Valuation

Question 1

What are some of they key changes in the recent update to the RICS Global Standards Red Book Global (2021)?

Answer 1

1. Changes to VPGA 1 (Valuation for financial reporting purposes)
2. Sustainability and ESG factors
3. Need for compliance with RBG and adequate terms of business reflecting this (PS1 and VPS 1)

Question 2

What are some of the key changes in the Global Standards (UK National Supplement) 2023?

Answer 2

1. New edition reflects out come of review undertaken by Peter Pereira Gray.
2. Changes aimed at reducing risks of Conflicts of Interest in the commissioning of valuation reports.

Key Changes:

UK VPS 3 - Regulated Purpose Valuations: Supplementary governance requirements

UK VPGA 8 - Valuation for charity assets - now refers to charities act 2022

UK VPGA 10 - Valuation of commercial secured lending - incorporates new ESG principles.

Question 3

What are the supplementary governance requirements for regulated purpose valuations which took effect from 1st May 2024?

Answer 3

Covers Mandatory Rotations when asset is regularly valued:

1. Max single engagement period of 5 years.
2. Max 10 years before rotation of firm.
3. Max period of 5 years before the rotation individual responsible valuer.
4. Min 3 year break after rotating off an engagement.

Other governance:
1. Mandatory recording by the valuer of preliminary advice / draft reporting and client disucssions.
2. Mandatory requirement for valuers to ask about involvement of individual parties in the client’s valuation.

Question 4

What is the hierarchy of evidence as found in the RICS Professional Standard: Comparable Evidence in Real Estate Valuation (2019)?

Answer 4

CAT A: Direct Comparables of Contermpary
1. Near identical with full information.
2. Similar with full information.
3. Similar with enough reliable information.
4. Similar where offer made but no binding contract
5. Asking prices

CAT B: General Market Data
1. Information from published sources or commercial databases
2. Other indirect evidence
3. Historic evidence
4. Demand / Supply data

CAT C: Other sources
1. Transactional evidence from other real estate types and locations.
2. Other background data

Question 5

What are the three valuation approaches and methods?

Answer 5

1. Income Approach (Residual / Profits / Investment)
2. Costs Approach (DRC method)
3. Market Approach (Comparable)

Question 6

How do you calculate a years purchase?

Answer 6

100 / Yield

Question 7

What are the current prime yields?

Answer 7

Retail
2.75-3% Bond Street
4.5% Oxford Street

Offices
City Prime - 5.5%
West End - 4 - 4.75%

Industrial
Prime 5-5.5%

Question 8

What RICS guidance do you refer to when valuing development property?

Answer 8

RICS Global Standards (2021) ‘‘Red Book’’

RICS: Comparable Evidence in Real Estate Valuations (2019)

RICS: Valuation of Development Property (2019)

RICS Global Standards (UK National Supplement) (2023)

Question 9

What do PS1 & PS2 cover in RICS Global Standards (2021)?

Answer 9

PS1 - When a valuation has to be Red Book Compliant

PS2 - Ethics, competency, objectivity and disclosers

Both are mandatory for all valuations

Question 10

When can a valuation not be red book compliant?

Answer 10

All Valuations must be red book compliant unless:

1. For Agency / Brokerage work (unless purchase report is required)
2. For internal purposes - must be w/o liability and not shared with 3rd parties.
3. When prepared as evidence as an Expert Witness
4. For statutory undertakings (but not statutory returns)
5. Negotiation / Litigation

Question 11

Tell me your understanding of Professional Standard 2?

Answer 11

1. Covers professional and ethical standards (must be in accordance with RoC)
2. Covers independence, objectivity, conflicts of interest
   - Must be objective / independent
   - Advice on dealing with COI
3. Terms of Engagement
   - Members must comply with minimum terms of engagement.

Question 12

What are the 5 VPS’s?

Answer 12

VPS1: Terms of Engagement

VPS2: Inspections / Investigations / Records

VPS3: Valuation Reports

VPS4: Bases of Value

VPS5: Valuation Approaches and Methodology

Question 13

What are the minimum terms of engagement as set out in VPS 1?

Answer 13

1. Identification and Status of valuer
2. Identification of client & intended users
3. The asset to be valued
4. Currency
5. Purpose of valuation
6. Basis of value
7. Valuation date
8. Extent of investigation
9. Nature and source of information to be relied upon.
10. Assumptions / Special assumptions.
11. Format of the report.
12. Restrictions for use / distribution.
13. Confirmation of Red Book compliance
14. Fee basis
15. CHP to be made available
16. Statement that valuation may be subject to RICS compliance
17. Limitation on liability agreed.

Question 14

What does VPS 2 cover?

Answer 14

Inspections / Records / Investigations

Inspections
- Must try to verify information being relied upon.

Desktop valuations
1. Agree nature of restriction in ToE
2. Confirm valuation implications of restriction in writing
3. Consider whether restriction is reasonable
4. Refer to restriction in report.

Question 15

What are the minimum requirements to be stated with a red book valuation report?

Answer 15

1. Identification & Status of the valuer
2. Client and other intended users
3. Purpose of valuation
4. Identification of asset
5. Basis of value
6. Valuation date
7. Extent of investigation
8. Nature / source of info
9. Assumptions and special assumptions
10. Restrictions on use / distribution / publication
11. Instruction undertaken in accordance with IVS
12. Valuation approach / reasoning
13. Valuation figure
14. Date
15. Comment on market uncertainty
16. Statement setting out limitations on liability

Question 16

What are the bases of value?

Answer 16

VPS 4 - Bases of value
1. Market Value
2. Market Rent
3. Fair value
4. Investment value
5. Equitable value
6. Liquidation value

Question 17

Define Market value?

Answer 17

Market Value

The estimated amount an asset out liability with exchange for:
1. On the valuation date
2. Between a willing buyer and willing seller
3. In an arms length transaction
4. After proper marketing
5. Where both parties have acted knowledgably, Prudently and without compulsion

Question 18

Define Market Rent

Answer 18

The estimated amount an interest will be leased for:
1. On the valuation date
2. Between a willing lessee and willing lessor
3. In an arms length transaction
4. On appropriate lease terms
5. After proper marketing
6. Where both parties have acted knowledgably, prudently and without compulsion.

Question 19

Define investment value

Answer 19

the value of an asset to a particular or potential owner for individual investment or operational objectives

Question 20

What does part 5 of the VPGA cover?

Answer 20

Valuation Practice Guidance Applications

VPGA 1 - Valuation for inclusion in financial accounts

VPGA 2 - Valuations for secured lending

VPGA 10 - Matters that may give rise to material uncertainty
- Should draw attention / comment on these

Question 21

What does VPGA 2 cover?

Answer 21

Valuation for Secured Lending

• Conflicts of Interest i.e relationship with borrower or bank or if fee obtained from borrower
• Reporting procedures: Additional information on top of minimum requirements.

Question 22

What additional information is required on top of the minimum requirements of a valuation report?

Answer 22

1. Disclosure of any COI
2. Valuation methodology
3. Comments on environmental consideration
4. Comment on suitability of the property for mortgage purposes
5. Circumstances that may affect the price.
6. Factors that conflict with market value
7. When using special assumption - report value with and without SA.