Case Study QnA Flashcards
What is the definition of Fair Value?
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Fair value is normally used as the bases of value for a valuation report that is used to financial reporting purposes.
How does Fair Value differ to Market Value?
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Whereas Market Value is 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.
Fair value is normally used as the bases of value for a valuation report that is used to financial reporting purposes. Market value is used for valuation report for loan security purposes.
Why would you report Fair Value and not Market Value?
I reported this case study in Fair Value, because this valuation report is used for financial reporting purposes and not for loan security purposes.
What are the key principles of the Red Book?
In the latest Red Book published in Dec 2024, effective from Jan 2025, the key principles of the Red Book is PS1, PS2 (Professional Standards) and VPS 1 to VPS 6. (Valuation technical and performance standards)
PS1: Compliance with standards where a written valuation is provided - all members should ensure that valuations are fully compliant with the mandatory requirements in the Red book; it also included the exception of VPS 1-VPS6, where VPS1-6 may be unsuitable, for example, agency, litigation, expert witness, statutory and internal purposes.
PS2: Ethics, competency, objectivity and disclosures - all members must ensure they are competent before accepting any engagement - SUK.
VPS1: Terms of engagement
VPS2: Bases of value, assumptions and special assumptions (assuming a fact that differs from existing at the valuation date)
VPS3: Valuation approaches (Market, Income and Costs) and methods (Investment, Comparable, Residual, Profit, DRC)
VPS4: Inspections, investigations and records (Documentation)
VPS5: Valuation model (a method used to convert input into output and produce the property value; must make sure model is suitable for the valuation purposes)
VPS6: Valuation report.
Tiny Bears Always Inspect Mighty Rocks
Talk me through your COI check.
Conflict of interest check
1. get full address from the client
2. pass the info to the legal and compliance team to check if there is any existing relationship with the property that could potentially cause conflict of interest
3. once I confirmed that there is no conflict of interest, let client know and I proceed with the engagement letter.
It is important to do COI check because if there is any COI that could impact my impartiality on providing the valuation, I should let the client know and reject the job.
What RICS guidance did you adhere to when undertaking the COI check?
Conflicts of interest 1st edition, effective from 2018.
3 types of conflict:
1. Party Conflict (borrower and lender)
2. Own interest conflict (own share)
3. Confidential information conflict (same building, buyer and seller)
Party On Confidentially
Provide an example of what was included in TOE.
An example of what I included in my ToE is bases of value, I mentioned the Fair Value and Market rent. This shows that as a valuer I will provide the Fair value and market rent of the property in the valuation report for the client.
Talk me through your DD checks.
Once I get all asset information from the client, I did a due diligence check,
1. looking at any materials that could impact the valuation, such as asbestos register
2. Business rate
3. EPC rating
4. Contamination
5. Flooding
6. Legal title
7. Planning history.
DD - A Big Elephant Can Feel Large Problems
Why did you check planning consent and EPC?
I checked planning consent to identify whether there is potential for redevelopment or expansion, which can increase the property’s value; If an office building has planning permission for conversion to residential units, this could potentially affect its value. But in this case in my case study, there is no planning application in place while I was preparing the valuation.
I checked the EPC rating because EPC rating reflects the building’s energy performance. A higher (better) rating makes the property more attractive to tenants or buyers due to lower running costs. And I also make sure that the property is above EPC rating E because according to Minimum energy efficiency standard, in the UK, all properties with an EPC below E cannot be rented out without improvements. In my case study, the building has EPC rating A which enhances its marketability.
What factors make a ‘prime business location’?
A prime business location like Paddington, London, offers exceptional transport connectivity, making it highly desirable for businesses. Paddington serves as a key transport hub with access to multiple Underground lines, connecting it seamlessly to the rest of London. The Paddington Station, one of London’s major train stations, provides easy access to the South West and West of England, including cities such as Bristol, Bath, and Oxford. Furthermore, Paddington boasts a direct link to Heathrow Airport via the Heathrow Express, which is ideal for businesses with frequent international travel requirements. This outstanding accessibility ensures employees, clients, and partners can reach offices conveniently, significantly increasing demand for office spaces in the area.
In addition to transport links, a prime business location provides high-quality amenities, which enhance its appeal as a business district. Hyde Park, located at Paddington, offers green spaces where employees can relax, exercise, or host informal outdoor meetings, promoting a work-life balance. The area also has a lot of cafes, restaurants, and retail outlets that cater to the needs of both employees and clients, creating a vibrant environment for business activity.
Moreover, Paddington has many hotels that offer convenient accommodation for business travelers, making it an excellent choice for multinational companies. These features make Paddington an ideal spot for businesses to establish a strong presence in London.
How do you know it was steel frame construction?
The marketing brochure and my site inspection confirm that 50 Eastbourne Terrace, London, is a steel frame construction. The brochure highlights its modern design with open-plan floorplates, which are typical of steel structures. During the inspection, I observed exposed steel beams in utility areas, supporting the brochure’s details. This type of construction provides strength and durability making it suitable for tenants needing adaptable office spaces.
What is Grade A specification?
There is a list of Grade A specification shown in the building so I will list out a few.
Firstly, it features a steel frame structure, known for its durability and strength, providing support and ensuring long-term reliability. The building also has a floor-to-ceiling height of 2.8 meters, exceeding the standard 2.6 meters often required for Grade A status. This creates a spacious and open working environment, enhancing natural light and airflow, which are attractive features for tenants and businesses.
Additionally, 50 Eastbourne Terrace is installed with LG7-compliant lighting and light sensors. This modern lighting system contributes to energy efficiency and reducing running costs for tenants and owners. This feature aligns with the growing demand for sustainable and cost-effective office spaces.
The building includes three passenger lifts, each capable of supporting up to 1,800 kg. These lifts ensure smooth and efficient vertical transportation for employees and visitors, adding to the convenience and practicality of the building.
Why did you adopt NIA?
I adopted NIA because my client instructed me to do so in order to align with the other assets in their portfolio.
What is a reasonable tolerance?
My measurement is 85,670 sq ft and the measurement provided by the asset manager is 85,672 sq ft; it is a 0.0023% difference, I considered this as within reasonable tolerance.
I adhered to RICS professional standard RICS property measurement 2nd edition 2018.
What are key principles of Surveying Safely 2019?
There are a few key principles in RICS Surveying Safely 2nd edition 2019, first, personal responsibilities where workers must ensure that they follow the lone working policy if they are inspecting the building alone, and make sure that they bring all PPE needed to the site (helmet, highly visible vest, steel toed cap boots, covered clothing).
Next principles is regarding corporate responsibilities where employers must provide liability insurance for workers and provide training to workers to make sure they are aware of the H&S policy and follow them.
Then, it talked about the RICS places of work where employers must provide a safe working environment for workers for example including an emergency arrangement at the working place and a clear fire exit.
Lastly, employers must carry out risk assessment assessing any hazards and risks regularly to avoid any accident happen on the site.
Talk me through your inspection.
During my inspection, my supervisor and I arrived at the site early to observe the surrounding area and assess its characteristics. I found that Paddington is a vibrant location, full of businesses, offices, restaurants, and retail outlets. The area is particularly busy around Paddington Station, one of London’s largest train and underground stations, offering excellent connectivity to the rest of London.
We then proceeded to the address provided by the asset manager, situated just across from Paddington Station. During the external inspection, I carefully observed the building from top to bottom and noted its steel frame structure, which includes a ground floor, six upper floors, and a roof terrace.
Inside the building, I discovered three passenger lifts with polished gold finishes, which I used to access the top (6th) floor. I inspected the building from top to bottom, noting that each office space featured floor-to-ceiling double-glazed windows and an average floor space of approximately 10,000 sq ft, offering spacious and well-lit working environments.
On the ground floor, I noticed several end-of-trip facilities designed to promote sustainability and convenience. These included 143 bike racks and 13 showers, which encourage employees to cycle to work, reducing carbon emissions and supporting a healthier lifestyle.
Finally, I conducted a thorough check for any hazardous materials (which can cause harm) or deleterious materials (which can weaken structures). Examples of these include Japanese knotweed, asbestos, and high alumina cement. No significant issues were observed during the inspection.
What notes did you take and why?
During my inspection, I made sure to take detailed notes about the property and its surroundings to help me later when looking for comparables. I will tell you a few. First, I focused on the area itself, noting things like the street setting, nearby amenities, and how accessible the building is to public transport, such as train stations and bus stops. These are important factors because they can really impact the building’s appeal to tenants and buyers.
I also paid close attention to the building itself, including how it was constructed, the number of floors, and its overall condition. I made notes on the quality of the finishes, the layout of the floors, and whether the property seemed well-maintained. All of this helps when comparing it to other buildings with similar features.
Lastly, I looked into the tenants, particularly their types of businesses and the strength of their leases. This is important because tenants can affect the building’s income potential and value.
These notes helped me get a clear picture of the property and ensured I could find comparable buildings with similar characteristics, making the valuation as accurate as possible.
How did you ensure you inspected safely?
I always make sure that I followed the RICS Surveying Safely 2nd edition 2019 and always bring my PPE to the site for inspection. I will do my research online before as well regarding the area and the building itself.
Are you aware of standard lease clauses for offices and retail units in this area?
Full repairing and insuring basis.
How do you know? I contacted the local agency to ask if they are seeing FRI leases in the area.
Why did you adopt the investment value?
Did you consider any alternative valuation methods and if not, why not?
There are residual method, profit method and depreciated replacement costs method, I do not consider them because residual method is used for development, profit method is used for trade related properties and depreciated replacement costs is used for specialised properties such as docks, submarine, schools, oil refineries.
I chose the investment method in my case study because it is an income generating property, hence investment method is the most suitable method.
What key factors did you consider when sourcing comparable evidence?
When sourcing comparable evidence, I prioritised key factors like the location, property type, specification, size, transaction date and lease term. For instance, the comparables were selected from properties near Paddington, aligning with the subject property’s location. Properties with similar Grade A specifications, multi-let profiles, and WAULT were particularly relevant. Adjustments were made for variances such as location (e.g., Fitzrovia adjustments for a superior area), tenancy profiles, and building quality. The analysis adhered to the hierarchy of evidence as outlined in the RICS guidance on Comparable Evidence in Real Estate Valuation 2019, ensuring completed transactions of near identical properties with full and accurate information available is prioritised.
How do the office and retail rental values differ?
Office and retail rental values differ primarily due to variations in demand, and usage. In this case study, the office rental values are significantly higher than retail, with a blended rate of £85/sq ft for offices compared to £35/sq ft for retail.
This difference is because office spaces are used for professional businesses, often requiring prime locations, modern end of trip facilities, and advanced specifications, such as Grade A office buildings like 50 Eastbourne Terrace. These features justify higher rents as they attract tenants willing to pay for quality and convenience. Moreover, the comparables that I have collected supported this level of rental value.
Conversely, retail spaces, particularly on ground floors, are influenced by footfall, visibility, and the type of retail activity. In this case, the retail units are priced lower because their entrances are not directly facing the main street, reducing visibility and accessibility compared to prime retail locations. Comps for retail supported this level of rental values as well.
What are the key principles of Comparable evidence in Real Estate Valuation 2019?
What is a hierarchy of evidence and why is it used?
The Hierarchy of Evidence is a framework used in real estate valuation to rank and prioritise data sources based on their reliability, relevance, and alignment with the property being valued. It ensures that valuations are grounded in the most accurate and robust evidence available, reducing the risk of subjective interpretation.
The hierarchy prioritises direct market evidence, such as recent transactions of comparable properties, over less reliable sources like asking rents, market opinions, or older transactions. For example, in this case study, I prioritised recent lease transactions from properties in Paddington with similar specifications, such as Grade A offices, to establish accurate rental values.
What is the hierarchy of evidence in real estate valuation?
The hierarchy of evidence is a framework used in real estate valuation to rank and prioritise data sources based on their reliability, relevance, and alignment with the property being valued.
What type of evidence is prioritised in the hierarchy?
Direct market evidence, such as recent transactions of comparable properties, is prioritised over less reliable sources like asking rents or market opinions.
How does the hierarchy of evidence ensure transparency?
It helps valuers systematically assess evidence quality and make informed adjustments for factors such as location, specification, and lease terms.
What is headline rent?
Headline rent is the rent agreed between landlord and tenant before making any adjustments like rent free or tenant incentives.
How did you adjust for location with the Fitzrovia comp?
I adjusted the yield for 50 Eastbourne Terrace to 4.90% to reflect Paddington’s slightly less prime nature compared to Fitzrovia, which had a net equivalent yield of 4.80%.
What is WAULT and how does it impact value?
WAULT, or Weighted Average Unexpired Lease Term, reflects the stability and predictability of income over time, influencing the yield applied in the valuation.
How does covenant strength impact value?
Covenant strength reflects the financial reliability of tenants, with strong covenant tenants leading to lower yields and higher property valuations.
What communication methods were used throughout the case study?
I used a mix of verbal, written, and digital communication methods, including phone calls, emails, and digital tools like Microsoft Teams.
How did you deliver good client care?
I ensured clear understanding of the client’s objectives, provided regular updates, and delivered a final report aligned with RICS Valuation Standards.
How did the lack of information on gyms impact your valuation?
The lack of reliable market data made it harder to accurately benchmark the rental value for the gym unit, leading me to rely on the best available evidence.
