Valuations Flashcards
What are the 5 Methods of Valuation?
- Profits
- Comparable
- Residual
- Depreciated replacement cost (DRC)
- Investment
How would you value a building using the profits method?
- Obtain 3 years of audited accounts.
- Turnover - Costs = Gross Profit
- Then deduct reasonable working expenses to give unadjusted net profit, before deducting operator’s remuneration to give adjusted net profit/FMOP = fair maintainable operating profit.
- Then capitalise at appropriate yield (YP) to achieve market value.
How would you value a building using the comparable method?
1.Obtain comparable evidence, confirm with agents.
2.Arrange in schedule and analyse against hierarchy of evidence.
3.Apply suitable rate psf to area and reporting value.
How would you value a building using the residual method?
Residual value = Gross development value (GDV) – total development costs, including profit.
It is possible to have a negative land value
Why does the Red Book exist?
To promote and support high standards in valuation and detail mandatory requirements and supplementary guidance through PS, VPS and VPGA’s in line with the IVS.
Tell me about the RICS guidance relating to comparable evidence
RICS Professional Standard: ‘Comparable Evidence in Real Estate Valuation’, 1st Edition 2023 (reissued as a Professional Standard in 2023)
When was the Red Book last updated?
RICS Valuation – Global Standards 2021 (Effective 2022)
Is there a separate UK Red Book?
No but there is a UK National Supplement which provides guidance for valuers undertaking work under UK jurisdictio
What type of valuations might be relied upon by a third party?
Loan Security Valuation
Which sections of the Red Book are mandatory and which are advisory?
PS1/PS2 – VPS1-5 Mandatory
VPGA – Advisory
When might a conflict of interest exist in relation to a valuation instruction?
Party Conflict
- Borrower vs Lender conflict
What is a restricted valuation service and can you provide one?
Valuation provided in short timeframe, which limits ability to establish facts that may be verified by inspection or making normal enquiries.
Yes you can provide this. However it need to be stipulated in the terms of engagement.
Key considerations:
- Is the restriction reasonable
- Valuation is not relied upon by third party
- If not possible to deliver valuation (even with restricted service) the valuer should decline the instruction.
How do you deal with limitations on inspection or analysis?
Agreed within the Terms of Engagement.
Set out as an assumption or special assumption - agreed with the client.
Can you revalue a property without inspecting?
Yes – but only if you are satisfied there have been no material changes to the property.
What is an internal valuer?
Valuer who is an employee of the business that owns the assets
or
Valuer at accounting firm responsible for preparing the businesses financial records.
Able to meet the requirements of independence and professional objectivity.
What happens if market conditions change between the valuation date and report date?
What additional criteria apply to secured lending valuations?
Where does the definition of fair value come from?
IFRS 13 – International Financial Reporting Standards
What is a Net Initial Yield?
Simple income yield for current income and current price.
What is an equated yield?
The yield on a property investment which takes into account growth in future income. (This is not applicable to reversionary situations, where the increase in income on reversion is to the market value as estimated at the present time.)
What is an equivalent yield?
Average weighted yield when a reversionary property is valued using an initial and reversionary yield.
How would a yield reported from auction differ from a Net Initial Yield? What purchaser’s costs do you deduct from a valuation?
Auction price reflects gross yield - i.e capital value gross of purchasers’ costs.
How would you value a property in uncertain market conditions - does the Red Book give any guidance?
Yes the Red Book does provide guidance:
VPS 3: “If appropriate, the valuer should draw attention to, and comment on, any issues affecting the degree of certainty, or uncertainty, of the valuation.”
VPGA 10: “The overriding requirement is that a valuation report must not be misleading or create a false impression. The valuer should expressly draw attention to, and comment on, any issues resulting in material uncertainty in the valuation as at the specified valuation date.”
What is existing use value (EUV)?
Describes what property or land is worth in its current form. In other words, the price that it can be sold for on the open market, assuming it will only be used for the existing use for the foreseeable future.
Generally little difference with Market Value
How could you value a long leasehold interest?
How does a term and reversion and DCF differ?
How would you value an under-rented property?
Term and Reversion Approach
How would you value an under-rented property?
Core and Topslice (Hardcore Approach)
What would you do if comparable evidence was limited?
What is the hierarchy of evidence?
Certain types of evidence take precedence over others:
Category A - Direct Comparables (completed transactions, near-identical properties, fully accurate information available).
Category B - General Market Data (information published on commercial databases, indices, historical evidence, demand/supply data for rent or investment).
Category C - Other Sources (transactional evidence from other real estate types and locations, other background data such as interest rates, stock market movements).
What are the 3 Valuation approaches?
Income (Investment, Residual, Profits), Cost (DRC), Market (Comparable)
What are the key elements included within terms of engagement?
Set out in VPS1 of RBG
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
What are special assumptions?
A supposition, which is taken to be true even though it is known that it is not true. For example assuming a building is let when it is not.
If there was contamination could you leave it out of the valuation if your client asked you to?
You would have to state within your terms of engagement and valuation report. This would be a special assumption
When/were do you state special assumptions?
They are stated in your valuation report and terms of engagement. The part of the Red Book relating to special assumptions is VPS 4
If your equivalent yield is lower than the initial and reversionary yield, what does that suggest?
There is a break in income either a void period or rent-free period.
How would you value a vacant building?
Comparable method of valuation and analyse similarly located, similar sized and recently transacted VP comparables/
When would you value on a NIY approach?
Where the property is rack rented – or let at full market rent.
What is loan to value ratio?
Loan to value ratio expresses the ratio of a loan to the value of an asset purchased. Typically 60-70%.
How do you calculate a WAULT?
Multiply the contracted rents by the unexpired terms and total this figure, divide this by the total annual contracted rent figure to calculate the WAULT
How would you conduct a valuation using Term and Reversion?
Term (current passing rent) is capitalised until the next review/lease event at an initial yield.
Reversion to Market Rent valued into perpetuity at a reversionary yield.
Term capitalised at lower yield to reflect security of income received.
What is ‘rack rented’?
The property is let at the current market rent
What is the Investment Method?
Used when there is an income stream to value.
Rental income is capitalised to produce a capital value.
Why is Investment Method considered growth implicit?
Growth is derived from the market capitalisation rate (yield), rather than explicitly built in through projected growth or reduction to rents and costs.
How do you value using the Core and Topslice method?
Used for overrented property:
Topslice = Passing Rent - Market Rent until next review / lease event.
Core = Market Rent
Higher Yield applied to toplice to reflect additional risk.
What is a running yield?
The yield at one moment in time
What is an 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 particular investment.
What is a reversionary yield?
Market Rent (MR) divided by current price on an investment let at a rent below the MR
What is the Gross Yield?
The yield not adjusted for purchaser’s costs (such as an auction result).
What is Net Yield?
The resulting yield adjusted for purchaser costs
What is a True Yield?
Assumes rent is paid in advance not in arrears)
What is Nominal Yield?
Initial yield assuming rent is paid in arrears
Describe how you have utilised the RICS Professional Statement Comparable Evidence in Real Estate Valuation, 1st Edition, October 2019?
Guided by this Professional Statement in every valuation I have undertaken:
- Understand general principles of comparable data.
- Highlights different factors to consider when valuing different property sectors.
-Sources of Comparable: Directly available information, published information, databases, asking prices, historical evidence
- Understand why it is sometimes difficult to source comparable evidence and identify ways to address the limitations.
- Document sets out hierarchy of evidence i.e. Cat A, B and C.
How have you applied the RICS Valuation - Global Standards, 2021 and the UK National Supplement, 2018 in your practice?
RBG Compliant Valuations
- Understood PS1 - whether valuation is except.
- PS2 - Ethics and Disclosures - Conflict of Interests
- VPS 1 - Terms of Engagement
- VPS 2 -
What are the key factors affecting comparability for commercial offices?
Owner Occupied:
- Layout, flexibility, floor area, building services, specification, service charge level, transport facilities, car parking, energy efficiency and sustainability.
Rental:
- As above, plus key lease terms, unexpired term, provision for rent increase (OMR or Index review), responsibility for repairs, maintenance and insurance, any restrictive covenants.
Investment:
- Yield, rental factors as above, plus tenant covenant strength.
What are the key factors affecting comparability for commercial out of town retail?
Rental: Layout, size, height, loading, access, car parking and access to public transport, other retail units adjacent. visibility, and key lease terms, unexpired term, provision, for rent increase, responsibility for repairs, maintenance and insurance, restrictive covenants, planning restrictions.
Investment: Yield, rental factors as above, plus tenant covenant strength.
What are the key factors affecting comparability for industrial/warehousing and distribution?
- Rental: Accessibility to major transport links, site access and loading facilities, building layout and eaves height, flooring loading, layout offering clear space, power supply, office content, site coverage, environmental issues, potential for alternative use.
- Investment: Yield, rental factors as above, plus tenant covenant strength.
What is Hope Value?
An element of market value in excess of the existing use value, reflecting the prospect of more valuable future use.
What is marriage value?
Prospect of merger with another property or asset or interests within the same property or asset at a future date.
