Valuation Flashcards

Question

What are some development costs?

Answer 1

o Site preparation: demolition, remediation work, landfill tax, provision of services, site clearance, levelling and fencing o Obtain contractors cost plan for these works

Answer 2

Planning consultant, Community Infrastructure Levy, o Costs of any specialist reports required by the local planning authority e.g. environmental, other planning obligations could relate to the provision of open space/playgrounds, public art, financial contributions towards local services etc

Answer 3

o Estimate total costs of building works o Sources of building costs: Client information, Spons architect’s and builders’ price book, quantity surveyor estimate/bill of quantities/cost plan, building surveyor estimate o RICS building costs information service (BCIS) usually based on a GIA basis (BCIS obtains updated from QSI BS sources and recent contract prices/tenders agreed

Answer 4

o 10-15% plus VAT of total construction costs for the professional fees for architects, M&E consultants, project managers, structural engineers etc o Architect are usually the largest amount o Remember CDM Principle designer costs

Answer 5

5-10% of construction costs depending upon level of risk and likely movements in building costs.

Answer 6

o Assume a realistic marketing budget (use evidence/quotes) o Cost of an EPC o Normal sale fee around 1-2% GDV & normal letting fee around 10% of initial rent

Answer 7

Choice of interest rate an include: current SONIA (Sterling overnight index average), Bank of England base rate plus premium, rate at which the developer can borrow the money

Answer 8

o Site purchase (compound interest at a straight line basis) o Total construction and associated cost – calculation based on an S-curve taking half the costs over the length of the build programme o Holding costs to cover voids until the disposal of the scheme (empty rates, service charges and interest charges) – compound interest on a straight-line basis

Answer 9

o Assumes 100% debt finance o Finance for borrowing the money to purchase the land is calculated on a straight-line basis using compound interest over the length go the development period o Rolled up method of calculation is used (compound interest) o To calculate the finance required for the construction period, assume total construction costs (including fees) over half of the time period using an ‘S’ curve calculation o The principle of the ‘S’ curve is that as the payment of construction costs adopts the profile of an ‘S’ shaped curve over the length of the development projects, the usual assumption is to halve the interest that would be borrowed for all of the construction period o The purpose of the ‘S’ curve is to reflect when monies tend to be drawn down o Calculate any finance required for on-going holding costs from completion of construction until disposal on a straight-line basis using compound interest

Answer 10

o Percentage of GDV or total construction cost – say around 15-20% depending on risk o GDV more frequently used as a base for residential use o If scheme low risk a lower return may be required o The percentage of profit required has recently risen given the current riskier market conditions o Other methods to calculate the profit required is to base it on the return upon capital employed o Deduct the TDC from the GDV to establish the site value having allowed for normal purchaser’s costs o Cross check the site value with a valuation of comparable site values if possible

Answer 11

o This is an arrangement made for the sharing of any extra receipts received over and above the profits originally expected as agreed in a pre-agreed formula o It can be shared between the vendor and developer in a pre-arranged apportionment o Also known as ‘claw back’

Answer 12

Professional Fees

Answer 13

This term relates to the length of time it will take for the development profit to be eroded by holding charges following the completion of the scheme until the profit from the scheme has been completely drawn down, due to interest charges, and the scheme is loss making

Answer 14

o Importance of accurate information and inputs o A residual valuation does not consider timing of cash flows o Very sensitive to minor adjustments o Implicit assumptions hidden and not explicit o Always cross

Answer 15

o Simple – looks at key variables like the yield, build costs and finance rate o Scenario – change of scenarios for the development which might change timing or costs such as phasing the scheme or changing the design o Monte Carlo – using probability theory using software such as “Crystal ball”

Answer 16

o It should only be used where direct market evidence is limited or unavailable for specialised properties o Specialised properties could include sewage wastes, lighthouse, oil refineries, schools etc. o Purpose – for owner-occupied properties, for accounts purposes for specialised properties, for rating valuations of specialised properties

Answer 17

1: Value of land in its existing use 2: Add current costs of replacing the building plus fees less a discount for depreciation and obsolescence/deterioration

Answer 18

* Aligns with IVS 2025 standards * Incorporates findings from 2021 Independent Review of Real Estate Valuations * Mandatory ESG reporting - valuers must record ESG data and consider valuation impacts * Addresses AI use in valuation * Reinforces comprehensive audit trail requirements * New content on valuation models, methods, and risk assessment * Reorders VPSs to align with IVS (VPS 2→4, VPS 3→6, VPS 4→2, VPS 5 splits into 3&5) * New VPGA 11 on auditor relationships

Answer 19

Identification and status of the responsible valuer, identification of the client(s), identification of any other intended uses, the asset(s) to be valued, currency, purpose of the valuation, basis(es) of value, valuation date, nature and extent of the valuer's work including investigations and limitations, nature and source(s) of the information to be relied upon, all assumptions and special assumptions to be made, format of the report, restrictions for use, distribution and publication, confirmation that the valuation will be undertaken in accordance with Red Book Global Standards, basis on which the fee will be calculated, complaints handling procedure to be made available where the firm is regulated by the RICS, statement that the valuation may be subject to monitoring and compliance by the RICS, limitation on liability agreed, and consideration of any significant environmental, social and governance (ESG) factors (new in the 2025 edition).

Answer 20

On the valuation date between a willing buyer and willing seller, an arm’s length transaction after property marketing where the parties had each acted knowledgeably, prudently and without compulsion.

Answer 21

On the valuation date between a willing lessor and lessee on appropriate lease terms in an arm’s length transaction after property marketing when the parties had each acted knowledgeably, prudently and without compulsion.

Answer 22

‘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’

Answer 23

‘The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives’ (May differ from market value, used as a measure pf worth to reflect the value against the client’s, Own in investment criteria).

Answer 24

Assumptions are made where it is reasonable to the valuer to accept that something is true without the need for specific investigation

Answer 25

Valuation approaches and methods – valuers are responsible for adopting, an as necessary justifying, the valuation approach(es) and method(s) used for a valuation

Answer 26

Inspections, investigations and records

Answer 27

Proper records must be held of the inspections and investigation and of other key inputs in an appropriate business format. The valuer is to maintain a proper audit trail and be in a position to respond effectively to a future enquiry. These notes should include a record of the key inputs and all calculations, investigations and analyses considered when arriving at the valuation.

Answer 28

Valuation Models

Answer 29

Identification and status of the responsible valuer, client and any other intended users, purpose of the valuation, identification of the asset(s) to be valued, basis(es) of value, valuation date, extent of investigation, nature and source(s) of information relied upon, assumptions and special assumptions, restrictions on use, distribution and publication, instruction undertaken in accordance with IVS and/or RICS Red Book Global Standards, valuation approach and reasoning, valuation figure(s), date of the valuation report, comment on any market valuation uncertainty in relation to the valuation, statement setting out any limitations on liability that have been agreed, significant ESG factors used and considered (New in the 2024 edition).

Answer 30

o The draft report can be given but must be market as a draft for internal use only, cannot be relied upon and on no account can be published or disclosed o A draft report provided to a client must state that it is a draft and it is subject to the completion of the final report

Answer 31

Valuation for inclusion in financial accounts: Fair value will be adopted for all IFRS adopted accounts, prescribed “performance standards” must be adhered to.

Answer 32

o First published in Nov 2018 o The latest UK supplement was published in Oct 2023 and came into effect on 1st May 2024 o The new edition reflects the outcome of the independent review of real estate investment valuations undertaken by Peter Pereira Gray commissioned by the RICS standards and regulation board, regulatory changes and consultation in the profession. o It sets out clarification that the UK National Supplement augments the Red Book Global requirements for valuations in the UK and is not substitute for it. o It provides specific requirements for members on the application of RICS valuation – global standard to valuations undertaken subject to UK jurisdiction. It contains Valuation Practice Guidance Applications (UK VPGAs).

Answer 33

o Valuation for financial reporting o Valuation of charity assets o Relationship with auditors o Valuation for commercial secured lending purposes o Valuation for UK residential property o Valuation of registered social housing for loan security purposes o Valuation for CGT, Inheritance tax, SDLT and ATED o The changes to the UK national supplement are intended to reduce the risks of conflict in the commissioning of valuation report, in the public interest.

Answer 34

Mandatory rotation 1: A maximum period of 10 year before the rotation of a valuation firm, this might include multiple engagements. 2: A maximum single engagement period of 5 years. 3: A maximum period of 5 years before the rotation of an individual responsible valuer. 4: A minimum 3 years break after rotating off an engagement. Other: 1: Mandatory requirement for valuers to ask about the involvement of individual parties in the client’s valuation. 2: Mandatory recording by the valuer of preliminary advice, draft reporting and client discussions.

Answer 35

Ranges from 5-15% depending on the type of asset

Answer 36

Created by a merger of interests which can be physical or tenurial. This can be undertaken before or after a valuation and calculate the level of marriage value created. Can also be known as synergistic value.

Answer 37

A particular buyer for whom a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market

Answer 38

Building Cost Information Services

Answer 39

These include LBTT (at the rate), Agent’s fees (c. 1% of purchase) and legal fees (0.5% of the purchase price + VAT).

Answer 40

Stokes vs Cambridge (1961) - when a value of one third of the uplift on the development site value was awarded to the owner of the ransom strip.

Answer 41

Party Walls Act 1996 - Wall that sits on a boundary, if you do any work to the wall you have to inform all people that border the wall

Answer 42

 To improve the quality of valuation and ensure the highest possible professional standards  To meet the RICS’ requirement to self-regulate effectively  To protect and raise the status of the valuation profession as the leading expertise in valuation.

Answer 43

Whether or not the asset is suitable for loan security.

Answer 44

'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'

Valuation Flashcards

(68 cards)