Valuations 1 Flashcards
What is the full title of the Red Book?
RICS Valuation Global Standards
There is also the UK National Supplement
When did the current edition of the Red Book come into force?
Effective from 31st Jan 2022
Who are the International Valuation Standards Council?
Non-profit organisation that set the global standards for valuation - they are dominated by large accountacy firms like PWC, KPMG etc. RICS are a member and a sponsor of the International Valuations Standards Council - therefore whatever the council decides, tends to go into the Red Book
What editions of the Red Book have been in effect during your APC training period?
2020 Edition and 2022 Edition
What is the Purpose of the Red Book?
To ensure consistency in the valuation process worldwide
It essentially states that to carry out a Red Book valuation - you must be competent, agree terms of engagement, inspect/measure and carry out appropriate investigations, analyse everything and produce your report
Must agree terms of engagement before issuing the report
What is the purpose of the UK National Supplement?
Supplements the Red Book
Countries often have their own national supplements
This one ensures UK valuations are consistent with UK accounting standards
To what valuations does the Red Book apply?
Red Book applies to all valuations unless a valuation is listed as an exception
What valuations are Exceptions to the Red Book?
If for internal purposes (for client to know market value of their property)
If for agency work prior to acquisition or disposal instructions (EG advertise at price X and if it does well, we’ll up the price but if it is not getting much interest then we will lower the price)
If for stautory function (where the Law tells us what to do)
If acting as expert witness (EG if you can’t agree a rent review or lease renewal, then you would give an expert witness report in court - arbitrator or judge would tell you what to do, not the Red Book)
If in negotiation or litigation
Can you name some valuations that are carried out for a Statutory Function
Lease renewal EG reporting on rent at lease renewal - see s34 of LL & T Act 1954 to see rent definition
Rating EG if giving a rating valuation there will be legislation to follow
Also compulsory purchase
What is the difference between Valuation Technical and Performance Standards (VPS) and
Valuation Practice Guidance – applications (VPGA)?
These are two elements that make up the Red Book
Compliance with VPS is mandatory
Compliance with VPGA is advisory
What are the possible consequences if a Valuer does not comply with a VPS?
RICS may take disciplinary action (depends on extent of non-compliance / severity of breach)
EG might have to sign a consent order to say you’ll get this sorted within a month or might get a fine
What are the possible consequences if a Valuer does not comply with a VPGA?
If giving advice, you MAY get sued for negligence
More senior people in Workman would agree terms of engagement with the client - if Workman causes a client to lose money, client can sue Workman for professional negligence. Therefore, in vals terms - if you advise someone to pay too much to buy a property, you could get sued for negligence. Lawyer would ask to see valuation file - will be looking for Red Book compliance.
Even if you comply with Red Book, you could still get sued - could have used crap comparables, could have measured the unit incorrectly etc.
Describe how Departure from the Red Book mandatory requirements may be possible.
Easy to get confused between Red Book exception and Red Book departure
Exception = Red Book doesn’t apply
Departure = Red Book does apply, but valuer does not comply with mandatory requirements
Can depart if there are special circumstances where it is inappropriate to comply with VPS 1 - VPS 5 and client agrees. EG client says ‘just want quick valuation, but not a Red Book valuation’ - can’t do this, valuer should decline
EG client says ‘do valuation without going inside the property’ - again, can’t do this, valuer should decline
IF there is good reason for not going into the property, then could depart
Can only depart if there are circumstances that justify departure
What information would you require from a telephone enquirer who asked: Can you do me a
valuation?
Location
Type of property (need to ensure you are competent)
Purpose of valuation (EG if for buying property, need to check whose selling it and ensure that the seller isn’t someone you know - need to avoid conflicts of interest)
First thing ‘WHAT is it and WHERE is it?’
What do your Valuation Files contain?
Conflict of Interest Check (not required for me becuase I already established this - for internal purposes)
Agreed Terms of Engagement
Inspection notes - photos, floor plans, planning permission etc.
Comparable evidence
Valuation calculations
Copy of valuation report
What are the main contents of the Terms of Engagement for a Valuation?
Entering into a contract
Valuer - name
Client - name
Property - address
Purpose of valuation
Basis of value
Valuation date
Nature and extent of the valuer’s work - including investigations - and any limitations thereof
Assumptions/special assumptions
The Fee
How would you respond to a request to value a property from a Drive-by only?
Same as external inspection only
Lots of people think this is not a Red Book valuation - it actually is
Usually carried out for a re-valuation (where you/your firm has inspected this property before and there have been no changes since then)
If it is a brand new industrial building and you’ve got the floor plans you can do it - it’s never been occupied so it’s fine
HOWEVER if you don’t have a copy of the lease or the floor plans and you don’t know the area, then you can’t proceed
Depends on:
Do you have prior dealings? IE have you previously carried out a full inspection of this property?
If it is new instruction, then might be acceptable if you’ve got sufficient plans and lease(s)
. Please name the Red Book Global Bases of Value.
Market value
Market rent
Investment value
Fair value
Please name the UK-Specific Bases of Value.
Existing use value and two residential ones (existing use value for social housing and projected market value)
What is the difference between a Basis of Value and a Method of Valuation?
Method of Valuation = the techniques used to arrive at a figure that we would describe with a Basis of Value
Basis Value = Red Book definition of Value (market value, market rent, investment value and fair value)
Describe three Assumptions that are usually made in producing a valuation.
Title - freehold vs leasehold
Assume any parts of a property that are covered, are free from defects - ie condition is okay
Assume property has full planning permission for existing use
Assume property is free from hazardous substances
Assume property is free from contamination
What is a Special Assumption?
A special assumption is where the valuer bases their work on factors that do not apply at the valuation date, or that would not be considered by a typical market participant at that time. For example, they may make a valuation based on a plot having planning consent when none has been granted, or they could value a development site based on the works being completed.
Give three situations when it would be appropriate to make a Special Assumption for a valuation.
If property is vacant, we could assume it is let (and vice versa)
If property is being developed, we could assume refurb has completed
If property hasn’t got planning permission, we could assume planning permission has been granted
Define Market Value in your own words.
Must include the words: willing buyer, willing seller, proper marketing and arms length transaction
What do consider Proper Marketing to be in the Market Value definition?
Sellking a property via the most appropriate method of sale (private treaty is most common EG hanging ‘to sale’ sign outside)
Allowing a property to be on the market for an appropriate period to get market value
Adveritsing the property to the target market (regionally, nationally or internationally).
Disposed through the appropriate method of disposal
What is an Arm’s Length Transaction?
When there is no connection/relationship at all between parties
What is Synergistic Value?
The value of two or more merged interests is greater than the sum of the individual interests
EG site A is £100k and site B is £100k
If you merge the sites, the synergistic value is £250k (more than £200k)
What is Marriage Value?
The extra value when 2 assets or more are combined.
Often common to split this value between seller and purchaser
What is a Special Purchaser?
Someone who can pay more than market value (EG they can pay the synergistic value)
Example of special purchaser - someone who can pay synergistic or marriage value (in a position where they can merge assets) EG owner of site A wants to buy site B next door
When is Market Rent not appropriate as a Basis of Value in providing a report on the rental value of a property and why not?
Rent review - use rent definition in lease
Lease renewal - s34 in LL&T Act
When is Fair Value the appropriate valuation basis?
When valuing for accounting/financial reporting (no different to market value, just used when valuing for inclusion in company accounts)
What is a Regulated Purpose Valuation?
When accounts are regulated, where third parties will have an interest
What is an Asset Valuation?
One undertaken for financial reporting purposes (another name for a regulated purpose valuation)
When is Existing Use Value the valuation basis?
A valuation on the basis that the valuation use gonna stay the same.
What is the fundamental difference between Market Value and Existing Use Value?
Existing use value is value of building as it is; market value is highest and best use of an asset (can take into account development and re-development potential)
When is DRC used in Asset Valuations?
For properties where there isn’t enough comparable evidence
For specialised properties EG properties that would not sell other than as part of a sale of the business in occupation
Name three situations that can adversely affect the Certainty of valuations.
When there is an unusal property (in design or location) EG very nice office building in middle of shit industrial estate
When there is market volatility EG mid-covid pandemic where there is high level of uncertainty / disrupted market
Where we have not carried out usual inspections EG not inspected interior of the property and not got the lease to hand
What is a reversionary yield?
the Market Rent expressed as a percentage of the Market Value
What is an equivalent yield?
the weighted average of the Initial Yield / Running Yield and the Reversionary Yield
What is an equated yield?
It is the overall rate of return, taking into account the growth
It is the true investment yield / discount rate at which the DCF equals the purchase price
What is a true equivalent yield?
It is the yield, when taking into account that rent is receieved quarterly in advance (rather than the nominal yield which is generated when rent is received annually in arrears)
What is the fundamental difference between conventional investment valuation techniques and discounted cash flow techniques?
In conventional Valuations, growth is implicit in the capitalised rate (all risks yield). In DCF we make the growth implicit.
What are the purposes of valuations?
Loan security
Investment
Taxation
Internal purposes
How would you value a leasehold interest?
capitalise the profit rent.
That’s when the passing rent is higher than the market rent.
Capitalise the profit rent by either yp single, yp dual tax adjusted, yp dual. the options are.
What are the two rates in the yp duel rate? accumulative and Remuneration Rate rate.
