RICS APC > Valuation > Flashcards

Valuation Flashcards

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1
Q

What are the three steps to take ahead of a valuation?

A
  1. Check that you are competent to undertake the work
  2. Confirm if there are any conflicts of interest
  3. Set out full confirmation of instructions prior to starting
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2
Q

What are the five methods of valuation as per VPS 5?

A
  1. Comparable Method
  2. Residual Method
  3. Investment Method
  4. Profits
  5. Depreciated Replacement Costs
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3
Q

What is a simple methodology when carrying out a Comparable valuation?

A
  1. Search and Select Comparables
  2. Confirm + Identify details and analyse headline rent to give a net effective rent
  3. Assemble comparables in a table
  4. Adjust comparables using hierarchy of evidence
  5. Analyse comparables to give an opinion on value
  6. Report value and prepare file note
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4
Q

What does RICS Professional Standard: ‘Comparable Evidence in Real Estate Valuation’ 2019 state?

A
  1. Principles in the use of comparable evidence.
  2. Provides advice in dealing with situations where there is limited availability,
  3. Sets out hierarchy of evidence.
  4. Definition of a Comparable
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5
Q

What is the hierarchy of evidence when searching for comparables?

A
  1. Category A - Direct Comparable of Contemporary
  2. Category B - General market data that can provide guidance
  3. Cat C - Other sources (e.g. other real estate classes)
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6
Q

Talk me through an example of a time when you completed a comparable valuation?

A

I have completed comparable analysis in connection with my investment valuation. In line with the RICS Professional Standard, Comparable Evidence in Real Estate Valuation, I would:

  1. Search for comparables (inspection, local agents, rightmove)
  2. Find market rent and assess net effective rent
  3. Put into a table
  4. Score in relation to hierarchy of evidence
  5. Give an opinion of value
  6. Present to client, in a report, file the report
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7
Q

What is the investment method of valuation?

A

Used when there is income stream to value. The income is capitalised to produce a capital value.

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8
Q

What are the different types of Investment Method of Valuation?

A
  1. Conventional Investment Method
  2. Term + Reversion Method
  3. Layer / Hardcore Method
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9
Q

What is the conventional investment method?

A

Market rent multiplied by the years purchase (or divided by the capitalisation rate)

Rental income is capitalised to produce a capital value

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10
Q

What is the Term + Reversion Method?

A

Used when under rented

Term capitalised until the next lease event at an initial yield

Reversion to market rent valued in perpetuity at a reversionary yield

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11
Q

What is the layer / hardcore method?

A

Used for over-rented properties

Income flow divided horizontally. Bottom slice = market rent capitalised at a certain yield. Top slide = Passing rent minus the market rent until next lease event capitalised at a certain yield.

Higher yield applied to top slice to reflect additional risk

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12
Q

What is a yield?

A

Measure of investment return as a percentage of capita invested

Income / price

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13
Q

What is a years purchase?

A

Dividing 100 by the (yieldx100). Number of years required for income to repay purchase price

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14
Q

What are some of the major risk factors that can affect a yield?

A
  1. Prospects for rental growth / capital growth
  2. Quality of location
  3. Lease terms / covenant
  4. Voids
  5. Ease of sale
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15
Q

Talk me through an example of when you completed an investment valuation?

A

Determined fair value of a vacant office building for purposes of financial reporting, in relation to IFRS 13

Established market rent through comparable analysis. Applied a discount or rental premium to account for details which differentiated from the subject scheme.

Analysed recent market transactions to assess proposed capitalisation rate for property. Looking specifically for vacant properties, and where I couldnt find them adjusting comparables.

I then used capitalisation rate to capitalise market rent to provide value.

Cross checked my fair value opinion using the comparable method against other vacant buildings.

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16
Q

Provide a simple methodology for a DCF?

A
  1. Estimate cash flow
  2. Estimate exit value
  3. Select discount rate
  4. Discount cash flow at discount rate
  5. Value is sum of the completed discounted cash flow to provide NPV
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17
Q

What is the Profit method of valuation?

A

Valuations of trade related property. Depends on profitability. Pubs, petrol stations.

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18
Q

Simple methodology for a Profits valuation?

A
  1. Calculate Gross Profit (turnover - costs)
  2. Calculated Unadjusted Net Profit (Gross profit - working expenses)
  3. Calculated adjusted net profit or Fair Maintainable Operating Profit (Unadjusted Net Profit - Operations Remuneration)

Turnover costs, expenses and remuneration.

Then capitalised at appropriate yield

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19
Q

What is the Depreciated Replacement Cost?

A

When direct market evidence is limited or unavailable for specialised properties. Could include sewage works, lighthouses, oil refineries.

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20
Q

Simple methodology for DRC?

A

Value of land in its existing use (assume planning permission) and add current cost of replacing the buildings plus fees less a discount for depreciation

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21
Q

What is a residual valuation?

A

Find the market value of the site based on market inputs

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22
Q

Talk through a residual valuation?

A

Calculated GDV using comparable method

Worked out development costs including construction cost (internal cost planning team benchmarked against external quantity surveyor), market assumptions for remaining development costs.

Subtracted Development costs and profit from GDV to get residual land

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23
Q

What is the Red Book?

A

They are the RICS Valuation - Global Standards (or Red Book).

Global standards for valuation. Are some national supplements that should be red in line with the global standard.

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24
Q

Talk through structure of Red Book global

A

Part 1 = Intro
Part 2 = Glossary
Part 3 = Professional Standards (PS)
Part 4 = Valuation Technical + Performance Standards (VPS)
Part 5 = Valuation Applications (VPGA)
Part 6 = International Valuation Standards (IVS)

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25
What is Part 3 of the RICS Valuation Global Standards
Professional Standards (PS) PS1 = Compliance with standards where a written valuation is provided PS2 = Ethics, competency, objectivity and disclosures
26
What is Part 4 of the RICS Valuation Global Standards
Valuation Technical + Performance Standards (VPS) VPS 1 - Terms of engagement VPs2 - Inspections, investigations + records VPS3 - Valuation reports VPS4 - Bases of Value VPS5 - Valuation Approaches + Methods
27
What are some of the minimum matters which must be confirmed in writing as part of VPS 1?
1. Identity of valuer 2. Identity of client 3. Asset to be valued 4. Purpose of valuation 5. Currency 6. Basis of Value 7. Valuation Date 8. Assumptions & Special assumptions
28
What is an assumption?
Made where it is reasonable for the valuer to accept that something is true without needing further investigation
29
What is a special assumption?
When something is taken as true and accepted as fact even though it is not true i.e. valuing assuming planning consent
30
What does VPS 3 state should be in a valuation report?
1. Identity of valuer 2. Identity of client 3. Asset to be valued 4. Purpose of valuation 5. Basis of value 6. Valuation date 7. Assumptions & Special Assumptions
31
What is Market Value
Estimated amount for which an asset or liability should exchange - On valuation date - Between a willing buyer + willing seller - In an arm's length transaction - After proper marketing - Where parties had acted knowingly
32
What is Market Rent?
Estimated amount forwhich an interest in real property should be leased - On valuation date - Arms length transaction - Willing leasor and leasee - After property markets - Parties acted knowingly
33
What is fair value?
IFRS 13 defines fair value as 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 (an exit price) Required if the client has adopted IFRS (International Financial Reporting Standards) RICS view is that definition is consistent with market value
34
What is investment value?
Value of an asset to a particular owner or prospective owner for an individual investment Measure of worth to reflect value against client's own investment criteria
35
What is Part 5 of the RICS Valuation Global Standards
Valuation Applications. 10 VPGA. Some are: - VPGA 1 - Valuation for inclusion in financial accounts (fair value for all IIFRS adopted accounts) - VPGA 2 - Valuation for secured lending - VPGA 3 - Valuation of Business & Business interest
36
What is Part 6 of the RICS Valuation Global Standards
International Valuation Standards - Sets out general standards (e.g. terms of engagement, approaches - IVS 105) - Asset standards - requirements for different assets (e.g. development)
37
What RICS Valuation standard applies in UK?
Global Standard and UK Supplement. UK Supplement updated in 2023 following Gray report. Will become effective in May 2024
38
What are the three aims of the RICS Valuer Registration Scheme?
1. Improved quality of valuations 2. Meet RICS requirement to self regulate 3. Protect and raise status of valuation
39
What is needed to register as an RICS Valuer?
- Type of valuations - Purpose of valuations - Number of valuations - Firms total fee income - Data sources - History of negligence
40
What is the Margin of Error?
Permissible range allowed by courts, for example in respect of a valuation
41
Whats an allowed Margin of Error?
Case involving CB Richard Ellis in 2010 surrounding hotel valuation stating that 10% MoE was acceptable. More recent case involving CBRE 2017 where an acceptable margin of error was 15%
42
What makes up Purchaser costs?
Stamp Duty 5% Legal Fees 0.5% Agent Fees 1% VAT = 20% on legal and agent fees
43
What is marriage value?
Value created by a merger of interest
44
What is hope value?
Value arising from an the impact of an expected outcome on a property
45
What are some of the changes from the previous version the red book?
Valuation for financial reporting purposes (VPGA 1) - reference to Fair Value & IFRS13 Integration of greater considerations around sustainability & esg
46
What is PS1 of the Red Book?
Compliance with standards and practice statements where a written valuation is provided (e.g. IPMS & Surveying Safely)
47
What is PS2 of the Red Book?
Ethics, competency, objectivity and disclosures (Rules of Conduct, act objectively, conflicts of interest )
48
What is VPS1 of the Red Book?
Terms of Engagement (IVS101 Scope of Work) minimum matters
49
What is VPS2 of the Red Book
Inspections, Investigations & Records
50
What is VPS3 of the Red Book?
Valuation Reports (IVS 103 Reporting) minimum requirements
51
What is VPS 4 of the Red Book?
Bases of Value
52
What is VPS 5 of the Red Book?
Valuation Approaches and Methods (IVS 105)
53
What is VPGA 1 of the Red Book?
Valuation for inclusion in financial accounts (fair value for all IFRS accounts)
54
What is VPGA 2 of the Red Book?
Valuations for secured lending
55
What is VPGA 3 of the Red Book?
Valuation of Business & Business Interests
56
What to include in terms of engagement of a valuation? & report?
1. Identity of valuer 2. Identity of client 3. Asset to be valued 4. Currency 5. Purpose of valuation 6. Basis of value 7. Valuation date 8. Assumptions & special assumptions
57
What are the three elements for finance?
1. Site purchase 2. Total construction & associated costs 3. Holding costs (cover voids)
58
What is typical Loan to Value?
60%
59
What different forms of debt?
Senior debt Mezzanine debt (on top of LTV)
60
Methods of development funding?
Debt Finance Joint Venture Forward SalesW
61
What is overage?
Arrangement for sharing of extra profits recieved above original agreement
62
Profit erosion period?
Time for Void costs to erode development profit
63
What is some guidance for valuation of development? and what does it state?
RICS Professional Standard - Valuation of Development Property 2019 - Assumptions & Special Assumptions must be noted - DCF for complicated lengthy schemes - FVA in line with Assessing Viability for a planning application: Conduct & reporting 2019
RICS APC
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