1
Q
What is the Profits method of valuation?
A
It is derived from trade related properties where the value is derived from the business and its trading potential.
Trading potential is the profit that a reasonably efficient operator would expect to realise from occupying the property i.e. hotels, schools, cinemas.
Common characteristic of these properties is that the property has been designed for a specific use and the value is linked to what the owner can generate from it.
The value reflects the trading potential of the property and it includes the property interest, business and locational goodwill and fixtures and fittings all reflected as a single figure.
The forecast represents the fair maintainable turnover and fair maintainable operating profit that a reasonable efficient operator would hope to achieve.
Considered a reasonably accurate forecast of the properties trading potential.
Actual performance is compared with similar trade properties to determine whether the fair maintainable turnover is realistic based on current market conditions.
FMOP is capitalised at the appropriate rate of return to reflect the risks and rewards of the property to determine its trading potential.
Evidence of accurate comparable market data should be analysed and applied.
2
Q
Tell me about the Profits methodology?
A
- Annual turnover for 3 years (FMT)
- Less costs/purchases = Gross profit
- Less reasonable working expenses = unadjusted net profit
- Less operators remuneration = adjusted net profit known as the FMOP
- Capitalised at an appropriate ARY to achieve market value
- Cross check with comparable sales if possible
3
Q
What is the DRC method of valuation?
A
It provides an indication of value based on the buyer paying no more than the cost to obtain the asset based on the current equivalent.
It involves calculating the replacement cost of the asset with its modern day equivalent including deductions for physical deterioration and all other relevant forms of obsolescence.
Method of last resort and used when it is impractical to use all other valuation methods. Used to value properties where there is no active market i.e. mosques, wharfs or oil refineries.
The capital value is determined by calculating the cost of building the equivalent asset and the purchase land value.
Replacement build cost should be calculated using new and cost effective building materials and techniques.
The total value of the new property is then adjusted for deterioration using evidential information and recent transaction values to calculate the land purchase cost.
4
Q
What are the 3 steps to DRC?
A
- Value of land in its existing use (assume planning permission)
- Add current cost of replacing the building plus fees
- Less a discount for depreciation (use BCIS and then judge level of obsolescence)
5
Q
DRC - Does the modern equivalent have to be like for like?
A
No but the functionality needs to be the same
6
Q
DRC - any RICS guidance?
A
Yes - RICS PS DRC Method of Valuation for Financial Reporting 1st Edition 2018.
7
Q
DRC - What are the 3 types of obsolescence?
A
Physical - Reflects deterioration in the property due to age. Although age itself is not a factor, the wear and tear of the property and higher maintenance costs are classed as physical obsolescence.
Functional/technical - Reflects the fact the property may no longer be fit for purpose. For example, the property may have very high ceilings, poor layout, inferior heating and ventilation.
Economical - Due to economical changes the whole property may no longer be fit for the purpose it was originally intended for.
8
Q
DRC - What are the disadvantages?
A
- Value based on cost rather than actual value
- Subjective - no active market so inputs are subject to the valuer
- Inflexible - can’t reflect lease terms
9
Q
DRC - How did you establish costs?
A
BCIS (Building Cost Information Services)
Build costs, tender price index and location factor
10
Q
DRC - How did you depreciate for age/obsolescence?
A
Straight line method - assumes that a property depreciates at the same rate each year (assume 1% per year)
11
Q
DRC - What is the S Curve method?
A
Based on the principle that at the beginning the property depreciates slowly and then as it gets towards the end of life it depreciates very quickly and then at the very end it plateaus again.
12
Q
DRC - How did you depreciate for age and obsolescence?
A
I reviewed the design life of each component, made a valuer judgement as to the remaining life of each component and this is what I depreciated via the straight-line method.
13
Q
What is the Comparable method of valuation?
A
Primarily uses sales data of properties that have recently sold focusing on assets that have a similar size, location, condition, features and specifications to the subject hereditament.
It is underpinned by comparable evidence which is identified, analysed and applied to the real estate that is to be valued. Therefore, fundamental to producing a sound valuation that can stand scrutiny from the client and market.
Valuer will compile a list of evidence that will contain details about the property such as age, quality, location, tenure, size, transaction price, date of sale, £/m2 - all of which can be used for the purposes of comparison with other similar properties.
The comparables gathered should be comprehensive (more than one), they should be recent and thus representative of the current market conditions, very similar and consistent with local market practice.
14
Q
Comparable - Tell me the methodology?
A
- Search and select comparables
- Confirm/verify details and analyse the headline rent to get the net effect rent (UKGN 6 Analysis of Commercial Lease Transactions)
- Assemble comparables using the hierarchy of evidence
- Analyse comparables to form an opinion of value
- Report value and prepare file note
15
Q
Comparable - State the 6 steps?
A
- Look at the subject property
- Select comparables
- Analyse comparables
- Display in table
- Value the subject property
- Stand back and look
16
Q
Comparable - Is there any RICS guidance on this?
A
Yes - RICS Comparable Evidence in Real Estate Valuation 1st Edition 2019.
17
Q
Comparable - What is the key point from the guidance?
A
Hierarchy of evidence is the following order:
- CAT A - Direct evidence
- CAT B - General market data
- CAT C - Other sources
18
Q
What is the Investment Method of valuation?
A
This is where there is an income stream to value and you reflect the level of risk in the yield.
Traditional approach is growth implicit in the choice of yield whereas DCF is growth explicit and the cashflow is explicitly modelled incorporating valuer assumptions.
If DCF is based on client data than it represents investment value, if based on market data than it is market value.
19
Q
DCF - What is DCF Method of valuation?
A
Used when there are no comparable market transactions, the explicit DCF model provides a rational framework for the estimation of market value.
20
Q
DCF - When can you use DCF?
A
DCF can be applied if there is expected short term market volatility present within the transaction i.e. if a tenant within a rental property is due to terminate their lease.
Can also be used if multiple investments are being compared side by side to support with long term investment decision.
21
Q
DCF - Can you tell me the steps in a DCF?
A
- Estimate the cashflow (income less expenditure)
- Estimate the exit value at the end of the holding period
- Select the discount rate
- Discount cashflow at discount rate (reflects perceived level of risk)
- Value is sum of completed DCFs to provide NPV
22
Q
DCF - Explain the DCF process?
A
Estimated cashflows are projected over an assumed investment period in addition to an exit value as the end of the investment period.
Cashflow is then discounted back to the present day value at a discounted rate (desired rate of return) that reflects the perceived level of risk.
A discount rate is applied to reflect market and property specific risks.
To arrive at the estimated revenue cash flow specific leasing patterns including rent reviews, lease renewals or co-lettings on lease expiry, void costs need to be considered.
The exit valuation needs to be reflecting the rental growth and unexpired terms of the leases at the exit date.
The assumptions and forecasts forming part of the calculation need to be set out clearly.
23
Q
DCF - Traditional over DCF?
A
As per VPS 3, valuers are responsible for adopting and justifying their valuation approach and methods.
Backed by evidence, proving client care and value for money
I would use traditional investment method where there is ample evidence and look at the purpose of the instruction.
24
Q
DCF - What is NPV?
A
Net Present Value
The sum of all the DCFs of the project which can be used to determine if an investment gives a positive return against a target rate of return.
25
DCF - What is IRR?
Internal Rate of Return
Rate of Return at which all future cashflows must be discounted to produce a NPV of zero.
Used to assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions.
26
DCF - Name the 3 DCF outputs?
1. NPV
2. IRR
3. Payback period
27
DCF - Is there any RICS guidance on DCF?
Yes - RICS Practice Information 'Discounted Cash Flow' Valuations' 1st Edition 2023
28
What is Term & Reversion?
Used when the property has an existing lease in place that is due to expire.
The existing lease terms are considered separate from the expected new lease terms within the valuation approach.
In this instance the property is said to have reversionary potential taking into account the new lease terms.
The existing term is valued separately from the reversion (new lease terms).
29
Term & Reversion - Give me a breakdown of this method of valuation?
Used for reversionary investments (when the market rent is more than the passing rent).
The term is capitalised until the next lease event.
Reversion to market rent in perpetuity at a reversionary yield.
30
What is the Hardcore/Layer Method of valuation?
Used as an alternative to T/R.
It considers the current market rent being received and applies this on a perpetual basis.
The difference between the current rent being received and expected market rent at the time of the lease renewal is also considered on a perpetual basis.
The two separate values are then added within the calculation.
31
Hardcore/Layer - Can you provide the steps to this?
1. Established market rent from comparables
2. Capitalised the market rent into perpetuity at an appropriate yield
3. Then capitalised the top slice (i.e. the additional rent being paid) at an appropriate yield up to the next lease event
4. These values were added together to reach the capital value
I would apply a higher yield to the over-rented part (top slice) because it carries higher risk as occupier is paying above market rent.
Higher yield = higher risk = lower value
32
Hardcore/Layer - How long do you value the over-rented bit for?
Until the end of the lease or next review depending on lease terms.
33
What is the Rack Rent approach of valuation?
Identified the appropriate market rent and then capitalised the market rent into perpetuity at an appropriate yield.
34
Is reversionary income riskier than rack rented?
Yes - Because future income is uncertain.
35
Residual Method - What are the 3 steps?
1. Establish the GDV
2. Assess all the development costs
3. Deduct cost from value to leave you with the residual land value
36
Residual Method - When do we use this method?
Most common purpose is to find the market value of a development site based on market inputs.
At one moment in time, at the valuation date, for a particular purpose.
Form of development appraisal - simple residual method or DCF.
All inputs are to be taken at valuation.
37
Residual Method - Tell me more in-depth details regarding the steps?
1. Calculate the GDV - Market Value of completed development
2. Less TDC - Site prep, planning/building costs, professional fees (1-2%), contingency (5-10%), marketing costs and fees (1-2% of GDV), finance costs (assume 100% debt finance on a straight line basis using compound interest over length of development at 5% or assume S-Curve).
3. Deduct TDC from GDV to establish site value.
4. Cross check site value against value of comparable site if possible.
38
Residual Method - What are the differences between this and Development Appraisal?
Residual form part of a Red Book Valuation Standard.
DA are based on worth where one or more valuations are coupled with professional advice, analysis and opinion.
DA takes into account time (phasing) where Residual doesn't.
DA used to determine whether profit levels are obtained at an acceptable level whereas Residual Valuations are used to determine market value.
39
Residual Method - What can be developed?
Usually there is a specific development plan in place.
If not, I would consider the surrounding area and use of the nearby properties and local planning policy. (i.e. housing estate in the middle of an industrial estate would be unlikely to happen).
40
Residual Method - What is the typical amount for developers profit?
15-20% of the GDV or total construction cost, depending on the risk of the development.
GDV more frequently used as a base for residential use. Therefore, percentage of profit required has risen recently given their riskier market conditions.
41
Residual Method - What are the purchasers cost in a Residual Method?
1% Agent
0.5% Legal fees
3% SDLT
42
Residual Method - How is finance calculated on the Residual Method?
Calculated using the estimated borrowing cost over the period of time the finance is required for.
Example: The finance costs for land would probably only be taken for half the period because when the build is halfway through it is generally expected that the development will have started to generate an income.
43
Residual Method - How much would you deduct for contingency fees in a Residual Method?
5-10% of total construction costs depending on the level of risk and likely movements in building costs.
Higher for listed buildings or complex projects.
44
Residual Method - What might developers need to borrow the money for in a Residual Method?
Site purchase (compound interest based on a straight-line basis)
Total construction costs (calculation based on a S-Curve) taking half of the costs over the length of the build programme).
Holding costs to cover voids until disposal of the scheme, empty rates, interest charges (compound interest on a straight-line basis).
45
Residual Method - When might developers profit be lower than normal in a Residual Method?
When the scheme is very small and not many houses are being built.
Or when a high percentage of the properties on the site are affordable housing units and they do not have the certainty of them.
46
Residual Method - What are the deduction for fees in a Residual Method?
10-15% plus VAT of total construction cost for architects, M+E consultants, project managers, structural engineers.
Lower % would be appropriate for a large project.
VAT is payable on all professional fees in a Residual valuation.
47
Residual Method - What are the 2 main ways of funding and which would you assume?
1. Debt financing - Borrow money from a bank or another funding institution. (I would assume 100% debt finance).
2. Equity finance - Selling shares in a company or joint venture partnership or own money used.
48
Residual Method - Limitations of the Residual Method?
Importance of accurate information and inputs.
Does not take into account the timing of cash flows.
Very sensitive to minor adjustments.
Implicit assumptions hidden and not explicit (unlike a DCF).
49
Residual Method - Name software for a Residual Method?
Argus
50
Residual Method - Are you aware of any RICS guidance on Residual Method?
Yes - RICS PS Valuation of Development Property 1st Edition 2019.
51
What is an Equivalent Yield?
It is a weighted average of the Net Initial Yield from current rental income and all future reversionary income.
Example: if a 5% yield is applied on the Hardcore rental income currently being received and a 6% yield is applied in future reversionary income, the uniform Equivalent Yield would be weighted to consider both of the individual percentages being applied at 5.5%.
This approach is often simpler for valuers as they can apply a yield to the entire income stream rather than having to value hardcore and reversionary incomes separately.
52
What is an Equated Yield?
This is the yield on a property investment which takes into account growth in future income.
Not applicable to reversionary situations, where the increase in income on reversion is to the market value as estimated at the present time.
53
What is an All Risks Yield?
Yield of a fully let property reflecting all prospects and risks attached to a particular investment.
Presents the rental revenue of a property as an annual percentage of the property cost.
Calculated in the following way:
Annual rental income/properties value X 100 = ARY.
54
What is a Net Initial Yield?
Relationship between rental income and capital value at the point of purchase.
The Net Initial Yield is based on annual passing rent.
The resulting yield adjusted for purchaser's costs.
55
What is a Running Yield?
Yield at one moment in time.
56
What is a Reversionary Yield?
If a property is close to a rent review or lease renewal, it will be valued by the reversionary yield based on the established rents to which rents are expected to rise.
57
What is a Nominal Yield?
Initial yield assuming payment made annually in arrears.
58
What is a True Equivalent Yield?
Average of term & reversion yield but assumes rents are received quarterly in advance.
59
What is a Gross Yield?
Yield not adjusted for purchasers costs (such as an auctions result).
60
What factors effect yield?
Covenant strength (look at companies house, dun & bradstreet, companies house)
Location
Specification
Rent levels
Growth potential
Asset management and development value
61
If I wanted to value my property with a rent of £100,000 and a yield of 5% forever, how would I do it?
I would calculate the YP = 100/5 = 20
And then multiply this by the passing rent = £100,000 x 20 = £2,000,000
62
What is Years Purchase?
Number of years required for its income to repay its purchase price. (YP = 100/yield).
Usually between 5-10%.
63
What is a return?
Term used to describe the performance of a property. It is measured retrospectively.
64
What is the purpose of a valuation?
Financial reporting
Commercial secured lending purposes
Residential mortgage purposes
Capital taxation purposes
CPO and Statutory Compensation
65
What are the steps to take following a valuation instruction?
1. Obtain details of the property
2. Undertake a conflict of interest check
3. Obtain a signed letter of instruction
4. Confirm the purpose of the valuation
5. Undertake information gathering including confirmation of the purchase price
6. Identify ratings, planning & environmental information
7. Inspection and measurement of the property
8. Research market values
9. Compile valuation report
10. Check valuation internally including sign off with any relevant signatories
11. Report to the client and address any queries
12. Submit an invoice
66
What is Market Value?
The estimated amount for which an asset should exchange on the date of the valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion.
67
What is Market Rent?
The estimated amount for which a property, or space within a property should lease, on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arms length transaction and after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion.
68
What is hope value?
The market value of land based on the expectation of getting planning permission for development.
69
What is marriage value?
The extra value that arises from the merger of 2 or more physical or legal interests.
70
What is special value?
An extraordinary element of value over and above market value.
71
What is the IVSC?
The International Valuation Standards Council.
72
What do the IVSC do?
Their principle interest is to publish valuation standards and procedural guides for valuation of assets for financial statements.
73
What International Valuation Standards do the IVSC recognise?
IVSC recognise the following IVS:
IVS 1 - Market value basis of valuation
IVS 2 - Valuation basis other than market value
IVS 3 - Valuation reporting
IVSC also recognise 2 applications:
IVA 1 - Valuations for financial reporting
IVA 2 - Valuation for lending purposes
74
What is a specialist property?
Trading properties i.e. hotels, where the property is designed to perform a specific purposes.
75
What is a specialised property?
Includes chemical plants and places of worship. Rarely sold on the open market except being exchanged within the industry or business they are part of.
76
What is market rent?
Assume vacant possession and is the amount of rent anticipated for the use of the property in comparison with similar properties in the area.
77
What is Estimated Rental Value?
Takes into account further considerations about the property assuming the building is occupied e.g. there will be due consideration of the specific lease term.
78
When would you use T&R or H/L?
Utilised when the terms of the lease and incoming rental income are expected to change in the near future.
79
What is Goodwill?
An intangible asset when property or real estate is being sold or purchased.
It is a value within the transaction that is higher than the sum of the net fair value.
Could be brand name, local customer base or good reputation.
Goodwill element will create a special value over and above the value of the land or building being exchanged.
80
What is Purchased Goodwill?
Created when an asset is exchanged for an amount above the fair market value.
Accounted for on a company's balance sheet and shown as an asset.
Only kind of goodwill that can be recognised on a company's accounts.
81
What is Inherent Goodwill?
Created over time as a non-measurable asset held by a property or company.
Derived from good location, good reputation, good customer base, good brand image and brand name.
Not recorded on a company's balance sheet.
Only realised financially at the time the property or company in consideration is sold or exchanged.
82
What is Face Rent?
A rent figure that excludes any incentives such as rent free periods or rent reductions or fit-out costs.
83
What is Effective Rent?
Average rental cost a tenant pays over a lease term accounting for any landlord incentives
84
What are Deleterious Materials?
These are considered as prohibited and have an effect on the structural integrity performance and longevity of a property. Can result in non-compliance with building regulations and decrease a property's value.
S P L
85
What are the main components of a valuation report?
1. Tenure
2. Date of valuation
3. Extent of inspection
4. Who inspected
5. Opinion of value
6. Allowance for VAT
7. 3rd party references
8. Clause prohibiting publication
9. External or independent valuer
10. Date of receipt
11. Statement that the valuer is qualified
86
How would structural defects be reflected in a valuation report?
Draw clients attention to them.
Advise them to have structural survey done.
Cant comment on an area outside of my expertise.
Seek and obtain cost input to remediate and include within report.
87
Are you allowed to know the purchase price when valuing?
Valuer must request this and also verify it.
If valuation differs you must state why.
Must be based on market evidence and bona fide.
88
If you're negligent, what can the client do?
Client can demonstrate loss and pursue the valuer or the valuing company through the courts for the losses incurred.
Merritt V Bab - provided that valuers and not firms can be pursued.
Highlights the importance of PII and run-off cover.
89
How would you rentalise reception in office building?
50% if single let.
0% if multi-let.
90
What would you caveat in a valuation report?
Publication
Confidentiality
Deleterious materials
Planning
Taxation
Information supplied
Environmental matters
91
What 3 items are in ToE but not referenced in the valuation report?
1. Professional fees for undertaking the valuation
2. Complaints handling procedure (CHP)
3. Description of the report
92
What's in the valuation report but not in the ToE?
Opinion of value
Valuation approach
93
What is meant by 'Passing Rent'?
The annual rental income currently generated by a property as recorded on the balance sheet date.
Passing rent generated by the property on the balance sheet date may be more or less than the estimated rental value.
Passing rent excludes any rental income when a rent free period is in effect and is based on actual income received.
94
Why does the valuation report include an 'opinion' and not an actual valuation?
Case law has found that providing valuations are in accordance with the RICS Red Book, a value based on an opinion cannot be wrong.
Providing the valuation is found to be within reasonable tolerances the surveyor cannot be considered wrong in their opinion.
If the valuation was based on an actual value this would not necessarily be accurate and may leave surveyor open to be pursued through court action.
95
What is an Internal Valuer?
Someone who undertakes a valuation for internal use only.
96
What is an External Valuer?
Someone who has no material links with the asset or client.
97
What are the 3 valuation approaches?
1. income Approach - Converting future cashflows into a capital value i.e. investment method, profits and residual (residual hybrid can cover all 3)
2. Cost Approach - Reference to the cost of an asset e.g. DRC
3. Market Approach - Using comparable evidence
98
How do you find relevant comparables?
Internal records/database and websites e.g. CoStar
Inspection of an area to find recent market activity by seeking agent boards
Speak to local agents
Auction results
99
What is the Hierarchy of Evidence?
1. Open market lettings
2. Lease renewals
3. Rent reviews
4. 3rd party determinations
5. Sales and leaseback
6. Inter-company transactions
100
What is the Divisible Balance?
Resultant figure when gross receipts are deducted from, gross income.
Divisible balance then needs to be split between the tenants profit levels and the amount they would be willing to pay in rent to occupy the premises.
101
What governs the way valuations are done?
The Red Book - RICS Valuation - Global Standards 2025
The Red Book is a mix of professional and performance requirements and advice providing practical implementation of wider RICS standards (including ethics and conduct) and relevant international standards such as IVS (International Valuation Standards).
102
Red Book - Date & Structure?
1976
1. Introduction
2. Glossary
3. Professional Standards
4. Valuation Technical and Performance Standards
5. Valuation Practice Guidance Applications
6. International Valuation Standards
103
Red Book - Does it tell you how to value?
No - It provides standards to follow when carrying out valuations as well as best practice guidance.
104
Red Book - What is the basis of valuation in the Red Book?
There isn't one, most appropriate basis applicable to the valuation should be used.
Could be:
Market value
Market rent
Investment value/worth
Fair value (IFRS definition)
105
Red Book - What VPS are contained in the Red Book?
VPS 1-6 as of 2023
VPS 1 - ToE (Scope of work)
VPS 2 - Bases of value, assumptions and special assumptions
VPS 3 - Valuation approaches and methods
VPS 4 - Inspections, investigations and records
VPS 5 - Valuation models
VPS 6 - Valuation reports
106
Red Book - What are the PS in the Red Book?
Professional Standards 1-2
PS1 - Compliance with standards and practice statements where a written valuation is provided
PS2 - Ethics, competency, objectivity and disclosure
107
Red Book - How would you deal with valuation uncertainty?
I would value with reference to VPGA 10 ~ Matters that may give rise to material valuation uncertainty.
I would specify in my report that there was an element of uncertainty to the valuation and explain why e.g. because the valuation is based on limited evidence or because the market is prone to change.
108
Red Book - What is VPGA?
Valuation Practice Guidance Application - Refers to guidance documents published by the Royal Institution of Chartered Surveyors (RICS) as part of its Red Book standards. These VPGAs provide detailed, sector-specific advice to valuers on how to perform their work in accordance with the global valuation standards, with specific VPGAs also available for different jurisdictions, such as the UK.
There are 17 of them.
109
Red Book - Which parts of the Red Book are mandatory?
PS 1-2 & VPS 1-6
VPGAs are advisory
110
Red Book - What guidance does VPGA 8 provide?
VPGA 8 - Valuation of real property interests
Confirm the title of the property
Note condition & construction
What services are present
Planning and necessary consents
Environmental factors such as flooding
Sustainability
111
Red Book - Under VPS 6 what must a valuation report contain?
VPS 6 - Valuation Report
Clearly set out conclusions of the valuation
Not be ambiguous
Comment on issues affecting certainty
Deal with matters agreed in the ToE
112
Red Book - What does the Red Book definition of market value ignore?
Ignores any price distortion caused by special value or marriage value
However, special value for the prospect of development where there is no current permission for that development and the prospect of marriage value are reflected in the market value.
113
Red Book - What is the UK National Supplement?
Supplement to the Red Book
Provides specific requirements and guidance on valuations undertaken subject to UK jurisdiction
114
Red Book - What is the main takeaway from the UK National Supplement2023?
UK VPS 3.3 Rotation Policy
Mandatory rotation policy (2-year transitional period from 05/2024 to 04/2026)
Single valuer after 5-years
Firms after 10-years
115
Red Book - How is the UK National Supplement structured?
1 PS - Compliance with valuation standards within the UK jurisdiction
VPS 1 - ToE and reporting: Red Book compliance
VPS 2 - ToE: supplemenatry provisions in Scotland
VPS 3 - Regulated purpose valautions
17 VPGAs
116
Red Book - Name a UK national Supplement VPGA?
UK VPGA 11 Valuation of UK residential property
It covers:
1. Bases of value
2. Valuation inspections
3. Assumptions and special assumptions
4. Reporting
117
Red Book - What does VPS 3 cover?
VPS 3 - Approaches and methods
Market approach - Comparing the subject with identical or similar assets for which price information is available.
Income approach - Based on capitalisation or conversion of present and predicted incomes to produce a single current capital value.
Cost approach - based on the economic principle that a purchaser will pay no more for an asset than the cost to obtain one of equal utility whether by purchase or construction.
118
Red Book - Where do you find advice regarding the valuation of interests for secured lending?
VPGA 2 - Valuations for secured lending
Market value is widely used as basis of value
119
Red Book - Which internal standards are recognised by the Red Book?
1. IPMS
2. International Financial Reporting Standard
3. International Ethics Standards
120
Red Book - How far does it apply?
Red Book applies globally.
121
Red Book - Are VPGAs mandatory?
They are advisory but may reference mandatory parts of the Global Red Book.
PS have mandatory status and use the word 'must'.
122
Red Book - When valuing a business, which VPGAs is it recommended you consider in addition to VPS 1-6?
VPGA 3 - Valuation of businesses and business interests
VPGA 6 - Valuation of intangible assets
123
Red Book - What is a valuation?
A valuation is an opinion of value of an asset or liability on a stated basis, at a specified date.
Referred to in the Red Book Glossary
124
Red Book - What is an asset valuation?
Where you determine the fair market value of an organisations assets for financial reporting purposes.
125
Red Book - What guidance is there for asset valuations?
RICS VPGA 1 - Valuations for financial reporting
RICS VPGA 4 - Valuation of local authority assets for accounting purposes
RICS VPGA 6 - Local authority and central government accounting: existing use value (EUV) basis of value
Chartered Institute of Public Finance and Accountancy (CIPFA) Code of Practice
126
Red Book - What are HoT?
Lease terms agreed in principle
127
Red Book - What does VPS stand for?
Valuation Technical and Performance Standards
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Red Book - What date is the UK National Supplement of The Red Book?
2023 but effective May 2024
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Red Book - What is a VfM report?
Formal opinion of value of the market rent at the valuation date.
Establishes whether the current rent is providing value for money.
130
Red Book - How did you carry out the Red Book Report?
Reviewed the instruction and carried out a COI Check and checked competence.
Drafted ToE and agreed them with agent.
Arranged an inspection of the surgery.
Used internal and external sources to find comparable evidence.
Adjusted evidence to reflect value Signiant factors and weighted accordingly to arrive at the Market Value.
Completed VfM report and sought sign off from senior valuer.
Report then issued to client.
131
Red Book - Guidance for VfM reports?
GN60 and the NHS Premises Costs Directions
132
Red Book - Exceptions to The Red Book?
1. Providing agency or brokerage service
2. Providing valuation advice during negotiations or litigation
3. Acting or preparing to act as an expert witness
4. Performing statutory functions
5. Providing valuations to a client purely for internal purposes
133
Red Book - Name some ToE?
1. Client
2. Purpose
3. Subject Property
4. Fee basis
5. Valuation Date
6. Agreed Departures
7. Basis of Value
8. Currency
9. Special Assumptions
10. Identity and Status of Valuer
11. Any Conflict of Interest
12. restrictions or Limitations
19 in total
134
Red Book - What is rent reimbursement (VfM)?
NHS uses privately owned surgeries to deliver its primary care services and reimburses GPs with a rent.
135
Red Book - Structure of The UK National Supplement?
1 PS - Compliance with valuation standards within the UK jurisdiction
VPS 1 - ToE and reporting: Red Book compliance
VPS 2 - ToE: supplemenatry provisions in Scotland
VPS 3 - Regulated purpose valautions
17 VPGAs
136
Red Book - Name a PS of the Red Book?
PS1 - Compliance with standards where a written valuation is provided (PENCIL)
PS2 - Ethics, competency, objectivity and disclosures (ECOD)
137
Red Book - Name a VPS?
VPS 1 - ToE
VPS 2 - Bases of value, assumptions and special assumptions
VPS 3 - Valuation approaches and methods
VPS 4 - Inspections, investigations and records
VPS 5 - Valuation models
VPS 6 - Valuation reports
138
Red Book - Name a VPGA?
VPGA 1 - Valuations for financial reporting
VPGA 2 - Valuations for secured lending
VPGA 3 - Valuation of businesses and business interests
VPGA 4 - Valuation of trade related properties
VPGA 5 - Valuation of plant and equipment (including infrastructure)
VPGA 6 - Valuation of intangible assets
VPGA 7 - Valuation of arts and antiques
VPGA 8 - Valuation of real property interests
VPGA 9 - Valuing portfolios and groups of assets
VPGA 10 - Material valuation uncertainty (MVU)
VPGA 11 - Relationship with auditors
139
Red Book - VPS 1?
a Identification and status of the valuer
b Identification of the client(s)
c Identification of any other intended users
d Identification of the asset or liability to be valued
e Valuation (financial) currency
f Purpose of the valuation
g Basis of value
h Valuation date
i Nature and extent of the valuer’s work – including investigations
j Nature and source of the information to be relied upon
k All assumptions and special assumptions
l Format of report
m Restrictions on use, distribution or publication
n Confirmation that the valuation will be undertaken in accordance with the IVS and/or RICS Red Book Global Standards
o The basis on which the fee will be calculated
p where the firm is registered for regulation by RICS, reference to the firm's complaints handling procedure, with confirmation that a copy is available on request
q a statement that compliance with these standards may be subject to monitoring under RICS' conduct and disciplinary regulations
r a statement setting out any limitations on liability that have been agreed
s Consideration of any significant environmental, social and governance (ESG) factors
140
Red Book - VPS 2?
Basis of Value
Get the correct basis with the correct definition.
Assumptions
Anything you do not know for a fact must be covered by a reasonable assumption.
Special Assumption
Vacant Possession, Planning, Building Works, 90 days…
141
Red Book - VPS 3?
Market approach
(comparable method)
Income approach
(investment method)
Cost approach
(Discounted Replacement Cost)
142
Red Book - VPS 4?
VPS 4: Inspections, investigations and records
Inspections and investigations must always be carried out to the extent necessary to produce a valuation that is professionally adequate for its purpose.
The valuer must take reasonable steps to verify the information relied on in the preparation of the valuation and, if not already agreed, clarify with the client any necessary assumptions that will be relied on.
VPGA 8: Valuation of real property interests
Advisory (not mandatory) but gives a list of matters which typically affect the value of a real estate asset.
Site notes and desktop enquiry notes should reflect all of these matters otherwise the valuer cannot say they have taken everything into account in considering value.
VPS 4: Inspections, investigations and records
A proper record must be kept of inspections and investigations, and of other key inputs, in an appropriate business format.
To maintain a proper audit trail and be in a position to respond effectively to a future enquiry, legible notes (which may include photographs or other images) of the findings and, particularly, the limits of inspection and the circumstances in which it was carried out must be made.
The notes should also include a record of the key inputs and all calculations, investigations and analyses considered when arriving at the valuation.
All of these requirements underline the importance of creating and keeping an Audit Trail.
'IF IT ISN’T WRITTEN DOWN, IT DIDN’T HAPPEN'
143
Red Book - VPS 5?
Provides guidance on the use of valuation models in professional practice, and covers:
Model Selection
Model Application
Model Validation
Documentation
144
Red Book - VPS 6?
Red Book says:
Valuation reports must address the following matters which reflect the requirements set out in VPS 1 for the terms of engagement (scope of work). (…) valuers are otherwise strongly advised where possible to consider and follow the headings set out below when reporting, to ensure that all relevant matters are covered.
a Identification and status of the responsible valuer
b Identification of the client and any other intended users
c Purpose of the valuation
d Identification of the asset(s) or liability(ies) valued
e Basis(es) of value adopted
f Valuation date
g Extent of investigation
h Nature and source(s) of the information relied, upon including sources of key data and inputs used
i Assumptions and special assumptions
j Restrictions on use, distribution and publication of the report
k Confirmation that the valuation has been undertaken in accordance with the IVS and/or RICS Red Book Global Standards
l Valuation approach and reasoning, including any valuation method(s) and complex or proprietary model(s) used
m Amount of the valuation or valuations
n Date of the valuation report
o Commentary on any material valuation uncertainty (MVU) in relation to the valuation where it is essential to ensure clarity on the part of the valuation user
p A statement setting out any limitations on liability that have been agreed
q Significant environmental, social and governance (ESG) factors used and considered
Yes, this largely duplicates the terms of engagement.
It is supposed to.
145
Red Book - VPGA 8?
This guidance note is about the investigations for the valuation of real estate and it covers much of the due diligence and inspection that a valuer will need to carry out to establish anything which might affect value.
This guidance provides additional commentary on certain specific topics and issues that arise in relation to the valuation of real estate and is supplemental to IVS 400 Real Property Interests, IVS 410 Development Property and VPS 2.
It expressly covers inspections and investigations, and includes important new material on sustainability and environmental issues, factors that continue to grow in importance as market influences in relation to real estate.
Top tip
The material in VPGA 8 can form the basis of a checklist. The 2022 version highlights the need to record survey details on Sustainability and environmental, social and governance (ESG) matters, which can be a market influence in relation to real estate.
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How are shops valued?
Shops are zoned having regard to comparable evidence
147
What would you look for when valuing a return frontage?
Look to see how busy the footfall is on the return frontage, type of frontage and if there is any masking.
148
If the 1st floor of a shop was retail rather than storage, how would you treat it?
Value is on an overall basis at a factor of Zone A (usually 10%).
Upwards adjustment to be made if there was lifted access.
149
How would you carry out a market valuation of an office?
Use an appropriate method e.g. H/L or T&R
If office was multi-let I would carry out a valuation for each individual occupation and add together
150
How would you reflect a good tenant?
Adjust the yield to reflect the covenant strength of the tenant
Good tenant would equal a lower yield as it is lower risk
151
How do you account for 3-year rent-reviews?
Depends on market norms.
if the market norm was to have 3-yearly rent reviews you would not need to make an adjustment.
If the market norm was say 5-7 years then it would depends in the market prospects/presence of upwards/downwards rent-review clauses.
In a rising market with upwards only review clause the yield would be lower as those circumstances are landlord favourable.
If the market was declining and the review clause was upwards and downwards, the yield would be higher as these circumstances are tenant favourable.
152
What is an assumption?
A supposition taken to be true
Made where specific investigation by the valuer is not required in order to provide that something is true
153
What is a Special Assumption?
An assumption that either assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical participant in a transaction on the valuation date.
154
What is a Special Purchaser?
A particular buyer for whom a particular asset has a special value because of advantages arising from its ownership that would not be available to other buyers in the market.
155
What factors cause market rent to vary?
Terms of the assumed lease contract e.g. lease length, frequency of rent-reviews and maintenance responsibilities
156
Who drives the need for standards?
Governments
Regulators
Employers
Public
Investors
Valuation Professionals
157
Who chooses the basis of value?
The valuer in consultation with client
158
Which approach should you use for a valuation?
Valuers should use the approach/es necessary to produce an accurate valuation
159
What basis of valuation is used for most financial reporting under IFRS?
Fair value
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When should the valuer agree the level of inspection to be made?
As part of the ToE
161
When selecting a basis of value, what should you have regard to?
1. Purpose/use and context of the particular valuation
2. Nature of the asset
3. Any statutory or mandatory requirements
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What statutory due diligence should you carry out when valuing?
Flooding
Asbestos
Legal title and tenure
Fire/H+S
EPC
Planning history
Mining
Right of way
163
What is the RICS valuer registration scheme?
Independent monitoring scheme
Reinforces professional standards
Mandatory for the Red Book
164
Is BICS reliable?
Updated annually so may not reflect the actual costs at the valuation date.
Doesn't account for inflation and regional differences.
165
What is the difference between a rent-free period and a stepped-rent?
Covenant strength of the tenant
166
What is the margin of error?
Residential - 5%
Commercial 10%
Exceptional circumstances - 15%
167
What is the Gray Report?
Independent Review of real Estate Valuation 2021
13 recommendations
Ensure RICS continue to ensure diversity and inclusion
Advocated the use of DCF as the principal model applied in preparing property investment valuations
Rotation policy - Max duration of 5-years before the rotation of an 'individual responsible valuer' and max duration of 10-years before rotation of a valuation firm
168
What is the TPI?
Tender Price Index
Measures the movement of prices in construction over time
169
What is location factors?
Multiplier that is used to adjust costs based on the particular location of the projects (factors in for local labour rates, material costs, availability particular to that location)
170
How would you find covenant strength of a tenant?
Dunn and Bradstreet credit check
Check occupiers website
Look at Companies House
171
Why is it important to know the purpose of your valuation?
It affects how you carry out your valuation and the assumptions you make.
172
RICS document when valuing to EUV?
Professional Standard 'Existing Use Value (EUV) Valuations for UK Public Sector Financial Statements
173
What are the IVS defined bases of value?
Market Value
Market Rent
Investment Value
Equitable Value
Synergistic Value
MMIES
174
Name case law regarding post-AVD evidence?
Specialeyes v Felgate
Can use post-AVD evidence but less weight given
Disregard events when considering rental evidence
175
Why would someone pay a premium?
Tenant might pay a premium to secure a prime location or if they don't have strong covenant.
Landlord might pay a premium to surrender leasehold interest.
176
What is the Present Value of £1
PV is the current value of a future sum of money or stream of cash flows.
Determined by discounting future value by the estimated rate of return that the money could earn if invested.
Based on the concept that a particular sum of money today is likely to be worth more than the same sum in the future because it can be invested and earn a return in the meantime.
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What is a Ransom Strip?
No statutory framework.
Stoke v Cambridge Corporation (1961)
Appropriate purchase price was 1/3 of the increase in the value of the land to be developed as attributable to the acquisition of the ransom strip.
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What is Present Value?
The present value of all cash flows received from an investment where each receipt/payment is discounted to its present value at the discount rate
APC Valuation Pathway
flashcards
Decks in class (28)
# Cards
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Valuation178
-
Capital Taxation90
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Local Taxation126
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Inspection113
-
Measurement59
-
Ethics, Rules of Conduct & Professionalism146
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Data Management110
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Health & Safety44
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Conflict Avoidance29
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Valuation Examples5
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Capital Taxation Examples18
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Inspection Examples7
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Measurement Examples2
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Case Study Questions117
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Local Taxation Examples10
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Ethics Example5
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Sustainability EB81
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Client Care65
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Diversity, Inclusion and Teamworking58
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Accounting Principles55
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Communication and Negotiation21
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Business Planning45
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Conflict Avoidance COPY47
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Legal and Regulatory Compliance32
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Sustainability COPY28
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Inclusion, Diversity and Teamworking23
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Sustainability DM28
