Case Study Flashcards
What was the date of valuation?
Date of inspection: 11th February 2019
What was the basis of valuation in the instruction letter?
- Market Rent
- Market Value
- Market Value on the Special Assumption of Full Vacant Possession
What section of the “Red Book” is relevant for valuations for secured lending purposes?
VPGA 2
What additional information must a report for secured lending purposes include?
- Disclosure of any conflicts of interest identified / agreement put in place to avoid a conflict of interest
- Valuation methodology adopted
- Where a transaction has recently occurred on the Subject Property or been provisionally agreed, the extent to which that has been accepted as Market Value
- Comment on the environmental considerations
- Comment on the suitability for mortgage purposes
- Any circumstances the valuer is aware of that could impact the price
What sections of the “Red Book” did you adhere to?
- PS 1: when does a valuation have to be “Red Book” compliant?
- PS 2: must act in accordance with the RICS Professional and Ethical Standards, must act independently by identifying and managing conflicts of interest, must comply with the minimum terms of engagement
- VPS 1: minimum terms of engagement
- VPS 2: must undertake inspections to verify information being relied upon
- VPS 3: minimum requirements to be stated within a report
- VPGA 2: valuations for secured lending
What does VPGA 2 state with regards to conflicts of interest?
- Any previous, current or anticipated involvement with the prospective borrower of the property to be valued must be disclosed to the lender
- ‘Previous involvement’ usually defined as within the last two years but can be longer
Explain the process of a conflict of interest check?
Check property name and name of the borrower in accordance with VPGA 2
If there had been a conflict, what would you have done?
- Conflict avoidance – consider whether conflict is irresolvable with your impartiality uncompromised. Decide whether to decline or accept instruction
- Written advice to both parties – if you accept instruction write to both parties disclosing nature of the conflict, outline how you propose to manage the conflict and request written confirmation of informed consent
- Conflict management – set up information barrier in accordance with the provisions agreed with both parties
What would be contained within the Terms of Engagement?
According to VPS 1, the minimum matters must be included in Terms of Engagement:
• Identification and status of the valuer
• Identification of the client
• Identification of any other intended users
• The asset to be valued
• Currency
• Purpose of the valuation
• Basis of value
• Valuation date
• Extent of investigation (i.e. whether inspection will be conducted)
• Nature and source of information to be relied upon
• Assumptions and special assumptions to be made
• Format of the report
• Restrictions for use, distribution and publication
• Confirmation of Red Book / IVS compliance
• Fee basis
• Complaints handling procedure to be made available
• Statement that the valuation may be subject to compliance by the RICS
• Limitation on liability agreed
What matters may you have discovered during your due diligence that would have adversely impacted on the value of the Property?
- Environmental – if it was located in an area at high risk of flooding (Environment Agency website)
- Contamination – if it was situated on a former landfill site (commissioned Groundsure report)
- Planning – if there was planning permission granted which would adversely impact the property (Croydon Council website)
- Lease terms – prolonged lease with no rent review provision would have an adverse impact on the property (Land Registry)
- Title Deed - onerous restrictions, encumbrances or outgoings contained within the Title Deed. (Received a Report on Title which indicated that there were none)
What does the “Red Book” state about the inspection of Properties?
According to VPS 2, valuers should take the necessary steps to verify the information being relied upon for a valuation to ensure the information is professionally adequate for its purpose
What was the age and construction of property?
- Most likely constructed in the Victorian Period. Late 1800s or early 1900s
- More recent extension to the rear of the property (consent granted in 2001)
- Flemish bond masonry – formed by laying headers and stretchers alternatively. Solid wall construction
- Trench or strip foundations would be most likely due to low load and age of the building
- Flat roof with asphalt covering
What are the common defects associated with this type of property? What would you you look for to identify these?
- Penetrating damp : water pooling on roof, asphalt dries up and cracks or gutters become blocked and overflow = Damp and discoloured patches on ceilings and walls
- Subsidence: ground becomes unable to support the load e.g. if drain collapses or a tree is planted = Vertical cracks
- Ground heave: ground expands and pushes up as moisture content increases e.g. if trees are cut down or die = Vertical cracks
- Timber: roof structure and floor joists. Wet rot = damp to touch; dry rot = fruiting bodies, mycelium strands and cuboidal cracking; infestations of wood boring insects = small circular holes / piles of saw dust
- Spalling: damaged brickwork where the surface of the brick starts to crumble because of the freeze/thaw action
How would you describe Croydon?
- Commuter town with direct trains to London Victoria, London Blackfriars and London Bridge with a journey time of as little as 12 minutes
- Public sector employers: Home Office, Land Registry, UK Borders Agency
- Private sector employers: AIG, Mott MacDonald, Direct Line.
- Significant volume of conversion of office to residential space under Permitted Development Rights
How would you describe the situation of the Property?
- Situated on a high street that passes through Croydon town centre
- 0.5 miles south of the prime pedestrianised thoroughfare and the Whitgift and Centrale shopping centres
- Large number of independent restaurants and bars located in proximity to the Subject Property. National tenants include William Hill and Co-Op
- Spice’s Yard Car Park is situated to the rear and provides 132 car parking spaces
- Nearest railway station is South Croydon (0.5 miles southeast) – provides regular services to London Bridge
- Located in close proximity to the A232 - connects Orpington to Ewell
How could you tell that there was a gradient in the quality of the retail provision?
- Shift from predominantly national occupiers to more local occupiers
- Higher volume of footfall
- Quality of the buildings ranges from aesthetic period properties to poorly maintained properties constructed in the 20th century
Describe the specification of the car showroom accommodation?
- Single glazed frontage with a powder coated aluminium frame
- Painted and plastered walls
- Floor is carpet tiled at the front with wooden parquet flooring at the rear
- Suspended title ceiling with recessed fluorescent lighting
- WC
What source of errors are associated with using a laser measuring device?
- Human error – not using the device appropriately i.e. not measuring a horizontal distance
- Systematic error – devices should be regularly checked for accuracy of calibration by checking a known distance and recording the results in a log
What did you include / exclude from your GIA measurement of the car showroom accommodation?
Gross Internal Area (GIA) is the area of a building measured to the internal face of the perimeter walls at each floor level
Exclude:
• Perimeter wall thickness and external projections
What did you include / exclude from your NIA measurement of the car showroom accommodation?
Net Internal Area (NIA) is the usable area within a building measured to the internal face of the perimeter walls at each floor level
Include:
• Built in cupboards occupying usable area
Exclude: • WCs • Stairwells • Cleaners' rooms • Areas less than 1.5m in height • Columns, piers, chimney breasts
What did you include / exclude from your GIA measurement of the residential accommodation?
Gross Internal Area (GIA) is the area of a building measured to the internal face of the perimeter walls at each floor level. There is no single accepted practice for measurement of residential property for valuation purposes. The GIA was taken as being the Net Sales Area (NSA)
Include:
• Areas occupied by internal walls and partitions
• Columns, piers, chimney breasts, stairwells
Exclude:
• Perimeter wall thicknesses and external projections
• Areas less than 1.5m in heights
How would your measurement of the residential accommodation change if you measured in an IPMS basis?
IPMS 3B: measurement of the area in exclusive occupation, including internal walls and columns, measured to the Internal Dominant Face (IDF) and finished surface.
Changes if I had measured using IMPS 3B:
• Measure to the IDF which is the finish comprising more than 50% of the floor to ceiling height for each IDF Wall Section
• Include areas with a restricted height less than 1.5m
• Include but state separately: attics, basements, garages, limited use areas
• Exclude but may state separately: patios, unenclosed parking area, vertical penetrations that form part of common facilities
What is Market Rent?
‘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
• When the parties had each acted knowledgeably, prudently and without compulsion
What is Market Value?
‘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
• When the parties had each acted knowledgeably, prudently and without compulsion
What is Vacant Possession Value?
Market Value of the property under the Special Assumption that the property is vacant
What were the conditions of the rent review clause?
- Upwards-Only Open Market Rent Review – rent reviewed on what the commercial property would be let for on the open market i.e. if rent assessed as being lower than currently achieved, rent will stay the same
- Assumed term of 5 years
- Disregard tenant improvements if landlord consent has been granted for the works
- Time is not of the essence i.e. failure to exercise right within the time limit means that the right is not lost
- Excluded the fact that they occupied the unit to the rear
What is an effective full repairing and insuring (FRI) lease?
- Tenant has responsibility for internal non-structural repairs
- Landlord takes on the responsibility for the repairs to the structure and outside parts of the building but recovers costs of doing so from the tenant
- Landlord will also maintain insurance and recover cost of premium from the tenant
Was the lease inside or outside of the 1954 Act?
- The lease was contracted inside of the act
* This would give the tenant security of tenure at the end of term
What would the landlord have to do to terminate the tenancy given that the lease is inside the 1954 Act?
Would have to issue tenant with a Section 25 notice no more than 12 months and no less than 6 months before the date for the termination of the tenancy
What grounds would the landlord have to refuse a new lease from the tenant given that the lease is inside the 1954 Act?
Section 30 states that there are SEVEN grounds for opposition to grant a new tenancy:
- Breach of repairing covenant
- Persistent delay in paying rent
- Other substantial breach
- Provide suitable alternative accommodation
- Uneconomic subdivision i.e. landlord could get more from renting out the property as a whole (compensation payable)
- Demolition or reconstruction (compensation payable)
- Owner occupation (compensation payable)
Would have to compensate tenant 2 x rateable value as they have been in occupation for longer than 14 years
How would you obtain vacant possession under the Assured Shorthold Tenancy (AST) agreement?
Evict tenant through a Section 21 notice, have to provide at least 2 months’ notice. Issued at the end of a fixed term tenancy or during a tenancy when there is no fixed end date (i.e. ‘periodic tenancy’)
What use class does the property fall under?
- Sui generis’ use class (informed by local planning authority website)
- When no use classes order category fits, the use of the land or buildings is described as sui generis, which means ‘of its own kind’
Explain the principle of Zoning?
- Used for retail properties to create a unit of comparison for different sized buildings
- Rationale – the rental value of the property reduces away from the street i.e. the area at the front of the shop is most valuable to a retailer as it will generate most sales
- Zone A closest to the window is most valuable with the value deceasing with distance from the frontage.
- Halving back principle with 6.1m (20 ft) zones
Explain how you applied the principle of Zoning to the Property?
- Property was 21m deep
- Divided it into three zones of 6.1m and the remainder: A, B (A/2), C (A/4) and D (A/8)
- Masking - could have adopted to apply a rental discount to the area behind the ancillary space due to masking but chose not to as it was visible from the secondary entrance from Spices Yard
How did you account for the property’s return frontage?
- Return frontage increases the prominence of the shop – customers can see inside the shop thus enhancing the tenant’s opportunity to attract more customers
- Typically one would make an adjustment of 2.5-10% to the total rental value of the ground floor to reflect the benefit of the return frontage
- Given that the return frontage was onto a secondary street and only had partial glazing, it was agreed to apply a 5% premium to the rent.
Had the return frontage been onto a more primary pitch, how would you have dealt with that?
- Could have applied a rental uplift of up to 10% to the total rental value
- Zoned from more than one frontage, using the value attributable to each street frontage and taking the highest rental psm for each overlapping zone area
Did you consider the impact of masking due to the stairwell located off Spices Yard?
- Could have applied a discount to the area which was masked by the stairwell and which was therefore not visible from South End
- Due to the return frontage this area was still visible from the secondary frontage and so no allowance was made
How did you arrive at an ERV of £30.00 and £35.00 per sq ft Zone A for the retail accommodation?
- I used my professional judgement to interpret the comparable data, taking account the Subject Property was located on a poorer pitch than the comparable evidence.
- ERV would have been approximately £29.50 prior to applying the 5% premium
- This range was corroborated by the rent review that was settled at the Property in December 2018
How did you arrive at an ERV of £14.74 per sq ft for the car showroom accommodation?
Strongest comparable evidence provided by the letting on Church Street in Theale at £13.24 per sq ft
• Similarities: let to a local tenant, situated on a high street
• Differences: property set back from the road, on the end of the high street but does benefit from a forecourt
How did you weight the comparable rental evidence at the time of valuation?
- Open market lettings
- Lease renewals
- Rent reviews
- Third party determinations
- Sale and leasebacks
- Inter-company transactions
If you were to conduct the valuation now, how would you weight the comparable rental evidence?
Guidance Note RICS Comparable Evidence in Real Estate Valuation (1st edition), 2019. Valuer should use professional judgement to assess importance of evidence on a case-by-case basis
• Category A: direct comparables
• Category B: general market data
• Category C: other sources
What is a net effective rent?
This is the rent that would be agreed between the parties for a letting of the premises on the relevant terms and conditions, but without incentives forming part of the transaction
Calculated as post fit-out, pre-incentive i.e. the difference between an allowance for tenant fit-out (usually 3 months) and the rent free period
Why did you use the outcome of the rent review (net effective rent) as your opinion of Market Rent (headline rent)?
Would have been minimal or no difference between net effective and headline rent. Would assume a 3 month period for tenant fit-out, which is in line with the typical 3-6 month rent free period for car showrooms
What impact would lease length have on rental value?
Tenant’s seek a discount if they have a long lease i.e. one which is longer than a lease that might be granted in the open market
Why did you not analyse the rental comparables on a net effective basis?
Rent free periods were not available for all of the comparable evidence and therefore I analysed the comparables on a headline basis to ensure that I was carrying out a like-by-like comparison
What is a net initial yield?
- Immediate return of the property based on the present income that the property produces
- Calculated as passing rent divided by Gross Purchase Price (inclusive of purchasers costs)
What purchaser’s costs would you include when calculating a net initial yield?
- 1% agents fees (+ 20% VAT)
- 0.5% legal fees (+20% VAT)
- Stamp duty:
Up to £150,000: Zero
£150,001 - £250,000: 2%
+ £250,000: 5%
What type of yield did you apply to value the car showroom component?
- Targeted an equivalent yield of 6.00%
- Equivalent yield is used to value reversionary properties and is an average time weighted yield
- Actual equivalent yield was 6.03%, rate used to capitalise the income
How did you derive the EY from the comparable evidence you used?
- Where a property is rack rented NIY = EY
* Can derive EY from comparable evidence by forming an opinion of what the Market Rent would be
The high street retail investment comparables date back to March 2017, how did you account for this?
- Examined the overriding yield trends
* Judged market sentiment from discussions with local investment agents
How did you account for the tenant’s fit-out when valuing the property?
- Under the yielding up clause the tenant was required to return the property in the same condition which it was let under
- Tenant improvements were therefore disregarded when establishing the Market Value of the Property
What is your understanding of covenant strength?
Assessing the ability of the tenant to perform the covenants in the lease e.g. rent, service charge and repairing covenants
How have you accounted for covenant strength in your comparable evidence?
- Covenant strength is reflected in the pricing of a property investment
- FTSE 100 companies are considered more likely to perform the covenants of the lease and therefore the asset achieves higher pricing
- P. Kingham Limited had a Dunn and Bradstreet rating of 1A1
How do you check covenant strength? Is Dunn and Bradstreet reliable and how up to date is it?
- Will be based on latest financial accounts – will be accurate as long as accounts are not misstated
- Could be up to 12 months old depending on the release date of the latest set of accounts
How did you arrive at 12 months as the void period?
- Conversations with local agents informed me of the typical void period of a retail unit
- Accounts for time to apply for a change of usage from generis to conventional retail
- Would cover marketing period and time to apply for planning permission
How did you calculate the rates liability?
Obtained the Rateable Value for the Property from the Valuation Office Agency (VOA) website. Multiplied this by the business rates multiplier:
0.48 x £24,000 = £11,520
(Property would benefit from the small business rates multiplier as the rateable value is below £51,000)
