1
Q
What is the key RICS guidance relating to valuation and what does it set out?
A
RICS Valuation – Global Standards 2022 (effective 31st January 2022)
- Also known as the ‘Red Book Global Standards’
- Sets out the professional and technical standards for valuation to ensure consistency, objectivity and transparency for valuation across the world
2
Q
What are the sections set out in the Red Book Global Standards?
A
The red book is split into the following sections;
- Professional Standards (PS) (mandatory) – defines the parameters for compliance with the Red Book Global Standards
- Valuation Technical and Performance Standards (VPS) (mandatory) – contain specific mandatory requirements and related implementation guidance
- Global Valuation Practice Guidance Applications (VPGAs) (advisory) – provides implementation guidance for valuations used for specific purposes, whilst not mandatory they represent best practice
- International Valuation Standards (IVS) (mandatory) – produced by the International Valuation Standards Council the RICS has adopted and applied the IVS through the Red Book Global Standards
3
Q
What is the RICS guidance on the valuation of development property and what does it set out?
A
RICS Guidance Note on the Valuation of Development Property (2019)
- Aims to guide the valuer in the approach to development property valuations
- This guidance should be read in conjunction with the Red Book Global Standards
- Sets out the professional and technical standards for valuation to ensure consistency, objectivity and transparency for valuation across the world
Sets out the following valuation methods
o Residual Valuation Method
o Discounted Cash Flow Application
o Basic Residual Method
- Core message is that one method of valuation is seldom appropriate
4
Q
What is the core message set out in RICS Guidance Note on the Valuation of Development Property (2019)?
A
- Core message is that one method of valuation is seldom appropriate for the valuation of development property
5
Q
What is the RICS guidance for the UK?
A
RICS Valuation Global Standards – UK National Supplement (2019)
- The national supplements to the Red Book global standards are to assist members in the application of those standards in a local context
- Should be read in conjunction with the Red Book Global Standards
6
Q
What is the RICS guidance on comparable evidence?
A
RICS Guidance Note: Comparable Evidence in Real Estate Valuation (2019)
Sets out the use of comparable evidence in the valuation process:
o Outline the principles of the use of comparable evidence
o Encourage consistency in the use of comparable evidence globally
o Address issues of availability and use of comparable evidence in challenging market
conditions
o Consider the potential sources of comparable evidence and their relative
importance
7
Q
What are the 5 methods of valuation?
A
- Investment Method
- Profits Method
- Residual Method
- Comparable Method
- Depreciation Replacement Cost
8
Q
What are the 3 different approaches to valuation?
A
- Income Approach – investment, profits, residual
- Market Approach - comparable
- Costs Approach - DRC
9
Q
Can you tell me when you would use each valuation method and how you would carry it out?
Investment Method
A
Investment Method
Used to value a property with an existing income stream
1. Assess the market rent by reviewing comparable evidence
2. Capitalise the market rent using a capitalisation rate based on NIYs
3. This will provide your market value
10
Q
Can you tell me when you would use each valuation method and how you would carry it out?
Profits Method
A
Profits Method
Used to assess the value of a business or specialist properties e.g public house, petrol station, golf course
It is the Fair Maintainable Operating Profit (FMOP) capitalised at an All Risks Yield
1. Calculate the Annual Turnover
2. Subtract costs to establish Net Profit
3. Subtract an allowance for ‘wear and tear’, which gives you the FMOP
4. Capitalise using an All Risks Yield to determine the Market Value
11
Q
Can you tell me when you would use each valuation method and how you would carry it out?
Residual Method
A
Used to assess the residual land value of a development opportunity
- Estimate the Gross Development Value
- Subtract construction costs – design and build costs, remediation works,
contingency fee, professional fees - Subtract development costs – developer’s profit, finance costs, planning costs
- This provides your residual land value
12
Q
Can you tell me when you would use each valuation method and how you would carry it out?
Comparable Method
A
Comparable Method
Used as the basis for all valuation methods. Used to assess market rent and market value
Using comparable evidence to establish an indication of value
13
Q
Can you tell me when you would use each valuation method and how you would carry it out?
Depreciation Replacement Cost
A
Depreciation Replacement Cost
Used to value specialised properties for internal and rating purposes when there is limited evidence
The method of last resort and should not be used where there are market sales of comparable properties
Depreciation Replacement Cost = The cost of replacing an asset at the valuation date with its modern equivalent asset minus obsolescence
1. Establish an Existing Use Value for the Land
2. Add the cost of replacing building
3. Add any additional fees e.g professional fees
4. Apply an obsolescence discount
14
Q
How do you decide which valuation method to apply?
A
You review the nature of the property and the basis of valuation to establish your valuation method.
15
Q
When and why would you use one of these methods?
A
Investment Method – Used to value a property with an existing income stream
Profits Method – Used to value specialist properties and businesses e.g public house, golf course, petrol station
Residual Method – Used to value the development land and establish the residual land value
Comparable Method – Used as the basis for all valuations it is typically used to assess Market Rent or Market Value
Depreciation Replacement Cost – the method of last resort used to value specialised properties for internal and rating purposes when there is limited/no comparable evidence
16
Q
What is the purpose of the Red Book?
A
- Sets out the professional and technical standards for valuation to ensure consistency, objectivity and transparency for valuation across the world
17
Q
What factors may impact value?
A
- Prospects for rental & capital growth
- Quality of location – impacts market rent
- Covenant Strength – impacts a property’s security of income
- Use of the property – some uses are higher value than others
- Lease terms – impacts rental growth (rent review), obligations for property owner, onerous
- Obsolescence – is the property fit for purpose
- Voids – gaps in income
- Security and regularity of income – impacted by covenant strength
- Liquidity - ease of sale
18
Q
What is your duty of care as a surveyor when undertaking a valuation and who is it owed to?
A
As a surveyor you have a duty to take all reasonable skill and care when undertaking the valuation of a property.
This duty of care will be owed to the client, either as an express or implied term of the contract under which the work is to be done
19
Q
Why is independence and objectivity important when valuing?
A
Independence and objectivity is essential to ensure that there are no conflicts of interest when undertaking a valuation.
Members must follow the mandatory requirements set out in RICS Professional Statement on Conflicts of Interest (2018)
20
Q
Is there a separate UK Red Book?
A
There is not a separate UK Red Book, however there is the RICS Valuation Global Standards – UK National Supplement (2019)
The national supplements to the Red Book global standards are to assist members in the application of those standards in a local context.
RICS are working on an update to the UK national supplement and aim to publish this in 2023.
21
Q
When was the Red Book last updated?
A
The Red Book was last updated November 2021 with the changes effective from 31st January 2022
22
Q
Does the Red Book differ from when IVS were last updated?
A
The changes to the International Valuation Standards (IVS) were also effective from 31st January 2022
23
Q
What changes were made to the updates in the Red Book?
A
- Emphasis on clearer terms of engagement
- Outlines a requirement to provide greater commentary on sustainability and wider ESG matters (covered in VGPA 8)
24
Q
Which do you follow - the latest IVS or the Red Book Global?
A
You follow the RICS Valuation – Global Standards 2022 as this has incorporated the latest IVS changes
If you follow the Red Book you will be following the IVS
25
Which sections of the Red Book are mandatory and which are advisory?
Professional Standards (PS) = MANDATORY
Valuation Technical and Performance Standards (VPS) = MANDATORY
Global Valuation Practice Guidance Applications (VPGAs) = ADVISORY
International Valuation Standards (IVS) = MANDATORY
26
What does PS1-2 relate to?
PS 1 – Compliance with standards (where a written valuation is provided)
PS 2 – Ethics, competency, objectivity and disclosures
27
What does VPS1-5 relate to?
VPS 1 – Terms of Engagement (scope of work)
VPS 2 – Inspections, investigations and records
VPS 3 – Valuation Reports
VPS 4 – Bases of Value, assumptions and special assumptions
VPS 5 – Valuation approaches and methods
28
What do VPGAs relate to?
VPGA 1 – Valuation for inclusion in financial statements
VPGA 2 – Valuation of interests for secured lending
VPGA 3 – Valuation of businesses and business interests
VPGA 4 – Valuation of individual trade related properties
VPGA 5 – Valuation of plant and equipment
VPGA 6 – Valuation of intangible assets
VPGA 7 – Valuation of personal property, including art/antiques
VPGA 8 – Valuation of real property interests
VPGA 9 – Identification of portfolios, collections and groups of properties
VPGA 10 – Matters that may give rise to valuation uncertainty
29
What type of advice does the Red Book cover?
Valuation advice
30
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
When providing preliminary advice or a draft valuation report you must state in writing that:
- the opinion is provisional and subject to completion of the final report
- the advice is provided for the client’s internal purposes only and
- any draft is on no account to be published or disclosed.
- If any matters of fundamental importance are not reflected, their omission must be declared
31
What type of valuations might be relied upon by a third party?
- Secured lending valuations
- Any valuation that expressly outlines this in the terms of engagement
32
What is the definition of Market Rent?
Market Rent
the estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion’
33
What is the definition of Market Value?
Market Value
the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion’
34
What is the definition of investment value?
Investment Value
The value of an asset to the owner or a prospective owner for individual investment or operational objectives
35
What is the definition of fair value?
Fair Value (as defined in IFRS): 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
36
Does the RICS recognise a difference between fair value and market value?
The RICS doesn’t believe there is a difference between fair value and market value. Fair value is working off the assumption that the property/land owner isn’t going to sell. Not influenced by market forces.
37
What is a net initial yield?
Net Initial Yield - the current annualised rent, net of costs, expressed as a percentage of capital value
38
What is the difference between an assumption and a special
assumption?
- A special assumption is a supposition that is taken to be true and accepted as fact, even though it is not true
- An assumption is something that would be reasonable to assume is true
39
What sources of information would you consider when preparing a valuation report?
- Transactional Data – information from transactions that have actually taken place in the market
- Market Data – market reports from researchers or analysts
- Other sources - indexes
40
What is the hierarchy of evidence?
Set out in the RICS Guidance Note: Comparable Evidence in Real Estate Valuation (2019)
Hierarchy of evidence
1. Category A – direct comparables - All types of relevant transactional comparable evidence
2. Category B – general market data - can provide guidance rather than a direct indication of value
3. Category C – other sources – Other data that may indicate value
41
If you have previously valued an asset, do you need to make any
additional disclosures and what might they be?
If valuing an asset that you have previously valued you must make the following disclosures in the terms of engagement, in the report, and in any published reference to the valuation:
- the relationship with the client and previous involvement
- rotation policy
- time as signatory
- proportion of fees
42
What is a rotation policy?
Rotation policy relates to where the RICS member has provided a series of valuations over time; familiarity with either the client or the asset valued could lead to the perception that the member’s independence and objectivity has been compromised
RICS recommends rotating valuers at least every seven years
43
What does time as signatory refer to?
Time as signatory means how long the RICS member and firm undertaking the valuation have been signatory to valuations for the same purpose and client
44
If your firm is too small to have a rotation policy or valuation panel, what else can you do to ensure objectivity?
You can arrange for the valuation to be periodically reviewed at intervals no greater than seven years by another RICS member to demonstrate that objectivity is being maintained
45
When might a conflict of interest exist in relation to a valuation
instruction?
- acting for the buyer and the seller of a property or asset in the same transaction
- acting for two or more parties competing for an opportunity
- valuing for a lender where advice is also being provided to the borrower
46
What must be included in your terms of engagement / valuation report?
The terms of engagement must set out the following:
- Identification – of the valuer, the client, any other intended user
- Property – set out the assets and liabilities being valued
- Purpose – of the valuation
- Basis – of value
- Date – of valuation
- Nature and Extent – of the valuer’s work
- Sources of Information – relied upon
- Assumptions and Special Assumptions – that have been made
- Fee – basis on which the fee will be calculated
- Complaints Handling Procedure
- Insurance – any limitations on liability and the PI cover in place
47
Where are the requirements for terms of engagement covered in the Red Book?
Terms of Engagement (scope of work) are set out in VPS 1
48
What is a restricted valuation service and can you provide one?
A restricted valuation service is a where there are restrictions on the information available or the nature of the valuation assignment.
A restricted valuation service may be requested by a client because:
- Requirements for a short timescale may limit the ability to inspect the property to verify facts
- the request may be for a valuation based on the output of an automated valuation model
You can provide one if the restriction is reasonable, with regard to the purpose for which the valuation is required
If you believe that it is not possible to provide a valuation even on a restricted basis the valuation should be declined
49
How do you deal with limitations on inspection or analysis?
Any limitations or restrictions on the inspection, inquiry and analysis for the purpose of the valuation assignment must be identified and recorded in the terms of engagement and also in the report
50
Can you revalue a property without inspecting?
You can revalue a property without re-inspecting if the valuer is satisfied that there have been no material changes to the physical attributes of the property, or the nature of its location, since the last assignment
51
What is an internal valuer?
A valuer who is in the employ of either the firm that owns the assets, or the accounting firm responsible for preparing the firm’s financial records
52
Can an external valuer provide an internal purposes valuation?
Yes – an external valuer can provide valuations for internal purposes only without liability and without communication to a 3rd party.
When this happens, the need for the terms of engagement and written advice to be absolutely clear about non-disclosure to third parties, and about the exclusion of liability, becomes even more crucial.
53
What happens if market conditions change between the valuation date and report date?
If there has been a material change in market conditions, or in the circumstances of a property, asset or portfolio, between the valuation date and the date of report, the valuer should draw attention to this.
54
Is special value from a special purchaser reflected in MV?
Market Value ignores any price distortions caused by special value (an amount that reflects particular attributes of an asset that are only of value to a special purchaser)
55
What is the Valuer Registration Scheme?
Valuer Registration is a risk monitoring and quality assurance programme which checks compliance with the RICS Red Book
56
Are there any instances where VPS 1-5 of the Red Book may not apply?
In the following instances valuers must state that the valuation was not performed in accordance with the International Valuation Standards
A – agency/brokerage valuations (giving investors indication of value)
S – statutory function valuations (tax purposes)
I – internal strategy purpose valuation
A – anticipation of giving evidence as an expert witness
N – negotiations/litigation
57
When would you use EUV?
You would use Existing Use Value when undertaking a depreciation replacement cost valuation
58
What is the definition of EUV?
Existing Use Value – the value of property or land in its’ current form
59
What additional criteria apply to secured lending valuations?
1. More Detailed Conflict Avoidance
2. Additional reporting requirements
60
What is a regulated purpose valuation?
Regulated Purpose Valuation – a valuation relied on by 3rd parties who have not commissioned the valuation and are subject to valuation monitoring
Regulated Purpose Valuation Includes:
1. Financial Statements
2. Stock Exchange Listings
3. Takeovers and Mergers
4. Collective Investment Schemes
5. Unregulated Property Unit Trusts
61
What is a yield?
Yield - a measurement of future income on an investment. It is generally calculated annually as a percentage, based on the asset's cost or market value
62
What is a reversionary yield?
Reversionary Yield - the anticipated yield to which the initial yield will rise (or fall) once the rent reaches the estimated rental value
63
What is an equivalent yield?
Equivalent Yield - the average weight between your reversionary and net initial yield (assuming rent is paid quarterly in advance)
64
What is a nominal equivalent yield?
Same as equivalent yield but you are assuming that your rent is paid annually in arrears
65
What is WAULT?
WAULT – Weighted Average Until Lease Termination when you have multiple tenants in a building and want to know the time until termination
66
What purchaser’s costs do you deduct from a valuation?
all out-of-pocket costs and expenses incurred by the Purchaser
Agents Fee = 1%
Legal Fees = 0.8%
SDLT + VAT = 5%
67
How would you value a property in uncertain market conditions – does the Red Book give any guidance?
VPGA 10 – provides guidance on matters that may give rise to material valuation uncertainty
You would value the property and if appropriate draw attention to, and comment on, any issues affecting the degree of certainty, or uncertainty, of the valuation
68
What is the difference between a growth explicit and a growth implicit yield?
Growth explicit yield – does not account for rental growth e.g reversionary yield
Growth implicit yield – does account for rental growth e.g All Risks Yield
69
How would you value an over-rented investment property?
Core and Top Slice Approach - Property is Over Rented
- Workout the market rent and establish what proportion of your current income is over-rented
- Split out the under rented and over-rented income streams
- Apply two different yields --> higher yield to the over rented, lower yield to the under rented
- Capitalise the under rented into perpetuity (assuming that the property will always be able to achieve the market rent)
- Capitalise the over rented until lease expiry at which point you assume the property will revert to market rent
70
How would you value an under-rented investment property?
Term and reversion Approach
- Value the rent until lease end capitalising using an all risks yield
- Capitalise the market rent into perpetuity using a reversionary yield
71
What is the Pereira Gray report and what does it set out?
The Pereira Gray report is an independent valuation review of the RICS standards and guidance.
3 over-arching Recommendations of the report are:
- Creation of a dedicated, independently led valuation regulatory quality assurance panel, under the jurisdiction of the RICS Standards and Regulation Board
-The creation of a formal Valuation Compliance officer role within regulated valuation providers
- encouraging the use of DCF’s rather than Core and Top Slice and Term and Reversion for investment valuations because DCF’s take into account rental growth
72
What would you do if comparable evidence was limited?
A lack of comparable evidence should not prevent a valuation from being undertaken
If there is a lack of comparable evidence:
- Search further afield across wider range of indicators or indirect evidence e.g national economic data
- Comment on any material uncertainty
73
What is a Discounted Cash Flow (DCF)?
Discounted Cash Flow -
A valuation model that seeks to determine the viability and investment value (or worth) of a real estate investment property by examining its future net income or projected cash flow from the investment and then discounting that cash flow to arrive at an estimated current value of the investment.
74
When would you use a DCF?
- You would use a DCF to account for more complex assumptions accounting for a potential investors’ timings and cash flow requirements
75
What are the advantages of a DCF?
Advantages:
- Able to model complex assumptions e.g specific client or funding requirements and development timings
- Growth explicit you can apply your own specific growth rate to a DCF model
- Increased accuracy as they tend to be less generic
76
What are the disadvantages of a DCF?
Disadvantages:
- Very sensitive to changes in assumptions
- Requires a large number of assumptions
- Time consuming
- Not always needed on straightforward project structures
77
What is a years purchased multiplier?
The multiplier of the net annual income to determine the capital value and it is useful to obtain the capital value of the property
78
What is present value?
the sum of the discounted values of a net cash flow, including all inflows and outflows excluding the initial outflow, where each receipt/payment is discounted to its present value at a specified discount rate
79
How does market value differ to investment value/fair value?
- Market Value is accounting for market forces
- Investment and Fair Value not influenced by market forces
80
What is intangible goodwill?
Intangible Goodwill - an asset (an asset that's non-physical but offers long-term value) which arises when another company acquires a new business
e.g brand loyalty
81
What is turnover?
Turnover - amount of money taken by a business in a particular period
82
What is gross profit?
Gross Profit - the profit a business makes after subtracting all the costs that are related to manufacturing and selling its products or services
83
What is net profit?
Net Profit - actual profit after working expenses not included in the calculation of gross profit have been paid
84
What is Fair Maintainable Turnover?
Fair Maintainable Turnover - the level of trade that a 'reasonably efficient operator' would expect to achieve on the assumption that the property is in good repair and suitably equipped
85
What is a Reasonably Efficient Operator?
assumes that the market participants are competent operators, acting in an efficient manner, of a business conducted on the premises
86
Do RICS provide any guidance on RLVs or valuing development
property?
RICS Guidance Note Valuation of Development Property (2019):
- Applies to all valuations of development property
- Should be read and applied in conjunction with RICS Valuation – Global Standards
2022
- This guidance note supplements the guidance set out in IVS 410
87
What is residual land value?
Residual Land Value - the amount remaining once the gross. development cost of a project is deducted from its gross development value (GDV) and an appropriate return has been deducted
88
What is a development appraisal?
Development Appraisal – the assessment of viability for development land or a development opportunity
89
What is the difference between a residual valuation and a development appraisal?
- With a development appraisal you have a known land value whereas with a residual valuation you are trying to determine the land value
- Development appraisals are not red book compliant
90
How do you calculate GDV?
Determine market rent/market value of completed development using comparable evidence
- capitalise the income using all risks yield
91
What are typical finance costs?
4-10% of GDV
92
What do holding costs typically include?
Property Management Fees
Council Tax
Capex and Opex
93
Give me an example of a good covenant and how this might impact a valuation.
A good covenant would be a large international company e.g Google and Apple
A good covenant provides a greater security of income and would provide an increased market value.
94
How would you distinguish limitations on liability in your valuations?
You would set out any limitations of liability very clearly within your Terms of Engagement
95
What relevance does Hart v Large have on your valuation practice?
The Hart v Large case emphasises the importance for surveyors of:
- Being clear and advising clients on the survey level and scope of inspection, limitations and caveats
- Recommending justifiable further investigation
- Considering whether any new information provided after inspecting or reporting affects their original advice, and updating their advice if it is justified to do so
96
What is the SAAMCO cap?
SAAMCO Cap - An important principle in the common law of damages, which ensures that surveyors can only be liable for the losses they can properly be said to have caused
97
Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?
No - surveyors can only be liable for the losses they can properly be said to have caused
98
What would you do if you received a notice of a PII claim from a client or their solicitor?
I would acknowledge the receipt of the claim and pass it on to our legal team to seek further advice on the appropriate next steps.
99
Explain what you understand by the term, margin of error.
Margin for error is a degree of deviation from a correct or exact value or target – accepted margin of error is between 10% either way
100
In a scenario where rents are static and the capital value increases, would you expect yields to increase or decrease?
NIY – would decrease
APC Revision 2023
flashcards
Decks in class (34)
# Cards
-
Ethics, Rules of Conduct and Professionalism (Level 1)88
-
Client Care (Level 1)21
-
Ethics, Rules of Conduct and Professionalism (Level 2)19
-
Ethics, Rules of Conduct and Professionalism (Level 3)16
-
Accounting Principles and Procedures (Level 1)29
-
Planning and Development Management (Level 1)65
-
Planning and Development Management (Level 2)11
-
Health and Safety (Level 1)38
-
Health and Safety (Level 2)6
-
Development Appraisals (Level 1)49
-
Development Appraisals (Level 2)14
-
Valuation (Level 1)100
-
Valuation (Level 2)22
-
Measurement (Level 1)44
-
Survey and Mapping (Level 1)44
-
Development/Project Briefs (Level 1)52
-
Development/Project Briefs (Level 2)21
-
Purchase and Sale (Level 1)76
-
Purchase and Sale (Level 2)11
-
Legal and Regulatory Compliance (Level 1)73
-
Legal and Regulatory Compliance (Level 2)15
-
Sustainability (Level 1)92
-
Sustainability (Level 2)9
-
Managing Projects (Level 1)66
-
Managing Projects (Level 2)13
-
Client Care (Level 2)15
-
Communication and Negotiation (Level 1 & 2)23
-
Business Planning (Level 1)15
-
Conflict Avoidance, Management and Dispute Resolution (Level 1)38
-
Data Management (Level 1)31
-
Diversity, Inclusion and Teamworking (Level 1)20
-
Inclusive Environments (Level 1)33
-
Submission Examples - Mandatory6
-
Submission Examples - Technical3
