Valuation (Level 2) Flashcards
What 3 standards relate to Valuation?
- RICS Valuation - Global Standards (2022) ‘Red Book Global’
- International Valuation Standards - incorporated into Red Book Global
- UK National Supplement (2024)
Explain your understanding of the rotation rules for valuation contained within the RICS Red Book Supplement
no more than 10 executive years, effective from May 2024
What Professional Indemnity Insurance (PII) is required when undertaking a valuation?
depends on company turnover
typically £1m
What does the Red Book apply to?
All members and regulated firms MUST comply with Parts 3 and 4 of the global Red Book.
Part 3 – PS 1 and 2
Part 4 – VPS 1-5
What is the structure of the Red Book Global 2022
Introduction
Glossary
Professional Standards (PS)
Valuation Technical and Performance Standards (VPS)
Valuation Applications (VPGA)
The International Valuation Standards (IVS)
Purpose of Red Book?
Consistency
Objectivity
Transparency
(COT)
Who signs off Red Book report?
RICS registered valuer
Who is to be named in a Red Book report?
Anyone with a material supporting role in the valuation
How many Professional Standards are there?
2
Are Professional Standards mandatory?
Yes
Name the Professional Standards
PS 1 - Compliance where written valuation provided
PS 2 - Ethics, competency, professional scepticism, disclosures (Conflicts of Interest), difference between internal and external valuers
What are the exemptions to PS 1
5 exemptions
- Valuation for internal purposes
- Litigation, negotiation e.g. rent review
What is the difference between an internal and external valuer? PS 2
Internal - employed by company, for internal use only, no 3rd party reliance
External - no links with asset or client
What is VPS?
Valuation Professional Standards
Is VPS mandatory?
Yes
What are the VPS?
VPS 1 - Terms of Engagement
VPS 2 - Investigation, inspections, records
VPS 3 - Valuation Reports
VPS 4 - Basis of Value, assumptions, special assumptions
VPS 5 - Valuation Approaches and Methods
What is included in the Terms of Engagement (VPS 1)
18 items
- Identification and status of the valuer
- Identification of client
- Identification of any other intended users
- Identification of the asset(s) being valued
- Valuation currency
- Purpose of valuation
- Basis(es) of value adopted
- Valuation date
- Nature and extent of the valuer’s work
- Source(s) of information relied upon
- Assumptions and special assumptions
- Format of the report
- Restrictions on use, distribution and publication of the report
- Confirmation that the valuation will be undertaken in accordance with the IVS
- Fee calculation
- Reference to the firm’s complaints handling procedure, with a copy available on request
- A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations
- A statement setting out any limitations on liability that have been agreed
What are the requirements of Inspection, Investigations, records (VPS 2)
Restrictions or limitations recorded in the Terms of Engagement (VPS 1) and the report (VPS 3)
Proper record of inspections kept in appropriate business format
Desktop due diligence, location maps, historic file records, leases, flood risk, risk assessment, access arrangements
What is included in valuation reports (VPS 3)
16 Minimum Requirements:
- Identification and status of valuer
- Client and any other intended user
- Purpose of valuation
- Identification of the asset 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 reasoning
- Valuation figure
- Date of valuation report
- Comment on market uncertainty
- Statement setting out any limitation
What are the main basis of value under VPS 4?
Market Rent
Market Value
Investment Value
Fair Value
What is Market Rent? (VPS 4)
‘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 arms length transaction
* after proper marketing
* where parties acted knowledgeable, prudently and without compulsion.
What is Market Value? (VPS 4)
‘Market Value ‘
‘The estimated amounts for which an asset or liability should exchange’
* on the valuation date
* between a willing buyer and willing seller
* in an arm’s length transaction
* after proper marketing
* where parties acted knowledgeably, prudently and without compulsion
What is Investment Value? (VPS 4)
‘The value of an asset to a particular owners or prospective owner for individual investment or operational objectives’
* may differ from Market Value
* sometimes used as measure of worth to reflect the value against the client’s own investment criteria.
How would you calculate Investment Value (worth)?
In much the same methodology as any other valuation, however would make a subjective estimate for a client using their inputs, not market inputs.
What is Fair Value? (VPS 4)
‘Fair Value’
‘The estimated price an asset would change hands between knowledgeable parties, considering market conditions, but not necessarily in an open market’
* Basis of value now required if IFRS adopted by client
* Consistent with definition of Market Value
What is Liquidation Value?
‘The amount that would be realised when an asset or group of assets are sold on a piecemeal basis. Liquidation value should take into account the costs of getting the assets into saleable condition as well as those of the disposal activity’
* Not used in UK
What is an assumption?
An assumption is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation or verification
What is a special assumption?
A special assumption is made by the valuer where an assumption either assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant in a transaction on that valuation date.
What is the difference between an Assumption and a Special Assumption (VPS 4)?
Both must be agreed with the client prior to reporting an opinion of value.
Assumption – reasonable to accept as fact in the context of the valuation assignment without specific investigation or
verification.
Special Assumption – an assumption that either assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant. E.g. a bid from a special purchaser has been made.is expected.
When can an assumption be made (VPS 4)?
Only assumptions that are reasonable and relevant having regard to the purpose for which the valuation assignment is required should be made. All assumptions that are to be made in the conduct and reporting of the valuation assignment must be identified and recorded in the Terms of Engagement (VPS1).
When can a special assumption be made (VPS 4)?
Special assumptions may only be made if they can reasonably be regarded as realistic, relevant and valid for the particular circumstances of the valuation. In order to provide the client with the valuation required.
What are the three main valuation approaches (VPS 5)
- Income
- Market
- Cost
How many VPGA’s are there?
10
What does VPGA stand for?
Valuation Practice Guidance Applicationa
What VPGA’s are relevant to your role?
VPGA 1 - vital for inclusion in financial accounts
VPGA 2 - valuation for secured lending
VPGA 8 - valuation of real property interests (ESG + sustainability).
VPGA 10 - matters that give rise to valuation uncertainty
Under VPGA 2, how do you deal with conflicts of interest in secured lending valuations?
Any previous, current or anticipated involvement with the prospective borrower/property must be disclosed to lender (‘previous involvement’ = past 2 years, but can be longer)
Confirm that they are acting as ‘independent valuers’
VPGA2 gives examples of such involvement resulting in conflict of interest include:
A longstanding professional relationship with prospective borrower/owner of property
When valuer will gain fee from introducing the transaction to the lender
If there is a financial interest in the property holding or prospective borrower
When valuer is retained to act in the disposal/letting of the completed development on the subject property
In addition to the min. valuation report requirements, what must also be reported for loan security valuations?
Disclosure of any conflicts in terms of engagement and arrangements to manage the conflict (last 2 years)
Valuation method adopted, supported with the calculation
When a recent transaction at the property has occurred/provisionally agreed price disclosed, the extent to which that information has been accepted as Market Value
Comment on the suitability of the property for lending
Any circumstances of which the valuer is aware that could affect the price
if the property is, or is intended to be, the subject of development or refurbishment for residential purposes, the impact of giving incentives to purchasers
Potential and demand for alternative uses
Occupational demand for the property
When might a property not be suitable for secured lending?
Short leasehold interest, high flood risk, tenant break option very soon (cannot guarantee income for any period of time)
Is VPGA mandatory?
No - advisory
What is IVS? What is purpose
International Valuation Standards
Promote and maintain high level of public trust in valuation practice by establishing requirements for valuers
What is the structure of IVS?
Asset Standards
General Standards
What are the core principles of valuation?
- Ethics
- Competency
- Compliance
- Basis of Value
- Date of Value
- Assumptions and Conditions
- Intended use
- Intended user
- Scope of Work
- Identification of Subject of Valuation
- Data
- Valuation Methodology
- Communication of Valuation
- Communication of Valuation
- Record Keeping
What are the general standards?
IVS 101 – Scope of Work
IVS 102 – Investigations and Compliance
IVS 103 - Reporting
IVS 104 – Bases of Value
IVS 105 – Valuation Approaches and Methods
What is IVS 101?
Scope of Work (Terms of Engagement)
18:
1. Identification and status of the valuer
2. Identification of client
3. Identification of any other intended users
4. Identification of the asset(s) or liability(ies) being valued
5. Valuation currency
6. Purpose of valuation
7. Basis(es) of value adopted
8. Valuation date
9. Nature and extent of the valuer’s work – including investigations – and any limitations thereon
10. Source(s) of information upon which the valuer will rely
11. All assumptions and special assumptions to be made
12. Format of the report
13. Restrictions on use, distribution and publication of the report
14. Confirmation that the valuation will be undertaken in accordance with the IVS
15. Fee calculation
16. Reference to the firm’s complaints handling procedure, with a copy available on request
17. A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations
18. A statement setting out any limitations on liability that have been agreed
What is IVS 102?
Investigations and Compliance
Inspection
Compliance with standards
Record keeping
What is IVS 103?
Reporting
- the scope of the work performed
- intended use,
- intended users,
- the purpose,
- the approach or approaches adopted,
- the method or methods applied,
- the key inputs used,
- the assumptions made,
- the conclusion(s) of value
- the date of the report (which may differ from the valuation date).
What is IVS 104?
Basis of Value
- Market Value
- Market Rent
- Equitable Value
- Investment Value
- Synergistic Value
- Liquidation Value
- Far Value
- Fair Market Value
What is IVS 105?
Valuation Approaches and Methods
Approaches
- Income
- Market
- Cost
Methods
1. Investment
2. Comparable
3. Residual
4. DRC
5. Profits
What is the investment method?
Used when income stream to value (tenants)
Rental income capitalised to produce capital value.
Includes assessing rental values (market rent) and a market-based yield.
The investment method can reflect income streams which are under-, rack- and over-rented by incorporating risk within the yield choice (i.e. an all risks yield).
What types of investment method are there?
Term and reversion
Hardcore and Layer
Hardcore and Topslice
DCF
Tell me about Term and Reversion?
Investment method
Traditional, implicit approach
For under-rented properties / Reversionary investments
Reduce yield to reflect low MR
- capitalise passing rent using YP at discounted yield for remaining years
- capitalise reversion using market rent into perp using YR at full market rate discounted using present value.
- Add together
- Stand back and look
Tell me about Hardcore and Layer?
Investment Method
Reversionary Investments
Under-Rented
It is used for REVERSIONARY (under-rented) properties.
Typically used by the institutional investment market, and used when the reversion is close in time.
Income flow is divided horizontally. Both the hardcore (PR) and layer (MR-PR) are valued into perpetuity, but the layer is deferred to the next lease event.
An Equivalent Yield is applied to both the hardcore and layer.
Argus Val Cap uses this method.
Tell me about Hardcore and Topslice
It is used for OVER RENTED investments.
Income flow is divided horizontally. The hardcore (MR) is valued into perpetuity at a net initial yield.
The top slice (PR-MR) is capitalised to next lease event at a net initial yield with a risk adjustment.
There is a yield differential; top slice at an inflated yield to reflect higher risk of over-renting.
Different yield type can be used based on market comparable evidence.
NO PV of £1 needed as both layers of income are being received NOW.
What is growth implcit?
rental growth built into the choice of yield, not explicitly modelled in calculation.
The Yield adopted assumed many of assumptions that are made explicit in a DCF approach and the risks are hidden in the selected yield
Tell me about the DCF method?
Investment method
Growth explicit
Assumptions made
Cash flow explicitly modelled incorporating assumptions.
Short leasehold interests
Properties with income voids
Over-rented properties
Why do we discount in a DCF?
To reflect the time value of money. The discount rate will always reflect the investor’s perception of risk. Also known as the capitalisation rate.
Simple Methodology to find Market Value?
- Estimate cash flow (income less expenditure)
- Estimate exit value at end of holding period
- Select discount rate
- Discount cash flow at discount rate
- Value is the sum of the completed discounted cash flow to provide the NPV
What is the PV of £1 formula?
PV of £1 = 1
÷
(1+i)n
‘i’ is the yield that the valuer thinks is appropriate.
‘n’ is the term in years (to next rent review)
What is the Years Purchase?
The relationship between the income and the capital value.
The number of years it will take for the annual income to add up to the capital value, when taking into account the time value of money (i.e. that it’s decreasing). i.e. the right to receive £10,000pa for 4 years won’t = £40,000 payment today.
What is the Years Purchase into perpetuity formula?
Used for valuing the reversionary rent into perpetuity.
100 ÷ i
i.e. 100/6.75 = 14.8
