Valuation Level 1 Flashcards
What is 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 Market Rent?
‘the estimated amount for which an asset or liability should be leased for at 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 red book?
Mandatory rules and best practice for members who undertake valuations
When is the red book used?
Mandatory for all valuations except
- valuation for internal purposes
- valuation for agency work
- valuation required by law
What are the 3 approaches to valuation?
MIC
Market approach
Income approach
Cost approach
What are the 5 methods of valuation?
PRICD
Profits method
Residual method
Investment method
Comparable method
Depreciated Replacement Cost Method
Describe the comparable method?
looks at similar properties within the same area that has been recently sold
Describe the investment method?
Used when there is an income stream to value, rental income is capitalised
Describe the profits method?
Used to value a property when the value depends on the trading potential of the business
Used for pubs, stations and hotels.
applies an all-risk YP (years’ purchase)/multiplier to the fair maintainable operating profit to provide a capital value.
Describe the depreciated cost replacement method
used where there is no active market for the
asset being valued such as lighthouse or oil refinery.
It is calculated in two steps
valuing the land in the current use
add cost of replacing the asset plus fees and less a discount for depreciation.
Describe residual method?
how much a purchaser should pay for a development site
GDV - less costs gives site value
What is the structure of the Red Book?
Introduction
Glossary
Professional Standards
Valuation Performance Standards (VPS)
Valuation Practice Guidance Applications (VPGA)
International Valuation Standards
What was the aim of the Red Book Update?
Reflect changes to the International Valuation Standards 2022
What is a recent change to the Global Redbook?
VPGA 2 - ESG and Sustainability should form an integral part of the report.
The need to agree clear and unambiguous terms of engagement
Explain the two professional standards?
PS1 - compliance with standards and practice statements when written valuation is provided.
PS2 - ethics, competency and disclosure
- comply with Rule of Conduct
- must act independently and objectively
- comply with terms of engagement
What goes into terms of Engagement?
In line with VPS1
- identify and status of valuer
- client
- asset to be valued
- purpose of valuation
- basis of value
- fee basis
- PII confirmation
What is in a valuation report?
in line with VPS 3
- identity of Valuer
- asset to be values
- basis of value
- information relied upon
- valuation approach & reasoning
- valuation figures
- market commentary
What are the different purposes of valuation?
- financial reporting
- secured lending
- tax purposes capital gains
What would you expect to see covered in a Banks Letter of Instruction?
Borrower
Property
Purpose
Details of Loan
Special assumptions
What does VPS 2 cover?
Inspections, Investigations and Records
Vaulers must take steps to verify all the necessary information being relied upon to ensure information is adequate
Can you carry out a re-valuation without inspecting the property?
A revaluation without a re-inspection must not be undertaken unless the valuer is satisfied that there have been no
material changes to the physical attributes of the property, or the nature of its location, since
the last assignment.
It is recognised that the client may need the valuation of its property updated at regular
intervals and that re-inspection on every occasion may be unnecessary. Provided that the valuer
has previously inspected the property, and the client has confirmed that no material changes
to the physical attributes of the property and the area in which it is situated have occurred, a
revaluation without re-inspection may be undertaken. The terms of engagement must state that this assumption has been made.
What does VPS 4 cover?
Basis of Value
What is Investment Value?
The value of an asset to a particular owner used to measure worth against a clients criteria
What does VPS 5 cover?
Valuation approaches and methods - choosing and justifying valuation approaches.
What does VPGA 8 cover?
Valuation of real property interests with emphasis on ESG and sustainability
When might a conflict of interest occur?
Having a longstanding professional relationship with the prospective borrower or owner of a property.
How could Investment Value differ?
an opportunistic investor may view a property to purchase, renovate and sell whereas a passive investor may view the same property to hold for long term income
so the investment value will vary depending on each investors objectives.
if you had a long standing professional relationship with the borrower or owner of a property could you accept an instruction?
In line with the RICS Professional Statement on Conflict of Interest 2017 I would not advise a client where a conflict was involved.
If you were carrying out a Bank security valuation what would the bank generally want their cover to cover?
Market value or loan amount.
Can special purchase be reflected in market value?
No as market value represents the amount would most likely be achievable for an asset across a wide range of circumstances.
Can you reflect hope value in market value?
You can but you need to be reasonably certain, for example if there was a parade and to my left all the properties to the left had planning permission for an extra floor then there would be hope value for the subject property.
What is an Internal Valuer?
Values for internal use only, no third party reliance
What is an External Valuer?
Valuer that has no material links with the asset to be valued
What are some statutory due diligence for valuation?
Asbestos register
EPC rating
Flood risk
Planning History
Legal title
How would you use the Discounted Cashflow technique?
- Estimate cash flow - income less expenditure)
- estimate exit value at end of hold period
- select and apply a discount rate
- value is the sum of the discounted cash flow to provide NPV
What can a NPV be used to show?
used to determine if an investment gives a positive return against a target rate of return
What does a positive NPV show?
investment has exceeded the target rate of return
what does a negative NPV show?
not achieved investors target rate of return
What is the IRR?
The rate of return at which all future cashflows must be discounted to produce an NPV of 0.
what is the IRR used for?
to assess the total return of an investment opportunity
What is the margin of error in relation to valuations?
Judge concluded that an appropriate margin error for a straightforward residential property would be 5%, one of commercial property 10% and a property with exceptional features 15%.
What is marriage value?
created by merger of interests - if two adjacent landowners decide to merge their properties to create the combined property’s value may be significantly higher than the sum of the individual values
What are the Stamp Duty Land Tax for non residential?
£0 - £150,000 - Nil
£150,000 - £250,000 - 2%
over £250,000 - 5%
What are the Stamp duty tax for residential?
£0 - £250,000 - Nil
£250,000 - £925,000 - 5%
£925,000 - £1.5m 10%
over £1.5m 12%
How would you value a long leasehold interest?
Rent received less ground rent
capitalised at appropriate yield for the remaining of the lease
What is a ransom strip?
piece of land that must be crossed for another piece of land to be developed.
How do you value a ransom strip?
need to consider the increase in value of the developers land
how much of that increase in value you should be owed in some cases has been assumed to be between 15% and 50% of the increase.
How do you calculate the WAULT?
- work out proportion of rent for each tenancy
- work out unexpired lease term from valuation date till lease expiry
- multiply unexpired lease term by % of proportion of rent to give a weighting for each tenancy
- add up all weightings to give you a WAULT
What is a party wall?
stands on the boundary of land belonging to two or more owners.
How would you deal with a situation when there was a lack of comparable evidence?
I would ensure that I was still competent to take on the instruction
I would look further afield and across a wider range of indicators when
transactional evidence of directly comparable real estate is lacking.
In line with the Red Book I would comment on any material uncertainty in relation to the valuation.
What is the most recent update to the UK VPS?
UK VPS 3
the new rules will prevent valuation firms from valuing an asset for regulated purposes for more than ten consecutive years. This will improve transparency serving public interest
Tell me about a discounted cash flow technique?
- estimate the cash flow (income less expenditure)
- estimate exit value at end of hold period
- bring future cash flows back to present value using selected discount rate
What is an IRR?
IRR is a measure of the profitability of an investment over time.
It represents the discount rate at which the net present value (NPV) of all cash flows from the investment equals zero.
Where in the red book do you find the definition of Market Value?
VPS4
Tell me about the UK Red Book National Supplement?
provides advice and mandatory statement for UK valuations.
What are some of the UK VPGAs?
Valuation for Charity Assets
Valuation for UK Residential Property
Valuation of Social Housing for loan security
What does a WAULT show?
it’s a way to measure how long a property is likely to keep generating income from its leases.
What is the aim of the red book?
to main confidence in clients, and public that an RICS valuer anywhere in the world can undertake a valuation to the highest standard.
Who can undertake a Red Book valuation?
- qualifications
- member of professional body
- sufficient current, local, market knowledge
- compliance with country regulations
Give me an example of a conflict of interest in valuation and how you would manage it?
valuing a property for another client that you have previously valued
The relationship with the client and previous involvement
Rotation policy
Time as signatory
Proportion of fees
What is the income approach?
based on capitalisation of present or predicted cash flows
What is the basis on value?
fundamental measurements of assumptions of a valuation
market value
investment value ect
What is the market approach?
based on comparing similar assets to the subject property that have been recently transacted
What is the cost approach?
based on the economic principle that a purchaser will pay no more for an asset than the cost to obtain one of equal utility
Can you use asking prices to ascertain market value?
Asking prices do not provide reliable evidence of value and should be treated with caution because they often differ substantially from the agreed final transaction price.
Asking prices can be useful when combined with information on the level of demand and offers received, though the valuer is required to verify that the properties are being effectively marketed.
What is the discount rate in a DCF model based on?
The discount rate in a discounted cash flow model is based on the time cost of money and the risks and rewards of the income stream in question.
Tell me about the Pereira review?
review of valuations
- values will need to rotate to ensure best interest in the public, can’t value the same property for 10 consecutive years
- to use the discounted cash flow as the
principal model applied in preparing property investment valuations in addition to traditional
the issue with DCF there are many variables that influence the value.
What is a loan security valuation?
report for a lender to make an informed decision if they could lend money on the property safely
When would a property be suitable for loan security purposes?
- good market demand / could be transacted
When would a property not be suitable for loan security purposes?
didn’t have the correct planning in place
If you reduced your fees because you were changing the scope of service what service would you change?
I could push out the timescales instead of 7 days it could be 14 days.
What is the date of valuation?
could be the date I carried out the valuation work or the date of inspection depending on time frames
What is a net initial yield?
return on investment less costs
calculated by rental income divided by value less purchasers costs
What is a gross yield?
return on investment without costs deducted
What is a all risks yield?
factors in market risk, vacancy rates, location.
what is fair maintainable operating profit
reflects the profit that a business can reasonably generate on an ongoing basis.
How would you value a property that was contaminated?
- do not provide any advice until specialised report has been commissioned
- caveat advice provided with appropriate disclaimer highlighting issue / use of special asumption
Can you provide preliminary valuation advice?
- can be given
- must be marked as draft
- for internal purposes only
- cannot be published
How do you calculate IRR?
- input market value as negative cash flow
- input rental income as positive cash flow
- input exit value as positive cash flow
- discount (IRR) rate is the rate that makes NPV 0
- if NPV more than 0 = target rate of return is met
