Valuation (L2) Flashcards

Question

Talk to me about Nature and extent of the valuer’s work – including investigations – and any limitations thereon

Answer 1

1. A short time timescale - for reporting may result in not all of the facts being established 2. A client may require a drive-by, desk-top or pavement valuation. 3. Restrictions to value - Instructions may be accepted if the restriction is considered reasonable. 4. The instruction should be declined if the valuer considers that it is not possible to provide a valuation on the basis of restricted information. 5. It must be made clear when confirming instructions that the restriction, any resulting assumptions and the impact on the accuracy of the valuation will be referred to in the Report.

Answer 2

- Failure to comply can result in disciplinary action, fixed penalty, refresher training, suspension for a period of time or even expungement (expulsion).

Answer 3

If you deviate from a valuation practice guidance application, it could be seen a contributory factor in a negligence case. You will be required to explain your reasoning for deviation

Answer 4

- Mandatory Application - Compliance with PS 1, PS 2 within these global standards is mandatory for RICS members/ firm involved in undertaking or supervising valuation services by the provision of written valuation advice - Notwithstanding the exceptions to the VPSs covered at PS 1 section 5

Answer 5

The standards do not: - instruct on how to value - prescribe a particular report format - override specific mandatory standards in individual jurisdictions

Answer 6

1. The overall purpose is to provide consistency, accuracy, objectivity and transparency in valuations. 2. To assure users that a valuation provided anywhere in the world is in accordance with the highest professional standards The standards set out procedural rules and guidance which: (a) impose mandatory obligations regarding competence, objectivity and transparency (b) establish a framework for uniformity and best practice (c) expressly comply with the RICS Rules of Conduct

Answer 7

Property exposed to market in most appropriate way at the most appropriate time.

Answer 8

No you do not need to comply, however compliance with PS1 and PS2, and VPS 1-6 is advised and should comply for BEST PRACTICE

Answer 9

PS 1 = Compliance with standards where a written valuation is provided - All members, whether practising individually or within an RICS-regulated, who provide a written valuation are required to comply with the international standards and RICS global standards. - Members must also comply with the requirements of RICS Valuer Registration Scheme (VRS) - Departure – If for any reason compliance is not possible, this must be clearly disclosed/justified in the report. - Exceptions - Sets out all valuations by RICS members must comply with IVS and the Red Book, unless an exception applies.

Answer 10

PS 1 and PS 2 are mandatory for all written red book valuations The mandatory application of VPS 1 to 6 may be unsuitable or inappropriate for purposes, such as: - Internal Purposes - Expert witness, agency/brokerage, - Statutory purposes ( business rates, tax), - Negotiation/ litigation

Answer 11

- For internal purposes it is not mandatory, - but to maintain best practice I ensured I still adhered to the Red Book and all professional/ethical standards where possible.

Answer 12

May be possible but would have to be in agreement with client beforehand – Documented under TOE + valuation report

Answer 13

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 proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

Answer 14

- Must be carried out by/under the supervision of a RICS Registered Valuer who accepts responsibility for it. This valuer must also sign off the document. - Valuer must have sufficient knowledge and skill to carry of the valuation of that specific market and location. Needs to be competent. The valuer must act independently, objectivity, confidentiality and the identification and management of conflict of interest.

Answer 15

PS 2: Ethics, competency, objectivity and disclosures Fundamental to the integrity of the valuation process, members practising as valuers must have appropriate experience, skill and judgment for the task & must act in a professional manner free from any influence, bias or conflict of interest Members must have: - market knowledge - the valuation skills to undertake the valuation competently - And comply with the RICS Valuer Registration Scheme (VRS) requirements

Answer 16

(a) Identification and status of the responsible valuer (b) Identification of the client(s) (c) Identification of any other intended users (d) Identification of the asset(s) or liability(ies) being valued (e) Valuation (financial) currency (f) Purpose of the valuation (g) Basis(es) of value adopted (h) Valuation date (i) Nature and extent of the valuer's work - including investigations - and any limitations thereon (j) Nature and source(s) of information upon which the valuer will rely (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 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 will be made available on request (r) A statement setting out any limitations on liability that have been agreed. (s) Consideration of any significant environmental, social and governance (ESG) factors

Answer 17

Market value is what the market would pay and worth is individual value to an investor

Answer 18

- Existing use value, - Existing value for social housing

Answer 19

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. - Usually no difference in the reported figure between Fair Value and Market Value

Answer 20

1. Planning consent has or will be granted 2. Proposed development has/will been completed in accordance with a defined plan and specification 3. The property has been changed in defined way 4. The property is vacant (when occupied at the valuation date) 5. The property is let on defined terms (when vacant at the valuation date) 6. That synergistic value is created where one or more parties has as a special interest

Answer 21

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 a market.

Answer 22

An assumption is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation or verification. - Any such assumption must be reasonable and relevant…….

Answer 23

The estimated amount for which an interest in property should be leased on the valuation date between a willing lessor and a willing lessee in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

Answer 24

The highest and best use of an asset - that is possible, legally permissible and financially feasible (can take development potential into account if so) - Market Value Ignores price distortions caused by special value or synergistic value (marriage value

Answer 25

The overall valuation approach is usually classified into one of three main categories: 1. the market approach (comparable method) 2. the income approach (investment method / DCF) 3. the cost approach (contractors method / DRC)

Answer 26

An additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values.

Answer 27

- Market Value - Market Rent - Investment Value (or worth) - Fair Value (under International Financial Reporting Standards)

Answer 28

- The property has been reinstated - Valuing as a cleared site with development permission for the existing use - Refurbishment or redevelopment for a different use

Answer 29

The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties

Answer 30

An amount that reflects particular attributes of an asset that are only of value to a special purchaser

Answer 31

These must always have regard to - the nature of the asset (or liability) - the purpose, intended use and context of the particular assignment - any statutory or other mandatory requirements applicable in the jurisdiction concerned.

Answer 32

* If the property has been reinstated * Valuing as a cleared site with development permission for the existing use * Refurbishment or redevelopment for a different use

Answer 33

- A bases of valuation is a statement of the fundamental measurement assumptions of a valuation. - A method of valuation is the technique employed. E.g Comparable, Investment, Residual etc

Answer 34

1) Title - correct title is shown and property is free from unusual issues 2) Condition of buildings- Good condition of areas covered or not shown would have material defect 3) Services – All in working order 4) Planning (Zoning)- Full planning permission for its current use, and wouldn’t be adversely affected by planning proposals 5) Contamination and hazardous substances 6) Environmental matters distinguishing between: (a) Natural environmental constraints (b) Non-natural constraints (contamination and hazardous substances). (c) Sustainability – assessing the implications for value

Answer 35

A special assumption is made by the valuer where an assumption either assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant in a transaction on that valuation date. Effectively - A fact that is not true, but is used by agreement with the client to create an "as if" valuation

Answer 36

A proper record must be kept of inspections and investigations, and of other key inputs, in an appropriate business format

Answer 37

Existing Use Value (EUV- UK VPGA 6) = The value of property for the purpose for which it is currently used, assuming that it can continue to be so used, disregarding any hope value for alternative uses Existing Use Value for Social Housing (EUV-SH) *Not relevant for us.

Answer 38

The value of an asset to the owner or a prospective owner for individual investment or operational objectives.

Answer 39

- All assumptions and special assumptions must be agreed with the client before reporting - the Report must make reference to the higher degree of uncertainty

Answer 40

VPS 3 = Valuation approaches and methods Usually classified into the market approach, income approach, or cost approach

Answer 41

- Inspections and investigations must 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.

Answer 42

The term forced sale value must not be used. - It was abolished some time ago but where a valuation may need to reflect an actual or anticipated marketing constraint, details of the constraint e.g. short period of marketing must be agreed and set out in the terms of engagement.

Answer 43

- NEW IN 2025 - IVS defines a valuation model as ‘a quantitative implementation of a method in whole or in part that converts inputs into outputs used in the development of a value’. - This is distinct from a valuation method, defined as ‘within a valuation approach, a specific technique to conclude a value’.

Answer 44

VPS 5 = Valuation Models.

Answer 45

Automated Valuation Models (AVMs) are more common in residential property - an AVM is a software programme that uses mathematical and statistical modelling to value property (without inspecting etc) - if you are declaring Residential Valuations in your APC submissions you are advised to have a view on the advantages and disadvantages of AVMs **However this is more for Residential Valuations – don’t need to know in depth

Answer 46

Valuation Reports

Answer 47

- A Valuation Report issued in the UK and stated as being in accordance with the RICS Red Book - Information on Report Content - Will be taken to mean in accordance with the Red Book Global Standards plus this UK national supplement.

Answer 48

- The instructions (client, purpose, asset, interest, basis, and valuation date) ToE and Valuation report must align - The assumptions and approach used - The opinion of value and supporting reasoning - Any limitations, uncertainty, or compliance statements

Answer 49

- Client name - Valuation purpose - Valuation subject - Property info - Basis of value - Date of valuation report - Status of valuer - Currency - Assumptions / special assumptions - Departures - Source of info - Valuation approach - Competency - Restrictions on publications

Answer 50

- Conflict of interest checks - Terms of Engagement - Inspection note etc - Planning, rating and environmental searches - Comparables and analysis - Valuation calculation with rationale - Report (stating opinion of value) **EFFECTIVELY VALUATION REPORT IS WITHIN VALUATION FILES

Answer 51

- A draft valuation can be discussed with the client but the valuer is not to be influenced by the client in any way in respect of the final valuation figure stated in the report. - Any additional information supplied by the client as a result of the discussion regarding the draft report must be stated in the report.

Answer 52

General duty to treat information relating to a client as confidential, where it is not in the public domain. Limitation & Non Publication

Answer 53

Valuations relied on by 3rd parties or there is a public interest who have not commissioned the valuation - Carried out for certain statutory or regulatory purposes, where there is a higher risk of conflict of interest and therefore extra safeguards are required by the Red Book. E.g for Financial statements, Stock Exchange listing, Takeovers & mergers

Answer 54

This is where the public has an interest, or where third parties may rely. - Financial statements, - Stock Exchange listing, - Takeovers & mergers - Collective investment schemes, - Unregulated property unit trust.

Answer 55

(a) one or more of the properties have been acquired with the last 12 months; and (b) the valuer or firm has received an introductory fee or negotiated the purchase

Answer 56

- Check with the client or managing agent if there were any material changes to the property since the last inspection. - If there was, then definitely re-inspect, but if not then maybe not needed. Workmans best practice is to inspect the property at least once a year, for multi-tenanted properties this would typically be every 6 months.

Answer 57

A valuation carried out to comply with financial reporting requirements. - The most common framework is IFRS (International Financial Reporting Standards) or UK GAAP. - It is a Regulated Purpose Valuation (RPV) under the Red Book.

Answer 58

1. Existing Use Value (EVU) – UK only - often used in UK public sector accounts 2. Fair Value – Global - equivalent to Market Value (Red Book definition) 3. Depreciated Replacement Cost (DRC) - for specialised assets with no active market (e.g., hospitals, schools)

Answer 59

(a) IFRS and (b) UK and Ireland Generally Accepted Accounting Practice (UK GAAP) Publicly listed companies in the UK are required to apply IFRS - others have a choice between the two The valuer’s role will be usually to provide Fair Value

Answer 60

Existing use value used when there is no expectation of that use changing in the forseeable future. (Is sometimes market value)

Answer 61

If the property is operational – Value of site or property in its existing use – different to market value on the expectation to gain planning permission to develop. (Also include that this basis may be used if it possible to get planning permission on the land)

Answer 62

- Not suitable for Red Book Compliant valuation for secured lending - Can be used to Calculate Market Rent for specialised properties in valuations for financial statements

Answer 63

To value specialised properties rarely sold on the open market – DRC is current cost to replacing an asset with its modern equivalent asset, less deductions for physical deterioration and all relevant forms of obsolescence and optimisation.

Answer 64

When direct market evidence is limited or unavailable (SPECIALISED PROPS E.G. LIGHTHOUSES, SCHOOLS) - Used for owner-occupier - Accounts purposes for specialised prop - Rating valuations for specialised prop

Answer 65

- Used to value specialised properties rarely sold on open market. A method of valuation used when there is no market evidence because the property is specialised.

Answer 66

A property that is rarely, if ever, sold in the market, except through a sale of the business or entity of which it is part, due specialised nature and design, its configuration, size, location, or otherwise. E.g a football stadium

Answer 67

The current cost of replacing an asset with its modern equivalent asset, less deductions for physical deterioration and all relevant forms of obsolescence and optimisation.

Answer 68

All valuations are professional opinions - on a stated basis with assumptions or special assumptions - ……. a valuation is not a fact. A failure to draw attention to material uncertainty could give the impression that - greater weight could be attached to the opinion than was warranted The report would be misleading.

Answer 69

1) Check competency to do so 2) Advise limited information can affect the certainty of the valuation – Note in TOE and valuation report 3) Ask for all relevant plans and documents to assist

Answer 70

(a) The asset or liability may have characteristics that make it difficult to value - it may be unusual or even unique - potential planning permission (b) Limited or restricted information (c) Disrupted markets - unforeseen financial, macro-economic, legal, political or natural events

Answer 71

1. Comparative 2. Investment 3. Residual 4. Profits / Accounts 5. Contractor’s / Depreciated Replacement Cost

Answer 72

- most reliable method of valuation - primary method of valuation and should be used whenever possible

Answer 73

Rent received OR market rent x YP @ chosen yield = Market value Get rent and yield from comparables

Answer 74

- Local letting agents - In house data bases - External data bases e.g. Costar, EGI

Answer 75

- the capital and rental valuation of residential property, and - the rental valuation of retail, office and industrial premises - the capital value of owner-occupied retail, office and industrial premises (when the market is dominated by owner-occupiers)

Answer 76

(a) physical characteristics (b) location (c) use (d) tenure (and lease terms if appropriate) (e) time scale (f) Comparables may be analysed- unit of comparison i.e. rental price or capital price per square metre

Answer 77

- Features other than hierarchy i.e. use, size, location, tenure, condition etc - Attaching more weight to the evidence most similar to the subject property

Answer 78

- Depends on the state of the market and the location i.e. declining market no comps. - Industry norm is 6 – 12 months

Answer 79

1) Search and select comparables 2) Verify details and analyse headline rent to give a net effective rent

Answer 80

Enough comparable to establish a trend – As many as can be obtained

Answer 81

- the seller or lessor not being willing - the transaction not being at arm’s length - the property not being subject to proper marketing - a purchaser or tenant having a special interest - one or both parties not acting knowledgeably, prudently and without compulsion **There is no ‘set’ number of comparables required. Need enough comparables to establish a trend

Answer 82

- non-transactional evidence (properties on the market) - transactional evidence (sold properties)

Answer 83

- Own / office records - For Sale and To Let boards - Agents / Valuers (must get the right contacts and ask the right questions) - Land Registry - various free web-sites for residential transactions - Estates Gazette Interactive (EGI) - Focus / Co-Star

Answer 84

Refers to the practice of dividing a building or space into distinct functional areas for measurement and reporting purposes.

Answer 85

Valuation: Principles into Practice (6th Edition, 2008) - in the Chapter on Lease Renewals and Rent Reviews of Commercial Propertysuggests the following hierarchy of evidence: (a) open market lettings (b) lease renewals (c) rent reviews (d) independent expert’s determination (e) arbitrator’s awards OML is more favourable as with a lease renewal, a tenant can walk. Third Party determination can be uncertain

Answer 86

Adjustments made to comparable evidence to value a property may be referred to as interpolation and extrapolation - Extrapolation acceptable when interpolation not possible

Answer 87

- Is calculating or, plotting on a graph, a value that lies outside two extreme points i.e. working outside 2 points of value <£5 - >£7psf. Rising market = evidence plus extra and falling market = evidence plus discount

Answer 88

Calculating a value that lies between two extreme points E.g. Calculation a rent in-between £25 and £29 per sqft

Answer 89

Zoning is NOT a method of measurement. This is a common mistake that candidates make, so make sure you do not mention it in the Measurement competency. - It is a valuation technique.

Answer 90

Based on the principle that the retail frontage is worth more than the ancillary areas. This is applied through the principle of ‘halving back’, meaning that each subsequent zone is worth half of the zone before.  For example: Zone A = A/1 Zone B = A/2, i.e. Zone B is half of Zone A Zone C = A/4, i.e. Zone C is a quarter of Zone A (or half of Zone B) Zone D (or remainder) = A/8, i.e. Zone D is 1/8 of Zone A (or half of Zone C)

Answer 91

As the market uses zoning, it allows easier comparison. - It is not required for department stores or very large units - Can be measured on an overall basis once ground level exceeds 10k sqft

Answer 92

- Zoning is usually optional. - Retail units are often simple, open-plan spaces. - If all comparables use NIA without zoning, it is acceptable not to zone, provided the methodology is transparent.

Answer 93

To place a value on a shop frontage which is the most valuable – ITZA (in terms of zone A) OR To analyse retail space for different frontage to depth ratios

Answer 94

Return frontage is the length of a shop's window display or exposure along the side street (perpendicular to the main street), usually in addition to the main street frontage.

Answer 95

1. Increased visibility: Return frontage gives a shop dual exposure, often increasing footfall and visibility. 2. Display space: More window display area may improve a retailer's trading potential. 3. Rental impact: Shops with return frontage often command higher rents per square metre than similar shops without one.

Answer 96

This maybe when a shop has two main frontages

Answer 97

1. A percentage uplift for the depth of the return. Units must have a higher value with a return frontage. It would depends how far the zone is but 5% is a normal uplift as an addition 2. All of a unit becoming Zone A if both frontages have equal pedestrian flow (could have a reduction for excessive Zone A) 3. A percentage reduction for lack of internal space for shelving and display racks

Answer 98

Refers to a property that faces a road or street on two different sides, allowing for customer access and visibility from both streets Can result in: halving-back from both frontages at the same or different Zone A rate(s)

Answer 99

When the property zones reflect physical changes in the property i.e. steps.

Answer 100

It is used when there is an income stream to value. The rental income is capitalised to give you the capital value.

Answer 101

Used when there is an income stream to value. Used to value shops, offices, industrial and warehouse properties that are; 1. Let as investments 2. Owner occupied 3. Vacant Where the majority of comparables are 4. rents (lettings, rent reviews, lease renewals), and 5. investment transactions

Answer 102

Market Rent (Net of Outgoings) x Years Purchase (YP) = Market Value

Answer 103

- The tenant is responsible for all repairs and insurance Therefore, no outgoings need to be deducted *usually prime property let to single tenant is let on FRI terms

Answer 104

Outgoings will need to be deducted to achieve the overall market rent This is usually: - repairs - insurance - management In some cases, additional outgoings may have to be deducted when services are provided inclusive of the rent (sometimes with fully serviced office suites and furnished residential lettings) - internal decorations - water charge - electricity - gas

Answer 105

A capitalisation factor used in valuation to convert a stream of income (usually annual rent) into a capital value. - YP represents the number of years' income that a purchaser is willing to pay up front to acquire the right to receive that income stream - Effectively the yield applied to the term (the lease length) of an investment. E.g £ 90,000 / 3.600 sq ft = £25.00 per sq. ft (£242.19 per sq m) £1,500,000 / £90,000 = 16.6667 YP 100 /16.6667 = 6% yield

Answer 106

Market rent (net of outgoings e.g. external repairs, insurance) X YP = Market Value

Answer 107

Included within the all-risk yield calculation

Answer 108

The Years Purchase (YP) in perpetuity is calculated as 100/Yield E.g 100/6% = 16.6667 YP in Perpetuity In other words - investment sold at 16.6667 times the market rent - the investor will recoup the capital invested in 16.6667 years

Answer 109

- YP in Perp - A capitalisation factor used in property valuation to convert a constant annual income into a capital value, on the assumption that the income continues forever (i.e., in perpetuity). This is the yield applied to the reversionary value, which is assumed to continue indefinitely after the lease expires.

Answer 110

A yield is the rate of return on an investment property, expressed as a percentage of capital value.

Answer 111

Accounts for all risks of the investment Also known as the market yield or capitalisation rate

Answer 112

All Risks Yield – Rate at which market capitalises the income

Answer 113

Constructing a yield – looking at gilts and adding a risk premium (look at market/property risks and deduct growth)

Answer 114

1. the construction (age, design, specification) 2. the quality of the tenant’s covenant strength 3. the amount of rent (i.e. market-rented, under-rented, over-rented) 4. the unexpired lease term 5. the other lease terms 6. anticipated rental growth (location)

Answer 115

Included within the all-risk yield calculation

Answer 116

Annual rent / prop value X 100 = Yield

Answer 117

Higher risk = higher yield e.g. use of prop, lease terms, voids, quality of location or covenant

Answer 118

Gross yield capitalisation = Market value Net yield capitalisation = Gross acquisition price

Answer 119

The Residual method is used to value land and properties with development, redevelopment and refurbishment potential - We would use it when it is not possible to value by comparison

Answer 120

Value of completed development Less development costs (E.g Demolition, construction costs, construction, finance, contingency) Less developers’ profit = Land Value

Answer 121

The basic form of a Residual valuation is as follows: Market Value of Completed Development LESS Developers Costs (Demolition, Construction Construction Fees Cost of Finance Contingency Agent’s / Legal Fees – (1.8%) Acquisition Costs ) LESS Developer’s Profit (15-20& GDV) Market Value (Residual Site Value) £

Answer 122

Residual land valuation

Answer 123

Comparable method but if no comparables then residual

Answer 124

- Site purchase - Compound interest - Total construction costs - interest taken at half of costs over length of the build programme - Holding costs to cover voids until disposal - compound interest on a straight line basis

Answer 125

No, I utilised the COMPARABLE method to ascertain the market rent value, which I then capitalised this at the appropriate yield in the RESIDUAL method

Answer 126

- Used the RICS building cost information service (BCIS), which is usually based on a GEA basis

Answer 127

10% of market rent

Answer 128

10% approx. of building costs - Got this from a chartered surveyor

Answer 129

- An allowance for any changes that may occur in the any of the building costs and interest. - For a new development or a redevelopment, 1% to 5% can be used. - For refurbishment / conversion, there is more risk and a contingency of 5% to 10% is usual

Answer 130

Can be calculated by: 1) a percentage of total cost (22% to 25%*) 2) a percentage of gross development value (15% to 17%). - Depends upon risk; not set in stone.

Answer 131

- Agents fees 1% - Sols fees 0.5% - VAT 0.3% effectively 1.8% for both

Answer 132

From 17th March 2016 for Commercial property this is: - 0% on First £150,000 - 2% on Next £100,000 = - 5% above £250,000

Answer 133

A valuation approach used to assess the value of trading properties where: 1. There is no open market rental evidence, AND 2. The value is linked to the ability of the business to generate profit

Answer 134

Multipled the market rent by YP perpetuity at 5% which is 100/yield (5%)

Answer 135

An accurate way to estimate the interest is calculate it for the whole debt incurred over the total development period and then half it. E.g if Finance will be at 7%. - It is assumed that the costs are incurred in equal monthly tranches (straight line) over the pre-construction and construction periods & interest is paid monthly at the effective rate of 7% p.a.

Answer 136

1/3 of the increase in value of the development land resulting from the access given - This is the industry standard - Leading case: Stokes v Cambridge ruled that 1/3 of the uplift in value the ransom strip adds to the development

Answer 137

Land that gives access to development land - can’t access development without using that land - It has ransom value (value attributed to the ransom strip)

Answer 138

If you cannot; 1. Value by direct capital comparison if possible, or, 2. Use the investment method Always try to use COMPARABLE, or then INVESTMENT before Used to measure LEISURE properties

Answer 139

1) Turnover LESS costs of generating that turnover = Net operating profit 2) Capitalise the net operating profit at the chosen yield to reach the market value Can be expressed as the EBITDA - Capitalised at appropriate yield to achieve market value - Cross check with comparables if possible

Answer 140

Turnover (net of VAT) Less Costs of generating the Turnover (purchases, wages, heating/lighting, repairs & decorations, insurance, rates and general expenses). = Net Operating Profit (Which is capitalised at appropriate YP rate (chosen by comparables))

Answer 141

- Amusement arcades - Amusement and theme parks - Bingo clubs - Bowling centres - Casinos - Cinemas - Golf courses Etc.............

Answer 142

Value of property depends on the profit generated from the business (NOT THE BUILDING/LOCATION)

Answer 143

A % of the net operating profit to arrive at market rent - Usually 50%

Answer 144

The analysis of accounts (profits method)

Answer 145

Accurate and audited accounts (last 3 years if poss) - Use estimates (business plan) if new business - Adjust for maturity for business + any exceptional items of expenditure

Answer 146

- Properties which do not usually change hands on the Market (Specialised Properties) - Inclusion in Company Accounts and other Financial Statements (Asset Valuations) - Compulsory Purchase (Rule 5) - Rating - Non-Specialised Properties when there is no direct / inconclusive comparable evidence This is why it is sometimes called the Contractor’s Test

Answer 147

Value of land in its existing use PLUS current cost of replacing building PLUS fees LESS discount for depreciation and obsolescence (use BCIS and judgement) = Value as existing

Answer 148

To value specialised properties that are rarely sold on the open market – DRC is current cost to replacing an asset with its modern equivalent asset, less deductions for physical deterioration and all relevant forms of obsolescence and optimisation.

Answer 149

Upper floors and basements may be taken as a fraction of X or, - as a spot figure per square metre, depending upon the particular property and the comparable evidence. - X / 10 is commonly used for first floor accommodation be it retail space or storage

Answer 150

Compound interest is when: - interest is added to invested cash, and - interest is also added to any interest previously paid. E.g Example 1 If £1 is invested for 5 years at 3% per annum interest: (1 + 0.03)5 = 1.035 = 1.1593 = £1.16

Answer 151

1. Demolition 2. Shoring up and weather-protection of adjoining buildings 3. Rebuilding in accordance with current Building Regulations 4. Professional Fees

Answer 152

AS A METHOD OF LAST RESORT When direct market evidence is limited or unavailable (SPECIALISED PROPS E.G. LIGHTHOUSES, SCHOOLS) - Used for owner-occupier - Accounts purposes for specialised prop - Rating valuations for specialised prop

Answer 153

Initial yield assuming rent is paid in arrears (quarterly in advance gives a higher yield) * The stated (headline) annual interest rate. * Does not take compounding into account

Answer 154

* The true annual rate once compounding effects are included. * Shows the actual growth in one year. When interest is paid over a period of less than a year - the effective rate is the annual percentage rate (APR)

Answer 155

Money has a Time Value in that: - invested cash sums will increase, and - rental and capital values of property can grow If follows that if a known cash sum is to be received at a specific time in the future - if that sum were available today, it could be invested and thus provide a larger amount of cash on the future date - The same applies to the future value of a property

Answer 156

- Discounting is the reverse of compounding. - Discounting is the calculation of the amount of cash that needs to be invested today to provide the future amount over the time period at the applicable rate of interest (discount rate). - Whereas compounding is calculating how much a present sum of money will grow over time when interest is added.

Answer 157

Present value - Current value of a future sum of money or stream of cash flows given a specified rate of return - The correct worth of money (or income) you will receive in the future, adjusting for the fact that money avalaible now is worth more than same amount in the future

Answer 158

- It tells us the present value of £1 to be received each year, for a given number of years - Tells us present value of annual series of incomes – further in future = lower sum as it is against today’s terms - £1 in future = not worth £1 today because you can invest it

Answer 159

Gross present value - GPV worth to investor

Answer 160

Net present value - Sum of discounted cash flows of the project - Used to determine if an investment gives a positive return against target rate - If positive, investment exceeds target and vice versa

Answer 161

A placement of capital in expectation of deriving income or profit from its use.

Answer 162

Investment can be for - income - capital growth - or both Different investment opportunities have different levels of risk and difficulties

Answer 163

Liquidity, transfer costs and management required

Answer 164

Gilts, equities, properties

Answer 165

Included within the all-risk yield calculation

Answer 166

Can improve performance through proactive property management

Answer 167

Fixed capital, fixed return for a fixed period Can be govt or corporate

Answer 168

Gilt is short for Gilt Edged Security - UK Government bonds (long-term debt instruments) - Considered “risk-free” investments - Offer a fixed annual return (coupon) – E.g 3% - Traded in the open market — their yield reflects market sentiment and economic expectations

Answer 169

- Gilts are considered to be the ideal risk free premium - Is usually between 2½% and 4% depending upon economic conditions - Gilts (risk-free premium) + risk premium = yield - Since 2022, inflation + BoE base rates have risen sharply, leading to Higher gilt yields (to attract investors), and therefore, higher “risk-free” rates, so it is around 4.5%, reflecting current economic conditions rather than long-term equilibrium.

Answer 170

- Market risks (lack of rental growth - Specific risks (Cost of ownership, management)

Answer 171

Higher risk = higher yield e.g. use of prop, lease terms, voids, quality of location or covenant

Answer 172

Gilts (risk-free rate) + risk premium = yield

Answer 173

In valuation theory, the yield (or required rate of return) that an investor demands for a property investment is made up of: - Gilts (risk-free rate): the baseline return you’d get by investing in a safe UK government bond. E/g 3% - Risk premium (comprises market and specific risks): the extra return you need to justify taking on the risks of property (tenant default, vacancy, obsolescence, illiquidity). Example: o UK 10-year gilt yield = 3% (risk-free). o Property risk premium = 3% (dependant for location, covenant, lease risk, etc.). o Property yield = 6%.

Answer 174

- It is the rate of return investors can earn with no risk of losing money - Typically represented by the yield on UK government bonds (gilts) particularly the 10-year gilt yield. As of October 2025, the data indicates: - The UK 10-year gilt yield is approximately 4.55%

Answer 175

A risk premium is the extra return (yield or profit) an investor requires to compensate for taking on additional risk, compared with a “risk-free” or lower-risk investment.

Answer 176

- When the BoE raises the base rate, gilt yields usually rise, because investors demand more return to hold gilts instead of cash. - When the base rate falls, gilt yields often fall too

Answer 177

- Illiquidity of sale - Lack of rental growth - Yield shift - Locational, economic, physical and functional depreciation through structural change - Legislative change

Answer 178

- Covenant risk - Void risk - Cost of ownership and management - Differing lease structures (e.g. rent review structure, lease breaks)

Answer 179

Check if it was over/underrented - If it was underrented/below MV --> the new tenant may be willing to pay a premium. - If the rent is above market, premium is unlikely. - Capitalise profit rent (difference between passing and market rent) and YP (dual/dual-tax adjusted/single) rate

Answer 180

Sum paid by the landlord to the assignee to induce the tenant to enter into the lease

Answer 181

gilt yield + risk premium – growth rate otherwise Annual Rent/Capital Value ×100

Answer 182

Gross yield capitalisation = Market value Net yield capitalisation = Gross acquisitipn price

Answer 183

The gross yield is the rent expressed as a percentage of the purchase price (Market Value)

Answer 184

The net yield is the rent expressed as a percentage of the gross acquisition price - i.e. purchase price plus purchaser’s costs

Answer 185

A reversionary freehold is an investment that is let at a rent other than the Market Rent - Traditionally, under-rented - can be over-rented

Answer 186

* Purpose: To report the value of the property after accounting for the costs a purchaser would incur. * You’re deducting fees because you want the “amount the seller effectively receives” or the value net of transactional costs. Calculation is Net MV = Gross MV (GAP) - Purchasers Costs

Answer 187

- term and reversion - hardcore / layer

Answer 188

Term and reversion Hardcore / layer PREDOMINANTLY TERM AND REVERSION

Answer 189

Calculate market rent using comparable evidence Then: 1) Determine Market rent 2) Term - Capitalise passing rent until review (reversion) – PASSING RENT X YP @ X ARY% 3) Reversion - Take MR to be received at reversion and then capitalise into perpetuity @ higher ARY% 4) Defer this further at a PV of £1, for the period of the term 5) Add the term & reversion together to get MV NOTE: Reversion gets capitalised at market rented rate (HIGHER) – term gets capitalised at a lower % due to lower risk

Answer 190

Used to value reversionary investments (over-rented)

Answer 191

- the term is capitalised a rate slightly lower than this to reflect the reduced risk as it is more secure income, and term rent is contractually guaranteed - the rent at review / reversion should arguably be an increased risk as it is not yet agreed

Answer 192

For over rented properties: ○ Core = The core income, the market rent - Capitalise into perp @ ARY ○ The top slice / froth = The profit rent - Capitalise to unexpired term @ higher yield - This reflects the uncertainty

Answer 193

Using either; - the term and reversion (block) income - hardcore (layer) income techniques.

Answer 194

1) Get your market rent as per the process 2) Get your rent split into market rent and profit/froth rent 3) Start by capitalising the market rent into perp @ ARY (Or NIY) 4) Then capitalise the froth/profit rent for the unexpired term @ higher yield and apply PV of £1 up to next lease event 5) Then I would add these two together to get the MV

Answer 195

- Overage / Profit / Froth rent The additional income received either after review/ reversion (under rented), or the overage before reversion (over rented) or your profit from a leasehold interest.

Answer 196

Hardcore / Layer method

Answer 197

DCF = useful for multi-let props with changing rental income Term and reversion = simplified DCF (only two time windows are considered (term and reversion))

Answer 198

(Used for reversionary investments when the Market Rent is less than the Passing Rent) 1) The Term is capitalised until next review / lease expiry. This is where the risk lies as the property is over rented. E.g YP for X years @ (X)Yield% 2) Reversion to market rent is valued in perpetuity at an all-risks yield (ARY) and PV backed by the number of years till the next review/renewal ARY is lower in the reversion as less risk with receiving it

Answer 199

The term income is capitalised at a higher rate than the reversionary income - to reflect the additional risk The percentage uplift from the market-rented rate is a function of - the amount of over-renting - the time period until reversion to the market rent - the quality of the tenant’s covenant

Answer 200

If the tenant is of first-class covenant there would be no additional risk attached the receipt of the term rent - E.g therefore, capitalize both term and reversion at the market rent rate of 7%

Answer 201

Hardcore and Layer is Used for predominantly over rented investments (Passing rent more than market rent)

Answer 202

To value a leasehold interest with value - e.g. when lease has profit rent and unexpired term of 1 year - Remunerative is rent for year - Accumulative is appreciation in prop value - Concept: comparing leasehold to freehold investments and need to recoup investment capital at end of leasehold investment period through use of sinking fund

Answer 203

A leasehold interest has a value when there is: - a Profit Rent (Market Rent less rent paid), and - an unexpired term of at least one year If a property is let at market rent, then leasehold interest has no value

Answer 204

Remunerative rate = income producing capability of prop (rental income) Accumulative rate = applies to future capital appreciation (increase in prop value over time)

Answer 205

Residual land valuation

Answer 206

- the remunerative rate and - the accumulative rate

Answer 207

It is the rate of return (yield) applied to a leasehold interest to reflect the risk profile of that interest. - Generally taken at 1% to 2% above the freehold market rent rate to reflect that: - there is the inconvenience of having a landlord and a lease - the difficulty of assigning and sub-letting near the end of the lease

Answer 208

Accumulative rate applies to future capital appreciation (increase in prop value over time) - This is basically the nominal interest rate (headline rate). It’s the rate that, if you just add up the instalments across the year, gives the stated % return. It does not account for compounding

Answer 209

- Market rent – rent passing = profit rent - Capitalise the profit rent to the end of the term. Must have 12 months left on the term otherwise there is no point subletting for less than 12 months.

Answer 210

A valuation method that estimates the present value of future cash flows generated by an asset e.g property, using a discount rate to reflect the time value of money and investment risk.

Answer 211

1) Estimate cash flow (income - expenditure) 2) Estimated the exit value at end of holding period 3) Select discount rate 4) Discount cash flow at discount rate 5) Value is sum of completed discounted cash flow - Providing the NPV

Answer 212

A discount rate can also refer to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flow

Answer 213

For a complex property: - Large-multi let props - Phased development projects - Properties with income voids or complex tenures

Answer 214

- Sum of discounted cash flows of the project - Used to determine if an investment gives a positive return against target rate - If positive, investment exceeds target and vice versa

Answer 215

- Break-even discount rate at which value of cash outflows = cash inflow - Simulated discount rate needed you need to apply to match your desired return

Answer 216

the Equated Yield

Answer 217

- to value multi-let properties with frequently changing rental income - e.g. where there are different lease start dates, different review dates, some rent-free periods, stepped rents and under-rented and, over-rented units Growth can implicit - or be made explicit

Answer 218

A risk premium is the extra return an investor requires above the risk-free rate (e.g. government gilts) to compensate for the risks of property investment. E.g illiquidity, void risk, market risk, management burden.

Answer 219

Conventional Investment Valuation = Based on market yields and rental income. Two common methods: Term & reversion, and Hardcore & top-slice. - growth is implicit in the yield (NOT SEPERATE) DCF= - Forecasts all expected cash flows: rent, voids, rent reviews, costs, disposal value. - Rental and Capital growth are made explicit, NOT HIDDEN IN YIELD.

Answer 220

A leasehold interest can have value (a premium) if the passing rent under the lease is below the market rent (i.e. the tenant is paying less than the open market). A leasehold interest is valued by capitalising the Profit Rent by either: - the YP dual rate - the YP dual rate, tax adjusted, or - the YP single rate

Answer 221

Profit / Loss account - Audited accounts - Need to see turnover and net operating profit (turnover LESS expenses)

Answer 222

Asbestos register Business rates / council tax Contamination EPC rating Flooding Planning history and compliance Environmental matters Equality act compliance

Answer 223

The yield at one moment in time (present income from a property expressed as % of market value)

Answer 224

Net income at date of purchase expressed as a percentage of the purchase price (START OF INVESTMENT THIS IS WHAT YOU TAKE THE YIELD TO BE)

Answer 225

Market rent expressed as a percentage of the purchase price or market value (If not already let at the market rent)

Answer 226

- The weighted average of initial yield/running yield (present income from property) and the reversionary yield - ALSO Expressed as the same yield throughout term and reversion - Says that the property is one investment, so both incomes are capitalised at one rate.

Answer 227

The internal rate of return taking into account future growth (growth in future income) - Not applicable to reversionary situations

Answer 228

The rent expressed as a percentage of the purchase price (effectively same as gross yield)

Answer 229

The estimated rental value (ERV) of a property expressed as a percentage of the purchase price (before costs).

Answer 230

Rent expressed as a percentage of the gross acquisition price ➢ i.e. purchase price plus purchaser’s cost (effectively the same as the net yield)

Answer 231

Estimated rental value (ERV) of a property expressed as a percentage of the gross purchase price i.e. purchase price plus purchaser’s cost

Answer 232

Assumes rent is paid in advance not in arrears (traditional valuation practice assumes rent is paid in arrears) (money produced by an investment considering effect of time value of money)

Answer 233

Deduct disposal costs from GDV (sale and letting fees)

Answer 234

Stamp duty land tax (bands 0%/2%/5%) Agents fees (1%) Legal fees (0.5%) Non-recoverable VAT on fees (0.3% or 20% of total)

Answer 235

Community Infrastructure Levy - Charge that can be set by local authorities on new developments to raise funds for infrastructure and services in the community

Answer 236

Rent received OR market rent x YP @ chosen yield = Market value Get rent and yield from comparables

Answer 237

Difference between annual rent and rent achieved between lessee and lessor

Answer 238

- Costs of planning consultant - Cost of planning application and building reg fees - Community infrastructure levy - Section 106 of town and country planning act 1990 payment

Answer 239

Scheme that regulates and monitors valuations (Gives RICS registered valuer tag) - Meets RICS self regulation requirements - Raises status of valuation profession - Improves quality of vals and ensures high standards

Answer 240

Building Cost Information Service - Obtains monthly updates from quantity surveyors and building surveyor sources and most recent contract price tenders agreed - Paid subscription service for members - Calculated by a metre square basis - Updates made monthly, quarterly, annually

Answer 241

A series of calculations to establish the value/viability of a proposed development based on clients inputs - Valuation is a possible output

Answer 242

1) Search and select comparables 2) Verify details and analyse headline rent to give a net effective rent

Answer 243

Actual rent cost with deductions related to incentives and concessions

Answer 244

Valuation subject to restricted info -> pre-agreed and written into ToE and report

Answer 245

- Number of tenants - Location, tenure, lease terms - Physical prop attributes - Market conditions

Answer 246

- Condition, - Specification (Grade A/B/C), - Look at the fit out, if tenants are in occupation (largely irrelevant in rent reviews/lease renewals).

Answer 247

Weighted average unexpired lease term - This is remaining to first break/expiry

Answer 248

Valuation for statutory functions such as reporting for company accounts/business rates/due diligence

Answer 249

Transaction between parties with no prior relationship or connection.

Answer 250

Agreement between developer and local planning authority about the measures the developer must take to reduce impact on community

Answer 251

- Client/owner of prop - Buyer of prop – For conflict-of-interest check - Know what the property is and its location - If I am competent to undertake

Answer 252

- Rent reviews – Actual definitions of rent and assumptions/disregards as per the lease have to be used. - Specialised properties - Statutory Valuations

Answer 253

Amount to be shared between tenant and landlord (tenant as gross profit and remaining as rental value to the landlord) - Gross profit LESS working expenses = divisible balance (OR NET PROFIT)

Answer 254

Gross acquisition price LESS agents fees, legal fees, SDLT

Answer 255

Rent payable after short-term incentive/rent free period has expired (inflated rent as ignores rent free)

Answer 256

The value arising from any expectation that future circumstances affecting the property may change e.g. realising marriage value, future prospect of securing planning permission

Answer 257

A % of the net operating profit to arrive at market rent - Usually 50%

Answer 258

Difference between market and passing rent (overrage)

Answer 259

RICS recommend every 7 years due to quality control measures

Answer 260

Costs to demolish building, shore up and weatherproof adjoining buildings, cost to rebuild to buildings regs + any fees

Answer 261

Currently 4.00% as at 18 September, next review is November

Answer 262

ITZA - Red Book as it relates to valuations Zoning - From the code of measuring practice

Answer 263

ITZA/10 or spot figure

Answer 264

A model that shows the impacts that different inputs of independent variables have on a dependent variable

Answer 265

Costar EGI Speaking with agents Land registry Own PM databases

Answer 266

Exceptions: Circumstances where the Red Book does not apply at all. E.g internal valuations, agency/brokerage services etc Departure: Situations where the Red Book does apply, but you are permitted to deviate from a specific requirement. ✅ In short: • Exceptions = outside Red Book (not covered at all). • Departures = within Red Book but flexed with disclosure.

Answer 267

for mid-2025 were approximately - 3.75% in the West End - 5.25% in the City

Answer 268

Around 4.75-5%

Answer 269

- Opinion of value - Valuation Approach

Answer 270

1) Profit as a % of GDV Used when: The project is speculative (open market sale, not pre-let/sold). There is greater market and sales risk. **We Chose 15% of GDV 2) Profit as a % of Total Cost. Used when: The scheme is lower risk, e.g. pre-let, forward-sold, or owner-occupied.

Answer 271

1) Introduction 2) Glossary 3) UK PS 1 - Compliance with valuation standards within the UK Jurisdiction. 4) UK VPS 1 to 3 - 1) ToE and reporting: Red book compliance, 2) ToE supplementary provisions in Scotland, 3) Regulated Purpose Valuations 5) UK 18 VPGAs

Answer 272

- The UK's annual inflation rate, as measured by the Consumer Prices Index (CPI), was 3.8% in September 2025.

Valuation (L2) Flashcards

(296 cards)