Valuation (Level 2) Flashcards
Why is statutory due diligence carried out for valuations?
To check that there are no material matters which could impact upon the valuation.
What statutory checks would be carried out for a valuation?
- Asbestos register
-Business Rates
-Contamination
-EPC
-Flood Risk
-Planning History
-Equality Act Compliance
-Legal title and tenure
-Highways
-Environmental Matters
What three steps would you undertake prior to commencing a valuation?
1 - SUK - Competence (Skills, Understanding and Knowledge)
2 - Conflicts and Personal Interests
3- Terms of Engagement (written instruction and confirmation, competence of valuer, extent and limitations of the valuer’s inspection)
What are the five methods of valuation?
- Comparative
- Investment
- Profits
- Residual
- Contractors (Depreciated Replacement Cost)
IVS 105 Valuation Approaches, what are they?
- Income Approach (Investment, Residual and Profits Method)
- Cost Approach (DRC Method)
- Market Approach (Comparable Method)
What is Market Value?
The estimated amount for which an asset or liability should exchange
- On the Valuation Date
- Between a willing buyer and a willing seller
- on appropriate terms
- in an arms length transaction
- after proper marketing
- where the parties had each acted knowledgeably, prudently and without compulsion.
What is Market Rent?
Estimated amount for which a 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
- where the parties had each acted knowledgeably, prudently and without compulsion
What is 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.
- required if the International Financial Reporting Standards have been adopted by the client.
- adopted by the International Accounting Standards Board
- RICS - see as consistent with Market Value
What is Investment Value?
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives.
- May differ to Market Value
- Sometimes used as a measure of worth to reflect value against the client’s own investment criteria.
What is an internal valuer?
Employed by company to value the assets of the company/enterprise.
Internal use only.
No third-party reliance.
External valuer?
Has no material links with the asset to be valued or the client.
What are main principles of RICS Guidance Note ‘ Comparable Evidence in Real Estate Valuation’ 2019?
- provides advice in dealing with situations where there is limited availability of evidence.
- Sets out a non-prescriptive hierarchy of evidence.
- assess the relative importance of evidence on a case-by-case basis.
Explain the hierarchy of evidence in the Comparable Evidence in Real Estate Valuation’ 2019 Guidance note.
- Category A - Direct comparables
- Category B - General market data
- Category C - Other sources and background data.
What is IVS 105?
Valuation Approaches and Methods.
1. Income Approach (converting current and future cash flow into capital value. (Investment and Profits).
2. Cost Approach (reference to the cost of the asset by purchase or construction (DRC or Residual)
3. Market/Comparable Approach
Can you detail the comparable approach methodology?
- Search and Select
- Confirm and Verify
- Assemble Schedule
- Adjust
- Analyse to get value
- Report Value
How do you find comparables?
- Local area for boards.
- Auction Sites
- Inhouse records
- Speak to agents
- Online Markets
What is the investment method?
- used when there is an income stream
- rental income is capitalised to produce a capital value,
Basic investment method equation?
CV = MR X YP
When is a term and reversion used? and how do you use it?
- Used for reversionary investments (market rent more than passing)
- Term is capitalised until the next lease event at an initial yield
- Reversion is at current market rent valued to perpetuity at reversionary yield (higher).
- These are then added together.
When is hardcore and layer used? and how do you use it?
- Used for over rented properties
- Bottom slice is market rent
- Top slice is rent passing less Market Rent until next lease event.
- Higher yield on top slice to reflect additional risk.
What section of the red book covers Loan Security valuation?
VGPA2 - Valuation of interests for secured lending
All Risk Yield
Remunerative rate of interest used in the valuation of fully let property let at market rent reflecting all the prospects and risk attached to the particular investment
True Yield
Assumes rent is paid in advance instead of arrears
Nominal Yield
Initial yield assuming rent is paid in arrears
Gross Yield
Yield that is not adjusted for purchasers costs.
Net yield
Yield that is adjusted for purchasers costs.
Equivalent Yield
Average weighted yield between an initial yield and a reversionary yield.
Initial yield
Current income divided by current Market Value
Reversionary Yield
The anticipated yield which the NIY is expected to rise when MR has been implemented expressed as a percentage of the purchase price.
Running Yield
The yield at one moment in time,
How does a DCF work?
- Project estimated cash flows over an assumed investment holding period.
- Plus an exit value at the end of period.
- ARY used.
- ## Cash flow is then discounted back to present day at a discount rate (rate of return, reflective of risk).
What is synergistic value?
The result of a combination of two or more assets or interests where the combined value is more than the sum of the separate values.
What is the profits method of valuation?
- Income producing properties.
- establishing fair maintainable operating profit (FMOP) capable of being generated by a reasonably efficient operator (REO). This is based upon assessment an analysis of fair maintainable turnover (FMT), requiring sound knowledge of accounting principles and market norms for the specific industry sector. A market-based profit multiplier is then used to convert FMT into a capital value
- Assess Turnover, gross profit and net profit then apply a market based profit multiplier to convert into Capital Value.
How many parts are in the red book?
6
What are the 6 parts of the red book? RICS Valuation - Global Standards 2021
- Introduction
- Glossary
- PS
- Valuation technical and performance standards (VPS)
- Valuation Applications
- IVS
Which sections of the red book apply for loan security?
VPGA2 - Valuation of interests for secured lending
UK Supplement - UK VPGA 10
Are there any true exemptions of the Red Book?
No, VPS 1 to 5 should be followed as best practice.
What are VPS 1 to 5?
VPS 1 Terms of engagement (scope of work)
VPS 2 Bases of value, assumptions and special assumptions
VPS 3 Valuation approaches and methods
VPS 4 Inspections, investigations and records
VPS 5 Valuation models (NEW)
VPS 6 Valuation Reports
What is in VPS 5? 14 Requirements.
- Valuer
- Client
- Purpose
- Asset
- Basis of value
- Extent of inspection
- source of information
- Assumptions
- Restrictions
- Approach
- Figures
- Date of valuation
- Comment on market
- statement of limitations
What is the difference between the Red Book and the UK National Supplement?
Red Book is a Global Standard.
It places fresh emphasis on the fact that the content is supplemental to that in Red Book Global Standards, and not in substitution for it. This removes the need for an overall Introduction reproducing that in Red Book Global Standards.
What is a yield?
The rental income reflected as a percentage of capital value.
How to become a registered valuer?
- Vals to Level 3.
- Provide a further summary of experience.
- Details of valuations.
- Claims of negligence.
- PII cover.
What is the UK national supplement?
It reflects valuation standards and other authoritative requirements that are specific to the UK jurisdiction, and provides additional valuation applications guidance accordingly.
What were the principal valuation considerations for St Laurence Drive?
- Location
- Specification
- Physical Characteristics
- Tenancies
Where are you guided by the standards where no inspection has been undertaken?
VPS 1 - Terms of Engagement
- Page 41
- The valuer must make it clear when confirming acceptance of such instructions that the nature of the restrictions and any resulting assumptions, and the impact on the accuracy of the valuation, will be referred to in the report.
VPS 4 - Inspection
Also details Any limitations or restrictions on the inspection, inquiry and analysis for the purpose of the valuation assignment must be identified and recorded in the terms of engagement and also in the report.
What is Investment Value?
The value of an asset to the owner or prospective owner for individual investment or operational objectives.
What are the steps for a term and reversion?
Term capitalised until next rent review / lease expiry at an initial yield
Reversion to Market Rent valued into perpetuity at reversionary yield
What are the factors to consider when determining a yield?
- Prospects for rental and capital growth
- Quality of location and covenant
- Use of the property
- Lease terms
- Obsolescence
- Voids
- Security and regularity of income
- Liquidity
Valuation factors to look for?
Location, tenure, aspect, defects, occupational details
What are the additional reporting requirements for a loan security valuation?
- Suitability for secured lending if terms of loan are known. General marketability if not known.
- EPC
- environmental factors
- Market Data
- Sustainability and ESG
- Disrepair and deleterious materials
How do you do a residual valuation?
- Gain gross development value using comparable methods for proposed units to be built.
- GDV - Developers Costs (Professional Fees, Contingency, Finance Costs).
- Less Developers Profit
= Residual Land Valuation
Types of Foundation?
- Trench - Resi
- Raft - Concrete slab over whole site
- Piled - Concrete piles
- Pad - a slab foundation under columns
Brick defects?
Spalling and Efflorescence
- Spalling is freeze/thaw
- Efflorescence - White marks caused by salts
Institutional specifications for offices and industrial?
Offices
- Raised floors with floor boxes (void of 150mm)
- Ceiling height of 2.6 metres
- Ceiling void of 350mm
- Air con/ double glazing
- Passenger lift
- 2.5 to 3.00 kN/sqm
Industrial
- 8m clear eaves
- 30 kN/sqm
- steel portal frame with insulated profiled steel cladding
- 3 phase electric
- 5-10% office
- 40% site coverage
- LED lighting
RICS Rotation Policy?
- Change valuer every 7 years
What is Material uncertainty?
- Red Book term - VPGA 10 - must write it down and declare how confident you are.
- particular characteristics that make it difficult to form an opinion of value, where information is limited or restricted and disruptions to markets due to unforeseen financial, macro-economic, legal, political or even natural events.
- Covid - a case for this , unknown how market would react.
VPGA 8 and VPS 4 - Inspection
- Mandatory for valuations
- safe and accessible - you should inspect all internal and external of the property
What is the new VPS 5?
- Valuation Models - a quantitative implementation of a method in whole or in part that converts inputs into outputs used in the development of a value.
How has ESG been incorporated into the updated Red Book?
ESG is built into valuation guidance throughout the Red Book, including Terms of Engagement, inspection, investigations, recording and reporting.
What does the new VPS 5 Valuation Models cover?
- Details the requirement to apply the provisions in IVS 105.
What are the characteristics of an Appropriate Valuation Model?
a - accuracy
b - completeness
c - timeliness
d - transparency
What are the main changes in the new RICS Valuation Global Standards 2024?
Aligning with other relevant global standards, such as the latest International Valuation Standards (IVS), published by the International Valuation Standards Council (IVSC), of which RICS is a member
Incorporating new content on modelling, methods and risk assessment
Practice and process changes regarding rapidly developing technologies such as AI, and, for the first time, a mandatory Environmental, Social and Governance principles (ESG) element
What is WAULT and how is it calculated?
- Weight Average Unexpired Lease Term
- Calculated by adding up all the contractual rents to lease expiry or first breaks then dividing by the contracted annual rent.
-Expressed in number of years.
What are the benefits of a high and low WAULT?
- A low WAULT might be good where rents are rising and the property is desirable.
- A high WAULT is good in weak property markets when rents are falling
