Case study

Question 1

What are the key characteristics of SSH property?

Answer 1

• Social housing for vulnerable adults with special needs, including learning and physical disabilities, mental health problems, drug and alcohol addictions, and those at risk of homelessness.
• Often includes some level of care provision and on-site staff facilities.
• Classified as exempt accommodation – exempt from certain Housing Benefit provisions – enabling higher rents to be paid, to account for the cost of specialist support needs.

Question 2

What was sensitive about the instruction that prevented you getting permission?

Answer 2

• The lender didn’t want details of the loan to be disclosed.

Question 3

Define a secondary market town.

Answer 3

• Smaller town or city that is economically less significant than a major metropolitan area.
• Regional economic hub for surrounding rural areas and smaller communities.
• Provides a range of goods, services, and employment opportunities to meet local needs.

Question 4

What is a bridging loan?

Answer 4

• Short-term financing option to bridge the gap between buying and selling property.
• Quick access to funds during transitional periods.
• Repaid when existing property sold or long-term financing obtained.

Question 5

What are the special considerations of a loan security valuation for a bridging loan provider?

Answer 5

Speed:
– short-term nature of bridging loans (quick decision-making and approval).

Risk:
– higher risk loans so risks must be thoroughly analysed (property value, condition, marketability etc.)

LTV:
– determine LTV to help lender understand lending risk (bridging loans have a higher default risk). Typically 70-80% but subject was 54%.

Question 6

Which part of the Red Book relates to secured lending?

Answer 6

• UK VPGA 10
• VPGA 2

Question 7

What is the legislation relating to conflict checks?

Answer 7

• RICS Global Professional Statement on Conflicts of Interest 2017
• Rules of Conduct 2021

Question 8

What was included in the Terms of Engagement?

Answer 8

• Valuer and lender details
• Objective and purpose
• Scope of work
• Assumptions, special assumptions and bases
• Compliance with RICS Valuation Standards
• Reporting format and content
• Professional fees and expenses
• Confidentiality and data protection
• Limitation of liability

Question 9

You mentioned that you relied upon marketing particulars from the client. When was it marketed?

Answer 9

• It had not yet been marketed but marketing particulars had been produced by the borrower as it intended to sell at a future date.

Question 10

What is a Report on Title and what is included in one?

Answer 10

Provides information about the legal status and ownership of a property.

It includes:
- Property description
- Ownership details
- Title info and restrictions
- Results of searches and enquiries
- Rights and easements
- Financial and legal obligations
- Summary and recommendations

Question 11

What do you mean by a clean and marketable title with no unusual restrictions or encumbrances? Can you give some examples of restrictions/encumbrances to be aware of?

Answer 11

No significant restrictions that would hinder its sale or use.

It means the property can be easily bought, sold, or mortgaged without significant obstacles.

Examples include:
- Restrictive covenants
- Easements
- Charges or unpaid taxes
- Leasehold interests
- Planning/building restrictions
- Environmental obligations

Question 12

What is a housing association?

Answer 12

A non-profit organization that provides affordable housing to individuals and families in need.

They offer below-market rental or ownership options and aim to address housing affordability issues.

Funded through various sources and are subject to regulatory oversight.

Question 13

What are the value and risk implications of a 1% collar and 4% cap on CPI?

Answer 13

Value Implications

Landlords: guarantees minimum increase but may restrain valuations when CPI is above the cap.

Tenants: Provide stability and predictability in rental expenses preventing excessive financial burden on tenants.

Risk Implications

Landlords: Expose landlords to the risk of underperforming CPI growth but ensures minimum 1% growth if inflation is lower.

Tenants: If CPI exceeds 4%, tenants may face higher rental increases than they anticipated. The collar’s minimum 1% increase also implies that tenants would need to pay a higher rental amount during deflationary periods.

Question 14

Why did it take from January to April to inspect?

Answer 14

Building works overran.

Question 15

You said you confirmed Right of Access off the public highway. The title looks like it has shared access. Can you explain this/did you notice this?

Answer 15

There was a shared right of access at the side of the property leading to the bin stores and parking. This was double-checked with the client.

Question 16

Describe the construction of the property.

Answer 16

Victorian building:
* Timber-framed pitched roofs and slate tiles
* Solid walls
* Stepped masonry foundations on compacted earth
* Rear extensions built separately with insulated cavity walls

Central connecting building:
* Felt covered flat roof
* Insulated cavity walls with render finish
* Likely strip concrete foundations

Childcare building:
* Timber-framed pitched roof with concrete tiles
* Insulated cavity walls with pebble-dash finish
* UPVC downpipes and windows
* Painted pebble dash render system on the walls
* Likely strip concrete foundations

Question 17

What are check measurements?

Answer 17

Taken on a sample to confirm the accuracy of a plan. If within an acceptable tolerance they enable full measurements to be scaled from scale plans.

Question 18

What is the net sales area and how does it differ from other standard bases of measurement?

Answer 18

• Code of Measuring Practice 2015
• Aggregate of GIAs of dwellings, excluding garages and conservatories.

Question 19

Why was the profits method not suitable?

Answer 19

Not a trading business.

Question 20

Why was the DRC method not suitable?

Answer 20

DRC is used when there is no trading market for the asset so no comparables. Also not suitable for loan security as per Red Book VPGA2.

Question 21

Define market value.

Answer 21

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 where the parties had each acted knowledgeably, prudently and without compulsion.

Question 22

What is a growth-explicit DCF and what are the advantages/disadvantages?

Answer 22

Estimates the value of an investment by calculating the present value of its expected future cashflows. Cashflows are projected explicitly for a certain period and a terminal value is applied to capture the value into perpetuity after the specified period.
Enables explicit growth assumption modelling and specific risks to be incorporated into the discount rate.

However, they are time-consuming and complex, the accuracy is highly dependent on the assumptions and there is uncertainty in forecasting growth.

Question 23

Describe a term and reversion calculation and how it differs from a DCF.

Answer 23

• Term and reversion = for reversionary investments (under-rented).
• Term capitalised until next lease event at initial yield (lower to reflect lower risk), then reversion to market rent capitalised into perpetuity at a reversionary yield.
• DCF projects explicit cashflows and estimates a terminal value based on assumptions of growth rates.
• Term and reversion is simpler and relies on fewer assumptions.

Question 24

What is an all-risks yield?

Answer 24

• The yield used in the valuation of fully let property let at market rent reflecting all the risks attached to the particular investment.
• Calculated by dividing the net operating income (NOI) by the total investment.

Question 25

What were the key points/recommendations/outcomes of the Pereira Gray review?

Answer 25

1. Valuer rotation
2. Public interest
3. DCF
4. Cross-checking with multiple methods

Question 26

What is a government bond?

Answer 26

• Type of debt security issued by a government to raise capital.
• It represents a loan made by investors to the government, which promises to repay the principal amount at maturity along with periodic interest payments.

Question 27

What does ‘GILT’ stand for?

Answer 27

• Government securities or ‘Gilt-Edged Securities’

Question 28

How did you factor in the volatility in the bond market evident in the soft GILT rate of 4.2%?

Answer 28

• I didn’t as this represented a fairer risk-free rate than the previously very low rates.
• Property and GILTs aren’t perfectly correlated so shouldn’t be moved perfectly in-line.
• Used professional judgement.

Question 29

What was the cause of the volatility in the bond market?

Answer 29

• High inflation, energy crisis and Lizz Truss’ mini-budget.

Question 30

What happened in the ‘mini-budget’?

Answer 30

• Lizz Truss introduced the largest tax cuts since 1972 (£45bn) funded by an expansion in borrowing.
• This included abolishing the highest 45% tax rate and freezing corporation tax at 19%.
• The pound fell to the lowest level against the dollar.
• GILT prices collapsed – lower investor confidence in the UK government.
• Bank of England intervened, promising to buy up to £65bn of bonds to save pension funds.

Question 31

Explain how the macro-economic factors mentioned (inflation, Ukraine, bond market, interest rates) impacted the risk to the SSH sector?

Answer 31

• Inflation: rising operational costs and rental demands to tenants, increasing risk of default.
• Ukraine war: largely affected the commodities markets, leading to energy and grain supply shocks, fuelling further inflation and costs.
• Bond market: general weakening for the other factors discussed, as well as the mini-budget.
• Interest rates: rising interest rates have affected mortgage rates and borrowing costs. This will have made the loan more expensive for the borrower and increases the risk of non-repayment.

Question 32

How does the RSH regulate RPs and why is this beneficial to risk?

Answer 32

1. Setting standards on governance, financial viability and housing quality.
2. Assessing and monitoring compliance with the standards through inspections and audits.
3. Enforcement and remedial actions - warnings, compliance notices, appointing managers or legal action.
4. Promoting best practice - knowledge sharing.
5. Transparency and accountability - publishing regulatory judgements and reports.

Question 33

What were the causes of the recent tenant arrears?

Answer 33

Fund – choosing poor quality tenants & poor quality properties so tenants not inclined to pay.

RPs/tenants - financial mismanagement, being under-capitalised so facing issues with rising rents.

Question 34

Explain the short-selling reports.

Answer 34

Short-selling reports on two large SSH funds led to share price decreases, one of which delisted.

The reports focused on:
- Rental arrears
- Financial mismanagement
- Poor quality properties - don’t qualify as exempt housing

Question 35

What were the EPCs and why were low EPCs relevant?

Answer 35

• Ds and Es
• Higher obsolescence risk. Less investor demand. Chance of becoming unlettable in the future with changing regulations, unless there is capex.

Question 36

How did you adjust for the negative factors?

Answer 36

I used my professional judgement to make sensible adjustments in 0.25% increments based on the relative weightings of each factor, how it affected value and whether this was reasonable based on evidence and assumptions.

For example the evidence seen in the market for general yield increases or the adjustments made to account for varying tenants in different valuations.

Question 37

Explain the changing MEES standards.

Answer 37

• The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015
• Minimum Energy Efficiency Standards
• From 2018 minimum E for private rented property with a new lease and from April 2023 for existing.
• Plans to increase it to a minimum C by 2028 have been cancelled by Rishi Sunak, however this could change if the government changes.

Question 38

What are the exceptions to MEES?

Answer 38

Exceptions:
- Cost of upgrades doesn’t meet 7-year payback test
- No further improvements can be made
- 3rd party consent cannot be gained
- RICS Registered Valuer confirms there would be 5% value reduction.

Question 39

Why was the relativity of the lease rent and market rent an important possible risk factor?

Answer 39

MV-VP was established with the investment method, driven by market rent. Therefore a large difference between market rent and lease rent increase the value difference and risk should the lease fail.

Question 40

What is an average rent for SSH?

Answer 40

£200-250 per week per service user.

Question 41

What are the advantages of cavity walls?

Answer 41

1. Thermal insulation
2. Cheaper.
3. Moisture in outer atmosphere can’t enter so they prevent dampness.
4. Sound insulators.
5. Reduce the weights on foundation.
6. Efflorescence prevented.