Valuation Fundamentals
146 Questions
1 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the first step in assessing the viability of a proposed development?

  • Deduct Development Costs
  • Estimate the Gross Development Value (GDV) (correct)
  • Evaluate Results
  • Calculate Residual Land Value

    • Which of the following is NOT typically included in the Development Costs?

  • Professional fees
  • Construction costs
  • Rental income during development (correct)
  • Marketing and sales costs

    • What does the investment method for valuation primarily rely on?

  • Cost of construction materials
  • Zone regulations and restrictions
  • Income streams generated from the property (correct)
  • Historical pricing patterns

    • How is the Residual Land Value calculated?

    <p>GDV - (Development Costs + Profit Margin)</p> Signup and view all the answers

    What should be compared to the Residual Land Value to assess project profitability?

    <p>The asking price of the land</p> Signup and view all the answers

    How is the implied growth rate derived in the conventional investment method?

    <p>From the market capitalisation rate (yield)</p> Signup and view all the answers

    In the context of property valuation, what does YEARS PURCHASE (YP) represent?

    <p>The years worth of income that would amount to asset value</p> Signup and view all the answers

    What is a typical contingency allowance in Development Costs expressed as?

    <p>A percentage of construction costs</p> Signup and view all the answers

    Which formula represents the calculation of yield?

    <p>$Annual Income / Property Value * 100$</p> Signup and view all the answers

    What method is used for over rented investments?

    <p>Layer/Hardcore method</p> Signup and view all the answers

    What does the term 'reversionary investments' refer to?

    <p>Properties where market rent exceeds passing rent</p> Signup and view all the answers

    Which of the following describes the 'bottom slice' in the Layer/Hardcore method?

    <p>Market Rent</p> Signup and view all the answers

    What is the relationship between yield and YEARS PURCHASE (YP)?

    <p>YP is the inverse of yield</p> Signup and view all the answers

    What is the primary role of an internal valuer?

    <p>To value assets for internal company use only</p> Signup and view all the answers

    What is a key requirement for establishing competence in valuation?

    <p>Having relevant skills and knowledge</p> Signup and view all the answers

    Which of the following is NOT identified as a statutory due diligence requirement?

    <p>Company financial health</p> Signup and view all the answers

    What does 'All Risks Yield' reflect in valuation?

    <p>Market rent reflecting risks and prospects</p> Signup and view all the answers

    What does the term 'True Yield' assume about rental payments?

    <p>Rent is always paid in advance</p> Signup and view all the answers

    The Gross Yield is defined as:

    <p>Yield before property costs are deducted</p> Signup and view all the answers

    Which yield assumes that rents are received in arrears?

    <p>Nominal Yield</p> Signup and view all the answers

    What aspect is crucial in the terms of engagement?

    <p>Written confirmation of instructions</p> Signup and view all the answers

    What does Environmental due diligence assess?

    <p>Presence of hazardous materials or risk factors</p> Signup and view all the answers

    What is the appropriate action if a valuer identifies potential conflicts of interest?

    <p>Notify the client and reassess involvement</p> Signup and view all the answers

    The Reversionary Yield is calculated as:

    <p>Market rent divided by the current price of the property</p> Signup and view all the answers

    Which is a common element of the comparable method?

    <p>Analysis of similar property sales for evidence</p> Signup and view all the answers

    What does the top slice refer to in property valuation?

    <p>Market rent less current rent passing until next lease event</p> Signup and view all the answers

    What is the main purpose of a Discounted Cash Flow (DCF) analysis?

    <p>To estimate future net income and project cash flow</p> Signup and view all the answers

    What does a positive Net Present Value (NPV) indicate about an investment?

    <p>The investment has achieved the target rate of return</p> Signup and view all the answers

    In the context of property valuation, what does the Internal Rate of Return (IRR) represent?

    <p>The rate of return at which all future cash flows must be discounted to produce an NPV of zero</p> Signup and view all the answers

    What is the main principle behind the Profits Method of Valuation?

    <p>It assesses the profitability and trading potential of the business linked to the property</p> Signup and view all the answers

    For a Residual Method valuation, what is typically assessed?

    <p>The profitability of a proposed development scheme</p> Signup and view all the answers

    What financial inputs are required for the Profits Method, specifically regarding business plants?

    <p>Accurate and audited accounts for the past three years must be available</p> Signup and view all the answers

    When conducting a DCF analysis, how should cash flows be treated?

    <p>Cash flows must be discounted to arrive at their present value</p> Signup and view all the answers

    In the Profits Method of valuation, which formula summarizes the calculation of Fair Maintainable Operating Profit (FMOP)?

    <p>Gross profit minus operator's remuneration equals FMOP</p> Signup and view all the answers

    What does the residual site value indicate in development appraisals?

    <p>The market value of the site based on development inputs</p> Signup and view all the answers

    Which type of properties are best suited to the Profits Method of Valuation?

    <p>Trade-related properties with significant business income</p> Signup and view all the answers

    What is the primary objective of a DCF analysis regarding cash flows?

    <p>To examine explicitly estimated cash flows over a finite holding period</p> Signup and view all the answers

    How is the exit value considered in the NPV calculation?

    <p>It is estimated at the end of the holding period as part of cash flow</p> Signup and view all the answers

    Which of the following best describes the concept of capitalisation in property valuation?

    <p>It estimates the future potential value of a property based on current income</p> Signup and view all the answers

    What must terms of reference clarify in valuations?

    <p>Whether the valuation is RBG compliant or not.</p> Signup and view all the answers

    Which of the following is NOT a mandatory valuation requirement?

    <p>Valuation for a client for internal purposes only.</p> Signup and view all the answers

    What is the primary purpose of compliance with the RBG?

    <p>To maintain ethical standards in valuations.</p> Signup and view all the answers

    What does Market Value generally represent?

    <p>The price after proper marketing in a knowledgeable transaction.</p> Signup and view all the answers

    Which of the following is a characteristic of Fair Value (IFRS 13)?

    <p>It reflects the price in an orderly transaction among market participants.</p> Signup and view all the answers

    Which valuation technique is specifically excluded from VPS 1-5 requirements?

    <p>Valuation for internal client use.</p> Signup and view all the answers

    What is included in both Terms of Engagement (IVS 101) and Valuation Reports (IVS 103)?

    <p>Assumptions to be made.</p> Signup and view all the answers

    Which of the following is NOT on the list for Mandatory use exceptions?

    <p>Valuations provided for financial investments.</p> Signup and view all the answers

    What does Investment Value reflect?

    <p>Value of an asset based on specific ownership criteria.</p> Signup and view all the answers

    How does material uncertainty affect property valuation?

    <p>It makes establishing an accurate property value challenging.</p> Signup and view all the answers

    Which of the following is part of the basis of value definitions?

    <p>Investment value.</p> Signup and view all the answers

    Which statement regarding fee basis in valuation is true?

    <p>The fee basis must be agreed upon and stated within the terms of engagement.</p> Signup and view all the answers

    What type of report is required when providing a valuation for agency work?

    <p>A purchase report that includes a valuation if requested.</p> Signup and view all the answers

    What is the formula used to calculate the Residual Land Value?

    <p>Residual Land Value = GDV - Development Costs - Profit Margin</p> Signup and view all the answers

    The Gross Development Value (GDV) is valued at a future date, assuming future market conditions.

    <p>False</p> Signup and view all the answers

    What should be deducted from the GDV to estimate the remaining land value?

    <p>Development Costs and Profit Margin</p> Signup and view all the answers

    To assess project profitability, the Residual Land Value must be compared to the ________ of the land.

    <p>asking price</p> Signup and view all the answers

    Match the following components with their roles in development appraisal:

    <p>Gross Development Value (GDV) = Estimated market value of finished development Development Costs = Expenses related to construction and planning Profit Margin = Return on investment expectation Residual Land Value = Value after costs and profit subtracted from GDV</p> Signup and view all the answers

    What does the investment method rely on for valuation?

    <p>Income stream and rental capitalisation</p> Signup and view all the answers

    The YEARS PURCHASE (YP) is the direct result of dividing the annual income by the property value.

    <p>False</p> Signup and view all the answers

    What formula represents the calculation of YIELD in property valuation?

    <p>YIELD (%) = (Annual Income / Property Value) * 100</p> Signup and view all the answers

    In property valuation, the term ________ refers to the value of the property during the current lease period.

    <p>Term</p> Signup and view all the answers

    Match the following terms with their descriptions:

    <p>Yield = Return on investment per annum Years Purchase = The inverse of yield Layer/Hardcore Method = Used for over rented investments Term = Value during current lease period</p> Signup and view all the answers

    Which method is used for reversionary investments?

    <p>Term &amp; Reversion Method</p> Signup and view all the answers

    Market Rent being greater than passing rent indicates an under rented property.

    <p>False</p> Signup and view all the answers

    What does implied growth rate derive from in the conventional investment method?

    <p>Market capitalisation rate (yield)</p> Signup and view all the answers

    What is the first step in finding relevant comparables?

    <p>Search and select comparables</p> Signup and view all the answers

    The hierarchy of evidence suggests that Category B evidence should always be prioritized over Category A evidence.

    <p>False</p> Signup and view all the answers

    What is crucial to consider regarding the date of evidence in valuation?

    <p>The date of evidence is crucial because it needs to be contemporary.</p> Signup and view all the answers

    In dealing with limited evidence, the valuer should use professional _______ to assess the relative importance of evidence.

    <p>judgment</p> Signup and view all the answers

    Match the categories of evidence with their descriptions:

    <p>Category A = Completed transactions of near identical properties Category B = General market data from published sources Category C = Transactional evidence from other real estate types</p> Signup and view all the answers

    Which of the following is NOT a step in the process of finding relevant comparables?

    <p>Prepare a project proposal</p> Signup and view all the answers

    Market sentiment can be important when there is ample transactional evidence.

    <p>False</p> Signup and view all the answers

    What is one example of the type of data that could be considered in Category C evidence?

    <p>Interest rates or stock market movement</p> Signup and view all the answers

    What is the role of an external valuer?

    <p>To value assets with no material links to the asset or client</p> Signup and view all the answers

    The 'All Risks Yield' only reflects market rents without considering any risks.

    <p>False</p> Signup and view all the answers

    What must be confirmed in the terms of engagement regarding the valuer?

    <p>Competence of valuer</p> Signup and view all the answers

    The __________ Assures that environmental matters like power lines and flooding are checked during due diligence.

    <p>Environmental due diligence</p> Signup and view all the answers

    Match the following yields with their definitions:

    <p>Net Yield = Yield adjusted for purchasers costs True Yield = Assumes rent is paid in advance Nominal Yield = Initial yield assuming rent paid in arrears Gross Yield = Yield not adjusted for purchasers costs</p> Signup and view all the answers

    Which of the following is NOT considered a statutory due diligence matter?

    <p>Business competition analysis</p> Signup and view all the answers

    Reversionary yield is calculated based on properties let above market rent.

    <p>False</p> Signup and view all the answers

    Explain what the term 'Terms of Engagement' signifies in valuation practice.

    <p>A written confirmation of instructions to the client.</p> Signup and view all the answers

    The initial yield calculation does not account for ___________ costs.

    <p>purchaser</p> Signup and view all the answers

    Match the following valuation types with their characteristics:

    <p>All Risks Yield = Reflects all prospects and risks Equivalent Yield = Average weighted yield True Yield = Assumes rent is paid in advance Gross Yield = Not adjusted for any costs</p> Signup and view all the answers

    What does the term 'EPC rating' refer to?

    <p>Energy Performance Certificate rating</p> Signup and view all the answers

    The independence of a valuer is important to avoid conflicts of interest.

    <p>True</p> Signup and view all the answers

    What is required from a valuer to ensure they are competent?

    <p>Relevant skills, understanding, and knowledge.</p> Signup and view all the answers

    The __________ assessment must address compliance with the Equality Act 2010.

    <p>due diligence</p> Signup and view all the answers

    Which of the following represents the yield for properties occupied at market rent?

    <p>Initial Yield</p> Signup and view all the answers

    What must be clearly stated in terms of reference for valuations?

    <p>That valuations are either RBG compliant or not</p> Signup and view all the answers

    Material uncertainty refers to situations where there is a high degree of reliability in property valuations.

    <p>False</p> Signup and view all the answers

    List one exception to the mandatory use for valuations as stated in VPS 1-5.

    <p>Valuation for internal purposes without liability.</p> Signup and view all the answers

    The estimated amount for which an asset should be exchanged is known as _________ Value.

    <p>Market</p> Signup and view all the answers

    Match the definitions of bases of value with their correct descriptions:

    <p>Market Value = Estimated amount for asset exchange Fair Value = Price in orderly transaction among market participants Market Rent = Amount for leasing real property Investment Value = Value based on individual investment objectives</p> Signup and view all the answers

    Which of the following factors must be included in the Terms of Engagement?

    <p>Nature and source of information relied upon</p> Signup and view all the answers

    A valuer performing a statutory function is required to comply with VPS standards.

    <p>False</p> Signup and view all the answers

    What are ESG factors?

    <p>Environmental, Social, and Governance factors.</p> Signup and view all the answers

    Market Rent additionally includes all Market Value conditions plus ________ terms.

    <p>appropriate lease</p> Signup and view all the answers

    Which of the following is NOT a mandatory use exception outlined in VPS 1-5?

    <p>Valuation for property leasing</p> Signup and view all the answers

    Investment Value may be the same as Market Value.

    <p>False</p> Signup and view all the answers

    What is the primary purpose of the International Valuation Standards (IVS)?

    <p>To provide guidelines and standards for property valuations.</p> Signup and view all the answers

    _________ uncertainty can make it difficult to establish an accurate property value.

    <p>Material</p> Signup and view all the answers

    Which document identifies the purpose of valuation and the asset to be valued?

    <p>VPS 3</p> Signup and view all the answers

    What is the first step in the process of finding relevant comparables?

    <p>Search and select comparables.</p> Signup and view all the answers

    Why is it important to verify details and analyze headline rents?

    <p>It ensures accuracy in determining the net effective rent.</p> Signup and view all the answers

    What should be considered when adjusting comparables using the hierarchy of evidence?

    <p>The relevance and reliability of the evidence should be evaluated.</p> Signup and view all the answers

    What is a potential pitfall when using auction data as comparables?

    <p>Auction prices are often gross and may not reflect true market value.</p> Signup and view all the answers

    What category of evidence includes completed transactions of nearly identical properties?

    <p>Category A - direct comparables.</p> Signup and view all the answers

    In the hierarchy of evidence, what type of information is found in Category B?

    <p>General market data that provides guidance.</p> Signup and view all the answers

    What is the formula for calculating the Residual Land Value?

    <p>Residual Land Value = GDV - (Development Costs + Profit Margin)</p> Signup and view all the answers

    Why is contemporary evidence emphasized in the valuation process?

    <p>The date of evidence is crucial for reflecting current market conditions.</p> Signup and view all the answers

    How can the Gross Development Value (GDV) be estimated?

    <p>The GDV can be estimated by researching comparable properties in the area while considering the specifications of the proposed development.</p> Signup and view all the answers

    What might market sentiment indicate when there is a lack of transactional evidence?

    <p>It can provide insights into prevailing trends and investor confidence.</p> Signup and view all the answers

    What role do purchaser costs play in commercial property valuations?

    <p>Purchaser costs are typically deducted from the valuation of commercial properties to reflect the true net value for buyers.</p> Signup and view all the answers

    What factors should be deducted from the GDV to assess financial feasibility?

    <p>Factors to deduct include construction costs, professional fees, finance costs, marketing costs, and a contingency allowance.</p> Signup and view all the answers

    What does comparing the residual land value to the asking price indicate about a project?

    <p>If the residual land value is higher than the asking price, it suggests the project may be profitable.</p> Signup and view all the answers

    What is the primary calculation involved in determining the Market Value using the Conventional Investment Method?

    <p>Market Rent is multiplied by the Years Purchase (YP) to calculate Market Value.</p> Signup and view all the answers

    How is the Yield calculated in terms of property investment?

    <p>Yield is calculated as (Annual Income / Property Value) * 100.</p> Signup and view all the answers

    What does the 'Term' refer to in the context of reversionary investments?

    <p>The 'Term' refers to the value of the property during the current lease period.</p> Signup and view all the answers

    In the context of property valuation, how is the Years Purchase (YP) related to Yield?

    <p>Years Purchase (YP) is the inverse of yield, calculated as YP = 1 / Yield.</p> Signup and view all the answers

    What is indicated by a high Yield percentage in property investment?

    <p>A high Yield percentage indicates a higher return on investment for the property.</p> Signup and view all the answers

    Why is it important to consider comparables when assessing rents and yields?

    <p>Comparables provide a benchmark for evaluating market trends and setting realistic prices.</p> Signup and view all the answers

    What does the term 'Reversionary Yield' signify in property valuation?

    <p>Reversionary Yield indicates the expected yield from a property once it reaches market rent.</p> Signup and view all the answers

    What is the purpose of the Layer/Hardcore method in property valuation?

    <p>The Layer/Hardcore method is used for over rented investments to analyze income flow.</p> Signup and view all the answers

    What does the declaration of material uncertainty indicate about a valuation report?

    <p>It indicates that the valuation may be unreliable due to unpredictable market conditions, requiring stakeholders to interpret the results with caution.</p> Signup and view all the answers

    In which scenario might a valuer apply material uncertainty to their valuation?

    <p>A valuer might apply material uncertainty when appraising property during an economic downturn, especially if there are limited comparable transactions.</p> Signup and view all the answers

    What role do the RICS Red Book sections play regarding material uncertainty in valuations?

    <p>They provide ethical guidance and communicate the need for transparency about uncertainties affecting valuation processes.</p> Signup and view all the answers

    How can unprecedented market changes impact the availability of comparable transaction data?

    <p>Such changes can decrease the availability of comparable data, making accurate benchmarking of property values more challenging.</p> Signup and view all the answers

    Why is it important for valuers to communicate uncertainties in their valuation reports?

    <p>Effective communication of uncertainties ensures that clients and stakeholders make informed decisions based on the current market conditions.</p> Signup and view all the answers

    What has been a notable instance that highlighted the importance of acknowledging material uncertainty in valuations?

    <p>The COVID-19 pandemic significantly impacted property valuation, demonstrating the need for caution due to rapid market changes.</p> Signup and view all the answers

    What is the ethical responsibility of valuers concerning material uncertainty according to the RICS guidelines?

    <p>Valuers have an ethical responsibility to disclose material uncertainties to safeguard clients' interests.</p> Signup and view all the answers

    What are some types of valuation methods that may be impacted by material uncertainty?

    <p>Methods such as comparable sales and income approaches may be affected by material uncertainty during volatile market conditions.</p> Signup and view all the answers

    What is the key difference between an internal valuer and an external valuer?

    <p>An internal valuer is employed by the company to value its assets for internal use only, while an external valuer has no material links with the asset or client and provides independent assessments.</p> Signup and view all the answers

    List two essential components that a valuer must check during statutory due diligence.

    <p>The valuer must check the asbestos register and environmental matters such as flood risks.</p> Signup and view all the answers

    What does the term 'Net Yield' refer to in property valuation?

    <p>Net Yield is the All Risks Yield adjusted for purchaser's costs.</p> Signup and view all the answers

    What assumption is made about rental payments in the context of 'True Yield'?

    <p>True Yield assumes that rent is paid in advance instead of in arrears.</p> Signup and view all the answers

    Define the term 'Equivalent Yield'.

    <p>Equivalent Yield is the average weighted yield when a reversionary property is valued using both initial and reversionary yields.</p> Signup and view all the answers

    What is the definition of 'Initial Yield'?

    <p>Initial Yield is the simple income yield calculated based on current income against the current price of the investment.</p> Signup and view all the answers

    During the terms of engagement, what must be explicitly confirmed in writing?

    <p>The extent and limitations of the valuer's inspections must be stated, along with receiving written confirmation back from the client.</p> Signup and view all the answers

    What is the significance of checking 'Legal title and tenure' during due diligence?

    <p>It ensures that the property's boundaries, covenants, and easements are correctly understood and compliant with legality.</p> Signup and view all the answers

    Explain the concept of 'Running Yield'.

    <p>Running Yield is the yield that is not adjusted for purchaser's costs at a specific moment in time.</p> Signup and view all the answers

    What does 'Reversionary Yield' measure in the context of property valuation?

    <p>Reversionary Yield measures the expected future income from a property valued at a rent below the market rent.</p> Signup and view all the answers

    What is the primary purpose of the comparable method in property valuation?

    <p>The primary purpose is to assess property value based on sales of similar properties in the market.</p> Signup and view all the answers

    In the context of valuation, what does 'Market Value' generally represent?

    <p>Market Value represents the estimated price at which a property would sell in an open market under normal conditions.</p> Signup and view all the answers

    What action should a valuer take if conflicts of interest are identified?

    <p>The valuer must disclose the conflicts to the relevant parties and may need to decline the engagement if necessary.</p> Signup and view all the answers

    What is assessed during environmental due diligence?

    <p>Environmental due diligence assesses potential environmental risks such as contamination, flooding, and compliance with regulations.</p> Signup and view all the answers

    How do statutory due diligence requirements contribute to property valuations?

    <p>They ensure that all material issues, such as planning compliance and fire safety, are reviewed and accounted for in the valuation.</p> Signup and view all the answers

    Study Notes

    Definitions of Valuer

    • Internal Valuer: Employed by a company to value its assets, for internal use only.
    • External Valuer: Has no material links to the asset or the client.

    Commencing a Valuation

    • Competence: Valuer must have necessary skills, understanding, and knowledge (SUK).
    • Independence: Valuer must be independent, with no conflicts of interest.
    • Terms of Engagement: Written confirmation of instructions, outlining the scope of work and responsibilities.

    Stat Due Diligence

    • Required to check no material matters which could impact the valuation:
      • Asbestos register
      • Business rates/council tax
      • Contamination
      • Equality Act 2010 compliance
      • Environmental matters (power lines, telecoms masts, flooding)
      • EPC rating
      • Fire safety compliance
      • Highways (adopted or not)
      • Legal title and tenure (boundaries, covenants, easements)
      • Planning history and compliance

    Definitions

    • All Risks Yield: Rate of return used for valuing fully let property, reflecting all risks and prospects.
    • Net Yield: All Risks Yield adjusted for purchaser's costs.
    • Equivalent Yield: Average weighted yield used for reversionary property valuation (using initial and reversionary yields).
    • True Yield: Assumes rent is paid in advance, not in arrears.
    • Initial Yield: Simple income yield for current rent and current price assuming rent is paid in arrears.
    • Nominal Yield: Initial yield assuming rent paid in arrears.
    • Reversionary Yield: Market rent divided by current price on an investment let at a rent below market rent.
    • Gross Yield: Yield not adjusted for purchaser's costs.

    Comparable Method

    • RICS Professional Standard outlines principles for using comparable evidence:
      • Completed transactions: Similar assets, using reliable available data.
      • Similar real estate being marketed: Offers made but no binding contract completed.
      • Asking prices: With careful analysis.

    Investment Method

    • Used when there is an income stream to value: Rental income is capitalized to produce capital value.
    • Conventionally assumes implicit growth: Implied growth rate is derived from the market capitalization rate (yield).

    Conventional Investment Method

    • Rent received (or market rent) multiplied by the years purchase (YP) to calculate market value.
    • Importance of comparables to rents and yields

    Equations

    • Yield (%) = (Annual Income / Property Value) * 100 (Return on investment per annum)
    • Years Purchase (YP) = 1 / Yield (Capitalisation rate, the number of years worth of income that equals asset value)

    Term & Reversion

    • Used for reversionary investments (when under rented): Market rent is more than passing rent.
      • Term: Value of the property during the current lease period, capitalized until the next review or lease expiry, at an initial yield.
      • Reversion: Value of the property after the current lease period, market rent valued in perpetuity at a reversionary yield.

    Layer/Hardcore Method

    • Used for over rented investments: Income flow is divided horizontally.
      • Bottom slice: Market rent.
      • Top slice: Rent passing less market rent, until the next lease event.
      • Higher yield applied to the top slice: To reflect additional risk.

    Discounted Cash Flow (DCF)

    • Growth explicit investment method of valuation: Examines future net income or projected cash flow to determine current value.
    • Used where projected cash flows are explicitly estimated over a finite period:
      • Short leasehold interest with income voids or complex tenures
      • Phased development projects
      • Non-standard investments
      • Over rented properties or social housing

    Methodology

    • Estimates future cash flows (income less expenditure) over an agreed holding period.
    • Estimates the exit value at the end of the holding period.
    • Selects a discount rate.
    • Discounts the cash flow at the discount rate.
    • Value is the sum of the completed discounted cash flows to provide the NPV.

    Key Terms

    • Net Present Value (NPV): Sum of the discounted cash flows of the project.
    • Internal Rate of Return (IRR): Rate of return at which all future cash flows produce a NPV of zero.

    Profits Method of Valuation

    • Used for valuations of trade related properties where there is a 'monopoly' position.
    • Assumes the value of the property depends on the profitability of its business and its trading potential.
    • Requires accurate and audited 3 year accounts.
    • Value of the property is based on the profit generated from the business, not the physical building or location.

    Methodology

    • Annual turnover (income) less costs/purchases = Gross Profit
    • Less reasonable working expenses = Unadjusted Net Profit
    • Less operator's remuneration = Adjusted Net Profit (Fair Maintainable Operating Profit - FMOP)

    EBITDA

    • Earnings before interest, tax, depreciation, and amortization (EBITDA)
    • Capitalized at an appropriate yield (YP multiplier) to achieve market value.

    Residual Method & Development Appraisal

    • Tool to financially assess the viability of development schemes.
    • Can be used to establish a residual site value or assess the profitability of a proposed scheme.

    Development Appraisal

    • Series of calculations to establish the value/viability/profitability/suitability of a proposed development based on client inputs.
    • Can assume a site value or calculate a site value.
    • Provides guidance on the viability of the proposed development.

    Residual Site Valuation

    • Most common purpose is for a specific valuation of a property holding to find the market value of the site based on inputs.
    • Form of Development Appraisal based on simple residual value or DCF method.
    • All inputs taken at the date of valuation.

    Residual Site Valuation Methodology

    • Estimate the Gross Development Value (GDV): Capital value of the completed scheme, using plans and current market conditions.
    • Deduct Development costs: Construction, professional fees, finance, marketing, and contingencies.
    • Subtract Profit Margin: Determine reasonable profit margin as a percentage of GDV or fixed return on investment.
    • Calculate the Residual Land Value: GDV - (Development costs + Profit Margin)
    • Evaluate Results: Compare residual land value to asking price of the land.

    Introduction

    • International Valuation Standards (IVS) are used for property valuations
    • Some changes from previous version include:
      • Need for compliance with Red Book Guidelines (RBG)
      • Terms of reference must explicitly state if valuations are RBG compliant
      • Sustainability and ESG factors are important considerations
    • There are five exceptions to compliance with VPS 1 to VPS 5

    Mandatory Exceptions to VPS 1-5

    • Valuation advice in preparation for negotiations or litigation
    • Valuer performing statutory functions (excluding valuations for tax returns)
    • Valuation for internal client use (without liability and not shared with third parties)
    • Valuations as part of agency and brokerage work (except when a purchase report is required)
    • Valuation advice in anticipation of providing expert witness evidence

    Terms of Engagement (IVS 101)

    • Valuer's identity and status
    • Client identification
    • Any other intended user's identification
    • Asset to be valued (or portfolio)
    • Valuation currency
    • Purpose of valuation
    • Basis of value
    • Valuation date
    • Extent of the investigation
    • Nature and source of information relied upon
    • Assumptions and special assumptions made
    • Report format
    • Restrictions on use, distribution, and publication
    • Confirmation of Red Book compliance
    • Fee basis
    • Complaints handling procedure
    • Statement that the valuation may be subject to RICS compliance
    • Agreed limitation on liability (PII)

    Valuation Reports (VPS3 - IVS 103 Reporting)

    • Valuer's identity and status
    • Client's identification (and any other intended user)
    • Valuation purpose
    • Asset to be valued (or portfolio)
    • Basis of value
    • Valuation date
    • Extent of the investigation
    • Nature and source of information relied upon
    • Assumptions and special assumptions made
    • Report format
    • Restrictions on use, distribution, and publication
    • Confirmation of Red Book compliance (and undertaken in accordance with IVS standards)
    • Valuation approach and reasoning
    • Valuation figure(s)
    • Comment on market uncertainty
    • Agreed limitation on liability (PII)

    Bases of Value (Definitions)

    • Market Value: Estimated amount for which an asset or liability should be exchanged on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, with both parties acting knowledgeably, prudently, and without compulsion.
    • Market Rent: Estimated amount for which an interest in real property should be leased, including all elements of market value plus appropriate lease terms.
    • Fair Value (IFRS 13): Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This is generally consistent with the definition of Market Value (RICS view).
    • Investment Value: Value of an asset to a particular owner or prospective owner for individual investment or operational objectives. It may differ from Market Value and is sometimes used to reflect value against a client's investment criteria.

    Material Uncertainty

    • Refers to situations where the reliability of a valuation is affected by uncertain market conditions or external factors, making it challenging to establish an accurate property value.

    Definitions of Valuer

    • Internal Valuer is employed by the company to value the company's assets for internal use only. There is no third-party reliance on such valuations.
    • External Valuer has no material links with the asset or the client, and therefore can provide an independent valuation.

    Commencing a Valuation

    • There are three key considerations when commencing a valuation:
      • Competence: The valuer must possess the relevant skills, understanding, and knowledge (SUK) to carry out the valuation. If not, refer to RICS Find a Surveyor to find a competent valuer.
      • Independence: There should be no conflicts or personal interests that would compromise independence. Identify and address any potential conflicts proactively.
      • Terms of Engagement: Ensure that there is a written agreement clearly outlining the instructions to the client before starting work. This includes confirming the competence of the valuer and describing the extent and limitations of their inspection.

    Statutory Due Diligence

    • Validate and verify materials that may affect the valuation, including:
      • Asbestos register
      • Business rates/council tax
      • Contamination
      • Equality Act 2010 compliance
      • Environmental matters such as power lines, telecoms masts, and flooding
      • EPC rating
      • Fire safety compliance
      • Highways (adopted or not)
      • Legal title and tenure, including boundaries, covenants, and easements
      • Planning history and compliance (s.106 agreement)

    Definitions

    • Net Yield: Adjusts the all-risks yield to account for the purchaser's costs.
    • All-Risks Yield: Refers to the return an investor receives when a property is fully let at market rent, factoring in all risks inherent in the investment.
    • Average Weighted Yield: Average yield for a reversionary property, calculated using a combination of initial and reversionary yield.
    • True Yield: Assumes rent is paid in advance, whereas traditional valuation practice assumes rent is paid in arrears.
    • Nominal Yield: Initial yield, calculated assuming rent is paid in arrears.
    • Reversionary Yield: Yield when property is let at a rent below market rent, calculated by dividing the market rent by the current price.
    • Gross Yield: Yield before deducting purchaser's costs. It is often obtained from auction results.
    • Running Yield: Yield at a specific point in time without considering purchaser's costs.

    Comparable Method

    • The RICS Professional Standard: Comparable Evidence in Real Estate Valuation (2019) provides guidance on using comparable evidence when limited data is available.
    • It prioritizes professional judgement over a rigid hierarchy, considering the strength of each data point based on the case.
    • Six steps for using the comparable method:
      • Search and select comparables.
      • Verify details and analyse rent information.
      • Organize comparables in a schedule.
      • Adjust for differences in comparables.
      • Analyze comparables to form an opinion of value.
      • Report and prepare a file note.

    Finding Relevant Comparables

    • Sources of comparable evidence:
      • Inspecting areas to identify recent market activity and reviewing agent's boards.
      • Talking to local agents.
      • Analyzing auction results (be cautious as these may reflect special or insolvency sales).
      • Utilizing in-house records, databases, and websites.
      • It is important to consider market sentiment and date of evidence.

    Hierarchy of Evidence

    • Category A: The most reliable evidence, includes:
      • Completed transactions of near-identical properties with full and accurate information.
      • Transactions of similar assets with full and accurate information.
      • Transactions of similar assets where data is limited but reliable.
      • Similar real estate being marketed.
      • Asking prices (with careful analysis).
    • Category B: Provides general market data and guidance, including:
      • Published information or commercial databases.
      • Other indirect evidence like indices.
      • Historic evidence.
      • Demand/supply data related to rent, owner occupation, or investment.
    • Category C: Less reliable evidence, including:
      • Transactional evidence from different real estate types and locations.
      • Background data such as interest rates and stock market movement.

    Investment Method

    • Applicable when valuing an asset generating income.
    • It focuses on capitalizing rental income to arrive at a capital value.
    • The conventional approach implicitly assumes growth and derives the implied growth rate from the market capitalisation rate (yield).

    Conventional Investment Method

    • Capital value is calculated by multiplying rent received (or market rent) by the years purchase (YP).
    • Key considerations include comparable rents and yields.
    • Yield is the return on investment per annum, calculated as (Annual Income / Property Value) * 100.
    • Years Purchase (YP) is the capitalisation rate, calculated as the inverse of yield (1 / Yield). It represents the number of years worth of income equal to the asset's value.
    • YP is the inverse of Yield: For example, a 5% yield translates to a 20YP (1 / 0.05 = 20), and vice versa (20YP = 1 / 20 = 0.05 * 100 = 5% yield).

    Term & Reversion

    • Used for reversionary investments where market rent is higher than the passing rent.
    • Term refers to the value of the property during the current lease period, while Reversion represents the value after the lease expires.
    • It can assume or calculate a site value, guiding feasibility for potential development.

    Layer/Hardcore Method

    • Used for over-rented investments, where income flow is divided horizontally.
    • The bottom slice represents the market rent, and the rest is calculated using development appraisal techniques.
    • This method relies on either a simple residual valuation or discounted cash flow (DCF) method, considering all inputs at the valuation date.

    Residual Site Valuation Methodology

    • It is a specific form of development appraisal.
    • Key steps:
      • Estimate the Gross Development Value (GDV) by researching comparables and considering the proposed development's specifications.
      • Deduct Development Costs including construction costs, professional fees, finance costs, marketing and sales costs, and a contingency contingency allowance.
      • Subtract Profit Margin, which is typically a percentage of the GDV or a fixed return on investment.
      • Calculate Residual Land Value by subtracting development costs and profit margin from the GDV.
      • Evaluate the results, comparing the residual land value against the asking price of the land to assess profitability.

    RICS Valuation Standards

    • The RICS provides a comprehensive framework for valuation, outlined in its Red Book.
    • Key parts:
      • Part 1: Introduction
      • Part 2: Glossary
      • Part 3: Professional Standards (PS)
      • Part 4: Valuation technique and performance standards (VPS)
      • Part 5: Valuation Applications (VPGA)
      • Part 6: The International Valuation Standards (IVS)

    Key Changes in the Latest RICS Red Book

    • Requirement for compliance with the RBG: Terms of reference must clearly state whether valuations are compliant with this requirement.
    • Emphasis on sustainability and ESG factors.
    • Five exceptions to VPS 1-5 (YOU MUST KNOW THESE):
      • Advice during negotiations or litigation.
      • Statutory valuations.
      • Valuations for internal purposes with no third-party reliance.
      • Valuations for agency and brokerage work.
      • Valuations in anticipation of giving evidence as an expert witness.

    Terms of Engagement (IVS 101)

    • Defining elements for a clear agreement, including:
      • ID and status of the valuer.
      • ID of the client.
      • ID of any other intended user.
      • Asset to be valued (or portfolio).
      • Currency.
      • Purpose of the valuation.
      • Basis of value.
      • Valuation date.
      • Extent of investigation.
      • Nature and source of information relied upon.
      • Assumptions and special assumptions to be made.
      • Format of the report.
      • Restrictions for use, distribution and publication.
      • Confirmation of Red Book compliance.
      • Fee basis.
      • Complaints handing procedure.
      • Statement on potential RICS compliance.
      • Limitation of liability agreed (PII).

    VPS 3 Valuation Reports (IVS 103 Reporting)

    • Reporting requirements include:
      • ID and status of the valuer.
      • ID of the client and any other intended user.
      • Purpose of the valuation.
      • Asset to be valued (or portfolio).
      • Basis of value.
      • Valuation date.
      • Extent of investigation.
      • Nature and source of information relied upon.
      • Assumptions and special assumptions to be made.
      • Format of the report.
      • Restrictions on use, distribution and publication.
      • Confirmation of Red Book compliance.
      • Valuation approach and reasoning.
      • Valuation figure(s).
      • Comment on market uncertainty.
      • Limitation on liability agreed (PII).

    Bases of Value (IVS 101)

    • There are six in total, focusing on the following four:
      • Market Value: The estimated price an asset or liability would be exchanged for between a willing buyer and seller in an arm's length transaction.
      • Market Rent: Estimated rent for an interest in real property leased under appropriate terms.
      • Fair Value (IFRS 13): Price received for selling an asset or paid to transfer a liability in an orderly transaction.
      • Investment Value: Value to a specific owner or prospective owner for investment or operational objectives, which may differ from market value.

    Material Uncertainty

    • It exists when the reliability of a valuation is affected by uncertain market conditions or external factors, making it difficult to establish an accurate property value.

    Valuation Definitions

    • Internal Valuer: Employed by a company to value assets for internal use; no third-party reliance.
    • External Valuer: No material links to the asset or client; independent.
    • Statutory Due Diligence: Required checks for material matters impacting the valuation; includes asbestos, business rates, contamination, legal title, planning regulations, and more.
    • All Risks Yield: Remunerative interest rate reflecting all risks and prospects of a fully let property; includes purchaser costs.
    • Net Yield: All Risks Yield adjusted for purchaser costs.
    • True Yield: Assumes rent is paid in advance, unlike traditional valuation practice that assumes arrears.
    • Nominal Yield: Initial yield assuming rent paid in arrears.
    • Gross Yield: Yield not adjusted for purchaser costs.
    • Running Yield: Yield at a specific point in time, not adjusted for purchaser costs.

    Comparable Method

    • RICS Professional Standard: Provides guidance on using comparable evidence when data is limited; uses a hierarchy of evidence.
    • Steps in the Comparable Method: Search and select comparables, verify details, assemble comparables in schedule, adjust using hierarchy of evidence, analyse, and report.
    • Finding Relevant Comparables: Seek out recent market activity, speak to agents, and review auction results, in-house records, and databases.

    Hierarchy of Evidence

    • Category A: Direct comparables; completed transactions of near identical properties with full and accurate information.
    • Category B: General market data; published sources, commercial databases, indices, historic evidence, demand/supply data.
    • Category C: Other sources; transactional evidence from other real estate types and locations, background data like interest rates, stock market movements.

    Investment Method

    • Investment Method: Used when there is an income stream to value; capitalizes rental income to produce capital value.
    • Conventional Investment Method: Multiplies rent received or market rent by the years purchase (YP) to calculate market value; relies on comparable rents and yields.
    • Yield: Return on investment per annum, calculated as (Annual Income/ Property Value)*100.
    • Years Purchase: Capitalization rate, calculated as 1/Yield; represents the number of years worth of income equaling asset value.
    • Term and Reversion: Used for reversionary investments (under rented); values the property during the current lease period.
    • Layer/Hardcore Method: Used for over-rented investments; income flow is divided horizontally, with the bottom slice representing market rent.

    Residual Site Valuation Methodology

    • Residual Site Valuation: Form of development appraisal used for over-rented investments; accounts for development costs, profit margin, and market conditions to determine the residual land value.
    • Steps:
      • Estimate the Gross Development Value (GDV).
      • Deduct development costs (construction, professional fees, finance costs, marketing, contingency).
      • Subtract the profit margin.
      • Calculate the Residual Land Value (GDV - Development Costs - Profit Margin).
      • Compare the residual land value to the asking price of the land.

    Material Uncertainty in Valuations

    • Material Uncertainty: Occurs when conditions impact the valuer's confidence in their valuation.
    • Declaration of Material Uncertainty: Informs stakeholders about limitations in the valuation report.
    • Conditions for Material Uncertainty: Significant, unprecedented or rapid changes in the market, limited comparable transaction data.
    • Importance: Promotes transparency and trust in the valuation profession.

    RICS Red Book Guidance on Material Uncertainty

    • VPGA 10: Specific guidance on material uncertainty, particularly for valuations affected by exceptional market conditions.
    • PS 2: Emphasises transparency and communication of uncertainty within valuation reports.
    • VPS 3: Addresses the communication of uncertainties in different valuation methods and the necessary disclosures.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Related Documents

    RICS Valuation Level 2 Revision Notes PDF

    Description

    This quiz covers key concepts related to valuation, including the definitions and roles of internal and external valuers, essential competencies, and terms of engagement. Additionally, it addresses statutory due diligence necessary for accurate asset valuation, focusing on various compliance and environmental factors.

    More Like This

    Valuation Standard Setting
    10 questions

    Valuation Standard Setting

    SustainableTurkey avatar
    SustainableTurkey
    Accounting Standards - Art. 28
    6 questions

    Accounting Standards - Art. 28

    ParamountStarlitSky avatar
    ParamountStarlitSky
    International Valuation Standards Committee (IVSC)
    10 questions

    International Valuation Standards Committee (IVSC)

    LuxuryLime avatar
    LuxuryLime
    Vietnam's Valuation Standards Circular
    49 questions

    Vietnam's Valuation Standards Circular

    CheapestOrangutan avatar
    CheapestOrangutan
    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser