Valuation (Level 2) Flashcards

Question

What is Fair Value? (VPS 4)

Answer 1

‘Fair Value’ ‘The estimated price an asset would change hands between knowledgeable parties, considering market conditions, but not necessarily in an open market' * Basis of value now required if IFRS adopted by client * Consistent with definition of Market Value

Answer 2

‘The amount that would be realised when an asset or group of assets are sold on a piecemeal basis. Liquidation value should take into account the costs of getting the assets into saleable condition as well as those of the disposal activity’ * Not used in UK

Answer 3

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

Answer 4

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.

Answer 5

Both must be agreed with the client prior to reporting an opinion of value. Assumption – reasonable to accept as fact in the context of the valuation assignment without specific investigation or verification. Special Assumption – an assumption that either assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant. E.g. a bid from a special purchaser has been made.is expected.

Answer 6

Only assumptions that are reasonable and relevant having regard to the purpose for which the valuation assignment is required should be made. All assumptions that are to be made in the conduct and reporting of the valuation assignment must be identified and recorded in the Terms of Engagement (VPS1).

Answer 7

Special assumptions may only be made if they can reasonably be regarded as realistic, relevant and valid for the particular circumstances of the valuation. In order to provide the client with the valuation required.

Answer 8

1. Income 2. Market 3. Cost

Answer 9

Valuation Practice Guidance Applicationa

Answer 10

VPGA 1 - vital for inclusion in financial accounts VPGA 2 - valuation for secured lending VPGA 8 - valuation of real property interests (ESG + sustainability). VPGA 10 - matters that give rise to valuation uncertainty

Answer 11

Any previous, current or anticipated involvement with the prospective borrower/property must be disclosed to lender (‘previous involvement’ = past 2 years, but can be longer) Confirm that they are acting as ‘independent valuers’ VPGA2 gives examples of such involvement resulting in conflict of interest include: A longstanding professional relationship with prospective borrower/owner of property When valuer will gain fee from introducing the transaction to the lender If there is a financial interest in the property holding or prospective borrower When valuer is retained to act in the disposal/letting of the completed development on the subject property

Answer 12

Disclosure of any conflicts in terms of engagement and arrangements to manage the conflict (last 2 years) Valuation method adopted, supported with the calculation When a recent transaction at the property has occurred/provisionally agreed price disclosed, the extent to which that information has been accepted as Market Value Comment on the suitability of the property for lending Any circumstances of which the valuer is aware that could affect the price if the property is, or is intended to be, the subject of development or refurbishment for residential purposes, the impact of giving incentives to purchasers Potential and demand for alternative uses Occupational demand for the property

Answer 13

Short leasehold interest, high flood risk, tenant break option very soon (cannot guarantee income for any period of time)

Answer 14

No - advisory

Answer 15

International Valuation Standards Promote and maintain high level of public trust in valuation practice by establishing requirements for valuers

Answer 16

Asset Standards General Standards

Answer 17

1. Ethics 2. Competency 3. Compliance 4. Basis of Value 5. Date of Value 6. Assumptions and Conditions 7. Intended use 8. Intended user 9. Scope of Work 10. Identification of Subject of Valuation 11. Data 12. Valuation Methodology 13. Communication of Valuation 14. Communication of Valuation 15. Record Keeping

Answer 18

IVS 101 – Scope of Work IVS 102 – Investigations and Compliance IVS 103 - Reporting IVS 104 – Bases of Value IVS 105 – Valuation Approaches and Methods

Answer 19

Scope of Work (Terms of Engagement) 18: 1. Identification and status of the valuer 2. Identification of client 3. Identification of any other intended users 4. Identification of the asset(s) or liability(ies) being valued 5. Valuation currency 6. Purpose of valuation 7. Basis(es) of value adopted 8. Valuation date 9. Nature and extent of the valuer’s work – including investigations – and any limitations thereon 10. Source(s) of information upon which the valuer will rely 11. All assumptions and special assumptions to be made 12. Format of the report 13. Restrictions on use, distribution and publication of the report 14. Confirmation that the valuation will be undertaken in accordance with the IVS 15. Fee calculation 16. Reference to the firm’s complaints handling procedure, with a copy available on request 17. A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations 18. A statement setting out any limitations on liability that have been agreed

Answer 20

Investigations and Compliance Inspection Compliance with standards Record keeping

Answer 21

Reporting 1. the scope of the work performed 2. intended use, 3. intended users, 4. the purpose, 5. the approach or approaches adopted, 6. the method or methods applied, 7. the key inputs used, 8. the assumptions made, 9. the conclusion(s) of value 10. the date of the report (which may differ from the valuation date).

Answer 22

Basis of Value * Market Value * Market Rent * Equitable Value * Investment Value * Synergistic Value * Liquidation Value * Far Value * Fair Market Value

Answer 23

Valuation Approaches and Methods Approaches 1. Income 2. Market 3. Cost Methods 1. Investment 2. Comparable 3. Residual 4. DRC 5. Profits

Answer 24

Used when income stream to value (tenants) Rental income capitalised to produce capital value. Includes assessing rental values (market rent) and a market-based yield. The investment method can reflect income streams which are under-, rack- and over-rented by incorporating risk within the yield choice (i.e. an all risks yield).

Answer 25

Term and reversion Hardcore and Layer Hardcore and Topslice DCF

Answer 26

Investment method Traditional, implicit approach For under-rented properties / Reversionary investments Reduce yield to reflect low MR 1. capitalise passing rent using YP at discounted yield for remaining years 2. capitalise reversion using market rent into perp using YR at full market rate discounted using present value. 3. Add together 4. Stand back and look

Answer 27

Investment Method Reversionary Investments Under-Rented It is used for REVERSIONARY (under-rented) properties. Typically used by the institutional investment market, and used when the reversion is close in time. Income flow is divided horizontally. Both the hardcore (PR) and layer (MR-PR) are valued into perpetuity, but the layer is deferred to the next lease event. An Equivalent Yield is applied to both the hardcore and layer. Argus Val Cap uses this method.

Answer 28

It is used for OVER RENTED investments. Income flow is divided horizontally. The hardcore (MR) is valued into perpetuity at a net initial yield. The top slice (PR-MR) is capitalised to next lease event at a net initial yield with a risk adjustment. There is a yield differential; top slice at an inflated yield to reflect higher risk of over-renting. Different yield type can be used based on market comparable evidence. NO PV of £1 needed as both layers of income are being received NOW.

Answer 29

rental growth built into the choice of yield, not explicitly modelled in calculation. The Yield adopted assumed many of assumptions that are made explicit in a DCF approach and the risks are hidden in the selected yield

Answer 30

Investment method Growth explicit Assumptions made Cash flow explicitly modelled incorporating assumptions. Short leasehold interests Properties with income voids Over-rented properties

Answer 31

To reflect the time value of money. The discount rate will always reflect the investor’s perception of risk. Also known as the capitalisation rate.

Answer 32

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

Answer 33

PV of £1 = 1 ÷ (1+i)n ‘i’ is the yield that the valuer thinks is appropriate. ‘n’ is the term in years (to next rent review)

Answer 34

The relationship between the income and the capital value. The number of years it will take for the annual income to add up to the capital value, when taking into account the time value of money (i.e. that it’s decreasing). i.e. the right to receive £10,000pa for 4 years won’t = £40,000 payment today.

Answer 35

Used for valuing the reversionary rent into perpetuity. 100 ÷ i i.e. 100/6.75 = 14.8

Answer 36

estimate the cashflow (income less expenditure) estimate the exit value at the end of the holding period select a discount rate discount the cashflow using the discount rate to give an NPV (which is the Market Value)

Answer 37

* Sum of discounted cashflows of the project * Used to see if investment gives possible return as TRR * When positive = has exceed TRR * When negative = has not achieved TRR

Answer 38

* Rate of return all future cashflows must be discounted so NPV = 0 * IRR used to assess total returns

Answer 39

RICS Guidance Note on ‘Discounted Cash Flows for Commercial Property Investment’ 2010.

Answer 40

DCF * Input MV as a negative CF * Input projected rents over holding period as positive * Input projected exit value at the end as positive value * Discount rate IRR is the rate to make NPV = 0

Answer 41

(RICS Guidance Note, Comparable Evidence in Real Estate Valuation, 2019) 6 steps 1. Search and select comparable 2. Confirm details and analyse headline rent to give net effective rent 3. Assemble comparables in schedule 4. Adjust comparables using hierarchy of evidence 5. Analyse comparables to form opinion 6. Report value and prepare file note Where there is a lack of evidence, surveyor should use professional judgement under Guidance Note.

Answer 42

1. Category A – Direct comparables, completed transactions 2. Category B – General data that can provide guidance 3. Category C – Background data

Answer 43

* Inspection of area, agents marketing boards * Local agents * In-house database records * Market sentiment

Answer 44

To express the comparable in like terms to the subject

Answer 45

Display key findings Research if transaction is open market Size Location Date Specification Condition Layout Price

Answer 46

Purpose * Valuations of trade related property where value depends on profitability of company * E.g. pubs, hospitals, hotels * Basic principle = value depends on profit generated, not physical building * Must have accurate and audited accounts for last 3 years Simple Methodology * Capitalise EBITDA by appropriate yield to achieve market value * Cross check with comparables if possible

Answer 47

Purpose * Used to determine the residual site value * Used to assess viability of development scheme * Output is market value of the land * Requires assumptions around input costs Methodology * First assess highest value use of land * Calculate value of finished scheme i.e. gross dev. Value (GDV) based on market comparable * Deduct development costs (developer profit finance costs) * Residual Value = GDV – total costs (inc profit) Fees * Professional fees = 10-15% of total construction costs * Purchaser fee = 6-7% (stamp duty, legal costs, agency) * Contingency = 5-10% of construction costs * Developers profit = 15-20% of GDV

Answer 48

Purpose * Used for owner-occupied property or specialised property * E.g. airports Methodology * Value of land in existing use * Add current costs of replacing the building plus fees less a discount for depreciation.

Answer 49

It is NOT suitable for Red Book compliant valuations for secured lending It can be used to calculate Market Value for specialised properties only for valuations for financial statements

Answer 50

* Measure of investment return (expressed as % of capital invested) * Yield = Income / Price x 100

Answer 51

Remunerative rate of interest used in the valuation of fully let property

Answer 52

Reflect risk

Answer 53

Average weighted yield between the term and reversion - so effectively same yield could apply to both, into perpetuity. Weighting takes into account the value of the passing rent and the reversionary rent and for how long the term subsists Smoothes out the income stream

Answer 54

Simple income yield for current income and price

Answer 55

Gross: Yield calculated on Gross price before Purchasers Costs have been deducted. Net: Yield calculated on the Net price (i.e. it’s been adjusted for Purchaser’s Costs).

Answer 56

MR / Current price on investment let below MR

Answer 57

YP = 1 / yield YP = number of years for its income to repay its purchase price

Answer 58

The new UK National Supplement has been updated following the independent Valuation Review led by Peter Pereira Gray. Concerns raised by the Review included valuation reliability, valuer independence and market dynamics.

Answer 59

Global valuation standard is to enable consistence and transparency globally, whilst UK guidance is specifically for the UK market, align with the UK jurisdiction an practice To incorporate VPGA’s on aspects specific to the UK such as inheritance tax and CGT

Answer 60

Competence PS 2 Conflict of Interest PS 2 Terms of Engagement (VPS 1)

Answer 61

* 16 step process (don’t need to know, just remember key points) 1. Receive instruction 2. Check competence 3. No COI 4. Issue ToE to Client 5. Receive signed ToE from Client 6. Gather information 7. Undertake DD 8. Inspection + Measure 9. Research market 10. Undertake valuation 11. Draft response 12. Check by another surveyor 13. Finalise, signed 14. Report to client 15. Issue invoice 16. File for archiving

Answer 62

* Asbestos regulations * Business rates * Contamination * Equality Act 2010 * EPC * Flood risk * Fire Safety * H&S * Title Deed * Planning history

Answer 63

Valuation Approaches and Methods 1. Income 2. Cost 3. Market

Answer 64

Regulatory monitoring scheme for all valuers carrying out Red Book Global valuations from October 2011. Three aims of the scheme * Improve quality of valuation and ensure high standards * Meet RICS requirements to self-regulate effectively * To protect and raise the status of the valuation professional as the leasing expertise in valuation Clients should expect following from valuation * Openness and transparency * RICS protection and IVS * Expertise and clear reporting * World class regulation Any valuer registered to scheme can state ‘RICS registered vauer’. Must have done valuation to level 3.

Answer 65

Openness and transparency RICS protection and International valuation standards Expertise and clear reporting ‘World class regulations’ RICS 2010

Answer 66

A piece of land which controls the access to another piece of land

Answer 67

A valuation technique NOT a method of valuation Used for comparison of retail properties to create a unit of comparison for different sized buildings Rationale: the rental value of the property reduces away from the street ‘Halving back’ principle with 6.1 m (20 ft) zones. Zone A-D then Remainder Some London retail streets (Oxford, Regent and Bond Street) or certain prime shopping streets in Scotland – 9.1m (30 ft)

Answer 68

Dependent on comparable evidence (check table breakdown to see how treated), however usually Area/10, then multiplied by ITZA. Depends on space usage, quality and accessibility.

Answer 69

Usually add a 10% uplift but dependent upon the comparable evidence and shopper’s footfall. Must consider quality of pitch for each frontage (highly reliant on footfall).

Answer 70

When the property has unusual physical characteristics, might adjust the conventional zoning depths

Answer 71

A technique that can be used for a shop with two main frontages

Answer 72

The valuation of ‘hidden’ or obscured areas within the retail unit

Answer 73

“an amount that reflects particular attributes of an asset that are only of value to a special purchaser” This could arise from the physical, functional or economic association of the property with another i.e. adjoining property Special value may be generated when transaction is NOT arm’s length where there is a special purchaser

Answer 74

a particular buyer for whom a particular asset has special value because of advantages not available to other buyers in the market e.g. a tenant purchasing his freehold interest

Answer 75

It stands astride the boundary of land belonging to two or more different land owners There are Chartered Surveyors who specialise in party wall disputes Party Wall Act 1996 – provides framework for resolving disputes in relation to party walls. The Act provides a building owner who wishes to carry out work to an existing party wall with additional rights beyond ordinary common law rights Party wall owners MUST inform all adjoining owners if intend to undertake any works to party wall

Answer 76

Weighted Average Unexpired Lease Term. Calculates to the first break or expiry weighted by the contracted rent. Often used when valuing multi-let properties.

Answer 77

IVS are produced by the IVSC (council) which is an international body RICS Red Book adopts the IVS and provides an implementation an application framework for members and firms

Answer 78

If it’s YP into perpetuity (which is 100/yield): Then 100 / the yield = YP

Answer 79

RICS Guidance Note on Risk, Liability and Insurance in Valuation Work, 2nd Ed 2018 Provides advice of liability caps, 3rd party reliance, PII

Answer 80

If NIY is lower than the equivalent yield = REVERSIONARY If NIY is higher than the equivalent yield = OVER-RENTED If the yields are the same = RACK RENTED

Answer 81

Rule 9 of Rules of Conduct for Firms Regulated firms need to ensure they have adequate and appropriate professional indemnity insurance Requires firms to put in place run-off cover Scullion v Bank of Scotland: the Court of Appeal’s decision that a surveyor who provides advice on value to a lender does not owe the borrower a duty of care.

Answer 82

This may detrimentally impact on the marketability and valuation of the property as it may be difficult to or expensive to obtain insurance – use Environment Agency website to check the flooding risk

Answer 83

The process of devaluing a headline rent with a rent-free period to equal a net effective rent 3 months fit out is typically deduct from rent-free period as its market standard Main approach: 1. Straight line method (either until lease expiry or next rent review/lease event) Could: 2. Use of DCF

Answer 84

The rent payable under lease terms after all incentives have expired, such as a rent-free period. It is an artificially inflated value. Does not represent the true market rental value, however helps to sustain the capital value of the property particularly as rent reviews are upwards only. Tenant agrees to this as they benefit from a relief period via the incentives.

Answer 85

The headline rent minus any incentives, to lease expiry or next lease event. Rent x (Term – Rent Free) ÷ Full Term

Answer 86

Depends on several factors, including: Establish if over- under- or rack-rented Company preferences and software The reversion in terms of time and rental value

Answer 87

Under VPGA 2 this valuation was for secured lending purposes

Answer 88

Agency fees / Legal fees = 15% SC Shortfall = £0.40p psf Business Rates No Capex

Answer 89

Under VPGA 2 / VPS 2 - the basis of value for secured lending was Market Value

Answer 90

I used the Hardcore / Layer Method This was used as the investment was reversionary (under-rented investments). The passing rent was £260k and the market rent was £270k The hardcore refers to the base, reliable income stream or passing rent that is assumed to be relatively safe in nature. When PR < MR, there is potential for the property to generate more income in the future; This potential is what we call the layer of income (MR - PR). Both the hardcore (PR) and layer (MR-PR) are valued into perpetuity, but the layer is deferred to the next lease event. An Equivalent Yield is applied to both the hardcore and layer. This is known as the cap rate. The cap rate (yield) takes into account factors such as the location, quality of the property, tenant strength, and market conditions Used Argus - Hardcore/Layer is standard practice

Answer 91

two units comprised of circa 25,000 sq ft each

Answer 92

the property was in relatively good condition with no outstanding capex required

Answer 93

the units were both in very similar spec, and condition, they had a similar unexpired term

Answer 94

6.75% Adopted same for both units as very similar terms, and spec. If this was different, could adopt a split yield Using investment evidence comparables

Answer 95

Could have been appropriate however, Hardcore and Layer was standard practice at Savills

Answer 96

Industrial park with 6 units 5 miles north of Cardiff city centre

Answer 97

steel frame construction. Eaves height of 9m which is very good (anything above 8m is good)

Answer 98

Under VPS 2, due dilligence included: * Asbestos regulations * Business rates * Environemntal Risk - acceptable risk * EPC - copy received * Flood risk - very low * H&S * Title Deed * Planning history

Answer 99

Under PS 2 of the Red Book Global 2022 I carried out a conflict of interest check Aligned with Conflict of Interest, 2017, professional standard Using internal database that revealed no existing conflict. Savills internal system called DWS

Answer 100

VPS 1 18 items 1. Identification of valuer 2. Identification of client 3. Identification of any other intended users 4. Identification of the asset(s) being valued 5. Valuation currency 6. Purpose of valuation 7. Basis(es) of value adopted 8. Valuation date 9. Nature and extent of the valuer’s work 10. Source(s) of information relied upon 11. Assumptions and special assumptions 12. Format of the report 13. Restrictions on use, distribution and publication of the report 14. Confirmation that the valuation will be undertaken in accordance with the IVS 15. Fee calculation 16. Reference to the firm’s complaints handling procedure, with a copy available on request 17. A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations 18. A statement setting out any limitations on liability that have been agreed

Answer 101

To get an understanding of potential void periods

Answer 102

Lloyd's Bankk

Answer 103

‘The price received to sell an asset in an orderly transaction between market participants at the measurement date.’

Answer 104

Accounting purposes - under VPGA 1

Answer 105

Fair Value is consistent with the definition of Market Value under the Red Book Global. 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”

Answer 106

I spoke to agents to provide a breakdown of Market Rent IZTA A

Answer 107

I used the Hardcore / Layer Method This was used as the investment was reversionary (under-rented investments). The passing rent was £450k and the market rent was £455k The hardcore refers to the base, reliable income stream or passing rent that is assumed to be relatively safe in nature. When PR < MR, there is potential for the property to generate more income in the future; This potential is what we call the layer of income (MR - PR). Both the hardcore (PR) and layer (MR-PR) are valued into perpetuity, but the layer is deferred to the next lease event. An Equivalent Yield is applied to both the hardcore and layer. This is known as the cap rate. The cap rate (yield) takes into account factors such as the location, quality of the property, tenant strength, and market conditions Used Argus - Hardcore/Layer is standard practice

Answer 108

the WAULT was 3 years.

Answer 109

Inputted property data, such as current rental income, lease terms, outgoings and any future reversionary rent Enter comparable properties sales data to be used as benchmarks, including sales prices, rental income, other attributes such as location and age. Argus determines the NIY by dividing NOI/Sale Price Equivalent yield is essentially a blend of initial yield and reversionary yield (expected yield once property reaches Equivalent yield calcuated on Argus (weighted average yield) that reflects bot the current income and the futre rental growth Based on the comparables' yields, adjusted for differences, and considering the income profile of the subject property, ARGUS estimates the equivalent yield. This yield reflects a single, blended rate that incorporates the different income streams (current and reversionary) and future expectations.

Answer 110

If the property has secure long-term leases or upward-only rent reviews, the equivalent yield may be lower, as investors are willing to accept a lower return for lower risk. Conversely, properties with short leases or void periods might attract a higher equivalent yield due to the increased risk.

Answer 111

£4.7m Fair Value

Answer 112

located on prominent position on the prime thoroughfare of Briggate extending to 10,786 sq ft

Valuation (Level 2) Flashcards

(150 cards)