Valuation L2

Question 1

What is the difference between an internal and external valuer?

Answer 1

An internal valuer is employed by a company to valuer their assets and these are not relied on by a 3rd party. An external valuer has no material links to the asset valued or the client.

Question 2

What are the three steps you should undertake prior to commencing a valuation?

Answer 2

Competence - check you have the correct level of skills, understanding and knowledge. Conflict of Interest - check you can act independently on the instruction. Terms of engagement - issue to the client and receive written confirmation.

Question 3

Why do you undertake statutory due diligence for valuations?

Answer 3

Confirm there are no material matters which could impact on the valuation.

Question 4

What types of statutory due diligence checks would you undertake when valuing a property?

Answer 4

Asbestos register, business rates/council tax, contamination, Equality Act compliance, environmental matters (high voltage power lines, electricity sub-stations, telecoms masts etc.), EPC rating if available, flooding, fire safety compliance, health and safety compliance, highways (check roads adopted with the local highways agency), legal title and tenure (check boundaries, ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves), public rights of way (from an OS sheet), planning history and compliance (check any onerous planning conditions, whether the property is in a conservation area / listed and subject to a s. 106 agreement or CIL).

Question 5

What are the five main methods of valuation?

Answer 5

Comparable, investment, profits, residual, DRC method.

Question 6

What are the three valuation approaches set out in IVS 105?

Answer 6

Income, cost, and market approach.

Question 7

What steps should you take when collecting comparable evidence?

Answer 7

Search and select comparables (agent’s boards, online databases), confirm / verify information with a party directly involved in the transaction, assemble comparables in a schedule, interpret comparables using hierarchy of evidence, analyse comaprables to form an opinion of value. Report value and prepare file note.

Question 8

What guidance did the RICS recently release on using comparable evidence?

Answer 8

RICS Comparable evidence in real estate valuation, 2019.

Question 9

What are the three categories of evidence outlined in RICS Comparable evidence in real estate valuation, 2019?

Answer 9

Category A: direct comparables, category B: general market data, category C: other sources.

Question 10

When would you use the investment method of valuation?

Answer 10

Used when there is an income stream to value.

Question 11

When would you use a Term and Reversion method? How does it work?

Answer 11

Used for reversionary investments i.e., where Market Rent is more than passing rent. Term capitalised until next rent review / lease expiry at an initial yield. Reversion to Market Rent valued into perpetuity at reversionary yield.

Question 12

When would you use the Layer / Hardcore method? How does it work?

Answer 12

Used for over-rented investment i.e., where passing rent is more than Market Rent. Income flow divided horizontally. Bottom slice = Market Rent. Top slice = passing rent - Market rent until the next lease event. Higher yield applied to the top slice to reflect additional risk. Different yields used depending on comparable investment evidence and relative risk.

Question 13

What is a yield?

Answer 13

Measure of investment return, expressed as a percentage of capital invested. Calculated as income divided by price x 100.

Question 14

How would you calculate Years Purchase? What does this show?

Answer 14

Divide 100 by the yield. This shows the number of years required for the income to repay the purchase price.

Question 15

What factors would you considering when determining a yield?

Answer 15

Prospects for rental and capital growth, quality of location and covenant, use of the property, lease terms, obsolescence, voids, security and regularity of income, liquidity.

Question 16

What is an All-Risks yield?

Answer 16

Yield which encompasses all the prospects and risks attached to a particular investment.

Question 17

What is a Gross yield?

Answer 17

Yield based on the net purchase price (i.e., not adjusted for purchasers’ costs).

Question 18

What is a Net yield?

Answer 18

Yield based on the gross purchase price (i.e., adjusted for purchasers’ costs).

Question 19

When would you use the profits method of valuation?

Answer 19

Used for the valuation of trade related property where the value of the property is directly linked to the profit generated by the business e.g., pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure, healthcare properties and care homes.

Question 20

What do you require to conduct the profits method of valuation?

Answer 20

Accurate and audited accounts for 3 years.

Question 21

What is the methodology for the profit’s method of valuation?

Answer 21

EBITDA (earnings before interest, taxation, depreciation, and amortisation) is capitalised at an appropriate yield.

Question 22

How should you verify a value obtained using the profits method of valuation?

Answer 22

Cross check with comparable sales evidence if possible.

Question 23

When would you use the depreciated replacement cost method of valuation?

Answer 23

Where direct market evidence is limited or not available for specialised properties e.g., sewage works, lighthouses, oil refineries, docks, schools, submarine base etc.

Question 24

What is the purpose of the depreciated replacement cost method of valuation?

Answer 24

Used for owner-occupied properties. For accounts purposes for specialist properties. For rating valuations of specialist properties.

Question 25

What are the two steps of the depreciated replacement cost method of valuation?

Answer 25

Value land in its existing use (assume planning permission exists). Add current cost of replacing the building plus fees (used BCIS). Then make a discount for depreciation and obsolesce / deterioration.

Question 26

Are valuations using the depreciated replacement cost method of valuation Red Book Global compliant?

Answer 26

Not suitable to be used for valuations for secured lending purposes. Can only be used for the calculation of Market Value for specialised properties for valuations for financial statements.

Question 27

When did the new RICS Valuation - Global Standards become effective as of?

Answer 27

31 January 2022.

Question 28

What does PS1 of the Red Book Global cover?

Answer 28

Requirements on when a valuation must be Red Book Global Complaint.

Question 29

What are the five exceptions, where a valuation does not have to be Red Book Global compliant?

Answer 29

Advice is provided in preparation for, or during negotiations or litigation. Statutory function except for the provision of a valuation for inclusion in a statutory return to a tax authority. Internal purposes, without liability and not communicated to any third party. Agency and brokerage work in anticipation of receiving instructions to dispose of or acquire and asset (except where a purchase port is required which includes a valuation). Expert witness.

Question 30

What is the hierarchy of evidence for establishing Market Rent?

Answer 30

Open market lettings, then lease renewals, then rent reviews, then third party determinations, then sale and leasebacks, then Inter-company transactions.

Question 31

What does VPS 1 of the Red Book Global cover?

Answer 31

Minimum matters that must be confirmed in writing to the client prior to commencing a valuation.

Question 32

According to VPS 1, what matters must be confirmed in writing to client prior to the commencement of valuation?

Answer 32

a. Identification and status of the valuer, b. Identification of the client, c. Identification of any other intended users, d. The asset to be valued, e. Currency, f. Purpose of the valuation, g. Basis of value, h. Valuation date, i. Extent of investigation, j. Nature and source of the information to be relied upon, k. Assumptions and special assumptions to be made, l. Format of the report, m. Restrictions for use, distribution and publication, n. Confirmation of the Red Book Global / IVS compliance, o. Fee basis, p. Complaints handling procedure to be made available, q. Statement that the valuation may be subject to compliance by the RICS, r. Limitation on liability agreed.

Question 33

What is an Assumption, as defined in the Red Book Global?

Answer 33

Supposition taken to be true and accepted as fact without the need for specific investigation.

Question 34

What is a Special Assumption, as defined in the Red Book Global?

Answer 34

Supposition taken to be true and accepted as fact, even though it is not true.

Question 35

What does VPS 2 of the Red Book Global cover?

Answer 35

Inspections, Investigations and Records.

Question 36

If a valuer undertakes a desktop valuation, is it still Red Book Global compliant?

Answer 36

Yes, if it does not meet any of the criteria outlined in the PS 1.

Question 37

What does VPS 3 of the Red Book Global cover?

Answer 37

Minimum requirements to be stated within a valuation report.

Question 38

According to VPS 3, what are the minimum requirements to be stated within a valuation report?

Answer 38

a. Identification and status of the valuer b. Identification of the client and any other intended users, c. Purpose of the valuation, d. Identification of the asset(s) or liability(ies) valued, e. Basis(es) of value adopted, f. valuation date, g. Extent of investigation, h. Nature and source(s) of the information relied upon, i. Assumptions and special assumptions, j. Restrictions on use, distribution, and publication of the report, k. Confirmation that the valuation has been undertaken in accordance with the IVS, l. Valuation approach and reasoning, m. Amount of the valuation or valuations, n. Date of the valuation report, o. Commentary on any material uncertainty in relation to the valuation where it is essential to ensure clarity on the part of the valuation user, p. A statement setting out any limitations on liability that have been agreed.

Question 39

What is the definition of Market Value according to VPS 4 of the Red Book Global?

Answer 39

Estimated amount for which an asset should exchange on the date of valuation between a willing buyer and willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

Question 40

What is the definition of Market Rent according to VPS 4 of the Red Book Global?

Answer 40

Estimated amount for which a property, or space within a property should lease (let) on the date of valuation between a willing lessor and willing lessee on appropriate lease terms in an arm’s length transaction and after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

Question 41

What is the definition of Fair Value (IFRS 13) according to VPS 4 of the Red Book Global?

Answer 41

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. Generally, this is the same as market value and is used for valuations for accounting purposes.

Question 42

What does VPS 5 of the Red Book Global cover?

Answer 42

Valuation approached and methods

Question 43

What do the VPGAs in the Red Book Global cover?

Answer 43

VPGA1 – Accounts valuation, VPGA2 – Loan security, VPGA3 – Businesses and business interests, VPGA4 – Profits valuation, VPGA5 – Plant and equipment, VPGA6 – Intangible assets, VPGA7 – Personal property, including arts and antiques, VPGA8 – Real estate valuation (Value significant factors), VPGA9 - Identification of portfolios, collections, and groups of properties, VPGA10 – Uncertainty.

Question 44

Explain the principle of Zoning?

Answer 44

This is used when valuing retail properties and works on the principle that the retail frontage is worth more than the ancillary. The width taken is the width of the frontage and this is then multiplied by the first 6.1m back, this is then Zone A. Zone b is calculated by multiplying the width by the next 6.1m back and is then half of Zone A’s value. Zone C is the width multiplied by the next 6.1m and is worth half of Zone B. the remainder is anything left after going 18.3m back and is worth half of Zone C. The calculated areas are then added up to give an area in terms of Zone A (ITZA).

Question 45

What are the key documents relating to valuation?

Answer 45

RICS Valuation Global Standards (Red Book), RICS Valuation Standards UK (UK Red Book), Comparable Evidence in Real Estate Valuation Guidance Note, Sustainability and ESG in Commercial Property Guidance Note, Environmental Risks and Global Real Estate Guidance Note, Valuation of Development Property Guidance Note, Depreciated Replacement Cost Method of Valuation for Financial Reporting Guidance Note, Discounted Cash Flow for Commercial Property Investments Guidance Note.

Question 46

What are the limitations of the comparable method?

Answer 46

Limited transactions, lack of up-to-date evidence, existence of special purchasers, limited market transparency.

Question 47

What does the residual method establish?

Answer 47

This establishes how much a purchaser should pay for a development site. It works on the principle that you work out how much the completed development would sell for and then deducting all the costs associated with the development.

Question 48

What is the difference between a residual valuation and a development appraisal?

Answer 48

A residual valuation is used to determine Market Value, where as a development appraisal is used to determine whether profit levels are obtained at an acceptable level. A residual valuation uses market inputs, where as a development appraisal uses client/internal inputs.

Question 49

What is the definition of an arm’s length transaction?

Answer 49

Transaction in which the buyers and sellers act independently without one party influencing the other.

Question 50

How would you address a defect within a valuation report?

Answer 50

In the event there is a defect within a property (such as damp) you should draw your client’s attention to the defect and advise that it is properly investigated by a qualified professional. It is important that you do not provide comment outside your scope of expertise.