTY DEVELOPMENT in the RICS PS valuation of development property 2019?
Interests where re-development is required to achieve the highest and best use of where improvements are either contemplated or in progress.
What is the RBG UK National Supplement? 2018?
Mostly an advisory document.
Practise guidance.
Updated 2023 October (transparency- Valuer rotation)
Now includes Val guidance for social housing.
Intro
Mandatory std’s
VPGAs
EBG Changes summary
What sources of finance are you aware of?
Debt. (Senior)
Equity.
Mezzanine.
Own capital.
What is the difference between LTV and LTC ratios in debt?
Loan to value - c. 60%
Loan/total asset value borrowed against
Loan to cost - c.80%
Loan/ total cost (adopted in difficult markets)
Mezzanine financings is > 60% LTV usually. Higher IRS. Higher risk.
What compounded interest rates are there?
Bank of England Base rate + premium
SONIA (sterling overnight index average) which is the average IR a bank pays to borrow overnight.
What is a swap and a swap rate?
Swap: derivative hedging for IRs
Swap rate: Fixed market IR
Dev appraisal versus residual valuation
DA: tool to financially asses viability. Profitability. Client inputs.
RA/V: specific BA of RLV. Market data. Market inputs at valuation date.
Residual
Disadvantages of the residual method?
Inputs must be accurate
CF timings aren’t considered
Sensitive outputs
Implicit assumptions
Always cross check with comp.
What is the profit erosion period?
The time for all profits to = 0% through erosion of holding charges on a scheme. Eh IR’s on holding costs.
What is overage? What must overage clauses consider?
Sharing of additional receipts
EG: planning (sqft) or sales (£) overage
Key elements include: duration, trigger, calculation, amount and payment security such as a charge or random
Name what a sensitivity analysis measures and the 3 sensitivity analysis.
Simple - finance rate/BCIS
Scenario - development programme/design
Monte Carlo - probability simulation
How would you undertake a residual valuation?
(Internal uses)
GDV - aggreg. Value of MV of dev using special assumption it’s complete.
-planning costs (S106,CIL, consultant, fees)
-professional fees (10-20% BC) (DD,Structual eng, building warranty)
-build cost (30% GDV) (demolition, clearance, remediation,prelims)
(BCIS: m2, scurve, cross ref with All In TPI) & contingency (5-10% BC)
-S&M (3% GDV) sales agent, incentives, show home.
-financing costs : site purchase, holding costs. (Straight line) Build cost (scurve)
- profit (24%)
RLV
What are the steps to a comparable method of valuation?
Comparing relevant properties and adjusting to apply to the subject property. Must apply professional skepticm.
SELECT COMPS
VERIFY/ANALYSE COMPS
ASSEMBLE COMPS
ADJUST
ANALYSE
REPORT VALUE
common measurement standard eg sqft.
What hierarchy is outline in the RICS Prof Std Comparable Evidence in RE Valuation. 2019.
Hierarchy of Evidence
Category A - direct, contemporary (asking price/market)
Category B - general market and historical data
Category C - other sources such as IR’s
What are the limitations of the comparable method?
Lack of transactions
Misleading information (gross versus net pricing?)
Unknown level of incentives awarded.
2nd hand stock is hard to compare.
What is the RICS literature on comparable analysis?
RICS prof. Std Comparable Evidence in Real Estate Valuation (2019)
Outlines the principles, adjustments, seeking indirect info or dealing with limited information, application of PROFESSIONAL SKEPTICISM.
What is Appendix B in the RICS prof. Std Comparable Evidence in Real Estate Valuation (2019)
FACTORS AFFECTING VALUE
RESI: age, style, access, services, redev opp.
LAND: permitted use, density, ground conditions, planning, BC.
What comparable land transactions did you refer to in your Land comparable analysis at Linmere?
Barratt and Bellway.
Cat A bc same servicing, opp consent, generally same constraints (ground conditions, remediation works, infastructure)
Outline the residual inputs in the Bedfordshire land residual valuation.
Income: £383 psf
BC: £175psf
Dev fees - professional (10-20% BC)
Planning costs (4%) £462 per dwelling
S106 - all Obligations with master developer except waste bin contrib.
SDLT 5%
Profit
How did the Bedfordshire land value compare with the comps?
£1.6m / acre
£90k / unit
What was the suitable land offering at Bedfordshire ??
Linmere
£16.3 million
