16. Valuation Flashcards

Question

Factors in a comparable valuation of a commercial retail property?

Answer 1

* building layout * size * height * loading * access * car parking * other retail units adjacent * visibility * key lease terms * yield * covenant strength * service charge * centre management

Answer 2

* Proximity to Major Roads – Easier access for transport and logistics increases value. * Site Access & Loading – Suitable for HGVs with good loading/unloading facilities. * Building Layout & Height – Efficient layout and clear internal height for storage/racking. * Floor Loading Capacity – Strong floors to support heavy goods or machinery. * Clear Span Space – Open, unobstructed areas improve flexibility and usability.

Answer 3

* Databases – CoStar, Estate Gazette Radius (EG Radius), land registry, Zoopla/Rightmove * Visit/ speak to local agents * Auction results (beware gross prices, insolvency sales, probate sales) * In house databases * Consider market sentiment where there is a lack of transactional evidence.

Answer 4

Property held to generate income return (rent), capital return (growth), or both, and is not occupied or used by the owner for their own business activities—unless the property is held separately in a property company (PropCo).

Answer 5

The Income Approach is commonly used, especially the investment method within it. This includes: 1) Conventional methods or 2) Discounted Cash Flow (DCF). Within these methods, valuers often use the comparable method to determine rent, yields, or the discount rate.

Answer 6

* When there is an income stream to value. * Rental income is capitalised to produce a capital value. * An investment valuation will be based on an analysis of comparable rents and comparable yields.

Answer 7

Discounting Implicit: 1. The Conventional Method 2. Term and Reversion 3. Layer/ Hardcore (hardcore and Topslice) Discounting explicit: 4. Discounted Cash Flow (DCF)

Answer 8

* All are capitalisation approaches. * Discounting and growth are implicit, embedded in the yields applied. * Unlike DCF, which models cash flows explicitly.

Answer 9

* The time value of money is the principle that £1 today is worth more than £1 in the future, due to risk, inflation, and opportunity cost. * Discounting is the financial process used to adjust future income to its present value. * In the capitalisation approach, discounting is implicit, it is embedded within the market yield, which reflects the timing, risk, and expected return of future income streams.

Answer 10

The number of years required for the income to repay the purchase price. Calculated by dividing 1/ Yield (%) (A multiplier used to convert an annual income (like rent) into a capital value, based on the expected yield or rate of return.

Answer 11

Rent received multiplied by the years purchase to calculate the market value.

Answer 12

Cross-checking different valuation methods or data to confirm a consistent, reliable value.

Answer 13

* A valuation technique under the investment method, * Used when Market Rent > Passing Rent, in other words the property is UNDER RENTED. Income is split into two layers: * Term: Capitalise passing rent up to next review/lease expiry at an initial yield. * Reversion: Capitalise market rent in perpetuity from that point at a reversionary yield. * Add them together.

Answer 14

Yes. The market rent is typically projected forward to the reversion date, using an appropriate growth rate based on expected inflation or market rent increases, before being capitalised at the reversionary yield.

Answer 15

Term: Capitalised at initial yield (term yield) Reversion: Capitalised at all risk yield (ARY) (reversionary yield)

Answer 16

* No. The term yield is lower because income is certain and secure. * The reversion yield is higher to reflect rental growth uncertainty and risk after the fixed term.

Answer 17

* A valuation technique under the investment method. * Used when Market Rent < Passing Rent, the property is OVER RENTED. Example: * Let say the property is over-rented contractually for 3 years. * Hardcore (bottom layer): capitalise market rent at an initial yield for 3 years. * Topslice (top layer): Although contractually due, it is considered less certain long-term, so capitalise the excess rent at ARY for same 3 years. * After 3 years (lease end): Project Market Rental Value (MRV) forward 3 years (to reflect growth). Capitalise the projected MRV in perpetuity at the reversionary yield (ARY). * Add the three capital values together to get the total valuation.

Answer 18

The annual return on investment expressed as a percentage of capital value. The correct yield to adopt found by comparable evidence.

Answer 19

The number of years required for the income to repay the purchase price. Calculated by dividing 1/ yield.

Answer 20

The remunerative rate of interest used in the valuation of fully let property let at market rent reflects all the prospects and risks attached to the particular investment. Many of the yields are all risk yields (ARY). This is a generic term meaning the yield is growth implicit. In other words, it takes account of risks, returns and expectations of growth.

Answer 21

Assumes rent is paid in advance, NOT in arrears. (traditional valuation assumes rent is paid in arrears)

Answer 22

Initial rent assuming rent is paid in arrears

Answer 23

* Excludes purchaser costs – in reality return will be lower. * Shown at auction. * An all-risk yield.

Answer 24

* Includes purchaser costs. * Lower yield than gross. * An all-risk yield.

Answer 25

Net Initial Yield is the annual net rent, expressed as a percentage of the total acquisition cost, including purchaser’s costs. It reflects the investor’s initial return on the capital outlay and is a growth-implicit, all-risks yield.

Answer 26

* Average weighted yield when a reversionary property is valued using an initial and reversionary yield. * This is the weighted average yield between the term and reversion or sometimes also called the internal rate of return with NO growth. * Equivalent yield is an all-risks yield.

Answer 27

True Equivalent Yield is all-risks yield that reflects the actual timing of rental income, typically quarterly in advance, rather than annually in arrears. It gives a more accurate return by accounting for the time value of money and is usually slightly higher than the standard equivalent yield.

Answer 28

* The discount rate used in a DCF that allows for rental growth. It reflects the investor’s total return over time. * NOT an all-risks yield because growth is explicitly modelled.

Answer 29

A simple income return: current rent ÷ price. It shows the starting return on the investment.

Answer 30

Reversionary yield is a measure of potential return on a commercial property investment. It's based on the estimated rental value (ERV) once the property reverts to market rent. Estimated Rental Value (MRV) / Property Value

Answer 31

The yield at one point in time.

Answer 32

SDLT at the prevailing rate (5%) 1% agent fees 0.5% legal fees 0.3% VAT Care Homes – standard assumption is 6.8%

Answer 33

The comparable method

Answer 34

Prime City – 5.25% Prime West End – 4.00% Secondary – 6.75%

Answer 35

Prime – 5.00% Secondary 6.00% - 8.00%

Answer 36

High street Prime – 6.50% Shopping centre prime – 8.00% High street secondary – 9.00% Shopping centre secondary – 10.00% - 12.00%

Answer 37

Prime - 4.25% in London Secondary – 5.25%+

Answer 38

Tier 1 - 4.50% - 5.25% Tier 2 - 4.75% - 5.50% SPV+ - 5.25% - 6.00% SPV - 5.75% - 6.50% Secondary – 6.00%+ - 9.00%

Answer 39

Prime - 5.25% Secondary 6.00% - 8.00%

Answer 40

RICS Practice Information Discounted cash flow valuations, November 2023

Answer 41

* Discounted cash flow is a valuation technique that is used by valuers for investment valuation and analysis. * It is an income approach valuation * And it is a growth explicit investment method of valuation.

Answer 42

It is a valuation technique that seeks to determine the value of a property by examining its future net income or projected cash flow from the property and then discounting the cash flow to arrive at an estimated current value of the property.

Answer 43

The time value of money – the concept that £1 today is worth more than £1 tomorrow.

Answer 44

1. Estimate the cashflow for the agreed holding period. 2. Estimate exit/terminal value of the asset. 3. Select the discount rate (use comparable method) 4. Discount cashflow at discount rate. 5. The value is the sum of the discounted cashflow to provide the NPV.

Answer 45

The discount rate reflects the required rate of return and is based on: * Market yields for similar properties * Risk profile of the asset (location, tenant, lease length, etc.) * Cost of capital (if applicable) Often aligned with the ARY or target return expected by investors.

Answer 46

* A discount rate is the rate used to convert future cash flows into their present value. * In property valuation, it usually reflects the target return a typical investor requires, based on the risk of the asset.

Answer 47

Net Present Value is the sum of all future cash flows, discounted back to today’s value. * Where the NPV is zero, the discount rate is also the internal rate of return (IRR). * If NPV > 0, the investment is financially viable, above the hurdle.

Answer 48

IRR, or Internal Rate of Return, is the discount rate at which the net present value of all future cashflows equals zero. * In simple terms, it’s the annualised rate of return an investment is expected to generate, taking account of the timing and size of cashflows. There are two types: * Geared IRR: includes the effect of debt (leverage) * Ungeared IRR: based on equity cash flows only (no debt)

Answer 49

* Short leaseholds * Properties with voids or unusual tenures * Phased developments * Social housing * Alternative assets (e.g. student housing, hotels, co-living)

Answer 50

Explicit assumptions are clearly set out in the cash flow — such as rent growth, voids, and costs, shown over time periods – used in DCF. Implicit assumptions are built into the All-Risk Yield - used in traditional techniques under the investment method.

Answer 51

* Used for valuations of trade related property, where there is a ‘monopoly’ position. * When the value of the property depends on the profitability of the business and its trading potential. * E.g. Pubs, petrol stations, nurseries, leisure, care homes, healthcare (owned by business themselves).

Answer 52

* Accurate and audited accounts (ideally 3 years) * If a new business use estimates/ projected cashflows based on comparables. * Adjust for maturity of business.

Answer 53

Fair Maintainable Operating Profit The profit a reasonable operator would expect from the property’s trading activities, before - Tax - Financing - Depreciation - Management fees - Rent

Answer 54

FMT - Top line (revenue) FMOP - bottom line (profit) after operating costs FMOP = FMT - Operating costs

Answer 55

Fair Maintainable Trade The level of turnover that a reasonably efficient operator would expect to achieve on the assumption that the property is properly equipped, repaired, maintained and decorated.

Answer 56

Reasonably Efficient Operator Assumes competent operator acting in an efficient manner

Answer 57

* Business is turnkey (Licenses and consents are in place) * Business is mature.

Answer 58

RICS Professional Standard: Valuation of Development Property (2019) Should be used to supplement International Valuation Standards (IVS) 410 “Development Property”

Answer 59

* To estimate land or site value for development by subtracting costs and profit from the completed value. * Used in feasibility, planning, or valuation. * Can be simple residual or DCF-based.

Answer 60

Inputs are based on market evidence at the valuation date, reflecting a single point in time and with development for a particular purpose.

Answer 61

A development appraisal is a financial tool used to assess the viability of a scheme, based on the developer's inputs, with developer profit usually being the output. A residual valuation is a valuation method used to estimate a site’s value, applying market-level inputs and assumptions at the valuation date.

Answer 62

1. Establish GDV – using sppropirate method. Rental and yield comparables for the completed scheme at today’s market values. 2. NDV = minus purchaser costs / letting and agency fee 3. NDV - Total development costs which include: - Professional fees - Planning contributions (CIL, S106) - Construction cost + contingency - Finance costs - Development profit = land value - purchaser costs = net residual land value

Answer 63

* Usually 10–15% of total development cost (plus VAT), depending on scheme complexity. * VAT is payable on professional fees. * Architects typically make up the largest proportion.

Answer 64

Typically, 5–10% of construction cost, depending on the risk and stage of the project. At early feasibility/residual stage, I would recommend 10%, particularly due to recent build cost inflation. In the retirement team, where development risk is taken on directly, we apply: * 10% on build costs, plus * An additional 5% on total development costs as overall risk allowance.

Answer 65

* Community Infrastructure Levy (CIL) * Section 106 contributions (S106) * Section 278 agreements (highways works) * Affordbale housing contribution (PiL)

Answer 66

Sales cost: 1% - 2% of GDV Letting fees: 10% of initial annual rent

Answer 67

Finance rate based on: * SONIA or Bank of England base rate plus a margin * The actual borrowing rate available to the developer * Market evidence and deal terms Method of calculation (rolled and compounded interest): * Site purchase: Land + acquisition costs: 100% financed over the full development period * Total construction costs: Often assume 50% costs over full period, or 100% costs over half the construction period (to reflect S-curve of spend) * Holding costs: Finance on Principal + interest to date during stabilisation or letting-up period.

Answer 68

* Typically, 15–20% of total development cost (profit on cost). * At my firm, we usually assume a minimum of 15%, depending on the risk profile. Factors affecting profit margin: * Higher risk (e.g. complex build, speculative scheme) → higher margin * Lower risk (e.g. pre-let or pre-sold schemes) → lower margin accepted

Answer 69

The swap rate is the fixed interest rate agreed for a set term, reflecting the market rate for fixed-rate borrowing. There are different swap rates for various loan types, such as development finance, mortgages, or corporate loans, each reflecting the market’s fixed borrowing cost for that specific term and risk profile.

Answer 70

* Joint venture * Forward funding * Equity investment

Answer 71

An investor agrees to buy the development site and fund construction in stages, with a pre-agreed price to purchase the completed property, usually at practical completion.

Answer 72

The length of time it takes for the development profit to be completed eroded by ongoing costs (like interest and fees) after the scheme is completed, until the profit is received.

Answer 73

1) Sensitivity to input assumptions – important these are accurate & minor adjustments could make big impact on values 2) Does not consider timing of cashflow – or the time value of money

Answer 74

1. Simple Sensitivity – changing one input at a time to see effect on output. 2. Scenario Analysis – testing multiple changes together to model different outcomes. 3. Monte Carlo Simulation – uses probability theory and software (Crystall ball) to model a wide range of outcomes.

Answer 75

Always triangulate your result by cross-checking with comparable site valuations, such as land value per acre to sense check.

Answer 76

RICS Professional Standard: Depreciated Replacement cost method of valuation for financial reporting (2018)

Answer 77

* Not fit for Red Book Valuations for secured lending * Can only be used for valuations for financial statements * If asset is private sector – valuation accompanied by statement of profitability of the business * If asset is in the public sector – valuation accompanied by statement of viability of asset for continued use.

Answer 78

Determines the value of an asset by estimating the cost of replacing it with a modern equivalent, then deducting for depreciation and obsolescence.

Answer 79

There is no useful or relevant direct evidence of recent sales transactions due to the specialised nature of the asset.

Answer 80

A specialised property is a type of property that is not usually sold on its own. It’s usually only sold as part of a whole business because it is unique in how it’s built, used, or where it’s located. Examples include sewage works, lighthouses, schools, oil refineries.

Answer 81

1. Value of land in its existing use 2. Add current cost of replacing the build plus fees less a discount for depreciation and deterioration (can use BCIS and judge level of obsolescence)

Answer 82

Physical obsolescence – wear and tear over years Functional obsolescence – design or specification of the asset no longer fulfils function/ fit for purpose Economic obsolescence – changing market conditions for use of asset.

Answer 83

RICS Valuation Global Standards (or The Red Book) Updated Dec 2024 Effective from Jan 2025

Answer 84

Part 1 – Introduction Part 2 – Glossary Part 3 – Professional standards 1 & 2 (PS1 and PS2) Part 4 – Valuation technical and performance standards (VPS 1-6) Part 5 – Valuation Practice Guidance Applications (VPGA 1-11) Part 6 – International Valuation Standards (IVS)

Answer 85

Valuation technical and performance standards There are 6, and they set out the mandatory technical rules for carrying out a valuation (e.g. terms of engagement, bases of value, reporting).

Answer 86

Valuation Practice Guidance Applications There are 11, and they provide sector-specific guidance on applying the Red Book standards in different contexts

Answer 87

International Valuation Standards – global standards issued by the International Valuation Standards Council, providing a consistent framework and methodology for valuations worldwide.

Answer 88

Mandatory: Part 4 – VPS Part 5 – VPGA Advisory: Part 6 - IVS

Answer 89

PS 1 (Compliance): Sets out the ethical and professional standards valuers must follow to ensure compliance with the Red Book.

Answer 90

PS 2 (Ethics, Competency, Objectivity and Disclosures): Focuses on ethical behaviour, avoiding conflicts of interest, and ensuring the valuer is competent and objective — in line with RICS Rules of Conduct (2022)

Answer 91

1. Agency or brokerage work 2. Valuation advice during negotiations or litigation 3. Valuations for expert witness preparation 4. Statutory functions – when a valuer is performing a legal duty (e.g. council tax banding) 5. For internal use only – valuations used only inside a company

Answer 92

Terms of Engagement (Scope of Work)

Answer 93

Bases of value, assumptions and special assumptions

Answer 94

Valuation approach and methods

Answer 95

Inspection, investigation and records

Answer 96

Valuation models (new to 2024)

Answer 97

Valuation reports

Answer 98

* Identify valuer and client * Identify any other intended users * Asset being valued * Currency * Purpose of val * Basis of val * Any special assumptions * Scope of work * Any information to be relied upon (QS report) * Restrictions for use * Confirmation in accordance with Red Book * Fee basis / what expenses can be included * Limitation of liability * CHP * Any ESG figures to be considered

Answer 99

1. Identification and status of the responsible valuer 2. Identification of client 3. Purpose of value 4. The asset 5. The basis of value adopted 6. Valuation date 7. Extent of investigation 8. Nature of sources of info relied on 9. Assumptions and special assumptions 10. Restrictions on use 11. Approach and method 12. Limitation of liability 13. ESG factors considered

Answer 100

VPGA 2 – Guidance for Valuation for Secured Lending Purposes Covers: * Taking instructions * Terms of Engagement * Basis of value and special assumptions * Conflicts of Interest * Reporting and disclosures * Risk specific to different asset types

Answer 101

* Compliance with VPS 1 * Conflict of interest disclosures (prior dealings with the borrower or asset) * Any special assumptions agreed. * Reference to any master service agreement. * Acknowledgement of lender's terms (indemnity, liability, etc.). * Statement if lender is unknown.

Answer 102

* Planning granted or development completed. * Property is vacant. * New lease agreed or rent review settled. * Business operating at maturity (Care Home) * a restricted 180-day marketing period * a restricted 90-day marketing period

Answer 103

* Marketability & Sustainability of Value – how easily sold if repossessed. * Risks During the Loan Term * Income Maintainability – reliability of income (cover interest) * ESG & Regulatory Risks * Special Assumptions * Development Risk Commentary (if applicable) * LTV Consideration – while not set LTV commentary on value

Answer 104

Red Book - VPGA 4 Section 9: Valuation of trade related property (investment method)

Answer 105

Red Book - VPGA 4 Section 1-8: Valuation of trade related property (profits method)

Answer 106

Red Book - VPGA 9 – Valuing Portfolios and Groups of Assets * Decide whether to value assets individually, as a whole, or in groups. * Avoid artificial grouping unless clearly justified. * Recognise synergistic value where combined value exceeds sum of parts. * Consider market impact of selling whole portfolio vs individual assets (Adjoining properties assembled for redevelopment; block of flats economies of scale).

Answer 107

ISURV High Street investment Property Investigations: Measurement and zoning

Answer 108

UK National Supplement to the Red Book – UK VPGA 14

Answer 109

UK National Supplement to the Red Book – UK VPS 3 Five purposes: 1. Financial reporting 2. Stock Exchange Listing 3. Takeover and Mergers 4. Collective Investment Scheme 5. Unregulated Property Unit Trusts Applies to valuations for OHF. (Secured lending purposes NOT regulated purpose valuation as not relied on by third party).

Answer 110

Applies to valuations for OHF – as regulated by FCA. Requirements include: * Inspection by the RICS Professional Regulation Team. * Annual declaration by the valuer of how long they have acted for the client. * Disclosure of whether fees from the client exceed 5% of the valuer’s total annual fees. * Conflicts of interest: If the property was introduced by a firm’s agency team (e.g., CBRE), that same firm cannot act as valuer for 12 months. * Valuer rotation: Must rotate every five years to maintain independence. * Record keeping: Preliminary advice, draft reports, and client discussions must be documented and minuted.

Answer 111

Mandatory since 2011 RICS introduced the VRS in October 2011 as a regulatory monitoring scheme for all valuers conducting Red Book valuations. Aims: * Improve valuation quality * Promote self-regulation within the profession * Protect clients and enhance the status of valuers

Answer 112

Periodic on-site checks by RICS for valuers registered under VRS to ensure compliance with Red Book standards. Typically conducted every 3-5 years.

Answer 113

A special assumption is something that is assumed to be true for the purpose of a valuation, even though it is not actually true. For example, assuming that planning permission has been granted (when it hasn’t), or that a business is operating at maturity (when it’s not) Special assumptions must be agreed with the client in writing at the time of instruction.

Answer 114

The estimated amount for which an asset should exchange * On the valuation date * Between a willing buyer and willing seller * In an arms lengths transaction * After proper marketing * Where the parties had acted knowledgeably and without compulsion

Answer 115

The estimated amount for which an interest in real property should be leased * On the valuation date * Between a willing lessor and lessee * On appropriate lease terms * In an arm’s length transaction * After proper marketing * Where the parties had acted knowledgeably and without compulsion

Answer 116

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. Very simialr to MV but defined by IFRS / For financial reporting

Answer 117

‘The value of an asset to a particular owner, or a prospective owner for individual investment or operation objectives’ Investment value = worth Market value = value

Answer 118

A price that reflects the interests of specific parties, often used in regulated or special-purpose contexts, not necessarily market value.

Answer 119

The value arising from combining two or more assets, where the whole is worth more than the sum of the parts (Buyer specific)

Answer 120

A specific type of synergistic value that arises from combining two or more interests in property (leasehold and freehold / OpCo and PropCo)

Answer 121

The amount that would be realised when an asset or group of assets are sold on a piecemeal basis. Liquidation value should take into account the costs of getting the assets into saleable condition as well as those of the disposal activity.

Answer 122

A 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 in a market.

Answer 123

The permissible range allowed by courts.

Answer 124

"extra slice" rather than basis of value An element of market value that exceeds the properties current use value, reflecting a more valuable future use or planning gain.

Answer 125

A capital payment made by one party to another in connection with a lease or property transaction. Grant of a lease – tenant pays a premium to the landlord for securing a long lease at a below-market rent. Lease variation or surrender – landlord may pay a premium to a tenant to surrender a lease early.

Answer 126

The Weighted Average Unexpired Lease Term to first break or expiry of lease across asset weighted by contract rent.

Answer 127

Non-residential: Under £150k = 0% £150k - £250k = 2% £250k+ = 5% Residential Under £125k = 0% £125k-250k = 2% £250k - £925k = 5% 925k - £1.5M = 10% +£1.5M = 12%

Answer 128

Headline Rent: The initial rent stated in the lease, before incentives Net Effective Rent: The actual rent received by the landlord over the lease term, adjusted for incentives. Instead of applying 100% of market value we apply a percentage. This is calculated depending on the lease terms we expect the property to achieve. [( lease term - rent free)/ lease term ] = 85% 85% * Headline rent = effective rent

Answer 129

(Lease term - rent free)/ lease term = % % x rent

Answer 130

A piece of land which controls the access to another piece of land.

Answer 131

A party wall is a wall that stands on the boundary between two properties, shared by two or more owners. The Party Wall Act 1996? - The law that sets out a process to resolve disputes between neighbours about party walls, including building, altering, or repairing them.

Answer 132

A legal right to receive natural light through windows if you’ve had it without interruption for 20 years. Right of Lights Act 1959 The prescription Act 1832 If a development infringes this right, the affected party may be entitled to: * An injunction (to stop or alter the development), and/or * Damages (compensation for the loss of light). RICS Professional Standard Rights of Light (2024)

Answer 133

RICS Professional Standard Valuation, Global Standards - UK National Supplement 2023 VPGA 14

Answer 134

Existing Use Value for Social Housing (EUV-SH) EUV-SH reflects the value of the property as a social housing asset, considering its restricted use, regulated rents, and specific management and maintenance obligations.

Answer 135

* Valued using the investment method, specifically a Discounted Cash Flow (DCF) technique. * Reflects how Registered Providers (RPs) appraise acquisitions for long-term investment. * Future rental (or sales) income is projected over a 40-year period. * Deductions applied for: o Bad debts o Cyclical maintenance o Acquisition and internal overheads o Service charges and finance costs

Answer 136

Pamwin Plus — the industry-standard appraisal software for RPs. It is not a valuation tool in the traditional RICS sense (like Argus), but it is widely used in the sector to model long-term cash flows and guide acquisition pricing.

Answer 137

* Social Rent: ~4.75% * Affordable Rent: ~5.00–5.25% * Shared Ownership: ~5.60% higher risk = higher discount rate. Social Rent is seen as low risk, with stable income backed by housing benefit (LHA), high waiting lists and low tenant turnover. Shared Ownership carries the highest risk, due to sales exposure and staircasing uncertainty.

Answer 138

Last updated Dec 2024, effective jan 25. * Aligned with the new International Valuation Standards (IVS 2025) - e.g. updated glossary and reordering of VPSs. * ESG reporting now mandatory – valuers must record relevant ESG data and consider its impact on value. * Guidance on use of AI in valuations. * New VPGA 11 – covers the valuer's relationship with auditors.

Answer 139

RICS launches a global standard for responsible use of AI in surveying (Sep 2025, effective Mar 2026). * Professional judgement - Professional scepticism is needed when using AI tools. * Transparency - Clients must be informed in writing about AI use in their service. * Accountability - Surveyors must assess AI output reliability and remain fully accountable for their work. * Governance - Firms must have clear policies on data use, AI governance, and risk management, including risk registers and due diligence.

Answer 140

Jan 26 - RICS published the fourth edition of its global professional standard on ESG and sustainability in commercial property valuation RICS mandates ESG considerations in valuations. As per the 2024 Red Book, valuers must identify and reflect material ESG factors — such as energy efficiency, obsolescence risk, and green certifications — where these impact market value, demand, or yield. The Professional standard provides guidance on: * Terms of Engagement – agree with client how esg is considered * Valuation Purpose – level of consideration depends on val purpose * Inspection – note observable esg factors i.e PV * Comparable Evidence– ESG factor influencing other transactions * Methodology – Potentially DCF in factoring in capex upgrade cost * Reporting – explicitly addressed in report.

Answer 141

In 2021, the RICS Standards and Regulation Board (SRB) commissioned an independent review, to futureproof valuation practices and maintain public confidence, particularly in the real estate investment sector. The review made 13 key recommendations, implemented through updating the Red Book (2024) and the UK National Supplement (2023) including: * Rotation of valuers * DCF as the principal valuation method * Stronger audit trails * Creation of a Valuation Audit Committee

Answer 142

The acceptable margin of error in valuations allowed by courts. ±10% (Singer & Friedlander v J D Wood, 1977) — historical leading case - stable residential. ±15% (Fundermile Building Society v CBRE, 2017) — accepted for commercial/volatile markets. Bottom line: Margin depends on asset type, market volatility and available evidence.

Answer 143

Tenant Covenant Strength refers to the financial reliability and creditworthiness of a tenant, indicating their ability to meet lease obligations such as paying rent. It assesses the risk of tenant default impacting the value of investment property.

Answer 144

* Argus Enterprise * Argus Developer Comps: * Co-star * EG Radius * Land Registry

Answer 145

Valuers must ensure ‘like-for-like’ measurement—comparable properties and the subject property should be measured consistently and accurately to enable reliable comparison.

Answer 146

I was responsible for the part of the valuation which used the Market Approach, specifically the Comparable Method to determine Market Rent.

Answer 147

The valuation formed part of a wider Portfolio Overview Report, the overall purpose of which was to assist the client with succession planning. The objectives of the Cosham valuation were two-fold: * To determine the Market Rental Value (MRV) of the unit to support reletting. * To determine the Market Value (MV) of the property, on both: 1. an as-is basis (with vacant possession), and 2. a special assumption that the property was relet on a 5-year lease at MRV.

Answer 148

It was a short form report part of a Portfolio Overview Report, that I was not involved with.

Answer 149

Market Rent & Market Value

Answer 150

Market Value: Vacant (as is) Market Value of special assumption it was let at Market Rent for 5 years. I was only responsible for collating comparables to determine Market Rent.

Answer 151

* Pedestrianised section at the northern end of Cosham High Street. * Cosham, within city of Portsmouth, Hampshire * Close to M27 * 400m from Cosham railway

Answer 152

* Retail unit over ground and first floor * Freehold * Total 1,639 sq ft * 555 ITZA sq ft * EPC D * Reasonable condition overall for age and use * Laminated concrete floor, suspended ceilings, basic finishes * 1980s build

Answer 153

I used Costar & I called local agents (Blue Alpine)

Answer 154

To ensure the evidence reflects current market conditions and recent rental trends relevant to the subject property.

Answer 155

The hierarchy of evidence — ranking comparables by relevance and similarity to the subject.

Answer 156

In Terms of Zone A – a unit of comparison.

Answer 157

* Zoning is a valuation technique, not a measurement method. * It is used to compare retail properties by creating a consistent unit of comparison for different-sized buildings. * Based on the principle that the front part of the shop is the most valuable due to visibility and footfall. * The shop is divided into zones of 6.1 metres (20 feet) in depth from the frontage. * The “halving back” principle is applied to reflect decreasing rental value with depth: Zone A = full rate, Zone B = ½ rate, Zone C, ¼ rate etc. * Zone D and remainder * All adjusted areas are added together to calculate the ITZA (In Terms of Zone A) area. * This method allows like-for-like rental comparison across shops.

Answer 158

Zoning as a valuation technique allows surveyors to create a consistent unit of comparison for different retail properties, helping to determine rental values and supporting comparable market analysis.

Answer 159

* Comparable evidence ranged from £30.06 to £34.19 psf ITZA. * I adopted a Zone A rate of £30.00 psf for the ground floor and £1.50 psf for the ancillary first-floor space. * These rates reflected the subject property’s slightly weaker location and condition compared to larger units let to Greggs and Barnardo’s. * The overall annual rent was £17,700, which compared well to a similar unit’s £17,500 (£34 psf).

Answer 160

£17,700 per annum. Comparable rents ranged from £17,500 to £37,500 per annum.

Answer 161

* All four rental comparables were located on the high street. * One was given less weight as it was only an asking rent, not an agreed lease. * Adjustments were made for rent frees to calculate the net effective rent where necessary. * The subject’s rent was slightly higher than a similar unit at £17,500, despite a lower psf rate of £30. * Annual rent was used as a key comparison due to the nature of this retail unit.

Answer 162

Ancillary space refers to non-sales areas within a property, such as storage rooms, staff areas, offices, or WCs, which support the main use but do not generate direct income.

Answer 163

* Address * Tenant * Status * Transaction date * Area Sq ft * Rate £pa * Rent £psf ITZA * Lease terms * Transaction type

Answer 164

An initial appraisal is a preliminary, often internal, estimate of value used for early decision-making. It is usually less detailed, may rely on limited data, and is not subject to external review. A Red Book valuation is a formal, external valuation prepared in accordance with RICS standards (the Red Book). It requires detailed analysis, inspection, and is suitable for external reporting and third-party reliance.

Answer 165

Market Value is the estimated amount an asset would sell for on the open market between a willing buyer and seller, acting at arm’s length and without compulsion. Investment Value (or Worth) is the value of an asset to a particular investor, based on their specific requirements, benefits, or synergies.

Answer 166

* Property Type: Purpose-built care home * Beds: 70 en-suite bedrooms (100% wetroom accommodation) * 3 storey, U shape * Location: Randlay Avenue, Randlay, Telford – a medium-sized Shropshire town near Shrewsbury * Developer: Urban Village Group * Contractor: Sandycroft Construction Limited – since put into administration * Practical Completion (PC): May 2023 * Tenure: Freehold * Site Area: Approx. 1 acre * Parking: 21 spaces * Ownership Structure: Held in SPV * Lease: To be let on 35-year lease to Bracebridge Care Group (cross collateralised with any future homes) * Date of internal valuation: Feb 2024

Answer 167

The Income approach and investment method. However, I had consideration for the profit’s method and comparable method in my valuation.

Answer 168

£11,000 per bed 6.00% NIY

Answer 169

Investment Value

Answer 170

* Founded in 2023 * Three operational care homes in and around Birmingham/ Manchester. * Established by Zephyr – property developers who own Urban Village Group * Samantha Crawley – CEO (Senior at Barchester) * OHF clinical assurance team reviewed – good ethos, still early stage operator with issues to iron out * No CQC inspections at time * Geared towards local authority pay

Answer 171

Tenant: SPVs of Bracebridge Care Group but with BCG as guarantor Cross collateralised in a portfolio agreement Term: 35 years Indexation: CPI-H+1% (collar – 2% / cap 4%) EBITDARM RCR test failure: 1.25x EBITDARM cash lockup 1.50x Starting Rent: £11k per bed

Answer 172

Full Repairing and Insuring lease - where the tenant is responsible for all repairs and maintenance of the property, as well as insurance cost.

Answer 173

Consumer Prices Index including owner occupiers’ housing costs. It is a UK inflation measure that reflects the costs of housing alongside standard CPI components and is considered more reflective of household inflation.

Answer 174

* RPI (Retail Prices Index) is no longer a National Statistic and is being phased out. * CPI is still used. * CPI-H was introduced in March 2017 by the ONS and tends to be 50 bps higher than CPI.

Answer 175

My client, Octopus Healthcare Fund, uses a standard 35-year lease with the following terms: * Indexation: CPI-H + 1% * Cap and collar 2% and 4% * EBITDARM test failure: Triggered if EBITDARM falls below 1.25x rent * EBITDARM cash lockup: Triggered if cash drops below 1.50x rent * Green lease: requires tenant to provide regular energy consumption data. Rent was determined using the comparable method, referencing 8 similar leases for market evidence. As well as consideration for the profits method ensuring a minimum 2.0x rent cover at Fair Maintainable Trade (FMT).

Answer 176

Had consideration for 8 comparables, three highest in the hierarchy of comparable evidence were: 1. Old Malton, North Yorkshire (Sandstone Care): SPV operator in comparable affluence location. £11.25k a bed, let Q3 2023. 2. Alton, Hampshire (Hartford Care): SPV+ operator in affluent Hampshire location. £13k a bed, let Q3 2023. 3. Bromsgrove, Worcesteshire (Torwood Care): SPV operator, more affluent. £11.6k a bed, let Q2 2023.

Answer 177

NIY is an All-Risk Yield meaning growth assumptions and risk were implicit in the yield. I considered the following points: * Tenant covenant strength * Current trade of the home * Location * Build quality * Lease terms * Build quality * ESG factors such as stranding risk * Keys back test * Comparable method – considered 7 investment comps

Answer 178

Had consideration for seven investment comparables, the three highest in the hierarchy of evidence were: 1. Danforth Care (LNT) Portfolio x4 - acquired by Target at 5.15% NIY, SPV operator, Q3 2023 2. Old Malton (Sandstone Care) – acquired by Octopus at 5.75% NIY, SPV+ operator, Q3 2023

Answer 179

* Trading for 9 months * 36.00% occupancy * £1,356 AWF * 0.2x Rent Cover Ratio * 2.9 Residents a month fill rate

Answer 180

* £1,356 AWF achieved * Typically, lower to fill * Local authority fees £1,360 * OHF owned Sandstone home in Telford was achieving £1,339

Answer 181

Valuation is an art, not a science. MV reflects a professional judgement based on the available evidence, assumptions, and market conditions at a given time.

Answer 182

Earnings Before Interest, Tax, Depreciation, Amortisation, Rent, and Management Fees. * It is commonly used in healthcare and operational real estate to assess the underlying trading performance of the asset, excluding lease costs (rent) and operator-specific overheads (management fees) * Management fees typically include central head office costs. * Excluding these items provides a consistent and comparable measure of asset-level performance regardless of operator.

Answer 183

Fair Maintainable Trade - The level of turnover that a reasonably efficient operator would expect to achieve on the assumption that the property is properly equipped, repaired, maintained and decorated.

Answer 184

The tenant was an SPV of Bracebridge Care Group. Covenant strength classification: SPV I assessed covenant strength based on: 1. Financial accounts and 5-year cash flow forecasts * Reviewed by the Fund’s finance team * £1.1m cash * Upcoming Wigan refinance to release approx. £7m * Expected £3.8m profit from the sale & leaseback * Group had £21m debt across 3 homes 2. Clinical assurance report 3. Cross-collateralised portfolio agreement provided additional comfort Strong “keys back” test – considered when deciding NIY.

Answer 185

6.80% purchaser’s costs were deducted to reflect standard market practice and RICS Red Book guidance for commercial investment valuations. This gives the Net Investment Value, consistent with how investors assess pricing and yields. Breakdown of 6.80%: * SDLT: ~5.0% * Legal & agent’s fees: ~1.5% * VAT on fees: ~0.3%

Answer 186

I obtained quotes from three firms, all with proven experience in healthcare valuations. * I ensured each had a dedicated healthcare valuation team with relevant Red Book expertise. * I reviewed their Terms of Engagement (ToE) to ensure: 1. No conflicts of interest 2. The valuer was competent under PS 2 of the RICS Red Book 3. The liability cap was appropriate and aligned with the client’s expectations * All fees were comparable and market-aligned, and the selected firm offered strong sector understanding.

Answer 187

Cushman and Wakefield

Answer 188

Valuation Report is for Financial Reporting under IFRS.

Answer 189

Basis of Valuation: Fair Value (IFRS) - Investment method Market Value - Profits method Going Concern = valuation premise (you are valuing the business in operation). Special assumption, profits method: - Turnkey - Mature

Answer 190

Lower of £25M or 25% of the Market Value of the Property (£3m)

Answer 191

Internal Valuation: * Investment Value - £12.03m (£11k* 70 / 6.00% NIY) (same as fair) Red Book * Fair Value (investment) - £12.03mm (£11k* 70/ 6.00% NIY) * Current Going Concern Value - £12.27m (10X EBITDARM less profits foregone) * Turnkey Value (profits)- £11.89m (10x EBITDARM less profits foregone) * Mature Going Concern Value (profits)- £15.34m (10X EBITDARM)

Answer 192

VPGA4 defines certain terms in accordance with the valuation of trade related property.

Answer 193

Long list of items but some include: 1. Purpose of the valuation 2. Basis of value 3. Assumptions and special assumptions 4. Confirmation of valuer competence and independence (no CoI) 5. Liability cap 6. Fee structure (including details of eligible expenses)

Answer 194

RICS Podcast: Professional Practice Update, Valuation and Investment – 10 June 2025 * RICS now mandates ESG considerations in valuations. * As per the 2024 Red Book, valuers must identify and reflect material ESG factors — such as energy efficiency, obsolescence risk, and green certifications — where these impact market value, demand, or yield. * The 2025 RICS Professional Standard on Sustainability and ESG in commercial real estate valuations (4th version) provides guidance across: 1. Terms of Engagement – agree with client how esg is considered 2. Valuation Purpose – level of consideration depends on val purpose 3. Inspection – note observable esg factors i.e PV 4. Comparable Evidence– ESG factor influencing other transactions 5. Methodology – Potentially DCF in factoring in capex upgrade cost 6. Reporting – explicitly addressed in report.

Answer 195

The Peter Gray Review, published in 2021, proposed 13 reforms to improve trust and relevance in real estate investment valuations. Including: * Mandatory rotation of valuers (max 5 years for individuals, 10 years for firms) * The DCF method to become the principal valuation technique

Answer 196

1. Realistic 2. Relevant 3. Valid

Answer 197

RICS defines a "basis of value" as the fundamental measurement assumption. "Going concern" is the premise that describes the assumed state of the business or asset—specifically, that it remains operational for the foreseeable future (12 months+) Basis of Value = MV Going Concern = valuation premise (you are valuing the business in operation). Turnkey or Mature = valuing business on special assumptions if not yet built.

16. Valuation Flashcards

(225 cards)