Valuation COPY Flashcards

Question

What is Initial Yield?

Answer 1

Simple **income yield** for **current income** and **current price**.

Answer 2

**Market Rent** (MR) **divided** by **current price** on an **investment** **let** at a rent **below the MR.**

Answer 3

The yield at one moment in time.

Answer 4

the current annualised rent, net of costs, expressed as a percentage of capital value, after adding notional purchaser's cost

Answer 5

- Growth explicit investment method of valuation - Projects estimated cash flows over an assumed investment holding period - with an exit value at the end of this period - The cash flow is then discounted back to the present day at a discount rate (known as desired rate of return) to reflect the perceived level of risk. - Approach separates out and explicitly identifies growth assumptions rather than incorporating them within an ARY. - A method that sets out inflows and outflows

Answer 6

An explicit discounted cash flow model uses predicted input changes, such as growth, rather than existing values.

Answer 7

* A method for **estimating** the **value** of an **asset** by **discounting** its **future cash flows**. * It's based on the idea that **money** is **worth more today** than it will be in the **future**.

Answer 8

* DCF considers the **time value** of money, which is the idea that money is worth more today than it will be in the future * DCF can help **identify** the most important **factors** that **drive** an **investment's valuation**

Answer 9

RICS Guidance Note on ‘Discounted Cash Flows for Commercial Property Investments’ (2010)

Answer 10

1. Estimate the 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 sum of the completed discounted cash flow to provide the NPV

Answer 11

* Net Present Value is the sum of all the discounted cash flows of the project. * NPV **positive** = investment has exceeded investor’s target rate of return * NPV **negative** = it has not achieved the investor’s target rate of return

Answer 12

“The rate at which all future cash flows must be discounted to produce an NPV of 0”. IRR used to assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions.

Answer 13

1. Input current MV as a negative cash flow 2. Input projected rents over holding period as a positive value 3. Input projected exit value at end of term assumed as positive value 4. Discount Rate (IRR) is the rate chose which provides a NPV of 0 5. If NPV is more than zero, then target rate of return is met.

Answer 14

* valuations of trade related property * Used where the value of the property depends upon profitability of its business and its trading potential.

Answer 15

value of the property depends on the profit generated from the business, not the physical building or location.

Answer 16

3 years (Audited accounts are superior to management accounts)

Answer 17

Use estimates/business plan for new business

Answer 18

Annual turnover (income received) LESS costs/purchases = Gross Profit LESS reasonable working expenses = Unadjusted Net Profit LESS operator’s remuneration = Adjusted net profit known as the Fair Maintainable Operating Profit (FMOP) Capitalised at appropriate yield (datamultiplier) to achieve Market Value Cross Check with comparable sales evidence

Answer 19

Earnings before interest, taxation, **depreciation** and amortisation.

Answer 20

Revenues - expenses = Operating profits Operating profit - undistributed operating expenses = GOP GOP - other expenses (mgt, insurance, tax etc) = EDITDA / NOI

Answer 21

- Tool to financially assess viability of development scheme. - Used to assess viability/suitability/profitability of proposed scheme and its sensitivity to changing inputs or assessing viability of different uses, rents, yields, S106, CIL etc. - Can be used to establish residual site value or can assume site value. - Can be based on client inputs.

Answer 22

- Valuation to appraise the value of development site/land to find market value. - It is based on market inputs. - It is ONE moment in time, at the valuation date, for a particular purpose. - Inputs are taken at valuation date. - Can be simple residual valuation or DCF method.

Answer 23

Demolition, remediation works, site clearance

Answer 24

blended rate (cost of debt + risk) (5%-7%)

Answer 25

Legal agreement between local authority and developer for planning obligations (e.g. affordable housing, local training) to gain planning consent. It is site-specific, and is a figure that can be negotiated.

Answer 26

Look at past schemes that have been developed, and look on planning website to see the S106 figure agreed as a benchmark/comparable analysis.

Answer 27

Community Infrastructure Levy charged by Local Planning Authorities for new development area (on the uplift on GIA). It is not necessarily site specific, and can be used on local infrastructure such as schools and healthcare. CIL is excluded for existing floorspace, charities, social housing.

Answer 28

Multiplying the NEW floorspace that a development will be creating by the relevant CIL rate set out in the Local Authority CIL Charging Schedule.

Answer 29

Allowance for risks of unforeseen costs. It is for additional costs/future needs that may arise.

Answer 30

£80,000 - £200,000 per bed

Answer 31

1. Relies on accurate inputs 2. It does not consider timing of cash flows 3. Sensitive to minor changes 4. Implicit assumptions hidden and not explicit (unlike DCF).

Answer 32

- Conflict of interest check - Terms of Engagement - Investigation – site inspection, market research, public data - Understand client requirements (profit they want to achieve, cost of finance, timings) - If you are developer, what are you targeting? How much do you want to make?

Answer 33

* SONIA rate (Sterling Overnight Index Average) * Bank of England base rate plus premium * Rate at which developer can borrow the money.

Answer 34

- Market Value - Sometimes Marriage/Hope Value for special assumption/assumption - Any assumptions/special assumptions must be clearly stated.

Answer 35

RICS Professional Statement on ‘Valuation of Development Property’ – 1st ed (2019) It supplements the International Valuation Standards (IVS) 410 on ‘Development Property’

Answer 36

Interests where redevelopment is required to achieve the highest and best use, or where improvements are either being contemplated or are in progress at the valuation date.

Answer 37

DCF over basic residual model.

Answer 38

RICS Professional Standard ‘Financial viability in planning: conduct and reporting’ (1st edn, 2019).

Answer 39

This is a revision of the RICS Professional Guidance, Financial Viability in Planning 2012. Accounts for the updated NPPF and PPG in 2018. The Professional Statement is informed by NPPF and PPG (Planning Practice Guidance). It concerns Financial Viability Assessments and what must be included to support the statutory planning process.

Answer 40

- When there is limited or unavailable direct market evidence for specialist properties. - Examples include lighthouses, oil refineries, submarine base and docks.

Answer 41

- For **accounts purposes for specialised properties.** - Used for owner occupied property - Also used for rating valuations of specialist properties

Answer 42

**Two steps**: 1. **Value** of the land in its **existing use **(assume planning permission exists) 2. Add **current cost of replacing the building** plus **fees** less a **discount** for **depreciation** and **obsolescence/deterioration**. (Use BCIS then judge level of obsolescence).

Answer 43

- This method of valuation is **NOT** suitable to be **Red Book** compliant valuations for **secured lending**. - It can be used for calculation of **Market Value** for specialised properties only for accounts **valuations**

Answer 44

- They must state the value for any readily identifiable alternative use if it is higher than the current use if appropriate, or if appropriate a statement that the market value would be lower on cessation of the business use.

Answer 45

RICS Guidance note on Depreciated Replacement Cost Method of Valuation for Financial Reporting 2018

Answer 46

* Terms of reference must be clear and unambiguous over whether a valuation is red book compliant or not (PS1 and VPS 1). * Valuation for financial reporting (VPGA 1) – reference IFRS 13 or IFRS 16, to provide Fair Value. * Profits method (VPGA 4) – reference to use of profits method for certain trade-related property valuations, with non-exhaustive list of properties including self-storage and flexi-workspace. * Sustainability and ESG brought to the forefront:

Answer 47

Professional Standard. These are **MANDATORY**.

Answer 48

1. PS1 – **Compliance** with **standards** and **practice statements** where a written valuation is provided. 2. PS2 – **Ethics**, **Competency**, **Objectivity**, **Disclosures**.

Answer 49

It states when a valuation must be **Red Book Compliant**.

Answer 50

1. When providing an **Agency** Service in anticipation of receiving instruction to **dispose** of, or **acquire** 2. When valuation advice is provided in anticipation of giving evidence as an **Expert Witness** 3. Performing a **Statutory Function** 4. Providing Valuation to a Client for **Internal Purposes** - no **liability** 5. When expressly provided in preparation for or during the course of negotiations or litigation

Answer 51

1. Compliance with RICS Global **Rules of Conduct** 2. Act **objectively** and independently – not influenced by situation that could threaten objectivity. 3. Must act with **professional scepticism **– review data before relying on it. 4. Reiterates rules surrounding **conflicts of interest**. 5. Comply with minimum **Terms of Engagement** (VPS 1) and understand client’s requirements. 6. Must demonstrate professional competence.

Answer 52

Rules Objectively Scepticism Conflicts Terms of engagement

Answer 53

* It refers to a policy of rotating the valuing firm or valuing member, in order to maintain **objectivity**. * The RICS **recommends** that this is done. * The **time period** of rotation will depend on **frequency** of valuation, control/review procedure in place such as ‘valuation panels’, and good business practice. * It is **not mandatory**, but considered good practice to rotate valuers at intervals not **exceeding 7 years**.

Answer 54

Sustainability A holistic approach to long-term value creation that considers the environment, society, and economy. It aims to reduce negative environmental impacts and ensure that business practices don't harm future generations. ESG A framework that measures a company's performance in three areas: environmental, social, and governance. It's used by investors and other stakeholders to assess a company's impact and risk. It is MANDATORY.

Answer 55

1. VPS1 – Terms of Engagement 2. VPS2 – Inspections, Investigations and Records 3. VPS3 – Valuation Reports 4. VPS4 – Bases of Value, Assumptions and Special Assumptions 5. VPS5 – Valuation Approaches and Methods

Answer 56

Terms of Engagement (IVS 101 Scope of Work)

Answer 57

These minimum matters must be confirmed in writing to the client PRIOR to commencing Red Book Valuation.

Answer 58

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**(s) e. **Currency** f. **Purpose** of the valuation g. **Basis** of value adopted. h. **Valuation date** i. Extent of investigations j. Nature and source of information relied upon k. All assumptions and **special assumptions** to be made l. Format of the report m. **Restrictions on use**, distribution and publication of the report n. **Confirmation** that the valuation will be undertaken in accordance with the IVS/**Red Book Compliance.** o. **Fee Basis** p. **Complaints Handling Procedure** to be made available. q. Statement that the valuation may be subject to compliance by RICS. r. Limitation on liability agreed.

Answer 59

An assumption is made where it is **reasonable** for the **valuer** to **accept** that something is **true** without the need for **specific investigation**. E.g. assumed **condition of property.**

Answer 60

* A special assumption is a supposition that is taken to be true and accepted as fact even though it is not true. E.g. planning consent/vacant possession. * Assumptions and special assumptions **must be agreed in writing at commencement of the instruction.**

Answer 61

The valuer must take **reasonable** **steps** to **verify** the **information** **relied** on for a valuation to ensure the information is professionally **adequate** for its purpose.

Answer 62

Yes, these can be considered a Red Book compliant valuation (unless for reasons set out in PS1). A valuer must consider these 4 factors: 1. Agree the nature of the **restriction** in writing in the **Terms of Engagement**. 2. **Possible valuation implications** of the restriction confirmed in writing before the value is reported. 3. Valuer should consider whether the **restriction** is **reasonable** with regard to the purpose of the valuation. 4. **Restriction** must be **referred to in the report**.

Answer 63

In accordance with VPS2 of the Red Book, it is not advised to revalue without re-inspection. HOWEVER, you can re-value a property without re-inspection providing you as the valuer are satisfied there has been **no material change** to the property or nature of its location that will impact the property’s value. This should be **stated in the Terms of Engagement**.

Answer 64

1. **Identification** and **Status** of valuer 2. **Client** and any other intended users 3. **Purpose** of valuation 4. **assets** to be valued 5. **Basis** of **value** 6. **Valuation Date** 7. Extent of investigation 8. Nature and **source** of **information** relied upon 9. Assumptions and Special assumptions 10. Restrictions on use, distribution and publication 11. Instruction undertaken in accordance with IVS standards 12. **Valuation approach** and rationale 13. **Valuation figure**(s) 14. **Date of valuation report** 15. Comment on **market uncertainty** 16. Statement setting out limitations on liability that have been agreed.

Answer 65

Yes according to **VPS3** of the Red Book, a valuer must sign a valuation report and make clear that they are objectively able to value the property. The RICS does not allow a firm to sign a valuation, it is signed off by an individual.

Answer 66

- Mark the report draft - It is for **internal** purposes only – it **cannot be relied** upon, and it cannot be published/disclosed. - Any **changes** to the **preliminary** valuation must be **noted** on file and **reasons provided.** - Any **additional information** supplied by the client as a **result** of discussing the **draft** report must be **stated** in the report.

Answer 67

Bases of Value, **Assumptions** and **Special Assumptions**

Answer 68

1. Market Value 2. Market Rent 3. Fair Value 4. Investment Value (or worth) 5. Equitable Value 6. Liquidation Value

Answer 69

Valuation Approaches and Methods (IVS 105).

Answer 70

* Valuers are responsible for choosing and justifying their valuation approach. * In some cases, more than one approach might be appropriate. * It outlines market, income and cost approach.

Answer 71

Valuation Practice Guidance Applications – VPGAs

Answer 72

10 VPGAs (18 VPGAs in National Supplement)

Answer 73

VPGA 1 – Valuation for inclusion in financial accounts VPGA 2 – Valuation for Secured Lending

Answer 74

Valuation for **inclusion** in **financial accounts**. **Note**: Fair Value is adopted for IFRS accounts. ‘Professional standards’ must be adhered to.

Answer 75

Valuation for Secured Lending.

Answer 76

* Any **previous involvement** with prospective borrower/property to be disclosed to the lender. * Previous involvement usually mean within past 2 years. * If previous involvement creates a **conflict** that **cannot be avoided**, the instruction should be **declined**. * It is valuer’s responsibility to decide whether to accept/decline instruction.

Answer 77

* Longstanding **professional** **relationship** with prospective borrower/owner. * When the **valuer** will g**ain a fee** from **introducing** the **transaction** to the **lender**. * If there is a **financial interest** in the property holding, or prospective borrower. * When the **valuer** is **retained** to act in the **disposal** or letting of the completed development on the subject property.

Answer 78

These should be recorded in the Terms of Engagement and in the Valuation Report.

Answer 79

- Disclosure of Involvement identified in ToE. If valuer has no involvement, statement to that effect is to be made. - Valuation Methodology Adopted - If there is a Recent transaction of the Property - the extent to which that information has been accepted as evidence of value. - Comment on the suitability for Secured Lending Purposes - Potential and demand for alternative uses, or any foreseeable changes in current mode of occupation. - Disrepair or deleterious or harmful materials - Environmental or economic designation - Environmental issues – flood risk, historic contamination. - Past, current and future trends – volatility in the market - Current marketability of the interest and whether this is likely to be sustainable over the life of the loan. - Details of comparable transactions relied upon. - Sustainability and ESG factors – impact market influence

Answer 80

Difference between reported market value with AND without special assumption.

Answer 81

Special assumptions that may arise: - Planning consent - All necessary licences and consents are in place - Property changed in a defined way (e.g. removal of equipment) - Property is vacant.

Answer 82

- Published 2018, but effective 2019. - It ‘augments’ the Red Book Global requirements. - It contains 18 VPGAs to become more user-friendly. - For UK jurisdiction - Advice is not mandatory, but guidance.

Answer 83

1. Introduction 2. UK Professional and Valuation Standards – mandatory – 3 VPS o UK VPS 1 – ToE Red Book Compliance o UK VPS 2 – ToE Supplementary provisions in Scotland o UK VPS 3 – Regulated purpose valuations – supplementary requirements 3. UK Valuation Practice Guidance Applications – advisory o 18 VPGAs 4. Summary of changes from Red Book UK 2014 (revised 2015).

Answer 84

1. VPGA 1 – Valuation for financial reporting 10. VPGA 10 – Valuation for commercial secured lending purposes 11. VPGA 11 – Valuation for residential mortgage purposes

Answer 85

VPS3 of the UK National Supplement covers Regulated Purpose Valuations. These are valuations that are relied upon by third parties who did not commission the valuation and they are subject to valuation monitoring. These may include valuation for 5 purposes: * Financial Reporting (company accounts) * Stock Exchange Listings * Takeovers and Mergers * Collective Investment Schemes * Unregulated Property Unit Trusts

Answer 86

No these are not regulated purpose valuations as they are not relied upon by a third party, or in public interest.

Answer 87

- RICS commissioned Independent Review of Real Estate Investment Valuations - Undertaken by Peter Gray - Review made 13 recommendations to increase trust in profession and ensure quality in valuation for clients

Answer 88

o Separation of valuation from advisory activities in respect of use of data o Developing time-specific mandatory rotation process for valuers o Developing Valuation Compliance Officer role for firms. o Independent review of real estate investment valuations o Review of post-qualification requirements for valuers o Ensure diverse and inclusive valuation profession

Answer 89

Issued a RIC Global Professional Standard ‘Sustainability and ESG in commercial property valuation and strategic advice’ (2021) Provides terms and factors relating to terms of engagement, inspection, reporting and valuation purposes. It also touches on relevant sustainability characteristics, considerations and risk which should be analysed when viewing comparable evidence.

Answer 90

The value arising from any expectation that future circumstances affecting the property may change. E.g. planning permission achieved where no planning permission exists at present time, or marriage value from merging two sites.

Answer 91

- Created by a merger of interests – can be physical or tenurial - Typical negotiated outcome is to split marriage value created 50:50, or divide it pro-rata to value of individual interest.

Answer 92

£0 - £150,000------------------- 0% £150,001 - £250,000 --------- 2% Over £250,000------------------ 5%

Answer 93

£0 - £250,000 -------------------0% £250,0001 - £925,000 ---------5% £925,001 - £1,500,000 --------10% Over £1,500,000----------------12%

Answer 94

It is a tax payable by the purchaser on a land or property transaction in England and N Ireland.

Answer 95

Charged in incremental basis at different rates depending on portion of the purchase price that falls into each rate band.

Answer 96

- Scotland – Land and Building Transaction Tax (LBTT) - Wales – Land Transaction Tax (LTT)

Answer 97

It is calculated by taking the NPV of the lease, and applying the following bands: NPV Up to £150,000--------- 0% NPV of £150,001 - £5,000,000--------- 1% NPV over £5,000,000--------- 2% NPV is the total rent payable over the term of the lease, reduce by an annualised discount rate. Break clauses are excluded from the valuation.

Answer 98

May be generated when the transaction is not at arm’s length and there is a special purchaser for the property because the special purchaser has advantages arising from its ownership that would not be available to other buyers in a market. E.g. tenant purchasing freehold interest.

Answer 99

* For building insurance purposes * Cost to reinstate building without a profit * Use BCIS (adopt GIA for commercial, GEA or resi) * Add VAT, demolition costs, professional fees, planning and building reg fees, inflation allowance. * It is NOT a ‘written opinion of value’ – therefore Red Book Compliance is not required.

Answer 100

SDLT – prevailing rate Agent Fees – 1% of purchase price plus VAT Solicitor Fees – 0.5% of purchase price plus VAT

Answer 101

Devaluation of headline rent, taking into account rent-free periods.

Answer 102

Rent that is payable after any incentive (such as rent-free period) has expired.

Answer 103

- Used for COMPARISON of retail properties to create a unit of comparison for different size buildings. - The rental value of the property REDUCES away from the street.

Answer 104

West end office: 4.00% City of London office: 4.75% Prime industrial: 5.25% Prime High Street retail: 6.75% Good secondary: 9.00% Secondary: 12% Resi Zone 2 prime: 4.15% Zone 3-6 secondary: 4.5%

Answer 105

Liability is a state of being responsible for something, such as a debt, financial obligation, or legal risk.

Answer 106

PS - Professional standard VPS - Valuation Professional standards

Valuation COPY Flashcards

(132 cards)