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PM - Summary of Experience - APC > Valuation - Summary of Experience > Flashcards

Valuation - Summary of Experience Flashcards

1
Q

What is the full title of the Red Book?

A

RICS Valuation - Global Standards

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2
Q

What is the current edition of the Red Book and when did it come into force?

A

Effective 31st January 2022

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3
Q

What editions of the Red Book have been in effect during your APC training period?

A

RICS Valuation - Global Standards 2017
RICS Valuation - Global Standards 2017 UK National Supplement
RICS Valuation - Global Standards 2020
RICS Valuation - Global Standards 2022

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4
Q

What is the purpose of the Red Book?

A
  • To promote and suppot high standards and ensure transparency and consistency
  • Establish a framework for best practice
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5
Q

What changes were made to the current edition of the Red Book?

A
  • More detail on terms of engagement when applying any exceptions to VPS 1-5
  • Definitions and commentary on sustainability / ESG
  • Improving and clarifying existing text
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6
Q

What are the International Valuation Standards Council?

A

Not for profit organisation sponsored by RICS that acts as the global standard setter for the valuation profession

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7
Q

What is the Red Book made up from?

A

2 mandatory sections and 1 advisory section

  1. introduction
  2. glossary
  3. professional standards
  4. Valuation Technical performance standards
  5. Valuation approaches
  6. IVSC
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8
Q

What sections of the Red Book are Mandatory and which are advisory?

A

Part 3 - professional Standards - mandatory
Part 4 VPS - mandatory
Part 5 VPGA - advisory

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9
Q

What is the purpose of the UK national supplement?

A

Assist with the application of Global Standards in a more local context

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10
Q

What does PS1 and PS2 relate to?

A

PS1 - Complianec with standards where a written valuation is provided

PS2 - Ethics, competency, objectivity and disclosures

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11
Q

What does VPS 1-5 relate to?

A

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

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12
Q

What do the VPGA relate to?

A

Valuation of various items such as:

  • intangible assets
  • Plant and equipment
  • personal property (including arts and antiques)
  • Interests for secured lending
  • inclusion in financial statements
  • matters that may give rise to material valuation uncertainty
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13
Q

To what valuations are exceptions to the Red Book?

A
  • Agency or Brokerage work
  • Expert witness
  • Performing statutory functions
  • During negotiation or litigation
  • Purely for internal purposes
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14
Q

Name some valuations that are carried out for statutory function?

A

Stamp Duty
Property Gains Tax
Compensation
Rating

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15
Q

Name some valuations that are carried out for statutory function?

A

Stamp Duty
Property Gains Tax
Compensation
Rating

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16
Q

What is VPS?

A

Valuation Technical Performance Standards

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17
Q

What is VPGA?

A

Valuation applications

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18
Q

What is VPGA?

A

Valuation applications

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19
Q

What is the difference between VPS and VPGA?

A

VPS is mandatory and VPGA is advisory

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20
Q

What do your valuation files contain?

A
  • Terms of Engagement and report templates
  • Conflict of Interest checks
  • Inspection notes
  • Comparables info
  • Quality assurances processes
  • Valuation calculation and methodology
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21
Q

What do your valuation files contain?

A
  • Terms of Engagement and report templates
  • Conflict of Interest checks
  • Inspection notes
  • Comparables info
  • Quality assurances processes
  • Valuation calculation and methodology
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22
Q

What are the main contents of the Terms of Engagement for a valuer?

A
  • Identifaction of valuer
  • Identification of Client
  • Identification of building
  • Currency
  • Method of valuation
  • Limitations on inspection
  • Basis of Value
  • Special assumptions
  • Assumptions
  • Complaints handling procedure
  • Purpose of valuation
  • Valuation date
  • Fee
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23
Q

What are the main contents of the Terms of Engagement for a valuer?

A
  • Identifaction of valuer
  • Identification of Client
  • Identification of building
  • Currency
  • Method of valuation
  • Limitations on inspection
  • Basis of Value
  • Special assumptions
  • Assumptions
  • Complaints handling procedure
  • Purpose of valuation
  • Valuation date
  • Fee
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24
Q

Name the Red Book bases of value?

A

market Value
Market Rent
Fair Value
Investment Value (worth)

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25
Q

Name the UK specific bases of value

A

Existing use Value
Existing use Value for social housing
Projected market value

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26
Q

What is an assumption?

A

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

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27
Q

What is an assumption?

A

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

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28
Q

What is a special assumption?

A

A special assumption is made either when as assumption assumes facts that differ from those made on the valuation date, or would not be made by a typical market participant

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29
Q

Name 3 assumptions typically made in a vluation

A
  • Condition of the building
  • Planning consent
  • Service to the building
  • Contamination and hazardous substances
  • Environmental matters
  • Title
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30
Q

name 3 special assumptions typically made in valuation

A
  • property is vacant (when let on the valuation date)
  • Property is let on defined terms (when vacant on the valuation date)
  • Property has changed in a defined way
  • Planning consent has or will be granted
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31
Q

name 3 special assumptions typically made in valuation

A
  • property is vacant (when let on the valuation date)
  • Property is let on defined terms (when vacant on the valuation date)
  • Property has changed in a defined way
  • Planning consent has or will be granted
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32
Q

Define market value

A

Estimated amount real property interest should exchange for on the valuation date between a willing buyer and willing seller in an arms length transaction, after proper marketing where each part acted knowledgably, prudently and without compulsion

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33
Q

Define market value

A

Estimated amount real property interest should exchange for on the valuation date between a willing buyer and willing seller in an arms length transaction, after proper marketing where each part acted knowledgably, prudently and without compulsion

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34
Q

Define fair value

A

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

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35
Q

Define fair value

A

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

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36
Q

Define investment value (worth)

A

The value of an asset to the owner or prospective owner for individual investment or ational objectives

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37
Q

Define investment value (worth)

A

The value of an asset to the owner or prospective owner for individual investment or ational objectives

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38
Q

Define market Rent

A

The estimated amount for which interest in real property should be leased for on the valuation date between a willing lessee and willing lessor on appropriate lease terms in an arms length transaction, after proper marketing and where both parties had each acted knowledgably, prudently and without compulsion

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39
Q

What is proper marketing?

A

Exposure to the market in the most appropriate manner (e.g good amount of time on the market)

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40
Q

What is an arms legnth transaction?

A

The parties do not have a relationship

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41
Q

What is an arms legnth transaction?

A

The parties do not have a relationship

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42
Q

What are the 5 conventional methods of valuation?

A

Comparative method
investment method
Profits method
Residual method
Depreciated Replacement Cost method

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42
Q

What are the 5 conventional methods of valuation?

A

Comparative method
investment method
Profits method
Residual method
Depreciated Replacement Cost method

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43
Q

What are the associated valuation approaches?

A

Market approach
income approach
Cost approach

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44
Q

What is a yield?

A

Measure of the return on an investment
-> Rental income expressed as a % of purchase price

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45
Q

What is a yield?

A

Measure of the return on an investment
-> Rental income expressed as a % of purchase price

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46
Q

What is a gross yield?

A

The yield not adjusted for purchasers costs

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47
Q

What is a net yield?

A

The yield adjusted for purchasers costs

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48
Q

What is a net yield?

A

The yield adjusted for purchasers costs

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49
Q

What is a reversionary yield

A

Yield achieved if passing rent adjusts to the level of estimated rental value

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50
Q

What is an equated yield?

A

Yield which takes into account growth in future income
IRR

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51
Q

What is a true yield?

A

Assumes rent is paid in advance and not arrears

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52
Q

What is a nominal yield

A

Assumes rent is paid in arrears

53
Q

What is a nominal yield

A

Assumes rent is paid in arrears

54
Q

What is the All Risks Yield

A

Remunerative rate of interest used in the valuation of fully let property, let at market rent, reflecting all prospects and risks attached to the property

55
Q

What factors make up the All Risks Yield?

A
  1. The construction (age, design, specification)
  2. The quality of the tenants covenant
  3. The amount of rent
  4. the unexpired lease term
  5. The other lease terms
  6. Anticipated rental growth (location)
56
Q

What statutory due diligence did you undertake prior to valuing and why?

A
  • asbestos register
  • Contamination
  • Equality Act compliance
  • EPC rating
  • Fire safetyand H&S comliance
  • Environmental matters // flooding
  • PLanning history and compliance

To ensure there are no material matters that may impact the valuation

57
Q

Talk me through the timeline from receiving your valuation instruction

A
  1. Check competance
  2. Conflict of interest check
  3. Issue ToE
  4. Gather information
  5. Due diligence check
  6. Inspect and measure
  7. Research market and assemble comparables
  8. Undertake valuation
  9. Draft report
  10. Have report reviewed by another survyor
  11. Finalise and sign report
58
Q

How do you know if you are competant for a valuation

A

Criteria set out in PS2 of Red Book

59
Q

What are the Red Book competance criteria?

A
  • appropriate qualifications
  • membership of professional body
  • Sufficent local, national and international (as appropriate) knowledge of asset type and market
  • Compliance with country regulations and RICS valuer registration requirements
60
Q

Talke me through how you value using the comparable method

A
  1. Search and select comparables
  2. Confirm / verify details and analyse headline rent to give net effective rent
  3. Assemble comparables in schedule
  4. Adjust comparables using heirarchy of evidence
  5. Analyse comparables to form opinion of value
  6. Report value and prepare file note
61
Q

What is the hierarchy of evidence

A

Open market lettings
Lease renewals
Rent reviews
Independent expert examination
Arbitrators awards

62
Q

When is the investment method used?

A

When there is an income stream to be valued
-> renatl income is capitalised to produce capital value

63
Q

How did you value Unit 24 Bourne Industrial

A

Used comparables to ascertain market rent and appropriate yield

As property was let at market rate -> Capitalised the market rent into perpetuity to produce market value

64
Q

What yield did you select at Unit 24 Bourne Industrial and why?

A

5.5% based on market comparables and confirmed with letting agent

65
Q

Did you make any adjustments to the yield at 24 Bourne Industrial?

A

No, no adjustment for reduced/increased risk required as let at market rate and no reversion or differing condition/location of properties

65
Q

Did you make any adjustments to the yield at 24 Bourne Industrial?

A

No, no adjustment for reduced/increased risk required as let at market rate and no reversion or differing condition/location of properties

66
Q

What was the Market value of Unit 24 Bourne?

A

£600,000 (£33,000 MR x 18.1818 YP in perp @ 5.5%)

67
Q

What would you have done differently at 24 Bourne Industrial is the property was under-rented

A

I would have used the term and reversion method

68
Q

What would you have done differently at 24 Bourne Industrial is the property was under-rented

A

I would have used the term and reversion method

69
Q

What would you have done differently at Unit 24 Bourne if the Unit was over-rented?

A

used the hardcore / layer method

70
Q

how did you gather your comparable evidence?

A

Internal database
External database (Egi, CoStar, Focus)
Confirmed with local letting agent

71
Q

How would market value at Unit 24 Bourne Industrial change after making a special assumption?

A

Special assumption of short marketing period: discount by 5% = £570,000

Special assumption that property is vacant: increase yield and PV for vacancy length

72
Q

Did you subtract any fees from your market value at 24 Bourne Industrial?

A

Yes, agents fees @1%, solicitors fees @0.5% and SDLT @3.5%

73
Q

Did you subtract any fees from your market value at 24 Bourne Industrial?

A

Yes, agents fees @1%, solicitors fees @0.5% and SDLT @3.5%

74
Q

Explain the term and reversion process

A

Term capitalised until review
-> passing rent x YP @ yield
+
Reversion to market rent valued in perpetuity at reversionary yield (higher yield) -> MR x YP @ reversionary yield

  • Current value of reversion by using PV £1 @ specified rate
75
Q

Explain the hardcore / layer method?

A

Income flow divided horizontally -> combines bottom slice and top slice to give market value

Bottom slice: passing rent capitalised into perpetuity (at lower yield due to higher risk)
Top slice: top slice rent is capitalised from reversion into perpetuity (higher yield as less secure)

76
Q

What is top slice rent?

A

passing rent less market rent

77
Q

How does risk affect yield?

A

higher risk = higher yield
low risk - lower yield

78
Q

What is years purchase?

A

Amount yielded by the annual income of the property
YP=100/yield

79
Q

What is years Purchase into perpetuity

A

Income of the property where a stream of cash flows continues indefinitely

80
Q

What is years Purchase into perpetuity

A

Income of the property where a stream of cash flows continues indefinitely

81
Q

What is present value of £1?

A

Current value of a future sum of money given a specified rate of return

82
Q

What are the current SDLT bands?

A

0% on first £150k
2% on next £100k
5% over £250k

83
Q

What is RLV?

A

Residual Land Value

84
Q

When is RLV used?

A

Valuation of Land and properties with development potential

85
Q

What is the purpose of the residual method of valuation?

A

Identify the value of a development site/ land

86
Q

What is a development appraisal?

A

Calculation to establish the value/profitability/viability/suitability of a proposed development, based on the Clients inputs

87
Q

Does RICS provide any guidance on RLVs?

A

RICS Valuation of Development property (1st Edition), 2019

88
Q

What is the basic process of undertaking a RLV?

A

Value of completed development (gross development value) less development costs and developers profit = site/land value

89
Q

What do development costs include?

A
  • Building costs
  • Planning costs
  • finance costs
  • contingency
  • Demolition
  • General professional fees
90
Q

What do planning costs include?

A
  • S.106 payment
  • CIL
  • Planning application and building regulation fees
  • Cost of planning consultant
  • Cost of environmental impact assessment
91
Q

What are building costs and where did you find them?

A

Estimate of total costs for construction

  • Building surveyor estimate
  • RICS Building Cost Information Centre, on £sq m, GIA basis
92
Q

What purchasers costs do you deduct from a valuation?

A

Agent fee
legal fee
SDLT
Cost of an EPC
- 1-2% of GDV

93
Q

What are general professional fees?

A
  • Architect fee
  • M&E consultant fee
  • Project manager fee
  • Building surveyor fee
  • QS

Usually 10-15% of building costs

94
Q

What is contingency

A

2-10% of build costs depending on risk and market

95
Q

What are the 3 elements for finance on RLV?

A

Developer borrows money for:
1. Site purchase
2. Construction costs
3. Holding costs to cover voids

96
Q

What interest rate did you assume in your RLV?

A

6% - based on risk

97
Q

What types of funding are available to developers

A

Senior Debt
Mezzanine funding
Bridging

98
Q

What is senior debt?

A

The conventional type of property development loan

As senior debt holder has the first position claim, such investment is considered relatively low risk and therefore the interest rate required by the lender is often the lowest when compared to other financing methods

99
Q

What is senior debt?

A

The conventional type of property development loan

As senior debt holder has the first position claim, such investment is considered relatively low risk and therefore the interest rate required by the lender is often the lowest when compared to other financing methods

100
Q

Where does the mezzanine funder sit in terms of charge?

A

2nd charge, behind senior debt

101
Q

Where does the mezzanine funder sit in terms of charge?

A

2nd charge, behind senior debt

102
Q

If senior debt is 6-7%, where would mezzanine finance be put?

A

8-11%

103
Q

If senior debt is 6-7%, where would mezzanine finance be put?

A

8-11%

104
Q

How did you determine developers profit?

A

15% of GDV (or 20% of total construction cost)

Less risk = lower develrs profit

105
Q

What are the limitations of the RLV method?

A
  • importance of accurate info and inputs
  • very sensitive to adjustments
106
Q

how do you present scenarios to your Client on a residual valuation?

A

Sensitivity analysis

107
Q

What is a sensitivity analysis?

A

Analysis of change in key variables such as yield, GDV, build costs, interest -> how this affects land value

108
Q

What is GDV and how do you calculate it

A

Gross Development value - essentially the value of completed development

MR x YP in perp @ initial yield

109
Q

What is NDV and how do you calculate it?

A

Net Development value -> take off disposal costs from GDV

letting fees 10% of MR
sale fees 1.5% of MR

110
Q

What is GRV and how is it calculated?

A

Gross Residual Value

Take away developers costs (building costs, interest, contingency) and developers profit from NPV

111
Q

How do you calculate Gross Acquisition price?

A

Current value of GRV
- PV of £1 in 12 months @ specified rate x GRV

112
Q

How do you calculate site value?

A

Gross acquisition price less purchasers costs

(GDV less disposal costs, developers costs, developers profit and purchasers costs)

113
Q

Talk me through the valuation of Prospect House

A

used comparative method to ascertain MR and yield -> Capitalised MR into perp @ yield to get sale price/GDV

  • less disposal costs (to give NDV)
  • less developers costs and developers profit (to give GRV)
  • PV of £1 x GRV (to give gross acquisition price)
  • less purchasers costs
  • = site value
114
Q

What is the planned site coverage at Prospect House

A

50% (understand its usually 30-40%) (30,000q ft on plot of 60,000)

115
Q

What is the market rent at Prospect House?

A

£12.55 psf -> £375,000pa

116
Q

How did you calculate rent at Prospect House?

A

market comparables -> confirmed with letting agent

117
Q

What yield did you select at Prospect House ?

A

5% -> increased slightly due to poor condition of property

118
Q

What were building fees at Prospect House?

A

General professional fees:
- architect
- QS
- M&E Consultant
- Building Survyor
- Project Manager

10% of building cost

119
Q

What were general professional fees at Prospect House?

A

General professional fees:
- architect
- QS
- M&E Consultant
- Building Survyor
- Project Manager

10% of building cost

120
Q

What were purchasrs costs at Prospect House?

A

Agents fees, legal fees, VAT on fees (1.8% total)

SDLT

121
Q

What were disposal costs at Prospect House

A

letting fees @ 10% of MR
sale fees @1.5% of MR

122
Q

What were building costs at Prospect House and how did you calculate?

A

£83psf -> building surveyor

Aware this can be found on BCIS

123
Q

What was interest at prospect House and how did you determine this?

A

6% -> bank of England rate of 0.5% adjusted for risk

124
Q

What was interest at prospect House and how did you determine this?

A

6% -> bank of England rate of 0.5% adjusted for risk

125
Q

What contingency did you allow for at Prospect House and why?

A

5% of building costs based on risk and market conditions

126
Q

What developers profit did you allow for at Prospect House and how did you calculate this?

A

15% of GDV (based on risk)

127
Q

What was the GDV at prospect house and how did you calculate it?

A

£7,500,000 -> MR x YP in perp @ 5%

128
Q

What was the site value of Prospect House and how did you calculate it?

A

£1,600,000
GDV less developers costs and developers profit
- PV of that sum
- Less purchasers fees

129
Q

What would you include in a valuation report?

A

Client name
Valuation purpose
Valuation subject
Property info
Basis of value
Date of valuation
Discolsure of material involvement
Status of valuer
Currency
Assumptions, special assumptions, departures
Extent of investigations
Nature / source of info
Restrictions on publications
Exclusion of liability to parties other than Client
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PM - Summary of Experience - APC (16 decks)

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