Valuation (Level 1 - Additional)

Question 1

What was changed in the last update to the Red Book UK National Supplement?

Answer 1

Updated guidance on financial reporting, ESG, secured lending, residential property, and statutory valuations

Question 2

When was the Red Book last updated?

Answer 2

Red Book Global (UK Supplement): Effective May 2024, reissued Jan 2025.

Question 3

Which do you follow – latest IVS or Red Book Global?

Answer 3

Red Book Global (plus relevant National Supplement), as it incorporates IVS and adds RICS requirements

Question 4

Which sections of the Red Book are mandatory/advisory?

Answer 4

Mandatory

Professional Standards (PS 1–2) – apply to all RICS members (e.g. ethics, compliance, objectivity).

Valuation Technical and Performance Standards (VPS 1–5) – apply to Red Book-compliant valuations (e.g. terms of engagement, inspection, reporting).

UK National Supplement – UK PS and UK VPS – mandatory where UK jurisdiction applies.

Advisory

Valuation Practice Guidance Applications (VPGAs) – sector/asset-specific best practice (e.g. secured lending, financial reporting, residential, charity, statutory valuations).

UK National Supplement – UK VPGAs – advisory guidance on UK-specific applications.

Question 5

Can you tell me about the five excepted purposes in the Red Book?

Answer 5

VPS 1–5 do not apply to these situations, but PS 1–2 (ethics, compliance, objectivity) still do.

The excepted purposes are:

    Internal use only (e.g. client’s management accounts or strategy).

    Agency/brokerage particulars.

    Non-independent expert reports.

    Preliminary/indicative advice.

    Specific exclusions by RICS (e.g. certain statutory valuations).

Question 6

Tell me the definition of Market Rent (MR) / Market Value (MV) / Investment Value / Fair Value.

Answer 6

Market Value (MV) – “Estimated amount an asset should exchange for between a willing buyer and willing seller in an arm’s-length transaction on the valuation date” (IVS 102 A10).

Market Rent (MR) – “Estimated amount for which an interest in real property should be leased between a willing lessor and lessee on appropriate lease terms” (IVS 102 A20).

Investment Value (Worth) – The value of an asset to a particular owner/investor based on their individual objectives (IVS 102 A40).

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 at the measurement date.”

Question 7

What is the difference between an assumption and a special assumption?

Answer 7

Assumption – Something accepted as true without verification (e.g. property has clear title).

Special Assumption – Assumes facts that differ from those existing at the valuation date (e.g. proposed development is complete).

Question 8

What must be included in your terms of engagement / valuation report? Where is this covered in the Red Book?

Answer 8

VPS 1 – Terms of engagement (scope, client, purpose, basis, assumptions, valuation date, restrictions, PII, etc.).

VPS 3 – Reporting requirements (clear statement of value, basis, date, disclosures, assumptions, compliance with Red Book).

Question 9

Where does the definition of fair value come from? Does this differ from MV? When is fair value used?

Answer 9

Fair Value – Defined in IFRS 13 (accounting standard).

Different from MV – Fair Value reflects “orderly transaction between market participants”; MV assumes willing buyer/seller in an open market.

Used in – financial reporting and company accounts under IFRS/UK GAAP.

Question 10

What might a statutory valuation relate to?

Answer 10

Valuations required under legislation – e.g. compulsory purchase compensation, rating, taxation (CGT, Inheritance Tax, SDLT), leasehold enfranchisement.

Question 11

What is the definition of the statutory basis of valuation? Is this the same for all statutory valuations?

Answer 11

Definition – The basis required by statute or regulation (e.g. “market value” in CPO, “rateable value” in rating).

Not the same – Each statutory regime has its own prescribed basis, which may differ from IVS/Red Book definitions.

Question 12

What is a Net Initial Yield (NIY)?

Answer 12

Current net rent (after deducting purchaser’s costs and non-recoverables) ÷ purchase price. Reflects the return on day one.

Question 13

What is a reversionary yield?

Answer 13

The yield on the estimated rental value (ERV) once the property is re-let or rent reviews take effect. Shows return when passing rent “reverts” to market rent.

Question 14

What is an equated yield?

Answer 14

A yield that takes into account income received over the whole period of ownership and equates it to a single rate of return using compound interest (DCF-based).

Question 15

What is an equivalent yield?

Answer 15

The internal rate of return (IRR) from a conventional term and reversion valuation, weighted between current and future income. It assumes rent will rise to ERV at review/expiry.

The equivalent yield is a useful metric for standardising the yield for properties with varying income patterns, helping investors to compare different assets on a like-for-like basis, particularly within a conventional term and reversion framework

Question 16

How would a yield reported from auction differ from a Net Initial Yield?

Answer 16

Auction yields are typically based on gross price without purchaser’s costs, whereas Net Initial Yield always accounts for purchaser’s costs (e.g. SDLT, agents, legal fees).

Question 17

What purchaser’s costs do you deduct from a valuation?

Answer 17

Standard RICS assumption is usually 6.8% for commercial property (Stamp Duty Land Tax, agents’ fees, legal fees). This can vary by asset class and value.

Question 18

When do you deduct purchaser’s costs from a valuation?

Answer 18

Purchaser’s costs are typically deducted when calculating net yields (like Net Initial Yield or Equivalent Yield) from a Market Value or purchase price for an investment property, as per Red Book principles and market convention.

This ensures the calculated yield accurately reflects the return on the total capital outlay and allows for proper comparison between investment opportunities.

Market Value itself is typically stated as a gross figure before deduction of these costs.

Question 19

How could you value a long leasehold interest?

Answer 19

Depends on the nature of the lease:

Treat like freehold if effectively virtual freehold (very long lease, peppercorn rent).

For shorter or onerous leaseholds, use a profits, DCF, or term & reversion approach, capitalising income net of ground rent.

Question 20

What is the difference between a growth explicit and a growth implicit yield? Give examples.

Answer 20

Growth implicit yield: Yield includes assumptions about growth but not shown separately. Example: Conventional investment method capitalisation using an all-risks yield.

Growth explicit yield: Growth is modelled explicitly in the cashflows, with discount rate applied separately. Example: DCF using rental growth assumptions and a discount rate.

Question 21

What is intangible goodwill?

Answer 21

Value of business reputation, personal goodwill, or brand – excluded from property valuation.

Question 22

What is turnover / gross profit / net profit?

Answer 22

Turnover – total sales.

Gross Profit – turnover minus cost of sales.

Net Profit – gross profit minus operating expenses.

Question 23

What is Fair Maintainable Turnover (FMT)?

Answer 23

Reasonable level of turnover achievable by a reasonably efficient operator.

Question 24

What is Fair Maintainable Operating Profit (FMOP)?

Answer 24

Sustainable profit achievable by a reasonably efficient operator after deducting operating costs.

Question 25

What are the key things you need to consider when appraising / inspecting a development site? What else should you consider?

Answer 25

Planning policy & consents. Site constraints (topography, contamination, access, services). Market demand and achievable values. Infrastructure costs, abnormal costs. Legal/title issues (easements, covenants). Statutory obligations (CIL, S106).

Question 26

Tell me about your due diligence when undertaking a RLV.

Answer 26

Check planning, title, site conditions, comparable sales, build costs, professional fees, finance assumptions, and statutory obligations. Verify all inputs.

Question 27

How do you calculate GDV?

Answer 27

By reference to comparable evidence (sales of completed units, yields on completed investment, rental values).

Question 28

What are typical finance costs?

Answer 28

Base rate + margin (e.g. 5–7% pa), plus arrangement fees, exit fees.

Question 29

What do holding costs typically include?

Answer 29

Rates, insurance, security, site management, interest during voids.

Question 30

How do you typically calculate developer’s profit?

Answer 30

As % of cost (15–20%) or % of GDV (c. 15–25%), depending on scheme type and risk.

Question 31

What are some typical inputs (and %/£) in a RLV?

Answer 31

Build costs (BCIS £/m²). Professional fees (c. 8–12% of build). Contingency (c. 3–5%). Finance (5–7%). Profit (15–25% GDV). CIL/S106 (scheme specific).

Question 32

What other criteria might be assessed in terms of performance measurement for a RLV?

Answer 32

IRR, NPV, development margin, sensitivity analysis, payback period.

Question 33

What is CIL? What is S106?

Answer 33

CIL (Community Infrastructure Levy) – standard charge per m² on new development to fund infrastructure. S106 Agreements – site-specific planning obligations negotiated with LPA (e.g. affordable housing, highways).

Question 34

What are the differences between CIL and S106? What is CIL charged on?

Answer 34

CIL – non-negotiable, charged on additional floorspace (new build, extensions). S106 – negotiated, tied to site-specific impacts. Both may apply alongside each other.

Question 35

What variables might you change and why?

Answer 35

GDV (market risk), build costs (cost inflation), finance rate (interest rate risk), profit margin (developer appetite).

Question 36

What factors affect sensitivity of a development appraisal?

Answer 36

Level of debt financing, volatility of market, scale of site, phasing, abnormal costs.

Question 37

What is viability?

Answer 37

Whether a development generates a sufficient return to cover costs, finance, obligations (CIL/S106), and profit – ensuring deliverability.

Question 38

What is the supposition that a DRC is based upon?

Answer 38

A buyer will pay no more than the cost of replacing the asset with a modern equivalent, less depreciation/obsolescence.

Question 39

What costs would you consider within GRC?

Answer 39

Construction, professional fees, infrastructure, services, external works, finance during build.

Question 40

What would you do if the building could be replaced with a modern equivalent?

Answer 40

Base GRC on the cost of the modern equivalent (often cheaper/more efficient) rather than a replica.

Question 41

How would you deal with depreciation/obsolescence?

Answer 41

Deduct allowances for physical deterioration, functional, and economic/external obsolescence.

Question 42

What types of obsolescence are there?

Answer 42

Physical (wear and tear). Functional (design inefficiency). Economic/external (market or locational factors).

Question 43

What are the three ways to deal with depreciation?

Answer 43

Straight-line method – Spread cost evenly over the estimated useful life of the asset (e.g. 50-year life = 2% per year). Observed condition/life method – Assess the building’s actual age and physical state against its expected life, adjusting for wear and tear. Market extraction/comparison method – Derive depreciation by comparing sales of similar assets with and without obsolescence, extracting the adjustment from market evidence.

Question 44

What is a liability cap and when would one be used?

Answer 44

A contractual limit on the valuer’s liability in Terms of Engagement – used to manage risk exposure.

Question 45

What caselaw relates to margins of error?

Answer 45

Singer & Friedlander v John D Wood (1977) – established acceptable margins of error.

Question 46

In a scenario where rents are static and the capital value increases, would you expect yields to increase or decrease?

Answer 46

Decrease – because investors are paying more for the same income (yield compression).