Valuation principles Flashcards
Briefly describe the residual method of valuation
- Determine the highest value use
- Calculate the GDV (using the comparables method)
- Deduct costs
a) Building costs
b) Demolition costs
c) Site prep
d) Fees (surveyors, professional fees etc)
e) Marketing
f ) CIL
g) Contingencies
h) Finance
In what scenario would you use the residual method?
The residual method is typically used for property or land with development potential. The output is market value of the land.
What is the difference between a residual valuation and a development appraisal?
- Residual land valuation - output is the market value of the land
- Development appraisal - output is the profitability or viability of the development
What is the investment method used for?
The investment method is used where there is an income stream to value, i.e. the property is tenanted. This can include commercial, residential, retail, industrial and agricultural properties.
How do you carry out a valuation using the investment method?
The investment method is used to determine the market value of a freehold/leasehold property from its potential to generate future income.
Where the tenant is providing the landlord with a return on their investment on the capital lost (purchasing the building).
- Assess rental values (market rent) and a market-based yield. A yield can be simply defined as the annual return on investment expressed as a percentage of capital value
- The profit is calculated based on the assessment of the future rental income, which is then discounted back to the present day giving the net present value (NPV)
- This is finally used as an indicator of how much the building is presently worth.
When is the profits method used?
The profits method is used for specialist income-producing properties. E.g.
- hotels
- golf courses
- petrol stations
- care homes
These types of properties are only usually sold as part of a business and are designed specifically for the intended use. Their value will depend on business profitability and trading potential, also known as intangible goodwill.
Briefly describe the principles of the profit method.
Introduces the concept of market value vs. investment value; the latter relating to the ‘measure of the value of the benefits of ownership to the current owner or to a prospective owner, recognising that these may differ from those of a typical market participant’.
- Involves establishing fair maintainable operating profit (FMOP) capable of being generated by a reasonably efficient operator (REO).
- This is based upon assessment and analysis of fair maintainable turnover (FMT)
- A market-based profit multiplier is then used to convert FMT into a capital value
Describe the concept and usage of the contractor method
The contractor method is used for owner-occupied or specialised property that is rarely sold on the open market.
It is also known as the method of last resort and should not be used where there are market sales of comparable properties.
Is based upon the assumption that the market will pay no more for the existing property than the amount it would cost to buy an equivalent site, plus the cost of constructing an equivalent building.
Provide a brief overview of the principles of the contractor method is practice
The basic steps involved include assessing the cost to replace the land and the building – with a modern equivalent, including all associated costs – before making appropriate deductions for depreciation and obsolescence.
What published resource would you use to inform the correct way to use the comparable method?
RICS Guidance Note:
Comparable evidence in real estate valuation 1st edition, October 2019
Name 7 characteristics of a good schedule of comparables, according to RICS: Comparable Evidence in Real Estate 2019
- Comprehensive – there should be several comparables rather than a single transaction or event
- Very similar or, if possible, identical to the item being valued
- Recent, i.e. representative of the market on the date of valuation
- The result of an arm’s-length transaction in the market
- Verifiable
- Consistent with local market practice and
- The result of underlying demand, i.e. comparable transactions have taken place with enough potential bidders to create an active market
What are the two primary standards set-out within the Red Book?
-
PS 1 - Compliance with standards where a written valuation is provided
- Looks at application - when a valuation needs to be Red Book Global compliant & the exemptions
-
PS 2 - Ethics, competency, objectivity and disclosures
- Compliance with the Rules of Conduct
How does the UK National Supplement to the Red Book differ from the Global standards?
The UK national supplement sets out specific requirements, together with supporting guidance for members on the application of the Global Standards in the UK. Effectively, this includes other authoritative requirements specific to UK jurisdiction and subject to UK laws. This includes valuations for things like CGT (Capital Gains Tax) or ATED (Annual Tax on Enveloped Dwellings).
Which sections of the Red Book are of mandatory or advisory application?
Professional Statements - PS 1-2 - these are mandatory for all members providing written valuations
Valuation Technical and Performance Standards - VPS 1-5 - these are mandatory unless otherwise stated. VPS 1, 4 and 5 focus on technical standards, whilst VPS 2-3 focus on performance and delivery
Valuation Practice Guidance Applications - VPGA 1-10 - these are advisory and provide guidance on best practice. They typically relate to valuations for specific purposes or of specific asset types, e.g. financial statements, secured lending, trade related property and portfolios
What are the 5 exemptions from the Red Book?
- Providing agency or brokerage advice for an acquisition or disposal
- Acting as an expert witness
- Performing statutory functions
- Providing a valuation purely for internal purposes, without liability and without communication to a third party
- Providing valuation advice in the course of negotiations or litigation where the valuer is acting as an advocate
What checks should you carry out prior to accepting a valuation instruction according to the Red Book?
Before accepting an instruction, you need to ensure you comply with PS 2 - Ethics, competency, objectivity and disclosures.
E.g. conflict of interest money laundering etc.
What does the Red Book state must be included within terms of engagement?
Identification and status of the valuer
Identification of the client(s)
Identification of other intended users
Identification of the asset(s)/liability(ies) being valued
Currency
Purpose
Basis of value (see VPS 4)
Valuation date
Nature and extent of investigations and limitations
Nature and source of information relied upon
Assumptions and special assumptions
Format of the report
Restrictions on use, distribution and publication
Confirmation of compliance with IVS
Fee basis
Reference to Complaints Handling Procedure
Statement relating to monitoring by RICS
Any limitations on liability agreed
What are the Red Book bases of Value?
- Market Value
- Market Rent
- Investment Value
- Fair Value
- Assumptions
What does rack rented mean?
A rack rent is usually a rent that represents the full open market annual value of a holding, often simply called the market rent
Name the four key sections / standards set out within the Red Book.
- Professional Standards (mandatory)
- Valuation technical and performance standards (mandatory)
- RICS global valuation practice guidance – applications (VPGAs) (advisory)
- National or jurisdictional standards
Which document should be referenced in relation to the valuation elements of your BtR work?
Valuing residential property purpose built for renting 1st edition, 2018
Name the key difference between the valuation of residential property purpose built for renting, and the valuation of commercial property purpose built for renting.
In residential rented property - the responsibility for maintenance of the tenanted demise sits with the landlord.
What are the key steps involved in valuing a BtR asset?
(Valuing Residential Property Purpose Built for Renting, 2018)
- Assessment of Gross Income
- Assessment of Operating Expenditure
- Net Operating Income
- Net Income Capitalisation
- Allowance for Capex or Lease up
- Checks / benchmarking (e.g. Discounted cash flow / break up potential)
Based on the RICS Guidance Note Valuing Residential Property Purpose Built for Renting (2018), what steps of the valuation process for BtR assets do you assist with?
- Assessment of Gross Income
- Assessment of Operating Expenditure
- Net Operating Income
