1
Q
What are the types of Valuers?
A
Internal Valuer
- Employed by the company to value the assets of the company
- Valuation for internal use only
- No third-party reliance
External Valuer
- Has no material links or interest to the asset or the client
2
Q
What should you check before commencing a valuation?
A
Three important steps: (CIT)
Competence
- Are you competent to undertake the work. Do you have the Skills, Understanding and Knowledge (SUK)
Independence
- Check if you are able to act independently by checking for a conflict of interest
Terms of Engagement
- Check that there has been a written instruction and confirmation of the instruction
- Include the level of competence of the valuer
- Include the extent of the inspection
3
Q
Before undertaking the inspection, what should you do?
A
Carry out your Statutory Due Diligence - what material matters could have an impact on the Valuation.
Asbestos Report - Request
Business Rates - Search - VOA - 0.49 for small business. 0.51 for large
Contamination -
Equality Act 2010 compliance - Inclusive building design
Environmental matters - High voltage power lines, substations
EPC Rating - Search
Flood plane - Search - Environment Agency Website
Fire Safety Compliance - Request
Health and Safety compliance - Request
Highways - Check if there are any adopted Highways
Legal Title and Tenure - (Boundaries, deeds, covenenants, ect)
Public rights of way - from OS map
Planning History - search the local planning authority (conservation area or listed.
4
Q
What is the order of steps that are taken from commencement to completion of a valuation?
A
Receive instruction
CIT
Request information
Carry out Due Diligence
Inspect and Measure
Research Market Assemble Comps and analyse
Undertake Valuation
Draft Report
Review from another valuer
Finalise and sign report
Report to client
Invoice
File to archives
5
Q
What are the five main methods of valuation
A
Comparative method
Investment method
Profits method
Residual method
Contractors method - DRC
6
Q
What are the approaches to valuation
A
Three approaches
Income approach (Investment, Profits, Residual)
Cost approach (Depreciated Replacement cost)
Market approach (Comparative)
7
Q
Where would you look to find the approaches to valuation?
A
IVS 103: Valuation Approaches and Methods - sets out the three valuation approaches.
8
Q
What methodology comprises the Comparative method?
A
- Search for Comparables
- Confirm/ verify comparables, establish net effective rents
- Assemble comparables into a schedule
- Adjust comparables using Hierarchy of Evidence
- Analyse comparables forming an opinion of Value
- Report valuation to Client
9
Q
Where can you find advice for analyzing evidence?
A
RICS Professional Standard: Comparable Evidence in Real Estate, 2019
10
Q
What is the structure of the Hierarchy of Evidence
A
Contemporary evidence is essential
Category A:
- Completed transactions near identical - available, accurate info
- Completed transactions similar - most information available
- Similar - on the market with offers
- Similar - asking prices
Category B:
-Indirect evidence - information from published sources or commercial database
-Historic evidence
-supply and demand data
Category C
- Economic data - macro -
- Other asset classes
11
Q
How can you find relevant evidence?
A
Inspection of local area
Speak to local agents
Auction results (Careful of Gross values and yields, special purchase)
In-house records and online database
Market sentiment
12
Q
When would you use the Comparative method?
A
When there is no income stream to value
13
Q
When would you use the investment method?
A
When there is an income stream to value
14
Q
What is the conventional investment method
A
Assumes growth implicit approach - growth is implied and summarised in the yield
15
Q
What methods are conventional?
A
Term and Reversion
Layer/ Hardcore
16
Q
How does the conventional method calculate the value?
A
Passing rent or Market rent multiplied by the YP = Market Value
17
Q
How would you value a property that had an income stream and was under rented?
A
Term and Reversion
Term
- Capitalise the passing rent up until the reversion date at an All Risks Yield (ARY) established from market evidence. (Multiply by YP term years)
Reversion
- Capitalise the Market rent using a softer yield to account for more risk into perpetuity (assumed infinite) then bring back to Present Value
Value = Term value + Reversion Value
18
Q
How would you value a property that had an income stream and was over-rented?
A
Layer/ Hardcore
Hardcore
Capitalise the lower of the market rent and passing rent using a keener yield (reflecting less risk - secured income if rent doesn’t increase) into perpetuity.
Layer
Value the froth (top up) capitalise at YP for term of years.
Value = Hardcore Value + Layer value
19
Q
What method is the following graph?
A
Term and Reversion
20
Q
What method is the following graph?
A
Layer / Hardcore
Under-Rented
21
Q
What is an All Risk Yield?
A
The rate of interest that reflects all the prospects and risks attached to the investment
22
Q
True Yield
A
Assumes the rent is paid in advance not in arrears
23
Q
Nominal Yield
A
Assumes the rent is paid in arrears
24
Q
Gross Yield
A
Yield not adjusted for purchasers’ costs
25
Net Yield
Resulting yield adjusted for purchasers' costs
26
Equivalent Yield
Average weighted yield when a reversionary property is valued using an initial and reversionary yield
27
Initial Yield
Simple income yield for current income and current price
28
Reversionary Yield
Market Rent / Current Price on an investment let below MR
29
Running Yield
Yield at one moment in time
30
When is a Discounted Cash Flow (DCF) used?
Alternative investments
When there is an assumed finite term
Short leaseholds
Phased developments
Over rented properties
31
How does a DCF differ to Term and Reversion, And Layer / Hardcore Method?
Explicitly inputs growth at each stage and accounts for rent-free periods and other cash flow factors instead of implying growth by summing it within a yield.
32
How does a DCF method value an investment?
Projects an estimated cash flow over an assumed holding period, plus an exit value (based on ARY), the cash flow is then discounted back to present value at a discount rate (desired rate of return) that reflects the risk.
33
What is the DCF Methodology?
1. Estimate Cash Flow
2. Estimate the exit value at the end of the holding period
3. Select a discount rate
4. Discount cash flow at discount rate
5. Value is the initial investment minus the sum of discounts to prove the Net Present Value (NPV)
34
What is the Net Present Value?
The sum of future cash flows, discounted back to the present, minus the initial investment.
Shows how valuable an investment is today?
35
What is an Internal Rate of Return?
It is the discount rate that produces an NPV of Zero
The total annual rate of return of an investment, making assumptions regarding rental growth, reletting and exit assumptions
36
What can a Net Present Value be used for?
To test the viability of an investment
Positive NPV - Profitable - Exceeds investor's Target Rate of Return (TRR)
Negative NPV - Non- Profitable - has not achieved investor's TRR
37
How would you calculate the IRR of an investment?
Using linear interpolation - Carry out two cashflows at two different discount rates. One discount rate that produces a negative NPV and one which produces a positive NPV. Then Estimate where NPV = 0 by proportionally scaling between them.
38
What document could guide you on how to carry out a DCF?
RICS Practice Information: Discounted cash flow valuations, November 2023
39
When would you use the profits method?
For trade-related properties where the value of the property depends on the profitability and trading potential (Pubs, Hotels). Value is derived from the profitability of the business.
40
What do you need to carry out the profits method?
3 Years Audited Accounts which are Superior to management accounts. If it's a new business, then estimates and a business plan.
41
What is the methodology of the profits method?
Annual Turnover - Costs / Purchases = Gross Profit
Gross Profit - working expenses = Un-Adjusted Net Profit
Un-Adjusted Net Profit - Operator's Remunerations = Adjusted Net Profit as the Fair Maintainable Operating Profit (FMOP)
FMOP is capitalised at market rate (comps) to achieve market value
42
What are the Steps to a valuation?
1. Purpose
2. Bases of Value
3. Method
43
What are the Purposes of a valuation?
Purpose
a. Loan security
i. Bank lending etc
b. Regulatory valuations
i. Relied on by 3rd parties
ii. Will be fair value rather than MV
44
What are the Bases of Value?
Market Value
Market Rent
Fair Value
45
What is the definition of Market Value?
The estimated amount for which 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 property marketing and where both parties acted knowledgeably, prudently and without compulsion.
46
What is the definition of Market Rent?
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 and where the parties had each acted knowledgeably, prudently and without compulsion
47
What is the definition of True Value?
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.
48
When is the Residual Method used?
Finding the market value of land based on Market Inputs at one moment in time at the valuation date for a particular purpose.
A form of development appraisal
49
What is the methodology of the Residual Method?
50
How do you establish a GDV for the Residual Method?
Using comparable evidence, adding discounts and premiums as appropriate.
51
What Costs are involved within Total Development Costs? (TDC)
1. Site Preparation
2. Planning Costs
3. Building Costs
4. Professional Fees
5. Contingency Fees
6. Marketing Costs & Fees
52
What is incorporated into site preparation?
Demolition, Remediation works, landfill tax, provision of services, site clearance, leveling and fencing
53
What planning costs could be incurred?
1. s.106 Town and Country Planning act 1990 - Planning obligations (eg. affordable housing, infrastructure costs)
2. Community Infrastructure Levy (CIL) - Based on Sq Ft increase in a development
3. S278 Payments for highway works
Others: (Planning ap fees, Cost of specialist reports eg environment)
54
Where can you find your build costs?
Provided by the client
Spons Architects and Builders Price Book
Consulted by a building surveyor
55
How do you calculate your professional fees?
10-15% plus VAT of build costs
56
How are contingency fees paid?
5-10% of the build cost
57
How are Marketing Fees calculated?
Sales Fees are 1-2% of GDV
Letting Fees are 10% of the initial annual rent
58
How do you choose an interest rate to incorporate?
Can use:
Bank of England Base rate plus premium
The rate at which a developer can borrow money
59
What are the three elements of finance?
1. Site purchase (include purchasers costs) - compound interest (straight-line basis)
2. Total construction costs and associated costs - calculation on an S-line basis - therefore 50% of costs over the length of the build program
3. Holding costs - to cover voids until the disposal of the scheme
60
What are the two main methods of financing a development?
1. Debt finance - borrowing money from a bank
2. Equity finance - selling shares in a company, joint venture or own money used
61
What are the two main methods of financing a development?
1. Debt finance - borrowing money from a bank
2. Equity finance - selling shares in a company, joint venture or own money used
62
How do you calculate the finance required to borrow at each stage?
100% debt finances
1.Acquisition of land - Straight line based on compound of interest over the length of the development period (Rolled up Method)
2. Construction - S curve - Half the interest of full construction cost
3. Holding period - void cost - Straight line compound interest
63
How is the Developers Profit Required Calculated?
1. As a percentage of GDV or Total cost - say 15-20% depending on risk.
2. If a scheme is lower risk a lower return may be required
3. The percentage of profit required has recently risen due to market conditions (increase build cost)
64
What is the typical Loan to Value Ratio a bank or lender might seek?
60%
65
What other ratio might a bank adopt in a difficult market?
Loan to cost ration at 60%
66
How is the interest calculated on a loan?
Compound interest - Interest is added to the loan as the project proceeds (Rolled up basis)
67
68
What is secured lending and why are valuations for it required?
A valuation of an asset which a bank customer is borrowing against as collateral for a loan. This then becomes secured debt owed to the bank.
Required to be able to see if the bank would be able to get their loan value back if they were to sell the property.
69
What is the red book?
Sets out rules and guidance for valuers in the conduct of most types of valuations. They set a framework for best practice in the delivery of valuations for different purposes.
70
What is the Title of the Red Book?
RICS Valuation - Global Standards 2024 ("the Red Book)
71
Why did the RICS Update the publication of the Red Book?
To support high standards in valuation delivery worldwide and future-proof practices in the public interest"
72
When is new publication of the Red Book effective from?
31st January 2025
73
What are the key changes to the Red Book?
1. Alignment with the new International Valuation Standards (IVS) 2025,
2. incorporating new content for modelling and methods - IVS 105 and 103.
/
3. Update material relating to modern market eg. Mandatory Reporting on ESG
/
4. Comments on the responsible use of AI
/
5. Revised odering of VPSs to align with IVS, such as:
/
VPS 2 becomes VPS 4 - (Inspsection Investigations and Records)
VPS 3 becomes VPS 6 - (Reporting)- Inclusino of ESG
VPS 4 becomes VPS 2 - (Basis of Value, Assumption and Sp Assump)
VPS 5 splits into VPS 3 (Approaches and methods)
/
New VPGA 11 relates to the relationship with auditors
74
What is the structure of the RICS Valuation - Global Standards 2024 ("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 practice guidance applications (VPGA 1-11)
Part 6 - International Valuation Standards (IVS)
/
Parts 3 and 4 are mandatory
75
What is incorporated within Part 3 of the Red Book?
sets out the RICS Professional Standards - which are Mandatory Worldwide
76
What is Professional Standard 1 within Part 3?
PS1 - Compliance with standards and practices where a written valuation is provided
77
Which valuations do not comply with PS1 or the VPS 1-6 (Red Book)?
1. Agency or Brokerage services
2. Providing valuations expressly in negotiations or litigation
3. Acting as an expert witness
4. Performing statutory functions
5. Providing valuations for internal purposes and express contractual terms excluding the valuer's liability.
78
What is Professional Standard 2 within Part 3?
PS2 Ethics, Competency, Objectivity and Disclosures
79
What does PS2 entail?
Members must act in accordance with the RICS Rules of Conduct, 2021
/
Independence, Objectivity and identifying and managing conflicts of interest
1. Act indepentantly and Objectively
2. Act with professional scepticism before relying on data
3. Advises managing conflicts of interest
80
What in incorporated within Part 4 of the Red Book?
Valuation Technical & Performance Standards (VPS 1-6)
81
What does VPS 1 state?
VPS 1 - Terms of Engagement
1. Identification and status of the responsible valuer
2. Identification of the client(s)
3. Identification of any other intended users
4. The asset(s) to be valued
5. Currency
6. Purpose of the valuation
7. Basis(es) of value
8. Valuation date
9. Nature and extent of the valuer’s work including investigations and any limitations
10. Nature and source(s) of the information to be relied upon
11. All assumptions and special assumptions to be made
12. Format of the report
13. Restrictions for use, distribution and publication
14. Confirmation that the valuation will be undertaken in accordance with Red Book Global Standards
15. Basis on which the fee will be calculated
16. Complaints handling procedure to be made available where the firm is regulated by RICS
17. Statement that the valuation may be subject to monitoring and compliance by the RICS
18. Limitation on liability agreed
19. Level of PI Cover required and if it is in place
20. Consideration of any significant environmental, social and governance (ESG) factors (new in the 2025 edition)
82
What does VPS 2 incorporate?
Bases of Value, Assumptions and Special Assumptions
83
What is the definition of Market Value?
Estimated amount for which an asset or liability should exchange:
@ on the valuation date
@ Between a willing buyer and a willing seller
@ In an arms-length transaction
@ After Proper Marketing
@ Where the parties had each acted knowledgeably, prudently and without compulsion
84
What is the definition of Market Rent?
Estimated amount for which an interest in real property should be leased
@ On the valuation date
@ Between a willing lessor and and a willing lessee
@ On appropriate lease terms
@ In an arms length transaction
@ After proper marketing
@ When parties had each acted knowledgeably, prudently and without compulsion
85
What is the definition of Investment Value?
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives
1. May differ from market value
2. Can be used as a measurement of worth to reflect the value against the clients own investment.
86
What is an assumption?
Where it is reasonable to accept something is true without the need for investigation
87
What is a special assumption?
A supposition that is taken to be true even though it is not true
88
What does VPS 3 entail?
Valuation Approaches and Methods - IVS 103
89
What does VPS 4 entail?
Inspections, Investigations and Records
/
1. Inspection and Investigation
Must be carried out to a necessary and appropriate extent.
Restrictions to inspections must be recorded in ToE and Report
/
2. Revaluation (without reinspection)
Only applicable if satisfied that there have been no material changes or its location.
Must be confirmed in ToE
/
3. Valuation Records
Proper records must be held of the inspections and key inputs.
Maintain proper audit trail
90
What does VPS 5 entail?
Valuation Models (New in 2024)
IVS 105- Sets out the valuation models
91
What is the definition of a valuation Model?
Quantitative implementation of a method that converts inputs into outputs used in the development of a value
92
What does VPS 6 entail?
Reports "Valuation reports and documentation are a critical and defining feature of the Red Book Global Standards process"
93
What are the minimum requirements to be stated within a report?
1. Valuer and their status and competence
2. Client and any other intended users
3. Purpose of valuation
4. Identification of the assets to be values
5. Basis of value
6. Valuation date
7. Extent of investigation
8. Nature & source of information relied upon
9. assumptions and special assumptions
10. Restrictions on the use, distribution and publication
11. Instruction undertaken in accordance with IVS and RICS Red Book Global Standars
12. Valuation approach and reasoning
13. Valuation figures
14. Date of the valuation report
15. Comment on any market valuation uncertainty in relation to the valuation
16. Statement setting out any limitations on liability that have been agreed
17. Significant ESG factors used and considered (New in the 2024 edition)
94
How can a draft valuation report be used?
Preliminary advice can be given, but it must be marked as a draft and cannot be relied upon.
95
What is incorporated within part 5 of the Red Book?
Valuation Practice Guidance applications (VPGAs)
VPGA 1 Valuation for inclusion in financial accounts
VPGA 2 Valuation for secure lending
96
Within Part 5 - how are valuations presented in within VPGA 1?
Valuation for financial accounts
@Fair Value is adopted
@Prescribed performance standards must be adhered to
97
Within Part 5 - how are valuations presented within VPGA 2?
Because valuations are for secured lending, valuers must be independent and act objectively.
- Any conflict or previous involvement with the borrower must be disclosed
- Previous involvement is usually defined as within the last 2 years
98
Within VPGA 2, What examples of involvement may result in a conflict of interest?
1. Having a long-standing relationship with the borrower
2. When the valuer will gain a fee from introducing the transaction to the lender
3. If there is a financial interest from the valuer
4. When the valuer is retained to act in the disposal of the property.
99
What information needs to be included within a loan security valuation?
1.Disclosure of any involvement identified or any conflicts of interest discovered
2. The extent to which a recent transaction has been accepted as market value
3. A comment on the effect that a special assumption will have on the
4. Comment on suitability for mortgage purposes
5. Any circumstances that the valuer is aware of that could affect price.
6. Comment on the effect of sustainability
100
What is the official name of the UK Supplement document?
RICS Professional Standard: Valuation - Global standards (UK National Supplement, 2023)
101
When was the UK National Supplement first published?
November 2018
102
When was the latest UK National Supplement updated?
published in October 2023
Effect - May 2024
103
In summery what is the purpose of the UK National Supplement?
1.Reflects the outcome of the independent review of real estate investment valuations.
2. Supersedes the Red Book for UK Valuations
104
What is in the Contents of the UK National Supplement?
Introduction
-
Part 1 UK Professional Standards (UK PS) mandatory
-
Part 2 UK Valuation Technical and Performance Standards (UK VPSs) - Mandatory
-
Part 3 UK Valuation Practice Guidance Applications (UK VPGAs)
105
What does VPGA stand for?
Valuation Practice Guidance Applications
106
What are the UK VPGAs ?
1. Valuation for financial reporting
-
8. Valuation of charity assets
-
9. Relationship with auditors
-
10. Valuation for commercial secured lending purposes
-
11. Valuation for UK residential property
-
14. Valuation of registered social housing for loan security purposes
-
15. Valuation for CGT, Inheritance Tax, SOLT and ATED
107
What are the changes to the UK National Supplement?
UK VPS 3 - Regulatory valuations: Supplementary governance requirements
See below
-
UK VPGA 8 - Valuation for charity assets
Refers to the Charities Act 2022
-
UK VPGA 10 - Valuation of commercial secured lending
Incorporates new ESG principles
108
Can Regulatory Valuations be relied upon by third Parties?
Yes
109
What 5 purposes are regulatory valuations used for?
1. Financial reporting
2. Stock Exchange listings
3. Takeover and mergers
4. Collective Investment Schemes
5. Unregulated property unit trusts
110
What are the requirements for regulatory valuations?
1. Declare the length of time a valuer has acted for the client and the extent of the relationship
-
2. Whether 5% of a firm's total fee income is from one client's regulatory valuation from the last financial year.
-
3. If a firm purchases or introduces a purchase, it cannot value it for over 12 months
111
As of May 2024 what does the New National Supplement require regarding valuation rotation?
1. Firms - Maximum of 10 years
2. Single engagement - 5 years
3. Individual must rotate every 5 years
4. The individual must wait 3 years before re-valuing
112
What is included within the purchasers costs?
1. Stamp Duty Land Tax
2. Legal Fees
3. Agents' Fees
4. Survey valuation Fees
5. Land Registry Fees
113
114
RICS APC 2025
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