Question Bank Flashcards
Case Study
How did you confirm instructions?
Instruction letter provided fee, basis of valuation, confirmation of no conflicts, property details, proposed loan, report delivery date
Client service agreement provides basis of value, reporting requirements e.g. Groundsure report, PII & Complaints handling
Fee and timelines agreed then documented in instruction letter
Case Study
If there wasn’t a service agreement, how would you set out your scope of instructions?
Terms of Engagement
Valuer
Client
Purpose
Property
Basis of value
Valuation date
Assumptions and special assumptions
Fee
PII & limitation on liability
Complaints handling procedure
Can you provide three examples of onerous lease terms.
Inability to Assign
Long lease term without break clauses
Aggressive RPI rent reviews/no collar and cap
None of your investment comparables are close to the subject property. Is that a problem?
In an ideal world you would have comparables from close by
The market meant that this wasn’t the case
I considered properties from towns similar to High Wycombe (oakfield House - Haywards Heath, Weald Court - Tonbridge) or as close as possible - (Beech Court and Forest Court - Wokingham).
I placed importance on similar quality buildings, multi-let, similar rents etc and adjusted where necessary
Is the term and reversion method of valuation adopted by the market?
Define Market?
Valuers use the term and reversion method
Investors may use cash flows which are explicit, Term and Reversion/investment method is implicit
Why is your equivalent yield the same as your term yield when the reversionary yield is higher? Shouldn’t there be a difference?
The reversionary yield reflects the uplift in rent after the vacant space lets
The term yields are just on the let units
I can see costs for Rates and Service charge. I can’t see what void allowances you have made for either existing vacancies or future lease expiries. How long a period have you allowed for new lettings? Is there a lesson to be learned from 2 Bishops Court?
I allowed 12 month void to let the vacant space + 3 months rent free in line with the market
I allowed 6 months void on let space as a mid-point between the tenant vacating or renewing, as we do not know what they will do.
Was the property the subject of a recent sale?
The valuation was for loan security for the purchase
Offer 1.3m however we concluded the buyer was a special purchaser
No other offers and no representation.
Are you obliged to report the purchase price?
Yes under VPGA 2
What do you do if the price is withheld from you?
Investigate as much as possible - marketing price, speak to agents etc
Report this to the bank
2 Bishops Court has been sold with planning permission for conversion to residential. Did you consider this angle for the subject property?
I did - however, the property had no planning permission, and also 3 units were subject to lettings.
Any developer would have to account for the years remaining on the leases + empty rates, service charges etc within their appraisal.
Four years remaining on each lease, only two of them have tenant only break options
Case study
(Bishop’s Court)
Are you aware of the background to that change of use?
Yes they received pre-app approval for change of use to create flats
Ours did not have pre-app approval and is subject to leases
Do you have a broad idea of residential values and conversion costs for this location?
High Wycombe BROADLY £300-400 psf cap value but the property is situated in a commercial business park
Conversion costs??
What is RICS current guidance regarding sustainability?
Must report EPC and other credentials
Must report environmental risks
Must consider impact of sustainability/energy efficiency on value
Assessing covenant status – understanding accounts / D&B – What are the primary measures that you consider when considering a tenant’s covenant?
What is their D&B rating
Are they national or local
What risk do they pose
Are they attractive to investors
What is happening at a macro level in their industry (e.g. banks/betting shops coming off the high street)
Are you qualified to comment on a tenant’s status?
(covenants)
We use D&B ratings and other sources to ascertain the market view, and comment on this within our report/valuation
We are not qualified to give a detailed insight into a tenant’s business/risk profile
What are the differences between Independent Expert, Arbitrator and Mediator?
Independent Expert undertakes their own investigations to come to a decision
An Arbitrator considers evidence provided by each side and decides the outcome of a dispute in accordance with statute (Arbitration Act 1990)
A Mediator facilitates discussion between two parties but has no decision-making authority and cannot impose a resolution.
An arbitrator can’t be sued, an Independent Expert could if negligent, a mediator could but unlikely.
MEES - when might a building be exempt from an EPC?
exempt from an EPC if listed, religious building, temporary building
exempt from MEES if exempt from EPC, where the tenancy is less than 6 months with no security of tenure or more than 99 years
On what basis do you measure offices within industrial property?
GIA
Are there circumstances in which office premises might be measured on a net basis?
If requested by the client
In what circumstances is the valuation of offices on an IPMS basis appropriate?
Should always be measured IPMS - dual measure if client requires NIA
Prime Industrial spec?
Minimum 8m clear eaves height
Minimum 30KN/sqm floor loading
full height loading doors + dock level
5%-10% office content
Approximate site cover 40%
Prime office spec?
Raised floors
suspended ceiling
Air-conditioning (VAV, VRV etc)
End of journey facilities
Sustainable spec
Retail
Give 3 examples of end allowances
Return frontage
Frontage superior to the rest of the pitch?
Discount for restricted view of frontage e.g. canopy
You are considering two retail units – one 60ft of frontage and 20ft of depth, the other, within 2 doors, 20ft of frontage and 60 ft of depth. Which is more valuable?
The 60ft frontage with 20ft depth
Offices – what are the key valuation considerations today?
Is it in a desirable location?
Is it Grade A specification?
Is it let and capable of attracting a new tenant if need be?
Is it sustainable?
Residential – how will the government’s proposed changes to tenants’ rights (and landlord’s responsibilities) affect the valuation of property in the private rented sector.
-opinion-
Could be perceived to be higher risk/more management duties
Could therefore push prices down/yields up
Could separately lead to landlords exiting the market which would reduce supply
In what circumstances might Fair Value be different to Market Value?
Hammersmith Office
With a short unexpired lease term, noting this property is held as an investment, what factors did you consider in your valuation?
I allowed for an 18-month void period for refurbishment and a further 12-month rent free (assuming pre-let)
Refurbishment to Grade A standard at £150 psf (full refurbishment - no M&E). Cat A, single-let.
The client planned to refurbish - didn’t know to what level or cost so I assumed Grade A. That was the instruction - not resi dev.
Golders Green
Ground floor only suggesting there are upper floors. What are they? How did you value them?
Residential sold-off on long leaseholds at peppercorn. No value
What’s better, retail with upper floors sold off or retail with ASTs above? Why?
Depends on the area but generally residential yields are lower than retail yields, so the mix of income de-risks the asset.
Can be management intensive
Two adjoining retail premises, one let to Specsavers, one let to a local covenant, both with a year unexpired. Which is worth more?
Specsavers as stronger covenant - could renew.
What are the primary concerns of a lender when considering a property investment as security for a loan?
Is the property capable of generating an income to service the loan
How much risk is attached to that income
How marketable is the property - both to occupiers and investors
If the bank has to sell the property to recover the loan, how much interest would there be, who would be interested, why would they be interested.
If the property were to become vacant, could it let, could it be sold, how is its value impacted
What issues does a Grade II Listed office building, held as an investment, present in the current market?
Demand for secondary offices is dwindling in the current market - lots of investors are refurbishing office to Grade A standards. Grade II Listed means it could be challenging to refurbish, modernise etc. Can also be expensive and often not as sustainable as modern buildings = less occupier demand.
Holborn
Did you consider your valuation of this property on any other basis than investment?
I cross-checked my investment figure with vacant sales in the vicinity as there was a number of vacant sales of similar stock (townhouse style offices in holborn).
Are there circumstances in which the value of a vacant office building might exceed its value as a let investment?
Yes - if it has development potential and vacant possession is required to achieve that.
Development appraisals – is there any RICS guidance upon the reporting of valuations dependent upon development appraisals?
Putney – were you provided with a residential scheme (if not, how did you determine the scale of development?)
Yes, provided by the client
four 2-beds and two 1-beds
c. 4,200 sq. ft
What are the fundamental principles of a residual valuation (GDV less the costs of getting there). Provide 5 costs that would be relevant.
Build costs
Professional Fees (10-15%)
Contingency (5-10%)
Finance
Profit
CIL/MCIL
Marketing & Sale fees (1%-2%)
Give examples of valuations not covered by the Red Book.
ALIES
e.g. valuations purely for internal use (strategic advice)
Agency advice for disposal/acquisition
Expert Witness
When does agency advice fall within the provinces of the Red Book?
Open storage, Greenwich – did you consider its value in open storage use (ie as an investment, not developing it out?).
No because the client requested the residual valuation.
Did CIL apply? Continuation of industrial use (Greenwich)
What do you understand by preliminaries
The costs involved in preparing and running a site for development e.g. site establishment, site accommodations such as welfare facilities, running costs e.g. heating, lighting and power. Costs to shutdown the site at the end etc
What is an acceptable level of developer’s profit. How might this change if the product is an investment?
Typically 15-20% on GDV (for resi) or on cost (for commercial).
The riskier the development, the higher the profit for the developer to take on the risk.
If the product is an investment, some of the profit might be baked into the yield/It might be lower as the developer plans to hold on to the property.
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How did you undertake your conflict of interest check?
I sent a company wide email
I then checked our conflicts register
I confirmed in our team meeting with the valuation team
I then spoke with teams who may have dealt with this type of property before - lease advisory
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What was the basis of valuation in this instruction? Would you use fair value for a loan security valuation? When would you use Fair Value?
Basis of valuation was Market Rent and Market Value
You wouldn’t use Fair Value for loan security, you would use it for fair value
Case Study
Looking at your passing rent table, it appears that the rents have been largely stagnant with lettings in 2017, 22 and 23 all at a similar level – why do you think this is?
The local office market has been stagnant
Demand has not outstretched supply
In your rental comparables, you describe Unit 7 Anglo Office Park as slightly more modern than the subject – what do you mean by this?
It was constructed later than the subject property - the fitout was less tired, the agent who marketed the property advised it was more attractive and typically commanded slightly higher rents
When considering rental comparables, what are the key factors you are looking at when comparing the comp to your subject?
Specification
Size
Lease terms
Incentives
Location
Is it appropriate to look at historic comps?
It can be if you don’t have enough recent evidence
You need to consider movements in the market since then
Case Study
When analysing the letting at unit 2, did you look at the net effective rent? How did you calculate this?
ASK ELEANOR
Case Study
Were all of the units of a similar specification? Was it appropriate to apply the same rate across the building?
Yes - some had tenant fitout but they were of a similar specification - raised floors, suspended ceilings, wall mounted radiators, no air-con, EPC C.
Case Study
Were the vacant suites available on the rental market? What was the quoting rent? Did this impact your assessment of Market Rent?
Yes they were on the market for £15 psf, the agent advised there was interest but no one currently close to signing. They typically agree just below this figure (which can be seen in the lettings)
Case Study
What is the EPC of the subject property? Why is that relevant?
EPC C
It is relevant because it can impact value - occupier demand, refurbishment costs and investor demand.
If comparables have considerably stronger/weaker EPCs, they may be considered a different investment profile.
What are the regulations surrounding EPC ratings
Minimum EPC E to let a building
There is talk of raising this to B by 2030 however it is unconfirmed. If a rating is lower than this, it should be considered that costs may have to be accounted for
Over what radius might evidence of investment yields be considered?
Important to consider within a similar market, ideally geographically close
E.g. High Wycombe comparable should be south east towns/comparable locations
You say the tenants are of a weak covenant, do you think it was appropriate to advise this to be suitable for the loan?
Yes - the risk of the tenants is reflected in the yield
the property is suitable for its intended use - similar to stock in the area, designed for tenants with that budget.
Case Study
Do you think it is suitable to assess your investment comps using a net initial yield? Why not?
I wouldn’t because the property was half vacant / under-rented
I also wanted to account for void periods and costs within my valuation
Did you calculate EY? How did you calculate them?
ASK ELEANOR
If your comparables did have vacancies, how would this impact the yield profile?
Their initial yields would also be lower than equivalent/reversionary
I would have to consider whether the yield is appropriate - I would also check if there is a rental guarantee on the vacant space
Case Study
How did you reflect the risk of vacant suites within your valuation? Is this appropriate?
I applied a void period and a rent free period, derived from comparables and understanding of the local market through discussions with agents.
Further risk is reflected within the yield as its an implicit valuation
You mention MSCI, what are the limitations of this?
It’s an index - it isn’t specific to a certain property
It is generally institutional stock
Why should you not value to the index?
It doesn’t take into account the profile of your property
It’s too broad
Did you comment on demand / marketability of the property. Who did you identify as the primary market for this property?
Demand from tenants would typically be local businesses/SMEs - 5-year terms, low rents.
Investors would be small-medium investors, HNWI. They would be attracted to the high yields, asset management opportunities etc.
Is there a potential special purchaser situation here? Did you investigate who owns the adjoining properties?
We determined the buyer was a special purchaser as they operated from the building next door (which they owned).
They did not have agent representation for this acquisition
They had bought the neighbouring property for the same £psf the previous year - they may not be aware of the changes in the office market since then.
There were no other offers on the property.
When they purchased the neighbouring property, they were the tenant however there had been other bids at that level and they had agent representation.
You mention the difficulties in the office market – what are they?
Cost of borrowing - base rate went up to 5.25% in 2023.
High vacancy rates - changes in working habits post-covid
Flight to quality
Did you consider alternative use for the property? Any planning restrictions for a change of use? (Article 4)
We did however as there was 4 years remaining on each of the leases, we determined it would be inappropriate to consider e.g. a residual.
You could reflect this in the yield - however, it seemed unlikely, it isn’t a very residential area (and comparables had a similar profile - **CHECK THIS)
