Valuations

Question 1

5 Valuation Methods

Answer 1

Comparison/market appraisal
Investment
Residual
Profits
Contractors/Depreciated Replacement

Question 2

4 Main parts of the red book

Answer 2

Part 3 - Professional Standards (PS 1&2)

Part 4 - Valuation technical and performance standards (VPS 1-5)

Part 5 - Valuation practice guidance applications (VPGA 1-10)

Part 6 - international valuations standards (IVS)

Question 3

5 exemptions when red book valuation not necessary and what part of red book are they specified

Answer 3

• for agency work
• to act as an expert witness
• for statutory functions (e.g tax returns)
• for internal purposes/ no 3rd party reliance
• negotiation or litigation

Under PS 1 Compliance

Question 4

What are the 6 bases of value and where in red book

Answer 4

VPS 4 Bases of Value

• market value
• market rent
• investment value (worth)
• equitable value (fair value)
• synergistic value (marriage value)
• liquidation value - not used in UK

Question 5

What should TofE include and where in red book

Answer 5

VPS 1 - terms of engagement

Written instructions
details of valuer (inc. competence)
state identity of client
Purpose of valuation - date, currency, basis of value
Assumptions to be made
Fee basis
Complaints handling procedure
Liability agreed
Confirm red book compliance

Question 6

What is VPS 3

Answer 6

VP3 = Valuation Reports

Must match the points in the terms of engagement

Draft copies should be labelled as ‘draft’ or ‘for internal purposes only’ so cannot be relied upon

Question 7

Red Book market value definition

Answer 7

The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after property marketing and where the parties had each acted knowledgeably, prudently and without compulsion

Question 8

3 things to consider before accepting an instruction (CIT)

Answer 8

Competence

Independence

Terms of engagement

CIT

Question 9

Reading on comparable method

Answer 9

RICS professional standard ‘Comparable evidence in real estate valuation’ (2023)

Question 10

3 categories of hierarchy of evidence

Answer 10

A - direct comps

B - general market date (published sources, historic evidence)

C - other sources of info (interest rates, econ factors, etc)

Question 11

Case law on accuracy of valuations

Answer 11

Webb Resolutions vs USurv 2012

Standard resi - 5%

One off features - 10%

Exceptional features - 15%

Question 12

When would profits method be used

Answer 12

To value buildings where the value is inherently linked to the value of the business occupying it

Pubs, bars, clubs, hotels, leisure

Question 13

How to calculate profits method market value

Answer 13

1. Total revenue

Less COGS (costs of goods sold)

2. Gross profit

Less SG&A (sales, general, admin expenses)

3. Net profit

Plus depreciation and amortisation

4. Gross Divisible Value

Less tenants renumeration & risk (%)
And halved for tenants share

5. Leaves ‘available for rent’

Capitalised by YP perp (yield in prep)

6. Leaves market value

Question 14

What is VPGA 10

Answer 14

Material Uncertainty

Very difficult asset to value, limited info or no comps

Report must note material uncertainty as to promote reporting anything misleading. Valuer can express in qualitative terms their uncertainty.

Question 15

What parts of the red book are mandatory or advisory?

Answer 15

Professional standards = mandatory

Valuation Performance Standards = mandatory

Valuation practice guidance applications = advisory

Question 16

Gross vs net yield

Answer 16

Gross is before purchaser’s costs, net is after

Question 17

3 investment approaches and which VPS

Answer 17

VPS 3

Market approach

Cost approach

Income approach

Question 18

For BtR is IV higher than VP and what difference?

Answer 18

Yes IV higher

Typically VP 5% lower than IV

Question 19

Current Bank of England base rate as of sept 2024

Answer 19

5%