Specific to Sum of Experience Flashcards
What is the purpose of the red book?
To ensure consistency in the valuation process worldwide
It essentially states that to carry out a Red Book valuation - you must be competent, agree terms of engagement, inspect/measure and carry out appropriate investigations, analyse everything and produce your report
Must agree terms of engagement before issuing the report
Please name some Valuation Technical and Performance Standards within the Red Book?
- Terms of Engagement (Scope of work)
- Inspections, investigations and records
- Valuation Reports
- Basis of Value, assumptions and Special Assumptions
- Valuation approaches and methods
Please name some Valuation Practice Guidance Applications within the red book?
- Valuation for inclusion in financial statements
- Valuation Interests for secured lending
- Valuation of Businesses and Business Interests
- Valuation of Individual trade related properties
- Valuation of Plant and Equipment
- Valuation of Intangible Assets
- Valuation of personal property, including art and antiquities
What should be included in the Terms of Engagement for a valuation?
Valuer - name
Client - name
Property - address
Purpose of valuation
Basis of value
Valuation date
Nature and extent of the valuer’s work - including investigations - and any limitations thereof
Assumptions/special assumptions
The Fee
What are the different basis of value?
Market value
Market rent
Investment value
Fair value
What are the five conventional methods of valuation?
Comparative
investment
residual
profits/accounts
contractors method (DRC)
How did you conduct a conflict of interest check?
Check work files to see if you have worked for the other party in the past
Send email around office
How did you measure the office in Richmond for your valuation?
IPMS 3
What online data basis did you use to collect your recent investment and lettings data?
Costar
How did you weigh and rank the comparable?
Hierarchy of Evidence
What is the Hierarchy of Evidence?
Ranking evidence by transaction type
Most weight should be attached to:
open market lettings
lease renewals
Rent review
Independent expert determination
Arbitrator award
Whats included in a valuation report?
Conflict of Interest Check (not required for me becuase I already established this - for internal purposes)
Agreed Terms of Engagement
Inspection notes - photos, floor plans, planning permission etc.
Comparable evidence
Valuation calculations
Copy of valuation report
Where did you do a residual valuation?
Kent (Halfords)
How did you arrive at the market rent?
Capitalised the market rent at the all risks yield
What is the all risks yield?
Buildings physical characteristics
Tenants covenant strength
Market rent to see if property is under or over rented (EG 7% market yield, would increase if over rented or decrease if under rented)
Other lease terms - likely to be some uncertainty in net rent (EG unexpired lease term)
Anticipated rental growth (links to location)
What is BCIS?
Building Cost Information Service
Who owns BCIS?
RICS
How did you value the property in Richmond?
Using a term and reversion valuation
How do you calculate Stamp Duty and Land Tax?
0% to £150k
2% for £150k - £250k
5% over £250k
How do you calculate legal fees, agents and non recoverable VAT?
1 % Agents Fees
0.5% Legal Fees
0.3% Non recoverable VAT
Of the Gross Acquisition Price
How do you value a property that is rack rented
Capitalise the passing rent at the all risks yield to arrive at Gross Acquisition Cost. Deduct fees, stamp duty to arrive at market value.
How do you value a property that is over rented?
Need to capitalise market rent into perpetuity and then capitalise the top-slice income (the over-rented portion) up to review/reversion
What fees are associated with building costs?
Architect,
Quantity Surveys,
Structural
Service Engineers
Planning fee
BREEAM Admin
What might be an appropriate contingency for building costs etc?
5%
How did you estimate you demo and enabling works?
Estimated/assumed from tender returns Tender contracts
What would be a typical rate for finance costs for the building works?
Short term finance at 7% for 1 year pre-construction and construction period on building costs (average 50%)
Industry standard according to bank of England base rate and a premium
How did you calculate developers profit?
either 15 - 17% of GDV or 22-25% of total development costs - went for size of the project was smaller. - RISK is the determinate factor.
What might influence the developers profit?
All the materials were readily available. Short building time frame.
What yield did you use to get to your estimated gross development Value?
5% (all risks yield)
Consequences if valuer does not comply with VPS?
RICS may take disciplinary action (depends on extent of non-compliance / severity of breach)
EG might have to sign a consent order to say you’ll get this sorted within a month or might get a fine
Consequences if valuer does not comply with VPGA?
If giving advice, you MAY get sued for negligence
Therefore, in vals terms - if you advise someone to pay too much to buy a property, you could get sued for negligence. Lawyer would ask to see valuation file - will be looking for Red Book compliance.
Even if you comply with Red Book, you could still get sued - could have used unsuitable comparables, could have measured the unit incorrectly etc
What are the usual acquisition costs of a development site?
(Purchase price of the site)
Stamp duty land tax
Acquisition agents fees
Legal fees
VAT on the agent and legal fees
Explain the process of the term and reversion technique? COMMON QUESTION
We capitalise the passing rent until review or reversion
(Do this, by multiplying the passing rent by the YP for the number of years to the reversion)
We take the market rent to be received at review/reversion and then capitalise that into perpetuity (gives value at that moment in time) to get the market value.
Capitalisation = multiplying by the YP
We then defer it further, at a PV of £1, for the period of the term
The reversion gets capitalised at market rented rate, but the term gets capitalised at a lower rate due to the lower risk (if over-rented, then term would have higher yield and reversion would have lower yield)
What’s a special assumption for your residual calculation?
That your construction costs are valid.
That
What is your statutory due diligence?
- Asbestos Register
- Business Rates / Council Tax
- Contamination
- Equality Act compliance
- EPC
- Flood risk
- Fire Safety compliance
- Health and Safety compliance
- Highways
- Legal title
- Planning history / compliance
What is the difference between a residual development and a development appraisal?
Development appraisal gives you the validity of a project. A residual gives you the land value.
