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RICS - FINAL APC > Valuation - Session 1 > Flashcards

Valuation - Session 1 Flashcards

1
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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2
Q

When did current edition of Red Book come into force and what editions have come in since you have been at workman?

A

Effective from 31st Jan 2022.

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3
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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4
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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5
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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6
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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7
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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8
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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9
Q

Please name the Red Book Global Bases of Value?

A
  • Market Rent,
  • Market Value,
  • Fair Value and
  • Investment/Worth
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10
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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11
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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12
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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13
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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14
Q

Do you know the updates to the UK National Supplement in May 2024?

A
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15
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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16
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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17
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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18
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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19
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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20
Q

What is an Arm’s Length Transaction?

A

When there is no connection/relationship at all between parties

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21
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

OLRIA

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22
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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23
Q

What factors make up the all risks yield?

A

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.

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24
Q

what is an All Risk Yield ?

A

It is the rental revenue of an investment as an annual percentage of the property cost.

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25
Q

Describe how you would carry out a residual valuation ?

A

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

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26
Q

Residual Method - explain the inpuits?

A

Market Value of completed development (GDV):

Deduct costs:

  • Demolition
  • Cost of construction -refer to BCIS - m2 measurement.
  • Professional fees - 10/15% (include building surveyors, planning consultants)
  • Cost of finance - use 7/8% due to the risk.
  • Contingency - depends on the works, adjustment to the build costs.

Deduct developer’s profit

= SITE VALUE

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27
Q

How did you calculate (would you calculate) developer’s profit in your / a Residual Valuation?

A

I calculated profit on GDV which is the industry norm at around 15 – 20% OR percentage of the total costs (22-25%).

28
Q

What are the usual acquisition costs of a development site?

A

Agents 1%,
Legal fees 0.5%,
SDLT 4 – 5%,
agents legal fees 0.3%
and non-recoverable VAT 20%

29
Q

Is a residual valuation covered by the Red Book?

A

Yes, it is a method of valuation

30
Q

What are the 5 conventional methods of valuation ?

A

Comparative, investment, residual, profits/accounts and contractors method (DRC)

31
Q

When would you use an investment method?

A

Used to value shops, offices, industrial and warehouse properties that are:

Let as investments

Owner-occupied

Vacant

32
Q

When would you use the contractors method?

A

It is a method of last resort

  • Used when no other methods can be used

Lighthouse or Oil Rig - examples.

33
Q

What is the basic approach to the profits method ?

A

Used to value leisure property for examples

  • Amusement parks
  • Golf courses
  • Tennis clubs
34
Q

Calculation to profits method?

A

Turnover

Less - cost of generating the turnover

= Net operating profit x perpetuity and use a multiplier.

35
Q

What is net profit?

A

Turnover

Less - cost of generating the turnover

= Net operating profit.

Same but without company corporation tax

36
Q

What is a gross yield?

A

The rent expressed as a percentage of the purchase price

37
Q

What is a yield ?

A

a return measure for an investment over a set period of time, expressed as a percentage.

38
Q

How would you work out the tenant’s liquidity ratio?

A

Divide current assets by current liabilities

39
Q

What is the net yield?

A

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%

40
Q

What is the process / mechanics of term and reversion technique ?

A

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).

  1. We then defer it further, at a PV of £1, for the period of the term
  2. 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.

41
Q

Define Market Rent ?

A

As defined in VPS 04 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.
42
Q

What is investment value?

A

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

43
Q

Calculate the Investment method

A

basic form is:

Market rent X Years Purchase (Yield - risk)

= Market Value

44
Q

what is the current interest rates and where would you find it?

A

5.25%

Bank of England

45
Q

What is ransom strip?

A

Strip of land that gives access to development land

46
Q

What is a ransom value?

A

Value attributable to the ransom strip -

47
Q

How did you or would you value a ransom strip?

A

% 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

48
Q

Who are the International Valuation Standards Council?

A

the IVSC are a not-for-profit organisation that acts as the global standard setter for the valuation profession, serving the public interest.

49
Q

Why do property investors require a risk premium?

A

Because there is more risk and more difficulty investing in property than there is investing in gilts (Government Stock/Government Bonds)

50
Q

What do you understand by the expression risk premium?

A

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

51
Q

What is the fundamental difference between conventional investment valuation techniques and discounted cash flow techniques?

A

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.

52
Q

Why is the YP single rate table also known as the Present Value of £1 per annum?

A

It tells us the PV of £1 to be received each year, for a given number of years

53
Q

How would you value a property where there are no comparable?

A

You would use the Contractor’s Method after analysing whatever evidence there was.

54
Q

Can you name me VPS 1 -5

A

PS1 - 2

VPS 1: Terms of Engagement
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 and VPS 5 Valuation Models

TIVBV

55
Q

What are contemporary methods?

A

One where discounted cash flows are used.

56
Q

What is the main difference between conventional and contemporary valuation methods?

A

Conventional = Growth is implicit
Contemporary = Growth is explicit

57
Q

When do you use Fair Value?

A
  • Company Accounts
58
Q

Does Fair Value differ from Market Value?

A

Usually similar

59
Q

What is the difference between synergistic value and marriage value?

A

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.

60
Q

Briefly describe the Depreciated replacement cost method?

A

Gross replacement cost = cost of new building – depreciation = Net replacement cost + Land value = DRC

61
Q

Difference between expert witness and independent expert?

A
  • Independent resolves dispute at rent review
  • Expert witness has duty of care to court and present at lease renewal dispute
62
Q

What is the profits method also known as?

A

The accounts method

63
Q

What is a reversionary yield?

A

The Market Rent expressed as a percentage of the Market Value

64
Q

What are the major disadvantages of property over the other two major investment opportunities?

A

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)

65
Q

What is another name for the contractor’s method?

A

Depreciated replacement cost

66
Q

What is extrapolation of comparable evidence?

A

Calculating a value outside of known data (above or below known data).

67
Q
A

RICS - FINAL APC (16 decks)

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