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APC > Valuation - Level 1 > Flashcards

Valuation - Level 1 Flashcards

1
Q

What is the full name of the Red Book?

A
  • RICS Valuation – Global Standards 2022
  • Known as the red book
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2
Q

What are the differences between 2018 and 2022 edition of the red book?

A
  • Implement changes to drive evolving changes in ESG, Sustainability and technology
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3
Q

What is the purpose of the Red Book?

A
  • SICOB
  • (S) To set out global standards
  • (I) To achieve high standards of integrity
  • (C) clarity and
  • (O) objectivity
  • (B) to adopt best practice in valuations
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4
Q

What is the purpose of carrying out a valuation?

A
  • SIFSS
  • Statutory
  • Internal
  • Financial
  • Secured lending
  • Sales/acquisitions
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5
Q

Are there exceptions to the red book?

A
  • Acting as an expert witness
  • Agency/brokerage purposes
  • Statutory purposes
  • Internal purposes
  • Negotiation/litigation
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6
Q

Can you tell me the 5 methods of valuation?

A
  • Comparable
  • Investment
  • Residual
  • Profits
  • Depreciated Replacement Cost
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7
Q

Discuss the conventional method of investment – Discounted Cash Flow

A
  • Assumes growth implicit
  • Yield is derived from comparable evidence
  • Capital value = rent x yield purchase
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8
Q

What are the bases of valuation?

A
  • FIMM
  • Fair Value
  • Investment value - also known as worth
  • Market Value
  • Market rent
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9
Q

What is fair value?

A
  • The price that would be received to sell an asset, or transferred for a liability, in an orderly transaction between market participants at the measurement date
  • Used if the international financial reporting standards have been adopted
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10
Q

What is investment value?

A
  • The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives
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11
Q

Why is worth different to market value?

A
  • Market value is the what you will obtain in the open market
  • However a property may be ‘worth’ more to a specific buyer and they will be willing to pay a higher price to obtain it
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12
Q

What is the definition of market rent/value?

A
  • Estimate value a property will let/sell for
  • On the open market
  • At an arm length transaction
  • Between a willing LL and willing tenant / buyer and seller
  • After proper marketing
  • Where both parties have acted knowledgably, prudently and without compulsion
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13
Q

What are the 3 valuation approaches?

A
  • Income – converting current and future cash flows into to capital value (investment, residual and profit)
  • Cost – the cost of the asset whether by purchase or construction (DRC)
  • Market approach – using Comparable evidence (comparable)
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14
Q

What is included in the terms of engagement?

A
  • Name of company
  • Name of client
  • Valuers name
  • Purpose of valuation
  • Property details
  • Assumptions or special assumptions
  • Basis of value
  • Method of valuation used
  • Calculation
  • Currency
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15
Q

What is included in the valuation files?

A
  • Conflict of interest (COI) check
  • Terms of engagement
  • Inspection notes etc
  • Planning, rating and environmental searches
  • Comparable and analysis
  • Valuation calculations with rationale
  • Report
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16
Q

Sources of comparable evidence

A
  • Direct Transactional Evidence
  • Publicly available info
  • Database info
  • Asking price– better for guidance
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17
Q

What to do when there is a lack of comparable data?

A
  • In reference to the RICS guidance note effective from 2019, widen you your search to include transactions in similar style locations.
  • It is important to emphasise that the valuers experience, judgement and market knowledge comes more important.
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18
Q

What do you understand of hierarchy of evidence?

A
  • Attaching the greatest weight to the transaction type. In order below:
    o New Letting
    o Lease Renewal
    o RR
    o Independent expert
    o Arbitration
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19
Q

What is an assumption and a special assumption?

A
  • An assumption is something that the valuer believes to be true without carrying out their own investigations, eg the building is structurally sound
  • A special assumption is something that may not be true at the time of the valuation but soon to be in place, eg planning permission will be granted
20
Q

What are examples of an assumption?

A
  • Assume that they have a clean title.
  • Assumed that the area is free from defects and hazards.
  • Assumed there is valid statutory docs. A valid EPC and asbestos management survey.
21
Q

What are examples of special assumptions?

A
  • That planning consent has been granted.
  • That the property is vacant at valuation date rather than fully let.
  • That the property is let of defined terms rather than vacant on the valuation date.
22
Q

When would you use the investment method?

A
  • Used when there are income streams to value
  • The rental income is capitalised to produce a market value
  • Term and Reversion or Hardcore method used to calculate value
23
Q

Discuss the term and reversion method

A
  • Used for properties which are under rented.
  • The term is a lower yield when compared to the reversionary yield due to being secure income
  • The term rent is capitalised by the PV of the income until next lease event at the initial yield
  • The market rent is then capitalised at YP in perpetuity at the Reversionary yield and multiplied by the deferred rate of the reversionary yield
24
Q

Discuss the layer and hardcore method

A
  • Used for properties which are over rented
  • The income flow is sliced horizontally
  • The bottom slice is the market rent
  • The top slice is the passing rent
  • The top slice has a higher yield to reflect the risk
  • Market comparables are used to determine the risk
25
Q

When would you use the Profits method?

A

The profits method is used to value trade properties and involves obtaining company accounts

26
Q

Can you tell me how you would calculate a valuation using the profits method?

A
  • Income – costs = gross profit
  • – expenses and operators remuneration = adjusted net profit. Capitalised at yield.
  • Often expressed as EBITDA (earnings before interest, taxation, depreciation and amortisation).
27
Q

How do you use the contractors method?

A
  • Step 1 – Issue term of engagement
  • Step 2 – Obtain the estimated building costs.
  • Step 3 – I would account for depreciation.
  • Step 4 – I would then add the land value (20-30% of GDV?)
  • Step 5 – I would then find the profit on cost.
  • Step 6 – Final value is the depreciated replacement cost and land value minus the profit on cost.
28
Q

You mentioned company accounts. Can you tell me what would be included what these entail?

A
  • Profit and Loss which states the properties income and expenditure
  • The balance sheet which provides details on the companies assets and liabilities
  • And finally the cashflow which details the amount of cash the company has in the bank at any given time
29
Q

What is the ARY?

A
  • Used in the Val of a fully let property let at MR reflecting all risks attached
30
Q

What is the initial yield?

A
  • Factual yield
  • Current income / current price
31
Q

What is the reversionary yield?

A
  • Market Rent / current price
32
Q

What is the equated yield?

A
  • The weighted average of the initial and reversionary yield
33
Q

What is years purchase?

A
  • t’s the number of years it will take the income to repay the purchase price
  • Calculated by dividing 100 by the yield
34
Q

What are the risks to consider when determining a yield?

A
  • Rental growth
  • Location and covenant strength
  • Void periods
  • Use
  • Lease terms
35
Q

Which sections of the global Red Book are mandatory?

A
  • PS 1 – 2
  • VPS 1 - 5
36
Q

What does PS1 & PS2 relate to?

A
  • PS1 - Compliance with standards where a written valuation is provide\
  • PS2 - Ethics, competency, objectivity and disclosures
37
Q

What is a particular buyer / special value?

A
  • When a particular buyer for whom a particular asset has special value because of the advantages arising from owning it are not available to other buyers in the market
  • Special value is the amount of particular attributes of the asset which only have value to the special purchaser
38
Q

What is Synergistic Value?

A

TWO OR MORE ASSETS WHERE THE COMBINED VALUE IS MORE THAN THE SEPARATE VALUES.

39
Q

What is Marriage Value?

A
  • An additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum if the separate values.
40
Q

Tell us about ransom strips?

A
  • When one piece of land controls access to another piece of land
  • The upper tribunal (land chamber) evidence conveys that the value of a ransom strip is up to 15% to 50% of the development value unlocked by including the ransom strip in the proposed development scheme.
  • Sometimes fixed sums are awarded.
  • The upper tribunal (land chamber) considers the facts of each case separately
41
Q

What is the key case study surrounding ransom strips?

A
  • Stokes vs Cambridge (1961) where 1/3 of the uplift in development value was awarded to the owner of the ransom strip
42
Q

What characteristics of a lease would have to be considered that affect value?

A
  • Rent reviews
  • Lease expires
  • Incentive periods
43
Q

What is the statutory due diligence should be reviewed?

A
  • Asbestos register
  • Business rates
  • Contamination (Contamination, the Environment and Sustainability, 2010)
  • Environmental assessment (electricity pylons)
  • Equality act compliance
  • EPC available
  • Flooding risk
  • Fire safety compliance
  • Highways – check adopted roads through local highway authority
  • Health and safety compliant
  • Legal title and tenure
  • Public rights of way
  • Planning history and compliance
44
Q

What effect did COVID have on valuations?

A
  • Lack of evidence and material uncertainty
  • Guidance note on comparable evidence provides advice for when info is less reliable or unverifiable
  • Material uncertainty should be explicitly stated in the Terms of Engagement
  • RICS issued a COVID-19 global valuation practice alert in March 2020 and updated it in November
  • Valuers must be aware of VPGA 10 and VPS 3 regarding material uncertainty and reporting, as it should be explicitly reported
45
Q

What is a right to light?

A
  • Arises when there is 20 years of uninterrupted enjoyment of light, via no 3rd party consent, by way of an easement with a restrictive right.
  • If infringed an injunction can be served
  • Guidance note on right to light 2016
46
Q

Do you know of any case law relating to right to light?

A

Highcross vs Heaney (2011) – served with an injunction on their Toronto Square development in leeds where they proposed to add 2 additional floors onto the office

47
Q

How would you respond to a request to value a property from a Drive-by only?

A
  • Ask - Why do you want to inspect by drive by? What is the purpose of the valuation? If for sale then I would reject this request and state you must inspect internal of the premises.
  • I would only do a drive-by if you have previously inspected the premises such as for Re-valuation purposes
  • You have to have enough information to carry out a valuation. A desk-top valuation or drive-by is departing from the red book mandatory requirements however you can do it.

APC (41 decks)

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