Loan Security Valuation

Question 1

What is a typical LTV Ratio?

Answer 1

60-70%

Question 2

What does UK VPGA 10 relate to?

Answer 2

Valuation for commercial secured lending purposes.

Question 3

What does UK VPGA 13 relate to?

Answer 3

Residential secured lending guidance for other related purposes including RICS Home Buyer Survey.

Question 4

State what is within UK VPGA 10?

Answer 4

• Guidance relating to commercial secured lending in the UK.
  -DRC method not to be used as primary valuation method.
  -Provides more detail for independence, objectivity and conflicts of interest.
• States that if panel agreements agreed, TofE must still reflect individual assignment.
  -Panel agreements should be under regular review by valuer.
  -Important that any loan sec report addressed only to named lender and not borrower.
  -As default position, the TOFE should limit reliance only to addressee.
  -Any comments by valuer to loan security must be limited only to property and market factors.
  -Valuer only expected to provide opinion based on info readily available in market.
  -Advises for caution regarding revaluations if required.
  -Mentions important of sustainability and ESG factors to value.

Question 5

What is Freemont (Denbigh) V Knight Frank LLP (2014)?

Answer 5

Knight Frank valued some land for secured lending purposes. The claiment alledged that Knightfrank overvalued the property and upon trying to sell the property they did not achieve any offers close the the valuation figure. They decided to sue Knight Frank for a breach in their duty of care requirements. However, the Courts ruled in favour of Knight Frank as the claimed losses were not within the scope of duties owed by Knight Frank (e.g. they were only required to value for secured lending purposes).

Question 6

On Wells Place, talk to me about the risk profile of the property and how your advice differs based on the risk profile?

Answer 6

My executive summary includes a SWOT analysis for this property. I identified strengths being that the warehouse was relatively newly built and in close proximity to both the A23 and M25. I identified a weakness to be due to the tree protection order limiting further extensions of the building. However, I advised that an opportunity was to sell parcels of the land off to the houses behind. I capitalised the income at an ARY which reflected both the growth and risk element for the property.

Question 7

How do you check previous involvement before agreeing to an instruction?

Answer 7

Send out a conflict checker to my company.

If there are files either online or paper, check these to see the last time any work was done and by whom.

Question 8

What would you do if you found out you were conflicted with a job half way through?

Answer 8

I would immediately inform my client and depending on the type of conflict, I would seek informed consent from all parties and potentially adopt an information barrier. However, I would make the last decision as to whether to continue the instruction or not.

Question 9

What is Scullion V Bank of Scotland (2011)?

Answer 9

Purchaser bought buy to let flat and sought finance. Lender instructed surveyor to value. Purchaser did not instructed own surveyor and the rent prospects were overstated by the lender’s surveyor. The purchaser sued the surveyor.

The judge felt that the surveyor owed a duty of care to the purchaser as they had relied on the valuation when securing a loan and looking to purchase.

However, court of appeal overturned decision stating that while purchaser may have relied on valuation, it was not reasonablly forseeable to impose duty of care on surveyor. As buy to let was a commercial transaction the first judge’s case law did not apply and generally purchasers of commercial transactions would instruct their own surveyors.

Therefore, unless lender’s valuer agrees to assume responsibility for purchaser as well, the purchaser should instruct their own valuer.

Question 10

Talk me through your SWOT analysis for Partridge Green?

Answer 10

S - At val date there was strong demand for VH Industrial VP units.
Good parking provision.
W - Poor location, no trunk road nearby
O - Continue to maintain and repair property to maximise MV.
T - Russia/Ukraine war/Cost of living crisis.

Question 11

In Partridge Green, was your MV based on the SWOT?

Answer 11

I used the investment method to value this property, in adopting ARY I used the SWOT analysis to factor in both future growth and risk.

Question 12

For Yateley, how did you calculate the costs for the extra work required using BCIS?

Answer 12

I measured each room that required work individually in order to get the sizes in sqm to calculate build costs using BCIS to fully fit out. I then checked my calculated total figures with a building surveyor at my firm for their opinion on if this was a fair reflection of the actual costs.

Question 13

For Yateley, why did you include developer’s profit for a VP property?

Answer 13

As req to value the property on a VP basis, I added in an element of profit/contingency for added hassle for a potential purchaser as it would be expected that there would be a discount if the property was unfinished.

Question 14

In Wells Place, how did you find out that there was ancient woodland onsite?

Answer 14

The LPA website listed it as a planning constraint and the client’s customer also mentioned it during my inspection.

Question 15

What is a Tree Protection Order?

Answer 15

An order to protect specific trees. It means that if an individual wants to undertake management/development, etc onsite they will need to consult LPA. Normally used in urban or semi-rural areas where you would want to conserve nature areas.

Question 16

In Wells Place, where are details of the protection plan held?

Answer 16

A protection plan was done onsite as a condition for planning being granted. It is held on the LPA website.

Question 17

For Wells Place, did you use woodland or garden comparables?

Answer 17

Woodland comparables as I valued the ancient woodland as is.

Question 18

What is UK VPGA 11?

Answer 18

Valuation of UK Residential Property

Question 19

What is the valuers role under UK VPGA 11?

Answer 19

Advise client on:

-Nature of proprerty and factors revealed during inspection that are likely to materially impact its marketability and value.
-The MV (and MR if req), with assumptions and SAs specified.
-Where there are serious items of disrepair or obvious potential hazards revealed during inspection.

Question 20

What is ‘projected market value’ as per UK VPGA 11?

Answer 20

Relates to the date after the date of the report.

Question 21

What is PMV?

Answer 21

Projected Market Value

Question 22

Does PMV require valuer to adopt a Special Assumption?

Answer 22

Yes, all provisos and disclaimers should be stated in terms of engagement.

Question 23

Are valuers expected to inspect roof voids and upper floor voids as per UK VPGA 11?

Answer 23

Unless instructed otherwise inspection to be carried out of property on as is readily accessible. For inspections of roof space, this should be done on a head and shoulders basis only.

Question 24

As per UK VPGA 11, what other additional requirements relate to the inspection of flats or maisonettes?

Answer 24

Should consider info relating to the unexpired lease term, ground rent and other relevant information. However, valuer cannot fully rely on this information if only given verbally, should caveat saying for client to seek legal representation to confirm this to be the case.

Question 25

What level of investigations are required by valuer into legal planning and environmental matters?

Answer 25

-For legal/planning matters, valuer not required to search for statutory notices but legal advisors may ask if a matter comes to light if it will effect value.

-For environment, no enquiries regarding contamination or other environmental hazards are to be made, but if valuer suspects issue it should be brought to attention.

Question 26

What does the UK National Supplement say about the DRC?

Answer 26

This method should not be used as the primary method of valuation. However, it may be used as a check measure.

Question 27

What does VPGA 2, state about previous or current involvement?

Answer 27

It must be disclosed to the client before agreeing the instruction.

Question 28

What does VPGA 2, state as previous involvement?

Answer 28

Normally any involvement with borrower, property or connected parties within the last 24 months from date of instruction. This may vary for different lenders.

Question 29

What happened in Smith V Bush (1980) and Harris V Wyre Forest District Council (1989)?

Answer 29

2 linked cases.

Related to a valuer’s duty of care when instructed to value for mortgage purposes.

House of Lords decided that for both cases the duty of care applied to the purchaser of the mortgaged property. Disclaimers to remove 3rd party liability were unsuccessful as it wasnt deemed fair and reasonable.

Set precedent that valuer owed duty of care to purchaser of mortgaged property if at lower scale. However, House of Lords reserved position for higher/more specialised properties.

Question 30

What happened in Hubbard V Bank of Scotland plc (2014)?

Answer 30

Valuer noticed historic cracking on wall of house during mortgage valuation but did not recommend full structural survey.

Property was then purchased and it was found that the property suffered from subsidence, leading to a negligence claim.

Court of Appeal held that no duty of care existed under these circumstances. Due to borrower not being able to establish that they had relied upon the valuation and disclosed that they had not actually read the report.

Also held that Surveyor’s duty of care was to recommend further investigations was only required where hidden defects were suspected.

Question 31

On West Street, were you able to advise on the suitability for lending?

Answer 31

Yes, I advised that the property was secured for lending at my opinion of Market Value. Despite the weak covenant for the yoga studio, the property was in a central location and I believed even if the tenants did default there would be demand for the unit.

Question 32

On Wells Place, what did you provide the client on its suitability for secured lending?

Answer 32

I was of the opinion that the property was secure for lending at my opinion of Market Value.

Question 33

On Partridge Green why did you do a SWOT analysis?

Answer 33

My client required one, it also provided them with a quick summary of the report and it also helped me identify factors both internally and externally within the party which affected what yields I would include.

Question 34

In Partridge Green, how did you use the Red Book in this valuation?

Answer 34

I complied with PS1-2.
I confirmed tofe in line with VPS 1
My records were in line with VPS 2
My report was in compliance with VPS 3
I identified the basis of value and any special assumptions as per VPS 4
I used the comparable and investment method as per VPS 5
I complied with VPGA 2 in terms of secured lending disclosures and reporting.

Question 35

In Partridge Green, talk me through your advice relating to the future performance of this asset to the lender?

Answer 35

Despite the uncertainty within the market at the time e.g. cost of living I suggested that with continued maintenance and repair at the property, the Market Value could be maximised.

Question 36

What are types of sensitivity analysis?

Answer 36

Simple sensitivity analysis - changes of key variables such as yield, build costs and finance rate.
Scenario analysis - change scenarios for dev content/timing costs such as pashing the scheme or modifying the design.
Monte Carlo Simulation - Using probability theory and software such as ‘Crystal Ball’

Question 37

In Yateley, did you provide sensitivity analysis relating to the costs of works?

Answer 37

Yes, using my software programme I was able to report sensitivity analysis showing a 5% +/- variance in build costs and site value.

Question 38

In Yateley, why would you use sensitivity analysis?

Answer 38

I used sensitivity analysis as my assumptions on the build costs and contingency fees. As these assumptions are likely to change the analysis helps me understand how variance is likely to effect the final market value.

Question 39

What is the current Bank of England base rate?

Answer 39

5%

Question 40

What is likely to happen in the future regarding the Bank of England’s base rate?

Answer 40

It is predicted to fall

Question 41

Run through Partridge Green valuation?

Answer 41

Comps:
4.21% - 7.03%
£7.50 - £14 psf

MR = £203,000 pa £7 psf
MV = £2.6m (7.25% ARY)
MV VP = £89 psf

Question 42

Run through Yateley valuation?

Answer 42

Comps:
MR - £2,250 - £3,500 pcm
MV - £315 - £405 psf (£400k - £1.8m)

MV = £950,000 (£25,000 less for finishing works)
£975,000 = £359 psf

MR = £42,000 pa

Question 43

Run through Wells Place?

Answer 43

Comps:
£10.39 - £17.71 psf
4.9% - 6.9%

MR = £289,424 pa (£14.74 psf)
@ 6% ARY
MV = £4.53m
Plus £60,000 for woodland
MV = £4.59 m

Woodland based on sales between £5000-£10,000 for residential units to extent gardens.

Question 44

Run through West Street, Horsham?

Answer 44

Comps:
MR - £51.80 ZA - £85 ZA
MV - 7.2% - 9.3%

MV = 1.3m
MV VP = £1.195 m (12 mrf)
MR = £108,000 pa

GF SHop:
7.5% @ £85,000 (£70.15 ZA)

1F Yoga:

9% @ £8 psf (10% on over-rented areas)

Question 45

How would you apply VPGA 2 in terms of reporting and typical SAs?

Answer 45

For Owner occupied:

Typical SAs; planning consent granted, building completed in line with plan, property changed in define way.

For investment:

Reporting; summarise leases, comment on potential redev and assume covenant strength.

Typical SAs; different rent agreed, no lease in place and proposed lease with specified terms in place.

For development:

Reporting; idea of costs, viability of development and assumptions using sensitivity analysis.

Typical SAs; works completed in suitable manner, completed dev let or sold on defined terms and prior agreed sale/letting failed to complete.

Question 46

Under UK VPGA 11 what are some assumptions a valuer can make without verification?

Answer 46

1. Property transfered VP unless BTL.
2. All required Planning permission has been complied with.
3. No deleterious or hazardous materials used in buildings construction.
4. Site not contaminated.
5. Property not subject to any onerous restrictions and good title can be shown.
6. Unrestricted access to property.

Question 47

What is PMV defined as under UK VPGA 11?

Answer 47

Projected Market Value is the value relating of a date after the report. Must only be used when valued has provided consent and great care should be taken in drafting TOFE.

Question 48

What is the role of a valuer under UK VPGA 11?

Answer 48

Advise client on;
-Nature of property and factors revealed during inspection.
-The Market Value, with assumptions and SAs agreed.
-Where cases of disrepair or hazards advise client in report of the material impact on value.

Question 49

What length of unexpired lease term does the RICS PS - Valuation of Residential Leasehold Properties for secured lending purposes reference?

Answer 49

85 years. This is to be the assumed term if the valuer cannot source information to the contrary.

Question 50

Why are you to assume 85 years lease length for residential property if you cannot find the actual term, why not less?

Answer 50

This is as marriage value affects premiums for new leases at leases below 80 years.

Question 51

What are matters affecting leasehold properties value according to RICS PS - Valuation of resi leasehold properties for sec lending?

Answer 51

Diminishing lease terms
Restrictive covenants
Planning agreements
Compliance with fire safety
Maintenance work
Service charges
Ground rents

Question 52

What does the RICS Professional Standard - Valuation of Residential Leasehold Properties for Secured Lending Purposes (1st Edn, Effective July 2021) cover?

Answer 52

Factors which affect leasehold value
Inspection of these properties
That to assume 85 years for lease if cannot confirm otherwise.

Question 53

What is PAS 9980?

Answer 53

This is a new code of practice published by BSI relating to appraising the fire risk of external wall construction and cladding on existing blocks of flats.

Question 54

What do EWS1 forms no longer need to be used for?

Answer 54

For owners wanting to sell or re-mortgage flat in buildings without cladding.

Question 55

How would you decide if an EWS1 form was required for the valuation?

Answer 55

Use decision tree within RICS PS - Valuation of properties in multi-storey, multi-occupancy resi buildings with cladding (1st edn, effective April 2021).

Question 56

When should an EWS1 form be comissioned?

Answer 56

If a 4 storey or higher residential building has cladding.

Question 57

Would you inspect the drains during a mortgage valuation?

Answer 57

No, as per UK VPGA 11, I would assume drains/sewers/etc to be in working order unless presented with info to contrary.