1
Q
What are the three steps needed prior to undertaking a valuation instruction? (3)
A
- Ensure competence
- Ensure no conflicts of interest
- Terms of Engagement
2
Q
What is the definition of an internal valuer? (3)
A
- Someone employed by the company to value the assets of the company
- Valuation for internal purposes only
- No third-party reliance
3
Q
What is the definition of an external valuer?
A
Someone who has no material links with the asset to be valued or the client
4
Q
Why is statutory due diligence required for valuations?
A
To check that there are no material matters which could impact upon the valuation
5
Q
Name some examples of statutory due diligence prior to a valuation (8)
A
- Asbestos register
- Contamination
- Equality Act 2010 compliance
- Environmental matters (power lines, sub-stations, flooding etc)
- EPC rating
- Legal title and tenure
- Planning history
- Health & safety compliance
6
Q
What is the timeline of a valuation? (16)
A
- Receive instructions from the client
- Check competence
- Check there are no conflicts of interest
- Issue terms of engagement to the client
- Receive signed terms of engagement
- Gather information (legal documents etc)
- Undertake due diligence
- Inspect and measure
- Research the market and assemble, verify, and analyse comparables
- Undertake valuation
- Draft report
- Have valuation and report considered by another surveyor
- Finalise and sign report
- Report to client
- Issue invoice
- File it
7
Q
What are the five methods of valuation? (5)
A
- Investment method
- Profits method
- Comparable method
- Residual method
- Contractor’s method (depreciated cost method)
8
Q
What are the 3 approaches to valuation according to IVS 105 (and which approach does each method fall into)? (3)
A
- Income approach (investment, profits, residual)
- Cost approach (contractor’s/DRC)
- Market approach (comparable)
9
Q
What is the main methodology for the comparable method? (6)
A
- Search and select comparables
- Confirm/verify details and analyse the head rent to give a net effective rent
- Assemble comparables in a schedule
- Adjust comparables using the hierarchy of evidence
- Analyse comparables to form an opinion of value
- Report value
10
Q
What is the RICS document relating to the comparable method?
A
RICS Professional Standard: ‘Comparable Evidence in Real Estate Valuation’ 1st Edition, 2019
11
Q
What is the hierarchy of evidence? (3)
A
- Category A - direct comparables
- Category B - general market data that can provide guidance
- Category C - other sources
12
Q
What are examples of Category A of the hierarchy of evidence? (4)
A
- Completed transactions of near-identical properties where full information is available
- Completed transactions of other similar real estate assets
- Similar properties where offers have been made but not binding yet
- Asking prices (with careful analysis)
13
Q
What are examples of Category B of the hierarchy of evidence? (4)
A
- Information from published sources or commercial databases
- Other indirect evidence like indices
- Historic evidence
- Demand/supply data
14
Q
What are examples of Category C of the hierarchy of evidence? (3)
A
- Transactional evidence from other real estate types and locations
- Other background data like interest rates, stock market movements
15
Q
When is the investment method used? (2)
A
- When there is an income stream to value
- The rental income is capitalised to produce a capital value
16
Q
What are the different types of investment methods? (4)
A
- The conventional investment method
- Term and reversion method
- Hardcore/layer method
- Discounted cash flow
17
Q
What is the conventional investment method? (3)
A
- Rent received or market rent multiplied by the years purchase equals market value
- This method relies on the importance of comparables for rent and yield
- Assumes a growth implicit valuation approach
18
Q
When/what is the term and reversion investment method? (3)
A
- Used for reversionary investments (when under-rented)
- Term capitalised until the next lease event at an initial yield
- Then a reversion to market rent valued in perpetuity at a reversionary yield
19
Q
When/what is the layer/hardcore method? (5)
A
- Used for over-rented investments
- Income flow divided horizontally
- The bottom slice is market rent
- The top slice is the passing rent less market rent until the next lease event
- A higher yield is applied to the top slice to reflect the additional risk
20
Q
What is a yield?
A
A measurement of an investment return, expressed as a percentage of the capital invested
21
Q
How is a yield calculated?
A
A yield is calculated by the income divided by the price times 100
22
Q
What is Years Purchase and how is it calculated? (2)
A
- By dividing 100 by the yield.
- This is the number of years required for its income to repay its purchase price
23
Q
What is obsolescence?
A
The gradual decline in value of a property due to factors such as age, deterioration, or changes in market conditions
24
Q
What is an all risks yield?
A
The remunerative rate of interest used in the valuation of a fully let property let at market rent reflecting all the prospects and risks attached to the particular investment
25
What is a true yield?
Assumes rent is paid in advance not in arrears (traditional valuation practice assumes rent is paid in arrears)
26
What is a nominal yield?
Initial yield assuming rent is paid in arrears
27
What is a gross yield?
The yield not adjusted for purchaser's costs
28
What is a net yield?
The resulting yield adjusted for purchaser's costs
29
What is an equivalent yield?
The average weighted yield when a reversionary property is valued using an initial and reversionary yield (e.g. during hardcore/layer method)
30
What is an initial yield?
Simple income yield for current income and current price
31
What is a reversionary yield?
Market rent divided by the current price on an investment let a rent below the market rent
32
Running yield
The yield at any one moment in time
33
What is a Discounted Cash Flow (DCF)? (3)
- A growth explicit investment method of valuation
- Form of income approach valuations
- Seeks to determine the value of a property by examining its future net income or project cash flow from the property and then discounting the cash flow to arrive at an estimated current value of the property
34
What is the RICS document surrounding DCFs?
RICS Practice Information, Discounted Cash Flow Valuations, November 2023
35
When is a DCF used?
Where the projected cash flows are explicitly estimated over a finite period, such as:
- Short leasehold interest
- Phased development projects
- Non-standard investments
- Over-rented properties and social housing
36
What is the methodology to find the market value for a DCF? (5)
1. Estimate the cash flow (income less expenditure)
2. Estimate the exit value at the end of the holding period
3. Select the discount rate
4. Discount the cash flow at the discount rate
5. Value is the sum of the completed discounted cash flow to provide the NPV
37
What is a net present value?
The sum of the discounted cash flows
38
How is the net present value used? (3)
- To determine if an investment gives a positive return against a target rate of return
- If positive, the investment has exceeded the investor's target rate of return
- If negative, it has not achieved the investor's target rate of return
39
What is the internal rate of return (IRR)
- The rate of return at which all future cashflows must be discounted to produce an NPV of 0
- Used to assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions
40
How is the IRR calculated? (5)
1. Input current market value as a negative cash flow
2. Input projected rents over holding period as a positive value
3. Input projected exit value at the end of the term assumed as a positive value
4. Discount rate (IRR) is the rate chosen which provides an NPV of 0
5. If NPV is more than 0, then the target rate of return has been met
41
When is the profits method of valuation used? (3)
- For valuations of trade-related property where there is a 'monopoly' position
- Where the value of the property depends on the profitability of its business and its trading potential
- E.g. pubs, hotels, nurseries, care homes
42
What is the methodology for a profits valuation? (7)
1. Annual turnover (income received)
2. Minus costs and purchases to get your gross profit
3. Minus reasonable working expenses to get your unadjusted net profit
4. Minus the operator's remuneration to get your adjusted net profit
5. Adjusted net profit is also known as Fair Maintainable Operating Profit (FMOP)
6. Then capitalised at an appropriate yield to achieve market value
7. Also expressed as EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation)
43
What is the difference between a residual valuation and a development appraisal?
A development appraisal will typically give you the profitability of a proposed development, whereas a residual valuation will give you the value of the land
44
What is the purpose of a development appraisal?
To financially assess the viability of a development scheme
45
How do you complete a residual valuation? (4 + 8 in no.3)
1. Calculate the GDV (Gross Development Value) using comparable evidence to establish rents and yields. Using All Risks Yield
2. Then deduct purchaser's costs (usually 6.8%, SDLT at 5%, legal fees at 1% plus VAT, and surveyor fees at 0.5% plus VAT)
3. Then deduct Total Development Costs including
- Site demolition/clearance
- Planning costs
- Build costs
- Professional fees (10-15% plus VAT of total construction costs)
- Contingency (5-10% of construction costs)
- Marketing costs/fees
- Finance
- Developer's profit (normally 15-20% of GDV or total construction cost)
4. Gives you the bid for land
46
Where would you be able to find out the build costs? (3)
- Client information
- RICS BCIS (Building Cost Information Service)
- Building/Quantity Surveyor estimate
47
What are the two types of development finance? (2)
- Debt finance (loan from a bank)
- Equity finance (selling shares)
48
How to calculate finance for residual valuation? (3)
- SONIA rate
- Bank of England plus premium
- Rate at which developer can borrow the money
49
When is the Depreciated Replacement Cost (Contractor's) method of valuation used? (2)
- Where direct market evidence is limited or unavailable for specialised properties
- E.g. sewage works, lighthouses, schools etc.
50
What is the purpose of the DRC method of valuation? (3)
- Used for owner-occupied property
- For accounts purposes for specialised properties
- For rating valuations of specialist properties
51
How is a DRC valuation undertaken? (2)
1. Value of land in its existing use (assuming planning permission)
2. Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence/deterioration)
52
Why is the DRC method not acceptable for Loan Security? (2)
- It assumes that there is a relationship between cost and value
- Purely based on estimates and averages rather than actual market evidence
53
What are the 3 types of obsolescence? (3)
1. Physical
2. Functional
3. Economic
54
What is the RICS documentation relating to valuations?
RICS Valuation - Global Standards 2021 (Red Book Global)
55
What is the structure of the red book/Valuation Global Standards?
1. Introduction
2. Glossary
3. Professional Standards (PS)
4. Valuation, Technical and Performance Standards (VPS)
5. Valuation Practice Guidance Applications (VPGA)
6. International Valuation Standards (IVS)
56
What are the relevant sections in Part 3: Professional Standards (PS)? (2)
PS 1: When do valuations have to be Red Book Global compliant?
PS 2: Ethics, Competency, Objectivity and Disclosures
57
What are the relevant sections in Part 3: Valuation, Technical & Performance Standards (VPS)? (5)
VPS 1: Terms of Engagement
VPS 2: Inspections, Investigations and Records
VPS 3: Valuation Reports
VPS 4: Bases of Value (plus assumptions and special assumptions)
VPS 5: Valuation Approaches and Methods
58
What are the relevant sections in Part 5: Valuation Practice Guidance Applications (VPGA)? (4)
VPGA 1: Valuations for inclusion in financial accounts
VPGA 2: Valuations for secured lending
VPGA 8: Valuation of real property interests (sustainability/ESG)
VPGA 10: Matters that may give rise to material valuation uncertainty
59
According to PS 1, when does a valuation have to be Red Book Global compliant? (1+5)
Mandatory use for all valuations except for:
1. During negotiations or litigation
2. Statutory function (except for tax return reasons)
3. Provided for a client purely for internal reasons, without liability or to a third party
4. Agency or brokerage work, except when a purchase report, including a valuation, is required
5. When giving evidence as an expert witness
60
What are the main points within PS 2? (3)
- Members undertaking valuations must act in accordance with the RICS Rules of Conduct
- Must act objectively and independently, not being influenced
- Must understand the client's requirements and comply with the minimum terms of engagement
61
According to VPS 1, what are some of the minimum matters to be confirmed in writing in a Terms of Engagement? (11)
- Identification and status of value, client, and any other intended users
- Asset type
- Currency
- Purpose of valuation
- Basis of value
- Date
- Sources of information
- Assumptions and special assumptions
- Confirmation of Red Book compliance
- Fee basis
- Complaints handling procedure to be made available
62
What is an assumption?
Made where it is reasonable for the valuer to accept that something is true without the need for specific investigations
63
What is a special assumption?
An assumption that is taken to be true and accepted as fact, even though it is not true (e.g. planning permission granted)
64
What are the main points under VPS 2? (4)
- Valuers must take the steps to verify the information being relied upon unless;
- A valuer is instructed to undertake a desktop valuation (restricted information valuation)
- A revaluation without re-inspection must not be undertaken unless the valuer is satisfied that there have been no material changes to the property
- Records must be held of the inspections
65
According to VPS 3, what are the minimum requirements to be included within a report? (10)
1. Identification and status of the valuer
2. Client and any other intended users
3. Purpose of valuation
4. Asset type
5. Basis of value
6. Valuation date and report date
7. Sources of information
8. Assumptions and special assumptions
9. Valuation approach and reasoning
10. Valuation figure
66
What are the bases of value and which section of the RICS Valuation - Global Standards 2021 has reference to them? (1+5)
VPS 4
1. Market Value
2. Market Rent
3. Fair Value
4. Investment Value
5. Equitable Value
6. Liquidation Value
67
What is Market Value? (6)
- The estimated amount 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 acted knowledgeably, prudently, and without compulsion
68
What is Market Rent? (7)
- The estimated amount for which an interest in real property should be leased;
- on the valuation date;
- between a willing lessor and a willing lessee;
- on appropriate lease terms;
- in an arm's length transaction;
- after proper marketing;
- where the parties had acted knowledgeably, prudently, and without compulsion
69
What is Fair Value and what accounting standard is it found? (2)
The Market Value at the measurement date
IFRS 13 (International Financial Reporting Standards)
70
What is Investment Value?
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives
71
What are the main points of VPS 5?
Valuers are responsible for choosing and justifying their valuation approach and use of model (in some cases more than one approach is appropriate)
72
What is included within VPGA 1? (2)
- Valuation for inclusion in financial accounts
- Fair Value adopted for all IFRS adopted accounts
73
What is included within VPGA 2? (2)
- Dealing with conflicts of interest for secured lending valuations
- Any previous, current, or anticipated involvement with the prospective borrower or property to be valued must be disclosed to the lender
74
What additional information is required for a loan security valuation? (3)
- Any environmental consideration
- Suitability of property for mortgage purposes
- If a special assumption has been used, must comment on the difference in value between the reported value with and without that special assumption
75
What does VPGA 8 cover?
- Inspections and investigations, with particular emphasis on ESG and sustainability
76
What does VPGA 10 cover? (2)
- Matters that may give rise to material valuation uncertainty
- The main point is that a valuation report must not be misleading
77
What does Part 6 International Valuation Standards cover? (2)
- General standards such as Terms of Engagement, bases, methods of valuation etc.
- Asset standards such as types of assets, real property/development property
78
Is there a UK version of valuation standards?
RICS Valuation - Global Standards (UK National Supplement 2023)
79
Why was the UK supplement of the Red Book brought in and when is it effective from?
- 1st May 2024, published October 2023
- Reflects the outcome of the Peter Gray investigation
- Adds to the Red Book, doesn't replace it
80
What is hope value? (2)
- The value arising from any expectation that future circumstances affecting the property may change
- E.g. planning permission or realisation of marriage value
81
What is marriage value? (2)
- Created by a merger of interests
- A before and after valuation is undertaken and the level of marriage value is calculated
82
What are the bands for SDLT for non-residential freehold purchasers?
£0 - £150,000 = 0%
£150,001 - £250,000 = 2%
Over £250,000 = 5%
83
What are the bands for SDLT for non-residential leaseholds?
Calculated on the Net Present Value:
£0 - £150,000 = 0%
£150,001 - £5,000,000 = 1%
Over £5,000,000 = 2%
84
What is the Net Present Value?
The total rent payable over the term of the lease, reduced by an annualised discount rate
85
What are the two Charities Acts? (2)
- Charities Act 2011
- Charities Act 2022
86
What are the main points of the Charities Acts?
- Requires trustees of a charity to obtain a valuation prior to the disposal of an asset in accordance with S119
- Must state within the report that the charity has obtained the best terms
- Must be a Red Book compliant valuation
87
What are the main changes with the new Charities Act? (2)
- Simplifies the requirements for the report and widens the categories of potential advisors
- Simplifies the contents of the reports
88
What is a special buyer?
A buyer for whom a particular asset has special value because of advantages arising from its ownership that wouldn't be available to other buyers
89
How is a long leasehold interest valued? (2)
- Ground rent is deducted from the gross income to calculate the net rent received
- This is capitalised at a yield for the length of the lease to create a market value
90
What is a WAULT and how do you calculate this?
- Weighted Average Unexpired Lease Term remaining to the first break or lease expiry weighted by the contracted rent
91
What is the net effective rent? (3)
- How you devalue a headline rent with a rent-free period to get the real market rent
- Typically until the next rent review or lease expiry
- A 3-month fitting-out period is usually deducted
92
What is a ransom strip and what is the case law?
- A piece of land which controls the access to another piece of land
- Stokes vs Cambridge
93
How do you value a ransom strip? (2)
- According to the Upper Tribunal, the value of a ransom strip could be in the order of 15% - 50% of the development value unlocked by the inclusion of the ransom trip
- Stokes vs Cambridge was 1/3 of the uplift
94
What is zoning?
- Used for the comparison of retail properties to create a unit of comparison
- Rationale is the rental value of the property reduces away from the street
- The halving back principle with 6.1m zones (except for certain streets)
- Basement/1st floor areas are usually treated as A/10
- Quantum discounts can be agreed upon for size
- Return frontages (usually 10%)
- Front to depth ratio
- Masking used for hidden areas
- Natural zoning when zones reflect physical changes in the building like steps
- Mirror zoning is used for shops with two main frontages
95
What is the difference between a S119 valuation and a normal red book valuation? (3)
- An S119 valuation report recommends the marketing/method of sale steps to achieve best value
- Needs to report if there are any repairs or alterations needed before disposal
- The second S119 report must be undertaken after an offer has been accepted and must report on whether it has been adequately advertised
96
What part of the UK National Supplement of the Red Book has reference to
VPGA 8 of the UK National Supplement
97
Why is peer reviewing important/required for valuations?
- Can help remove any unconscious bias
- Provides a second level of assurance
98
How would you value the freehold interest of a tenanted commercial building?
- Investment method of valuation
- Use comparable evidence to find the market rent and the market yield
- Decide which investment method to use based on the difference between market rent and passing rent
- Capitalise using an appropriate yield to get your value
99
Can you undertake a red book valuation if you qualify today?
No, if I took valuation to Level 3, I would still need to register with the RICS Valuer Registration Scheme.
If taken to Level 2, you would need to demonstrate Level 3 competency at a later date
100
Who did you complete Conflict of Interest checks on for the industrial park valuation example? (3)
As it was a loan security valuation, conflict of interest checks were undertaken on:
- The asset
- The borrower
- The lender
101
Who would be able to undertake a S119 valuation report?
A qualified surveyor who the trustees believe has the skills and experience appropriate for the valuation.
102
How do you work out the capital value using a yield?
Rent divided by yield, multiplied by 100
103
How is a ground rent calculated?
- Upfront capital sum
- Percentage (typically 5-10%) of the income from the land or buildings
APC Spring 2024
flashcards
Decks in class (17)
# Cards
-
Weak Areas54
-
Measurement42
-
Ethics, Rules of Conduct & Professionalism68
-
Landlord & Tenant72
-
Inspection68
-
Health & Safety37
-
Valuation103
-
Purchase & Sale58
-
Data Management29
-
Leasing & Letting16
-
Accounting Principles13
-
Sustainability20
-
Case Study30
-
Other Mandatory Competencies24
-
Strategic Real Estate Consultancy8
-
Documents/Standards7
-
General Questions3
