Valuation - Summary Of Experience Flashcards
What are the different types of valuers?
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.
What three things should you consider as first steps before undertaking a valuation?
- Your Professional Competence to undertake the valuation.
- Your independence / no conflicts of interest.
- Terms of Engagement
What is the purpose of the Red Book?
The Red Book creates a set of valuation standards created to achieve the highest standards of integrity in adopting valuation practice.
What should be considered in terms of Statutory Due Diligence before undertaking a Valuation?
- 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
Describe the timeline to a typical valuation instruction (Roughly)?
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.
What are the FIVE methods of valuation?
1) Comparative Method
2) Investment Method
3) Profits Method
4) Residual Method
5) Contractors Method (Depreciated Replacement Cost)
What are the 3 Valuation Approaches according to International Valuation Standards (IVS) 105.
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)
Describe the Methodology Behind Using the Comparative Method of Valuation and What RICS Docs are there?
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.
Why did you adopt funding costs at 8% for a period of 9 months (Hawkspur Green Example)
This was because 8% was regarded the reasonable rate for cost of money at the time the valuation was undertaken.
How did you find comparable evidence and check its accuracy (Upper Richmond Road Example)?
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.
What were the figures involved in your Upper Richmond Road Example?
- 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
Tell what the RICS document on Comparable Evidence outlines?
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.
What is the Hierarchy of Evidence when considering leasing deals?
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.
How would you find relevant comparables?
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
Why should you be careful of using auctions for comparable evidence?
The price shown is the gross price, there may be a special purchaser or it may be an insolvency sale.
When is the investment method of valuation used?
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.
Explain the Conventional Investment Method?
- Rent Received, or Market Rent x by the Years Purchase = Market Value.
- Importance of comparables for rent & yield.
Explain 2 of the 5 methods of valuation and when you might use them.
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.
What is the formula for calculating PV?
PV = FV/((1+R)^n)
What is the term and reversion valuation and when is it used?
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.
What method of valuation do you use when a property is over rented?
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.
How does a Discounted Cash Flow (DCF) work?
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.
When would you use a DCF for a valuation?
Where the projected cash flows are explicitly estimated over a finite period.
What is the methodology to find Market Value via DCF?
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.
Define Net Present Value (NPV)?
NPV = The Sum of all the discounted cash flows of the project.
Define Internal Rate of Return (IRR)
The rate at which all future cash flows must be discounted to produce an NPV of 0.
How is the IRR calculated?
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.
What is a yield?
A yield is a measure of investment return, expressed as a percentage of capital invested.
Formula is:
Income / (Price x 100)
What is a Year’s Purchase?
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.
Define Equivalent Yield?
The weighted average yield between the initial and reversionary yields.
Define All Risks Yield?
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.
Define Nominal Yield
Initial yield assuming rent is paid in arrears
Define True Yield
Assumes rent is paid in advance, most traditional valuation assumes that rent is paid in arrears.
What is the difference between a Gross & Net Yield?
Gross Yield is not adjusted for purchaser’s cost e.g. auction purchase.
A Net Yield is adjusted for purchaser’s costs.
What is a running yield?
The yield at a moment in time.
When is the Profits Method of Valuation used and how does it work?
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.
How many years of audited accounts would you ideally like to see for a Profits Method Valuation?
3 years.
What is the methodology of the Profit method of valuation?
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.
What is the difference between a development appraisal and residual valuation?
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.
Define Development Land?
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.
When should you use the depreciated replacement cost method of valuation? How is it calculated and what is the guidance note on it?
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.
What does the Red Book say about DRC Method of Valuation?
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.
What is the Global Standard produced by the RICS and when was it effective from?
RICS Valuation Global Standards 2021 (‘The Red Book Global’)
Effective from 31 January 2022
What are the principle changes of the red book?
- 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.
What are the TWO Red Book “Professional Standards” (PS)?
1) PS1 - Compliance with standards where a written valuation is required.
2) PS2 - Ethics, Competency, Objectivity, Disclosures.
What is the application of PS1?
PS1 details when a valuation needs to be red book compliant.
What are the FIVE situation in which a valuation does not have to be Red Book compliant?
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.
What does the PS2 of the Red Book make Mandatory?
(PS2 = Ethics, Competency, Objectivity and Disclosures)
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.
What are the 5 Valuation and Technical Performance Standards (VPS)
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.
According to VPS3 What are the Minimum Requirements to be Confirmed in Writing Prior to a Red Book Valuation Commencing?
(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.
Define an Assumption and a Special Assumption?
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.
According to VPS2 of the Red Book, what is the main purpose in Inspection and Investigation?
‘“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.”
Are Desktop Valuations Red Book Compliant?
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.
Does a Valuer have to sign a Valuation Report?
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.
What are the SIX bases of valued as defined in the IVS 2020?
1) Market Value
2) Market Rent
3) Fair Value
4) Investment Value
5) Equitable Value
6) Liquidation Value
What must a Valuer ensure when choosing a ‘basis’ of valuation?
In accordance with VPS4 of the Red Book, a valuer must ensure that the basis adopted is appropriate for the purpose of the valuation.
What is the Red Book definition of Market Value?
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and wiling seller.
What is the Red Book Definition of Market Rent (as in IVS04)?
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
What is the Red Book Definition of Investment Value (as in VPS 4)
The value of an asset to a particular owner or prospective owner for individual investment or operational objectives.
What is the Red Book Definition of Fair Value (as in IFRS 13)?
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
What margin of error is allowed?
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%.
Define Hope Value?
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.
What is a special purchaser?
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”
What is a premium?
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.
What must you consider when valuing a leasehold property?
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.
What is a Ransom Strip and How Might the Valuation of a Ransom Strip be Approached?
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).
How do you calculate SDLT for Commercial Property?
There is a banded system with the following rates:
£0 - £150,000 --------- 0% £150,001 - £250,000 --------- 2% Over £250,001 --------- 5%
What is Unique About the Valuation Technique Used for a High Street Retail Unit?
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?)
How do you zone?
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
How do You Calculate a Net Effective Rent from a Headline Rent?
You make deductions for rent free (either straight-line basis, or discount cash flow).
How do You Calculate a Net Effective Rent from a Headline Rent?
You make deductions for rent free (either straight-line basis, or discount cash flow).
What is a net effective Rent?
This is the devaluation of a headline rent taking into account a rent-free period.
What are the three approaches to calculate a net effective rent?
Straight line method, straight line assuming time value of cash flow using a yield and use of DCF.
What are the 3 Aims of the RICS Valuer Registration Scheme?
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.
How do you consider your fee in valuation?
Consider whether it is full or a desktop (restricted valuation). Consider timescales.
What are the main factors contributing to a property’s value?
The Market Value of a Property is determined by factors such as location, occupancy, WAULT, quality of tenant, quality of building, sustainability and connectivity.
What are the different Methods of Valuation you mention?
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)
What do you have to include in your Terms of Engagement in accordance with VPS1 of the RED Book?
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….
When you collect evidence from agents, what do you do with it?
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.
How did you account for void periods?
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.
What are the Bases of Value (VPS 4)
Market Value
Market Rent
Fair Value (IFRS 13)
Investment Value
Define Market Value?
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.
Define Market Rent?
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
Please explain your understanding of the rotation rules for variation contained within the RICS Red Book UK Supplement?
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.
Please explain your understanding of the RICS Discounted Cash Flow Valuations Guidance Note November 2023?
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.
What is the residual method and how is it applied?
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.
When is the Profit Method used and how is this undertaken?
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.
What is the depreciated replacement cost method of valuation and how does it work?
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.
What is the comparable method of valuation and how does it work?
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.
Is there UK specific guidance to read alongside the Global Red Book?
Yes - the UK National Supplement
When was the UK Red Book last updated?
With effect from 1 May 2024
When was the Red Book Global last updated?
31 January 2025
What is the full title of the Red Book?
RICS Valuation - Global Standards
What were some of the key changes to the latest Red Book update?
IVS changes incorporated
Titles and content of VPS 1-5 amended and swapped around.
VPS 6 introduced
Other minor changes to various sections
More detailed commentary on matters relating to ESG and technology, including valuation models
Improving and/or clarifying some of the existing Red Book Global text in light of feedback, experience and evolving needs.
What does IVS stand for?
International Valuation Standards
Which sections of the global Red Book are mandatory?
PS 1-2
VPS 1-6 (some parts, where the word ‘must’ is used.
What does PS1 relate to?
Compliance with standards where a written valuation is provided.
What is some advice the Red Book applies to?
Written valuation advice
AVM-derived output
Oral valuation advice (to the fullest extent possible)
What are some expected valuations under PS1?
Agency or brokerage advice (not purchase reports)
Acting as an expert witness
Statutory functions
Internal purposes
In the course of negotiations / litigation
Which sections of the Red Book do excepted valuations not have to comply with?
VPS 1-6
Can an external valuer provide an internal purpose valuation?
Yes
What does PS2 relate to?
Ethics, competency, objectivity and disclosures.
What do you need to satisfy in order to be competent to provide a valuation?
Appropriate academic / professional qualifications (demonstrating technical competence)
Membership of a professional body, demonstrating a commitment to ethical standards
Sufficient current local, national and internal (if appropriate) knowledge of the asset type and its particular market.
Compliance with any country or state legal regulations governing the right to practice valuation.
Where applicable, compliance with the RICS Valuer Registration (VR) requirements.
If you decide to provide preliminary advice or a draft valuation report, what should you state in writing?
That your opinion is provisional and subject to completion of the final report
That your advice is provided for the client’s internal purposes only.
That any draft is on no account to be published or disclosed
What type of valuations may be relied upon by a third party?
Published financial statement
Stock exchange or similar body
Publication, prospectus or circular
Investment schemes
Takeovers or mergers
If you have previously valued an asset for any purpose, what additional disclosures must you make?
Relationship with the client and previous involvement
Rotation policy
Time as signatory
Proportion of fees
If your firm is too small to have a rotation policy or valuation panel, what else could you do to ensure objectivity?
7 yearly (or less) review by another member.
Could a conflict of interest exist if you or your firm have been involved with an asset (i.e. purchase or valuation) during the last 12 months?
Yes
In relation to the proportion of fees additional disclosure, what would a significant amount be considered as?
5-25%
What does VPS 1 relate to?
Terms of engagement (scope of work)
Do your terms of engagement need to be in writing?
Yes
What does VPS 2 relate to?
Bases of value, assumptions and special assumptions.
What is an assumption?
Something that is reasonable to accept as fact without specific investigation or verification.
What is Market Value?
The estimated amount for which an asset or liability should be exchanged on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
Should you reflect special value (from a special purchaser, not a general market expectation) or marriage value in Market Value?
No
What is Market Rent?
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 arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
What is investment value (worth)?
The value of an asset to a particular owner or prospective owner for individual investment or operational objectives.
What is Fair Value?
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.
Where does the Fair Value definition come from?
IFRS 13
Is there generally any difference between Market Value and Fair Value?
NO
When would Fair Value generally be used?
Financial reporting valuations
Should you refer to forced sale value?
No
What is a special assumption?
Something that assumes facts that differ from the actually facts existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date.
What is the market approach?
Based on comparing the subject asset with identical or 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 asset (or liability) within an appropriate time horizon.
What does VPS 3 relate to?
Valuation approaches and methods.
What is the income approach?
Based of capitalisation or conversation of present and predicted income (cash flows), which may take a number of different forms, to produce a single current capital value.
What is the cost approach?
Based on the economic principle that a purchaser will pay no more for an asset than the cost to obtain one of equal utility whether by purchase or construction.
Can the valuation date be different to the report date?
Yes
What does VPS 4 relate to?
Inspections, investigations and records.
Can you provide a restricted valuation service?
Yes - if it is reasonable with regard to the purpose and subject to appropriate conditions.
What are the bases of value recognised under the Red Book (not wider IVS)?
Market Value
Market Rent
Investment Value (worth)
Fair Value
How can you deal with limitations or restrictions on inspection, inquiry or analysis?
Record them in your terms of engagement and report.
Can you revalue a property without inspecting?
Yes - but only if there are no material changes to the physical attributes or location.
What should you do if market conditions change between the valuation date and date of the report?
Comment that value changes over time.
Draw attention to this.
What is an internal valuer?
A valuer who is in the employ of either the enterprise that owns the assets, or the accounting firm responsible for preparing the enterprise’s financial records and/or reports.
What does VPS 5 relate to ?
Valuation models
What does VPS 6 relate to?
Valuation reports
How do RICS regulate valuation work?
Valuer Registration Scheme (VRS)
Do you have to pay to become a Registered Valuer?
Yes
What is the structure of the RICS Red Book Global
Tell me what the 5 methods of valuation are?
Comparative
Investment
Profits
Residual
Contractors method (depreciated replacement cost)
How do valuation methods and approaches differ?
Comparison Method - involves identifying comparable properties and making adjustments.
Investment Method - involves calculating the property’s value by dividing its net annual income by a capitalisation rate.
Profits Method - Used for specialist properties such as pubs or hotels and focuses on the properties ability to generate profit.
Residual Method - Used to value land with development potential by subtracting the costs of development from the projected sale price.
Contractors Method - Used when there is a lack of market evidence or no market demand . I.e. valuing schools or hospitals.
How do you decide on which valuation method to apply?
Considering the specific task / instruction.
Nature of the property
Available Market Evidence.
When and why would you use one of the valuation methods?
I would use the profits method when valuing a hotel or pub for example and I would take into account the ability of the property to make profit.
What is a years purchase multiplier?
The YP is a factor used to convert an annual income stream such as rent into capital value, reflecting the markets perception of the incomes worth.
Give me an example of a good covenant and how this might impact a valuation?
An example of a good covenant could be a strong financial standing, long term lease and a good reputation.
This would positively impact a valuation as it reduces risk of rent arrears and as such increases the property’s perceived value.
How did the decision in Hart v Large affect PII?
The Hart v Large decision impacted PI insurance for surveyors, highlighting the importance of clear advice, scope of inspection and recommending further investigations when necessary which potentially leads to increased claims and premiums.
Consequences of Negligence ^ PI Claims
What level of PII cover does your firm have?
Our firm have £1 million worth of PI cover.
How would you distinguish limitation on liability in your valuations?
Clear Terms of Engagement
Clearly define the scope of the valuation
Special Assumptions
Outline limitations clearly in Terms of Engagement and the Valuation Report itself.
Where in your valuation report do you state any limitations?
Limitations of Liability should be agreed within the Terms of Engagement but included before the appendices in the valuation report.
What relevance does Hart v Large have on your valuation practice?
When inspecting properties for valuation purposes, I am even more aware of making the client aware of my limitations and scope of evidence clearly in writing and include these both in my Terms of Engagement and Valuation Report.
I must recommend further specialist advice if I feel an area of the valuation is outside my scope of experience.
What is the SAAMCO Cap?
Stems from the South Australia Asset Management v York Montague Ltd 1997 judgement.
Limits a professionals liability in negligence cases to the consequences of providing incorrect information rather broader losses.
What aspect of Hart v Large allowed the judge to award damages without applying the SAAMCO cap?
Because Mr Large’s negligence went beyond a mere failure to identify defects.
Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?
A valuer is generally not liable for losses due to a subsequent downturn in the property market but only for the amount of the overvaluation (the difference between the negligent valuation and the true value at the valuation date)
Under the SAAMCO cap, is a valuer’s liability usually limited to the overvaluation on the valuation date?
Yes, a valuers liability is usually limited to the amount of the overvaluation on the valuation date.
E.g. if a valuer negligently valued a property at a £1 million when its true value was £900,000. The lenders recoverable damages would be capped at £100,000.
What would you do if you received a notice of a PII claim from a client or their solicitor?
I would immediately notify my PII insurer and seek guidance from the insurance broker or the RICS regulation hotline.
What is run off cover?
Run Off Cover refers to PII that protects firms and their clients against financial losses from past work after the firm ceases to trade, covering claims arising from potential negligence.
What is the Red Book
The Red Book is a publication that outlines the standards and practices that Chartered Surveyors must follow when conducting valuations.
What is the purpose of the Red Book?
To provide a comprehensive framework and mandatory practices for RICS members conducting valuations, ensuring high standards and consistency in valuation delivery worldwide.
Tell me about a factor which may impact value?
A factor that could impact value would be property damage/defects, leading to the property becoming unlettable thus no income stream for potential investors.
What is your duty of care as a surveyor when undertaking a valuation?
As a surveyor undertaking a valuation for RICS, your duty of care encompasses using reasonable skill and care, acting within your competence, adhering to RICS standards and ensuring the valuation report is fit for purpose and reliable.
To whom do you owe a duty of care to when undertaking a valuation?
To your client, to the profession and to the wider public.
Why is independence and objectivity important when valuing?
To ensure fair, unbiased and reliable assessment which are essential in maintaining public trust and confidence in the valuation process.
Is there a separate UK National Supplement?
Yes, the Red Book UK National Supplement published on 19 October 2023 and was effective from 1 May 2024.
How should the UK National Supplement be applied in relation to the Red Book?
Should be applied alongside, not as a replacement.
What was changed in the last update to the UK National Supplement?
Introduced a mandatory rotation policy for regulated purpose valuations, requiring both members and firms and responsible valuers to rotate after certain periods.
