Valuation (Level 2) Flashcards
Comparable Method - Office, Suffolk Street.
What are the categories of comparable evidence?
Category A - direct comparables of contemporary (transactions of near identical properties)
Category B - general market data that can provide guidance (information from published sources or commercial databases)
Category C - Other sources (transactional evidence from other real estate types and locations - interest rates, stock market movements etc)
What is the hierachy of evidence?
The relative weight attached to different types of evidence
How do you analyse comparable data?
Find comparables (Similar physical characteristics, Location, Use, Tenure, Lease Terms, Time Scale
Use weighting to put comparables into the heirachy of evidence - Open Market Lettings, Lease Renewals, Rent Reviews, Independant Expert Determination, Arbitrators awards
What does the Red Book say about inspections?
VPS 4 - Valuers must take steps to verify information to ensure accuracy.
If this is a Desktop valuation (no valuation undertaken), it is a Global Red Book Valuation unless stated otherwise in PS1.
The nature of the restriction must be agreed in writing in TOE, valuation implications must be confirmed in writing and must be reffered to in the report.
How do you ensure that information relied upon in your valuation is appropriate and reliable?
Verify sources, conduct inspection, check legal and planning information, seek expert advice, review market evidence and comparables
Investment Method - Office, Old Bailey (Sole Occupier)
Was this valuation Red Book?
No - it was conducted for internal purposes.
Talk me through the term and reversion method
Receive instructions from my client
Undertake necessary checks (ensure I am competant, COI check, Issue TOE, undertook desktop DD, gathered information)
Receive signed TOE from client
Inspect and measure property
Collect comparables and ascertain the Market Rent
As the property was under rented, adopt the term and reversion method.
Use comparable evidence to determine my initial yield
Capitalise the passing rent until the review date at my initial yield (8%)
Then Capitalise the market rent by my reversionary yield (9% - increase yield due to uncertainty). YP in Perp and Present Value of £1 in 3 years.
Add the two components (term and reversion) to calculate my capital value/the market value.
Draft report and check with line manager.
Finalise report and send to client.
Issue my firms invoice to client.
How did you determine that Old Bailey was under rented?
I utilised comparable evidence, checked with agents and reviewed market insights
How would you approach this if it was over rented?
I would use the layer/hardcore method.
Income flow divided horizontally
Bottom slice = Market Rent
Top Slice = Rent passing less Market Rent until next lease event
Higher yield applied to top slice to reflect additional risk
Different yields used depending on comparable evidence etc
Explain the residual method to me
Used to calculate the residual land value.
assess the GDV from comparables
estimate development costs (Build costs BCIS, Professional Fees 10% GDV, Selling Agents Fees 1% GDV, Finance 8% GDV, Contingency 5% GDV and Developers Profit 20% of GDV.
deduct costs from GDV to establish land value
How did you measure the site?
Trundle Wheel and Measured Plans
What percentage would you allocate to professional fees?
Architects , surveyors, planning consultants, pm fees, m&e
10% of GDV
Typically what is developers profit?
The return a developer expects from a project (20% of GDV)
What makes up an ARY All Risks Yield
Construction
Quality of tenants covenant
length of term
amount of rent
anticipated rental growth
other lease terms
What is a years purchase multiplier?
A years purchase (YP) multiplier is a factor used to calculate the value of an income stream over a specific period.
What is new in the new Red Book?
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
Simplify and clarify guidance for valuers
Build public trust in valuations provided by RICS Registered Valuers
Why is a lease renewal the most reliable form of comparable evidence?
Because you can walk away - rent review you are tied to the terms of the existing lease.
What is the margin of error for valuations? And what is the case law?
Generally 10%. Singer & Friedlander vs John D Wood
What is the margin for error for valuations? And case
Singer Friedlander vs John D Wood - 10%
What was the Hart v Large Case and what affect does it have on PII?
Hart v Large involved a surveyor who failed to spot and report significant defects in a property. The buyer later sued for the cost of repairs. The case clarified that surveyors can be held liable for failing to identify and report risks, even if they did not directly cause the issue.
For professional indemnity insurance, it highlights the need for thorough inspections, clear disclaimers, and detailed reporting to avoid claims of negligence.
When would you use fair value as the basis for valuation?
In financial reporting
What is a special assumption?
Something that is taken to be true for the purpose of the valuation
e.g Planning permission granted
e.g Property let when vacant
Not all valuations are Red Book Valuations. Are you aware of the exceptions?
Agency work to win an instruction
Advice during negotiation or litigation
Statutory function
Acting as an expert witness
Internal purposes
What would you expect to see in Terms of Engagement in a Red Book Valuation
The property
The client
The Valuer and Status
Assumptions and special assumptions
The fee
Method of valuation
Valuation date
Limitations
Currency
Complaints handling procedure
Purpose of valuation
You are doing the standard investment method of valuation. What factors affect value?
Covenant strength of tenant
Location
Unexpired term / lease length
Specification / condition
Rent review clause
Planning
Restrictions
Definition of Market Value
The estimated amount for which an asset or liability should exchange on a valuation date between a willing buyer and seller in an arms length transaction after proper marketing where both parties had acted knowledgably, prudently and without compulsion.
Definition of Market Rent
The estimated amount for which an interest in real property should be leased on a valuation date between a willing lessor and willing lessee on appropriate lease terms in an arms length transaction after proper marketing and when the parties had acted knowledgably, prudently and without compulsion.
Definition of 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.
Definition of Investment Value
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives.
How would you distinguish liability in valuation?
defining the scope of work, assumptions, and limitations in the terms of engagement, making it clear what the valuer is responsible for.
What would you expect to have in a Red Book valuation file?
Terms of Engagement
COI
Statutory Due Diligence
Inspection Notes
Measurement
Valuation Report
How would a valuation inspection compare to a leasing and letting or management inspection?
Valuation inspection - Condition, location, rental income, comparables, unexpired lease terms, tenants.
Leasing and letting inspection - Marketability of space, building sustainability, end of trip facilities, fit out, condition of space
Property Management inspection - Assess any maintenance or repairs issues, compliance with lease terms, condition of the property and general wear and tear, health and safety
What is the contents of the Red Book
Introduction
Glossary
Professional Standards
Valuation technical performance standards
Valuation Practice Guideline Applications
International Valuation Standards
Could you name the VPS’s of the Red Book?
VPS 1 - Terms of Engagement
VPS 2 - Basis of value / assumptions and special assumptions
VPS 3 - Valuation Methods
VPS 4 - Inspection
VPS 5 - Valuation Models
VPS 6 - Valuation Reports
What is Fair Value?
The price received to sell an asset or paid to transfer liability in an orderly transaction between market sector participants at a measurement date
For residual valuation explain stamp duty land tax?
Calculated from the Gross Acquisition Price net of Agents and Legal fees.
Commercial
Up to £150,000: 0% for purchases below this threshold.
£150,001 to £250,000: 2% on the portion above £150,000.
Above £250,000: 5% on the portion above £250,000.
What does the UK National Supplement do?
Augments the Red Book.
Includes new mandatory requirement for firms to rotate after 10 consecutive years valuing a single asset.
When must Valuations be Red Book Compliant
Used for all valuations (mainly loan security and financial reporting). Except from:
Litigation or negotiation
Performing a statutory function
Used for internal purposes
Acting as an expert witness
Agency work to win an instruction
Examples of statutory due diligence for valuation?
Deed/title information
Planning documents
EPC
Flood risk/environmental
Fire Risk
Health and Safety Documentation
Asbestos info
Equality Act 2010
Business rates
What risks does an ARY take into account?
All risks associated with that income stream
Covenant strength
Unexpired lease term
Market conditions
RR provisions
What is an initial yield?
Current income at current price
Net initial yield is annual rental income divided by gross property value
How would you become a registered valuer?
Be an RICS member (AssocRICS, MRICS or FRICS)
Have appropriate valuation experience and competence (Level 3)
Apply to join the Valuer Registration Scheme (VRS) through RICS
Complete the VRS application form and provide supporting evidence (like CPD, compliance with Red Book standards)
Pay the registration fee
What yields would you use for term and reversion and what would you use for hardcore/layer?
term and reversion - initial and reversionary yield
Hardcore - equivalent yield
Are you aware of the link between valuation methods and approaches?
Income approach - Investment
Market Approach - Comparable
Cost Approach - DRC
What does the Red Book say about AVM’s/automated valuation models?
The RICS Red Book, in its most recent update, acknowledges the growing role of Automated Valuation Models (AVMs) but stresses they must be used responsibly and in line with professional standards.
AVMs should rely on high-quality, up-to-date data and be transparent and reliable. However, the Red Book makes it clear that AVMs should not replace human judgment, especially for complex or unique properties.
Valuers are required to validate AVM outputs and ensure they align with market conditions. While AVMs are a helpful tool for standard property valuations, the final valuation opinion must always come from a qualified professional, ensuring proper oversight
Stamp Duty Thresholds?
Up to £150,000 - 0%
£150,000 - £250,000 - 2%
Above £250,000 - 5%
What RICS guidance are you aware of in relation to comparable evidence?
RICS Professional Standard Comparable evidence in real estate valuation
In your term and reversion, why would you discount back to present day?
Because you are not receiving the income now. This is in the future.
What is zoning?
A valuation TECHNIQUE
What is the timeline of a valuation instruction?
Receive instructions from client
Complete checks (COI DD)
Issue Terms of Engagement
Gather Information and Statutory Checks
Inspect and Measure Property
Comparables
Complete Valuation Report
Report and review with Manager
Finalise and Issue to client with invoice
Check filing in order
What is a years purchase multiplier?
The total number of years required for income to repay its purchase price
How would you work out/complete a valuation using the profits method?
Annual Turnover (income received)
Minus costs/purchases
= Gross Profit
Gross Profit minus expenses = Net profit
Net Profit - Operators renumeration = FMOP / EBITDA
Capitalised at an appropriate yield (yp multiplier) to achieve market value.
What RICS Guidance on Sustainability are you aware of in relation to valuation?
RICS Professional Statement - Sustainability and ESG in Commercial Property Valuation and Strategic Advice 2022
- Valuers must be aware of how sustainability can impact levels of value they report
- eg physical characteristics of building and effect of climate change on location
When would the DRC or contractors method be used?
Limited comparable evidence available
Used for financial reports/rating purposes
