Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

RICS-APC > VALUATION NEW > Flashcards

VALUATION NEW Flashcards

1
Q

What are the two commonly used financial reporting standards used in the UK?

A

IFRS (International Financial Reporting Standards); principles-based
UKGAAP (Generally Accepted Accounting Practice in the UK); rules-based

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Why would you undertake research on flooding risks?

A

This may detrimentally impact on the marketability and valuation of the property as it may be difficult to or expensive to obtain insurance – use Environment Agency website to check the flooding risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is a valuation?

A

An opinion of the value of an asset or liability on a stated basis, at a specified date

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the role of a valuer?

A

Red Book (Global): to assess value in the light of evidence normally obtained through analysis of comparable transactions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the definition of an internal and external valuer?

A

Set out in RICS Valuation – Professional Standards 2018 (Red Book)
Internal Valuer – A valuer who is employed by: either the company that owns the assets, or the accounting firm responsible for preparing the company’s financial records. Valuation if for internal use only with no third-party reliance. Generally capable of meeting the requirements of independence and professional objectivity in PS 2, but may not always be able to satisfy additional criteria for independence specific to certain types of assignment.
External Valuer – has no material links with the client, agent or asset to be valued.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What makes up the Purchaser’s Costs?

A

Blended rate 4.99% (max.) SDLT
1% Agent fees +VAT
0.5% Legal fees +VAT

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is a yield?

A

Yield are a measure of investment return. They show the income expressed as a percentage of capital invested.
(Income / price) x 100
Yields are growth implicit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Explicit and Implicit Growth – What is the difference?

A

It refers to how the prospect of future rental growth, beyond the ERV.

Implicit* means the prospect for rental growth is factored into the yield, therefore if there is anticipation rents will improve over the coming years from the existing ERV today, an investor will pay a keener (smaller) yield in anticipation of a larger yield becoming receivable in the near future.

Explicit means the prospect for rental growth is factored into the expected rental cashflow, by “growing the rent” manually from the current ERV to predicted future levels using informed assumptions. In other words the rent is grown “explicitly” from its ERV today.

*In Investment Valuation, unless requested otherwise, we use factual information as at the valuation date. Our valuations are therefore growth Implicit**

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Q
Before commencing a valuation instruction, what three steps must you first undertake?

A

CIT.
Competence – do you have correct levels of skills, understanding and knowledge? (SUK). If not, refer to RICS Find a Surveyor tool
Independence – check for any conflicts or personal interests
Terms of Engagement – set out in writing full confirmation of instructions prior to starting work
confirm competence of valuer
the extent and limitations of valuer’s inspections must be stated

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What statutory due diligence are you required to carry out when undertaking a valuation, and why?

A

To check that there are no material matters which could impact the valuation.
Asbestos register, business rates/council tax, contamination, Equality Act compliance, environmental matters, flooding, H&S compliance, fire safety compliance, legal title and tenure, public rights of way , planning history and compliance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the five main methods of valuation?

A

Comparative method
Investment method
Residual method
Profit method
Depreciated Replacement Cost method (Contractors)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the widely accepted valuation approaches under the IVS 105?

A
  1. Income approach – converting current/future cash flows into a capital value (i.e. Investment, Residual, Profits method)
  2. Cost approach – reference to the cost of constructing the asset (i.e. Contractors/DRC method)
  3. Market approach – using comparable evidence (i.e. Comparable method)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the methodology of the Comparable method of valuation?

A
  1. Identify comparables
  2. Verify details, analyse headline rent to give net effective rent
  3. Assemble comparables in a schedule; matrix with weighting
  4. Analyse comparables to form an opinion of value.
  5. Report value
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What RICS guidance would you have regard to when using the comparable method?

A

New Guidance Note (Comparable Evidence in Real Estate Valuation 2019) published in October 2019.
Scope:
1. principles of the use of comparable evidence
2. encourage consistency
3. issues of availability of comparable evidence
4. potential sources
RICS Information Paper on Comparable Evidence in Property Valuation 2012 (ARCHIVED in 2018, but still useful)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

How do you find relevant comparables?

A

Inspection of an area to find agent’s boards
Visit/speak to local agents
Auction results (beware that these are gross prices, and may also be special purchaser/insolvency sale)
In house records
Databases and websites, such as EGi, CoStar, Rightmove, Lonres

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How would you analyse rent free periods and headline rents?

A

Calculate the Net Effective Rent.

(rent*term)-incentive/term= Rent receiveable.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is the headline rent?

A

The rent payable under lease terms after all incentives have expired, such as a rent-free period.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is price?

A

Actual observable price in the open market.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is value?

A

An estimate of the price that would be achieved if a property were sold in the market.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is worth?

A

A specific investor’s perception of the sum he would be prepared to pay (or accept).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is net effective rent? How is it calculated?

A

The headline rent minus any incentives, to lease expiry or next lease event.
Rent x (Term – Rent Free)
÷
Full Term

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is the hierarchy of rental evidence?

A

The relative weight attached to different types of evidence

1.Open market lettings
2. Lease renewals
3. Rent reviews
4. Third party determinations (independent expert)
Sale and leasebacks
Asking rents

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is the investment method of valuation?

A
  • Used when there is an income stream to value.
  • The income is capitalised using a yield to produce a capital value
  • Conventional method assumes growth implicit approach – implied growth rate is derived from the market capitalisation rate (yield).
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

How do you choose which investment method approach you will use?

A
  1. Establish if over- under- or rack-rented
  2. Company preferences and software
  3. The reversion in terms of time and rental value
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What are the different types of methodologies you would use with the investment method?

A
  1. Conventional method
  2. Term and Reversion
  3. Hardcore and top slice method
  4. DCF
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Tell us about the conventional method

A

Rent received or Market Rent x YP = Market Value (rent/yield comparables important)
Growth is implicit in the yield.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Tell us about the term and reversion method

A

It is used for REVERSIONARY (under-rented) investments
Income flow is divided vertically.
Term (passing rent) is capitalised until next lease event (review/expiry) at an INITIAL yield
Reversion to Market Rent valued in perpetuity at a reversionary yield
There is a yield differential; term at a keener yield to reflect lower risk.

28
Q

Tell us about the hardcore and top slice method

A
  1. OVER RENTED investments.
  2. Income flow is divided horizontally. 3. The hardcore (MR) is valued into perpetuity at a net initial yield.
  3. The top slice (PR-MR) is capitalised to next lease event at a net initial yield with a risk adjustment.
  4. There is a yield differential; top slice at an inflated yield to reflect higher risk of over-renting.
29
Q

What is the All Risks Yield (ARY)

A

The remunerative rate of interest used in valuation of fully let property let at Market Rent reflecting all the prospects and risks attached to particular investment.

30
Q

Is a rack-rented or reversionary property more risky?

A

Reversionary always carries more risk than rack-rented because a greater proportion of the value is reliant on future market rental values which are not certain.

31
Q

Tell us about the DCF method

A
  1. Used for worth calculations for a specific investor. They have a target rate of return.
  2. A growth explicit investment method of valuation.
  3. Project the assumed cashflows over the assumed holding period to exit, enter an exit value, then discount the cashflow back to today at an investor’s target rate of return.
32
Q

For what valuations is DCF method typically used?

A
  1. Short leasehold interests
  2. Properties with income voids
  3. Phased development projects
  4. Non-standard investments
  5. Over-rented properties
33
Q

What is the Years Purchase?

A

The number of years it will take for the annual income to add up to the capital value.

34
Q

How would you carry out a DCF?

A
  1. estimate the cashflow (income less expenditure)
  2. estimate the exit value at the end of the holding period
  3. select a discount rate
  4. discount the cashflow using the discount rate to give an NPV (which is the Market Value)
35
Q

What is the Net Present Value (NPV)?

A

Used to determine if an investment gives a positive return against a target rate of return. Sum of discounted cash flows.

36
Q

What is the Internal Rate of Return (IRR)?

A

The discount rate which produces an NPV of zero when used to discount the cashflow

37
Q

How do you calculate the IRR?

A
  1. Input current Market Value as a negative cash flow
  2. Projected rents over holding period as a positive value
  3. Input projected exit value at end of the term assume as a positive value
  4. Discount rate (IRR) is that rate which provides NPV of 0
38
Q

When to use the Profits method of Valuation?

A

For valuations of specialist training properties or entities, where there is a ‘monopoly’ position. The value of the property depends upon trading potential. Pubs, golf courses, hotels, petrol stations, cinemas, care homes etc

39
Q

Profits method calculation?

A

The profits method firstly takes into account the gross operating income of the business. The working expenses are then deducted to create the net cashflow. The net cashflow over a period of time is then converted into present value by selecting an appropriate risk yield for the business.

40
Q

When is the Contractor’s method (Depreciated Replacement Cost) used?

A

-Where there is no active market for the asset being valued i.e. specialised properties lacking ocmprabale evidence.

  1. Owner occupied property
  2. Used for account purposes
  3. For rating valuations of specialist properties
41
Q

Is the Contractors method Red Book compliant?

A

No. It can be used to calculate Market Value for specialised properties only for financial statements

42
Q

How do you undertake a Contractor’s/DRC valuation?

A
  1. Value as existing use
  2. Replacement cost of the building, minus discount for depreciation.
43
Q

What is the Red Book?

A

Global Professional Standards that define procedural rules and guidance for carrying out Valuations.

44
Q

What is the Red Book’s purpose?

A
  1. Consistency
  2. Objectivity
  3. Transparency
45
Q

What does the Red Book NOT do?

A

Instruct members on how to value in individual cases
Prescribe a format for reports
Override standards specific to jurisdictions

46
Q

What are the RICS Professional Standards (PS) in the Red Book?

A

PS1: Compliance with standards and practice statements where written valuation is provided.
PS2: Ethics, competency, objectivity and disclosure

47
Q

What are the RICS Global Valuation Practice Statements (VPS)?

A

VPS 1: TOB
VPS 2: Inspections, investigations and records
VPS 3: Valuation reports
VPS 4: Bases of value, assumptions and special assumptions
VPS 5: Valuation approaches and methods

48
Q

What is a restricted information (desk top) valuation (no inspection undertaken)?

A

Red Book Valuation. If undertake a valuation on the basis of restricted information and/ or no physical inspection, must fulfil requirements
1. The nature of restriction must be agreed in writing.
2. The possible valuation implications of the restriction confirmed in writing before value is reported.
3. The valuer should consider whether the restriction is reasonable to the purpose of the valuation.
4. The restriction must be referred to in the report.

49
Q

What are the 4 bases of value, as defined by VPS 4?

A
  1. Market Value.
  2. Market Rent.
  3. Investment Value
  4. Fair Value
50
Q

Red book definition of Market Value

A

VPS 4: The estimated amount for which an asset or a liability should exchange on the valuation date between a willing buyer and a willing seller in arms length transaction, after proper marketing and where both parties acted knowledgeably, prudently and without compulsion.

51
Q

What is the Red Book definition of Market Rent?

A

VPS 4: The estimated amount for which an asset should be leased on the valuation date between a willing Lessor and Lessee on appropriate lease terms in an arms length transaction, after proper marketing and where both parties acted knowledgeably, prudently and without compulsion.

52
Q

What is the Red Book definition of Investment Value (worth)?

A

VPS 4: The value of an asset to a particular owner or prospective owner for individual investment or operational objectives

53
Q

What is the red book definition of fair value?

A

VPS 4: VPS 4: 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.
The concept of fair value is consistent with that of market value.

54
Q

What is the difference between an assumption and a special assumption?

A

Both must be agreed with the client prior to reporting opinion of value.
Assumption- reasonable to accept as fact in the context of the valuation assignment without specific investigation or verification.
Special Assumption- an assumption that assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant.

55
Q

When can an assumption be made (VPS 4)?

A

Only assumptions that are reasonable and relevant having regard to the purpose of which the valuation assignment is required. All assumptions that will made in the conduct and reporting of the valuation assignment must be identified and recorded in TOB (VPS 1)

56
Q

When can a special assumption be made (VPS 4)?

A

Special assumptions may only be made if they can reasonably be regarded as realistic, relevant and valid for the particular circumstances of the valuation. In order to provide the client with the valuation required.

57
Q

What does VPS 5 State

A

Valuers are responsible for justifying valuation method adopted.

58
Q

What are the RICS Global Valuation Practice Guidance Applications (VPGAs)?

A

VPGA1 Valuation for inclusion in financial statements.
VPGA2 Valuations of interests for secured lending.
VPGA8 Valuation of real property interests.
VPGA9 Identification of portfolios
VPGA10 Matters that may give rise to material valuation uncertainty.

59
Q

UK VPGA 1 – Valuation for Financial Reporting

A

Makes a clear distinction between IFRS and UK GAAP

60
Q

What is Hope Value?

A

Value arising from any expectation that circumstances affecting the property may change

  1. Future prospect of securing planning permission for development of land, where none exists at present time
  2. Realisation of marriage value arising from the merger of two interest in land
61
Q

What are Building Cost Reinstatements?

A

The cost of reinstatement of the building without profit. For insurance purposes

62
Q

How would you value a Leasehold interest?

A
  • Deduct the ground rent from the income=Net Income
  • Capitalise as a yield for the remaining term.
  • creating a Market Value of Leasehold Interest.

Wasting asset

63
Q

How would you work out the Net Yield from a Gross price?

A

Deduct Purchasers Costs from the Gross purchase price to give the Net Purchase Price.
Current Rent/ Net Purchase Price x 100 = Net Yield

64
Q

What is the difference between an Initial yield and a Reversionary yield?

A

Initial is the yield based on the passing rent and current price. Reversionary yield is calculated from the Market rent and the current price.

65
Q

What is a running yield?

A

The yield a one moment in time. Usually used for multi-let properties.

66
Q
A

RICS-APC (15 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions