Valuation (Level 2) - SOE Specific Flashcards
The RICS Valuation – Professional Standards (Global and UK) or the Red Book was originally produced in January 2014 – what has this been subsequently split into in 2017?
- RICS Valuation – Global Standards (2017)
- RICS Valuation – Global Standards: UK National Supplement (2019)
The RICS Valuation – Global Standards & RICS Valuation – Global Standards: UK National Supplement have been updated several times, what is the most current edition of both documents published?
- RICS Valuation – Global Standards (2017) was most recently updated in December 2024, to be effective for valuation dates from 31st January 2025 and thereafter .
- RICS Valuation – Global Standards: UK National Supplement (2019) was most recently updated in October 2023, effective from 1st May 2024 and thereafter.
What is the purpose of the Red Book?
“To establish a framework for uniformity and best practice in valuation”
To assure users that a valuation provided anywhere in the world is in accordance with the highest professional standards.
Consistency, objectivity and transparency.
Why was the Red Book updated recently?
The RICS Valuation – Global Standards (Red Book) December 2024 update, effective from 31st January 2025, was primarily updated to align with the new International Valuation Standards (IVS), which also take effect on the same date.
The most recent Red Book update ensures compliance with IVS 2025 while improving the structure of valuation standards and guidance. The changes enhance clarity, modernize valuation modelling guidance, and introduce a new standard on valuation models and engagement with auditors.
What key changes were made in the most recent Red Book update?
Key Changes in the 2025 Update:
- Rearrangement of Valuation Technical and Performance Standards (VPS) in Part 4 – The structure has been modified, with some VPS sections renumbered and a new standard on valuation models (VPS 5) added.
- New Content on Valuation Modelling and Methods – Expanding guidance on valuation methodologies, particularly with the introduction of VPS 5.
- Re-titled Valuation Practice Guidance Applications (VPGA) in Part 5 – These sections have been updated, and a new VPGA 11 (Relationship with Auditors) has been introduced.
- Extensive Editing – While the wording has been revised extensively, the core principles remain unchanged.
What changes were made to the structure of the Red Book in the most recent update?
Part 4 (VPS) Updates:
VPS 1: Terms of engagement (unchanged)
VPS 2: Bases of value, assumptions, and special assumptions (was VPS 4)
VPS 3: Valuation approaches and methods (was VPS 5)
VPS 4: Inspections, investigations, and records (was VPS 2)
VPS 5: New section on Valuation Models
VPS 6: Valuation reports (was VPS 3)
Part 5 (VPGA) Updates:
VPGA sections re-titled, with VPGA 11 (Relationship with Auditors) added.
Whats the purpose of the UK National Supplement?
Supplements the Red Book
Countries often have their own national supplements
This one ensures UK valuations are consistent with UK accounting standards
What is the contents of the Red Book?
Part 1: Introduction
Part 2: Glossary
Part 3: Professional Standards (PS) (Mandatory)
Part 4: Valuation Technical and Performance Standards (VPS) (Mandatory)
Part 5: Valuation Applications (VPGA) (Advisory)
Part 6: International Valuation Standards
What is the contents of the UK National Supplement?
Part 1 - Introduction
Part 2 - UK Professional and Valuation Standards (UK PS and UK VPS) - mandatory
Part 3 - UK Valuation Practice Guidance Applications (UK VPGA) - advisory
Part 4 - Summary of changes from Red Book UK 2014 (revised January 2015)
Outline Part 3 of the Red Book?
Part 3: Professional Standards (PS) (Mandatory), is broken down into:
PS 1 = Compliance with standards where a written valuation is provided
PS 2 = Ethics, Competency, objectivity and disclosures
Outline Part 4 of the Red Book?
Part 4: Valuation Technical and Performance Standards (VPS) (Mandatory), is broken down into:
VPS 1 Terms of engagement (scope of work)
VPS 2 Bases of value, assumptions and special assumptions (was VPS 4)
VPS 3 Valuation approaches and methods (was VPS 5)
VPS 4 Inspections, investigations and records (was VPS 2)
VPS 5 Valuation models (new)
VPS 6 Valuation reports (was VPS 3)
Outline Part 5 of the Red Book?
Part 5: Valuation Applications (VPGA) (Advisory), is broken down into:
VPGA 1 Valuation for financial reporting
VPGA 2 Valuation for secured lending
VPGA 3 Valuation of businesses and business interests
VPGA 4 Valuation of trade related properties
VPGA 5 Valuation of plant and equipment (including infrastructure)
VPGA 6 Valuation of intangible assets
VPGA 7 Valuation of arts and antiques
VPGA 8 Valuation of real property interest
VPGA 9 Valuing portfolios and group of assets
VPGA 10 Material valuation uncertainty (MVU)
VPGA 11 Relationship with auditors (new)
What’s a conventional valuation method?
A conventional method of valuation refers to a traditional and widely accepted approach used to determine the value of an asset
What’s a contemporary valuation method?
A contemporary method of valuation refers to modern, data-driven, and technology-enhanced approaches that go beyond traditional valuation techniques.
What are the Conventional Valuation Methods?
- Comparative
- Investment
- Residual
- Profits / Accounts
- Contractor’s / Depreciated Replacement Cost
What is an example of a Contemporary Valuation Technique?
- Discounted Cash Flow (DCF)
- Automated Valuation Models
What is the difference between a basis of value and a method of value?
Method of Valuation = the techniques used to arrive at a figure that we would describe with a Basis of Value
Basis Value = Red Book definition of Value (market value, market rent, investment value and fair value)
What bases of value are included in the Red Book?
Market Value
Market Rent
Investment Value (or Worth)
Fair Value
What additional Bases of Value are outlined in IVS 104?
Equitable Value
Synergistic Value
Liquidation Value
What is the definition of 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 in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgably, prudently and without compulsion.
What is an arms length transaction?
Where there is no connection/relationship between all parties.
What is the definition of Market Rent?
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.
What is Investment Value?
The value of an asset to the owner or a prospective owner for individual investment or operational objectives?
Why do we value property? What purposes are there of Valuation?
- Purchase/Sale
- Secured Lending
- Financial Statements (E.g. Accounts)
- Statutory Purposes
- Internal Purposes
Describe how Departure from the Red Book mandatory requirements may be possible?
Easy to get confused between Red Book exception and Red Book departure
Exception = Red Book doesn’t apply
Departure = Red Book does apply, but valuer does not comply with mandatory requirements
Can depart if there are special circumstances where it is inappropriate to comply with VPS 1 - VPS 5 and client agrees. EG client says ‘just want quick valuation, but not a Red Book valuation’ - can’t do this, valuer should decline
EG client says ‘do valuation without going inside the property’ - again, can’t do this, valuer should decline
IF there is good reason for not going into the property, then could depart e.g. if you might be met with hostility and violence, say in terms of engagement due to relationship between landlord and tenant I have been instructed not to enter the property- got to be confirmed in terms of engagement and it has got to be reported that this may impact the valuation.
Can only depart if there are circumstances that justify departure
How does VPGA differ from PS & VPS?
It is advisory, not mandatory.
What should you do before any valuation?
- Competancy check
- Check for a conflict of interest
- Agree to terms of engagement
What Valuations are exemptions from the Red Book?
PS 1: The Red Book applies to all valuations unless the purpose is specifically listed as an Exception:
Agency or brokerage work in anticipation of disposal or acquisition instructions
Acting or preparing to act as an expert witness
Performing statutory functions
Purely for internal Purposes
Preparation for or during negotiations or litigation
NOTE: A Replacement cost for insurance purposes is not a “valuation” - therefore don’t say its an exemption!
What should happen if a valuation veers away from Red Book guidance for any reason?
This must be confirmed and agreed with the client as a departure and a clear statement to that effect must be included in the terms of engagement, report , and any published reference to it.
What are the main Terms of Engagement?
VPS 1 - The main Terms of Engagement are:
(a) Identification and status of the valuer
(b) Identification of the client(s)
(d) Identification of the asset(s) or liability(ies) being valued
(f) Purpose of the valuation
(g) Basis(es) of value adopted
(h) Valuation date
(i) Nature and extent of the valuer’s work - including investigations - and any limitations thereon
(k) All assumptions and special assumptions to be made
(o) The basis on which the fee will be calculated
Talk me through your valuation at Unit 2 Southampton Trade Park?
- Client instructed me to value a industrial unit for internal purposes
- I underwent a competency check, conflict of interest check and agreed terms of engagement before undergoing the valuation.
- To determine the Market Rent, I used the comparable method to establish the Market Rent.
- This involved compiling and weighing a table of comparable recent lettings into a table based on key factors such as location, size, specification, and lease terms to ascertain the market rent. This outlined that the property was under-rented. - As the property was under-rented, to determine the market value, I used a term and reversion method.
- This involved capitalizing the passing rent (£45,790) by YP 3 yrs @ 6% to get the value of the term
- Then capitalizing the Market Rent (£63,655) by YP into Perpetuity, deferred for 3 yrs @ 6.5% to get the value of the reversion
- Adding the term and reversion values together gave the Gross Acquisition Price
- Then taking away acquisition fees and stamp duty land tax gave Market Value
In brief terms what do you understand the hierarchy of evidence to be?
The better the evidence, the more weight it will carry.
What similarities must a property have to be considered comparable?
- Physical Characteristics
- Location
- Time Scale
- Use
- Tenure
What do you understand by the expression weighting of comparable evidence?
After gathering comparable evidence a valuer must weight and rank each piece, some may be disregarded.
This is subjective depending on what the valuer thinks.
Attach the greatest weight to those transactions which are most similar to the subject property
What are the sources of comparable evidence?
letting boards, speaking with agents, EGI, CoStar Focus, own/office records, Land Registry
What is the Investment Method of valuation?
Used to value shops, offices, industrial and warehouse properties that are:
Let with an income stream
Owner occupied
Vacant
What is the investment method in a basic equation?
Market Rent (Net of Outgoings) X Years Purchase (YP) = Market Value
What is a reversionary investment?
A reversionary investment is where a property is let at a rent other than the Market Rent.
What is an initial yield?
the net income (or passing rent) at the date of purchase expressed as a percentage of the Purchase Price
What is a reversionary yield?
the Market Rent expressed as a percentage of the Market Value (or Purchase Price)
What is the definition of Yield?
The yield is a measure of investment return expressed as a percentage of capital invested.
How do you calculate the YP in perpetuity?
YP in perpetuity = 100/yield
What risk of an investment does the all risk yield take into account?
- The physical characteristics
- The tenants covenant strength
- The unexpired lease terms
- The other lease terms including rent
- Anticipated rental growth (may not have been made explicit in the valuation)
What is the residual method of valuation?
- The residual method is used to value land and properties with:
- Development, redevelopment and refurbishment potential
- When it is not possible to value by comparison
What equation is used for the residual method?
Value of Completed Development - Development Costs - Developers Profit = Land Value
What costs did you deduct in your residual valuation?
Demolition/site prep
Cost of construction (Building cost)
Construction fees (architects, engineers etc.)
Cost of finance
Contingency to allow for fluctuations in these costs
Agent and legal fees (in disposing the development)
Acquisition costs - Fees and stamp duty land tax on acquisition when you buy the site
(GIVE ANSWER IN THIS ORDER AS IT IS LOGICAL)
How did you calculate developers profit in you Residual Valuation?
Developers profit can be calculated by either a percentage of total cost (22-25%) or a percentage of Gross Development Value (15-17%) *Depends upon risk
The riskier the development, the greater the percentage
Would say ‘I used 15% because there was only a moderate risk’
What are the usual acquisition costs of a development site?
Stamp duty land tax
Acquisition agents fees
Legal fees
VAT on the agent and legal fees
1.8%= 1% lettings fees 0.5% for sols fees + 20% VAT= 1.8%
What are the stamp duty rates?
0% on the first £150K
2% on the next £100K
5% above £250K
For purchases above £250K the SDLT can be calculated from the Gross Acquisition Price net of agent and legal fees.
