Valuation Level 1 Flashcards
What is a DCF?
A growth explicit valuation which calculates an investments value based on the ability to receive a future cash flow.
When would you use a DCF for a valuation?
Where the investment cash flows are explicitly estimated over a holding period such as
- Short leasehold interests and properties with income voids.
- Phased development projects.
- Some ‘Alternative’ investments.
What is the methodology to find MV via DCF?
Estimate the cash flow
Estimate the exit value
Select a discount rate
Discount cash flow
The value is the sum of the discounted cash flow to provide the NPV
Define NPV
Net Present Value = sum of all the discounted cash flows of the project. Can be used to determine viability of an investment given a certain level of desired return.
Define IRR
“The rate at which all future cash flows must be discounted to produce an NPV of 0”
What is an IRR?
IRR is a measure of the profitability of an investment over time.
It represents the discount rate at which NPV = 0
How is the IRR calculated?
- Input current MV as a negative cash flow
- Input projected rents over holding period as a positive value
- Input projected exit value at end of term assumed as positive value
- IRR is the rate chose which provides a NPV of 0
- If NPV is more than zero, then target rate of return is met.
What are the five methods of valuation?
Comparable method
Investment method
Profits method
Residual method
Contractor’s method (Depreciated replacement cost)
Describe the comparable method?
Looks at similar properties within the same area that has been recently sold
What is the investment method of valuation?
Used when there is an income stream to value, rental income is capitalised
What is the conventional investment method?
Rent received, or Market Rent multiplied by the years purchase = Market Value
What is a yield
A yield is a measure of investment return, expressed as a percentage of capital invested.
Formula is Income / (Price x 100).
What is a year’s purchase?
A Years purchase shows us how many years would be required for the income to repay the purchase price.
It is calculated by dividing 100 by the yield.
Define Equivalent Yield
The weighted average yield between the initial and reversionary yields.
All Risks Yield
a growth implicit yield used in an investment valuation that reflects all of the risks and rewards of the subject property.
Define Nominal Yield
Initial yield assuming rent is paid in arrears
Define True Yield
Assumes rent is paid in advance not in arrears
What is the difference between a Gross & Net Yield
A gross yield is not adjusted for purchaser’s costs, e.g. during an auction purchase. A net yield is adjusted for purchaser’s costs.
What is a running yield
The yield at a moment in time.
When is the Profits Method of Valuation Used and How does it Work?
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.
How Many Years of Audited Accounts would you ideally like to see for a Profits Method Valuation?
3 years
What is the methodology of the profits method?
- Annual Turnover (income received)
* Less costs and purchases = Gross Profit
* Less reasonable working expenses = Unadjusted Net Profit
* Less operator remuneration = Fair Maintainable Operating Profit (FMOP) - Capitalised at appropriate yield to achieve MV
- Cross check with comparables
What does EBITDA stand for?
Earnings before income taxation, depreciation and amortisation.
When should you use the depreciated replacement cost method of valuation? And How is it calculated? What is the guidance note on DRC?
It should be used when there is limited availability of market evidence. Examples could include a lighthouse
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.
RICS Guidance Note on Depreciated Replacement Cost Method of Valuation for Financial Report, 2018.
What does the Red Book say about DRC Method of Valuation?
The Red Book says that the method should not be used for loan security valuations, but may be used for valuations to form part of a financial statement.
There is an RICS Guidance note on Depreciated Replacement Cost Method of Valuation for Financial Reporting 2018
What must a valuer include when reporting a DRC valuation?
They must state the value for any readily identifiable alternative use if it is higher than the current use if appropriate, or if appropriate a statement that the market value would be lower on cessation of the business use.
What is a loan security valuation?
A report for a lender to make an informed decision if they could lend money on the property safely
When would a property provide reasonable security for a loan?
Strong covenant
good location
When it is liquid
When would a property be perceived as having weak loan security?
If the property is not liquid
Say if the property is obsolete
When there is a risk of the saleability of the property
What are the different types of valuer?
An internal valuer is employed by the company to value the assets for internal purposes only, there is no third party reliance.
An external valuer has no material link with the company or assets.
What three things should you consider as first steps before undertaking a valuation?
Your professional competence to undertake the valuation
Your independence (No conflict of interest)
Terms of Engagement
Describe the timeline to a typical valuation instruction?
Preamble:
- Receive instruction from the client
- Check competence
- Check independence
- Issue terms of engagement (inc. Scope of works, fee, PII, CHP)
- Receive Countersigned terms
Due Diligence
- Gather information – leases, title, planning doc, OS plans etc.
- Undertake statutory due diligence (listed previously)
- Inspect and measure
- Research market / analyse comps
Valuation & Reporting
- Undertake the Valuation
- Draft Report
- Have another Surveyor review your work
- Finalise and sign report
- Report your valuation to the client
Completion
- Issue invoice
- Ensure filing in good order for audit.
What are the Three Valuation Approaches and Methods According to International Valuation Standards (IVS) 105
- The Income Approach (Converting Current and Future Cash flows into Capital Value)
- The Market Approach (Using Comparable Evidence in the Market)
- The Cost Approach (Considering value with reference to the Cost of Replacement or Purchase)
Describe the Methodology Behind Using the Comparable Method of Valuation?
- Search and select comps
- Verify information (triangulated approach)
- Produce Schedule
- Adjust comparables according to a hierarchy of evidence
- Analyse comparable evidence to form opinion of value
- Report value and prepare file note
RICS doc on comparable method of val
RICS Guidance Note Comparable Evidence in Real Estate Valuation (October 2019). Highlights that a valuer should use professional judgement to assess the relative importance of evidence on a case by case basis.
How would you find relevant comparables?
Inspect local area to find recent market activity by seeking agent’s boards, speak to local agents, third party databases, auction sites.
Why should one be careful of using auctions for comparable evidence?
Price shown is gross price, there may be a special purchaser or it may be an administration sale.
What is a term and reversion valuation, when is it used?
Term and reversion methodology is used for reversionary assets (ERV>Passing). The term is valued until break / review at initial yield, the reversion capitalised into perp at the reversionary yield.
In what situation would your yield between the term and reversion reflect less risk?
When it is indexed linked. You have an idea of where the reversion is going to go to.
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
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 Technical and Performance Standards (VPS)
Valuation Practice Guidance Applications (VPGA)
International Valuation Standards
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
Valuation date
currency
extent of investigation
identify and status of valuer
client
asset to be valued
purpose of valuation
basis of value
fee basis
PII confirmation
complaints handling
What are the different purposes of valuation?
financial reporting
secured lending
tax purposes capital gains
What is an accounts valuation?
Used for accounting purposes, could be internal or more formal year end accounts.
Refer to UKGAAP (General Accepted Accounting Practice) and IFRS requring fair value. Caveat that you would look at VPGA1 in the red book if you were to undertake an accounts valaution.
What would you expect to see covered in a Banks Letter of Instruction?
Borrower
Property
Purpose
Details of Loan
Special assumptions
What does VPS stand for?
Valuation Technical & Performance Standards (VPS)
What are the different basis of value?
As stated in VPS 2 Bases of Value, asusmptions and special assumptions
Market Value
Market Rent
Fair Value
Equitable Value
Investment Value
Liquidation Value
What is fair value (IFRS13)?
The price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.
Can you carry out a re-valuation without inspecting the property?
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.
The terms of engagement must state that this assumption has been made.
What is Investment Value?
The value of an asset to a particular owner used to measure worth against a clients criteria
What is a special assumption?
A special assumption is an assumption that assumes facts that differ from the actual facts existing at the valuation date
What are some examples of a special assumption?
Planning consent
Vacant property has been leased
New building constructed
What is a Depreciated Replacement Cost
The current cost of replacing an asset with its modern equivalent asset less deductions for physical deterioration and all relevant forms of obsolescence and optimisation (RICS Valuation – Global Standards, 2022).
Equitable Value
Value for asset to identified knowledgeable and willing parties that reflects the respective interests of those parties
Fair Value
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
Gross Development Value
The aggregate market value of the proposed development, assessed on the assumption that the development is complete at the date of valuation in the market conditions prevailing at that date.
Investment Value (or Worth)
The value of an asset to a particular owner or prospective owner for individual investment or operational objectives (RICS Valuation – Global Standards 2022).
Market Rent (MRV)
The estimated amount for which an interest in real property should be leased on the valuation 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 (RICS Valuation – Global Standards 2022).
Market Value (MV)
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 are some statutory due diligence for valuation?
Asbestos register
EPC rating
Flood risk
Planning History
Legal title
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 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 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.
Where in the red book do you find the definition of Market Value?
VPS2
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?
The weighted avaerage unexpired lease term remaining weighted by the contracted rent
How do you calculate a WAULT?
Multiply the remaining lease term by the current rent for each tenant.
Sum the results from step 1.
Divide the total from step 2 by the sum of the current rent for all tenants.
What are the three approaches to calculate net effective
rent?
Straight line method
Straight line method assuming time value of cash flow using a yield
Use of DCF
What is the basis on value?
Fundamental measurements of assumptions of a valuation
market value
investment value ect
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.
what is fair maintainable operating profit (FMOP)
reflects the profit that a business can reasonably generate on an ongoing basis.
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 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
What is a report on title?
A report on title is a document prepared by the purchaser’s solicitor during a property transaction. It provides a detailed summary of the property’s legal status and any issues that might affect ownership or use.
What are the new valuation requirements regarding rotation
National Supplement sets out from May 2024
maximum period of 10 years before the rotation of a valuation firm; this might include multiple engagements
maximum single engagement of 5 years
maximum period of 5 years before the rotation of an individual valuer
a minimum 3 year break after rotating off an engagement
a transition policy to allow that a smooth transition to the new arrangements has been incorporated, allowing two years before the new rules will be enforced.
What method of valuation do you use when a property is over rented?
- Layer / Hardcore Method.
- The income stream will be divided horizontally.
- The bottom slice is the market rent
- The top slice is the rent passing less market rent until the next lease event.
- A higher yield is applied to the top slice to reflect the uncertainty and risk in achieving the market rent.
When did red book come into effect?
31st Jan 2025
Descibe the contents of the Red Book
Part 1: Intro
Part 2: Glossary
Part 3: Professional Standards
PS1 = Compliance with standards where a written valuation is provided
PS2 = Ethics, competency, objectivity and disclosures
Part 4: Valuation technical and performance standards
VPS1 = Terms of engagement
VPS2 = Bases of value, assumptions and special assumptions
VPS3 = Valuation approaches and methods
VPS4 = Inspections, investigations and records
VPS5 = Val models
VPS6 = Val reports
Part 5: Valuation practice guidance applications
VPGA 1 = Val for financial reporting
VPGA 2 = Valuations for secured lending
VPGA 3 = Val of businesses and business interests
VPGA 4 = Val of trade related properties
VPGA5 = Val of plant and equipment
VPGA 6 = Val of intangible assets
VPGA 7 = Val of arts and antiques
VPGA 8 = Val of real property interests
VPGA 9 = Valuing portfolios and groups of assets
VPGA 10 = Material valuation uncertainty
VPGA 11 = Relationship with auditors
Part 6: International Val standards
What are the two Professional Standards?
PS1 = Compliance with standards where a written valuation is provided
PS2 = Ethics, competency, objectivity and disclosures
What does VPS stand for?
Val technical and performance standards
What are the 6 VPS?
VPS1 = Terms of engagement
VPS2 = Bases of value, assumptions and special assumptions
VPS3 = Valuation approaches and methods
VPS4 = Inspections, investigations and records
VPS5 = Val models
VPS6 = Val reports
What are the 11 VPGAS?
VPGA 1 – Valuation for inclusion in financial statements
VPGA 2 – Valuation of interests for secured lending
VPGA 3 – Valuation of businesses and business interests
VPGA 4 – Valuation of individual trade related properties
VPGA 5 – Valuation of plant and equipment
VPGA 6 – Valuation of intangible assets
VPGA 7 – Valuation of personal property, including arts and antiques
VPGA 8 – Valuation of real property interests
VPGA 9 – Identification of portfolios, collections and groups of properties
VPGA 10 – Matters that may give rise to material valuation uncertainty.
VPGA 11 - Relationship with auditors
Purpose of the VPGAs
They embody ‘best practice’ –
that is procedures that in the opinion of RICS meet a high standard of professional competence.
What is the red book?
Mandatory rules and best practice for members who undertake valuations
What does VPS 1 cover?
Terms of engagement (IVS 101 scope of work)
What does VPS 2 cover?
Basis of value
The valuer must determine the basis of value that is appropriate for every valuation to be reported.
What does VPS 3 cover?
Valuation approaches and methods.
Valuers are responsible for choosing and justifying their valuation approach and use of model
In some cases, more than one approach may be appropriate.
What does VPS4 cover?
Inspections, Investigations and Records
Valuers must take steps to verify all the necessary information being relied upon to ensure information is adequate
What are the different basis of value?
Market Value
Market Rent
Fair Value
Equitable Value
Investment Value
Liquidation Value
What does VPS5 cover?
Valuation Models
Valuers must make sure the model is suitbale for the valuation purpose
A greater degree of vigilence is needed to ensure there is no errors in more complex models
Where in the red book do you find the definition of Market Value?
VPS2 / glossary
What are some of the UK VPGAs?
Valuation for Charity Assets
Valuation for UK Residential Property
Valuation of Social Housing for loan security
What is the aim of the red book?
to give confidence in clients, and public that an RICS valuer anywhere in the world can undertake a valuation to the highest standard.
What is the cost approach?
method used to estimate the value of a property by considering the cost to replace or reproduce it, minus any depreciation
Define Fair Value
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.)
investment value, or worth
The value of an asset to the owner or a prospective owner for individual investment or operational objectives
(May also be known as worth.)
market approach
Provides indication of value
by comparing the subject asset
with identical or similar assets
for which price information is available.
market rent
The estimated amount for which a property should be leased
on the valuation date
between a willing lessor and willing lessee
on appropriate lease terms
in an arm’s length transaction
after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion
market value
(MV)
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
- where the parties had each acted knowledgeably, prudently and without compulsion
equitable value
The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties (see IVS 104 paragraph 50.1).
special purchaser
A particular buyer for whom a particular asset has a special value because of advantages arising from its ownership that would not be available to other buyers in a market
What is covered in VPS6?
Valuation reports
The minimum requirements that must be stated within the report
How would you find relevant comparables?
Inspect local area to find recent market activity by seeking agent’s boards
speak to local agents
third party databases
auction sites
Why should one be careful of using auctions for comparable evidence?
Price shown is gross price, there may be a special purchaser or it may be an insolvency sale.
What are the Three Valuation Approaches and Methods According to International Valuation Standards (IVS) 105
- The Income Approach (Converting Current and Future Cash flows into Capital Value)
- The Market Approach (Using Comparable Evidence in the Market)
- The Cost Approach (Considering value with reference to the Cost of Replacement or Purchase)
Why has the red book been updated (2025)?
Reflect the changes to the latest version of IVS
Incorporate changes from the RICS Valuation Review
Future proof valuation practice, e.g., updates relating to technology and ESG
Help valuers to provide the highest standard of service
Simply and clarify guidance for valuers
Build public trust in valuations provided by RICS Registered Valuers
What are some examples of statutory DD?
EPC rating
Flooding (EA website)
Fire Safety Compliance
Health and Safety Compliance
Legal Title and Tenure
Planning history (any onerous conditions such as listed/conservation area)
Asbestos register
Contamination
What is a Development Appraisal?
Tool to financially assess viability of development scheme.
Used to assess viability/suitability/profitability of proposed scheme and its sensitivity to changing inputs or assessing viability of different uses, rents, yields, S106, CIL etc.
Can be used to establish residual site value or can assume site value.
Can be based on client inputs.
What is a Residual Valuation?
Valuation to appraise the value of development site/land to find market value.
It is based on market inputs.
It is ONE moment in time, at the valuation date, for a particular purpose.
Inputs are taken at valuation date.
Can be simple residual valuation or DCF method.
what is s106?
Legal agreement between local authority and developer for planning obligations (e.g. affordable housing, local training) to gain planning consent.
It is site-specific, and is a figure that can be negotiated.
What are the FIVE situations in which a valuation does not have to be Red Book Compliant?
- When providing an Agency or Brokerage Service in anticipation of receiving instruction to dispose of, or acquire
- When valuation advice is provided in anticipation of giving evidence as an Expert Witness
- Performing a Statutory Function
- Providing Valuation to a Client for Internal Purposes - no liability
- When expressly provided in preparation for or during the course of negotiations or litigation
Is a replacement cost figure, provide for insurance purposes a ‘written opinion of value’
no
Name some requirements of Terms of Engagement (there are 18!)
a. Identification and status of the valuer
b. Identification of the client(s)
c. Identification of any other intended users
d. Identification of the asset(s) or liability(ies) being valued – if portfolio then lotting of assets should be considered.
e. Currency
f. Purpose of the valuation
g. Basis(es) of value adopted.
h. Valuation date
i. Extent of investigations
j. Nature and source(s) of information upon which the valuer will rely
k. All assumptions and special assumptions to be made
l. Format of the report
m. Restrictions on use, distribution and publication of the report
n. Confirmation that the valuation will be undertaken in accordance with the IVS/Red Book Compliance.
o. Fee Basis
p. Complaints Handling Procedure to be made available.
q. Statement that the valuation may be subject to compliance by RICS.
r. Limitation on liability agreed.
Define assumption
An assumption is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation. E.g. assumed condition of property.
Are Desk-top Valuations (i.e. without inspection) Red Book Compliant?
Yes, these can be considered a Red Book compliant valuation (unless for reasons set out in PS1).
However, when valuer is instructed to undertake valuation with restricted information or without physical inspection, valuer must consider these 4 factors:
1. Agree the nature of the restriction in writing in the Terms of Engagement.
2. Possible valuation implications of the restriction confirmed in writing before the value is reported.
3. Valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation.
4. Restriction must be referred to in the report.
What are minimum requirements to be included in Valuation Report?
Identification and Status of valuer
Client and any other intended users
Purpose of valuation
Identification of assets to be valued
Basis of value
Valuation Date
Extent of investigation
Nature and source of information relied upon
Assumptions and Special assumptions
Restrictions on use, distribution and publication
Instruction undertaken in accordance with IVS standards
Valuation approach and rationale
Valuation figure(s)
Date of valuation report
Comment on market uncertainty
Statement setting out limitations on liability that have been agreed.
What is the margin of error for valuation?
K/S Lincoln v CBRE (2010) – regarding valuation of hotels, judge said appropriate margin for error:
o +/- 5% for standard residential property
o +/- 10% for one-off commercial property
o +/- 15% if exceptional features of the property
What is headline rent?
Rent that is payable after any incentive (such as rent-free period) has expired
What is Overage?
Arrangement made for the sharing of any extra profit - also known as clawback
Tell me about the Valuer Registration Scheme
- Its a scheme for RICS valuer which aims to improve the quality and raise the status of the valution profession
- To register you must provide infroamtion around the type of valuations you undertake
- The RICS monitor the valuer through the submission of their firms annual return
What is a gross yield?
return on investment without costs deducted
