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RICS - FINAL APC > Valuation - Session 1 > Flashcards

Valuation - Session 1 Flashcards

1
Q

What are the important steps to take before taking on an instruction?

A

Are you competent, any conflict of interest and also have the terms of engagement been signed.

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2
Q

What is the full title of the Red Book?

A

The RICS Valuation Global Standards. There is also the UK National Supplement.

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3
Q

When did current edition of Red Book come into force and what editions have come in ?

A

Effective from 31st Jan 2025

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4
Q

What do valuation files contain?

A

Before undertaking a valuation, I checked competency.

  • Conflict of interest checks
  • Agreed Terms of Engagement
  • Inspection notes - photos, floors plans, Planning permission.
  • Planning, rating and environmental searches
  • Comparables and analysis
  • Valuation calculations and rationale
  • Report - stating opinion of value.
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5
Q

What are the main contents of the terms of engagement ?

A

Main Contents include;

  1. The Client
  2. The Property
  3. The Valuer.
  4. Purpose of the valuation
  5. The basis of value
  6. The method of valuation
  7. Currency
  8. Valuation date
  9. Assumptions / special assumptions
  10. Extent and limitations of inspection
  11. The Fee
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6
Q

Purpose of the Red Book?

A
  1. Provide Consistency, transparency and objectivity.
  2. Commitment to promote and support high standards and best practice in valuation delivery worldwide.
  3. Mandatory practices for RICS members undertaking valuation services.
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7
Q

Purpose of UK National Supplement?

A

The UK national supplement augments the Global Red Book for valuations that are subject to UK jurisdiction - come into effect 1st May 2024.

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8
Q

Can you name some valuations that are carried out for a Statutory Function?

A

CPO, ratings, tax, insurance, leasehold & enfranchisement

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9
Q

What is the difference between Valuation Technical and Performance Standards (VPS) and Valuation Practice Guidance – applications (VPGA)?

A
  • VPS (Valuation Technical and Performance Standards) are mandatory
  • VPGA (Valuation Practice Guidance/Valuation Application) are best practice, guidance only
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10
Q

Talk me through the comparable method?

A

Search and select comparables – Egi, CoStar, online databases, agents
* Analyse and establish the headline rent / net effective rent . Refer to the straight line method.
* Put the comparables in a schedule in DATE order
* Adjust the comparables referring to the hierarchy of evidence
* Category A – direct comparables of contemporary
* Category B – general market data
* Category C – other unverified sources / market commentary etc
* Analyse comparables
* Report value

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11
Q

Please name the Red Book Global Bases of Value?

A
  • Market Rent,
  • Market Value,
  • Fair Value and
  • Investment/Worth

Additional bases of value

Equitable
Synergistic
Liquidation

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12
Q

To what valuations does the Red Book apply?

A

Red Book applies to all valuations unless a valuation is listed as an exception.

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13
Q

What is equitable value?

A

The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties

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14
Q

What valuations are exceptions to the Red Book? (PS1)

A
  • If for Internal Purposes
  • If for agency / brokerage work prior to acquisition or disposal instructions.
  • If for statutory function
  • If acting as expert witness
  • If in negotiation or litigation
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15
Q

Please name the UK-Specific Bases of Value?

A
  • Existing Use Value,
  • Existing Use Value for Social Housing,
  • Value of plant and equipment
  • Projected market value of residential
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16
Q

What is the difference between a Basis of Value and a Method of Valuation?

A
  • A bases of valuation is a statement of the fundamental measurement assumptions of a valuation.
  • A method of valuation is the technique employed
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17
Q

What is an assumption ? Describe three Assumptions that are usually made in producing a valuation ?

A

An assumption is something which is likely to be true.

  • Title
  • Condition of buildings
  • Services
  • Planning (Zoning)
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18
Q

What is a Special Assumption?

A

A special assumption is where an assumption assumes facts that differ from those existing at the valuation date.

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19
Q

Give three situations when it would be appropriate to make a Special Assumption?

A

➢ the property has been changed in defined way
➢ the property is vacant (when occupied at the valuation date)
➢ the property is let on defined terms (when vacant at the valuation date).

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20
Q

Define Market Value?

A

The price an asset or liability would exchange on the valuation date between willing buyer and willing seller in an arm’s length transaction after proper marketing with the parties acting knowledgeably and without compulsion.

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21
Q

What do you consider Proper Marketing to be in the Market Value definition?

A

Depends on the state of the market and the number of interested parties. Property should be exposed to the market for a reasonable timeframe.

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22
Q

What is an Arm’s Length Transaction?

A

When there is no connection/relationship at all between parties

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23
Q

What is a hierarchy of Evidence?

A

The relative weighting attached to different types of evidence:

A) Open Market Lettings
B) Lease Renewals
C) Rent Reviews
D) Independent experts determination
E) Arbitrators awards
Sale and lease back

OLRIA

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24
Q

What do you understand by the expression weighting of comparable evidence?

A

To be comparable, a property must have similarities such as :

Physical characteristics
Location
Time scale
Use
Tenure

Attaching more weight to the evidence most similar to the subject property.

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25
What factors make up the all risks yield?
The all risks yield is made up of all the risks associated with the investment – * Physical characteristics * Lease terms * Unexpired lease terms * Anticipated rental growth * Covenant strength * Tenure NOTE: also known as market capitalisation rate.
26
what is an All Risk Yield ?
It is growth implicit and takes into account all the risk of an investment.
27
Describe how you would carry out a residual valuation ?
Value of the completed development (GDV) – development costs – developers profit = land value Extra: Deduct costs (fees, legal, architects, surveyors, site investigations, surveys, site preparation, demolition, contamination) Deduct construction costs Deduct developer’s profit Deduct cost of financing = SITE VALUE
28
Residual Method - explain the inpuits?
Market Value of completed development (GDV): Deduct costs: - Demolition costs - Cost of construction - refer to building cost information service (BCIS - m2 measurement. - Professional fees - 10/15% (include building surveyors, ARCHITECTS, planning consultants, M&E consultants ) - Cost of finance - use 7/8% due to the risk. - Contingency - 5-10%, depends on the works, adjustment to the build costs. - Environmental Surveyor (BNG) 10& of developments have to have biodiverity. Deduct developer’s profit (15% moderate risk) = SITE VALUE
29
What is the difference between a development appraisal and a residual method
Development Appraisals - tool used to financially assess the viability, value, profitability, suitability of a development scheme. Residual Valuation - For specific valuation of a property holding to find the market value of the site.
30
What can be some limitations to the residual method?
Residual valuation does not consider timing of cash flows Very sensitive to minor adjustments
31
How did you calculate (would you calculate) developer’s profit in your / a Residual Valuation?
I calculated profit on GDV which is the industry norm at around 15 – 20% OR percentage of the total costs (22-25%).
32
What are the usual acquisition costs of a development site?
Agents 1%, Legal fees 0.5%, SDLT 4 – 5%, agents legal fees 0.3% and non-recoverable VAT 20%
33
Is a residual valuation covered by the Red Book?
Yes, it is a method of valuation
34
What are the 5 conventional methods of valuation ?
Comparative, investment, residual, profits/accounts and contractors method (DRC)
35
When would you use an investment method?
Used when their is an income stream to value. The rental income is capitalised to produce a capital value. 1. The classic conventional investment method 2. Term and Reversion Method Types : value shops, offices, industrial and warehouse properties that are:
36
When would you use the contractors method and how would you carry it out?
It is a method of last resort where direct comparables is limited or unavailable for specialised properties. Examples: Lighthouse or Oil Rig Cost of modern building £ - Depreciation £ = Net replacement cost PLUS + Site Value = Value as existing
37
Contractors method for RICS
Not a suitable method and is not Red Book Global Compliant for valuation for securing lending purposes. **RICS guidance note on depreciated replacement cost method of valuation for financial reporting 2018
38
What is the basic approach to the profits method ?
Used where the value of the property depends upon the profitability of its business and its trading potential. Used to value leisure property for examples - Amusement parks - hotels - Tennis clubs
39
Calculation to profits method?
Annual Turnover Less - cost of generating the turnover (costs & purchases) = Gross operating profit x perpetuity (YP multiplier ) to achieve Market Value.
40
What is net profit?
Turnover Less - cost of generating the turnover (costs and purchases) = Net operating profit. Same but without company corporation tax
41
What is a gross yield?
The rent expressed as a percentage of the purchase price
42
What is a yield ?
a return measure for an investment over a set period of time, expressed as a percentage.
43
How would you work out the tenant’s liquidity ratio?
Divide current assets by current liabilities
44
What is the net yield?
The rent expressed as a percentage of the gross acquisition price (i.e. purchase price plus purchaser's costs which include agents fees, legal fees, VAT on fees, and stamp duty - 6.8%
45
What is the process / mechanics of term and reversion technique ?
Term: We capitalise the passing rent until review or reversion (Do this, by multiplying the passing rent by the YP for the number of years to the reversion) Reversion: We took the market rent to be received at review/reversion and then capitalise that into perpetuity (gives value at that moment in time). 3. We then defer it further, at a PV of £1, for the period of the term 4. Market Value (multiply) Note: the reversion gets capitalised at market rented rate, but the term gets capitalised at a lower rate due to the lower risk - secured tenancy.
46
Define Market Rent ?
As defined in VPS 03 as the estimated amount for which an asset will be leased for * On the valuation date * Between a willing lessor and willing lessee * In an arm’s length transaction * On appropriate lease terms * After proper marketing * When the parties have acted knowledgeably, prudently and without compulsion.
47
What is investment value?
The value of an asset to the owner or a prospective owner for individual investment or operational objectives.
48
Calculate the Investment method
basic form is: Market rent X Years Purchase (Yield - risk) = Market Value
49
what is the current interest rates and where would you find it?
5.25% Bank of England
50
What is ransom strip?
Strip of land that gives access to development land
51
What is a ransom value?
Value attributable to the ransom strip -
52
How did you or would you value a ransom strip?
% of the increase in the development land resulting in access – case law: Stokes v Cambridge ruled that 1/3 of the uplift in value the ransom strip adds to the development
53
Who are the International Valuation Standards Council?
the IVSC are a not-for-profit organisation that acts as the global standard setter for the valuation profession, serving the public interest.
54
Why do property investors require a risk premium?
Because there is more risk and more difficulty investing in property than there is investing in gilts (Government Stock/Government Bonds)
55
What do you understand by the expression risk premium?
The return over and above Government Stock, that the investor will require The yield an investor would require that is over the yield from gilts
56
What is the fundamental difference between conventional investment valuation techniques and discounted cash flow techniques?
In conventional investment valuations, growth is implicit in the capitalisation rate (IE we do not calculate future rental and capital growth so investor may accept low yield as they are expecting growth) In a DCF, we make the growth explicit - calculate the future values.
57
Why is the YP single rate table also known as the Present Value of £1 per annum?
It tells us the PV of £1 to be received each year, for a given number of years
58
How would you value a property where there are no comparable?
You would use the Contractor's Method after analysing whatever evidence there was.
59
What are the main updates to the Red Book?
Primary Reason for the Global 2025 Update: - To align with the new International Valuation Standards (IVS) effective from 31st January 2025 The valuation technical and performance standards have been re-arranged: VPS 1 Terms of engagement (scope of work) VPS 2 Bases of value, assumptions and special assumptions VPS 3 Valuation approaches and methods VPS 4 Inspections, investigations and records VPS 5 Valuation models (new) TIVIV
60
What are contemporary methods?
One where discounted cash flows are used.
61
What is the main difference between conventional and contemporary valuation methods?
Conventional = Growth is implicit Contemporary = Growth is explicit
62
When do you use Fair Value?
* Company Accounts
63
Does Fair Value differ from Market Value?
Usually similar
64
What is the difference between synergistic value and marriage value?
Synagagistic – value of 2 or more assets is greater than the sum of the value of the individual asset’s value. Marriage – the additional value created by the synergistic value of owning 2 or more assets.
65
Briefly describe the Depreciated replacement cost method?
Gross replacement cost = cost of new building – depreciation = Net replacement cost + Land value = DRC
66
Difference between expert witness and independent expert?
* Independent resolves dispute at rent review * Expert witness has duty of care to court and present at lease renewal dispute
67
What is the profits method also known as?
The accounts method
68
What is a reversionary yield?
MR divided by current price on an investment let at a rent below the MR
69
What are the major disadvantages of property over the other two major investment opportunities?
Low liquidity - You can buy/share equities and guilts almost instantly, but with property it takes a long time to get into it Requires active management (easiest to let FRI)
70
What is another name for the contractor's method?
Depreciated replacement cost
71
What is extrapolation of comparable evidence?
Calculating a value outside of known data (above or below known data).
72
How would you calculate Years Purchase?
It is 100 / Yield
73
What is an equivalent yield?
Average weighted yield when a reversionary property is valued using an initial and reversionary yield.
74
How would you make sure co star and your sources of comparable are accurate and reliable?
Triangulate the comparable and call up an agent to make sure that the comparable is accurate.
75
What is the difference between CAT A & B?
CAT A - CAT B -
76
If you made a large mistake in a report what would you do?
Inform client and ensure that you follow negligent steps.
77
In your valuation if you couldn't get to a part of the building to value, what would you do?
you would make sure that you made a note in the valuation and comply with VPS 3 - investigation, inspections and records.
78
If you have already carried out an inspection of a property one and half years ago and the client asked you to carry out a new inspection -
make it known in the report that you have carried out a valuation of this unit beforehand. There could be a COI as youll impartial judgement could be compromised.
79
What is the difference between an internal v external valuer?
Internal - employed to carry out valuations for internal use. External - Valued externally.
80
Hardcore layer method
Used for overrented properties - split the income horizontally. Top slice - market rent (higher yield for top slice) Bottom slice - passing rent (lower rent)

RICS - FINAL APC (17 decks)

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