Valuations Flashcards
What should you check when commencing a valuation instruction?
- Competence
- Independence - COI
- Issue Terms of Engagement
What is included in statutory due diligence for a valuation?
Undertaken to check there are no material matters that could impact the valuation:
- Asbestos register
- Council tax
- Contamination
- Equality Act (2010) compliance
- High voltage power lines / substations / telecoms
- EPC rating
- Flooding
- Fire safety compliance
- H&S compliance
- Highways (roads adopted?)
- Legal title and tenure
- Public rights of way
- Planning history and compliance
What are the steps in a valuation instruction?
- Receive instruction
- Competence
- Independence
- Issue TOE
- Receive TOE signed
- Gather leases, title docs, planning info, OS plans
- Due diligence (as above)
- Inspect and measure
- Market research and analyse comps
- Undertake valuation
- Draft report
- Vet report
- Finalise and sign
- Report to client
- Invoice
- File in archives
What are the five methods of valuation?
- Comparative
- Investment
- Profits
- Residual
- Depreciated replacement cost
What are the three approaches to valuation?
- Income (investment, residual, profits)
- Cost (DRC)
- Market (comparative)
Talk me through the comparative method?
- Find comps
- Find headline rent to give a net effective rent (as appropriate)
- Assemble in schedule
- Adjust using hierarchy of evidence
- Opinion of value
- Report value and prepare file note
Talk me through the hierarchy of evidence?
- Category A (direct comps)
- Category B (general market data)
- Category C (other sources)
What is included in Cat A?
- Completed transactions of identical
- Completed transactions of similar
- Offers on similar
- Asking prices
What is included in Cat B?
- Info from public sources or commercial databases
- Indirect evidence (indices)
- Historic evidence
- Demand / supply data for rent / owner occupier / investment
What is included in Cat C?
- Evidence from other use classes or locations
- Interest rates / stock market movements / returns which can indicate yields
How can you find relevant comps?
- Inspection
- Local agents
- Auction results
- In-house records
- Market sentiment
When is the investment method of valuation used?
- When there is an income stream to value
- The rental income is capitalised to produce a capital value
- Assumes growth implicit (rental growth built into yield)
Talk me through the conventional investment method of investment? Growth implicit
Market Rent x Years Purchase = Market Value, or
Market Rent / Yield = Market Value
YP: The number of number required for the market rent to yield its market value
Calculation for YP: If Yield is 4%, 100/4 (or 1/0.04) = 25, YP is 25
Talk me through the term and reversion method of investment? Growth implicit
Used for under rented properties when rent passing rent needs to REVERT to market rent
- Passing rent capitalised until rent review / lease expiry at an initial yield
- Reversion to market rent in perpetuity at a reversionary yield
What is an initial yield?
Simple income yield for current income and current price
What is a reversionary yield?
Market rent divided by current price on an investment let at a rent below the market rent
Talk me through the layer / hardcore method? Growth implicit
Used for over rented properties when rent passing is more than market rent
- Bottom slice is market rent at lower yield
- Top slice is rent passing less market rent until next lease event at higher yield (reflects additional risk)
What is a yield?
Measure of investment return, expressed as a percentage of capital invested
Yield = Rent / Value x 100
Determined by comparable evidence
How does risk affect yield?
Relates to:
- Prospects for rental growth / capital growth
- Quality of location / covenant
- Use of property
- Lease terms
- Obsolescence - likely future rate?
- Voids - what is risk?
- Security and regularity of income?
- Liquidity - ease of sale
Talk me through the Discounted Cash Flow Technique (type of Investment method) Growth explicit?
Value found by examining future cash flow discounted back to current value
Used if cash flows are over a finite period (like short leases, phased development projects, alternative investments, over rented properties and social housing)
- Estimate cash flow (income - expenditure)
- Estimate exit value
- Select discount rate
- Discount cash flow at discount rate (IRR)
- Value (aka the Net Present Value) is sum of completed discounted cash flow
What is IRR?
The rate of return at which all future cashflows must be discounted to produce NPV of zero
How do you calculate IRR?
- Input current market value as negative cash flow
- Input projected rents over holding period as a positive value
- Input projected exit value at the end of the term assumed as a positive value
- Discount rate (IRR) is the rate chosen which provides a NPV of zero
- If NPV is more than zero, then IRR is met
Talk me through the profits method of valuation?
- Used when value of property depends upon the profitability of the business rather than property itself e.g. pubs / nurseries / healthcare
- Requires audited accounts for 3 years
- Annual turnover - less costs = Gross profit
- Gross profit - less working expenses = Unadjusted net profit
- Unadjusted net profit - less operator’s remuneration = Adjusted net profit (Fair Maintainable Operating Profit)
This can also be expressed as EBITDA (earnings before interest, taxation, depreciation, amortisation)
Capitalised at appropriate yields for market value
Talk me through the difference between a development appraisal and a residual valuation?
Development appraisal - Viability of a proposed development
Residual valuation - Market value of the site at a moment in time
What is GDV?
- Market value of completed proposed development at today’s date
- Comparable method used to establish rents and yield
- All Risks Yield
- Allowance for rent-free period / tenant’s incentives / marketing void can be assumed
- Purchaser’s costs usually deducted for commercial property valuations
What is an all risks yield?
Remunerative rate of interest used in the valuation of fully let property at market rent reflecting all prospects and risks attached to the particular investment
What are included in development costs?
- Site preparation
- Planning costs
- Building costs
- Professional fees
- Contingency
- Marketing fees and costs
What does site preparation include?
Demolition, remediation works, landfill tax, provision of services, site clearance, levelling, fencing
What do planning costs include?
S106 payments, CIL payments, AH level, planning policy requirements like open spaces / playgrounds, section 278 payments for highways, planning application fees, building regulation fees, planning consultant, specialist reports (EIA)
What do building costs include?
- Total cost of building works
- From client info, quantity surveyor, building surveyor, BCIS (GIA basis)
What do professional fees include?
10-15% of construction costs
Architects, M&E, PMs, Structures, CDM Principal Designer
What do marketing costs and fees include?
- EPC
- NHBC warranty (for resi schemes)
- Sales fee 1-2% GDV, Letting fee 10% annual rent
What is the finance rate?
- SONIA rate
- Bank of England Base Rate + Risk
- Rate at which developer can borrow money
Why will the developer need to borrow money?
- Site purchase (compound interest - straight line)
- Construction and associated costs (S curve)
- Holding costs to cover voids (empty rates, service charges, interest charges) (compound interest - straight line)
What is an S curve?
Construction costs take form of an S over the time of development projects
Shows when money is likely to be drawn down
What is developer’s profit?
Percentage of GDV or total construction costs (15-20% depending on risk)
- Percentage of profit is higher at the moment due to riskier market conditions
- Cross check with comparables
What is development finance?
- Debt finance (borrowing)
- Equity finance (selling shares in company)
What is loan to value ration (LTV)?
Typically in region of 60%
What is senior debt?
First level of borrowing which takes precedence over secondary / mezzanine
What is mezzanine funding?
Additional funding for monies required over normal LTV
What is a swap rate?
Market interest rate for fixed term loans
What are other methods of finance?
- JV
- Forward sales
Silvertown is combination of JV funding from Starwood, debt financed through Homes England loan
What is Overage?
Sharing extra receipts over or above the profits expected, also known as ‘claw-back’
What is VAT?
Payable on all professional fees
What is the profit erosion period?
Length of time it will take for the development profit to be eroded by holding charges following the completion of the scheme, until the profit has been drawn down
What are some limitations of residual valuation methodology and financial modelling?
- Rely on accurate inputs
- Residual valuations do not consider timing of cash flow
- Sensitive to minor adjustments
- Implicit assumptions hidden and not explicit (unlike DCF)
- Always cross check with comparable
What is a sensitivity analysis?
Shows range of values
Three forms of sensitivity analysis?
- Simple (on yields, GDV, build costs, finance rate)
- Scenario (development content, timing, costs, phasing the scheme or modifying design)
- Monte Carlo simulation (probability theory, like Crystal Ball)
What does the RICS Professional Standard: Valuation of Development Property (2019) stipulate?
- Supplements IVS ‘Development Property’
- Stipulate if assumption or special assumption
- Comparative method should be cross checked with residual method, don’t rely on one method if possible
- For lengthy projects, DCF might be best used
- Risk analysis so scenarios can be modelled, risk and return levels should be explicitly stated in the valuation report
- When valuing land, determine land plus costs, and completed development minus costs - check against each other
- Valuation reported as single figure
What is an assumption?
A reasonable thing for the valuer to accept without specific investigation
A valuer might make an assumption about the treatment of purchaser’s costs when using an income capitalization approach
What is a special assumption?
An assumption that differs from the actual facts at the valuation date
A valuer might value a property without planning permission on the special assumption that it has planning permission
Talk me through the Depreciated Replacement Cost (DRC) / Contractor’s method?
- Used for specialised properties like sewage works, lighthouses, oil refineries, docks, schools
- Value of land in existing use (assume planning permission exists)
- Add current cost of replacing the building plus fees, less a discount for depreciation and obsolescence / deterioration (use BCIS and then judge level of obsolescence)
What are the types of obsolescence?
- Physical
- Functional
- Economic
Is the Depreciated Replacement Cost method compliant with the Red Book?
No
- Not compliant for secured lending purposes
- Only used for financial statements
- Private sector: statement that it is subject to adequate profitability of the business
- Public sector: statement that it is subject to the prospect and viability of the continued occupation and use
- Valuer must state the market value for any readily identifiable alternative use, if higher or if appropriate, a statement that the market value on cessation of the business would be materially lower
Is there any guidance on DRC method?
RICS Guidance Note: Depreciated Replacement Cost Method of Valuation for Financial Reporting (2018)
How is the Red Book structured?
- Part 1 - Introduction
- Part 2 - Glossary
- Part 3 - Professional Standards (PS)
- Part 4 - Valuation technical and performance standards (VPS)
- Part 5 - Valuation applications (VPGA)
- Part 6 - The International Valuation Standards
What do changes to the Red Book include?
- Make clear if it’s Red Book compliant or not, can’t be quasi
- Profits method includes self-storage, flexible workspace and purpose built student housing
- Sustainability and ESG including how they could impact a valuation / collection of data
- Valuation for secured lending and how Sustainability and ESG will impact a valuation to meet investor expectations
- Direct valuation factors include storm or flood, indirect valuation factors include resilience or carbon emissions, physical risks include heat or wildfire, transition risks include regulatory change or carbon emissions
What are exceptions to the Red Book? Falls under Part 3 - Professional Standards
- Advice is prepared for a negotiation or litigation
- It’s a statutory function (except tax)
- Purely for internal purposes, without liability and not communicated to any third party
- Provided as part of agency work in anticipation of receiving an instruction to dispose, acquire, expect when a purchase report of required which includes a valuation
- Provided in anticipation of giving evidence as an expert witness
What is VPS1? Falls under Part 4 - Valuation Techniques and Performance Standards
Terms of Engagement
- Identify valuer
- Identify client
- Identify intended user
- The asset
- Currency
- Purpose
- Basis of value
- Valuation date
- Extent of investigation
- Nature and source of the information relied on
- Assumptions and special assumptions
- Format of report
- Restrictions of use / publication
- Confirmation of Red Book / IVS compliance
- Fee basis
- Complaint’s handling procedure
- Statement that valuation mat be subject to compliance by RICS
- Limitation on liability agreed
What are the bases of value?
Market Rent
Market Value - For loan security
Fair Value
Investment Value - For regulatory
Definition of market rent?
- Asset or liability should exchange
- On the valuation date
- Between a willing buyer and a willing seller
- In an arm’s length transaction
- After proper marketing
- And where the parties had each acted knowledgeably, prudently, and without compulsion
Definition of market value?
- Asset or liability would be leased
- On the valuation date
- Between a willing buyer and a willing seller
- In an arm’s length transaction
- After proper marketing
- And where the parties had each acted knowledgeably, prudently, and without compulsion
Definition of 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
Definition of investment value?
- The value of an asset to a particular owner or prospective owner for individual investment or operational objectives
What is VPS2? Falls under Part 4 - Valuation Techniques and Performance Standards
Inspections, Investigations and Records
- Inspections: To verify info
- Desktop valuations: If restricted info and no inspection undertaken (still a Red Book Valuation)
- Revaluation (without re-inspection): Must not do this unless satisfied no material changes, must be confirmed in TOE
- Records: Record inspections and investigations
If undertaking a desktop valuation:
1. Nature of restriction must be agreed in writing in TOE
2. Valuation implications of the restriction confirmed in writing
3. Consider whether restriction is reasonable with regard to purpose of valuation
4. Restriction must be referred to in the report
What is VPS 3? Falls under Part 4 - Valuation Techniques and Performance Standards
Valuation Reports
- Identify valuer
- Identify client
- Purpose of valuation
- Identification of asset
- Basis of value
- Valuation date
- Extent of investigation
- Information relief upon
- Assumptions and special assumptions
- Restrictions on use and publication
- Accordance with IVS?
- Valuation approach and reasoning
- Valuation figure(s)
- Date of valuation report
- Comment on market uncertainty
- Limitations on liability
Draft advice - Can be given for internal purposes, but no relied upon. Draft report to client must state that it is draft. Can’t be influenced by client after issuing draft. If changed must be noted on file and reasons stated.
What is VPS 4? Falls under Part 4 - Valuation Techniques and Performance Standards
Bases of Value
- Market Value
- Market Rent
- Fair Value
- Investment Value
- Equitable Value
- Liquidation Value
What is equitable value?
Not used in UK
Estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties
What is liquidation value?
Not used in UK
Used for group of assets sold in piecemeal basis considering the costs of getting the assets into a saleable condition
What is VPS 5? Falls under Part 4 - Valuation Techniques and Performance Standards
Valuation Approaches and Methods
What is VPGA 1? Falls under Part 5 - Valuation applications
Valuations for inclusion in financial accounts
- Use fair value
What is VPGA 2? Falls under Part 5 - Valuation applications
Valuations for secured lending
If COI:
- If previous involvement with borrower, must disclose (past 2 years)
- Decline if involvement created conflict
- E.g. if you have a longstanding relationship with the borrower or owner (might value higher, get a fee, if valuer is retained to act in disposal or letting of completed development)
Reporting Procedures?
Report additional info to the lender to advise whether to agree to the loan / borrower defaults:
- Disclose involvement / COI
- Method adopted and calculation
- If transaction on property has occurred, extent to which that info has been accepted as market value
- Environmental considerations
- Suitability of property for mortgage purposes
- Circumstances that could affect price
- Potential conflicts
- Valuation enquiries
- If used special assumption, comment made in the report on any material difference between reported value and without special assumption
- Sustainability factors becoming more significant
What is VPGA 8? Falls under Part 5 - Valuation applications
Valuation of Real property Interests
- Covers inspections and investigations
- Emphasis on ESG and sustainability
What is VPGA 10? Falls under Part 5 - Valuation applications
Matters that may give rise to material valuation uncertainty
- Must not be misleading
- Comment on issues relating to material uncertainty
- Standard caveat should not be used
What does the RICS Valuation - Global Standards (UK National Supplement, 2023) set out?
Relationship between Red Book and UK National Supplement
- Came into effect May 2024
- Reflects outcomes of review by Peter Pereira Gray
- The National Supplement expands on the RB and is not a substitute
- Specific requirements for members on application of RICS Valuation - Global Standards
What additional guidance does it give to UK VPS 3 - Valuation Reports?
Regulated Purpose Valuations
Valuation for five purposes:
1. Financial reporting (company accounts)
2. Stock Exchange listings / inclusion
3. Takeovers and mergers
4. Collective investment schemes
5. Unregulated property unit trusts
Valuation monitoring:
- Declare how long members have acted for clients
- Whether the % fee income from a client is less / more than 5% total fee income
- Whether the above will change
Governance requirements:
- Max 10 years before rotation of a valuation firm
- Max single engagement of 5 years
- Max 5 years before rotation of individual responsible valuer
- Min 3 years break after rotating off
- Valuer must also ask about individual parties involvement
- Record preliminary advice
What was the RICS Independent Review of Real Estate Investment Valuations (2021)?
- Review by Peter Pereira Gray to futureproof practises
- All recommendations implemented
13 recommendations:
- Commissioning and receiving of valuation reports
- Rotation of valuers for regulated purpose valuations
- Valuation of profession should incorporate the use of DCF as the principal model applied in preparing property investment valuations
- Valuation audit trails
- Valuation Assurance Committee
Following the Review, what did the Professional Standard: Sustainability and ESG in commercial property valuation and strategic advice (effective 2022) set out?
- Glossary of terms which should be incorporated (TOE, valuation purpose, inspection, reporting)
- Sustainability characteristics, considerations and risks which should be borne in mind
- How these should be reflected in choice of valuation methodology
What did the Review say about Margin of Error?
- Permissible range allowed by courts
- Smaller margin for simpler valuation (Singer & Freidlander Ltd vs. J D Wood, 1977)
- 5% for standard resi, 10% for one off commercial, 15% if exceptional features (KS Lincoln vs. CB Richard Ellis, 2010)
What did the Review say about Hope Value?
- Value arising from expectation that future circumstances affecting property may change e.g. through planning permission / marriage value from merger of two interests in land
What did the Review say about Marriage Value?
- Created by merger or interests, physical or tenurial
- Undertake a before and after valuation
- Split the marriage value 50:50
What did the Review say about SDLT?
Non resi tax:
£0 - 150,000 = Nil
£150,001 - 250,000 = 2%
£250,000 + = 5%
Resi:
£0 - £250,000 = Nil
£250,001 - £925,000 = 5%
£925,001 - £1,500,00 = 10%
£1,500,000 + = 12%
- £% extra is second home / buy to let
- First time buyers can claim relief up to £425,000, and 5% on portion from £425,001 to £625,000
- SDLT is payable on grant of new leases, calculated on the NPV of the lease, discounted at the RPI
NPV up to £150,000 (£125,000 for resi) = 0
NPV over £150,000 (£125,000 for resi) = 1%
NPV over £5,000,000 = 3%
- NPV is defined as the total rent payable over the term of the lease, reduced by an annualised discount rate
What is ATED?
Annual Tax on Enveloped Dwellings
- Stops on shore and off shore individuals using companies to avoid SDLT
What are party walls?
Wall is a party wall is it stands astride the boundary of land belonging to two or more land owners
- Must always inform adjoining owners if intent to undertake works
Party Wall Act (1996)
What are rights to light?
Right to light arises after 20 years uninterrupted enjoyment of light without consent of a third party by way of an easement with a prescriptive right. If a right to light is infringed, an injunction can be granted, or damages awarded
HKRUK II (CHC) Ltd v Heaney (2011)
RICS Guidance Note: Rights to Light (2016)
RICS Consumer Guide to Right to Light (2022)
What are surrender / renewal valuations?
- When a LL / tenant wants a surrender of the existing lease and agrees to grant a new lease - longer / different terms
- Calculate premium to reflect change in value of leasehold interest
- Value before and after
Valuations for charities?
- Charities must obtain valuation prior to disposal of an asset
- Report must confirm charity has obtained best terms for transaction
Charities Act (2011)
Particular buyer / special value?
- Special buyer: particular buyer for whom an asset has a special value because of advantages arising from its ownership that would not be available to other buyers
- When a transaction is not at arm’s length and there is a special purchaser
- E.g. tenant purchasing their freehold interest
Building cost reinstatement valuations / estimations
- For building insurance purposes, the cost of reinstating a building without profit
- Use BCIS adopting GIA for commercial properties
- Add VAT, demolition costs, professional fees, planning and building regulation fees and inflation
- Replacement cost figure is not a ‘written opinion of value’ so RB compliance not required
Valuation of long leasehold interests
- Rent received less ground rent = Net rent
- Net rent capitalised at yield for remainder of lease = Market Value
What is a Premium?
- Capital payment made by one party to another e.g. to retail tenant, to tenant for FF&E, to tenant to represent positive difference between passing rent and market rent, this is profit rent, if negative it can be reversed, paid by landlord to tenant for surrender of a leasehold
What are purchaser’s costs?
- Deduct likely costs of purchase from the gross market value to provide a net market value of a property as a purchaser will have to pay these costs
- Usually include SDLT. agents fees (1% purchase price plus VAT), solicitors fees (0.5% of purchase price plus VAT)
What is WAULT?
Weighted average unexpired lease term
Remaining to the first break of a lease across asset weighted by the contracted rent
Used when valuing an asset / considering investment yield for multi-occupied investments or portfolios
Analysis of rent free periods / headline rents?
- Devalue a headline rent with a rent-free period to produce a net effective rent
- Straight line basis either until end of lease or until next review / lease event
- Net effective rent is the market rent
- 3 month fit out period is deducted from rent free period
Three approaches to calculate net effective:
1. Straight line method
2. Straight line method assuming time value of cash flow using a yield
3. Use of DCF
Valuation of ransom strips?
- Piece of land which controls access to another piece of land
- The Upper Tribunal suggests that value of ransom strip could be in the order of 15-50% of the development value unlocked by the inclusion of the ransom strip within the proposed development scheme. In some cases, a fixed sum has been awarded.
Stokes v Cambridge (1961) when a value of one third of the uplift in the development site value was awarded to the owner of the ransom strip
Zoning?
- Used for comparison of retail properties to create a unit of comparison for different sized buildings
- Rental value reduces away from the street
- Halving back principle with 6.1m zones
- 9.14m (30ft) zones are used in prime London streets
- Basements / first floor areas are usually treated as A/10 approx
- ‘End allowances’ allowed for shape, such as split levels, excessive front to depth ratio and hard frontages
- Return frontages add 10% uplift
- Natural zoning is when property zones reflect physical changes in the building such as steps
- Mirror zoning if shop has two main frontages
- Masking for hidden areas
RICS Valuer Registration Scheme?
Regulatory monitoring scheme for all valuers carrying out RBG valuations.
- To improve quality of valuation and ensure highest standards
- To meet RICS requirement to self-regulate
- To protect and raise the status of the valuation profession as the leading expertise in valuation
Clients can expect:
- Openness and transparency
- RICS protection and IVS
- Expertise and clear reporting
- World class regulations
-Registration not mandatory for non RBG work
- Valuer can use RICS Registered Valuer on marketing
- Have to have done APC L3 Vals
- Annual fee
To register:
- Type of valuations
- Purpose of valuations
- Number of valuations
- Firm’s total fee income from RBG vals in the last year
- Data sources
- Quality assurance audit procedures
- History of negligence
Monitored through submission of firm’s annual return. Aditional monitoring ranges with Risk Based Reviews from desktop investigations to site based Regulatory Review Visits (RRVs), dependent on risks identified. Head of Regulation can remove you.
What RICS guidance should you follow when undertaking a development appraisal?
RICS Professional Standard: Valuation of Development Property (2019)
What is the difference between a development appraisal and residual appraisal?
DA - Viability of proposed development
RLV - Residual market value of land at a given time
What do you mean when you say revenue and cost inputs are influenced by the market?
Revenue - Rents influenced by demand
Costs - Construction cost inflation
Can you talk me through the headings I would expect to see in a development stack?
GDV
Costs
Profit
In your Plot 6 viability example, how many affordable units were in the scheme?
106 units
What was the unit price per unit in Plot 6?
For Plot 6, can you talk me through what the market assumptions were for the other development costs?
What were your clients required profit metrics and what did the scheme achieve in Plot 6?
For VE in 1D2D, what was the outcome on the MOC?
For 1D2D VE, were there any other changes you could have made to increase the MOC?
What are the NDSS?
Nationally Describes Space Standards (2015)
Requirement for GIA of new dwellings at a defined level of occupancy as well as floor areas and dimensions
What is scenario analysis?
Simple (yields, GDV, build costs, finance rate)
Scenario (development content, timing, costs, phasing, modifying design)
Monte Carlo (probability theory so you get random outcomes each time, use to produce the probability of every possible outcome)
Was was the mix of 1, 2, 3 beds in Option 3 in Plot 78 increasing GDV?
What are five methods of valuation?
Comparable
Investment
Residual
Depreciated Replacement Costs
Profit
In the red book, what is VPS1?
Terms of Engagement
Can you talk me through the headings I would expect to see in a valuation TOE?
Identify valuer
Identify client
Purpose of valuation
Valuation date
Extent of valuation
Bases of value
Assumptions and special assumptions
Confirmation of Red Book / IVS compliance
When would it be acceptable not to undertake an inspection of a site?
As long as there have been no material changes
Must be confirmed in TOE
What is the basis of value?
Fundamental measurement assumption of a valuation
Also known as the standard of value
What is the fundamental measurement assumption of a valuation?
The basis of value
What is market value?
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 proper marketing
- Where the parties had each acted knowledgeably, prudently, and without compulsion
What is investment value?
The value of an asset to the owner or a prospective owner for individual investment or operational objectives
Also known as worth
What is fair value?
The price that would be received to sell an asset
Or paid to transfer a liability
In an orderly transaction
Between market participants
At the measurement date
Can you explain synergistic value?
The result of a combination of two or more assets or interests where the combined value is more than the sum of the separate values
Also known as marriage value
Can you explain zoning?
A valuation technique used for the comparison of retail properties to create a unit of comparison for different sized buildings
The rental value of the property reduces away from the street
What is the difference between an assumption and a special assumption?
Assumption - Supposition taken to be true involving facts and conditions that do not need to be verified
Special assumption - An assumption that either assumes facts that differ from the actual facts existing or that would not be made by a typical market participant
What is the difference between VPGA1 and VPGA 2?
VPGA 1 - Financial accounts
VPGA 2 - Secured lending
What is the comparable method of valuation?
The comparable method can be used where there is a good body of recent, reliable comparable rental, yield or sales evidence
A comparable is defined as an item of information used during the valuation process as evidence to support the valuation or another, similar item
Can you explain what the hierarchy of evidence is?
A - Direct comps (completed transactions / asking)
B - Market data (commercial databases/indices/historic evidence/market demand)
C - Other sources (locations/assets)
Can you talk me through your comparable method example?
Why would you use IVS over the VPGAs?
The IVS are not RICS, whereas the VPGAs are RICS - they fully incorporate concepts defined in the IVS
IVS are the global baseline for valuation, RICS has fully adopted them into the VPGAs
When were the IVS last updated?
Published 31st January 2024
- Revised structure
- Increased focus on ESG, data, and modelling
What does IVS 410 set out about Development Property?
- Development properties defined as where development is required to achieve the highest and best use
- Valuer’s responsibility to understand intended use of development
What is the difference between headline rent and net effective rent?
- Headline is total rent paid over the lease, including the value of any incentives (e.g. 100k)
- Net effective rent total rent paid over the lease, less the value of any incentives (e.g. 80k)
£20k worth of incentives
What does arm’s length mean?
A deal where the buyer and seller act independently, without any special relationship or influence, ensuring the property is values at its true market value
What is an example of an assumption and a special assumption?
Assumption: Statements that are accepted as true without evidence
E.g. Assumption about tenure or property condition
Special assumption: Statements that are not necessarily true but used to illustrate the effect of possible changes
E.g. That planning consent has been granted / works being complete
When was the Red Book last updated?
Published 31st January 2024
Effective 31st January 2025
Key changes:
- Alignment with updated IVS (also published on 31st January 2024 and effective from 31st January 2025)
- Incorporate changes from the RICS Valuation Review
- Futureproof valuation practise in evolving areas such as technology and ESG
- New content relating to modelling and methods
- Help valuers to provide the highest standard of service
- Simplify and clarify guidance for valuers
- Build public trust in valuations provided by RIVS Registered Valuers
Please can you give further detail on the updates to the Red book that took effect in January 2025?
IVS:
- Red book structure was revised to align with updated IVS (‘ve always learnt the new way with the 6 x VPS’s)
- VPS 5 ‘Valuation Models’ is new
- VPGA 1 ‘Valuations for financial reporting’ has been rewritten (to mention IFRS)
- Added VPGA 11 Relationship with Auditors
Models and methods:
- New coverage on these topics that encourages analytical approaches, but maintaining the valuer’s choice and judgement (e.g. where AI is used in automated valuations, the outputs are only considered to be a written valuation if a valuer has applied their professional judgement to it’
Technology and ESG:
- Amended PS1 (Compliance) around automated valuation models, and incorporated new standards covering automation, AI and ESG (e.g. built into valuation guidance such as in ToE, inspection, investigations, recordings and reporting)
When was the Red Book Supplement last updated?
Published 19th October 2023
Effective from 1st May 2024
It was reissued in January 2025 to reflect the changes in the updated Red Book
What do the updates to the UK National Supplement, that was issued in January 2025, entail?
- Minor UK specific terms added to the glossary
- UK VPGA 1 ‘financial reporting - Minor amends
- UK VPS 3 ‘valuation approaches and methods’ - Addition of mandatory rotations for valuers:
- Max single valuer period of 5 years
- Max single firm period of 10 years
- Min 3 year break after rotating off the above
Which methods of valuation have to be red book compliant?
Valuations have to be RCB if they are for taxation, finance, insurance, or legal purposes (e.g. for LPAs, institutional lenders, solicitors, accountants, HMRC, the courts)
RCB have to be undertaken by a RICS Registered Valuer
RBC valuations include:
- Comparable method
- Investment method
- Residual method
- Profit’s method
DRC is not suitable to be used for RBG compliant valuations for secured lending purposes, can only be used for market value / valuations for financial statements
Do FVAs have to be red book compliant?
Yes:
- FVAs that include valuation elements should be RBG
- Unless the PPG (Planning Practise Guidance) overrises the requirements of the RBG
- If PPG does not override, then yes surveyors need to ensure that any valuation elements of FVAs adhere to RBG
What is the difference between a valuation for loan security and a valuation for regulatory purposes?
Loan Security: Assesses a property’s worth to determine if a lender can realistically recover the loan amount if a borrower defaults.
Regulatory: Used for specific legal or regulatory purposes, such as determining the value of a property for taxation or insurance.
