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APC REVISION > Valuation - Summary Of Experience > Flashcards

Valuation - Summary Of Experience Flashcards

1
Q

What are the different types of valuers?

A

An Internal Valuer - Employed by the company to value the assets for internal purposes only.

An External Valuer - Has no material link with the company or assets.

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2
Q

What three things should you consider as first steps before undertaking a valuation?

A
  • Your Professional Competence to undertake the valuation.
  • Your independence / no conflicts of interest.
  • Terms of Engagement
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3
Q

What is the purpose of the Red Book?

A

The Red Book creates a set of valuation standards created to achieve the highest standards of integrity in adopting valuation practice.

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4
Q

What should be considered in terms of Statutory Due Diligence before undertaking a Valuation?

A
  • Asbestos
  • Tax (Rates / Council Tax)
  • Contamination
  • Equality Act Compliance
  • Environmental Matters (High Voltage Power Lines)
  • EPC Rating
  • Flooding
  • Fire Safety
  • H & S Compliance.
  • Legal Title and Tenure
  • Public Rights of Way.
  • Planning History
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5
Q

Describe the timeline to a typical valuation instruction (Roughly)?

A

1) Receive Instructions from Client / Check Competence.

2) Due Diligence / Gather Information

3) Undertake the Valuation / Draft Report / Review and Finalise & Report

4) Issue Invoice / Ensure Report is well filed.

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6
Q

What are the FIVE methods of valuation?

A

1) Comparative Method

2) Investment Method

3) Profits Method

4) Residual Method

5) Contractors Method (Depreciated Replacement Cost)

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7
Q

What are the 3 Valuation Approaches according to International Valuation Standards (IVS) 105.

A

1) Income Approach (Converting Current and Future Cash Flows into Capital Value)

2) The Market Approach (Using Comparable Evidence in the Market)

3) The Cost Approach (Considering value with reference to the Cost of Replacement or Purchase)

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8
Q

Describe the Methodology Behind Using the Comparative Method of Valuation and What RICS Docs are there?

A

The RICS produce a Professional Standard on “Comparable Evidence in Real Estate Valuation”, 1st Edition (2019)

There is a SIX Step Methodology:

1) Search & Select Comps
2) Verify Information & Analyse Headline Rent
3) Produce Schedule
4) Adjust Comparables according to hierarchy of evidence.
5) Analyse Comps to form opinion.
6) Report Value and prepare file note.

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9
Q

Why did you adopt funding costs at 8% for a period of 9 months (Hawkspur Green Example)

A

This was because 8% was regarded the reasonable rate for cost of money at the time the valuation was undertaken.

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10
Q

How did you find comparable evidence and check its accuracy (Upper Richmond Road Example)?

A

I used third party data sites to compile a list of local recent transactions, once I compiled my list and formed an opinion, I confirmed the data by calling up the agents involved.

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11
Q

What were the figures involved in your Upper Richmond Road Example?

A
  • The Basement & Ground Floor Units had a total rent of £35,050.00 per annum.
  • The Upper Floors were sold on long leases until the year 2126. The rental income p.a. Was £50.00 Doubling every 25 years.
  • Yield 7%
  • Wanted to seek offers in excess of £500,000
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12
Q

Tell what the RICS document on Comparable Evidence outlines?

A

The RICS Professional Standard on Comparable Evidence 2019 outlines the principles in the use of comparable evidence and provides advice in dealing with situations where there is limited availability of evidence.

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13
Q

What is the Hierarchy of Evidence when considering leasing deals?

A

1) Direct Comparables Of Contemporary
- Completed transactions of similar properties.
- Can include asking prices

2) General Market Data that can provide guidance
- Information from published sources of commercial databases
- Historic Evidence

3) Other Sources
- Transactional evidence from other real estate types and locations.

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14
Q

How would you find relevant comparables?

A

Inspect local area to find recent market activity by seeking agent’s boards.

Speak to local agents

Third party databases.

Auction Sites. (GROSS PROFIT ONLY) BE CAREFUL

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15
Q

Why should you be careful of using auctions for comparable evidence?

A

The price shown is the gross price, there may be a special purchaser or it may be an insolvency sale.

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16
Q

When is the investment method of valuation used?

A

The method is most commonly used when there is an income stream to value. Income is capitalised at a yield to provide a capital value. Growth is implicit.

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17
Q

Explain the Conventional Investment Method?

A
  • Rent Received, or Market Rent x by the Years Purchase = Market Value.
  • Importance of comparables for rent & yield.
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18
Q

Explain 2 of the 5 methods of valuation and when you might use them.

A

The Comparative Method - Step by Step Methodology used when there is comparable transactions available.

The Residual Method - GDV minus all costs including Build costs, prof fees, letting fees, funding costs = Total Profit Cost / Gross Profit. Should be used when valuing land for development purposes.

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19
Q

What is the formula for calculating PV?

A

PV = FV/((1+R)^n)

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20
Q

What is the term and reversion valuation and when is it used?

A

Term and Reversion methodology is used for reversionary assets (ERV>Passing). The term is valued until next lease event at initial yield, the reversion capitalised into perp at the reversionary yield.

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21
Q

What method of valuation do you use when a property is over rented?

A

You use the Layer / Hardcore Method.

The income stream will be divided horizontally.

Bottom Slice = Market Rent and Top Slice = Rent Passing less Market Rent until next lease event.

A higher yield is applied to the top slice to reflect the uncertainty and risk in achieving the market rent.

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22
Q

How does a Discounted Cash Flow (DCF) work?

A

A DCF is a growth explicit method of valuation that involves projecting estimated cash flows over an assume holding period with an exit value at the end of this period.

The cash flow is then discounted back to the present day to reflect the perceived level of risk.

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23
Q

When would you use a DCF for a valuation?

A

Where the projected cash flows are explicitly estimated over a finite period.

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24
Q

What is the methodology to find Market Value via DCF?

A

1) Estimate the cash flow (income less expenditure)

2) Estimate the exit value.

3) Select the discount rate

4) Discount cash flow at discount rate

5) Value is the sum of the completed discounted cash flow to provide the NPV.

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25
Q

Define Net Present Value (NPV)?

A

NPV = The Sum of all the discounted cash flows of the project.

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26
Q

Define Internal Rate of Return (IRR)

A

The rate at which all future cash flows must be discounted to produce an NPV of 0.

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27
Q

How is the IRR calculated?

A

1) Input current market value as a negative cash flow

2) Input projected rents over holding period as a positive value.

3) Input projected exit value at end of term assumed as positive value

4) IRR is the rate chose which provides a NPV of 0.

5) If NPV is more than zero, then target rate of return is met.

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28
Q

What is a yield?

A

A yield is a measure of investment return, expressed as a percentage of capital invested.

Formula is:

Income / (Price x 100)

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29
Q

What is a Year’s Purchase?

A

A Year Purchase shows us how many years would be required for the income to repay the purchase price. It is calculated by dividing 100 by the yield.

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30
Q

Define Equivalent Yield?

A

The weighted average yield between the initial and reversionary yields.

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31
Q

Define All Risks Yield?

A

The remunerative rate of interest used in the valuation of fully let property let at market rent reflecting all the prospects and risks attached to the investment.

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32
Q

Define Nominal Yield

A

Initial yield assuming rent is paid in arrears

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33
Q

Define True Yield

A

Assumes rent is paid in advance, most traditional valuation assumes that rent is paid in arrears.

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34
Q

What is the difference between a Gross & Net Yield?

A

Gross Yield is not adjusted for purchaser’s cost e.g. auction purchase.

A Net Yield is adjusted for purchaser’s costs.

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35
Q

What is a running yield?

A

The yield at a moment in time.

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36
Q

When is the Profits Method of Valuation used and how does it work?

A

Used to value property on the basis of a business / trading potential.

Used commonly for the valuation of pubs, petrol stations, hotels, healthcare properties.

Value is determined by the profitability of the operation within the asset.

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37
Q

How many years of audited accounts would you ideally like to see for a Profits Method Valuation?

A

3 years.

38
Q

What is the methodology of the Profit method of valuation?

A

1) Annual Turnover (income received)
- Subtract costs and purchases = Gross Profit
- Less reasonable working expenses = Unadjusted Net Profit
- Less operator remuneration

2) Capitalised at appropriate yield to achieve Market Value.

3) Cross check with comparables.

39
Q

What is the difference between a development appraisal and residual valuation?

A

Development Appraisal assesses the viability of a project for a specific developer.

A Residual Valuation looks to the market for assumptions to appraise the value of a piece of development land.

40
Q

Define Development Land?

A

Development Property is an interest where redevelopment is required to achieve the highest / best use or where improvements are being contemplated.

Value the land + Costs expended at the Val date

Or

Development Value - Remaining Costs.

41
Q

When should you use the depreciated replacement cost method of valuation? How is it calculated and what is the guidance note on it?

A

The DRC method should be used when there is limited availability of market evidence.

It is calculated;

1) Value of land, with existing planning permission in place.
2) Cost of replacing the building

RICS Guidance Note on Depreciated Replacement Cost Method of Valuation for Financial Report, 2018.

42
Q

What does the Red Book say about DRC Method of Valuation?

A

The Red Book states that the method should not be used for loan security valuations but may be used for valuations to form part of a financial statement.

43
Q

What is the Global Standard produced by the RICS and when was it effective from?

A

RICS Valuation Global Standards 2021 (‘The Red Book Global’)

Effective from 31 January 2022

44
Q

What are the principle changes of the red book?

A
  • Terms of reference must be clear over whether a valuation is red book compliant or not.
  • Sustainability and ESG brought to the forefront
    - Valuers should have regard to relevance and significance of ESG and Sustainability factors which form an integral part of the valuation approach.
45
Q

What is the Structure of the Red Book? (Parts 1-6)

A

Part 1 - Introduction
Part 2 - Glossary
Part 3 - Professional Standards (PS)
Part 4 - Valuation Technical and Performance Standards (VPS)
Part 5 - Valuation Applications (VPGA)
Part 6 - The International Valuation Standards, 2017 (IVS)

46
Q

What are the TWO Red Book “Professional Standards” (PS)?

A

1) PS1 - Compliance with standards where a written valuation is required.

2) PS2 - Ethics, Competency, Objectivity, Disclosures.

47
Q

What is the application of PS1?

A

PS1 details when a valuation needs to be red book compliant.

48
Q

What are the FIVE situation in which a valuation does not have to be Red Book compliant?

A

1) When providing an Agency or Brokerage Service.
2) When Acting as an Expert Witness
3) Performing a Statutory Function
4) Providing Valuation to a Client for Internal Purposes.
5) When expressly provided in preparation for or during the course of negotiations or litigation.

49
Q

What does the PS2 of the Red Book make Mandatory?
(PS2 = Ethics, Competency, Objectivity and Disclosures)

A

1) Compliance with RICS Global Rules of Conduct

2) Act objectively and independently. Must act with professional scepticism.

3) Reiterates rules surrounding conflicts of interest.

4) Members must understand their client’s goals and ensure they are competent at the point of agreeing Terms of Engagement.

50
Q

What are the 5 Valuation and Technical Performance Standards (VPS)

A

VPS1 - Terms of Engagement
VPS2 - Inspections, Investigations and Records
VPS3 - Valuation Reports
VPS4 - Bases of Value, Assumptions and Special Assumptions.
VPS5 - Valuation Approaches and Methods.

51
Q

According to VPS3 What are the Minimum Requirements to be Confirmed in Writing Prior to a Red Book Valuation Commencing?

A

(a) Identification and status of the valuer
(b) Identification of the client(s)
(c) Identification of any other intended users
(d) Identification of the asset(s) or liability(ies) being valued
(e) Valuation (financial) currency
(f) Purpose of the valuation
(g) Basis(es) of value adopted
(h) Valuation date
(i) Nature and extent of the valuer’s work – including investigations – and any limitations thereon
(j) Nature and source(s) of information upon which the valuer will rely
(k) All assumptions and special assumptions to be made
(l) Format of the report
(m) Restrictions on use, distribution and publication of the report
(n) Confirmation that the valuation will be undertaken in accordance with the IVS
(o) The basis on which the fee will be calculated
(p) Where the firm is registered for regulation by RICS, reference to the firm’s complaints handling procedure, with a copy available on request
(q) A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations
(r) A statement setting out any limitations on liability that have been agreed.

52
Q

Define an Assumption and a Special 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.

A special assumption is a supposition that is taken to be true and accepted as fact even though it is not true. Examples include special assumption of planning permission / vacant position.

53
Q

According to VPS2 of the Red Book, what is the main purpose in Inspection and Investigation?

A

‘“The valuer must take reasonable steps to verify the information relied on in the preparation of the valuation and, if not already agreed, clarify with the client any necessary assumptions.”

54
Q

Are Desktop Valuations Red Book Compliant?

A

Yes, desktop valuations can be considered Red Book compliant. However VPS2 sets out the following steps which should be undertaken by a valuer:

1) Agree the nature of the restriction in writing in the Terms of Engagement.

2) Confirm the possible valuation implications in writing prior to undertaking the valuation.

3) The surveyor should consider whether it is reasonable for the purposes of the valuation.

4) The restriction must be referred to in the Valuation Report.

55
Q

Does a Valuer have to sign a Valuation Report?

A

In accordance with VPS3 of the Red Book, a valuer must sign a valuation report and make clear that they are objectively able to value the property. Must be signed off by an individual.

56
Q

What are the SIX bases of valued as defined in the IVS 2020?

A

1) Market Value
2) Market Rent
3) Fair Value
4) Investment Value
5) Equitable Value
6) Liquidation Value

57
Q

What must a Valuer ensure when choosing a ‘basis’ of valuation?

A

In accordance with VPS4 of the Red Book, a valuer must ensure that the basis adopted is appropriate for the purpose of the valuation.

58
Q

What is the Red Book definition of Market Value?

A

The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and wiling seller.

59
Q

What is the Red Book Definition of Market Rent (as in IVS04)?

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

60
Q

What is the Red Book Definition of Investment Value (as in VPS 4)

A

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

61
Q

What is the Red Book Definition of Fair Value (as in IFRS 13)?

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

62
Q

What margin of error is allowed?

A

Singer & Friedlander v J.D.Wood (1977) demonstrated that it will be narrower for a relatively straightforward valuation case and wider for more complex case.

Dunfermline Building Society v CBRE (2017) assumed an acceptable error margin of 15%.

63
Q

Define Hope Value?

A

The value arising from any expectation that future circumstances affecting the property may change e.g. planning permission achieved or marriage value from merging two sites.

64
Q

What is a special purchaser?

A

A purchased “for whom a particular asset has special value due to advantages arising from its ownership that would not be available to other buyers in a market”

65
Q

What is a premium?

A

A capital payment made by one party to another. For example paid by an incoming tenant to secure a prime retail shop, paid by a landlord to a tenant for surrender of a leasehold.

66
Q

What must you consider when valuing a leasehold property?

A

You would have consideration to the following factors:

  • To capitalise the net rent (after ground rent deductions).
  • Make appropriate adjustments to the yield for any increased risk associated with leasehold.
  • You can use a dual rate table to value as a depreciating asset, however in reality a DCF would more commonly be used.
67
Q

What is a Ransom Strip and How Might the Valuation of a Ransom Strip be Approached?

A

A ransom strip is a piece of land that enables access to a development site . Typical valuation could be 15% to 50% of the development value unlocked (i.e. the uplift).

68
Q

How do you calculate SDLT for Commercial Property?

A

There is a banded system with the following rates:

£0 - £150,000		--------- 0%
£150,001 - £250,000 	--------- 2%
Over £250,001		--------- 5%
69
Q

What is Unique About the Valuation Technique Used for a High Street Retail Unit?

A

You use the method of zoning and halving back and record the rent in terms of Zone A, when it is appropriate to do this depends on the market (i.e. are your comparables Zone A?)

70
Q

How do you zone?

A

Rationale is that the rental value of the property reduces away from the street. Within 6.1m zones (although sometimes 9.14 for super prime locations).

Remembers HUT
(H)alving back principle
(U)nit of comparison
(T)echnique not a method

71
Q

How do You Calculate a Net Effective Rent from a Headline Rent?

A

You make deductions for rent free (either straight-line basis, or discount cash flow).

72
Q

How do You Calculate a Net Effective Rent from a Headline Rent?

A

You make deductions for rent free (either straight-line basis, or discount cash flow).

73
Q

What is a net effective Rent?

A

This is the devaluation of a headline rent taking into account a rent-free period.

74
Q

What are the three approaches to calculate a net effective rent?

A

Straight line method, straight line assuming time value of cash flow using a yield and use of DCF.

75
Q

What are the 3 Aims of the RICS Valuer Registration Scheme?

A

1) Improve the quality of Valuations and professional standards.
2) Meet the RICS’s requirements to self-regulate.
3) To protect and raise the status of the valuation profession.

76
Q

How do you consider your fee in valuation?

A

Consider whether it is full or a desktop (restricted valuation). Consider timescales.

77
Q

What are the main factors contributing to a property’s value?

A

The Market Value of a Property is determined by factors such as location, occupancy, WAULT, quality of tenant, quality of building, sustainability and connectivity.

78
Q

What are the different Methods of Valuation you mention?

A

There are 5 common methods of valuation:

1) The investment method
2) Comparable method
3) Profits method
4) Residual method
5) Depreciated replacement cost method.

(These are often confused with the three approaches from the (IVS 2017) to valuation which are the income approach, comparison approach, and cost approach)

79
Q

What do you have to include in your Terms of Engagement in accordance with VPS1 of the RED Book?

A

There are 18 things that you have to include according to VPS1 of the RICS Valuation Global Standards (2017)

These include items such as
- The Fee involved
- The timing for the instruction
- The level of professional indemnity cover to be offered.
- The currency in which the property is to be values.
- Details of the company’s complaints handling procedure, bases of value, valuation method….

80
Q

When you collect evidence from agents, what do you do with it?

A

I consider it, I consider how it compares with information obtained from other sources and if I am satisfied that it is relevant and accurate to my knowledge I include it. I make a paper record of it normally, which I then scan in and retain an accurate a systematically formatted file of evidence.

81
Q

How did you account for void periods?

A

I accounted for the associated costs including Service Charge, empty rates and insurance payable by the Landlord. I then deferred future income for the period with present value taking into account the void.

82
Q

What are the Bases of Value (VPS 4)

A

Market Value

Market Rent

Fair Value (IFRS 13)

Investment Value

83
Q

Define Market Value?

A

The estimated amount for which asset or liability should exchange :

  • On a valuation date
  • Between a willing buyer or seller
  • IN AN ARMS LENGTH TRANSACTION
  • After proper marketing.
  • Where both parties have acted knowledgeably.
84
Q

Define Market Rent?

A

The estimated amount for which an interest in real property should be leased:

  • On the valuation date
  • Between a willing Lessee and Lessor
  • On appropriate lease terms.
  • In an arm lengths transaction.
  • After proper marketing
85
Q

Please explain your understanding of the rotation rules for variation contained within the RICS Red Book UK Supplement?

A

The RICS released an updated UK supplement of the Red Book in January 2022 to update its recommendations around mandatory rotation cycles for regulated valuations.

The new rules mean that firms undertaking valuations for regulation purposes will not be able to repeat this service for more than ten consecutive years.

86
Q

Please explain your understanding of the RICS Discounted Cash Flow Valuations Guidance Note November 2023?

A

This guidance note has looked to provide further clarity around the difference between Market Value and Investment Value definitions set out under RICS VPS 4.

87
Q

What is the residual method and how is it applied?

A

The main aim of the residual method of valuation is to establish how much a purchaser should pay for a development site.

The gross development value is established first of all and there after all the costs associated with undertaking the development are then deducted.

This leaves a surplus amount remaining which is also known as the residual value.

88
Q

When is the Profit Method used and how is this undertaken?

A

The profits method is derived from trade related properties where the value is derived from the business and its trading potential.

Examples of when the profits method would be used would include hotels, schools, cinema’s, pubs.

The common characteristics of these properties is where the property has been designed for a specific use and the value is liked to what an owner can generate from the property.

The value therefore reflects the trading potential of the property and it includes the property interest.

89
Q

What is the depreciated replacement cost method of valuation and how does it work?

A

The DRC method provides an indication of value based on the buyer paying no more or no less than the cost to obtain the asset.

It involves calculating the replacement cost of the asset with its modern equivalent including deductions for physical deterioration.

This method is known as the method of last resort and used when it is impractical to use all other valuation methods.

The cost approach is used to value unusual properties where there is no active market such as mosques or refineries.

90
Q

What is the comparable method of valuation and how does it work?

A

The comparable method primarily uses scales of data of properties that have recently been sold focussing on assets that have a similar size, location, condition, features and specifications.

The comparable method is underpinned by comparable evidence which is identified, analysed and applied to the real estate that is to be valued.

APC REVISION (22 decks)

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