Case Study Flashcards
Were there any special assumptions
No
What has superseded RICS Valuation - Global Standards (2017)
RICS Valuation - Global Standards (2020)
What are the changes to the Red Book Global
- PS1: ‘Written’ means any valuation by paper/electronic/digital means
- PS2: Reinforces the point that valuers must be independent and objective and have ‘professional scepticism’ when reviewing data and info
- VPS1: Additional reference to IVS 220 about ‘non-financial liabilities’ which need to be referred to as aspects of an asset/liability to be valued in the Terms of Engagement
- VPS3: Reinforces the need for valuation reports to state clearly to users of the reports what the valuation approach was and relevant reasoning leading to findings (particularly applies to relevance and significance of sustainability matters)
How do you become an RICS Registered Valuer
- Need level 3 valuation for those qualified after 01/01/12
- Annual fee paid to RICS on registration
To register, info is required regarding valuation work undertaken:
- Type, purpose and number of valuations
- Firm’s total fee income from Red Book Global valuations in last year
- What data sources used
- Quality assurance audit procedures in place
- History of any negligence claims and notifications
How did you undertake C of I check
I checked using Salesforce as per AY routine and input the Property and the Borrower to see if any conflicts. If there were I would then consult with those people flagged.
Did you meet the time frames of the Service agreement? What are the set time frames of the service agreement?
Service Agreement states within 10-15 working days of receiving the instruction or from the time you have received all the requested information.
We had delays in getting information on tenancies from the Borrower which delayed timeframe - however then completed within 10-15 working days once we had received all information.
Talk me through the Finsbury Park/Hackney retail market
- Prime yields for high street retail yields are around 4.5% whilst secondary locations can expect yields ranging from 6-8%
- Blackstock Road is made up of mainly independent traders, with a high proportion of cafes, restaurants and takeaways.
- Whilst the retail market has struggled in recent times, we consider areas such as Blackstock Road to be more resilient as this is a destination shopping area where community groups come from other areas to shop and dine.
Can you talk me through the wider construction of the property? What type of foundations would you expect to see?
Commercial:
- Fully glazed frontage
- Wooden casement window
- Fire door out back.
Resi:
- Solid brick construction with dormer roof, casement windows and pitched (slate) roof
- Victorian era - checked with building surveyors.
Run me through the inspection - what did you consider?
- My personal safety - the AY H&S procedures for site inspection and had regard to RICS Guidance Note: Surveying Safety (2018)
- Inspection of the local area - good location, transport links
- External inspection - no obvious structural defects, commercial and resi access from Blackstock Road (separate door for resi. Commercial unit had fully glazed frontage
- Internal inspection - Commercial unit had ceramic tiled floor, kitchen, storage room and toilet. Resi flats were all in good condition and had one double bedroom each, bathroom and open plan kitchen/living room. Flat C was a maisonette.
Why did you measure in GIA for commercial
Unit was operating as a restaurant - GIA is standard practice for these as per RICS Code of Measuring Practice 2015. (Be aware - Kitchen and storage could have been stated as best practice)
Why have you not measured on NIA for commercial?
Unit was operating as a restaurant - GIA is standard practice for these as per RICS Code of Measuring Practice 2015.
How would your valuation have changed if the property was held Leasehold?
Methodology:
- Rent received less ground rent = Net Rental Income
- Capitalise net rental income at an appropriate yield for the remaining length of the lease = Market Value
What is an AST? What rights do these grant tenants?
Assured Shorthold Tenancy:
- Agreement used by landlord to let residential property to private tenants
- Typically for 6 months but can be for longer
- After this period, the landlord can evict the tenant without legal reason
What are the weaknesses of CoStar
Need to verify to ensure information is accurate as can be errors
What makes for good comparable evidence?
Similarities in:
- Physical characteristics
- Location
- Use
- Tenure (& lease terms if appropriate)
- Timescale
Why would you not rely on historic data? How did you determine a suitable parameter to widen your search?
Market may have changed therefore recent market evidence is most useful. Widened to ensure that enough relevant evidence could be gathered. Not further than 1.5 mile radius
How would you have devalued for net effective rents?
3 methods:
- Straight line method
- Straight line method assuming time value of cash flow using a yield
- Use a DCF
Straight line method:
- Either until end of the lease or until the next lease event
- Deduct rent free from the remaining lease term, multiply by the rent, divide by (lease term less fit out 3 months) = effective rent
Why would you not devalue for net effective? Are they the same thing?
- Used headline rent for valuation as look at comparables on headline basis as secondary retail units like this have minimal rent free.
- So net is your headline rent.
Why is return frontage a driver in value?
- 2.5-10% uplift depending on the comparable evidence and footfall
- Use mirror zoning i.e zone from both frontages
What do you understand by the term ‘rack-rented’
Passing rent = Market Rent
How would your valuation have changed if the property was over-rented/under-rented?
Would have applied either the term & reversion/hardcore topslice valuation technique. to get to Market Value
How did you devalue the auction comps to get NIY?
Deducted purchasers costs (as per the SDLT bands):
- Stamp duty (5%)
- Legals (0.8%%)
- Agents (0.2%)
- VAT (inclusive)
What is the danger in relying on evidence from auctions?
- There may be a special purchaser or an insolvency sale/distressed sale
- The sale price is gross of costs
- However, the market evidence suggested that this was the appropriate method for similar properties to the subject property.
Are auctions an arms length transaction? Is it an appropriate method to determine Market Value?
Not typically an arm’s length transaction as has not been openly marketed - the seller’s are typically distressed sellers looking for a quick sale. Typically the local market evidence of secondary retail assets, with small lot sizes such as the subject property, suggested that sales of similar assets were from auctions. Therefore this was the best method of sourcing evidence.
How would your yield have changed if the property was let to a stronger retail covenant?
Would have sharpened and therefore reduced compared to current value.
Why have you applied 6.5% yield when you say it is similar to comparable 338 Hornsey Road (NIY 6.15%)? Why not say 6.25%?
- Based off the market evidence.
- Although unit in reasonable (albeit basic) condition and specification, benefitted from good location on the high street, excellent transport links and long unexpired term.
What were the purchasers costs owing to the value of the property? How much did you deduct to get to your £300,000 overall figure for commercial unit?
Deducted purchaser’s costs of 3.2757% from the gross value.
Comprised Stamp duty (1.4757%), Agents fee (1%) and Legal fees (0.8%)
Are you well positioned enough to provide advice on the residential element?
Yes - I have completed residential valuations based off market evidence such as this before.
Why would the lot be sold as one as opposed to individual commercial/residential?
For landlord:
- Cost of transaction is cheaper - rather than paying multiple sales fees.
Were the mixed-use comparables auction comparables too?
Yes
How did you devalue to establish net yield of the mixed-use investments?
Didn’t do this as we were comparing on a GIY basis
How would you value the Property assuming VP?
For commercial:
- Account for void costs (3 months) and rent free (6 months)
- Capitalise your market rent into perpetuity using an equivalent yield (c7.5% given we used 6.5% with tenant)
- Legals (5%) and reletting (10%) fees need to be accounted for.
For resi:
- The same
What specifically does VPGA2 say regarding Conflicts of Interest?
Potential scenarios that could be a conflict:
- Longstanding professional relationship with borrower
- Valuer gains a fee from introducing the transaction to the lender
- If financial interest in the property/prospective borrower
- If valuer is retained to act in disposal of development on the subject property
What does the Red Book Global state about applying scrutiny to the valuation? Was this an update?
PS2: Reinforces the point that valuers must apply independence and objectivity to their work and ‘professional scepticism’ when reviewing information and data i.e. be aware evidence may be misleading
What constitutes suitability for secured lending?
- Consider the SWOT of the asset and then assess this in regards to how liquid the asset would be on the market were the borrower to default
How would your valuation change owing to the recent Covid pandemic?
Likely caused uncertainty in the retail, residential has remained fairly resilient. Retail may impact the yield - may be slightly higher therefore reducing value. Or may advise as a weakness the uncertainty of Covid when doing SWOT analysis as something that the lender should take into consideration when deciding their LTV ratio.
Where can I read about material uncertainty?
RICS Practice Alert: Covid 19 and Valuation.
- Issued March 2020, updated in May 2020 and November 2020.
What is material uncertainty?
- Market activity is impacted as at the valuation date, consider can attach less weight to previous market evidence (i.e. pre Covid) for comparison purposes to determine Market Value.
- Therefore, less certainty and higher degree of caution should be attached to the valuation than normal
Are you in a position to provide advice on re-letting prospects? Shouldn’t this come from a letting agent
I identified this as a strength of the property due to the benefits of its location and proximity to Finsbury Park Station and this was confirmed when speaking to letting agents during inspection of the locality.
Why are the houses here relatively affordable?
Houses are relatively affordable at MV of £250,000. Other 1 bed houses in the Finsbury Park area can range from £350k-£600k. In more central London or south London the same property could go for £400k to £800k.
What were the EPC ratings for Flats A and B
Flat A - EPC rating B - expires 07/09/19
Flat B - EPC rating D - expires 07/09/19
Do you have to renew EPCs?
Yes
Did you send a draft report to your client? How does this impact your ability to be independent and objective?
No - if you did you would have to remain independent and objective regardless of their feedback.
Talk me through the methods of communication you used in this report?
Used communication via email and telephone to organise inspection, speak to agents to confirm comparables and understand the local market and keep the client updated on timescales.
If a client presented you with a key piece of comparable evidence, how would you deal with this?
Would say that you have already reviewed the market evidence as role as valuer in an objective and independent way
You mention that you would speak to more residential agents in person on the day of inspection as they can be more willing to assist you. Does this mean that you did not establish accurate information?
I spoke to some agents on the day of inspection but I would ensure that in future I spoke to more. I am confident that I established accurate information but it would have come at greater ease and potentially quicker time frame rather than chasing agents over the phone who may be less willing to talk.
