Valuations Flashcards
1
Q
What is the full title of the Red Book?
A
The RICS Valuation Global Standards 2022 (2nd ed)
2
Q
When did the current edition of the Red Book come into force?
A
31st January 2022
3
Q
Who are the International Valuation Standards Council?
A
Non-profit organisation acting as global standard setter for the valuation profession, whilst serving public interest.
4
Q
What editions of the Red Book have been in effect during APC training period?
A
Just the November 2021 version, effective of 31st January 2022
5
Q
What is the Purpose of the Red Book?
A
Although the Red Book does not instruct how to value properties, it ensures consistency, objectivity and transparency with regards to mandatory obligations that are placed on valuers.
6
Q
What is the purpose of the UK National Supplement?
A
To be used alongside the Red book, providing country specific guidance within the UK – Ensures UK valuations consistent with UK accounting standards
7
Q
To what valuations does the Red Book apply?
A
All valuations except those listed as exemptions under PS1 (Internal, expert witness, agency/brokerage, statutory purposes (company accounts), negotiation/litigation)
8
Q
What valuations are Exceptions to the Red Book (PS1)?
A
Internal, expert witness, agency/brokerage, statutory purposes ( business rates, tax), negotiation/litigation
9
Q
Can you name some valuations that are carried out for a Statutory Function?
A
Preparing company account/financial accounts, mergers and takeovers
10
Q
What is the difference between Valuation Technical and Performance Standards (VPS) and Valuation Practice Guidance – applications (VPGA)?
A
VPS are mandatory, VPGA are advisory
11
Q
What are the possible consequences if a valuer does not comply with a VPS?
A
Disciplined and if severe, struck off by RICS
12
Q
What are the possible consequences if a Valuer does not comply with a VPGA?
A
Can be sued for negligence
13
Q
Describe how Departure from the Red Book mandatory requirements may be possible?
A
May be possible but would have to be in agreement with client beforehand – Documented under TOE + valuation report
14
Q
What information would you require from a telephone enquirer who asked: Can you do me a valuation?
A
- Client/owner of prop
- Buyer of prop – For conflict-of-interest check
- Know what the property is and its location
- If I am competent to undertake
15
Q
What do your Valuation Files contain?
A
- TOE
- Conflict of interest check
- Inspection notes
- Comparables
- Valuation calculations
- Limitations of valuation
- Valuation report
- Environmental searches
16
Q
How would you respond to a request to value a property from a Drive-by only?
A
1) Check competency to do so
2) Advise limited information can affect the certainty of the valuation – Note in TOE and valuation report
3) Ask for all relevant plans and documents to assist
17
Q
Please name the Red Book Global Bases of Value?
A
(VPS4) – Market value, market rent, investment value (worth), fair value
18
Q
Please name the UK-Specific Bases of Value?
A
Existing use value, Existing value for social housing
19
Q
What is the difference between a Basis of Value and a Method of Valuation?
A
Basis = figure arrived at valuation
Method = technique used to arrive at that basis
20
Q
Describe three Assumptions that are usually made in producing a valuation?
A
Something that can be assumed to be true without investigation
- Property fit for occupation
- Premises free from contamination
- Title
21
Q
What is a Special Assumption + three situations where they are appropriate?
A
Assumption that either assumes facts differ from those at valuation date or would not be made by a typical market participant in a transaction on that valuation date:
- Property vacant (occupied at valuation date)
- Property let on define terms (when vacant at valuation date)
- Planning consent has/will be granted
22
Q
Define Market Value in your own words.
A
Amount asset is likely to exchange on the open market between a willing buyer and willing seller in an arms length transaction after a proper marketing period whereby both parties have acted knowledgably, prudently and without compulsion.
23
Q
What do consider Proper Marketing to be in the Market Value definition?
A
Property exposed to market in most appropriate way at the most appropriate time.
24
Q
What is an Arm’s Length Transaction?
A
Transaction between parties with no prior relationship or connection.
25
What is Synergistic Value?
Where value of two combined assets higher than if they were sold/let separately.
26
What is Marriage Value?
Similar to synergistic value but add on that is an additional element of value.
27
What is a Special Purchaser?
Someone to whom an asset has a particular or higher value to – e.g. own the property next door.
28
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 reviews – Actual definitions of rent and assumptions/disregards as per the lease have to be used.
29
What is Fair value?
Price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (consideration of market discounts do not come into play) – Usually no difference between this and market value -
30
When is Fair Value the appropriate valuation basis?
Valuation for statutory functions such as reporting for company accounts
31
What is a Regulated Purpose Valuation?
Disclosures where the public has an interest or upon which a 3rd party may rely – financial reporting, takeovers and mergers or unregulated property unit trusts.
32
What is an Asset Valuation?
Valuation for financial reporting. IFRS and UK GAAP (Generally Accepted Accounting Practice)
33
When is Existing Use Value the valuation basis?
If the property is operational – Value of site or property in its existing use – different to market value on the expectation to gain planning permission to develop. (Also include that this basis may be used if it possible to get planning permission on the land)
34
When is DRC (Depreciated replacement cost) used in Asset Valuations?
To value specialised properties that are rarely sold on the open market – DRC is current cost to replacing an asset with its modern equivalent asset, less deductions for physical deterioration and all relevant forms of obsolescence and optimisation.
35
What is the fundamental difference between Market Value and Existing Use Value?
Existing use value used when there is an expectation that it will be possible to get planning permission to develop the land. (Is sometimes market value)
36
Name three situations that can adversely affect the Certainty of valuations.
- Asset having characteristics that make it difficult to value (unique/unusual)
- Limited/restricted information
- Disrupted markets - financial/legal/political
37
Name the two professional valuations standards (PS)
- PS 1 Compliance with standards where a written valuation is provided
- PS 2 Ethics, competency, objectivity and disclosures
38
What are the VPGA’s?
- VPGA 1 Valuation for inclusion in financial statements
- VPGA 2 Valuation of interests for secured lending
- VPGA 3 Valuation of businesses and business interests
- VPGA 4 Valuation of individual trade related properties
- VPGA 5 Valuation of plant and equipment
- VPGA 6 Valuation of intangible assets
- VPGA 7 Valuation of personal property including arts and antiques
- VPGA 8 Valuation of real property interest
- VPGA 9 Identification of portfolios, collections and groups of properties
- VPGA 10 Matters that may give rise to material valuation uncertainty
39
What are the VPS’s?
VPS 1 Terms of engagement (scope of work)
VPS 2 Inspections, investigations and records
VPS 3 Valuation reports
VPS 4 Bases of value, assumptions and special assumptions
VPS 5 Valuation approaches and methods
40
Name the conventional methods of valuation.
- Profits/accounts
- Comparable
- Investment
- Residual
- Contractors
41
What makes a property transaction comparable to the property being valued?
Similarities – physical characteristics, location, tenure, use, size
42
How many comparables are needed to produce a valuation?
Enough comparable to establish a trend – As many as can be obtained
43
What is the longest time-period before a valuation date that a transaction could be accepted as being comparable?
No time limit – but closer to valuation date the better (depends on the market)
44
What do you understand by the expression weighting of comparable evidence?
Ranking comparables with greatest similarities so they have the most weight – Not all are as relevant and therefore have less weighting
45
What is interpolation of comparable evidence?
Calculating a value that lies between two extreme points
46
What do you understand by the expression hierarchy of evidence?
Order in which recent transactions are weighted – most weight attached to:
- Open market lettings
- Lease renewals
- Rent review
- Independent expert determination
- Arbitrator award
47
What is extrapolation of comparable evidence?
Calculating a value outside of known data – considered statistically uncertain
48
What is the purpose of Zoning?
Used due to retail units having different depth and frontage ratios – Allows you to value account for this difference
49
What is the standard Zone depth?
6.1m / 20 feet
50
How would you arrive at the Market Rent the first floor of a retail unit?
Divide the ITZA value by 10 or if sales and storage ITZA/10 for sales area and spot figure per sq m for storage space
51
How would arrive at the Market Rent of a retail unit with a return frontage?
Whole unit would become Zone A if frontages have equal footfall
Uplifts can be provided at 5% for Zone A and 2.5% for Zone B – If return frontage covered all of Zone A and half of Zone B
52
How would you value a shop unit for rent review with frontages on two roads i.e. it is a through unit?
Halve back from both frontages
53
How would you determine the Market Value of an investment property let on internal repairing terms?
Market rent (net of outgoings) X YP = Market Value
54
What is the market capitalisation rate?
All Risks Yield – Rate at which market capitalises the income
55
What factors make up the all risks yield?
Property characteristics, covenant strength, rent, unexpired lease term, rental growth
56
Why is the YP single rate table also known as the Present Value of £1 per annum?
- It tells us the present value of £1 to be received each year, for a given number of years
- Tells us present value of annual series of incomes – further in future = lower sum as it is against today’s terms
- £1 in future = not worth £1 today
57
What are the three principal sources of investment?
- Gilts, equities, properties
58
What is a bond investment?
- Fixed capital, fixed return for a fixed period
- Can be govt or corporate
59
What is the major attraction of property over the other two major investment opportunities?
- Can improve performance through proactive property management
60
What are the major disadvantages of property over the other two major investment opportunities?
- Liquidity, transfer costs and management required
61
How did the all risks yield get its name?
- Due to accounting for all risks of the investment
62
63
What is another name for the all risks yield?
- Market capitalisation rate
64
What is a gross yield?
- Rent expressed as a percentage of the purchase price
65
What is a net yield?
- Rent expressed as a percentage of the gross acquisition price (includes fees e.g. acquisition and stamp duty)
66
Name the costs that a purchaser must incur when acquiring a property investment?
- Stamp duty land tax (bands 0%/2%/5%)
- Agents fees (1%)
- Legal fees (0.5%)
- Non-recoverable VAT on fees (0.3% or 20% of total)
67
What would you do if you had to value an investment property but could not find any evidence of yields?
Constructing a yield – looking at gilts and adding a risk premium (look at market/property risks and deduct growth)
68
How is rental and capital growth accounted for in a conventional investment valuation?
Included within the all-risk yield calculation
69
What is a reversionary investment?
Investment let at a rent other than market rent
70
What techniques can be used to value an under-rented reversionary investment?
Term and reversion
71
Explain the process of the term and reversion technique?
1) Capitalise passing rent until review(reversion) – PASSING RENT X YP for number of years to reversion
2) Take market rent to be received at reversion and then capitalise into perpetuity = market value (capitalisation = multiplying by the YP)
3) Defer this further at a PV of £1, for the period of the term
4) Reversion gets capitalised at market rented rate – term gets capitalised at a lower rate due to lower risk
72
Explain the process of the hardcore / layer technique?
1) Capitalise passing rent into perpetuity
2) Take additional rent expected to be received at review and capitalise into perpetuity (forever)
3) The top slice value (froth) is then given at that moment - Needs to be deferred for the period of the term
4) Bottom slice capitalised below market rent due to reduced risk – top slice capitalised above rate due to higher risk
5) Risk at review that you wont receive increased rent
73
How did you / would you value an over-rented investment?
- Hardcore/layer method
74
What is an initial yield?
Net income(rent) at date of purchase as a percentage of the purchase price
75
What is a reversionary yield?
Future market rent (after property re-let) as a percentage of current market value or purchase price
76
What is an equivalent yield?
Internal rate of return from an investment disregarding any rental or capital growth (used in both under and over rented properties)
77
What is an equated yield?
Overall rate of return, taking into account the growth ALSO discount rate at which DCF equals purchase price of investment (Also called true investment yield)
78
What do you understand top slice income to be?
- Additional rent expected at review/reversion when underrented
- Overrage/froth
- Risk on receiving extra proportion of rent
79
What is a true equivalent yield?
Yield when taking into account that rent is received quarterly in advance - Weighted average of NIY and reversionary yield (represents return the property will produced based upon timing of how income is received)
80
How is top slice income valued?
- Capitalise above market rented rates to reflect increased risk
81
How would you value a leasehold interest / ascertain if a premium can be charged for the assignment of a lease?
Capitalise the profit rent (market rent less rent paid) – Using one of YP dual rate, YP dual tax adjusted or YP single rate
81
What are the names of the two yields in the YP Dual Rate?
Remunerative (2% above freehold market rent) and Accumulative (interest paid on sinking fund used to replace cap outlay)
82
What effect does rent received quarterly in advance have on the yield?
Increases the yield – Know as the true equivalent yield (versus nominal yield which suggest rent is received annually in arrears)
83
What is the fundamental difference between conventional investment valuation techniques and discounted cash flow techniques?
Growth implicit (don’t calculate future growth so lower yield accepted) in the conventional and explicit (do calculate future growth/values) in the DCF
84
How is growth calculated in a discounted cash flow?
Compound growth – Parrys table OR Amount of £1 to receive over X number of years (1+i)^n
85
How would you arrive at a discount rate when carrying-out a discounted cash flow?
Take risk free rate and add risk premium (e.g. market/property risks)
86
What is a risk-free rate?
Yield from UK gilts
87
What do you understand by the expression risk premium?
A function of property market risk and asset specific risk
88
Why do property investors require a risk premium?
Due to higher risks investing in property than other forms such as gilts
89
How would you value a green-field site with planning permission for residential development?
Assuming there are no appropriate comparables, should use the residual method
90
Describe how you have carried out (or would carry out) a Residual Valuation.
Market value of completed development, and deduct development cost and developers profit, to get the land value
91
What costs did you deduct (are deducted) in your / a Residual Valuation?
- Demolition / Site clean up costs
- Costs of construction (Build costs)
- Fees for construction (architects, engineers)
- Finance costs (interest)
- Contingency to allows for cost fluctuations
- Agent and legal fees on disposal + acquisition
- Fees and stamp duty land tax upon acquisition
92
How did you calculate (would you calculate) developer’s profit in your / a Residual Valuation?
Take percentage of total costs (25% average), or a percentage of gross development value (15% average) – Riskier development is higher percentage – SAY I USED 15% AS ONLY A MODERATE RISK
93
What are the usual acquisition costs of a development site?
- 1.8% acquisition – 1% Agents, 0.5% Legal, 0.3% VAT
- Stamp duty land tax – 0% up to 150k, 2% 150-250k, 5% 250k+
94
What is a ransom strip?
Strip of land giving access to development land – Owner can hold other part to ransom preventing access over ransom strip
95
What is ransom value?
Value attributable to ransom strip
96
How did you (would you) value a ransom strip?
Valued at 1/3 of the increase in development value that the land received from the development
97
What does the case of Stokes v Cambridge mean to you?
Compulsory purchase case – held that value of ransom strip was 1/3 of the uplift in value of development land
98
What is the Profits Method also known as?
Accounts method
99
Name three property types that would be valued by the Profits Method.
Leisure props – pubs, theatres, cinema
100
Why are certain properties valued by the Profits Method?
Due to their value being linked to their use as a building and the profits generated
101
Explain and basic approach to the Profits Method.
Company turnover (estimated) less costs to achieve the profit = net operating profit, which is then capitalised using YP single rate
102
What valuation checks can be carried out on a valuation produced by the Profits Method?
- Cinema = per seat basis
- Hotel = per bed/room basis
103
When is the Contractor’s Method used in practice?
Last resort when no other methods available
104
Explain the basic approach to the Depreciated Replacement Cost Method.
1) Find cost to replace with modern building (gross replacement cost) SUBTRACT depreciation = net replacement cost
2) Add site value to net replacement cost to give value of land as existing
105
What is another name for the Contractor’s Method?
Depreciated replacement cost
106
Explain what is included in a Reinstatement / Replacement Cost for Insurance Purposes.
Costs of - Demolition, shoring up and weather protection of adjoining buildings, rebuilding and professional fees
107
What is GIA and when is it used?
Gross internal area - Used in industrial and warehouses (IPMS2) (includes internal walls but not walls beyond the external wall face)
108
What is NIA and when is it used?
Net internal area - Used in shops/retail and office (IPMS3)
109
What is the residual value?
Value of site without development on it
110
What are in your terms of engagement?
Identification of asset
Identification of client
Identifying valuer
Purpose of valuation
valuation date
basis of value
method of valuation
Assumptions
Special assumptions
fees
111
Valuation files?
112
