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APC - PERSONAL > Valuation L3 > Flashcards

Valuation L3 Flashcards

1
Q

What is the RICS Red Book?

A

The RICS Red Book is the RICS Global Valuations Standards which sets out professional guidelines and standards for property valuation.

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2
Q

What is the structure of the Red Book?

A

PS - Professional Standards - Mandatory
VPS -Valuation Professional Standard - Mandatory
VPGA - Valuation Practice Guidance Application - Advisory.

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3
Q

What steps do you take before undertaking a valuation?

DO YOU HAVE THE RIGHT CIT? SUK COI TOE

A
  • Competence
  • Skills, understanding, knowledge
  • Inderpendence
  • Conflict of interest check
  • Terms of engagement
  • Agreed in writting

DO YOU HAVE THE RIGHT CIT? SUK COI TOE

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4
Q

What is statutory due diligence and what is required for valuations?

A

Statutory Due Diligence is chekcing material matters that could affect the valuations such:
* Asbestos Register
* Environmental Matters such as contamination
* MEES/EPC
* Fire Safety
* Planning History

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5
Q

What is PS1?

A

PS 1 enures written valuation report comply with RICS Red Book Standards.

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6
Q

When does PS1 apply and not apply?

A

PS1 is Mandatory for all written valuations expect for valuations where compliance with other procedures are also mandatory such as valuations for:
1. Statutory Purposes
2. Legal Purposes (expert witness & adovcate)
3. Brokerage

In these cases supplementary gudiance is provided in jurisdictions

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7
Q

What is PS2?

(ECOD)

A

PS2 is Ethics, Compentancy, Objectivity and Disclosure

ECOD

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8
Q

What is included in PS2?

A
  1. Ethics and professional standards
  2. Member qualification
  3. Inderpendance, Objectivity, Confidentiality
  4. Conflict management
  5. Rotation Policy
  6. Terms of engagement

Ethics, Comptence, Objectivity and Disclosure

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9
Q

What is VPS 1 - VPS 5?

A
  1. VPS 1 Terms of engagament
  2. VPS 2 Inspections, Investigations and Records
  3. VPS 3 Valuation Reports
  4. VPS 4 Basis of Value, Assumptions and Special Assumptions
  5. VPS 5 Valuation Approach & Method
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10
Q

What is included in VPS 1?

A
  • VPS 1 is Minimum Requirments for Terms of Engagement which includes:
  • Indentification of people
  • Client
  • Valuer status
  • Indentification of Asset
  • Purpose of Valuation
  • Date of Valuation
  • Basis of Value
  • Exttent of Investigation
  • Assumptions and Special Assumptions
  • Report Format
  • Distribuation
  • Fee Basis
  • Limiation
  • Insurance Liability
  • Complaints Handling Procedure
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11
Q

What is included in VPS 2?

A

VPS 2 is Inspetions, Investigations and Records
* Extent of investigation and any restrictions on investigations such as on inspection must be confirmed in writting

IIR

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12
Q

What is included in VPS 3?

A

VPS 3 is Valuation Report
* Minimum requirments for the valuation reoprt
* Should address all point agreed in Terms of Engagement
* States the valuation should not be ambiguous or misleading

Differs from VPS 1 in that includes actual valuation, reasoning and market commentry

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13
Q

What is included in VPS 4?

A

Basis of Value, Assumptions & Special Assumotions
* Market Value
* Market Rent
* Investment Value
* Fair Value - e.g. IFRS reporting when tranfering an asset

MMIF

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14
Q

What are the defintions of the 4 basis of values set out in VPS 4 (Basis of Value and Assumptions)?

A
  • Market Value - Estimated amount an asset would achieve on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and parties acted prudently and without compulsion.
  • Market Rent - Estimated amount an asset would be leased for on the valuation date between a willing lessor and lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and parties acted prudently and without compulsion.
  • Investment Value - The value of an asset to a particular owner for individual investment objectives.
  • Fair Value - The price paid to transfer a liability in an orderly transaction between market participants at the measurement date.’ - e.g. IFRS reporting when tranfering an asset

MMIF

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15
Q

What is included in VPS 5?

A

Valuation Approach & Valuation Method

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16
Q

What are the valuation approachs in VPS 5 and what can they involve?

A
  1. Market Apporach - Involes comparable evidence
  2. Income Approach - Coverting cashflow into capital value
  3. Cost Approach - Cost of construction

M I C

Maket Income Cost (IVS 105)

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17
Q

What are the 5 Valuation Methods in VPS 5?

A
  1. Comparable Method
  2. Investment Method
  3. Residual Method
  4. Depricated Replacement Cost (DRC) (Contractors)
  5. Recipts and Expenditure
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18
Q

Are there any recent changes to the RICS Red Book Global Standards?

A

Yes there will be a new edition of the RICS Global Standards in January 2025 which is implimenting changes from the Internation Valuation Standards (IVS)
Main changes include:
* VPS 2 & 4 are swapping
* VPS 3 becomes VPS 6
* VPS 5 becomes VPS 3
* VPS 5 becomes valuation models
* Also is going to impliement evolving ESG technology and advancements

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19
Q

Have there been any recent changes to the RICS Global Standards UK National Supplement?

A

Yes changes are effecting from 1 May 2024
Main changes are regarding VPS 3 with a mandatory rotation policy such as:
* Single instruction has a max of 5 years and 10 years for firms
* Minimum 2 year break

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20
Q

Talk me through the Comparable Methodology?

Is there any RICS guidance for this?

A
  1. Find and select comparable
  2. Varify comparable
  3. Assemble schedule
  4. Adjust and analyse evidence using a hierarchy
  5. Form an opinion of value
  6. Report your valuation and prepare file note

Professional Standard/Guidance Note:
RICS Comparable Evidence in Real Estate Valuation (1st Edition) 2019

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21
Q

How do you categorise comparable evidence?

A

In accordance with RICS Comparable Evidence in Real Estate Valuation (1st Edition) 2019
A. Category A - Direct Comparables of Contemporary
- Completed transactions with full details
- Completed transactions without full details
- Asking price with careful analysis
B. Category B - General Market Data
- Reports from published sources
- Historic non contemporary evidence
C. Category C - Other Sources
- Evidence of other types of property
- Economic Data such as interest rates and stock market

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22
Q

When is the investment method used?

A

Investment methos is used for income producing properties

23
Q

What is a yeild?

A

A yeild reflects the risk of and prospects of an investment

24
Q

What is a term and reversion? Talk me through the methodolgy?

A

A term and reversion is used when the passing rent of an investment property is below market rent.

  1. The passing rent is capitlised, adopting an inital yeild over the remaining term until the next lease event.
  2. The market rent is then capitlised into perpitutity and a reversionary yield.

An equivalent yeild is an average of the intial and reversionary yield

25
Q

What is a hardcore layer? Talk me through the methodolgy?

A

A hardcore layer is used when the passing rent of an investment property is over market rent.
1. Income flow is divded horizontally with the bottom slice being the market rent and top slice being the passing rent until the lease event
2. Higher yeild is adopted for the top slice to reflect risk

26
Q
  • What are the following yields for:
  • All Risk Yeild
  • True Yeild
  • Nominal Yeild
  • Gross Yeild
  • Net Yeild
  • Inital Yield
  • Reversionary Yeild
  • Equivalent Yeild
  • Running Yeild
A
  • All Risk Yeild - Yeild of a fully let property reflecting all risks
  • True Yeild - Assumes rent is paid in advance
  • Nominal Yeild - Assumes rent is paid in arrears
  • Gross Yeild - Not adjusted for purchasers costs
  • Net Yeild - Adjusted for purhcasers cost
  • Inital Yield - Straigt income yeild for current income
  • Reversionary Yeild - Under rented
  • Equivalent Yeild - Average of intial and reversionary
  • Running Yeild - Yeild at one moement in time
27
Q

What is discounted cash flow (DCF) model and what is it used for?

Is there RICS guidance for DCF?

A

DCF is a growth explicit method that projects estimated cashflow over a holding period with an exit value usually adopting an all risk yield.

Used for:
* Phased developement
* Complex leaseholds

RICS Practice Infomation ‘Discounted Cash Flow Valuations 2023

28
Q

What is the DCF methodolgy?

A
  1. Estimate cashflow
  2. Estimate Exit Value at the end of holding
  3. Select a discount rate
  4. Discount cashflow to reflect risk (reflects percieved level of risk)
  5. The valuation is the sum of the discounted cashflow to provide the Net Present Value (NPV)
29
Q

What is the the Net Present Value and Internal Rate of Return?

A

NPV
* Sum of disounting cashflows
* If positve then target rate of return has been exeeded
* If negative then target rate of return has been not been met

IRR
* Rate at which future cashflow is must be dicounted to to produce an NPV of 0
* IRR assess total return from an asset making assumptions on voids etc
* If NPV is more than 0 then target rate of turn is met

30
Q

What is a recipts and expenditure valuation? Talk me through the methodolgy?

A

Recipts and expenditure is for trade producing properties and is related to its trading profitabliity and potential by establishing the Fair Maintable Operating Profit (FMOP) from a Reasonbly Efficent Opereator .(REO)

  1. Annual Turnover less costs = Gross Profit
  2. Less Reasoble Working Expenses
  3. Less operators Remuneration of a REO = FMOP
  4. Capitlised using an All Risk Yeild = Market Value
  5. Cross check wih sales comps if possible
31
Q

What VPGA covers valuation of trade related properties?

A

VPGA 4

32
Q

What is a Residual Valuation? Talk me through the methodolgy?

A

A residual valuation values the Market Value of a development site

1) GDV - Estmiate the GDV using sales comps
2) TDC - Deduct the Total Development Costs (TDC)
Site Preperation
* Includes site preperation such as demolition and removal £20K
* construction costs £1800m2
* professional fees (10%)
* contingency (5%)
* Marketing fees (1%)
Finance costs
* Finance Costs Assume 100% debt finance on stright line basis at 8.25% over the length of the development - Above Bank base rate
Developers Profit
* Developers Profit 20% what developers in the market would want based on the level of risk for this undertaking

3) GDV - TDC = Establish Site Value
4) Check - Cross check site value against comparable where possible

RICS Proffesional Standards - Valuation of Development Property (2020)

33
Q

What was your developers profit in your residual valuation and how did determine this?

A

I adopted 20% developers profit.

This is an estimation of what developers would want in the market based on the level of risk for undertaking of this sort of developemnt in the market.

34
Q

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

What RICS guidance is there?

A

Residual valuation is to obtain a land value.

Development apprasial assesses provides a viablity study of a development for an investor

RICS Proffesional Standards - Valuation of Development Property (2020)

35
Q

What is Depreciated Replacement Cost (DRC) or contractors valuation? Talk me through the methodolgy?

A

DRC is used when market evidence is limited or for specialist properties. It is used in rating and accouting.

  1. Cost of land in exisiting use, planning is assumed
  2. Calculate the cost of constuction
  3. Adjust for obsolence - physical, functional, economic obsolence
  4. Land development costs
  5. Decapitlisation - used in contactors valution adopting staturory decap rate of 2.6% and 4.4%
  6. Stand back and look
36
Q

What VPGA covers Inspections and Investigations and assumtions?

A

Global VPGA 8

37
Q

What VPGA covers Matter that may give rise to material valuation uncertainty

A

Global VGPA 10

38
Q

What are the main changes to the UK National Suppliemt?

A
  • Rotation policy
  • 5 years max for single engagement
  • 10 years for firms
  • RICS can give an expect
39
Q

What UK VPGA apply to your work?

A
  • UK VPGA 4 - 6 relates to valuations for the public secor
  • VPGA 15 - Valuation for Capital Taxation
  • VPGA 16 - Valuations for Compulosry Purchase and Statutory Compensation
40
Q

What VPGA applies to trade related properties?

A

VPGA 4

41
Q

What margin of error can be expected in valutions?

What case law is there?

A

CBRE v Lincoln [2010]
Valuation of 4 hotels
* 5% Residential Valuations
* 10% One off commerical Valuations
* 15% Valuation with exceptional features

42
Q

What is marriage value?

A

Value reated by the merger of property intrests, considering a before and after valuation

43
Q

What gudiance is there for RICS registered Firms and valuers? What is the benefit of being registered?

A

RICS Rules for the registration of firms (2022)
Benefits include:
* Imporved valuation quality ensuring professional standards
* Meets RICS requirments to self regulate
* Protects and raises the statur of the profession

Rules for the registration of firms - Version 7 (with effect 2 February 2022)

44
Q

What are automated valuation models (AVMs)?

name some pros and cons

A
  • Software systems which can provide property valuations using mathematical modelling combined with a database
  • They are most used for residential property

Pros
* * Able to consider a larger number of data points
* Saves time, money and resources
* Removes any human bias or subjectivity
* Useful for assessing the value of a property portfolio
Cons
* Do not take into account property condition and specific factors
* Use transactional data which may lag the actual market i.e. cannot include evidence from properties which might be under offer

45
Q

What is rack rented?

A

Rent is in line with the estimated rental value, implying nil reversion.

46
Q

PARO your level 2
GP Surgery, Long Eaton – DRRS - Comparable
Example

A

Purpose: to value the CRM for reimbursement purpose under the NHS premise cost directions

Approach: Compile and create a scheduled of CMR attaching appropriate weight to surgeries

Reasoning: I considered value significant factors pertinent to GP surgeries and based on the evidence available and agreements of other CMRs I arrived at my valuation of a fair CMR

Outcome: After receiving assurance I initiated negotiations with the agent and reached an agreement on my proposal

47
Q

PARO your level 2

Sure Start Centre, Leicester – Rating - Contractors

A

Purpose: To value the rateable value inline with schedule 6 of LGFA 1988
Approach: considering the nature of the property and the lack of comparable transactions for this type of property I adopted the contracts method
Reasoning: using BICS for build costs, i considered the depreciation rate by assessing obsoletion and undeveloped land costs, I adopted the statutory recapitalisation rate of 4.6%

Outcome: arrived at the RV which was sent via a decision notice

48
Q

L3 Residential - Farndish - IHT - Residual

Why did you choose the residual method?Gross development value

A

Highest

49
Q

L3 Leicester Redbook

claw back clause

A
50
Q

L3 Residential, Farndish - IHT - Residual

Why did you adopt the residual method?

Statutory assumotion…

MUST MENTION VPGA 15

A

For IHT I valued under the statutory assumption that the value of any property shall be the best price which it might reasonably be expected to fetch if sold in the open market at the relevant time. The price obtainable for an estate may depend on how it is sold, i.e. whether it is sold in one or several lots

With regard to VPGA 15 and In this case the bunglow formed part of a natural lot determind applying the principles of prudent lotting

51
Q

What does UK VPGA 15 set out in terms of basis of value?

A

The property is offered for sale on the open market by whichever method of sale will achieve the best price

52
Q

The red book provides what to clients?

A
  • Consistency in appraoch
  • Consistency in Valuation
  • Inderpendance, objectivity and transparency
  • Clarity
53
Q

What is a special purchaser?

A

A person with a particular intrest in a property because of its advantages arising from the ownership that would be availble to other purchasers

54
Q

How do you work out stepped rents?

A

Take the income at each step and capitalise it using an appriorate yeild years and divding it by the years purchase to work out the aggrigate rent

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