Valuation Level 1

Question 1

What is the significance of RICS Valuation - Global Standards: UK National Supplement?

Answer 1

1. Provides requirements for valuations in the UK.
2. Contains 18 UK VPGAs
   - UK VPGA 1 Valuation for financial reporting
   - UK VPGA 10 - Valuation for commercial secured lending purposes
3. Advice is not mandatory for guidance

Question 2

What are the contents of the UK National Supplement?

Answer 2

1. Introduction
2. Part 1 – UK Professional Standards (UK PS) mandatory
3. Part 2 – UK Valuation Technical and Performance Standards (UK VPSs) – Mandatory
4. Part 3 – UK Valuation Practice and Guidance Applications (UK VPGAs) – Mandatory

Question 3

Can you name some key changes of the UK National Supplement?

Answer 3

UK VPS 3 – regulated purpose valuations: supplementary governance required

UK VPGA 8 – Valuation for charity assets

UK VPGA 10 – Valuation of commercial secured lending
- Incorporates new ESG principles

Question 4

What is included in the UK VPS 3?

Answer 4

Valuer mandatory rotation
* A max. single engagement period of 5 years
* A max. period of 5 years before the rotation of an individual responsible valuer
* A min. 3 year break after rotating off an engagement
* Max period of 10 years before the rotation of a valuation firm

Question 5

What are the key changes from the 2018 UK National Supplement?

Answer 5

1. Changes in the market
2. Implementation of the recommendations of Peter Grays review in 2021

Question 6

What were the 3 general areas of recommendations of the Review of Investment Valuations undertaken by Peter Grey in 2021

Answer 6

1. Independence
2. Conflicts of parties
3. Creating formal valuation compliance officer

Question 7

Why were their changes of the UK National Supplement?

Answer 7

To reduce the risk of conflicts of interests in the commissioning of valuation reports in the public interest

Question 8

What else does VPS 3 cover in the new UK National Supplement?

Answer 8

Valuations that are subject tto monitoring

Valuations for FIVE purposes:
1. Financial reporting (company accounts)
2. Stock exchange listings
3. Takeovers and mergers
4. Collective investment schemes
5. Unregulated property unit trusts

Secured lending valuations are NOT regulated purpose valuations as they are not relied upon by third party or public interest

Question 9

Can you name some recommendations of The RICS Independent review of Real estate Investment Valuations 2021?

Answer 9

13 recommendations, some examples include:

1. Valuer rotation
2. Separation of valuation from advisory services within firms
3. Commissioning and receiving of valuation reports
4. A new valuation assurance committee
5. Developing Valuation Compliance Officer role for firms.

Question 10

Investment Method

Answer 10

• Used when there is an income stream, rental income is capitalised to produce a capital value.
• Conventional method assumes growth implicit where implied growth rate is derived from the market capitalisation rate (yield).

Question 11

Comparable Method

Answer 11

1. Gather comparables and confirm details.
2. Adjust headline rent to ‘net effective rent’ if appropriate.
3. Assemble in a schedule adjust using ‘Hierarchy of Evidence’.
4. Analyse to form an opinion of value and report the value.

Question 12

RICS Professional Standard: ‘Comparable Evidence in Real Estate Valuation’ 2019

Answer 12

Cat A – direct comparables, accurate, recent, asking prices (analysis)
Cat B – general market data to give guidance, historic and reports
Cat C – other asset classes, locations, background data interest rates

Question 13

Term and reversion

Answer 13

Used for reversionary investments, term capitalised until rent review then into perp at new yield.

Question 14

Layer and Hardcore

Answer 14

Used for overrented investments, horizontally split, different yields used due to risk of higher income.

Question 15

Profits method

Answer 15

Trade related – uses (3 years of audited accounts)
* Income – costs = gross profit – less expenses & operator’s
remuneration = Fair Maintainable Operating Profit (FMOP).
* Expressed as EBITDA (earnings before interest, taxation, depreciation and amortisation.

Capitalised at yield.

Question 16

What is a reversionary investment?

Answer 16

an investment in a property that is rented out for less than the market rate, but will eventually be rented out at the market rate

Question 17

Residual Valaution

Answer 17

MUST be MARKET led, ONLY used to calculate LAND VALUE

• GDV of scheme at today’s date assuming current market.
• Comparable method used to establish rent and yield (ARY). Rent
  free and void periods can be assumed and purchaser’s costs are
  usually deducted.

Question 18

Depreciated Replacement Cost use and purpose

Answer 18

• Used where direct market evidence is limited or unavailable for specialised properties.
• Used for owner- occupied property for accounts or rating valuations.
• Not Red Book Global Compliant for secured lending.

Question 19

Market Value

Answer 19

The estimated amount for which an asset or liability should exchange…

• On the valuation date
• Between a willing buyer and willing seller
• In an arms length transaction
• After proper marketing
• Where the parties had each acted knowledgeably, prudently and without compulsion

Question 20

Market Rent

Answer 20

The estimated amount for which an interest in real property should be leased…

• On the valuation date
• Between a willing buyer and willing seller
• In an arms length transaction
• After proper marketing
• When the parties had each acted knowledgeably, prudently and without compulsion

Question 21

Fair Value (IFRS13)

Answer 21

‘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

This basis of valuation is now required if the International Financial Reporting Standards have been adopted by the client

It is adopted by the International Accounting Standards Board

Question 22

Investment Value

Answer 22

The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives

Question 23

UK VPGA 10 - Valuations for commercial secured lending

Answer 23

Includes guidance on:
- Independence, objectivity and conflicts of
interest
- Must act as an External valuer
- Guidance on what needs to be involved in Terms of Engagement
- Reporting - suitability for lending and Sustainability and ESG impacting value

Question 24

How do you ensure you are competent to undertake a valuation?

Answer 24

SUK
- Skills
- Understanding
- Knowledge

Question 25

What are the FIVE non red book compliant valuations?

Answer 25

**E – Expert witness** A – Agency & brokerage apart from Purchase Report S – Statutory purposes **I – Internal accounts** N –Negotiation or litigation

Question 26

What is the difference between Market Value and Fair Value?

Answer 26

Market value is the estimated amount for which an asset or liability should exchange… - On the valuation date - Between a willing buyer and willing seller - both acting knowingly - In an arms length transaction - After proper marketing Fair Value is 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

Question 27

Why do you use Fair Value in Reporting?

Answer 27

Stated in VPGA 1 Valuation for Financial Reporting

Question 28

How is a DRC calculated?

Answer 28

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).

Question 29

When should you use a depreciated replacement cost method?

Answer 29

- Used when there is limited direct market evidence for specialist properties. - Examples include lighthouses, oil refineries, submarine base and docks. Purpose: - Used for owner occupied property - For accounts purposes for specialised properties. - Also used for rating valuations of specialist properties

Question 30

Is the depreciated replacement cost suitable for secured lending?

Answer 30

No

Question 31

What is the guidance on Depreciated Replacement Cost Method of Valuation?

Answer 31

RICS Professional Standard: Depreciated Replacement Cost Method of Valuation for Financial Reporting 2018

Question 32

What other guidance is there for the Development of land?

Answer 32

RICS Professional Standard on ‘Valuation of Development Property’ – 1st ed (2019)

Question 33

Quick comparable method defintion

Answer 33

comparable method involves **comparing similar transactions** to give an **indication of value**

Question 34

What makes a good comparable?

Answer 34

* Comprehensive, i.e. ideally a valuer needs more than one transaction * Very similar or identical * Recent * Result of an arm’s length transaction * Verifiable * Consistent with local market practice

Question 35

Method of comparable method

Answer 35

Gather evidence in a table Analyse the net effective rate, i.e. taking any incentives into account Collate evidence in a schedule or matrix Adopt a common measurement or comparison standard Adjust quantitatively and qualitatively using the hierarchy of evidence and other key considerations (including the valuer’s own knowledge and experience) Analyse to form opinion of value Stand back and look to sense check the final valuation figure Report their opinion to the client

Question 36

When is the investment value used?

Answer 36

- When provided a value on the basis of a truncated marketing period

Question 37

How is lack occupancy accounted for in PBSA?

Answer 37

Income deduction

Question 38

How does supply and demand impact the valaution?

Answer 38

Impacts the yield - better S&D = sharper yield

Question 39

why new red book 2025?

Answer 39

to reflect updates in the valuation industry, particularly regarding technology, environmental, social, and governance (ESG) factors, to align with the latest International Valuation Standards (IVS), ensuring that valuation practices remain relevant and accurate in the current market landscape