Vals Flashcards
What are the 5 methods of valuation?
- Investment
- Comparable
- Profits
- Depreciated replacement cost / Contractors
- Residual
When do you use the residual method?
Value of development land
When do you use the Profits method?
Income producing property such as a pub
When do you use the Contractors method –& why is it the method of last resort?
- Use it to value something like a church, bandstand or ancient monument
- Use it because something has special characteristics which make it not easily comparable.
- only when there are no comps basically
What basis of value would you use for a valuation that is for accounting purposes?
Fair Value
Valuation for Internal purposes – what is the relevance of the fact a valuation is for internal purposes?
It is an exception to the Red book.
If you want to undertake a valuation that is an exception to the red book, what do you have to do?
- Set it out in the TOE.
- Set out that your client has agreed to the fact that it is an exception
What are the basis of value as defined by the Red Book?
- Fair value
- Market Rent
- Market Value
- Investment value.
What is the definition of market value?
Estimated Amount for which a property should exchange on the valuation date between a willing buyer and willing seller in an arm’s length transaction after proper marketing and where the parties had each acted knowledgeable, prudently and without compulsion.
What is proper marketing – how do you define it ?
Marketing for the appropriate amount of time and selling via the correct/best method of sale for the property.
I understand you undertook a red book valuation in xxx – please talk me through it – what did you do?
- I started by checking competency, running a conflict of interest check and taking instructions & agreeing terms –
- Red book PS1 – competency = ‘having the appropriate knowledge and experience of dealing with this type of property’.
How do you check for conflicts?
- Circulate conflict on internal coi system
- Check emails , files etc
- A conflict is e.g. we are instructed to sell the property post valuation. Or we are doing a loan sec valuation for the bank but have already done work in past for the applicant.
What do TOE for a Red Book valuation include?
- Detail client
- Property details
- Valuation Date
- Fee
- PI cover
- Complaints handling procedure
- Basis of value
- Limitations
- Assumptions (e.g. property has relevant planning)
- Currency
- Special Assumptions (e.g. vacant possession when the property is tenanted atm).
What due diligence would you carry out prior to valuation?
- Asbestos register
- EPC certificate
- Flood risk assessment
- Planning
- Rateable value
“Comparables ranked in hierarchy of evidence to determine market rent and appropriate capitalisation rate.” – What is the hierarchy of evidence ?
- Open Market Letting
- Lease renewal
- Rent review
- Independent expert determination
- Arbitrator’s award
- Sale & leaseback
Why is lease renewal above RR in hierarchy
- Bc tenant can walk away
- The rent can go down (not upwards only).
Where would you put subletting in the hierarchy of evidence?
- Depends on alienation / onerous clauses
- This would probably go after open market letting if no onerous clauses / alienation.
What would an appropriate capitalisation rate be? – What factors determine capitalisation rate ?
- Covenant strength
- Lease length
- Other terms e.g. repairing / insurance liability
- Location/size/spec
How do you capitalise an income stream in order to come to a gross value?
- Multiply by y into perpetuity
- Years purchase = 100/yield
- Yield = factor of risk
How do you get a net value ?
Deduct purchasers costs from gross value. / Gross value minus purchasers costs.
What are purchasers costs?
- Stamp duty
- Land tax
- Agency fees
- Legal fees
- & VAT on Agency/legal fees^
If property is under-rented what valuation technique should you use?
- Term and reversion
How do you do a term & reversion valuation?
- Term = up until next RR / reversion
- Capitalise reversion into perpetuity
- Add term and reversion together
o To get value that the term & reversion is worth today, you x (multiply) it by the present value of £1.
What is differential in yield between term and reversion?
- Yield is adjusted based on risk for the reversion – so would be at a higher yield
If a property was over-rented what would you use?
- Hardcore/layer method
- (could also use term and reversion but less common).
How do you do a valuation with vacant possession?
- Use comparable method and look at nearby vacant units
- ^ failing this – if there are no comparables then you use the investment method
o Look at the rent the property could generate (ERV) and apply an appropriate yield
Would the appropriate yield be the same yield you’d apply if the property was actually already let at that ERV?
- No – you need to take account of the risk by:
- Increasing yield
– Or – factor in a void period e.g. 6 mths – do a term & reversion where your term is at 0 rent for however long the void period is e.g. 6 mths.
Residual valuations are used for the valuation of land – talk me through the calculation/method of a residual valuation.
- Look at gross development value of a project – then deduct the costs and profit to get residual value.
How do you work out GDV (gross development value)
- Use comparable analysis to work out what newly built houses would be worth
Costs that you include – what sort of costs would you improve?
- Building costs – BCIS (Building Costs Information Service)
- Demolition costs
- Contingency
- Finance costs
What does BCIS stand for?
- Building Costs Information Service (owned by RICS)
What unit of measurement does BCIS refer to/ use
M2 (Meters Squared)
What basis of measurement does BCIS use?
GEA (Gross External Area)
What do banks consider in terms of their lending rate?
- Risk
What types of funding are available to developers (other than senior debt 6-7%).
- Mezzanine (8-11%)
Fees in a residual valuation – what to include?
- Architects fees
- Professional fees – covering:
o Project manager
o Independent monitoring surveyor
o Building surveyor
o Quantity surveyor
o Civil engineers - Professional fees global percentage = 12.5%
- Contingency, depends on risk – could be between 2-10% , tends to be lower.
How would you calculate developers profit?
- 15% of GDV
- Or – 20% of total development costs
How do you present scenarios to client on a residual valuation?
- Sensitivity analysis
What is the key RICS material for Vals.
RICS - Valuation, Global Standards 2021 (Red Book).
PS 1 - Compliance - Mandatory for all valuations bar
5x Red book exemptions
PS 2 - Ethics
- COI
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VPS 1 - TOE
VPS 2 - Inspection
VPS 3 - Report
VPS 4 - Bases of Value, Assumptions, Special Assumptions
VPS 5 - Valuation approaches & Methods of Valuation.
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VPGA 1 - Financial Reporting
VPGA 2 - Loan Sec
VPGA 8 - Real Property Assets
VPGA 10 - Material Uncertainty Clauses
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6, International Valuation Standards (IVS)
RICS Valuation - Global Standards (UK Supplement) 2018
UK VPGA 1 - Financial Reporting
UK VPGA 8 Charity assets
UK VPGA 10 - Loan Sec
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UK VPS 3 - Regulated Purpose Valuations
1. Financial reporting
