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apc spring 2024 > Valuation - Red Book > Flashcards

Valuation - Red Book Flashcards

1
Q

What are some of the key purposes of why a valuation is carried out?

A
  1. Loan security
  2. Rating
  3. Accounts
  4. Landlord & Tenant functions
  5. Tax (e.g. Capital Gains Tax or Inheritance Tax)
  6. Corporate real estate advice (e.g. relocation or refurbishment)
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2
Q

What is the Red Book?

A

The Red Book is a set of global standards which set out procedural rules and guidance for written valuations.

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3
Q

What is the Red Book not?

A

It is not a valuation manual and it does not:

  1. Tell members on how to value in individual cases
  2. Prescribe a particular format for reports
  3. Override standards specific to and mandatory within individual jurisdictions
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4
Q

What does VPS stand for and what does it mean in relation to the Red Book?

A
  1. Valuation Practice Statements
  2. Processes to follow
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5
Q

What does PS stand for and what does it mean in relation to the Red Book?

A
  1. Professional Standards
  2. Things to think about
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6
Q

What was the key update within the 2022 Red Book?

A

ESG - Environmental, Social and Governance.

This is the driver behind the update where language is clearer and robust.

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7
Q

What is the purpose of the Red Book?

A

To provide consistency, objectivity and transparency.

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8
Q

Why is the Red Book updated?

A

The IVS (International Valuation Standards) are updated on a 2-year rolling basis.

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9
Q

What is the IVS and why are the RICS aligned with it?

A

RICS is a key member of the IVS Council along with other professional valuation organisations (e.g. American Society of Appraisers).

Members of the IVS Council work together to produce the IVS, and the RICS then produces more detailed standards for its members to follow.

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10
Q

What is Professional Standard (PS) 1 in relation to?

A

Compliance

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11
Q

What is Professional Standard (PS) 2 in relation to?

A

Ethics and conflicts

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12
Q

What is Valuation Practice Statement (VPS) 1 in relation to?

A

Terms of Engagement (TOE)

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13
Q

What is Valuation Practice Statement (VPS) 2 in relation to?

A

Inspections

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14
Q

What is Valuation Practice Statement (VPS) 3 in relation to?

A

Reporting

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15
Q

What is Valuation Practice Statement (VPS) 4 in relation to?

A

Basis of valuation

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16
Q

What is Valuation Practice Statement (VPS) 5 in relation to?

A

Valuation approach

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17
Q

What is VPGA?

A

Valuation Practice Global Applications

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18
Q

What is VPGA 1 in relation to?

A

Accounts valuations

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19
Q

What is VPGA 2 in relation to?

A

Loan security

20
Q

What is VPGA 4 in relation to?

A

Profits valuations

21
Q

What is VPGA 8 in relation to?

A

Real Estate valuation (inspections)

22
Q

What is VPGA 10 in relation to?

A

Certainty

23
Q

In what instances does the Red Book (VPS 1 to 5) not need to be followed?

A

ALIES

  1. Agency (e.g. marketing appraisal agency)
  2. Litigation (e.g rent review litigation)
  3. Internal (e.g internal processes)
  4. Expert witness (e.g. duty to Court)
  5. Statutory (e.g. carried out by statutory officer. CGT, IHT, Rating)
24
Q

What is the difference between an independent expert and an expert witness?

A

Independent Expert - Expert in determining a rent in a rent review dispute

Expert witness - Expert called to give evidence to a Court, where their duty is to the Court and NOT their Client.

25
Q

What else does PS 1 detail?

A

Red Book compliance is binary. It either is a Red Book valuation or it isn’t. There is no partiality or in between.

26
Q

Why do we complete Terms of Engagement?

A

The contractual basis of the relationship established with the Client and an important defence against negligence claims.

27
Q

What are some of the minimum terms that must be established within the Terms of Engagement as per VPS 1?

A
  1. Identification and status of the Valuer
  2. Identification of the Client
  3. Identification of the asset or liability that is to be valued
  4. The purpose of the valuation
  5. The date of the valuation
28
Q

What are some of the minimum headings that must be established within the Reporting as per VPS 3?

A

The same as VPS 1 but in addition:

  1. Nature of sources relied upon
  2. Assumptions and special assumptions
  3. Restrictions on use, distribution and publication of report
  4. Valuation approach and reasoning
  5. Date of the valuation report
29
Q

What is the definition of Market Value as stated within VPS 4?

A

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

Aka

Market value represents the price that would most likely be achievable for a property in an unrestricted market place following proper marketing appropriate for the type of asset.

30
Q

What is the definition of Market Rent as stated within VPS 4?

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 arms length transactions, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”

Similar definition to market value, with a fundamental aspect being the lease terms which should reflect current practice in the market in which the property is situated.

31
Q

What is the definition of investment value as per VPS 4?

A

“The value of an asset to the owner or a prospective owner for individual investment or operational objectives.”

Investment value is an estimate of value of a property to a particular owner or purchaser who may wish to analyse the potential performance against certain investment criteria e.g. a target rate of return, as opposed to those generally prevailing in the market.

32
Q

What is the definition of fair value as per the International Accounting Standards Board?

A

“The price that would be received to sell an asset or transfer the liability in an orderly transaction between market participants at the measurement date.”

The IFRS definition of fair value applies only to financial statements and in the case of assets, the IVS advises that the definition of fair value is generally consistent with market value.

33
Q

What is the definition of Synergistic Value and is it defined within VPS 4?

A

It is not defined within VPS 4, and instead defined in International Valuation Standards 2022 - IVS 104.

Synergistic Value is the result of a combination of two or more assets or interests where the combined value is more than the sum of the separate values.

34
Q

What is marriage value in relation to synergistic value?

A

The added value above the aggregate of the respective interests is often referred to as “marriage value”.

35
Q

What is a special assumption?

A

A special assumption is made by the valuer where an assumption either assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant in a transaction on that valuation date.

36
Q

What is an assumption?

A

An assumption is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation or verification.

Any such assumption must be reasonable and relevant, having regard to the purpose for which the valuation is required.

37
Q

What is a valuation approach as per VPS 5?

A

It is a brief description provided to the Client within a valuation report for their benefit and understanding.

38
Q

What are the three valuation approaches which are described within VPS 5?

A
  1. Market Approach
  2. Income Approach
  3. Cost Approach
39
Q

What is the market approach as per VPS 5 and what valuation method(s) is it based on?

A
  1. Market approach is based on comparing similar assets or liabilities for which price information is available, such as a comparison with market transactions in the same, or closely similar, type of assets or liability within an appropriate timeframe”
  2. The Comparable Method
40
Q

What is the income approach as per VPS 5 and what valuation method(s) is it based on?

A
  1. The income approach is based on capitalisation or conversion of present and predicted income (cash flows), which may take a number of different forms, to produce a single capital value. Among the forms taken, capitalisation of a conventional market based income or discounting of a specific income projection can both be considered appropriate depending on the type of asset and whether such an approach would be adopted by market participants.”
  2. Investment Method AND Profits Method
41
Q

What is the cost approach as per VPS 5 and what valuation method(s) is it based on?

A
  1. “The cost approach provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction”
  2. Residual Method AND DRC Method
42
Q

What can you tell me about the “Sustainability and ESG in commercial property valuation and strategic advice”

A
  1. It is an RICS Guidance Note published in 2021
  2. It is almost a companion volume to the 2022 Red Book, covering the definitions of sustainability, ESG and the role of the valuer
  3. It considers the role of sustainability at each stage such as the valuation process, instructions, terms of engagement, inspections, comparables, valuation methods and reporting
43
Q

What can you tell me about the Independent Review of Real Estate Investment Valutions?

A
  1. It was an independent review commissioned by the RICS and published in December 2021 by Peter J Pereira Gray.
  2. The RICS Standards and Regulations Board has accepted all 13 recommendations

Key recommendations include:

The creation of an independent led dedicated panel to bolster the RICS’ regulatory approach in valuation.

Creation of a formal Valuation Compliance Officer role

The need for further guidance to clarify the RICS’ expectations around culture and the behaviours expected of RICS professionals undertaking valuations.

Focusing on analytical techniques, the drive towards discounted cash flow methodology, and the conflict of interest implication.

44
Q

What is the UK Valuation Standards 2019 national supplement?

A

As the name suggests, it is a supplement to the Red Book

45
Q

Which parts of the UK Valuation Standards national supplement is mandatory and what is entailed in each?

A
  1. UK PS 1 - compliance with the valuation standards within the UK and complying with UK law
  2. UK VPS 1 - Terms of Engagement and reporting - compliance with the Red Book
  3. UK VPS 3 - Regulated purpose valuations: supplementary requirements
46
Q

Which parts of the UK Valuation Standards national supplement is advisory?

A

UK Valuation Practice Global Applications (VPGA) 1 to 18

apc spring 2024 (18 decks)

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