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Valuation - Level 3 Flashcards

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1
Q

What 3 things should you consider before undertaking a valuation?

A

Your professional competence
Your independence
Terms of engagement

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2
Q

What are the minimum information points for Terms of Engagement?

A

There are 18 matters listed alphabetically set out in IVS 101 (Scope of Work) which should be included in terms of engagement as sub headings.

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3
Q

Why might a valuation need to be carried out?

A

Valuations may be carried out for the following purposes:
- Loan security
- Accounts
- Tax (CGT/IHT)

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4
Q

What is the Red Book?

A

The Red Book is a set of global standards which set out procedural rules and guidance for written valuations.

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5
Q

What is the purpose of the Red Book?

A

Consistency
Objectivity
Transparency

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6
Q

When might a valuation not be Red Book?

A

Agency - Market Appraisal
Litigation - Rent Review
Internal
Expert witness - duty to court
Statutory

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7
Q

What are the five valuation methods?

A

Comparable
Investment
Profits
Depreciated Replacement Cost
Residual

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8
Q

How many report headings must be included as per VPS 3 and can you name a few?

A

16 minimum headings
- Identification and status of valuer
- Identification of client and other intended users
- Purpose
- Identification of asset/liability
-Basis of Value
- Valuation date

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9
Q

What is the definition of Market Rent?

A

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 market terms, in an arms length transaction, after proper marketing
Where parties acted knowledgeably, prudently and without compulsion

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10
Q

What is the definition of Market Value?

A

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 arms length transaction, after proper marketing
Where parties acted knowledgeably, prudently and without compulsion.

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11
Q

How many minimum terms must be included in the TOE and can you name a few?

A

18 minimum terms
- Identification and status of valuer
- Identification of client
- Identification of any other intended users
- Identification of the asset/liability being valued
- Purpose
- Basis of value

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12
Q

What is investment value?

A

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

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13
Q

What is the process to become a registered valuer?

A

Valuation to L3 at APC
Valuer Registration Application Form
Renewed annually by firm
Alternative route requires an assessment, 100 days valuation experience signed off by registered valuer, case study submission and CPD.

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14
Q

What is Fair Value?

A

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. IFRS 13

used for accounts purposes
IVS advises FV is generally consistent with MV.

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15
Q

Which parts of the Red Book apply specifically to loan security?

A

VPS 1-5
VPGA 2 - Valuation of interests for secured lending
VPGA 8 - The Valuation of Real Estate
VPGA 10 - Material Uncertainty

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16
Q

Are you aware of a recent piece of valuation negligence case law?

A

Hart V Large 2021

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17
Q

What does the Hart V Large case highlight for surveyors?

A

The Hart v Large case is important for surveyors as it highlights the need to:

Be clear and advise clients on the survey level and scope of inspection, limitations and caveats.
Recommend further investigations are carried out if the surveyor has suspicions that a visible defect may affect other concealed building elements.
Report if any of the elements of the building have not been inspected and provide explanation as to why.
Consider whether any new information provided after inspecting or reporting affects their original advice, and updating their advice if it is justified to do so.

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18
Q

What is the RICS Red Book called?

A

RICS Valuation - Global Standards

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19
Q

When was the RICS Red Book (global) published?

A

published December 2024 and effective 31 January 2025

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20
Q

What is the purpose of the Red Book?

A

Consistency, objectivity, transparency

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21
Q

What is the Red Book?

A

Set of global standards which set out procedural rules and guidance for written valuations

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22
Q

What is a VPS?

A

Valuation Technical and Performance Standards and they are mandatory

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23
Q

VPS 1

A

Terms of Engagement

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24
Q

VPS 2

A

Bases of Value, assumptions and special assumptions

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25
VPS 3
Valuation models
26
VPS 4
Inspections, investigations and records
27
VPS 5
Valuation approaches and methods
28
VPS 6
Valuation reports
29
What is a VPGA?
RICS Valuation Practice Guidance Applications
30
Can you tell me what is covered under VPGA 1
Valuation for inclusion in financial statements
31
Can you tell me what is covered under VPGA 2
Valuation for interests for secured lending
32
Can you tell me what is covered under VPGA 3?
Valuation of businesses and business interests
33
Can you tell me what is covered under VPGA 4?
Valuation of individual trade related properties
34
Can you tell me what is covered under VPGA 5?
Valuation of plant and equipment
35
Can you tell me what is covered under VPGA 6?
Valuation of intangible assets
36
Can you tell me what is covered under VPGA 7?
Valuation of personal property, including arts and antiques
37
Can you tell me what is covered under VPGA 8?
Valuation of real property interests
38
Can you tell me what is covered under VPGA 9?
Identification of portfolios, collections and groups of properties
39
Can you tell me what is covered under VPGA 10?
Matters that may give rise to material valuation uncertainty
40
Can you tell me what is covered under VPGA 11?
Relationship with auditors
41
What is a valuation date?
Date on which opinion of value applies
42
What is the date of the valuation report?
Date on which the valuer signs the report
43
What is the difference between an assumption and a special assumption?
An assumption is something that is taken to be true without the valuer needing to verify (e.g., we have assumed the services at the property are in working order). A special assumption is something that is known not to be true, but is taken as true for the purpose of the valuation (e.g., vacant possession when property is occupied)
44
Are there any RICS guidance notes or professional statements you would have regard to when carrying out valuations?
RICS Sustainability and ESG Professional Statement Comparable Evidence in Real Estate Valuation (professional standard - effective October 2019)
45
What are the principles/purposes of PII?
The purpose of professional indemnity insurance is to ensure that if a firm faces a claim it is protected from financial loss that it cannot meet from its own resources.
46
Does the RICS provide any guidance to assist regulated firms understanding risks and liabilities associated with professional services provided by its members?
Risk, liability and insurance - guidance note effective April 2021
47
What is a liability cap?
A liability cap is a clause in a contractual agreement that limits the amount that a party is liable for in the event of a breach of contract or any sort of negligence
48
What is the minimum limit of indemnity?
£250,000
49
What are the different purposes valuations are undertaken for?
Tax Accounts Loan security
50
Why is due diligence taken?
Due diligence is taken to check their are no material matters which could impact the valuation
51
What statutory due diligence do you undertake as part of the valuation process?
Asbestos register Business rates/council tax Contamination Equality act 2010 compliance Environmental matters EPC rating if available Flooding Fire safety compliance Health and safety compliance Highways Legal title and tenure Public rights of ways Planning history
52
Why is it important to understand the purpose of a valuation?
Understanding the purpose of a valuation is crucial because it dictates the methods used, the scope of the analysis, and the interpretation of the results
53
What is an internal valuer?
Is employed by the company to value the assets of the company/enterprise Valuation for internal use only No third party reliance
54
What is an external valuer?
Has no material links with the asset to be valued or the client
55
What are the 6 steps when undertaking the comparative method?
1. Search and select comparables 2. Confirm/verify details and analyse headline rent to give a net effective rent as appropriate 3. Assemble comparables in schedule 4. Adjust comparables using the hierarchy of evidence 5. Analyse comparables to form opinion of value 6. Report value and prepare file note
56
What is a yield?
A measure of investment return, expressed as a percentage of capital interest
57
How do you calculate a yield?
Income / price x100
58
What is a years purchase?
The number of years required for its income to repay its purchase price
59
How do you calculate a Years Purchase?
Dividing 100 by the yeild
60
What are some key risks that should be considered when arriving at a yield?
Prospects for rental and capital growth Quality of location and covenant Use of property Lease terms Obsolescence - what is the likely future rate? Voids - what is the risk? Security and regularity of income Liquidity - ease of sale
61
What is a gross yield?
The yield not adjusted for purchasers costs e.g auction result
62
What is a net initial yield?
The resulting yield adjusted for purchasers costs
63
What are the 3 valuation approaches?
Income approach - converting current and future cash flows into a capital value (Investment, residual & profits methods) Cost approach - reference to the cost of the asset whether by purchase or construction (DRC method) Market approach - using comparable evidence available (comparative method)
64
When would you carry out a hardcore and top slice valuation? And what does the hardcore represent?
I would use it for over rented investments so if the passing rent if more than the market rent Bottom slice = market rent Top slice = Rent passing less market rent
65
What Key data do you need to use the Hardcore and Top Slice method?
Passing rent Market rent (Estimated rental value) Yield for hardcore Yield for top slice Time until review or reversion
66
How would you calculate a Hardcore and Top Slice method?
Hard core The current rent is capitalised at a lower yield Hardcore = Passing rent/hardcore yield Tope Slice The difference between estimated rental value and passing rent capitalised at the higher yield Top slice = (ERV-Passing rent)/ Top slice yield Total Total value = Hardcore value + Top Slice value
66
Why is the Hardcore and Top Slice method used?
The hardcore and top slice method is used because it reflects the differing levels of risk between the current and potential rental income. The existing rent (hardcore) is secure and therefore capitalised at a lower yield, while the reversionary or potential rent (top slice) is more uncertain and valued at a higher yield. This provides a more realistic and investor-focused valuation than using a single yield, as in the term and reversion method.
67
When would you use the term and reversion method of valuation?
I would use term and reversion for reversionary investments so if market rent is more than passing rent
68
What key data do you need to calculate a term and reversion?
Current passing rent Market rent Time to review or reversion Years Purchase (YP) or yield/capitalisation rate
69
How would you calculate a term and reversion?
Value the term Term value = Passing rent x YP for years to expiry at yield Value the reversion Reversion value = Market rent x YP in perpetuity (at same yield) x PV for years to expire Total Total value = Term value + Reversion value
70
Why is the Term and Reversion method used?
The Term and Reversion method is used to value income-producing property where the passing rent differs from the market rent. It allows the valuer to separately capitalise the current income for the unexpired lease term and the future reversionary income at market rent, providing a realistic reflection of lease structure, income risk, and future rental growth.
71
When would you use the profits method?
I would use it when valuing it on a tradeing basis and on its ability to generate a profit
72
When and how would you use the Investment method?
I will use it when there is an income stream to value. The rental income is capitalised to produce a capital value.
73
Can you explain the methodology behind a profits valuation?
Turnover – Costs = Gross Profit Gross Profit – Reasonable Working Expenses = Unadjusted Net Profit Unadjusted Net Profit – Operators Remuneration = Fair Maintainable Operating Profit Capitalised at yield to achieve Market Value
74
What is the Depreciated Replacement Cost Method?
DCF technique measure the value of an asset by the present value of its future economic cash flow, which is cash that is generated over a period of time by an asset, group of assets or business enterprise
75
What is the Residual Method?
The residual method calculates the residual amount after deducting all known or anticipated costs required to complete the development from the anticipated value of the project when completed after consideration of the risks associated with completion of the project.
76
What does growth implicit mean?
Growth implicit means that future income growth is already assumed and reflected within the valuation or yield applied, without being separately identified.
77
What is the market approach?
The market approach provides an indication of value by comparing the asset and/or liability with identical or comparable asset and/or liability for which price information is available.
78
What is the cost approach?
The cost approach provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or construction, unless undue time, inconvenience, risk or other factors are involved.
79
What is the income approach?
It provides an indication of value by converting future cash flow to a present value equivalent, through the application of an appropriate rate of return an investor would require, when considering the purchase of the asset.
80
What are the main drivers that can have an impact on a property’s value?
Location condition and age of property Size Planning and legal restrictions
81
When might you undertake a desktop valuation?
Where the property has been previously inspected by the valuer/firm When, following discussion with the client, they have confirmed that there have been no material changes to the physical attributes/location of the property Any assumptions made to this affect must be set out in the terms of engagement Where clients may require regular re-valuations of their property it would not always be necessary to re-inspect – whether or not the property should be inspected would be determined by the valuer. Guidance is within VPS 2
82
What changes did the new Red Book introduce?
Alignment with the latest International Valuation Standards Council (IVS) and has reordered Valuation Technical and Performance Standards (VPS) now 1-6 Mandatory consideration of ESG factors at every stage Introduces new content on modelling and methods and acknowledge the use of AI Revised guidance for VPSA and introduction of VPGA 11 - Relationship with auditors UK specific supplement changes/rotation rules (e.g. a maximum of 10 years for a firm to value an asset consecutively, followed by mandatory rotation)
83
What is an all risk yield?
Yield which reflects all the prospects and risks attached to a particular investment
84
What is a True Yield?
Assumes rent is paid in advance, not in arrears
85
What is a Nominal Yield?
Assumes rent is paid in arrears
86
What is a running yield?
Yield at one moment in time
87
What does a DCF Valuation assume?
Growth implicit
88
What is a reversionary yield
Market Rent/purchase price
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