Case Study Flashcards
What additional things did you include in your valuation report, with it being for secured lending?
- Disclosure of any conflicts (last 2 years):
- Stated the valuation method adopted, supported with the calculation: Investment method, and stated assumptions and inputs.
- 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
Where would you find further information on secured lending in the Red Book?
In the Global Red Book – VPGA 2 (secured lending)
UK Red Book supplement – VPGA 10 (commercial secured lending)
When is Practical Completion deemed?
When the Certificate of Practical Completion is issued.
What’s the difference between a lease and license? Do you know any case law relating to this?
A license grants a legal right to use the land that would otherwise be illegal, whereas a lease provides an occupier with an estate in the land. A lease can also be assigned but a license cannot.
What is an AST?
Used for privately rented residential property.
Introduced by the Housing Act 1988, and extended by the Housing Act 1996.
Can be fixed term or periodic.
Limited security of tenure; landlord can regain possession without giving a specific reason as long as they follow procedures.
Is a 3-year AST normal?
It is becoming more typical as tenants commit to renting longer term rather than buying.
It is the max. term before the tenancy has to be made by deed.
How do you account for breaks / tenancies ending in your valuation?
With BTR, you value the income stream into perpetuity and do not assume individual tenancy breaks. This is because ASTs have a fairly high turnover compared to commercial leases and there are typically a high number on ASTs within an asset; it is very difficult to forecast breaks and voids. Void expenses are therefore accounted for in the Operating Expenditure assumption, and the risk is reflected in the yield sector-wide.
What’s a typical void assumption in BTR?
Between 3 and 5%. We assumed 3% as we anticipate a low incidence of voids in the medium term due to newness of AST agreements.
What type of investment method does the PRS model use?
The ‘conventional’ investment method.
Market Rent x YP = Market Value
What is a peppercorn ground rent? How much is considered peppercorn?
A nominal or very small amount. Subject Property = £10 per year fixed.
What is the use class for BTR?
C3 Residential
You state areas on your case study; what was the basis of measurement?
Would you measure balconies? How?
Under IPMS I would, and I would measure the roof terrace, but these would be stated separately.
Depends on the purpose;
IPMS 1 I would measure to the outer perimeter of the balcony to the external wall. External wall included.
IPMS 2 and 3 I would measure to the internal perimeter of the balcony to the external wall. External wall excluded.
When did IPMS become mandatory for residential?
When the RICS Property Measurement Professional Statement became effective on 1 May 2018
The block is 56% let – how did you value the vacant units/voids?
The instruction was to apply a Special Assumption that the block is fully let, therefore I did not value the vacant units as vacant.
The block is 56% let – is this a concern to you as valuer?
This isn’t as it is a newly completed block that is part-way through its letting up period.
It is a Special Assumption (assumes facts that differ from the actual facts).
I discussed lettings velocities with local agents and was satisfied that the SA was reasonable and relevant per Red Book requirements.
How did you allow for the impact of vacant units in your comparables?
We were assuming the block is fully let.
Voids are allowed for in the operating expenditure, therefore this requires analysis of actual operating expenditure in the comparables. Typically 3-5% voids are assumed.
What are the main elements of a cashflow?
- Hold period
- Rent
- Rental Growth
- Ongoing Costs
- Purchaser’s Costs
- Exit Yield
- Required Return
What are the affordable requirements in Lewisham? Where would you find them?
If you had to provide affordable, would a poor door be acceptable?
Ethically, no. But it is not currently illegal.
How do you check compliance with DDA?
Are construction costs the same for private and affordable build costs?
Apply a blended rate.
Why did you use a NIY?
Because its
• Approach taken by institutional investors in BTR and as valuer, trying to reflect the market.
• Applying to the income net of Purchaser’s Costs
• Applying it to the current (Market) Rent against the current price
Why not an equivalent yield?
Because we are not assuming a reversion.
What is the difference between a Gross yield and a Net yield?
The difference is whether Purchaser’s Costs have been allowed for.
Gross – not adjusted for PCs, Net – adjusted for PCs.
If you had the Gross purchase price and the Gross rent, how would you work out the Net yield?
Deduct Purchaser’s Costs from the Gross purchase price to give the Net Purchase Price
Current Rent / Net Purchase Price x 100 = Net Yield.
Do your Gross rents include council tax? Utilities?
Gross rents are net of ancillary costs and bills.
What was the construction of the building? How did you deduce this?
Reinforced concrete frame with concrete slab floors. Deduced from the column structure and requesting further info from client.
The block is clearly managed by the operator. Where are their management fees accounted for? How much are they?
Fees accounted for in the operating expenditure.
Typically expect management fees of c. 4% of the OPEX (works out about 1% of the GROSS INCOME).
What are OpEx costs made up of?
Voids, Maintenance, Insurance, Utilities and services, Management costs, Lettings costs, Amenity costs, Service charge and ground rent, Other.
What takes up the largest proportion of OpEx?
Maintenance and Utilities. These will be affected by age of building and size/level of amenity.
Why did you consider Canning Town the most similar OpEx comp?
Looking for something similar in age, size, and level of amenity.
Similar location in Zone 2/3 – similar costs of personnel and services.
Similar size block at 87 units and similar amenity; daytime concierge and rooftop allotments – WHICH AFFECTS UTILITIES COSTS.
Age of building similar, PC’d 12 months prior – WHICH AFFECTS LIKELY MAINTENANCE COSTS.
What IRR would an investor expect from a BTR investment?
In BTR expect 6-8% for a normal to low risk investment, with a holding period of 10 years.
What is an IRR?
The discount rate which produces an NPV of zero when used to discount the cashflow
How do you assess covenant strength in BTR?
In BTR currently, covenant strength is not typically assessed.
What is the hierarchy of sales evidence?
What is the hierarchy of rental evidence?
Open market Lease renewal Rent review Third party determinations Sale and Leaseback Inter-company transactions
What are current BTR yields?
London Zone 1: 3.00 – 3.25% Zone 2: 3.50 – 3.75% Zone 3-4: 3.75% Greater London: 4.00% Prime Regional: 4.00 – 4.50% Secondary Regional: 5.00%
How do BTR yields compare to office? Retail?
BTR Zone 2 Prime: 3.50 - 3.75% and are stable. Zone 3 closer to 3.75%.
Prime Offices 4.00%+ Stable
Prime high street retail around 5.50% in this location – trending Weaker.
The yield is a reflection of risk, these yields could be interpreted that office investments in the area are more risky than the subject property as an investment.
What is the standard expectation of an institutional investor when considering build-to-rent investments?
Basic requirements are that it is professionally managed, with a daytime concierge and 24-hour security on call.
What are the differences between income capitalisation and DCF? Why use income capitalisation as the primary method?
They both rely on the future expected cashflows as drivers of value.
Income capitalisation is simpler approach where growth is implicit, DCF is more flexible when you want to make explicit assumptions.
There is no parking. Is this typical of a BTR site? What would an investor expect?
This is common with build to rent, particularly in London, aim for no parking at planning due to build costs of basements.
Developers aim to achieve a high PTAL rating (Public Transport Access Level – measures connectivity) to show that the site is well connected and therefore not require parking.
How would you assess parking requirements?
PTAL measure. A measure of the connectivity of the site by public transport (excl. car). Ratings range from 0 to 6, and a high rating is good connectivity.
What is Brexit’s impact on BTR?
If Empire Heights was not a contracted yield, but was deemed, how would this affect the valuation?
It would affect the weight I would attach to that comparable as it is not yet contracted.
If you carried out this valuation in Euros, what would you do?
I would state the currency I’d be reporting in in the TOEs and Report.
What is the 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.
