RICS Assessment of Professional Competence (APC) Valuation Syllabus

What is the hardcore (layer) method and when is it used?

It splits income into horizontal layers: the secure "bottom"/hardcore income (the lower, passing rent) capitalised in perpetuity, plus the "top slice" (the uplift to Market Rent) capitalised and deferred. It is typically used for over-rented or layered-income situations.

What is a Discounted Cash Flow (DCF) valuation?

An explicit cash-flow model that projects all future income and costs over a holding period, including an exit (terminal) value, and discounts each cash flow to present value at a chosen discount rate to give Net Present Value (NPV) or to solve for the IRR.

State the Net Present Value (NPV) formula used in a DCF.

$$NPV = \sum_{t=1}^{n} \frac{CF_t}{(1+r)^{t}}$$ where $CF_t$ is the net cash flow in period $t$, $r$ is the discount rate, and $n$ is the number of periods (including the discounted terminal/exit value).

What is the Internal Rate of Return (IRR) and how is it defined mathematically?

The discount rate at which the net present value of all cash flows equals zero: $$\sum_{t=0}^{n} \frac{CF_t}{(1+IRR)^{t}} = 0.$$ It is the effective annualised return that equates the present value of inflows to the initial outlay.

How is the exit (terminal) value typically derived in a DCF, and how is it treated?

It is usually the projected net income at exit capitalised at an assumed exit yield, then discounted back to the valuation date along with the income flows. It often forms a large share of NPV, so the exit-yield assumption is critical.

Describe the profits (accounts) method and the types of property it suits.

Used for trade-related properties valued by reference to their trading potential (e.g. hotels, pubs, petrol stations, cinemas, care homes). Value derives from the Fair Maintainable Operating Profit (EBITDA) the property is capable of generating, capitalised at an appropriate multiplier/yield.

Set out the standard steps of the profits method.

Estimate Fair Maintainable Turnover, deduct purchases/cost of sales to get gross profit, deduct reasonable working/operating expenses to reach Fair Maintainable Operating Profit (EBITDA/divisible balance), then capitalise that profit (or apply it to derive Market Rent) for a reasonably efficient operator.

What is the "divisible balance" in the profits method?

The Fair Maintainable Operating Profit available to be shared between the tenant (as remuneration/return for running the business) and the landlord (as rent). For a rental valuation, an apportionment of this balance produces the Market Rent.

Describe the residual method and give its basic equation.

Used to value development land/development opportunities. $$\text{Residual Land Value} = \text{GDV} - (\text{Total Development Costs} + \text{Developer's Profit})$$ where GDV is the Gross Development Value (value of the completed scheme).

What cost items are deducted from GDV in a residual development appraisal?

Construction (build) costs, professional fees, contingency, finance/interest costs, site preparation/demolition, planning and statutory costs, marketing and disposal costs, and the developer's required profit (and any acquisition costs).

How is developer's profit usually expressed in a residual appraisal?

As a percentage either of total development cost or of Gross Development Value (commonly around 15-20% of GDV, or 20%+ of cost), reflecting the risk of the scheme. It can also be assessed as a target profit-on-cost or IRR.

Why is the residual method considered sensitive, and what mitigates this?

Small changes in inputs (GDV, build cost, yield, finance, timescale) produce large swings in residual land value. Sensitivity/scenario analysis and cross-checking against comparable land values are used to test robustness.

Describe the Depreciated Replacement Cost (contractor's) method and when it is used.

A cost-approach method of last resort for specialised properties rarely sold on the open market (e.g. refineries, schools, hospitals). Value = current cost of replacing the asset less deductions for depreciation/obsolescence, plus the value of the underlying land.

State the DRC formula and the forms of obsolescence it accounts for.

$$\text{DRC} = \text{Land Value} + (\text{Gross Replacement Cost} - \text{Depreciation})$$ Depreciation reflects physical deterioration, functional/technical obsolescence and economic/external obsolescence.

List the "six functions of one" (compound interest functions).

1) Amount of £1 (compounding); 2) Present Value of £1 (discounting); 3) Amount of £1 per annum; 4) Annual Sinking Fund; 5) Years' Purchase (Present Value of £1 per annum); 6) Annuity £1 will purchase (mortgage instalment/capital recovery).

Give the formula for the Amount of £1 (future value of a single sum).

$$A = (1+i)^{n}$$ where $i$ is the periodic interest/discount rate and $n$ is the number of periods. It compounds a single present sum forward to a future value.

Give the formula for the Present Value of £1 (PV of a future single sum).

$$PV = \frac{1}{(1+i)^{n}}$$ It discounts a single future sum back to its present value; it is the reciprocal of the Amount of £1.

Give the formula for the Amount of £1 per annum (future value of an ordinary annuity).

$$A_{pa} = \frac{(1+i)^{n}-1}{i}$$ It is the accumulated future value of £1 invested at the end of each year for $n$ years at rate $i$.

Give the Annual Sinking Fund (ASF) formula and explain its purpose.

$$ASF = \frac{i}{(1+i)^{n}-1}$$ It is the equal annual sum that must be invested at rate $i$ to accumulate £1 by the end of $n$ years - the reciprocal of the Amount of £1 per annum. Used to recoup capital over a finite term.

Give the Years' Purchase (single rate) / Present Value of £1 per annum formula.

$$YP = \frac{1-(1+i)^{n}}{i}^{-1}\ \text{i.e.}\ YP = \frac{1-(1+i)^{-n}}{i}$$ It is the capital sum that buys the right to receive £1 per annum for $n$ years at rate $i$ (an ordinary annuity factor).

Give the formula for Years' Purchase in perpetuity and state when it applies.

$$YP_{perp} = \frac{1}{i}$$ It applies to a freehold income assumed to continue indefinitely (e.g. perpetual Market Rent). Multiplying net income by $\frac{1}{i}$ capitalises it into capital value.

Give the Annuity £1 will purchase formula and explain its use.

$$\text{Annuity} = \frac{i}{1-(1+i)^{-n}}$$ It is the annual income (interest plus capital recovery) that a present capital sum of £1 will provide over $n$ years - the reciprocal of the single-rate YP; used for mortgage/capital recovery instalments.

Distinguish single rate and dual rate Years' Purchase.

Single rate YP uses one rate of interest for both the return on capital and the sinking-fund recoupment (used for freeholds/perpetual income). Dual rate YP uses one (higher) remunerative rate for return on capital and a separate, lower, safe rate for the sinking fund - traditionally used for leasehold (terminable) interests.

State the dual rate Years' Purchase formula.

$$YP = \frac{1}{i + s}$$ where $i$ is the remunerative (yield) rate and $s = \frac{i_{sf}}{(1+i_{sf})^{n}-1}$ is the annual sinking fund at the accumulative (safe) rate $i_{sf}$ for an $n$-year term.

Why is a sinking fund adjusted for tax in dual rate leasehold valuations?

Because the income used to fund the sinking-fund instalments is taxed before investment, so a larger gross sum must be set aside to recoup the capital. The YP is adjusted to a "dual rate tax-adjusted" basis using the investor's tax rate to grant the correct net replacement of capital.

What is "capitalisation" in valuation?

The conversion of an income stream into a capital value by applying a multiplier (Years' Purchase) or dividing by a capitalisation rate (yield): $$\text{Capital Value} = \text{Income} \times YP = \frac{\text{Income}}{\text{Yield}}.$$

What is "deferment" and why is income deferred in a valuation?

Deferment discounts a future capital sum or future income back to its present value because money receivable later is worth less today. A reversion to Market Rent received in $n$ years is multiplied by the PV of £1, $\frac{1}{(1+i)^{n}}$, to reflect the wait.

How does rental growth relate the equivalent yield to the equated yield (growth-implicit vs growth-explicit)?

The All Risks/equivalent yield is growth-implicit: expected growth is embedded in the (lower) capitalisation rate. The equated yield is growth-explicit: it is the target total return (often a gilt rate plus risk premium) used in a DCF where rental growth is projected separately. The implied growth rate reconciles the two.

State the relationship that links equated yield, all risks yield and implied rental growth.

$$ (1+g)^{t} = \frac{(1+e)^{t} - k \cdot ASF_e}{1 - k \cdot ASF_e}\ \text{(Crosby/growth model)}$$ Simplified, the implied growth $g$ rises as the gap between the equated yield $e$ and the all risks yield $k$ widens over the review period $t$.

How are rent-free periods and other incentives treated when analysing rental evidence?

The headline rent is adjusted to a net effective rent by spreading the value of incentives (rent-free periods, capital contributions, stepped rents) over the term to the first review/break. This avoids overstating Market Rent when capitalising comparable evidence.

How is a void period reflected in an investment valuation?

During a void no rent is received and the owner bears holding costs (rates, service charge, insurance, marketing). In a DCF or term/reversion model the void income is set to zero (or negative for costs) and any re-letting rent is deferred to reflect the expected void length and re-letting incentives.

What is the impact of an upward-only rent review clause on value, and how is it modelled?

It protects the landlord by preventing rent falling at review, supporting the income's security and value. In valuation, the passing rent is held until review and only increased to Market Rent if MR exceeds passing rent; for an over-rented property the excess ("froth") is treated as a less secure top slice.

Under VPGA 2 (secured lending), what additional matters must a valuer address?

Disclose any current/previous involvement with the borrower, property or other parties, and any conflict of interest; comment on suitability of the property as security, marketability, any factors affecting future value (e.g. specialised use), and provide the basis (usually Market Value) on which the lender will rely.

Under VPGA 2, what specific conflict-of-interest disclosure is required before accepting a secured lending instruction?

The valuer must disclose to the lender any involvement (within a stated period, e.g. introducing the borrower, acting for the seller, or a financial interest) that could create a conflict, and confirm independence - or decline the instruction if the conflict cannot be managed.

Under VPGA 1 (financial reporting), which basis of value is normally used and under which standard?

Fair Value, generally treated as equivalent to Market Value, in accordance with IFRS 13 (or the relevant accounting framework such as UK GAAP/FRS 102). The valuer must also consider the highest and best use concept required by IFRS 13.

What is the IFRS 13 fair value hierarchy that a valuer for financial reporting should be aware of?

Level 1 - quoted prices in active markets for identical assets; Level 2 - observable inputs other than Level 1 quoted prices; Level 3 - unobservable inputs (the valuer's own assumptions). Most property valuations fall into Level 2 or Level 3.

For valuation for taxation purposes, what basis of value is typically required in the UK?

Market Value, but defined by the relevant tax statute (e.g. "open market value" under s.272 TCGA 1992 for CGT, and s.160 IHTA 1984 for Inheritance Tax). The statutory definition assumes a hypothetical sale in the open market and may include statutory assumptions differing from the Red Book MV.

What is the "Prudent Lotting" principle in taxation valuations?

For Inheritance Tax, the estate's assets are assumed to be divided and offered for sale in the lots that a prudent vendor would adopt to obtain the best overall price - so adjoining interests may be valued together (or apart) to maximise the aggregate market value.

What does an insurance reinstatement cost assessment estimate, and how does it differ from Market Value?

It estimates the cost of rebuilding/reinstating the property (the Reinstatement Cost) - construction costs plus demolition/site clearance, professional fees, and an allowance for inflation during rebuild - NOT the market value. It excludes land value because the land is not destroyed.

What items are typically included in a reinstatement cost assessment for insurance?

Rebuilding/construction cost, demolition and site-clearance costs, professional/architects' fees, an allowance for inflation/cost escalation over the rebuild period, compliance with current building regulations, and any necessary statutory or planning costs. Day-one (declared) value adjustments may apply.

On what basis is land valued in compulsory purchase, and which principle governs compensation?

Open market value of the land taken (under the Land Compensation Acts), governed by the principle of "equivalence" - the claimant should be put, so far as money can, in the same position as if the land had not been taken (no better, no worse).

What are the main heads of claim for compensation in a compulsory purchase (total/partial take)?

Value of the land taken (open market value); injurious affection and severance (loss to land retained); disturbance (losses such as relocation, removal and business losses); and statutory loss payments/fees. These reflect the principle of equivalence.

What are the six rules in section 5 of the Land Compensation Act 1961 for assessing compensation?

Rule 1 - no allowance for compulsory nature; Rule 2 - value is open market value of a willing seller; Rule 3 - ignore special suitability for a purpose only realisable under statutory powers/one purchaser; Rule 4 - ignore value due to unlawful use; Rule 5 - equivalent reinstatement basis where no general market; Rule 6 - disturbance and other claims are not affected by Rule 2.

What is the "no-scheme world" (Pointe Gourde) principle in compulsory purchase valuation?

Compensation must be assessed disregarding any increase or decrease in value attributable solely to the underlying scheme of acquisition. The land is valued in a "no-scheme world" so that the acquiring authority neither pays for, nor profits from, value created by its own scheme.

Compare the market, income and cost approaches as to the type of property each best suits.

Market (comparable) approach: properties with good transactional evidence (residential, standard commercial, land). Income approach (investment/DCF): income-producing investments. Cost approach (DRC): specialised properties with no market evidence. The choice depends on data availability and the nature of the asset.

Compare Market Value, Investment Value and Fair Value.

Market Value is the hypothetical exchange price between typical willing parties (market-wide). Investment Value (worth) is value to a specific owner reflecting their own criteria. Fair Value (IVS) reflects the respective interests of two specific identified parties, while IFRS 13 Fair Value aligns with Market Value for reporting.

Compare the equivalent yield and the equated yield.

Equivalent yield is a growth-implicit single discount rate derived from the market that capitalises term and reversion income (no explicit growth). Equated yield is a growth-explicit target rate of return used in a DCF where rental growth is forecast separately; the difference between them implies the market's growth expectation.

How does an over-rented property differ in valuation treatment from a reversionary (under-rented) property?

Reversionary (passing rent below MR): value rises at review to MR, modelled by term and reversion with the reversion capitalised in perpetuity. Over-rented (passing rent above MR): the rent above MR ("froth"/top slice) is less secure and is capitalised at a higher yield over the period it is receivable, with the core MR capitalised more securely.

What is "highest and best use" and why is it relevant to Market Value?

The use of an asset that is physically possible, legally permissible and financially feasible, and that results in the highest value. Market Value assumes the asset is valued for its highest and best use, which may differ from its current use (e.g. development potential).

What is the difference between gross income, net income and net effective rent in investment valuation?

Gross income is the total rent receivable. Net income deducts non-recoverable outgoings (repairs, management, voids, irrecoverable service charge) to give the income actually capitalised. Net effective rent adjusts a headline rent for incentives spread over the term, giving the true rental value for comparison.

What is the relationship between yield and risk, and how does yield move with capital value for a fixed income?

Higher perceived risk (or lower expected growth) means investors require a higher yield. For a fixed income, yield and capital value move inversely: as yield rises capital value falls, since $\text{CV} = \frac{\text{Income}}{\text{Yield}}$.