Mandatory > Valuation > Flashcards

Valuation Flashcards

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1
Q

What is the full title of the Red Book?

A

RICS Valuation – Global Standards (Red Book Global Standards) was published in December 2024, taking effect on 31 January 2025.

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2
Q

What is the purpose of the Red Book?

A

It’s a framework for best practice, setting out procedural rules and guidance. Ensuring consistency, objectivity, and transparency in valuations.

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3
Q

What are redbook valuations?

A
  • Loan security
  • Ratings
  • Tax
  • L&T functions
  • Accounts
  • Corporate Real Estate
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4
Q

What 5 valuations are exceptions to the Red Book?

A
  • Internal only
  • Agency/marketing
  • Statutory
  • Litigation
  • Expert witness
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5
Q

What is the difference between Valuation Technical and Performance Standards (VPS) and Valuation Practice Guidance applications (VPGA)?

A

VPS is mandatory, and VPGA is guidance, best practice recommendations.

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6
Q

What are the 9 main contents of the Terms of Engagement for a Valuation?

A
  • Valuer’s competency
  • Client details
  • Property details
  • Purpose
  • Bases of value
  • Valuation date
  • Limitations
  • Assumptions and Special assumptions
  • Fee and indemnity
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7
Q

Please name the Red Book Global Bases of value?

A
  • Market value
  • Market rent
  • Investment value
  • Fair value
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8
Q

Describe three assumptions that are usually made in producing a valuation?

A
  • Title (good and free of restrictive covenants)
  • Property condition (that any hidden aspects will not reveal defects and all equipment is maintained and in good repair)
  • Free from contamination and hazards
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9
Q

Give three situations when it would be appropriate to make special assumptions?

A
  • If let assume it’s vacant possession
  • If vacant, assume it’s let
  • Assume development is complete
  • Assume planning permission is achieved
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10
Q

When is DRC (Deprecated Replacement Cost) used?

A

As a last resort for bespoke properties that cannot be valued any other way.

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11
Q

How do you calculate the Depreciated Replacement Cost?

A

Calculate the modern substitution value, adjust for depreciation and add land value.

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12
Q

What is the Profits Method of Valuation?

A

Properties, where you can’t separate their use from their value? Pubs, leisure centres, hotels.

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13
Q

How do you do a Profits Method?

A

Capitalise the net operating profit.

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14
Q

What are the hierarchy of evidence in valuation?

A
  • Open Market letting
  • Agreed lease renewal
  • Agreed rent reviews
  • Independent expert determination or Arbitration Award
  • Court Decision
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15
Q

What is NPV?

A

Net Present Value (NPV) is used to evaluate the profitability of an investment by comparing the present value of future income to the initial investment cost. Positive is viable. O (irr) is break even.

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16
Q

What is IRR?

A

It is the break even point.

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17
Q

What is an equivalent yield?

A

Weighted average between the initial yield and the reversionary yield.

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18
Q

What is an initial yield?

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A

Initial Yield is the annual rents of a property as a percentage of the property value.

19
Q

Name the 5 mains methods of valuation?

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A
  • Sales comparison
  • Investment
  • Residual
  • Profit (accounts)
  • Contractors (DRC (Depreciated replacement cost))
20
Q

What makes a property transaction comparable to the property being valued?

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A

Similarities in physical, location, time, use and tenure.

21
Q

What is the purpose of zoning?

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A

To analyse and value retail units with different frontage to depth ratios, ie. the shapes differ.

22
Q

What is the standard zone depth?

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A

6.1m. Scotland 9.14m.

23
Q

How would you arrive at the market rent for the first floor of a retail unit?

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A

Depends on its use. Retail: zone A/10. Other: Comparison sales method.

24
Q

What is a residual value for?

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A

Land with development potential.

25
What is SDLT rates?
* 0% to £150k * 2% £150-250k * 5% £250k +
26
What is a ransom strip?
A piece of land that is used to access development land. Normally valued at 1/3 of uplift in value.
27
Define 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 arms length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
28
Explain the process of the term and reversion technique for under rented properties?
Capitalise the term to reversion. At reversion capitalise the market rent into perpetuity. Defer it for the term period at a higher yield to reflect risk.
29
Explain the process of hard-core technique for under rented property?
Capitalise the passing rent into perpetuity. Then capitalise the top slice into perpetuity. Then, defer it for period up to reversion, at a higher rate for the top slice.
30
How would you arrive at a discount rate when carrying out a discounted cash flow?
Start with risk-free rate and on a risk premium.
31
What is a reversionary yield?
Reversionary yield is the yield when it reverts to market rated.
32
What is a red book valuation as opposed to an appraisal?
A Red Book valuation is a formal opinion of value and can be relied upon by the instructing party. An appraisal is a less formal estimate of value or opinion of worth.
33
What is an equated yield?
Equated yield is the rate of return (or interest rate) that makes the value of all the future rental income from a property equal to the price you're paying for it today.
34
What are the 6 key components of the Red Book?
* Sets out the professional standards * Terms of engagement * Basis of value * Assumptions and special assumptions * Valuation approach and methodology * Reporting
35
What are the 4 VPS (technical standards) in the red book?
* Terms of Engagement * Inspections and investigations * Valuation reports * Bases of value, assumptions and special assumptions
36
How do systematic and specific factors like ESG impact property valuations, specifically in terms of green premiums and brown discounts?
* Systematic factors include market-driven and legislative impact on yields. Such as green premium, brown discount and MEES. * Specific factors included the cost of retrofitting or operational costs, which impacts rental tone, increase void risks and market value.
37
What was the identified purpose of leasing the vacant expansion space at the Ombersley Medical center?
The purpose was to lease 225 sqm of vacant expansion space to the existing GP tenant to improve occupancy and enhance asset value.
38
What valuation method did you use for Ombersley and why was it suitable for this case?
The Hardcore Method. Assura standard. Existing rent is protected due to NHS rental reimbursement.
39
Why did you include a toilet in the NIA?
As set out in the RICS PS Valuation of medical centres and surgeries.
40
What factors did you consider when adjusting the base value for property, location, timing and relevancy?
Condition, location, data of transaction, lease terms, tenant type, incentives and compliance with Premises cost directions and rental tone.
41
Why did I use Hardcore?
It's the most frequently used method for Assuras portfolio
42
Why did you use the same yield for the hardcore and froth at Ombersley?
It's government backed income so the froth doesn't usually present any additional risk. Had it been non-reimbursed then I would have applied a softer yield.
43
Explain how you valued Ombersley?
I was tasked with determining the valuation uplift to the asset if the expansion space was let. It had two spaces the GP reimbursed space and the expansion space. I used the hardcore method to assess the market value for the GP at a yield of 5.5% for both the bottom and top slice into perpetuity. I differed the top slice to reversion. I applied an ARY of 7.5% to the expansion space to reflect the additional risk as the rent would not be reimbursed. The difference was an uplift of £196,000
44
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