Valuation level 3

Question 1

What is the full name of red book?

Answer 1

RICS Global valuation standards – 2021 effective February 2022

Question 2

What are the five methods of valuation?

Answer 2

Comparable – based on the market.
Investment – when a property has an income to value.
Profits – business not the property – require 3 year’s worth of audited accounts, Earnings before interest, taxation, depreciation, amortisation EBITDA
Income: +
Less costs and purchases
Gross profit
Less reasonable working expenses
Unadjusted net profit
Less operator’s remuneration (money for work and services)
Adjusted net profit known as the fair maintainable operating profit (FMOP)
Residual: works out the land value
Development appraisal: works out the profit
Contractors: used for unusual properties where there isn’t any comparable evidence. How much it would cost to reinstate the property.

Question 3

What is the definition of market value?

Answer 3

The estimate amount for which an asset or liability exchanges for on the valuation date, between a willing buyer and a willing seller in an arms length transaction after a period of proper marketing whereby each party acted knowledgeably prudently and without compulsion.

Question 4

What is the definition of market rent?

Answer 4

The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion

Question 5

When is a RICS red book valuation required?

Answer 5

When the valuation is being relied on for a purpose – tax, loan security

Question 6

When is a RICS red book valuation not required?

Answer 6

1. Statutory function except for tax
2. Internal decision making
3. Expert witness
4. Negotiation
5. Agency services

Question 7

Statutory due diligence for red book valuation?

Answer 7

1. Asbestos
2. Business rates/council tax
3. Contamination
4. Equity act 2010
5. Environment matters
6. EPC rating
7. Flooding
8. Fire safety compliance
9. Health and safety compliance
10. highways
11. Legal Title – boundaries, covenants
12. Public rights of way
13. planning

Question 8

steps to take prior to valuing?

Answer 8

1. Am I competent
2. Is there any conflicts?
3. Terms of engagement

Question 9

Internal valuer?

Answer 9

Employed by a company to value assets.
For internal use only
No third party reliance

Question 10

External valuer?

Answer 10

Employed by a valuer company
Can be relied on by a third party
No material links to client or property

Question 11

EUV-SH?

Answer 11

EUV-SH was devised specifically for this purpose. In essence, the definition is built upon the principles of Market Value (see below) and assumes a hypothetical sale, by either a mortgagee in possession or a Registered Provider (RP), to another RP, on the strict assumptions that: the stock will continue to be let at affordable rents in perpetuity; will be managed in accordance with the regulator’s requirements; and that any void properties will be re-let and not sold with vacant possession.

Question 12

EUV-SH/DCF

Answer 12

The established methodology for arriving at an opinion of EUV-SH is a discounted cashflow, which allows the valuer to capture explicitly the many variables affecting the letting, management and operation of social housing; and to set these out transparently over the long term. However, this is not the only or prescribed method of arriving at such a valuation and valuers should also have regard to comparable transactions (where evidence is available); the relationship between EUV-SH and Market Value with vacant possession; and both gross and net yield.

Question 13

MV-T/MV-ST/MV-STT

Answer 13

only applicable to loan security valuations.
MV-T differs from EUV-SH in that the purchaser is assumed to be operating outside the regulated sector and is therefore free to approach the properties in a more commercial way.

Question 14

Market Value subject to special assumption

Answer 14

This market evidence is a powerful driver for a different approach to loan security valuations and indeed for valuations undertaken for stock rationalisation purposes.

Question 15

IRR?

Answer 15

Internal rate of return is an used by investor to compare different assets. It’s the rate of return used when the NPV is equal to zero.

1. Market value (negative)
2. Plus the projected rents over the holding period
3. Input projected exit value at the end of the term as a positive
4. Discount rate is the rate chosen which provides a NPV for zero
5. If the NPV is more than zero then the target rate of return Is met

Question 16

NPV

Answer 16

Net present value is the sum of all cashflows discounted at the chosen discount rate to provide the value of the assets as at today.

Question 17

DCF for social housing

Answer 17

The established methodology for arriving at an opinion of EUV-SH is a discounted cashflow, which allows the valuer to capture explicitly the many variables affecting the letting, management and operation of social housing; and to set these out transparently over the long term. However, this is not the only or prescribed method of arriving at such a valuation and valuers should also have regard to comparable transactions (where evidence is available); the relationship between EUV-SH and Market Value with vacant possession; and both gross and net yield.

Question 18

Why do you use a 50 years cashflow?

Answer 18

Market standard and NPV become minimal the further in the future you go.

Question 19

Major repairs?

Answer 19

30 years is used as components lifecycles turnover in that time.

Question 20

Bad debts and voids

Answer 20

Review information provided by the client
MDS – how many voids

Question 21

Discount rate

Answer 21

Captures the level of risk
Government gilts
Work from there
Location
How risky is the income?
Tenure – social housing backed by social housing list will always be in demand.

Question 22

Term and reversion

Answer 22

Used when a property is under rented
Market rent is adopted from the next lease event
Different yields used
Lease extension

Question 23

Layer/hardcore

Answer 23

Used for over rented properties.
Income flow divided horizontally.
Bottom slice = market rent
Top slice = rent passing minus the market rent until next lease event
High yield is applied to the top slice as riskier income.

Question 24

TOE

Answer 24

Identification and status of the valuer
Identification of the client(s)
Identification of any other intended users
Identification of the asset(s) or liability(ies) being valued
Valuation (financial) currency
Purpose of the valuation
Basis(es) of value adopted
Valuation date
Nature and extent of the valuer’s work – including investigations – and any limitations thereon
Nature and source(s) of information upon which the valuer will rely
All assumptions and special assumptions to be made
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
The basis on which the fee will be calculated
Where the firm is registered for regulation by RICS, reference to the firm’s complaints handling procedure, with a copy available on request
Identification and status of the valuer

Question 25

What are the bases of value?

Answer 25

Market value
Market rent
Fair value
Investment value
Equitable value
Liquidation value

Question 26

Fair value

Question 27

Equitable value

Question 28

Investment value

Answer 28

the value of an asset to a particular owner, or prospective owner for individual investment or operational objectives
- may differ from market value
- this is sometimes used as a measure of worth to reflect the value against the client’s own investments criteria

Question 29

Liquidation value

Answer 29

not used in the UK
this basis of value can be used for a group of assets sold in a piecemeal basis considering the costs of getting the assets into a saleable condition

Question 30

What is the hierarchy of evidence?

Answer 30

Demonstrates the best comparable evidence sources. Three categories. E.g. Best open market sales. Least - arbitration results.

Question 31

How would you carry out a Depreciation Replacement Cost basis of valuation for?

Answer 31

Buildings where there is not normally a transactional market. E.g. brewery/ unique properties

Question 32

When would you use the residual method of valuation and what are its main components?

Answer 32

Used to value property with development potential or vacant land.
Purchase price/site acquisition value = GDV - (Construction + Fees + Profit)

Question 33

What is fair value and when would you use it?

Answer 33

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.

Question 34

What is a special assumption?

Answer 34

An assumption that either assumes facts that differ from the actual facts existing at the valuation

Question 35

Give an example of a special assumption.

Answer 35

Assuming planning permission, when it is yet to be granted.
Assuming a property is vacant when it is let.

Question 36

What is a marketing period?

Answer 36

The length of time a property to predicted to be marketed for before sale.

Question 37

When would you have regard to marriage value?

Answer 37

Additional value created by the combination of two or more assets or interests. E.g. lease extension.

Question 38

What is a protected or regulated tenancy?

Answer 38

A tenancy which started before the 15 January 1989 - governed by Rent Act 1977.
* Tenants had strong rights in relation to rent, security of tenure and succession rights.
* The rent must be fair and is determined by the Valuation Office.

Question 39

What is the Comparable Method and when would you use it?

Answer 39

• Using comparable data, based on the subject property’s characteristics to assess the value.
• Most common
• E.g. Houses, shops
• Provides an estimated market value.

Question 40

What is the Contractors Method and when would you use it?

Answer 40

• Cost method of valuation
• E.g. airports, shipbuilding yards, public sector buildings.
• The current cost of replacing the asset - deductions for physical deterioration.