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Tilly Rees SoE > Valuation Level 1 > Flashcards

Valuation Level 1 Flashcards

1
Q

What is the significance of RICS Valuation - Global Standards: UK National Supplement?

A
  1. Provides requirements for valuations in the UK.
  2. Contains 18 UK VPGAs
    - UK VPGA 1 Valuation for financial reporting
    - UK VPGA 10 - Valuation for commercial secured lending purposes
  3. Advice is not mandatory for guidance
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2
Q

What are the contents of the UK National Supplement?

A
  1. Introduction
  2. Part 1 – UK Professional Standards (UK PS) mandatory
  3. Part 2 – UK Valuation Technical and Performance Standards (UK VPSs) – Mandatory
  4. Part 3 – UK Valuation Practice and Guidance Applications (UK VPGAs) – Mandatory
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3
Q

Can you name some key changes of the UK National Supplement?

A

UK VPS 3 – regulated purpose valuations: supplementary governance required

UK VPGA 8 – Valuation for charity assets

UK VPGA 10 – Valuation of commercial secured lending
- Incorporates new ESG principles

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4
Q

What is included in the UK VPS 3?

A

Valuer mandatory rotation

  • Max period of 10 years before the rotation of a valuation firm
  • A max. single engagement period of 5 years
  • A max. period of 5 years before the rotation of an individual responsible valuer
  • A min. 3 year break after rotating off an engagement
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5
Q

What are the key changes from the 2018 UK National Supplement?

A
  1. Changes in the market
  2. Implementation of the recommendations of Peter Grays review in 2021
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6
Q

What were the 3 general areas of recommendations of the Review of Investment Valuations undertaken by Peter Grey in 2021

A
  1. Independence
  2. Conflicts of parties
  3. Creating formal valuation compliance officer
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7
Q

Why were their changes of the UK National Supplement?

A

To reduce the risk of conflicts of interests in the commissioning of valuation reports in the public interest

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8
Q

What else does VPS 3 cover in the new UK National Supplement?

A

Valuations that are subject tto monitoring

Valuations for FIVE purposes:
1. Financial reporting (company accounts)
2. Stock exchange listings
3. Takeovers and mergers
4. Collective investment schemes
5. Unregulated property unit trusts

Secured lending valuations are NOT regulated purpose valuations as they are not relied upon by third party or public interest

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9
Q

Can you name some recommendations of The RICS Independent review of Real estate Investment Valuations 2021?

A

13 recommendations, some examples include:

  1. Valuer rotation
  2. Separation of valuation from advisory services within firms
  3. Commissioning and receiving of valuation reports
  4. A new valuation assurance committee
  5. Developing Valuation Compliance Officer role for firms.
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10
Q

Investment Method

A
  • Used when there is an income stream, rental income is capitalised to produce a capital value.
  • Conventional method assumes growth implicit where implied growth rate is derived from the market capitalisation rate (yield).
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11
Q

Comparable Method

A
  1. Gather comparables and confirm details.
  2. Adjust headline rent to ‘net effective rent’ if appropriate.
  3. Assemble in a schedule adjust using ‘Hierarchy of Evidence’.
  4. Analyse to form an opinion of value and report the value.
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12
Q

RICS Professional Standard: ‘Comparable Evidence in Real Estate Valuation’ 2019

A

Cat A – direct comparables, accurate, recent, asking prices (analysis)
Cat B – general market data to give guidance, historic and reports
Cat C – other asset classes, locations, background data interest rates

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13
Q

Term and reversion

A

Used for reversionary investments, term capitalised until rent review then into perp at new yield.

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14
Q

Layer and Hardcore

A

Used for overrented investments, horizontally split, different yields used due to risk of higher income.

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15
Q

Profits method

A

Trade related – uses (3 years of audited accounts)
* Income – costs = gross profit – less expenses & operator’s
remuneration = Fair Maintainable Operating Profit (FMOP).
* Expressed as EBITDA (earnings before interest, taxation, depreciation and amortisation.

Capitalised at yield.

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16
Q

What is a reversionary investment?

A

an investment in a property that is rented out for less than the market rate, but will eventually be rented out at the market rate

17
Q

Residual Valaution

A

MUST be MARKET led, ONLY used to calculate LAND VALUE

  • GDV of scheme at today’s date assuming current market.
  • Comparable method used to establish rent and yield (ARY). Rent
    free and void periods can be assumed and purchaser’s costs are
    usually deducted.
18
Q

Depreciated Replacement Cost use and purpose

A
  • Used where direct market evidence is limited or unavailable for specialised properties.
  • Used for owner- occupied property for accounts or rating valuations.
  • Not Red Book Global Compliant for secured lending.
19
Q

Market Value

A

The estimated amount for which an asset or liability should exchange…

  • On the valuation date
  • Between a willing buyer and willing seller
  • In an arms length transaction
  • After proper marketing
  • Where the parties had each acted knowledgeably, prudently and without compulsion
20
Q

Market Rent

A

The estimated amount for which an interest in real property should be leased…

  • On the valuation date
  • Between a willing buyer and willing seller
  • In an arms length transaction
  • After proper marketing
  • When the parties had each acted knowledgeably, prudently and without compulsion
21
Q

Fair Value (IFRS13)

A

‘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 basis of valuation is now required if the International Financial Reporting Standards have been adopted by the client

It is adopted by the International Accounting Standards Board

22
Q

Investment Value

A

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

23
Q

UK VPGA 10 - Valuations for commercial secured lending

A

Includes guidance on:
- Independence, objectivity and conflicts of
interest
- Must act as an External valuer
- Guidance on what needs to be involved in Terms of Engagement
- Reporting - suitability for lending and Sustainability and ESG impacting value

24
Q

How do you ensure you are competent to undertake a valuation?

A

SUK
- Skills
- Understanding
- Knowledge

25
Q

What are the FIVE non red book compliant valuations?

A

E – Expert witness
A – Agency & brokerage apart from Purchase Report
S – Statutory purposes
I – Internal accounts
N –Negotiation or litigation

26
Q

What is the difference between Market Value and Fair Value?

A

Market value is the estimated amount for which an asset or liability should exchange…
- On the valuation date
- Between a willing buyer and willing seller
- both acting knowingly
- In an arms length transaction
- After proper marketing

Fair Value is 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

27
Q

Why do you use Fair Value in Reporting?

A

Stated in VPGA 1 Valuation for Financial Reporting

28
Q

How is a DRC calculated?

A

Two steps:
1. Value of the land in its existing use (assume planning permission exists)
2. Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence/deterioration. (Use BCIS then judge level of obsolescence).

29
Q

When should you use a depreciated replacement cost method?

A
  • Used when there is limited direct market evidence for specialist properties.
  • Examples include lighthouses, oil refineries, submarine base and docks.
    Purpose:
  • Used for owner occupied property
  • For accounts purposes for specialised properties.
  • Also used for rating valuations of specialist properties
30
Q

Is the depreciated replacement cost suitable for secured lending?

A

No

31
Q

What is the guidance on Depreciated Replacement Cost Method of Valuation?

A

RICS Guidance note on Depreciated Replacement Cost Method of Valuation for Financial Reporting 2018

32
Q

What other guidance is there for the Development of land?

A

RICS Professional Standard on ‘Valuation of Development Property’ – 1st ed (2019)

33
Q

Quick comparable method defintion

A

e comparable method involves comparing similar transactions to give an indication of value

34
Q

What makes a good comparable?

A

Comprehensive, i.e. ideally a valuer needs more than one transaction

Very similar or identical

Recent

Result of an arm’s length transaction

Verifiable

Consistent with local market practice

Result of underlying demand, i.e. sufficient bidders to create active market

35
Q

Method of comparable method

A

Gather evidence in a table

Analyse the net effective rate, i.e. taking any incentives into account

Collate evidence in a schedule or matrix

Adopt a common measurement or comparison standard

Adjust quantitatively and qualitatively using the hierarchy of evidence and other key considerations (including the valuer’s own knowledge and experience)

Analyse to form opinion of value

Stand back and look to sense check the final valuation figure

Report their opinion to the client

36
Q

When is the investment value used?

A
  • It is sometimes used as a measure of worth to reflect the value against the client’s own investment criteria

Tilly Rees SoE (42 decks)

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