L1 Flashcards
What guidance is there on loan security valuations?
Rebook VPGA2
UK National Supplement VPGA 10
What are some keys risks for lenders to consider before lending?
Micro and macro economic conditions
Quality and condition of the property
Alternative uses
What is included in a secured lending instruction letter?
Property
Bank details
Banks customers
Loan details
Red book basis
Timescales
Fee
How could a change in interest rates affect the property market?
- Increases the costs of borrowing
- Slows investment in property as it’s less attractive
- Return on investment affected
- Yields move out to reflect the increased risk
What risks would rising interest rates pose to a lender?
They’d have to charge higher fees on borrowing
Less investment and lending
Borrowers may be more likely to default on payments as higher costs
What does the UK National Supplement state about secured lending valuations?
Within VPGA 10
Includes:
Conflicts of interest
Panel agreements -> the standardised terms of engagement may not always be appropriate and valuers should regularly review
Limitation of liability
Limitation of reliance
Extensions of validity and revaluations - valuers should exercise caution should there be any material change in facts and circumstances
Sustainability and ESG
When might a property not be suitable for loan security?
If the property was constructed of deleterious materials for example mundic, if the property was held on a very short leasehold interest or if it was a flat less than 30 sqm
What 2 main pieces of information does VPGA 2 advice the valuer to request off the lender?
Enquire if there has been a recent transaction or provisionally agreed price and further enquiries eg marketing, incentives etc
The value should request details of the terms of the lending facility being contemplated by the lender
Under VPGA 2, what must you state if you have made a special assumption?
Any valuation for secured lending purposes arrived at by making a special assumption, must be accompanied by a comment on any material different between the reported value with and without that special assumption
Under VPGA2, what are some examples of previous involvement which may result in a conflict of interest?
Where the valuer or firm:
1) has a long stand professional relationship with the borrower or owner of the property
2) is introducing the transaction to the lender or borrower, for which a fee is payable
3) has a financial interest in the asset or in the borrower
4) is acting for the owner of the property in a related transaction
5) is acting for the borrower on the purchase of the property
6) has recently acted in a market transaction involving the property
Under VPGA2, if the valuer and client agree that any potential conflict can be avoided what must be done?
1) recorded in writing
2) included in the terms of engagement
3) referred to in the report
Where would you find the main guidance on valuations for loan security purposes?
VPGA 2 of the Red Book
UK VPGA 10 of the UK National Supplement
You refer to valuing an over rented property in Paignton. What advice did you provide to your client in terms of the risks associated with this?
As the rent was deemed over rented, I advised my client that there is greater risk in the tenant defaulting on the payment of rent given its above market levels
With regards to the over rented property you valued in Paignton- considering the length of the loan, what advice did you provide in terms of future performance of the investment?
I deemed that the investment would be sufficient to cover the length of the loan but when the lease falls away the value of the property may drop as the topslice would fall away as the lease expires
What advice did you provide your client in terms of the main drivers which impact the property’s value?
Lease terms and covenant strength
Economy / interest rates
Current strength of industrial market
