Valuation Pt 2

Question 1

Explain the method behind the Profits Method valuation and when it is used?

Answer 1

Used when the profitability of the running businesses is the key driver, over and above the bricks and mortar (e.g. hotel)

Annual Turnover
LESS costs/purchases = Gross profit

LESS working expenses = Unadjusted Net Profit (earning before interest, tax, depreciation, tax, amortisation (EBITDA))
The EBITA is also considered as the Fair Maintainable Operating Profit (FMOP)

LESS tenants share = Adjusted net profit

Capitalise at yield to achieve Mv, check with comparable evidence if possible

Question 2

What variables can impact value?

Answer 2

• Topography and elevation
• Tenure
• Development
• Access/responsibilities
• National Parks and designations
• Location and accessibility to amenities

Question 3

Identify some reasonable ‘assumptions’ you could make during a Valuation inspection?

Answer 3

• No Structural defects
• No hazardous materials
• Mains services
• Tenant status

Question 4

What is the IVS and when was the most recent version published?

Answer 4

International valuation standards which is a framework designed to ensure parity in delivering valuation services

released 31 January 2024

Question 5

Who created the IVS and what is the relationship with the RICS red book?

Answer 5

The International Valuation Standards Council
The IVS is fully incorporated into the RICS red book global standards

Question 6

When will the next updated version of the RICS red book global standards take effect?

Answer 6

31st January 2025

Question 7

What are the main updates expected to be seen in the RICS global standards in 2025?

Answer 7

-Implementation of valuation review mechanisms
-Alignment with other relevant global standards such as the IVS published in Jan 2024.
-Adaption to evolving practices including environmental, social and governance (ESG) and technological advancements

Question 8

What year was the RICS red book first published?

Answer 8

1976

Question 9

What are the mandatory valuation ‘Professional Standards’ in the RICS red book?

Answer 9

PS 1 – Compliance with standards where a written valuation is provided
PS 2 – Ethics, competency, objectivity and disclosures

Question 10

What are the mandatory valuation ‘technical and performance standards’ in the RICS red book?

Answer 10

VPS 1 – Terms of engagement (scope of work)
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.

Question 11

Where would I look within the RICS red book for guidance on unique or specific valuation assignments?

Answer 11

VPGAs - Valuation Practice Guidance Applications where there are 10 different guides/specialist examples

Question 12

What is your firms professional Indemnity insurance and what purpose does it serve?

Answer 12

£5 million per valuation, but varies depending on value

Question 13

What does the word ‘probate’ mean?

Answer 13

The word Probate means ‘proving’, as it involves proving that the Will in the Executor’s possession is the last Will of the deceased.

Question 14

When do you date a probate valuation?

Answer 14

The date of death

Question 15

When is the current RICS red book version effective from?

Answer 15

31st January 2022

Question 16

Define the ‘investment value’ and which VPS would this fall under?

Answer 16

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

VPS 4: Basis of value and assumptions

Question 17

Define the ‘Fair value’ and which VPS would this fall under?

Answer 17

‘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.’

VPS 4: Basis of value and assumptions

Question 18

What are the 5 methods of Valuation?

Answer 18

P.R.I.C.C

1. Profits
2. Residual
3. Investment
4. Comparable
5. Contractors (DRC)

Question 19

What is VPGA and what is covered in VPGA 2?

Answer 19

VPGA is within the RICS red book and provides Valuation Practice Guidance
e.g. VPGA 2 = valuation of interests for secured lending

Question 20

What is the All Risks Yield (ARY)?

Answer 20

Rate of interest used in the valuation of let property at market rent reflecting all the prospects and risks attached to the particular investment

Question 21

What valuation technique involves the Gross Development Value? Give an example?

Answer 21

Residual Method - When valuing land with development value. Basic understanding is the GDV (minus) costs = land value

Question 22

Identify some generic costs you would deduct from the GDV?

Answer 22

Construction cost
Acquisition cost (cost of land, legals, etc)
Contingency
Planning cost
Professional Fees (engineers, architects, planning consultants)
Developers profit **

Question 23

What is the purpose of the IVS?

Answer 23

International valuation standards provides an effective, regulatable framework for the delivery of valuation services to clients. It is composed/regulated by the International valuation standards council (IVSC).

Question 24

When was IVS published?

Answer 24

31 Jan 2024

Question 25

What is another name for a Probate Valuation?

Answer 25

‘Confirmation of Estate’ valuation

Question 26

What is the comparable method approach?

Answer 26

Comparable method provides an indication of value by comparing the subject asset with identical or similar assets

Question 27

What is the Investment Method and when is it used?

Answer 27

Investment Method is used when there is an income stream to value with a sitting tenant for the purpose of an investment

The capital value of an investment is found by multiplying the annual income flow by a multiplier (YP).
You can then use comparable method to establish market rent and appropriate all risks yield (ARY).

Question 28

What is Hierarchy of evidence and what are the categories?

Answer 28

Category A – direct transactional evidence

Category B – general market data providing guidance rather than a direct indication of value

Category C – other sources, such as transactional evidence from other property types and locations

Question 29

What makes a good comparable?

Answer 29

Comprehensive, i.e. ideally a valuer needs more than one transaction

Very similar or identical

Recent

Result of an arm’s length transaction

Verifiable

Consistent with local market practice

Result of underlying demand, i.e. sufficient bidders to create active market

Question 30

How would you value an investment if there was a freehold factory being let on the Open Market for £100,000 per annum; comparable evidence indicate ARY is 8%?

Answer 30

YP = 1/ARY (e.g. 8%)

YP = 1/0.08

YP = 12.5

Value = Market Rent x YP = 100,000 x 12.5 = £1,250,000

Value = £1,250,000

Question 31

What do you need to take into account when applying an All Risk Yield to an Investment?

Answer 31

• Review comparable data, but you need to ensure you take into account location, nature of the property, strength of the tenant covenant, and any important lease terms/clauses
• ARY reflects all the risks, uncertainties and likely beneficial prospects of an investment

Question 32

What version of the RICS are we on and when was it effective from?

Answer 32

31 January 2022

Question 33

What changes are we expecting to see from 31 January 2025 in the layout of the RICS red book?

Answer 33

They anticipate that they will restructure/re-order the VPS (1-5) to cross reference with the IVS

Question 34

Are VPS mandatory or Voluntary?

Answer 34

Mandatory

Question 35

Why do we, as surveyors across the globe, require the RICS red book?

Answer 35

1. Provide consistency, objectivity and transparency in valuations
2. Build public confidence and trust in RICS members’ valuations
3. Ensure valuers are working to the latest international standards
4. Provide an essential quality control check without the need for legislation.

Question 36

What is the RICS black book?

Answer 36

The ‘Black Book’ is a collection of technical practice documents which covers all processes throughout the construction project life cycle.

Typically used by quantity surveyors

Question 37

What is the RICS key measurement practice and when was it introduced?

Answer 37

International Property Measurement Standard (IPMS)

January 2023

Question 38

What do you think you need to take into account when valuing land with a 1991 AHA tenancy and you are looking at future Vacant Possession? How would you calculate this?

Answer 38

1. The tenants age, how much longer do they realistically have before they retire?
2. Do they have any children, or close family who are clearly working on the farm and show an interest?

Calculate this using the Parry’s Table which is used for complex valuations

Question 39

You say you were involved in a valuation for Secured Lending. What special assumptions did you make in this valuation?

Answer 39

We made the special assumption of Vacant Possession as requested by the bank; all properties were tenants at the time of Valuation inspection

Question 40

What headings would you specifically see in a Secure Lending Valuation, and not in others?

Answer 40

1. Lending considerations:
   - information on the proposed loan and term
   -Marketability of the properties
   -Property performance
   - Due diligence recommendations
   -Confirmation that they are suitable properties for loan security
   - Active Management i.e. is there anything the owner needs to do to maintain value
2. Removal of heading on BPS and environmental schemes
3. Capital value
4. Insurance reinstatement cost Estimate (using BCIS)