Valuation Level 1 Flashcards
What is the significance of RICS Valuation - Global Standards: UK National Supplement?
- Provides requirements for valuations in the UK.
- Contains 18 UK VPGAs
- UK VPGA 1 Valuation for financial reporting
- UK VPGA 10 - Valuation for commercial secured lending purposes - Advice is not mandatory for guidance
What are the contents of the UK National Supplement?
- Introduction
- Part 1 – UK Professional Standards (UK PS) mandatory
- Part 2 – UK Valuation Technical and Performance Standards (UK VPSs) – Mandatory
- Part 3 – UK Valuation Practice and Guidance Applications (UK VPGAs) – Mandatory
Can you name some key changes of the UK National Supplement?
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
What is included in the UK VPS 3?
Valuer mandatory rotation
* 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
* Max period of 10 years before the rotation of a valuation firm
What are the key changes from the 2018 UK National Supplement?
- Changes in the market
- Implementation of the recommendations of Peter Grays review in 2021
What were the 3 general areas of recommendations of the Review of Investment Valuations undertaken by Peter Grey in 2021
- Independence
- Conflicts of parties
- Creating formal valuation compliance officer
Why were their changes of the UK National Supplement?
To reduce the risk of conflicts of interests in the commissioning of valuation reports in the public interest
What else does VPS 3 cover in the new UK National Supplement?
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
Can you name some recommendations of The RICS Independent review of Real estate Investment Valuations 2021?
13 recommendations, some examples include:
- Valuer rotation
- Separation of valuation from advisory services within firms
- Commissioning and receiving of valuation reports
- A new valuation assurance committee
- Developing Valuation Compliance Officer role for firms.
Investment Method
- 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).
Comparable Method
- Gather comparables and confirm details.
- Adjust headline rent to ‘net effective rent’ if appropriate.
- Assemble in a schedule adjust using ‘Hierarchy of Evidence’.
- Analyse to form an opinion of value and report the value.
RICS Professional Standard: ‘Comparable Evidence in Real Estate Valuation’ 2019
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
Term and reversion
Used for reversionary investments, term capitalised until rent review then into perp at new yield.
Layer and Hardcore
Used for overrented investments, horizontally split, different yields used due to risk of higher income.
Profits method
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.
What is a reversionary investment?
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
Residual Valaution
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.
Depreciated Replacement Cost use and purpose
- 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.
Market Value
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
Market Rent
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
Fair Value (IFRS13)
‘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
Investment Value
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives
UK VPGA 10 - Valuations for commercial secured lending
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
How do you ensure you are competent to undertake a valuation?
SUK
- Skills
- Understanding
- Knowledge
What are the FIVE non red book compliant valuations?
E – Expert witness
A – Agency & brokerage apart from Purchase Report
S – Statutory purposes
I – Internal accounts
N –Negotiation or litigation
What is the difference between Market Value and Fair Value?
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
Why do you use Fair Value in Reporting?
Stated in VPGA 1 Valuation for Financial Reporting
How is a DRC calculated?
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).
When should you use a depreciated replacement cost method?
- 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
Is the depreciated replacement cost suitable for secured lending?
No
What is the guidance on Depreciated Replacement Cost Method of Valuation?
RICS Professional Standard: Depreciated Replacement Cost Method of Valuation for Financial Reporting 2018
What other guidance is there for the Development of land?
RICS Professional Standard on ‘Valuation of Development Property’ – 1st ed (2019)
Quick comparable method defintion
comparable method involves comparing similar transactions to give an indication of value
What makes a good comparable?
- 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
Method of comparable method
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
When is the investment value used?
- When provided a value on the basis of a truncated marketing period
How is lack occupancy accounted for in PBSA?
Income deduction
How does supply and demand impact the valaution?
Impacts the yield - better S&D = sharper yield
why new red book 2025?
to reflect updates in the valuation industry, particularly regarding technology, environmental, social, and governance (ESG) factors,
to align with the latest International Valuation Standards (IVS), ensuring that valuation practices remain relevant and accurate in the current market landscape
