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Valuation more focused Flashcards

1
Q

What is the RICS Valuation – Global Standards (2024)?

A

Set of global valuation standards created to achieve high standards of integrity, clarity and objectivity in adopting valuation best practice

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2
Q

Why was the RBG updated?

A

To support high standards in valuation delivery worldwide and future-proof practices in the public interest

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3
Q

Explain the differences between the old and the new red book?

A

Key changes – simplification of wording and the consolidation of related content, in order to reduce a duplication and improve navigation. Greater use of ‘must’

  1. Alignment with the new IVS 2025
  2. Comment on the use of AI in valuations
  3. Reinforcement of the need to create a robust and comprehensive audit trail
  4. Valuers must record ESG data
    Revised order of VPS
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4
Q

Valuation Practice Statements

A

VPS 1 – Minimum terms of engagement – must be confirmed in writing prior – new consideration of ESG factors that can impact value.
VPS 2 –Bases of value, assumptions, and special assumptions (used to be VPS 4) – MV, MR, Fair Value, Investment Value – new section on transaction costs.
VPS 3 – Valuation approaches and Methods (used to be VPS 5) – approach is the use of the market, income or cost approach, the method is the specific technique to conclude a value. DCF not mandated but encouraged.
VPS 4 – Inspections and record (used to be VPS2)
VPS 5 – Valuation models – new section - model is “a quantitative implementation of a method that coverts inputs into outputs in the development of value”. Valuers must ensure the model is suitable for the purpose.
VPS 6 – reports – used to be VPS3 – repeating valuations make sure terms and report read together – significant ESG factors used and considered.

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5
Q

Valuation Practice Guidance – Applications

A

VPGA 1 – Valuation for Financial Accounts
VPGA 2 – Valuation for secured lending
* Not mandatory to request loan terms anymore
* Conflicts – previous involvement – normally 2 yrs however, relevance is more important and involvement with actual property
VPGA 8 – Valuation of real property interests
* New ESG MATTERS
* EG. Natural, transition risk, stranding risk, circularity, knowledge.
* Not undertaking an assessment but reporting how it impacts value.
* Must comply with VPS 6 reporting
VPGA 10 – Valuation in markets susceptible to change
* Valuer should draw attention to the issue affecting the certainty
* Should consider using special assumptions and sensitivity analysis
* Degree of uncertainty caveat must be specific to each valuation
Re-written, including a new section on the removal of MVU declarations

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6
Q

UK Valuation Standards

A

UKVS 1 – Valuations for financial statements – company accounts
UKVSP3 – regulated purposes valutions -relied upon by 3rd party who haven’t commissioned valuation – five purposes – financial statements, stock exchange listings, takeovers/mergers, collective investment schemes, unregulated property unit trusts -Can only value if: company has not acted for purchase in last 12m, must state if more than 5% of annual fees, 10 year rotation policy for firm, 5 year individual, 3 year break after rotating off an engagement
UKVPGA 10– Valuations of commercial secured lending – includes ESG

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7
Q

What is the structure of the red book?

A
  1. Introduction
  2. Glossary
  3. Professional standards (PS1 and PS2)
  4. Valuation technical and performance standards (VPS 1-6)
  5. Valuation practice guidance applications (VPGA 1-11)
  6. IVS
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8
Q

What are the International Valuation Standards?

A
  1. Income
  2. Cost
  3. Market
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9
Q

What are the 5 Methods of Valuation?

A

Investment
Residual
Comparative
Profit
DCR

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10
Q

What are the appropriate uses of the 5 Valuation Methods?

A

Investment – income
Residual – MV of a site based on market inputs
Comparable
Profit – hotels, pubs (trade related property)
DCR – lighthouse, schools

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11
Q

What are the strengths and weaknesses of each method?

A
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12
Q

What are the main drivers that impact value?

A
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13
Q

Please can you talk me through the timeline of a valuation instruction?

A
  1. Receive instruction
  2. Confirm competence
  3. Confirm independence
  4. Issue ToE
  5. Receive signed ToE
  6. Gather information
  7. DD – no matters that could materially impact value i.e. contamination, flooring, EPC, Equality Act, legal title
  8. Inspect and measure
  9. Research market and assemble comparables
  10. Undertake valuation
  11. Draft report
  12. Vet report
  13. Finalise and sign report
  14. Report to client
  15. Issue invoice
  16. Confirm file notes in order
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14
Q

CAN YOU EXPLAIN THE NEW NATIONAL supplement governance requirements from may 2024 in terms of rotating?

A
  1. Max 10 years for firm
  2. Max single engagement 5
  3. Min 3 year break after rotating off an engagement
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15
Q

Tell me about the office?

A

Apsley, 43,000 sq ft, 4.50 acres, refurbished in 2020, recently let to the council, 10 year term, EPC C.

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16
Q

What did you look out for on your inspection? And how did you ensure it was safe?

A

Occupation, location, aspect, construction, defects. I spoke to the property manager before and checked whether any PPE was required.

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17
Q

Was this a regulating purpose valuation, why?

A

Regulated purpose valuations (UK VPS3) are replied on by third parties/subject to evaluation monitoring. Yes, it was for company accounts.

Check – internal purposes? But does this mean red book – at KF are all RB?

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18
Q

What is Fair Value? What is the difference between Fair and Market Value?

A

The estimated price that an asset or liability would transfer or sell for in an orderly transaction between market participants at the measurement date.
IFRS 13

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19
Q

What yield did you use if it was rack rented?

A

I used an ARY based on comparable evidence. The best evidence was from a site nearby. The leasing deal was from within the subject and westside nearby.

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20
Q

What is market rent?

A

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 knowledgeably, prudently and without compulsion.

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21
Q

Which part of the red book did you have regard to?

A
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22
Q

Did you consider the tenant strength?

A

Yes, I checked the D&B and confirmed it was low risk.

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23
Q

In what scenarios can you depart from the red book?

A
  • Agency for disposal or acquisition
  • Advice for preparing of negotiation
  • For expert witness
  • For statutory functions
  • internal purposes
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24
Q

How did you confirm that you were competent?

A

Checked my prior experience

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25
What was the impact of the property being tenanted on your valuation?
I considered the income length and the tenant covenant strength.
26
What is the Investment Method of Valuation?
Income stream. Rental income to capitalise to produce a cap value. Growth implicit valuation.
27
What is a capitalisation rate? What do you do with it?
Unlevered, net operating income and market value not including finance and debt.
28
What’s the difference between cap rate and yield?
Cap rate – measures property profitability relative to its value (NOI / MV) (doesn’t include financing costs or debt – unlevered) Yield (total return on investment, including debt and equity) measures a property’s profitability relative to its cost. Higher cap rate = higher risk = higher returns
29
How would the valuation process differ on a property that is held long leasehold versus freehold?
Ground rent is deducted from the gross income to calculate the net rent received. This is capitalised at a yield for the length of the lease to create MV. Rent – less ground rent = net rental income Capitalise appropriate yield for the remaining length of the lease = MV of leasehold interest Can be viewed as wasting asset.
30
Explain the Brentwood site?
Cleared site with implemented planning for 8 x 3 bedroom houses at approx. 1.050 sq ft.
31
What is a residual valuation?
For a specific valuation of a property holding to find the market value of the site based on market inputs. A form of development appraisal At one moment in time, at the valuation date, for a particular purpose.
32
Can you explain the process of a residual valuation?
Determine the land or site value, important to determine how much a developer/investor can afford to pay. Made off market level assumptions. Determine the GDV – comparable method. For example, 8 units x 8,400 x £625 psf = £5,250,000 Total costs Site preparation eg. demolition = £0 (not required) Planning costs eg. CIL / S106 (site had planning) Build costs £200 psf Contingency 5% Professional fees 7% Marketing £50k Disposals fees 1.5% Finance debt rate 7% - land & construction Developers profit 17.5% GDV – TOTAL COSTS = RESIDUAL LAND VALUE.
33
How would you carry out a residual valuation?
GDV - developer’s costs (construction costs + fees) - developer’s profit = residual value
34
What are the main differences between CIL and S106?
CIL: For all infrastructure to support development Cannot be used to secure affordable housing A charging schedule must cover the whole area Tariff based charging system based on the increase on floor area of the scheme Viability tested at district wide level at the evidence gathering stage then charges are mandatory S106 Directly related to development and reasonable in relation to the scale of the development Can be used for affordable Site specific charge Negotiation Viability is case by case
35
What type of planning permission was it?
Implemented full planning.
36
Why did you not consider any affordable housing provision?
If more than 10 homes you have to put 35% affordable homes
37
What are the limitations of argus developer
Because it runs appraisals with a lot going on behind the scenes so you cant see these things - If there are a certain number of licences within the company there could be a confidential issue - It assumes 100% debt
38
What finance rate did you use?
7% norm
39
What are the different types of sensitivity?
Simple Scenario Monte Carlo - crystal ball theory
40
What is the typical Loan to Value ratio?
Typically, 50-60% - it was previously 70% but lenders are now more risk averse
41
What is the difference between a development appraisal and a residual valuation?
Residual is a dev app but it is used to find the value of the land using MARKET INPUTS Development appraisal is used to assess viability of a scheme using CLIENT INPUTS (can also find the land value)
42
What part of the red book did you have regard to in terms of the revaluation?
VPS4
43
What part of the red book applies to secured lending?
Part 5: VPGA 2 – objectivity and COI. Any previous involvement with borrower must be disclosed eg. Within the last 2 years.
44
Main difference between secured lending val and normal?
Advise whether to agree to the loan or in case the borrower defaults. Additional info from valuation report - Disclosure of any involvement - Valuation method - If recent transaction, extent to which mv has been accepted - Environmental consideration - Suitable for mortgage purposes - Sustainability factors Eg. SWOT, comment if suitable for secured lending and market context
45
How did you reflect that I had planning in my residual?
17.5% developers profit to reflect the lower risk.
46
What part of the red book does loan sec relate to?
VPGA 2
47
WHY DID YOU undertake the uxbridge val?
sense check offer, client requested rb compliant
48
What is the AMV and how is it different to MV
Aggregate market value is the total of a number of individual units, that are complete – eg. they are built.
49
What are the limitations of a desktop valuation?
Rely on data, physical defects, good to see occupancy levels.
50
What is a special assumption?
51
What was the discount rate applied?
20%
52
What impacts the discount rate?
If larger lot size, maybe a larger bulk discount.
53
Why is there a discount for selling to a single buyer?
Basis of purchasing in a bulk discount. For example, it is like developers profit, the developer may decide to rent them out or sell them individually and this will be their profit. This is usually the discount they would expect.
54
Did you consider yield?
In this instance, I considered the yield. I determined this by doing the MR / price paid. This yield is an output and is the gross reversionary yield. This calculated to approx. 7%.
55
Can you explain the industrial unit?
Built in 2001 (dated). Steel portal frame with profile metal cladding to the warehouse element and brick and glass on the office element. * Eaves c.11m, 7 dock levellers, 2 level access doors. * 3.613 acres
56
What is the Amersham market like?
Local rents have gone up by 17% in the last 3 years. The ERV is £15.00 post refurbishment.
57
Why did you think the property required refurbishment?
Dated in order to achieve.
58
Was their office accommodation?
Yes but treated it as a floor area of the main unit.
59
Is there anything specially on inspection you had regard to?
I noticed that the building was dated and required refurbishment. I also checked the boundary with the title and promap.
60
What would you have done if your clients costs were out of line with your own cost findings?
I would double check my findings on BCSI and when my client costs were undertaken. I would in fact adopt theirs or I would ask them to get a proper survey with reliance. £20-25 psf – poor.
61
What method did you use?
Term and reversion – investment method & comparable method
62
What cap rate did you apply?
6.5% give a range
63
What were the refurbishment costs?
£20.75 psf / £1.50m
64
What is a void period?
empty not generating income
65
When would you include the void cost and what do these include?
If the tenant was to vacate.
66
What was included in the SWOT?
Weakness short wault 1.71 years, dated. Strength – good tenant, opportunities refurbish unit. Threats – flooding.
67
When might a valuation not be suitable for secured lending?
Short leasehold interest, high flood risk, tenant break option very soon (cannot guarantee income for any period of time)
68
What section of the UK national supplement 2023 does secured lending apply?
UK VPGA 10 commercial
69
What do you class as appropriate rent free and expiry, what figures did you use?
12 months refurbishment and 12 months rent free.
70
What are the 3 approaches to calculate the net effective rent?
Straight line, straight line assuming time value of cash flow using a yield, DCF.
71
What was the WAULT?
1.71-year term – WHY APPLY LESS THAN 3 YEARS? House view / consistent view.
72
Investment Method – Overrent/Under rented
Equivalent Yield – during time this moves closer to the reversionary yield Time weighted average yield changes with time Even though the market rent or value hasn’t changed Time between passing rent to reversion – how soon you get the reversion. Weighted by time For rack-rented, even though you are moving forward in time the equivalent yield doesn’t change because the initial yield and reversionary yield don’t change. You are not moving closer to the reversion. Rack-rented = no change in any of the yields. Overrented/under rented = the equivalent yield changes
73
Equivalent yield?
Average weighted yield when a reversionary property is valued using an initial and reversionary yield
74
What are typical defects with pitched roofs?
leakages sky lights, pot holes on tarmac
75
What is important for industrial units?
highways
76
If you looked a rent reviews for comps what is the hierarchy?
This is the relative weight attached to comparable evidence. The common weighting is: * Open market lettings * Lease renewals * Rent reviews * Independent expert determinations * Arbitrator awards * Court determinations under Landlord and Tenant Act 1954 * Hearsay Evidence * Sale & Leaseback * Surrender & renewals Inter-company arrangements
77
How does eaves impact value?
Eaves height is particularly important, as more stuff can fit into warehouse. For example, if lower eaves height this would be factored into market rent as occupiers unable to store as much in warehouse. Loading door, more beneficial for lorries loading- detrimental impact on valuation
78

APC Isla (11 decks)

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