Valuation Main

Question 1

What is the full title of the Red Book?

Answer 1

RICS Valuation – Global Standards (Red Book Global Standards) was published in December 2024, taking effect on 31 January 2025.

Question 2

What is the purpose of the Red Book?

Answer 2

It’s a framework for best practice, setting out procedural rules and guidance. Ensuring consistency, objectivity, and transparency in valuations.

Question 3

What 5 valuations are exceptions to the Red Book?

Answer 3

1. Internal only. 2. Agency/marketing. 3. Statutory. 4. Litigation. 5. Expert witness.

Question 4

What is the difference between Valuation Technical and Performance Standards (VPS) and Valuation Practice Guidance applications (VPGA)?

Answer 4

VPS is mandatory, and VPGA is guidance, best practice recommendations.

Question 5

What are the main contents of the Terms of Engagement for a Valuation?

Answer 5

1. Valuer’s competency 2. Client details 3. Property details 4. Purpose 5. Bases of value 6. Valuation date 7. Limitations 8. Assumptions and Special assumptions 9. Fee and indemnity.

Question 6

Please name the Red Book Global Bases of value?

Answer 6

1. Market value 2. Market rent 3. Investment value 4. Fair value.

Question 7

Describe three assumptions that are usually made in producing a valuation?

Answer 7

1. Title (good and free of restrictive covenants) 2. Property condition (that any hidden aspects will not reveal defects and all equipment is maintained and in good repair) 3. Free from contamination and hazards.

Question 8

Give three situations when it would be appropriate to make special assumptions?

Answer 8

1. If let assume it’s vacant possession 2. If vacant, assume it’s let 3. Assume development is complete 4. Assume planning permission is achieved.

Question 9

When is DRC (Deprecated Replacement Cost) used?

Answer 9

As a last resort for bespoke properties that cannot be valued any other way. Eg school, council asset, library, fire station.

Question 10

How do you calculate the Depreciated Replacement Cost?

Answer 10

Calculate the modern substitution value, adjust for depreciation and add land value.

Question 11

What is the Profits Method of Valuation?

Answer 11

Properties, where you can’t separate their use from their value? Pubs, leisure centres, hotels.

Question 12

How do you do a Profits Method?

Answer 12

Estimate the gross turnover. Deduct cost of the turnover. Giving you the net operating profit which is capitalised.

Question 13

What are the hierarchy of evidence in valuation?

Answer 13

1. Open Market letting 2. Agreed lease renewal 3. Agreed rent reviews 4. Independent expert determination or Arbitration Award 5. Court Decision.

Question 14

What is NPV?

Answer 14

Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time and discounted to present value.

Question 15

What is IRR?

Answer 15

Is the break even point.

Question 16

What is an equivalent yield?

Answer 16

Weighted average between the initial yield and the reversionary yield.

Question 17

What is an initial yield?

Answer 17

Initial Yield is the annual rents of a property as a percentage of the property value.

Question 18

Name the 5 mains methods of valuation?

Answer 18

1. Sales comparison 2. Investment 3. Residual 4. Profit (accounts) 5. Contractors (DRC (Depreciated replacement cost)).

Question 19

What makes a property transaction comparable to the property being valued?

Answer 19

Similarities in physical, location, time, use and tenure.

Question 20

What is the purpose of zoning?

Answer 20

To analyse and value retail units with different frontage to depth ratios, ie. the shapes differ.

Question 21

What is the standard zone depth?

Answer 21

6.1m. Scotland 9.14m.

Question 22

How would you arrive at the market rent for the first floor of a retail unit?

Answer 22

Depends on its use. Retail: zone A/10. Other: Comparison sales method.

Question 23

What is a residual value for?

Answer 23

Land with development potential.

Question 24

What is SDLT rates?

Answer 24

0% to £150k, 2% £150-250k, 5% £250k +.

Question 25

What is a ransom strip?

Answer 25

A piece of land that is used to access development land. Normally valued at 1/3 of uplift in value.

Question 26

Define market rent?

Answer 26

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 arms length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

Question 27

Explain the process of the term and reversion technique for under rented properties?

Answer 27

Capitalise the term to reversion. At reversion capitalise the market rent into perpetuity. Defer it for the term period at a higher yield to reflect risk.

Question 28

Explain the process of hard-core technique for under rented property?

Answer 28

Capitalise the passing rent into perpetuity. Then capitalise the top slice into perpetuity. Then, defer it for period up to reversion, at a higher rate for the top slice.

Question 29

How would you arrive at a discount rate when carrying out a discounted cash flow?

Answer 29

Start with risk-free rate and on a risk premium.

Question 30

What is a reversionary yield?

Answer 30

Reversionary yield is the yield when it reverts to market rated.

Question 31

What is a red book valuation as opposed to an appraisal?

Answer 31

A Red Book valuation is a formal opinion of value and can be relied upon by the instructing party. An appraisal is a less formal estimate of value or opinion of worth.

Question 32

What is an equated yield?

Answer 32

Equated yield is the discount rate at which the net present value (NPV) of all future net income cash flows from a property equals its current capital value.

Question 33

What are the 6 key components of the Red Book?

Answer 33

1. Sets out the professional standards 2. Terms of engagement 3. Basis of value 4. Assumptions and special assumptions 5. Valuation approach and methodology 6. Reporting

Question 34

What are the 4 VPS (technical standards) in the red book?

Answer 34

1. Terms of Engagement 2. Inspections and investigations 3. Valuation reports 4. Bases of value, assumptions and special assumptions