Valuation (Level 1) Flashcards
What is the key RICS guidance relating to valuation and what does it set out?
RICS Valuation – Global Standards 2022 (effective 31st January 2022)
- Also known as the ‘Red Book Global Standards’
- Sets out the professional and technical standards for valuation to ensure consistency, objectivity and transparency for valuation across the world
What are the sections set out in the Red Book Global Standards?
The red book is split into the following sections;
- Professional Standards (PS) (mandatory) – defines the parameters for compliance with the Red Book Global Standards
- Valuation Technical and Performance Standards (VPS) (mandatory) – contain specific mandatory requirements and related implementation guidance
- Global Valuation Practice Guidance Applications (VPGAs) (advisory) – provides implementation guidance for valuations used for specific purposes, whilst not mandatory they represent best practice
- International Valuation Standards (IVS) (mandatory) – produced by the International Valuation Standards Council the RICS has adopted and applied the IVS through the Red Book Global Standards
What is the RICS guidance on the valuation of development property and what does it set out?
RICS Guidance Note on the Valuation of Development Property (2019)
- Aims to guide the valuer in the approach to development property valuations
- This guidance should be read in conjunction with the Red Book Global Standards
- Sets out the professional and technical standards for valuation to ensure consistency, objectivity and transparency for valuation across the world
Sets out the following valuation methods
o Residual Valuation Method
o Discounted Cash Flow Application
o Basic Residual Method
- Core message is that one method of valuation is seldom appropriate
What is the core message set out in RICS Guidance Note on the Valuation of Development Property (2019)?
- Core message is that one method of valuation is seldom appropriate for the valuation of development property
What is the RICS guidance for the UK?
RICS Valuation Global Standards – UK National Supplement (2019)
- The national supplements to the Red Book global standards are to assist members in the application of those standards in a local context
- Should be read in conjunction with the Red Book Global Standards
What is the RICS guidance on comparable evidence?
RICS Guidance Note: Comparable Evidence in Real Estate Valuation (2019)
Sets out the use of comparable evidence in the valuation process:
o Outline the principles of the use of comparable evidence
o Encourage consistency in the use of comparable evidence globally
o Address issues of availability and use of comparable evidence in challenging market
conditions
o Consider the potential sources of comparable evidence and their relative
importance
What are the 5 methods of valuation?
- Investment Method
- Profits Method
- Residual Method
- Comparable Method
- Depreciation Replacement Cost
What are the 3 different approaches to valuation?
- Income Approach – investment, profits, residual
- Market Approach - comparable
- Costs Approach - DRC
Can you tell me when you would use each valuation method and how you would carry it out?
Investment Method
Investment Method
Used to value a property with an existing income stream
1. Assess the market rent by reviewing comparable evidence
2. Capitalise the market rent using a capitalisation rate based on NIYs
3. This will provide your market value
Can you tell me when you would use each valuation method and how you would carry it out?
Profits Method
Profits Method
Used to assess the value of a business or specialist properties e.g public house, petrol station, golf course
It is the Fair Maintainable Operating Profit (FMOP) capitalised at an All Risks Yield
1. Calculate the Annual Turnover
2. Subtract costs to establish Net Profit
3. Subtract an allowance for ‘wear and tear’, which gives you the FMOP
4. Capitalise using an All Risks Yield to determine the Market Value
Can you tell me when you would use each valuation method and how you would carry it out?
Residual Method
Used to assess the residual land value of a development opportunity
- Estimate the Gross Development Value
- Subtract construction costs – design and build costs, remediation works,
contingency fee, professional fees - Subtract development costs – developer’s profit, finance costs, planning costs
- This provides your residual land value
Can you tell me when you would use each valuation method and how you would carry it out?
Comparable Method
Comparable Method
Used as the basis for all valuation methods. Used to assess market rent and market value
Using comparable evidence to establish an indication of value
Can you tell me when you would use each valuation method and how you would carry it out?
Depreciation Replacement Cost
Depreciation Replacement Cost
Used to value specialised properties for internal and rating purposes when there is limited evidence
The method of last resort and should not be used where there are market sales of comparable properties
Depreciation Replacement Cost = The cost of replacing an asset at the valuation date with its modern equivalent asset minus obsolescence
1. Establish an Existing Use Value for the Land
2. Add the cost of replacing building
3. Add any additional fees e.g professional fees
4. Apply an obsolescence discount
How do you decide which valuation method to apply?
You review the nature of the property and the basis of valuation to establish your valuation method.
When and why would you use one of these methods?
Investment Method – Used to value a property with an existing income stream
Profits Method – Used to value specialist properties and businesses e.g public house, golf course, petrol station
Residual Method – Used to value the development land and establish the residual land value
Comparable Method – Used as the basis for all valuations it is typically used to assess Market Rent or Market Value
Depreciation Replacement Cost – the method of last resort used to value specialised properties for internal and rating purposes when there is limited/no comparable evidence
What is the purpose of the Red Book?
- Sets out the professional and technical standards for valuation to ensure consistency, objectivity and transparency for valuation across the world
What factors may impact value?
- Prospects for rental & capital growth
- Quality of location – impacts market rent
- Covenant Strength – impacts a property’s security of income
- Use of the property – some uses are higher value than others
- Lease terms – impacts rental growth (rent review), obligations for property owner, onerous
- Obsolescence – is the property fit for purpose
- Voids – gaps in income
- Security and regularity of income – impacted by covenant strength
- Liquidity - ease of sale
What is your duty of care as a surveyor when undertaking a valuation and who is it owed to?
As a surveyor you have a duty to take all reasonable skill and care when undertaking the valuation of a property.
This duty of care will be owed to the client, either as an express or implied term of the contract under which the work is to be done
Why is independence and objectivity important when valuing?
Independence and objectivity is essential to ensure that there are no conflicts of interest when undertaking a valuation.
Members must follow the mandatory requirements set out in RICS Professional Statement on Conflicts of Interest (2018)
Is there a separate UK Red Book?
There is not a separate UK Red Book, however there is the RICS Valuation Global Standards – UK National Supplement (2019)
The national supplements to the Red Book global standards are to assist members in the application of those standards in a local context.
RICS are working on an update to the UK national supplement and aim to publish this in 2023.
When was the Red Book last updated?
The Red Book was last updated November 2021 with the changes effective from 31st January 2022
Does the Red Book differ from when IVS were last updated?
The changes to the International Valuation Standards (IVS) were also effective from 31st January 2022
What changes were made to the updates in the Red Book?
- Emphasis on clearer terms of engagement
- Outlines a requirement to provide greater commentary on sustainability and wider ESG matters (covered in VGPA 8)
Which do you follow - the latest IVS or the Red Book Global?
You follow the RICS Valuation – Global Standards 2022 as this has incorporated the latest IVS changes
If you follow the Red Book you will be following the IVS
Which sections of the Red Book are mandatory and which are advisory?
Professional Standards (PS) = MANDATORY
Valuation Technical and Performance Standards (VPS) = MANDATORY
Global Valuation Practice Guidance Applications (VPGAs) = ADVISORY
International Valuation Standards (IVS) = MANDATORY
What does PS1-2 relate to?
PS 1 – Compliance with standards (where a written valuation is provided)
PS 2 – Ethics, competency, objectivity and disclosures
What does VPS1-5 relate to?
VPS 1 – Terms of Engagement (scope of work)
VPS 2 – Inspections, investigations and records
VPS 3 – Valuation Reports
VPS 4 – Bases of Value, assumptions and special assumptions
VPS 5 – Valuation approaches and methods
What do VPGAs relate to?
VPGA 1 – Valuation for inclusion in financial statements
VPGA 2 – Valuation of interests for secured lending
VPGA 3 – Valuation of businesses and business interests
VPGA 4 – Valuation of individual trade related properties
VPGA 5 – Valuation of plant and equipment
VPGA 6 – Valuation of intangible assets
VPGA 7 – Valuation of personal property, including art/antiques
VPGA 8 – Valuation of real property interests
VPGA 9 – Identification of portfolios, collections and groups of properties
VPGA 10 – Matters that may give rise to valuation uncertainty
What type of advice does the Red Book cover?
Valuation advice
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
When providing preliminary advice or a draft valuation report you must state in writing that:
- the opinion is provisional and subject to completion of the final report
- the advice is provided for the client’s internal purposes only and
- any draft is on no account to be published or disclosed.
- If any matters of fundamental importance are not reflected, their omission must be declared
What type of valuations might be relied upon by a third party?
- Secured lending valuations
- Any valuation that expressly outlines this in the terms of engagement
What is the definition of Market Rent?
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 lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion’
What is the definition of Market Value?
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 and where the parties had each acted knowledgeably, prudently and without compulsion’
What is the definition of investment value?
Investment Value
The value of an asset to the owner or a prospective owner for individual investment or operational objectives
What is the definition of fair value?
Fair Value (as defined in IFRS): 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
Does the RICS recognise a difference between fair value and market value?
The RICS doesn’t believe there is a difference between fair value and market value. Fair value is working off the assumption that the property/land owner isn’t going to sell. Not influenced by market forces.
What is a net initial yield?
Net Initial Yield - the current annualised rent, net of costs, expressed as a percentage of capital value
What is the difference between an assumption and a special
assumption?
- A special assumption is a supposition that is taken to be true and accepted as fact, even though it is not true
- An assumption is something that would be reasonable to assume is true
What sources of information would you consider when preparing a valuation report?
- Transactional Data – information from transactions that have actually taken place in the market
- Market Data – market reports from researchers or analysts
- Other sources - indexes
What is the hierarchy of evidence?
Set out in the RICS Guidance Note: Comparable Evidence in Real Estate Valuation (2019)
Hierarchy of evidence
- Category A – direct comparables - All types of relevant transactional comparable evidence
- Category B – general market data - can provide guidance rather than a direct indication of value
- Category C – other sources – Other data that may indicate value
