Flashcards in Valuation Deck (83)
What are the RICS Professional Standards (PS) in the Red Book?
They are Part 3 of the Red Book.
PS 1: Compliance with standards and practice statements where a written valuation is provided
PS 2: Ethics, competency, objectivity and disclosures
No departure is permitted from PS 1, where a written valuation is provided, or PS 2 in these global standards, which are mandatory in all circumstances.
What are the RICS Global Valuation Practice Statements (VPS)?
They are Part 4 of the Red Book.
VPS 1: Terms of engagement (scope of work)
VPS 2: Inspections, investigations and records
VPS 3: Valuation reports
VPS 4: Bases of value, assumptions and special assumptions
VPS 5: Valuation approaches and methods
What does VPS 2 (Red Book) say about inspections?
They must always be carried out to the extent necessary to produce a professionally adequate valuation. Limitations must be recorded in TOE (VPS 1) and the report (VPS 3). A proper record of the inspection and investigations must be kept.
What is a restricted information (desk top) valuation (no inspection undertaken)?
Red Book valuation. If undertake a valuation on the basis of restricted information and/or no physical inspection, must fulfil requirements
1. The nature of the restriction must be agreed in writing in the terms of engagement (VPS 1)
2. The possible valuation implications of the restriction confirmed in writing before the value is reported
3. The valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
4. The restriction must be referred to in the report
What are the requirements for revaluation without re-inspection (VPS 2)?
Revaluation without inspection must not be undertaken, unless the valuer is satisified that there have been no material changes to the property or nature of its location since its last inspection
Must be confirmed in the terms of engagement and in the valuation report as an assumption.
What requirements must be stated within a valuation report, as per VPS 3?
VPS 3 sets out 16 report headings to clearly an accurately set out conclusions of the valuation. Similar to those in VPS 1.
(a) Identification and status of the valuer
(b) Identification of the client and any other intended users
(c) Purpose of the valuation
(d) Identification of the asset(s) or liability(ies) valued
(e) Basis(es) of value adopted
(f) Valuation date
(g) Extent of investigation
(h) Nature and source(s) of the information relied upon
(i) Assumptions and special assumptions
(j) Restrictions on use, distribution and publication of the report
(k) Confirmation that the valuation has been undertaken in accordance with the IVS
(l) Valuation approach and reasoning
(m) Amount of the valuation or valuations
(n) Date of the valuation report – (may be different than the valuation date agreed with client)
(o) Commentary on any material uncertainty in relation to the valuation where it is essential to ensure clarity on the part of the valuation user – (only required where the uncertainty is material)
(p) A statement setting out any limitations on liability that have been agreed.
What rules govern a preliminary/draft valuation?
Red Book PS 2
A valuer may provide the client with preliminary valuation advice, or a draft report or draft valuation, in advance of the completion of the final report. Must state that:
• the opinion is provisional and subject to completion of the final report
• the advice is provided for the client’s internal purposes only
• any draft is on no account to be published or disclosed
• (If any matters of fundamental importance are not reflected) their omission must be declared.
What are the 4 bases of value, as defined by VPS 4?
Must ensure the bases are appropriate for the purpose of valuation.
1. Market Value
2. Market Rent
3. Investment Value (Worth)
4. Fair Value (or Equitable Value)
Also references Synergistic Value and Liquidation Value.
What is the Red Book definition of Market Value?
VPS 4: 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 arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
Ignores any price distortions caused by special value or marriage value.
What is the Red Book definition of Market Rent?
VPS 4: 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 arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
Normally be used to indicate the amount for which a vacant property may be let, or a let property may re-let.
What is the Red Book definition of Investment Value (worth)?
VPS 4: The value of an asset to a particular owner or prospective owner for individual investment or operational objectives
What is the Red Book definition of Fair Value?
VPS 4: 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.
The concept of fair value is consistent with that of market value.
What is the difference between an Assumption and a Special Assumption (VPS 4)?
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
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.
When can an assumption be made (VPS 4)?
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).
When can a special assumption be made (VPS 4)?
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.
What does VPS 5 state?
Valuers are responsible for adopting and justifying, the valuation approach(es) and the valuation methods used.
What are the RICS Global Valuation Practice Guidance Applications (VPGAs)?
Valuation Practice Guidance Applications; there are 10 in the Global Red Book.
Relevant to my work:
VGPA 1 Valuation for inclusion in financial statements
VGPA 2 Valuation of interests for secured lending
VGPA 8 Valuation of real property interests
VPGA 9 Identification of portfolios, collections and groups of properties
VPGA 10 Matters that may give rise to material valuation uncertainty
Global VPGA 1
- For inclusion in financial statements
- Must comply strictly with applicable financial reporting standards adopted by the client
- Under IFRS basis of value is Fair Value
Global VPGA 2
- Specific additional commentary for secured lending
- Additional requirements for conflicts and reporting procedures
Under VPGA 2, how do you deal with conflicts of interest in secured lending valuations?
- 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
In addition to the min. valuation report requirements, what must also be reported for loan security valuations?
- 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
In addition to the min. valuation report requirements, what must also be reported for loan security valuations THAT ARE TO BE HELD AS INVESTMENTS?
- Commentary on rental income vs. market rental value
- Comment on maintainability of income over the life of the loan
- Potential for redevelopment or refurbishment
- An assumption regarding covenant strength where none available, or comment on the market’s view of the quality, suitability and strength of the tenant’s covenant
In addition to the min. valuation report requirements, what must also be reported for loan security valuations THAT IS OR WILL BE SUBJECT OF DEVELOPMENT?
- Comment on costs
- Implication of cost overruns
- Comment on viability
- Sensitivity analysis for residual valuations
- Comment on development timelines
When might a property not be suitable for secured lending?
Short leasehold interest, high flood risk, tenant break option very soon (cannot guarantee income for any period of time)
Global VPGA 8 – Valuation of real property interests
Covers inspections and investigations
Inspection: includes characteristics to have regards to on inspection that impact value;
a. Surrounding area
b. property characteristics and use
c. site characteristics
d. potential for redevelopment
1. review TITLE (solicitor synopsis)
2. CONDITION of buildings
3. PLANNING use / consents
4. ENVIRONMENTAL enquiries (taking care that we are not specialists)
5. assumption SERVICES are in working order
What is included in the Red Book’s UK supplement?
PS1, VPS1-3, VPGA 1-18
PS1 – ensure compliance with UK law
VPS1 – state which edition of the Red Book a valuation is compliant with in TOE
Is the 2018 UK national supplement to the Red Book mandatory?
Contains both mandatory requirements (PS and VPS) and guidance (VPGAs).
What is Synergistic/Marriage value?
Created by a merger of interests – can be PHYSICAL or TENURIAL
Undertake a ‘before’ and ‘after’ valuation and calculate the level of marriage value created
Typically negotiated outcome is to split the marriage value created 50:50 or divide it pro-rata
What is Hope Value?
Value arising from any expectation that circumstances affecting the property may change
1. Future prospect of securing planning permission for development of land, where none exists at present time
2. Realisation of marriage value arising from the merger of two interest in land