Valuation - Level 2 (Ready) Flashcards
What are the five methods of valuation?
- Comparative
- Investment
- Residual
- Profits method
- DRC
What is the definition of “Market Value”
The estimated price for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arms length transaction after proper marketing where the parties had each acted knowledgably, prudently and without compulsion
What is the DRC method? Can you briefly describe the principles?
- Current cost of replacing an asset with its modern day equivalent
- Less deductions for physical deterioration and all relevant forms of obsolescence
What is professional indemnity insurance? Who does it protect?
- Commercial policy designed to protect business owners, clients
Are there any other standards you need to be aware of apart from the Global Standards?
RICS Valuation - Global Standards 2017 UK National Supplement
What method did you use and why?
I used the comparable method to establish my GDV and the residual approach to formulate my land value
What yield did you apply and why?
4% - Based on comparable transactions and discussions with agents
What purchaser’s costs did you deduct?
6.80%
What were your purchasers costs made up of?
5% stamp duty
1% Agents Fee
0.5% Legal Fee
VAT on the legal fee and agents fee
What are the stamp duty rates for mixed use property?
£0 - £150,000 - 0%
£150,001 - £250,000 - 2%
£250,001 + - 5%
Why did you deduct purchaser’s costs?
- They are an allowance for the notional costs a buyer will incur in the transaction
What is an internal valuer?
- Employed by a company to value their assets
- Internal use only
- No third-party reliance
What is an external valuer?
- No material links with the asset or the Client
What steps would you undertake prior to a valuation?
CCT
- Competence
- Conflicts of interest
- Issue terms of engagement
What are the benefits of carrying out due diligence prior to a valuation?
Confirm that there are no material considerations that can impact on value
Can you give me some examples of statutory due diligence you would undertake when valuing a property?
- Asbestos register
- Business rates / Council Tax
- Contamination
- Equality Act Compliance
- Environmental matters
- EPC
- Flood risk
- Fire Safety
- Health and safety compliance
- Highways
- Legal title
- Rights of way
- Planning history / compliance
What are the three valuation approaches set out in IVS 105?
- Income approach - Investment method / Discounted Cash Flow / Profits method
- Cost approach - DRC / Residual method
- Market approach - Comparison method of valuation
What steps should you take when collecting comparable evidence?
- Search and identify
- Verify
- Assemble
- Interpret
- Analyse (form an opinion of value)
- Report
What is the most recent guidance issued by RICS on comparable evidence?
RICS Comparable Evidence in Real Estate 2019
What are the three categories of evidence outlined in the RICS Comparable Evidence in Real Estate 2019
Cat A - Direct
Cat B - General Market
Cat C - Other sources
What is the Hierarchy of Evidence?
- Contemporary, completed transactions of near-identical with full info
- Contemporary, completed transactions of similar with full info
- Contemporary, completed transactions of similar without info
- Similar real estate being marketed where offers made but not exchanged
- Asking prices
So, when would you use the investment method of valuation?
When there is an income stream to be valued
And how does the investment method work?
Rent multiplied by Years Purchase = Market Value
What is a yield?
- A measurement of the return of an investment against capital invested
- Expressed as a %
How would you calculate years purchase?
- 100 divided by the yield
What does years purchase demonstrate?
- The number of years it would take an investor to repay the purchase price
Can you tell me what factors impact on a yield?
- Location
- Use
- Demand
- Lease terms
- Security of income
- Liquidity
- Prospects for rental growth
What is an all risks yield?
- Yield assuming all risks attached to an investment
What is a true yield?
- Yield assuming rent is paid in advance
What is a nominal yield?
- Initial yield assuming rent is paid in arrears
What is a gross yield?
- Yield before purchasers costs
What is a net yield?
- Yield adjusted for purchasers costs
What is an equivalent yield?
- Average yield of term and reversion
What is an initial yield?
- Current income / current price
What is a reversionary yield?
- Market rent / current price on an asset that is under rented
What is a running yield?
- The yield at any given point in time
When would you use the profits method of valuation?
- When the value is dependant upon the success of the business
- Examples include:
- Hotels
- Petrol Stations
- Leisure centre
- Pubs
What would you require to carry out a profits method valuation?
3 years audited accounts
What are the main principles of the profits method?
EBITDA capitalised at a yield
Earnings before interest, tax, depreciation and amortisation
How would you cross check and verify a method obtained by the profits method?
Using comparable evidence if possible
When would you use the DRC method?
When limited or no comparable evidence is available
- For specialised properties
- Examples include:
- Submarine base
- Sewerage works
- Lighthouse
- Oil refinery
What steps would you take in a DRC valuation?
- Value land in its existing use (assume planning permission exists)
- Add current cost of replacing the building plus fees (using BCIS)
- Discount for obsolescence / deterioration
Are DRC valuations Red Book compliant?
No.
- Can only be used to value for financial statements (internal)
When reporting value of DRC, what must valuer state regarding alternate use?
- If higher, state the MV for any readily available use
- If lower, state that MV must be materially lower upon cessation of business
What guidance is there to cover DRC method?
RICS Depreciated Replacement Cost method of valuation for financial reporting
When did the RICS Valuation - Global Standards become effective? (The Red Book)
31st January 2020
What are the six parts of the Red Book?
- Intro
- Glossary of terms
- Professional Standards (PS)
- Valuation technical and performance standards (VPS)
- Valuation applications (VPGA)
- The International Valuation Standards (IVS)
What is the difference between fair value and market value?
- Fair value reflects the intrinsic value of an asset
- Market value can be determined by market forces such as supply and demand
What is hope value?
- Value arising from the expectation that future circumstances may change
- Planning permission is an example
- Marriage value is another example
What is marriage value? How do you calculate it?
- Value created by the merging of interests (physical or tenurial)
- Undertake a before and after valuation and ascertain marriage value
- Marriage value typically split 50:50 or pro-rata on the basis of the party’s interests
How would you value a long leasehold interest?
- Deduct ground rent from gross rent to calculate net rent received
- Capitalise at a yield for the remaining length of lease (46 years)
How is SDLT calculated on granting of new leases?
Up to £150k - Zero
£150k - £5m - 1%
£5m + = 2%
Calculator on HMRC website
What is Special Value
The amount that reflects particular attributes of an asset that are only of value to a special purchaser
What is a Party Wall?
- Extends across the boundary of land belonging to two or more land owners
What is included in the Party Wall Act 1996
- Provides framework for resolving party wall disputes
- Gives a building owner that wants to carry out various works to party wall with additional rights
- Must inform all adjoining owners of your intentions to undertake works on the party wall
Are you qualified to comment on Party Walls?
- No, but I have a basic knowledge
What valuations are exempt from Red Book?
- Internal purposes
- Advice prepared for negotiations
- Agency or brokerage work in anticipation of receiving instructions to dispose of or acquire an asset
- Statutory function except for the provision of a valuation for inclusion in statutory return
- Expert witness
What is an assumption, as defined in the Red Book?
Something that is taken to be true without the need for specific investigation
Definition of MV?
The estimated amount for which an asset or liability should exchange
- On the valuation date
- Between willing buyer and a willing seller
- In an arms length transaction
- After proper marketing
- Where the parties had each 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
When would you be required to report fair value?
- Financial statements
- If IFRS have been adopted by the client
What is difference between FV and MV?
- RICS view is that definitions are generally consistent
- Fair value is the actual worth
- Market value is price which asset will exchange for
What industrial agents did you speak with regarding Burnham?
- Kemsley
- Savills
What rents and yield did they advise?
£5 per square foot / 7%
Hierarchy of evidence Category A - Direct comparables - What types does it set out?
- Recent completed transactions of near identical properties where all info available
- Recent completed transactions of similar properties where all info available
- Recent completed transactions of similar properties where all info not available
- Similar real estate being marketed where offers made but not completed
- Asking prices
Hierarchy of evidence Category B - General Market Data - What types does it set out?
Data that can provide guidance rather than direct indication of value
- Info from published sources or commercial databases
- Other indirect evidence (e.g indices)
- Historic evidence
- Demand/supply data for rent, owner occupation or investment
Hierarchy of evidence Category C - Other sources - What types does it set out?
- Transactional evidence from other real estate types and locations
- Other background data (interest rates, stock market movements and returns which indicate yields)
What to include in a comparable schedule?
- Address
- Type of property
- Tenure
- Location details
- Description, specification, condition
- Area
- Date of transaction
- Financials
- Parties involved
- Source
- Date of confirmation
- Comments on reliability
Have the RICS issued any guidance with regards to how to deal with comparables?
RICS Guidance Note Comparable Evidence in Real Estate Valuation 2019
What are the key principles of the RICS Guidance Note - Comparable Evidence in Real Estate Valuation 2019
- Sets out how to deal with comparable evidence
- Hierarchy of evidence
- Encourages global consistency in comparable evidence interpretation
- Considers potential sources of comps
Have the RICS issued any guidance in terms of new build premium?
RICS Guidance Note on Valuation of Individual New Build Properties
- Deals with valuation of new build homes
- Talks about new build premium / first owner benefit
- Access to government schemes such as HTB
- Avoidance of competitive bidding
- Potential to make units bespoke
- Ten year warranty
- Also talks about added value of better spec / design
What guidance would you have regard to if carrying out the valuation of development property?
RICS Guidance Note Valuation of Development Property 2019
- Aims to supplement IVS 410 “Development Property”
- Suggests a surveyor should use at least two methods of valuation (comparable / residual) etc
- Establishes that common basis of val is MV
- Requires you to undertake risk analysis
What guidance have the RICS issued in relation to Discounted Cash Flows?
RICS Guidance Note on Discounted Cash Flow of Commercial Property Investments 2010
Have the RICS issued any guidance in relation to COVID-19 and valuation?
RICS Practice Alert on impact of COVID-19 on Valuation
- Despite not able to inspect, valuations can still be Red Book compliant
- Need to confirm the nature of restriction in ToE’s and the report
- Any assumptions made because of this must be clearly stated
- Where impact of COVID-19 is more severe, material uncertainty must be declared.
