Valuations Flashcards
1
Q
Three steps to take when undertaking valuation
A
Competence. Are you competent to undertake the work? Do you have the correct level of skill understanding knowledge SUK
Independence- conflict of interest checks
Terms of engagement- set in writing full confirmation of instruction to the client prior to starting work and receive written confirmation of instruction.
Confirm the competence of the valuer
Extent and limitation of the valuers inspections must be stated.
2
Q
What are the Methods of valuation and give me an example of when you would use each
A
Comparable
Investment
Contractors basis- valuation of building
Profits method
Residual- valuation of land
3
Q
what is Term and reversion and how to calculate
A
Market rent more than passing rent= under rented
term: current rent up until lease event such as break or rent review. Softer yield
reversion: market rent. capitalise reversion into perpetuity. reversion keener yield.
add two together and times by present value to work out value of today.
4
Q
how to calculate Hardcore method
A
Over rented properties - passing rent more than market rent
I deduced an appropriate capitalisation rate – based on similar estates.
Bottom slice: market rent. lower yield as know can achieve. capitalised into perpetuity
top slice: current rent. higher yield as risky.
hardcore bottom slice
Core
MR YP in perp @% lower
Topslice
CR-MR (froth)
YP X years to next lease event
5
Q
What are the RICS valuation global standards (Red Book)?
A
Set of global valuation standards created to achieve the highest standards and best-practice in valuation
6
Q
What are the main changes from the previous Red Book Version?
A
Sustainability and ESG factors – definitions, inspections and valuations
7
Q
What are the pros and cons of Argus?
A
pros- efficiency
cons- not completely visible
8
Q
How do you know you are competent?
A
SUK
-Skills
-understanding
-knowledge
Valued a few retail/office/ industrial units in a similar location so I know I’m competent.
9
Q
What is included in terms of engagement?
A
A few of these include:
property address
valuation date
client details
fee
10
Q
What is Net internal area?
A
The useable area within a building measured to the internal face of the perimeter walls at each floor level
11
Q
What to include / exclude for NIA
A
include: kitchens and area above 1.5 meters high
exclude: cleaners’ cupboards, plant rooms, stairwells, lift wells, those parts of entrance halls, landings.
12
Q
Why do we zone? what about upper floors or basement?
A
Zoning is a standard method of measuring retail premises to calculate and compare their value for lots of sizes, shapes equally.
6.1 meters depth from the frontage. Halfing each zone back.
market evidence for upper floors and basement
13
Q
What is the hierarchy of evidence for comparable properties?
A
Stated in Comparable evidence in Real Estate Valuations
Cat A – direct comparables
Cat B – general market data
Cat C – other sources
14
Q
What is the definition of fair value?
A
price that would be recieved to either sell or be paid between market participants at a measurement date.
Price that would be received to sell an asset in an orderly transaction between market participants at the measurement date
15
Q
What is the gross internal area?
A
The area of a building measured to the internal face of the perimeter walls at each floor level.
16
Q
What is a good spec of an industrial unit?
A
3 phase power, minimum 8m clear eaves. Full height loading doors. Site cover of 40%. LED lighting
17
Q
How can planning impact value - why do you need to check this
A
if there was planning to build extra storey would add extra value.
18
Q
What is the definition of market value?
A
Price an asset/liability should exchange for in the open market, between willing seller and buyer, on the valuation date, after proper marketing, in an arms length transaction and where both parties have acted prudently and without compulsion
19
Q
What is WAULT and how do you calculate it?
A
weight average unexpired lease term
Unexpired term of each tenant. used when there are multiple occupants or portfolio.
Work out multiplier by rent x unexpired term / total income
Add these all together at the end
20
Q
Can you talk me through the term and reversion method
A
implicit
Current rent
capitalise to next event lower @%
Value
Market rent
capitalise into perp @% higher
PV X years to next event
Capital value
Total Value (value + capital value)
21
Q
What is the definition of freehold
A
you own the building and the land it stands on
22
Q
What is a grade A office spec?
A
raised floor and suspended ceilings (ceiling void 3.50)
A/C (VAV) and double glazed windows
passenger lift- Equality act compliant- lower buttons, Braille
LED lighting- LG 7
maximised opportunities for daylight
Reception
Open plan
23
Q
What is a special assumption and what is an assumption?
A
Assumptions – assumed to be correct.
Special Assumptions- an assumption that assumes facts that differ from the actual facts existing at the valuation date
24
Q
What is the RICS VRS?
A
Valuer Registration Scheme – regulatory monitoring scheme for valuers carrying out a red book valuation
introduced in 2011: to 1.improve valuation quality, 2. self-regulate, 3. elevate status of profession
25
Tell me about the factors that impact Market Rent, and how this differs from Market Value?
MR – location, specification, construction, size
MV – impacted by the same issues, but when analysing comparables, will also be paying consideration to covenant and income profiles.
26
Why are ToE important?
Set out the agreement of instruction -provide a document to refer back to so you know the scope of work and what to deliver.
27
Did you include PI cover? What PI cover would be included?
Yes, mandatory for surveyors in all disciplines, as set out in RICS Professional Indemnity Insurance Requirements (2022)
Ensure an adequate and appropriate level is taken out.
RICS recommends the use of liability caps for jobs
An industry accepted standard is c.30% for a loan security valuation instruction, 10% accounts purposes
28
What defects industrial could have been present?
Spalling or efflorescence of the brickwork, penetrating damp, rising damp, condensation, cracking due to heave/subsidence, any deleterious materials that had been worn away from use
29
What made the property suitable for lending purposes?
The property would be saleable if the borrower defaulted on their loan – e.g. didn’t have any onerous conditions on title, easements, was a depreciating LLH
30
why is a report on title important?
report on title might cover charges on the land, any rights or easements, or anything else onerous that might impact value
31
Can you give me an example of when a property wouldn't be suitable for loan security?
Onerous conditions on title, restrictive covenants, contamination, depreciating LLH.
Japanese knot weed
32
What is a yield?
Measure of return on an investment
33
Why does the Red Book exist?
To ensure consistency, objectivity and transparency.
34
What type of advice does the Red Book cover?
Red book provides advice for all valuation types and methods.
35
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
Yes, within your ToE, report and other published reference you must state:
* The relationship with the client and previous involvement
* Rotation policy
* Time as signatory
* Proportion of fees
36
When is fair value used? Why is it important?
When undertaking valuations for financial statements such as balance sheet.
Property inputted as ‘asset’ on balance sheet. Which in turn affects company’s net worth.
37
What purchaser’s costs do you deduct from a valuation?
Stamp duty (varies%)
Agent fees 1%
Legal fees 0.5%
VAT 20%
38
How does a term and reversion and DCF differ?
DCF – explicit – expected future cash flows
Term and reversion – implicit
39
What is NPV?
Net Present Value
Sum of the discounted cash flows of a project
40
What is a Discounted Cash Flow (DCF)?
It is a growth explicit method that estimates the exit value.
41
What is turnover / gross profit / net profit?
Turnover – total company’s revenue
Gross profit – revenue - costs of goods sold
Net profit – gross profit – expenses
42
What is EBITDA?
Earnings
Before
Interest
Tax
Depreciation
Amortization
43
What is a development appraisal?
DA assess the viability of a development project for developers / used to assess the profitability of a scheme.
44
How would you deal with depreciation/obsolescence?
It depends
Depreciation – condition
Obsolescence – how it works as a building
45
if no rent what valuation methods could you use?
comparable method.
if no comparables, use the investment method. calculate rent property could generate and apply appropriate yield.
46
Hierarchy of evidence (rent)
Open market rent- arms length transaction
Lease renewal
Rent reviews
independen review
determination
arbitration
sale or lease back
Use before Cat A,B,C comparable evidence
47
Office Kennington valuation. What advice did you give?
Adviced Refurbishment needed- day 1 cap expenditure needed to bring up to lettable standard £50 sqft
Advised Opinion of fair value
Advised the property should be let as individual units
Advised the office block should be assessed as multi let scenario
48
Why do we use the investment method?
1. Asset income producing
2. Chance of change of occupation such as from vacant to an investment. Need to see what the yield would be if occupied.
3. Who the most likely purchaser is of the asset.
49
how would you take account for void period if using investment method ?
term and reversion
term at £0 rent for however long void period is
50
what is the residual valuation method?
gross development value
- costs
- profit
= residual valuation
51
how to work out Gross development value (GDV)?
Comparable analysis
52
costs of residual valuation
build cost- use BCIS
demolition
contiguency- 2-5% proff costs and fees
finance costs
professional fees- 12.5%- project manager, architects, building surveyor, QS
interest rate- 6-7% based on risk
developers profit- 15% GDV or total development costs
53
unit of measurement and basis of measurement does BCIS refer to?
- meter square (m2)
- gross external
54
why inspect for valuation purposes?
requirement of red book
condition of property
55
typical industrial spec
40% site cover
steel portal framed
profile steel cladding
roller shutter doors
10% offices
concrete screed floor
services: gas and water
56
What are some RICS publications you use in vals?
comparable evidence in real estate
57
Can you tell me how would you value an oil refinery?
Contractors Basis
58
Can you tell me about a recent valuation you’ve undertaken using Argus Enterprise?
retail unit in clapham
59
What are prime Industrial rents in Ealing?
range from £15-20/ sqft
60
If you were unable to gain access to any part of the property, what would you have to do?
tell the client- ask to reinspect if not then make note in the report that access was not given.
any restrictions must be written in the terms of engagement.
61
Guildford retail level 3- What sort of condition were your units? What would you have done if they were all in poor condition?
in reasonable condition
applied a high yield
62
What are some requirements of a Loan Security Valuation that may not be in accounts vals?
- conflict of interest must be disclosed- valuers responsibility to decide to either accept or decline instruction having record to the RoC.
- reporting- additional info must be reported on the instruction to advise whether to agree to the loan.
an example of info included: comment on any environmental consideration. valuation methodology adopted.
63
what are the yields in Aylesbury?
6-8% yield
64
What did you look for in the profits test?
turnover
pre tax profit
net worth
65
retail inspection what to look out for?
location,
fit out- return frontage, width to depth
66
is IPMS mandatory for offices? are you permitted to not use IPMS?
yes, need to justify reasons. if comps are measured using code of measuring practice you wouldn't use as you cant compare.
67
main difference between IPMS 3 and NIA?
1.5 meters are included in IPMS3 but seperatly
IPMS Global standard, NIA used UK.
68
DCF
financially modelling technique in which future inflows and outflows of cash associated with a project are expressed in present day terms by discounting
holding years- 5-10 years
future income with reference to void, rent review- explicit rental growth
bring it back to today's value
discount rate-
advantage- explicit and transparent- all assumptions laid out. any future voids etc.
when little market evidence- good way to reflect risk through discount rate. can out a lot more inputs
disadvantages- complicated, hypothetical assumptions, growth on rent is subjected, discount rate is based on market, subjective.
an opinion of value.
69
Explicit valuation what is it and what does it allow?
DCF
Investor allows for the assumption of growth to be included in the calculation.
70
Implicit valuation
term and reversion-
the valuer is deriving the appropriate all risks yield (initial yield) from market evidence of other property transactions.
71
Changes in the Red Book. What do they include?
Need for compliance
ESG
Sustainability interpretations
72
what should clients expect from a RICS valuation?
openness and transparency
expertise and clear reporting
72
what Market Value did you achieve for Ealing Industrial
£200/sqft
73
what is VPGA 1
provides guidance on valuations for financial statements
74
what is included in VPGA 2
guidance on secured lending
deals with:
independence, objectivity and conflicts of interests
basis of value and special assumptions
reporting and disclosures
75
What are the components of the Red Book?
* Part 1 – Introduction
* Part 2 – Glossary
* Part 3 – PS (Professional Standards)
* Part 4 – VPS (Valuation Technical and Performance Standards)
* Part 5 – VPGA (Valuation Applications)
* Part 6 – IVS (International Valuation Standards)
76
Are there any exceptions to the use of the Red Book?
5 exceptions to the requirements of the RBG:
1. litigation or negotiations
2. Some statutory functions- rating
3. Internal purposes
4. Agency or Brokerage
5. expert witness
77
Are you still liable for advice given orally?
Yes – This is detailed under PS1 – Compliance with standards where written valuation is provided.
78
What are the differences between a desktop and a full valuation report?
Desktop valuations – this is where no inspection is carried out. The valuer must confirm that they have sufficient information to undertake the valuation. Stated in the Terms of engagement.
Full valuation report – is where the valuer will inspect the property.
The extent of any investigations must be stated in the ToE as per VPS 2
79
Give me some Due diligence examples
Flood risk, planning, EPC
80
What is synergistic value? (marriage value)
The result of a combination of two or more assets/interests where the combined value is more than the sum of the separate values.
81
What is hope value?
Value arising from any expectation that future circumstances affecting the property may change.
Example – future prospect of securing planning permission for development of land where no planning currently exists.
82
To what extent can a valuer reflect hope value?
I don’t have experience in this – depends on the terms. Could reflect it implicitly depending on comparable evidence.
83
Explain what you understand by the term, margin of error.
It is the permissible range allowed by the courts in respect of valuation.
Dependent on case law – between 5-15%
84
How would you value a ransom strip?
Have not had experience in this, however a ransom strip is a piece of land which controls the access to another piece of land.
85
How could you value a long leasehold interest?
Long leasehold
1. Rent received Less ground rent
2. Capitalised at appropriate yield for the remaining length of lease
86
When might you use the profits method? Can you roughly explain how this works?
Used for trade-related properties (hotels, pubs, petrol stations) – where value of prop. depends upon profitability of biz / trading potential.
Need 3 yrs audited accounts.
Method:
1. Turnover less costs = gross profit.
2. Less reasonable working expenses = unadjusted net profit
3. Less operators remuneration = adjusted net profit (Fair Maintainable Operating Profit) FMOP
86
Can you name some inputs that you would account for in a residual?
Build costs, finance rate, dev profit, contingency, planning costs (s.106/CIL), professional fees.
87
What are the different bases of value?
VPS – Bases of Value
1. Market Value = amount asset/liability will exchange on -val date -willing buyer etc.
2. Market rent = as above but for an interest in property for lease
3. Fair value = price in an orderly transaction between two market participants on the measurement date
4. Investment value = value of an asset to a particular owner
87
What is the calc for NIY / RY / EY ?
Net Initial Yield = Current rent/ opinion of MV (net of costs)
Reversionary Yield = MR / MV
Equivalent Yield = Time weighted average between Initial and reversionary yield
Takes into account all of risk over entire cashflow.
88
Why would a property be over-rented or reversionary?
market conditions
89
Why would a property be rack-rented?
New letting close to val date.
90
supplement red book?
UK National Supplement
91
valuation approaches
IVS 105
market, income, cost
92
What is the importance of impartiality? How would you check for this?
Ensure in accordance with PS2 (Ethics, Competency, Objectivity and Disclosures). Valuer must think independently to be able to come to a reasonable, unbiased valuation.
Checks – think first, then run conflict of interest checks on system.
93
Profits test
3 years of audited accounts (tenant to provide) showing a net profit of 3x the annual rent.
94
rack rented what valuation method? and how to calculate?
use the conventional method
net income x years purchase = market value
yp- yield / 100
95
how to value vacant possession
- comparable method
hypothetical investment method:
assume void- rent free
re let at opinion of market rent into perp
capitalise at equivalent yield, higher yield to reflect property is vacant
deduct vacant rates
96
exit value
value investment asset at end of holding period
holding period- amount of time investment held by investor
97
Can you name some inputs that you would account for in a residual?
Build costs, finance rate, dev profit, contingency, planning costs (s.106/CIL), professional fees.
98
Difference between accounts valuations and loan security
Any previous involvement must be enclosed in terms of engagement.
SWOT
Environmental consideration
Suitability for loan security
99
How to rank comparables?
Rank
open market letting
Lease renewal
Rent review
Expert determination
Arbitration
Comparables evidence: Cat A,B,C
100
When would you adopt the residual method?
Land value- Viability of a development potential. Using Market inputs
101
What is the relationship between the RBG & the UK National supplement?
The UK Red Book Global UK National Supplement used alongside rics valuation global standards
Provides members on the application of RICS valuations undertaken subj. to UK jurisdiction.
102
What liability cap did you set? Why is it important to cap liability?
10% MV accounts, 30% MV Loan sec.
103
If doing a revaluation without inspection? How do you ensure there was no material change?
Inspection Should be undertaken unless valuer confident in no material change (VPS 3 – Inspections).
Otherwise check with the client. Also cross-checked with street view, which had been recently updated.
104
What are the risks associated with over-rented properties?
Investors will want higher return for over-rented properties, therefore will pay less as this income will only be secured for a limited period of time.
risk that the income will sink to market level at next lease event.
Also risk that tenant may default due to rent being too high.
105
Stamp Duty brackets
£0-£150,000- nil
£150,000-£250,000- 2%
Over £250,000- 5%
106
Professional fees
6.5%
legal- 0.5%
agents- 1%
stamp- depends but 5%
107
What type of debt was being issued?
Senior debt
108
What is mezzanine finance and how is it priced?
Mezzanine finance is additional finance for the additional monies required over the normal LTV ratio.
risky loan for bank- bridge gaps- lending rates higher % as higher chance bank wont get it back
109
Where do you take of agents/solicitors fees or stamp costs?
Our calculations take them off at the same time in a combined calculation
Both are based off the net price
110
what is the running yield?
yield at one moment in time
111
What are the drawbacks of creditsafe?
You don’t know exactly what they are basing their rating on, rating somewhat subjective, not as well industry recognised, could be different to other indices scores
112
What would you do if someone asked you to value a football stadium?
Decline – not competent
113
Is the valuation date always the inspection date?
Generally it is. If not – need to put in an assumption that noting has changed
114
What does the cover of the red book look like?
Grey and red, with a globe on it
115
What’s include in a valuation scope of works?
Inspection, whether you are going to measure, the report, what the report will include
116
Tell me about a factor which may impact value.
The lease term.
If a property has unexpired term of say 2 years and compared to a property with an unexpired lease term of 4 years, the yield adopted on the property with 2 years remaining will differ and as such will impact on the value.
117
Which sections of the Red Book are mandatory and which are advisory?
Mandatory:
* PS1
* PS2
* VPS, 1, 2, 3, 4, 5
Advisory:
* VPGA 1-10
118
Where does the definition of fair value come from?
International Financial Reporting Standards
119
how do you undertake a development appraisal?
Calculate
1. GDV
2. – total construction costs
3. – profit
= Land Value
120
How might onerous lease terms, e.g. restrictive user, break clause, impact upon capital or rental value?
Restrictive user clause – this will only allow certain occupiers to trade form the property
Break clause – this can reduce the unexpired lease term. Which reduces the guaranteed security of an asset.
As a result, impacting on value.
121
What is a liability cap and when would one be used?
Liability cap would be used for PII
It reduces the amount for which a claim can be brought against a surveyor and firm
122
What is the difference between negligence and margin of error?
- Negligence and you breach your duty of care and fail to act with reasonable care and skill
- A Mistake is covered by the margin of error 10-15%
123
What would you expect to find in a valuation ToE that you wouldn’t find in a BR ToE?
scope of instruction different
fee basis differs- rating TofE fee are success based
valuations- fixed fee
124
How does your approach for a Val inspection differ from a BR inspection?
firstly you are looking for different things.
vals- quality of building, saleability, marketability
rating- assumes the property is in good repair and condition
125
Guildford Retail- explain what 'an overall basis rather than a zoned basis' means
overall- £/sqft of entire floor
zoned- first 6.1m more valuable than rest of property
126
explain what you would do if there was a conflict?
* Review the facts to see whether or not its manageable.
* Inform parties that there is a conflict
* Define whether you believe the conflict could be managed?
* How would you mitigate the conflict? – by information barriers.
127
What is the purpose of a conflict-of-interest check?
To assess whether you are able to act in your client’s best interest and to be able to act with integrity.
128
What is a letter of informed consent?
Informed consent occurs when a party who might be adversely affected by a conflict of interest acknowledges the existence of that risk but still agrees to instruct an RICS regulated firm or RICS member to proceed with the assignment.
129
What is included within a Letter of Informed Consent?
* State that you are complying with the RICS Global Professional Statement on Conflicts of Interest 2017 to inform both parties of involved of the conflict.
* Can only be given in writing
* State the conflict
* State how you will be mitigating the effects of the conflict
* State that it would be in the interest of both parties to proceed
* State the conflict may affect the ability of the RICS member to advise in the clients’ interests
* Both clients must agree and sign
130
What is the purpose of the Redbook?
* To promote and support high standards in valuation delivery worldwide.
131
What are the three internationally defined valuation approaches recorded in the Redbook?
There are three approaches in Redbook:
* The Market Approach (equates to the comparison method)
* The Income Approach (refers to the investment method/residual method/profits method)
* The Cost Approach (refers to the contractors)
132
What is PS1 (professional standard 1)?
Compliance
133
If you want to undertake a valuation which is an exception to the Redbook, what do you have to do?
It would need to be set out in the terms of engagement and report that your client has agreed that it is an exception.
134
How has the RICS placed more of an emphasis on sustainability?
* Released a Global Guidance Note “Sustainability and ESG in commercial property valuation and strategic advice, December 2021 (effective 31st January 2022).
* Provides useful terms which valuers should incorporate into their valuation approaches:
o Terms of engagement
o Valuation purpose
o Inspection
135
What is a long leasehold? How does it differ from a leasehold?
Allows the freeholder to sell a long leasehold and receive a ground rent per annum (this will be considerably lower than the MR).
136
Kennington- What advice did you give your client in relation to the sub-prime condition? How did it impact your valuation?
special assumption of refurbishment
cap expenditure given of £50/sqft added to gross value
137
What is: PS1
PS2
PS1- exceptions to the red book
PS2- ethics, competency objectivity disclosures
138
who was the client? internal purposes
family office
