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SOE Valuation Flashcards

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1
Q

What are the five methods of valuation recognised by RICS, and when would each be applied?

A
  • Comparable Method : analysing evidence of recent letting or sales
  • Investment Method : used for income producing properties by capitalising income at appropriate yield
  • Profits Method: used where value is linked to the business trading e.g opre (hotels, pubs, carehomes)
  • Residual Method- used for development purposes to calculate site value where the value is GDV - cost - developer profit profit
  • Contractors method - when no market evidence exists, schools/hospital
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2
Q

What is the difference between Market Value and Market Rent?

A

Market Value is:
The estimated amount for which an asset should exchange on the valuation date between a willing buyer and seller in an arms length transaction after proper marketing and where both parties act knowledgably, prudently and without compulsion.

Market rent is:
The estimated amount for which a property should be let on appropriate lease terms on the valuation date, between a willing lessor and lessee, in an arms length transaction after proper marketing and where both parties act knowledgably, prudently and without compulsion.

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3
Q

What is the difference between Fair Value and Market Value?

A

Market Value is:
The estimated amount for which an asset should exchange on the valuation date between a willing buyer and seller in an arms length transaction after proper marketing and where both parties act knowledgably, prudently and without compulsion.

Fair value, defined by IFRS, reflects the price that would be receive to sell an asset or liability between market participants in an orderly transaction at the measurement date.

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4
Q

What is the purpose of the RICS Valuation – Global Standards (Red Book 2025)?

A

The Red Book sets mandatory professional standards, rules and guidance for RICS members undertaking valuations.

It ensures aligning with IVS.

Its purpose is to protect public interest, provide confidence to clients and uphold trust in the profession.

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5
Q

What are the main updates in the UK National Supplement (May 2024)?

A

Key updates to align with IVS:
- Guidance on ESG in valuations
- Clarification on assumptions/ special assumptions
- Strengthen requirements for reporting e.g emphasis on transparency in methodology, risk and uncertainty.

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6
Q

What are the requirements for Terms of Engagement?

A
  • Purpose of valuation
  • Basis of value
  • Fees
  • valuation date
  • assumptions/special assumptions
  • plan of payment of expenses
  • Copy of the firms complaints handling procedure upon request
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7
Q

What is the hierarchy of evidence for comparable analysis in valuations?

A

Direct comparables

General market data
(historic data, demand supply dats)

Other sources

(Transactional evidence from other real estate types/locations Other background data (interest rates, stock market movement)

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8
Q

What is the difference between equivalent yield, initial yield, and reversionary yield?

A

EY - Average weighted yield when a reversionary property is valued using an initial and reversionary yield.

IY - Simple income yield for current income and current price.

RY - Market Rent (MR) divided by current price on an investment let at a rent below the MR.

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9
Q

What factors can influence yield movement?

A
  • interest rates
  • investor sentiment
  • supply and demand
  • covenant strength
  • WAULT
  • sector performance
  • location
  • ESG credentials
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10
Q

What is the role of assumptions and special assumptions in a valuation? (VPS2)

A

An assumption is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation. E.g. assumed condition of property.

A special assumption is a supposition that is taken to be true and accepted as fact even though it is not true. E.g. planning consent/vacant possession.

Assumptions and special assumptions must be agreed in writing at commencement of the instruction.

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11
Q

How do you approach sustainability and ESG factors in a valuation, in line with the RICS Sustainability and ESG Guidance (2021)?

A

Consider sustainability factors:
- EPC
- Building fabric
- MEES
- BREEAM

In line with guidance, consider how these could impact value for example, low EPC may reduce lettability

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12
Q

What is valuation uncertainty, and when must it be reported under the Red Book?

A

Under VPS6, valuers most comment on uncertainty in report. Arises where the is less confidence in accuracy of valuation figure. e.g limited evidence or market votality.

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13
Q

What are key changes in the latest version of the red book?

A
  • Alignment with the new IVS 2025
  • New content relating to valuation modelling and methods
  • Mandatory ESG reporting
  • Use of AI in valuations
  • Reinforcement of creating a robust audit trail
  • New content on use of valuation models/methods and risk assesment
  • Revised ordering of the VPS’s
    New VPGA 11 relating to relationship with auditors
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14
Q

What are the VPS (valuation performance standards) ?

A

VPS1 - TOE
VPS2 - Bases of value, assumptions and special assumptions
VPS3 - Valuation approach/method
VPS4 - Inspection/ Investigation / Method
VPS5 - Valuation Model
VPS6 - Valuation Reports

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15
Q

How did you determine the Market Rent in your high street retail valuations, and what evidence did you rely on?

A

Analysis recent letting evidence in the local high street retail market. Did comparable analysis based on size, location, spec, WAULT and incentives. I liaised with agents to verify headline rent and ERV’s. Allowed me to form an opinion.

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16
Q

In the Kingston valuation, why did you recommend a £0.50 increase in Market Rent but no yield movement?

A

Evidence demonstrated higher rents were being achieved, but no evidence to support tighter yields. Therefore adjusted accordingly.

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17
Q

In the Chessington Industrial Estate valuation, how did you model the hypothetical lease terms and test their impact on value?

A
  • Requested new lease terms from client
  • Used investment method to model the new terms in AE
  • Collected evidence to justify assumptions
  • Calculated the new capital value and calculated the value uplift in both monetary and percentage terms and reported it back to the client
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18
Q

When preparing the Brixton Industrial Estate valuation, how did you identify that the passing rent was reversionary?

A

I compared the rent levels to recent deals in the area, information i had gathered from local agents and online data sources.

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19
Q

In the Brentford Industrial Estate valuation, how did you model the new letting scenario compared to the lease regear scenario?

A

Scenario 1 - New letting
Assumptions - void period, rent free, Legal and letting fees, empty rates. New letting at ERV based on evidence.

Scenario 2 - Regear with RF.

Regear produced a more secure CV by reducing void risk and extending the WAULT.

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20
Q

How do you decide voids, rent-free periods, and capital expenditure in your valuations?

A

I base these assumptions on market evidence, discussions with local agents, cost advice from building surveyors. Ensure that the valuation reflects realistic market behaviour and risk, and i am not working outside of my competence.

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21
Q

How do you check and verify the tenancy schedule and data before using it in a valuation?

A

Cross check tenancy schedules with lease documents and other legal documents in the data room. This verifies dates, rent levels, incentives.
Confirm with client or AM when needed.

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22
Q

How do you deal with discrepancies in comparable evidence, for example when evidence points to different rental levels?

A

Use the hierarchy of evidence
Sensitivity analysis to give a range of values

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23
Q

How do you check your valuation models for accuracy before submission?

A
  • Double check all inputs against data source
  • Review cashflow for any errors
  • Peer review
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24
Q

In the Brixton Industrial Estate case, how did you justify recommending a 25 bps yield shift to the client?

A

Collated evidence of other reversionary estates in proximity to the subject property. Because they were trading at sharper yields, i could justify bringing in the yield to reflect the appetite for such investments.

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25
How did you explain the potential benefits of a lease regear versus a new letting in the Brentford Industrial Estate valuation?
2 scenarios: 1 - New letting with assumptions 2 - Lease regear Regear provided greater certainty of income, avoided void costs, extended the WAULT. Risk around new lease reduced benefit. Advising on balance of risk and return.
26
If a client disagreed with your valuation figure because it was lower than their expectations, how would you manage the conversation?
- Communicate and listen - Outline methodology clearly - Refer back to red book to show compliance - Evidence - Emphasise professional standards
27
How would you advise a client about valuation uncertainty in a volatile market?
- In line with red book VPS 6 that there is a statement about uncertainty in the valuation report - Highlight the source of uncertainty (limited evidence, economic volatility) - Provide sensitivity analysis
28
How would you explain the risks of relying on headline rents rather than net effective rents to a client?
Headline rent - Advertised rent, doesn't account incentives NER - Actual rent after incentives are removed Relying on headline rent could give misleading impressions, leading to unrealistic expectations.
29
If you identified ESG risks (such as a poor EPC rating), how would you explain the potential impact on value and advise your client on next steps?
- Poor EPC rating could harm marketability - Model a refurbishment scenario - Promote compliance with regulations
30
What are the five methods of valuation recognised by RICS, and when would each be applied?
Comparable Method : analysing evidence of recent letting or sales - Investment Method : used for income producing properties by capitalising income at appropriate yield - Profits Method: used where value is linked to the business trading e.g opre (hotels, pubs, carehomes) - Residual Method- used for development purposes where the value is GDV - cost + profit - Contractors method - when no market evidence exists, schools/hospital
31
What are the key changes introduced in the RICS Valuation – Global Standards (2024) compared with previous editions?
- Alignment with the new IVS 2025 - New content relating to valuation modelling and methods - Mandatory ESG reporting - Use of AI in valuations - Reinforcement of creating a robust audit trail - New content on use of valuation models/methods and risk assessment - Revised ordering of the VPS's New VPGA 11 relating to relationship with auditors
32
In the Kingston High Street Retail Parade valuation, how did you determine Market Rent and capitalisation rate?
Collated evidence through speaking to agents and using online platforms such as EGI and CBRE database. Also used CBRE's yield report.
33
In the Chessington Industrial Estate valuation, how did you test the impact of new lease terms on capital value?
- Requested new lease terms from client - Used investment method to model the new terms in AE - Collected evidence to justify assumptions - Calculated the new capital value and calculated the value uplift in both monetary and percentage terms and reported it back to the client
34
In your Brixton Industrial Estate valuation, how did you identify reversionary potential and incorporate yield shift into your advice?
Collated evidence of other reversionary estates in proximity to the subject property. Because they were trading at sharper yields, i could justify bringing in the yield to reflect the appetite for such investments..
35
In the Brentford Industrial Estate valuation, how did you assess the options of a new letting vs. a lease regear, and why did you recommend the latter?
2 scenarios: 1 - New letting with assumptions 2 - Lease regear Regear provided greater certainty of income, avoided void costs, extended the WAULT. Risk around new lease reduced benefit. Advising on balance of risk and return.
36
If comparable evidence is scarce or inconsistent, how would you justify your adopted Market Rent or Yield to a client?
- Explain the RICS hierarchy of evidence - Gather view on market sentiment from local agents - Reference uncertainty in the valuation report under VPS 3
37
How would you deal with a situation where a client asks you to base your valuation on “aspirational” rather than evidenced market rents?
Under RICS Global Standards, my professional obligation is provide an independent and evidence based opinion of value. Using 'aspirational' values would put myself and the client at risk. Goes against RICS Rules of conduct and compromise integrity. Ensure compliance with RICS standards!
38
What does VPS 6 (Valuation Reports) require you to include in a valuation report
1. Identification and Status of valuer 2. Client and any other intended users 3. Purpose of valuation 4. Identification of assets to be valued 5. Basis of value 6. Valuation Date 7. Extent of investigation 8. Nature and source of information relied upon 9. Assumptions and Special assumptions 10. Restrictions on use, distribution and publication 11. Instruction undertaken in accordance with IVS standards 12. Valuation approach and rationale 13. Valuation figure(s) 14. Date of valuation report 15. Comment on market uncertainty 16. Statement setting out limitations on liability that have been agreed.
39
What are the 3 key steps when undertaking a valuation instruction?
1. Competence (SUK) 2. Independence 3. TOE
40
How do you select appropriate comparables for valuation reports?
Following: RICS Global Standards (2024) RICS Comparable Evidence in RE Valuation (2019) RICS Hierarchy of Evidence - Direct comps - General market data - other sources
41
How would you define yield profile and why is it important in valuations
Yield profile is the pattern of income returns over time, showing yield changes depending on lease events. Important as it reflects both current return and future return.
42
How do you treat over-rented and under-rented property in an investment valuation?
Over rented - Harcore Under Rented - Term and reversion
43
What is the difference between traditional investment method / term and reversion method/ layer hardcore method
All used when there is an income stream to value. Traditional - Income is capitalised at a yield to provide a capital value. T+R - Used for reversionary investments - Term is capitalised until next review/break/lease expiry at an initial yield. - Reversion to Market Rent is capitalised into perpetuity at a reversionary yield. Hardcore - - Used for over rented investments - Income flow divided horizontally. - Bottom slice – market rent - Top slice – rent passing minus market rent until next lease event - Higher yield applied to top slice to reflect additional risk in achieving market rent. - Different yields used depending on comparable investment evidence and risk .
44
What is the difference between a valuation for loan security and a valuation for financial reporting?
Valuation for loan security (VPGA 2) - The focus is for a lender to asses the value of a property that will be used as security for a loan. It focuses on risk level. MARKET VALUE. Financial reporting (VPGA1) - To present a fair and accurate representation of a company's assets and liabilities for accounting and financial reporting purposes. In line with IFRS and UK National supplement (2024.) FAIR VALUE.
45
How does lease length and WAULT impact capital value?
Determines risk around vacancy.
46
How did you use CBRE’s Property Yields report in your valuations?
Use as supportive evidence in my analysis of capitalisation rates. Compliance with Red Book requirement to use reliable market evidence.
47
How did you decide which comparables were most relevant when analysing industrial lettings evidence?
RICS Hierarchy of Evidence: - Direct comps - General market data - other sources
48
How do you balance client instructions with professional independence when preparing a valuation report?
Ensuring i am working in line with the RICS Global Standards 2024 and the RICS rules of conduct. Ensure the instruction is clear, and set out in the Terms of Engagement.
49
How would you justify your valuation approach if challenged by another valuer with a different opinion of value?
I would explain my approach in line with the RICS Valuation Global Standards (2024) and the IVS (2024.) I would then compare, and remain open to advice, but ultimately it is down to the client, as long as i am compliant.
50
How do you ensure your valuation advice is impartial and defensible when under pressure from a client or lender?
Compliance with RICS Global Standards 2024 Robust Evidence Accuracy Peer Reviews
51
What are the different bases of value?
VPS2 - Bases of value Market Value Market Rent Fair Value (IFRS13) Investment Value
52
What is the definition of Investment value?
The value of an asset to a particular owner
53
What are the two things that affect a property’s yield?
Rental income Property value
54
What are the 6 steps to the comparative method of valuation?
1. Research and select comps 2. Confirm details and calculate NER 3. Assemble comps in a schedule 4. Adjust using Hierarchy of evidence 5. Analyse to form opinion of value 6. Report value and prepare file note
55
Which RICS document gives advice on the use of comparable evidence?
RICS Professional Standard: Comparable evidence in RE valuation, 2019
56
What is the importance in accurate and up to date market knowledge and timing when finding comparables?
Valuations rely on analysing real evidence. If comps are outdated, they could not reflect the tone of the market, resulting in a misleading valuation.
57
What makes a good comparble?
Something that is recent and matches the subject property in terms such as - location - property type - size -spec - conditions -lease terms - covenant strength
58
How do you calculate a yield?
Income/Price x 100
59
What is the prime/secondary industrial yield atm?
Prime - 5.25% Secondary - 6.50%
60
What is the prime/secondary HSR yield atm?
Prime - 6.25% Good Secondary - 9.00%
61
What is a yield?
A measure of return
62
What risk factors are considered when determining a yield?
- Location - Covenant strength - Lease terms - Voids - Prospects for rental/capital growth - Security of income
63
What is a years purchase and how is it calculated?
100/Yield It is the number of years required for its income to repay its purchase price.
64
What are the 3 forms of sensitivity analysis?
- simple sensitivity analysis of key variables e.g yield, gdv, build cosrs - scenario analysis - changes in timings 3. monte carlo simulation
65
What are the two RICS professional standards?
PS1 - Compliance with standards and practice statements where a written valuation is provided PS2 Ethics, competency, objectivity and disclosure - Members must follow the RICS Rules of Conduct 2021 - Valuer must act objectively and independently - Apply professional sceptiscim - Follow advice on COI
66
What are the 5 exceptions for the mandatory use of the RICS Professional Standards?
1. During agency 2. Litigation 3. Expert witness 4. Statutory functions 5. Internal purposes (must be stated)
67
What does VPS and VPGA stand for?
Valuation Performance Standards Valuation Practice Guidance Applications
68
What is the purpose of the red book?
The Red Book a comprehensive set of global standards, mandatory rules, and best practices published by RICS for professionals conducting property valuations and other valuation work.
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