Valuation - Level 1 Flashcards
What is the Red Book?
The Red Book is a set of global standards which set out procedural rules and guidance for written valautions
What is the Red Book NOT?
The Red Book is not a valuation manual. Global Standards do not:
- instruct members on how to value in individual cases
- prescribe a particular format for reports
- Override standards specific to, and mandatory within, individual jurisdictions
When was the Red Book published?
With Effect - 31 January 2022
What Sections are there in the Red Book?
- Professional Standards - PS 1&2
- Valuation Technical and Performance Standards (VPS) - 1-5
- Valuation Practice Guidance Applications (VPGA)
- International Valuation Standards (IVS)
What is the RICS Guidance to Valuation?
RICS Global Standards 2022
What are the 2022 update all about in nutshell?
One could term this edition ‘the ESG issue’. Sustainability and ESG are the driver behind most of the updates in substance and style and tone. Language is clearer and more robust throughout
What is the purpose of the Reb Book?
prupose = consistency, objectivity and transparency (COT)
What are the exceptions to Red Book?
- Statutory Basis - where carried out by statutory officer
- Negotiation or Litigation - e.g. rent review Litigation
- Internal purposes only
- Agency
- Expert witness valuation
Agency, Litigation, Internal, Expert Witness, Statutory (ALIES)
What are the purpose of valuation?
- Loan Security
- Rating
- Accounts
- Landlord and Tenant
- Tax - Inheritance Tax
- Corporate real estate advice - relocate/refurbish etc.
what is PS 1 & 2?
PS 1 = Compliance with standards where a written valaution is provided
PS 2 = Ethics, competency, objectivity and disclosures
What would you find the Terms of Engagement?
- Identification and status of the valuer
- Identification of the client(s)
- Identification of any other intended users
- identification of the asset(s) or liability(ies) being valued
- Valuation (financial) currency
- Purpose of valuation
- Basis(es) of value adopted
- Valuation date
- Nature and extent of the valuer’s work - including investigations - and any limitations thereon
- Nature of source(s) of information upon which the valuer will rely
- all assumptions and special assumptions to be made
- format of the report
- restrictions on use, distribution and publication of the report
- Confirmation that the valuation will be undertaken in accordance with the IVS
- the basis on which the fee will be calculated
- where the firm is registered for regulation by the RICS, reference to the firm’s complaints handling procedure, with confirmation that a copy will be made available on request
- a statement that compliance with these standards may be subject to monitoring under the RICS’ conduct and disciplinary regulations
- a statement setting out any limitations on liability that have been agreed
What is VPS 1-5?
1 - Terms of Engagement
2 - Inspection, Investigation and recording
3 - Valuation Report
4 - Basis of Value, assumptions and special assumptions
5 - Method of valuation
What are the 6 parts of the Red Book
- Introduction
- Glossary of terms
- Profesional Statements
- Valuation technical and performance standards (VPS)
- Valuation Practive Guidance Application (VPGA)
- International Valuation Standards (IVS)
VPS 3 - what is the minimum headings?
- Identification and Status of valuer
- Identification of client and other intended users
- Purpose of valuation
- Identification of assets
- Basis of value adopted
- Valuation date
- Extent of investigation
- Nature and sources of information relied upon
- Assumptions and special assumptions
- Restrictions on use, distribution of the report
- Confirmation valuation undertaken in accordance with IVS
- Valuation approach and reasoning
- Amount of the valuation
- Date of the valuation report
- Commentary of any material uncertainty
- Statement setting out any limitations on liability that have been agreed
What is the Red Book definition of Market Value and where is it found?
The estimate amount of which an asset or liability should exchange on the valuation date between a willing buyer and willing purchaser in an arm’s length transaction where proper marketing has taken place and both parties acted knowledgably, prudently and without compulsion.
IVS 104. Paragraph 30.1
What is the Red Book definition of Market Rent and where is it found?
The estimated amount which an interest in real property should be leased on the valaution 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 knowledgably, prudently and without compulsion.
IVS 104. Paragraph 40.1
What is the Red Book definition of Fair Value and where is it found? When is it used?
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 (this definition derives from International Financial Reporting Standards IFRS 13). For most practical purposes the concept of fair value is consistent with that of market value, and so there would ordinarily be on difference between them in terms of the valuation figure reported.
Financial Reporting Purposes
What is the Red Book definition of Investment Value and where is it found?
The value of an asset to a particular owner or prospective owner for individual investment or operational objectives.
As the definition implies, and in contrast to market value, this basis of value does not envisage a hypothetical transaction but is a measure of the value of the benefits of ownership to the current owner or to a prospective owner, recognising that these may differ from those of a typical market participant. It is often used to measure performance of an asset against an owner’s own investment criteria.
IVS 104. Paragraph 60.1
What are assumptions?
Assumptions are made where it is reasonable for the valuer to accept that something is true without the need for specific investigation or verification. Any such assumption must be reasonable and relevant having regard to the purpose for which the valuation is required.
What are special assumptions?
Special assumptions are made by the valuer where an assumption either assumes facts that differ from those existing at the valaution date or that would not be made by a typical market participant in a transaction on that valuation date.
What is the Red Book definition of Synergistic Value and where is it found?
Synergistic value is not defined in Valuation Practice Statement 4. it is defined in the International Valuation Standards 2022 - IVS 104
Synergistic value is the result of a combination of two or more assets or interests where the combined value is more than the sum of the seperate values. If the synergies are only available to one specific buyer, then synergistic value will differ from market value, as the synergistic value will reflect particular attributes of an asset that are only of value to a specific purchaser. The added value above the aggregate of the respective interests is often referred to as “marriage value”
what is the market approach
comparing the subject asset with identical or similar assets, for which price information is available, such as market transactions
Comparable method
What is a 3 approaches of valuation
Market Approach
Income Approach
Cost Approach
What is the Income approach?
capitalisation or conversion or present and predicted income.
Investment method
profits method