1
Q
What is an internal valuer?
A
Employed by a company to value the assets of the company
Valuation for internal use only, with no third-party reliance.
2
Q
What is an external valuer?
A
Has no material links with the asset to be valued or the client
3
Q
What are the 3 key steps before commencing a valuation instruction?
A
- Competence
- Independence – conflicts
- Terms of engagement – set out full instructions and receive written instruction
4
Q
What statutory due diligence should be undertaken for a valuation?
A
- Asbestos register
- Business rates
- Contamination
- Equality Act compliance
- Flooding
- EPC
- Highways
- Environmental factors
5
Q
Describe the 16 step timeline of a valuation.
A
- Receive client instructions
- Check competence
- Check independence and conflicts
- Issue terms of engagement
- Receive terms of engagement signed
- Gather information
- Undertake due diligence
- Inspect and measure
- Research market and analyze comparables
- Undertake valuation
- Draft report
- Cross check with another surveyor
- Finalize and sign report
- Report to client
- Issue invoice
- Ensure file is appropriately organized for archiving
6
Q
What are the 5 methods of valuation?
A
- Comparable
- Investment
- Profits
- Residual
- Depreciated replacement cost
7
Q
What are the 3 approaches to valuation according to IVS 105?
A
- Income approach
- Cost approach
- Market approach
8
Q
Describe the methodology for the comparative method of valuation.
A
- Search for and select comparables
- Confirm details and analyze headline rent to give net effective rent
- Assemble comparables in a schedule
- Adjust comparables using hierarchy
- Analyse to form opinion of value
- Report value and prepare file notes
9
Q
Which is the key RICS document for comparable valuations?
A
RICS Professional Standard: Comparable evidence in Real Estate Valuation, 2019
10
Q
Describe the hierarchy of comparable evidence.
A
- Category A – direct comparables:
- Completed transactions of near-identical properties
- Completed transactions of other similar assets
- Completed transactions of similar assets with limited reliable data
- Similar assets being marketed
- Asking prices (with careful analysis)
- Category B – general market data
- Category C – other sources
11
Q
How do you find relevant comparable evidence?
A
- Inspection of an area for agents boards
- Visit/speak to local agents
- Auction results
- In-house records and databases
- Market sentiment
12
Q
Describe when the investment method is used.
A
Used when there is an income stream to value
13
Q
Describe the conventional investment method.
A
Rent received or market rent multiplied by the YP to calculate the Market Value
14
Q
What is the term and reversion method?
A
Used for reversionary investments where MR is above passing rent
15
Q
What is a yield?
A
A measure of investment return, expressed as a percentage of capital invested
16
Q
What is the relationship between risk and yields?
A
Risk is a major factor when determining a yield in relation to:
* Prospects for rental and capital growth
* Quality of location and covenant
* Use of the property
* Lease terms
* Obsolescence
* Voids
* Security and regularity of income
* Liquidity
17
Q
What is return in the context of property valuation?
A
Used retrospectively to describe the performance of a property
18
Q
What is an all risks yield?
A
Remunerative rate of interest used in the valuation of fully let property at market rent
19
Q
What is a true yield?
A
Assumes rent is paid in advance
20
Q
What is nominal yield?
A
Initial yield assuming rent is paid in arrears
21
Q
What is gross yield?
A
The yield is not adjusted for purchasers costs
22
Q
What is net yield?
A
The resulting yield adjusted for purchasers costs
23
Q
What is equivalent yield?
A
Averaged weighted yield when a reversionary property is valued using an initial and reversionary yield
24
Q
What is initial yield?
A
Simple income yield for current income and current price
25
What is reversionary yield?
MR divided by current price of an investment at a rent below the MR
26
What is running yield?
The yield at one moment in time
27
What is DCF method?
Growth explicit method of valuation
28
When would a DCF be used?
* Short leasehold interests
* Phased development projects
* Over rented properties and social housing
29
What is the simple DCF methodology?
* Estimate cash flow for an agreed holding period
* Estimate the exit value
* Select discount rate
* Discount cashflow at discount rate
30
What is NPV?
Net Present Value, used to determine if an investment gives a positive return against the target rate of return
31
Describe Internal Rate of Return (IRR).
The rate of return at which all future cashflows must be discounted to produce an NPV of 0
32
Which RICS document covers DCF?
RICS Practice Information: Discounted Cash Flow Valuations, November 2023
33
What is the purpose of the profits method?
Used for valuations of trade-related properties where there is a monopoly position
34
What is a simple methodology for the profits method?
* Annual turnover (income) – costs = gross profit
* Gross profit – working expenses = unadjusted net profit
* Unadjusted net profit – operators remuneration = FMOP
35
What is EBITDA?
Earnings before interest, taxation, depreciation and amortization
36
Describe residual site valuations.
Most common purpose is for a specific valuation of a property holding to find the market value of the site
37
What elements make up total development costs?
* Site preparation
* Planning costs
* Building costs
* Professional fees
* Contingency
* Marketing
* Finance costs
38
How are finance costs calculated?
Assumes 100% debt finance with three elements: site purchase, construction, holding period
39
What is developers profit?
Percentage of GDV or total construction costs, typically 15-20%
40
What are the two main methods of development finance?
* Debt financing
* Equity financing
41
What is overage?
The arrangement made for the sharing of any extra receipts received over and above the profits originally expected
42
What is the profit erosion period?
The length of time it will take for the development profit to be eroded by void costs
43
What are the limitations of residual valuations?
* Importance of accurate information
* Doesn’t consider timing of cashflow
* Sensitive to minor input adjustments
44
What is a sensitivity analysis?
Required for key variables such as GDV, finance costs, and build costs
45
Which RICS document discusses residual valuations?
RICS Professional Standard: Valuation of Development Property 2019
46
What is the purpose of the DRC method?
Only used when direct market evidence is limited or unavailable
47
What is a simple DRC method?
Value of land in its existing use plus current costs of replacing building less a discount for depreciation
48
How do you judge the level of depreciation?
* Physical obsolescence
* Functional obsolescence
* Economic obsolescence
49
What considerations are there with the DRC method and the Red Book?
Method is not suitable for Red Book compliant secured lending valuations
50
Which RICS statement is key to DRC method?
RICS Professional Standard: Depreciated replacement cost method of valuation for financial reporting, 2018
51
Describe the key changes to the Red Book.
RICS updated the Red Book in December 2024, effective 31st January 2025
52
What must a valuer state regarding MV for alternative uses?
MV for alternative uses if higher or a statement MV on cessation of business would be considerably lower.
53
Which RICS statement is key to the DRC method?
RICS Professional Standard: Depreciated replacement cost method of valuation for financial reporting, 2018.
54
When was the Red Book updated?
Updated in December 2024, effective 31st January 2025.
55
What new content is included in the updated Red Book?
Valuation modelling incorporating findings from the Independent Review of Real Estate Valuations 2021 and updated material relating to mandatory ESG reporting.
56
What are the parts of the Red Book?
* Part 1 – Introduction
* Part 2 – Glossary
* Part 3 – Professional Standards (PS 1 and PS 2)
* Part 4 – Valuation technical and performance standards (VPS 1-6)
* Part 5 – Valuation practical guidance applications (VPGA 1-11)
* Part 6 – International Valuation Standards (IVS)
57
Describe PS 1.
Compliance with standards and practice statements for written valuations, mandatory for all valuations except for 5 exemptions.
58
What does PS 2 cover?
Ethics, competency, objectivity and disclosures including rules of conduct and professional skepticism.
59
What is required in Terms of Engagement as per VPS 1?
* Identification and status of registered valuer
* Identification of clients
* Identification of intended users
* Assets to be valued
* Currency
* Purpose of valuation
* Bases of value
* Valuation date
* Nature and extent of valuers work
* Nature or sources of information relied upon
* All assumptions and special assumptions
* Format of report
* Restrictions for use, distribution and publication
* Confirmation of following Red Book Global Standards
* Fee basis
60
Define Market Value as per VPS 2.
The estimated amount for which an asset should be exchanged on the valuation date, between a willing buyer and seller in an arm's length transaction.
61
What is Fair Value according to VPS 2?
The price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
62
What are Assumptions and Special Assumptions?
* Assumptions: Reasonable acceptance of truth without specific investigation.
* Special assumptions: Accepted as fact even though not true, agreed in writing.
63
What is VPS 3?
Valuation approaches and methods
Valuers are responsible for justifying the valuation approaches and methods used.
64
What is VPS 4?
Inspections and investigations
Limitations must be identified and recorded in terms of engagement and report.
65
What is the requirement for revaluation?
A revaluation without inspection must not be undertaken unless satisfied there are no material changes since the last inspection.
66
What should be maintained according to considerations relating to valuation records?
Proper records of inspections and investigations, including an audit trail and key inputs and calculations.
67
What is VPS 5?
Valuation models
Model: A quantitative implementation of a method that converts inputs into outputs for the development of a value.
* Where a complex or proprietary valuation model is used, valuers must make sure that the model is suitable for the valuation purpose using professional judgement
* Greater vigilance is needed to ensure that there is no internal inconsistency or error
68
What are the minimum requirements in a valuation report as per VPS 6?
* Identification and status of registered valuer
* Client and other intended users
* Purpose of valuation
* Identification of assets
* Bases of value
* Valuation date
* Extent of investigation
* Nature and sources of information relied upon
* Assumptions and special assumptions
* Restrictions on use, publication or distribution
* Instruction undertaken in accordance with IVS and/or Red Book
* Valuation Approach and Reasoning
* Valuation Figures
* Date of Valuation Report
* Commentary on market
* Limitations statement
* ESG
69
What must be included in a draft report?
Marked as draft, for internal purposes only, cannot be relied upon or published.
70
What are the aims of the RICS Valuer Registration Scheme?
* Improve the quality of valuation and ensure high professional standards
* Meet RICS requirements for self-regulation
* Protect and raise the status of the valuation profession
71
What should clients expect from an RICS valuation?
* Openness and transparency
* RICS Protection and International Valuation Standards
* Expertise and clear reporting
* World Class Regulations
72
When is registration required for valuers?
Not mandatory for non-Red Book valuations.
73
What information is required to register as an RICS valuer?
* Type of valuation
* Purpose of valuation
* Number of valuations
* Firms total fee income from Red Book valuations
* Data sources used
* Quality assurance audit procedures
* History of negligence claims
74
What is the relevance of Tort?
- Relates to negligence and the breach of duty of care. Allows damages claims.
75
What is VPGA 4?
Valuation of trade related properties
76
Describe the UK National Supplement?
- Clarifies use of Red Book in UK
- UK VPGAs include 1. financial reporting 10. secured lending
- UK VPS 3 Regulated purpose valuations
77
Describe UK VPS 3?
- Regulated purpose valuations are relied upon by third parties and are subject to monitoring
- 5 purposes:
1. company accounts
2. stock exchange listings
3. M&A
4. collective investment schemes
5. unregulated property unit trusts
78
What are the rules regarding regulated purchase valuations and purchases?
when a property is purchased it cannot be valued by the same form for regulated purposes within 12 months
79
What are the rotation requirements?
1. max 10 years before rotation of valuation firm
2. max single engagement period of 5 years
3. max 5 years before individual valuer rotation
4. min 3 year gap after rotating off
80
RICS guidance on ESG in Vals?
Professional Standard: Sustainability and ESG in commercial property valuation and strategic advice, 2021
81
What is the margin of error?
Permissible range allowed by courts
Singer and Friedlander Ltd v J D Wood (1977) - usual margin for error can be varied with more for complex valuations and less for simple ones
Usually +15% at max
82
What are the SDLT brackets?
Commercial
£0-150k - 0%
£150k-250k - 2%
£250k+ - 5%
Residential
up to £125k - 0%
£125k-250k - 2%
£250-925k - 5%
£925-1.5m - 10%
£1.5m + - 12%
83
What is ATED?
Annual Tax on Enveloped Dwellings aims to stop on and off shore individuals using companies to avoid SDLT on resi property
84
What are considerations when valuing for charities?
Charities Act requires valuation prior to disposal to ensure charities get an appropriate deal
85
What is a special purchaser?
A particular buyer to whom an asset has special value because of advantages arising from ownership that wouldn't be available to other buyers
- May arise from a transaction not being arms length and physical, functional or economic association with the property or adjoining properties
86
What are reinstatement valuations?
Used for building insurance purposes, the cost of rebuilding without a profit.
87
What is BCIS?
RICS Building Cost Information Service
- Excludes VAT, demolition, professional fees, planning fees and inflation
88
How do you value long leasehold assets?
* Ground rent is deducted from gross income to calculate net rent received
* This is capitalized at a yield for the length of the lease to create market value
* Simple method:
o Rent received – ground rent = net rental income
o Capitalized at appropriate yield for remaining lease term = MV of leasehold interest
* As a leasehold interest can be viewed as a wasting asset, dual rate tables adjust a leasehold valuation to be on same basis as freehold using a sinking fund
* However in practice leaseholders don’t use a sinking fund so valuation practice often uses a single rate yield discounted to reflect additional risk from a wasting asset
* DCF can also be used
89
Describe premiums?
* A premium is a capital payment made from one party to another. Can arise from various causes:
o Key money paid by an incoming tenant to receive a prime retail unit
o FF&E payment by incoming tenant
o Sum paid for a leasehold interest to represent savings compared to market rent. Profit rent can be capitalized to next lease event to calculate premium
o Reverse premiums can also be paid
o Landlord can pay tenant to surrender and grant new lease
90
What are typical purchasers costs?
* Usual valuation practice deducts likely purchase costs from gross market value to provide net market value
* SDLT
* Agents fees – 1% of purchase price
* Solicitors fees – 0.5% of purchase price
91
What is a WAULT?
Weighted average unexpired lease term remaining to the first break or expiry across an asset weighted by contractual rent
Calculation often undertaken when valuing an asset or considering appropriate investment yield comparables
To calculate a WAULT:
- List all tenants with:
Current annual rent (£/year)
Unexpired lease term (years to expiry, or to break if relevant)
- Multiply each tenant’s rent by their lease term.
o Add up all these rent × lease term figures.
o Divide by the total rent roll.
92
How do you account for rent free periods in a valuation?
* This is how you devalue a headline rent with a rent free period to produce net effective rent
* Straight line as is until the end of the lease or next lease event
* Normally a 3 month fitting out period is deducted for fitting out
* 3 approaches:
o Straight line
o Straight line method assuming time value of cash flow using a yield
o Use a DCF
93
Describe the valuation of ransom strips?
* Piece of land that controls access to another piece of land
* Value of ransom strip could be 15-50% of development value unlocked by inclusion of the strip
* Stokes v Cambridge (1961) value of 1/3 given to owner of ransom strip
94
Describe the use of zoning?
* Valuation technique not a method of valuation
* Use to compare retail properties to allow comparison of different size buildings
* The rental value reduces away from the street
* Halving back principle with 6.1m zones
* 9.14m zones used in some prime streets
* Basements or 1st floors are treated as A/10 depending on comparable evidence
* Quantum discounts can be agreed
* End allowances can be allowed for split levels and hard frontages
* Treatment of return frontages – usually 10% uplift
* Natural zoning reflects physical features such as steps
* Mirror zoning can be used with 2 main frontages
* Masking is used for hidden areas
* HUT
o H – Halving back principle
o U – Zone A Rate is a unit comparison
o T – Technique not method
95
Describe the treatment of party walls?
* It’s a party wall if it stands astride the boundary of two or more different landowners
* Some surveyors specialize in party wall disputes
* Party walls act 1996 provides framework for dispute resolution. If you are a party wall owner you must inform the other owner of intention to carry out any work
96
Describe rights to light?
* RICS Professional Standard: Rights to Light, 2024
* Right to light of a building arises after 20 years of uninterrupted enjoyment of light without the consent of 2rd pary. If it is infringed then damages can be awarded
* HKRUK II (CHC) Ltd(subsidiary of Highcross) v Heanery (2011)
o Left highcross with a remedial works bill and injunction to reduce scale of Toronto Square scheme n Leeds where 2 new floors were being added to an office building
* There is an RICS Consumer Gide to Right to Light published in April 2022
97
When did the RICS publish a practice alert on RVS?
July 2024
Reminded members of regulatory requirements for members conducting valuations
98
What is IRR used for and how is it calculated?
Used to assess total return from an investment making assumptions regarding rental growth, re-letting and exit.
Produced in software programmes.
Manual calculation: Input current MV as negative cash flow, input projected rent over holding period as positive, input exit value as positive, discount rate (IRR) is chosen to provide NPV of 0
99
What is the relationship between yields and YPs?
YP is the reciprocal of a yield.
Yield = percentage return on an investment (income/price x 100)
YP = Years it would take for income to repay purchase price (100/yield)
