Valuation (Level 3)

Question 1

What is a valuation?

Answer 1

An estimation of the price the property will sell for

Question 2

What the five methods of valuation?

Answer 2

1) Comparable
2) Investment
3) Residual
4) DRC
5) Profits

Question 3

Explain the comparable method of valuation?

Answer 3

1) Use of comparable evidence to establish opinion of value

2)

Question 3

Explain the comparable method of valuation?

Answer 3

1) Use of comparable evidence to establish opinion of value
2) Adjustments are then made reflecting differences in characteristics and analysis of the local market whilst applying professional skepticism

Question 4

Explain the residual method of valuation

Answer 4

1) It is used to value land with development potential
2) Technique requires assessment of GDV from which the development costs (build costs, professional fees, finance etc) as well as profit are deducted to arrive at a residual land value

Question 5

Explain the investment method of valuation

Answer 5

1) Used to value premises on the basis of a flow of rental income
2) Different techniques can be adapted, typically when property’s are over/under rented

Question 6

Explain the profits method of valuation

Answer 6

1) Used to value operational assets where the profitability of the business is a key component of value (care homes, hotels, pubs etc)
2) Calculated by deducting operational costs from the annual turnover to work out the FMOP (fair maintainable operating profit) which is then capitalized at an appropriate yield to achieve market value

Question 7

Explain the DRC method of valuation? (depreciated replacement cost)

Answer 7

1) Used to value sets which rarely transact on the open market, therefore very limited comparable evidence (eg lighthouse, oil refinery’s etc)
2) Calculated by establishing the existing use value of the land, adding the cost of replacing the building and fees, minus a discount for depreciation/obsolesce

Question 8

What are the different methods of completing an investment valuation?

Answer 8

1) Conventional method
2) Term & reversion
3) Layer/hardcore
4) DCFs

Question 9

What is a yield?

Answer 9

A measure of investment return. expressed as a percentage of capital value invested

Question 10

What is an all risks yield?

Answer 10

The remunerative rate of interested used in the valuation of fully let property let at market rent reflecting all the prospects and risks attached to that investment

Question 11

What is a gross yield?

Answer 11

The yield not adjusted for purchases costs

Question 12

What is a net yield?

Answer 12

Yield adjusted for purchasers costs

Question 13

What is the initial yield?

Answer 13

Income yield for current income and current price

Question 14

What is a reversionary yield?

Answer 14

MR divided by the current price on an investment let a rent below the MR

Question 15

What is an equivalent yield?

Answer 15

Average weighted yield when a reversionary property is valued using an initial and reversionary yield

Question 16

What is the GDV?

Answer 16

Aggregate market value of the proposed development, assessed on the special assumption that the development is complete on the date of valuation in the market conditions prevailing on that date

Question 17

What is synergistic/marriage value?

Answer 17

Synergistic value is 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

Question 17

What is synergistic/marriage value?

Answer 17

Synergistic value is 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

Question 18

What is existing use value?

Answer 18

What the property is worth in its current form, usually used for internal financial statement purposes. Disregard potential alternative uses.

Question 19

What is the hierarchy of comparable evidence?

Answer 19

Category A (Direct Comparable)

1) Completed transaction of similar properties with full details
2) Completed transactions of similar properties with enough data present
3) Asking prices

Category B (General market data)

1) Historic evidence
2) Indices

Category C (Other sources)
1) Evidence from other locations and types

Question 20

What is the RICS red book?

Answer 20

Mandatory rules, best practice guidance and related commentary for all members undertaking asset valuations

Question 21

Why do we need the red book?

Answer 21

1) Consistency in approach
2) Credible and high standards or integrity, clarity and objectivity
3) Valuation best practice
4) Reduce risk of negligence claims
5) Quality assurance

Question 22

What is the structure of the red book?

Answer 22

1) RICS professional standards
2) RICS global valuation practice statements
3) IVSC International valuation standards
4) RICS global valuation practice guidance
5) RICS UK valuation standards
6) UK appendices
7) UK guidance notes

Question 23

When does a valuation have to be red book compliant?

Answer 23

1) All cases except
2) Advices expressly provided in preparation for or during course of negotiation or litigation
3) Valuer performing a statutory function except valuation for inclusion within statutory tax return
4) Valuation provided for internal purposes without liability and not communicated to any third party
5) Valuation provided as part of agency and brokerage work in anticipation of receiving instructions to dispose or/acquire an asset
6) Valuation provided in anticipation of giving evidence as an expert witness

Question 24

What are the minimum terms of engagement to be confirmed to the client before commencing a Red Book valuation?

Answer 24

1. Name and status of valuer, disclosure of any previous involvement.
2. Name of client (and any other intended users).
3. Purpose of valuation.
4. Identification of asset.
5. Basis of value.
6. Valuation date.
7. Extent of investigations.
8. Nature and source of information to be relied upon.
9. Assumptions and special assumptions.
10. Restrictions for use/distribution/publication.
11. Confirmation of Red Book/IVS compliance.
12. Description of report.
13. Fee basis
14. CHP
15. Statement that valuation may be investigated by the RICS for monitoring regulations to comply with their conduct and disciplinary regulations.