Vals Flashcards
1
Q
What are the five methods of valuation?
A
Comparable method
Investment method
Profits method
Residual method
Depreciated replacement cost method
2
Q
What is an internal valuer?
A
“Employed by a company to value their assets
Valuation for internal use only
No third-party reliance”
3
Q
What is an external valuer?
A
Has no material links with the asset to be valued or the client
4
Q
“What are the THREE steps you should undertake
prior to commencing a valuation?”
A
“CCT:
Competence - check you have the correct level of skills, understanding and knowledge
Conflict of Interest - check you are able to act independently on the instruction
Terms of engagement - issue to the client and receive written confirmation”
5
Q
“Why do you undertake statutory due diligence for
valuations?”
A
Confirm that there are no material matters which could impact on the valuation
6
Q
“What types of statutory due diligence checks would you undertake when valuing a property?”
A
“Asbestos register
Business rates / Council tax
Contamination
Equality Act Compliance
Environmental matters (high voltage power lines,
electricity sub-stations, telecoms masts etc.)
EPC rating if available
Flooding
Fire safety compliance
Health and safety compliance
Highways (check roads adopted with the local highways agency)
Legal title and tenure (check boundaries,
ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves)
Public rights of way (from an OS sheet)
Planning history and compliance (check any onerous planning conditions, whether the property is in a conservation area / listed and subject to a s. 106 agreement or CIL)”
7
Q
“What are the THREE valuation approaches set out in IVS 105?”
A
“Income approach - converting current and future cash flows into a capital value
Cost approach - reference to the cost of the asset whether by purchase or construction
Market approach - using available comparable evidence”
8
Q
“What are the SIX steps used when collecting
comparable evidence?”
A
1) Search and select comparables (agent’s boards, online databases)
2) Confirm / verify information with a party directly involved in the transaction
3) Assemble comparables in a schedule
4) Interpret comparables using hierarchy of evidence
5) Analyse comaprables to form an opinion of value
6) Report value and prepare file note”
9
Q
What guidance did the RICS recently release on
using comparable evidence?”
A
“RICS Comparable evidence in real estate
valuation, 2019”
10
Q
“What are the THREE categories of evidence outlined in RICS Comparable evidence in real estate valuation, 2019?”
A
“Category A: direct comparables
Category B: general market data
Category C: other sources”
11
Q
What is the hierarchy of direct comparable evidence outlined in the RICS Comparable evidence in real estate valuation, 2019?
A
Contemporary, completed transactions of near-identical properties for which full and accurate information is available (may include the subject property)
Contemporary, completed transactions of other, similar real estate assets for which full and accurate information is available
Contemporary, completed transactions of similar real estate for which full data may not be available
Similar real estate being marketed where offers have been made but a binding contract has not been completed
Asking prices (with careful analysis)”
12
Q
What is the hierarchy of other sources outlined in the RICS Comparable evidence in real estate valuation, 2019?”
A
“Transactional evidence from other real estate type and locations
Other background data (e.g. interest rates, stock market movement and returns which can given an indication for real estate yields)”
13
Q
“When would you use the investment method of
valuation?”
A
Used when there is an income stream to value
14
Q
“How does the conventional investment method
work?”
A
Rent received (or Market Rent) x Years Purchase = Market Value. Assumes growth implicit valuation approach”
15
Q
“When would you use a Term and Reversion method?
How does it work?”
A
“Used for reversionary investments i.e. where Market Rent is more than passing rent
Term capitalised until next rent review / lease expiry at an initial yield
Reversion to Market Rent valued into perpetuity at reversionary yield”
16
Q
“When would you use the Layer / Hardcore method?
How does it work?”
A
“Used for over-rented investment i.e. where passing rent is more than Market Rent
Income flow divided horizontally
Bottom slice = Market Rent
Top slice = passing rent - Market rent until the next lease event
Higher yield applied to the top slice to reflect additional risk
Different yields used depending on comparable investment evidence and relative risk”
17
Q
What is a yield?
A
“Measure of investment return, expressed as a percentage of capital invested
Calculated as income divided by price x 100”
18
Q
“How would you calculate Years Purchase?
What does this show?”
A
“Divide 100 by the yield
* Number of years required for the income to repay the purchase price”
19
Q
“What factors would you considering when
determining a yield?”
A
“Prospects for rental and capital growth
Quality of location and covenant
Use of the property
Lease terms
Obsolescence
Voids
Security and regularity of income
Liquidity”
20
Q
What is an All Risks yield?
A
Yield which encompasses all the prospects and risks attached to a particular investment
21
Q
What is a True yield?
A
Assumed rent is paid in advance (traditional valuation practice assumes rent is paid in arrears)
22
Q
What is a Nominal yield?
A
Initial yield assuming rent is paid in arrears
23
Q
What is a Gross yield?
A
Yield based on the net purchase price (i.e. not adjusted for purchasers’ costs)
24
Q
What is a Net yield?
A
Yield based on the gross purchase price (i.e adjusted for purchasers’ costs)
25
What is an Equivalent yield?
Average time weighted yield reversionary property is valued using an initial and reversionary yield
26
What is an Initial yield?
Simple income yield for current income and current price
27
What is a Reversionary yield?
Market Rent divided by current price on an investment that is under rented
28
What is a Running yield?
Yield at one moment in time
29
"When would you use the profits method of
valuation?"
Used for the valuation of trade related property where the value of the property is directly linked to the profit generated by the business e.g. pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure, healthcare properties and care homes
30
"What do you require to conduct the profits method of valuation?"
Accurate and audited accounts for 3 years
31
"How would you use the profits method of valuation to value a new business?"
Use estimates / business plan
32
What is the methodology for the profits method of
valuation?"
EBITDA (earnings before interest, taxation, depreciation and amortisation) is capitalised at an appropriate yield
33
How should you verify a value obtained using the
profits method of valuation?"
Cross check with comparable sales evidence if possible
34
When would you use the depreciated replacement cost method of valuation?
Where direct market evidence is limited or not available for specialised properties e.g. sewage works, lighthouses, oil refineries, docks, schools, submarine base etc.
35
What is the purpose of the depreciated replacement cost method of valuation?
Used for owner-occupied properties
For accounts purposes for specialist properties
For rating valuations of specialist properties"
36
What are the TWO steps of the depreciated replacement cost method of valuation?
"Value land in its existing use (assume planning permission exists)
Add current cost of replacing the building plus fees (used BCIS). Then make a discount for depreciation and obsolesce / deterioration"
37
"How do you estimate the amount to depreciate the property by when using the depreciated replacement cost method of valuation?"
"Physical obsolescence - result of deterioration / wear and tear over the years
Functional obsolescence - where the design or specification of the asset no longer fulfils the function for what it was originally designed
Economic obsolescence - due to changing market conditions for the use of the asset"
38
Are valuations using the depreciated replacement cost method of valuation Red Book Global compliant?
"Not suitable to be used for valuations for secured lending purposes
Can only be used for the calculation of Market Value for specialised properties for valuations for financial statements"
39
"When reporting a valuation carried out using the
depreciated replacement cost method, what must the valuer state with regards to alternative use?"
"If higher, the valuer must state the Market Value for any readily identifiable alternative use
If appropriate, they must state that the Market Value must be materially lower on cessation of the business"
40
"What guidance has the RICS produced on the
depreciated replacement cost method of valuation?"
RICS Depreciated replacement cost method of valuation for financial reporting, 2018
41
When did the new RICS Valuation - Global Standards become effective as of?
31st January 2022
42
What are the SIX parts of the RICS Valuation - Global Standards (“Red Book Global”)?
1) Introduction
2) Glossary
3) Professional Standards (PS)
4) Valuation technical and performance standards (VPS)
5) Valuation applications (VPGA)
6) The International Valuation Standard (IVS)"
43
"What are the material changes that have been
included in the Red Book Global?"
"PS1: “Written” means any valuation conveyed by paper, any electronic or digital means or in the form of recorded media. This could include the output of valuation software e.g. an AVM
PS2: Reinforces that valuers must apply independence and objectivity to their work and “professional scepticism” when reviewing information and data
VPS3: Valuation reports must clearly state the valuation approach and relevant reasoning which led to their findings. Where appropriate, sustainability and environmental matters should form an integral part of the valuation approach
VPS5: Reinforcement of the obligation to ensure that the valuation model is appropriate for the basis of value, that this is recorded and the model’s assumptions are understood (as per new IVS 105)
IVS 410: requirement for valuers of development property to apply a minimum of two method of valuation"
44
What does PS1 of the Red Book Global cover?
Requirements on when a valuation has to be Red Book Global Complaint
45
"What are the FIVE exceptions, where a valuation
does not have to be Red Book Global compliant?"
"Advice is provided in preparation for, or during the course of negotiations or litigation
Statutory function except for the provision of a valuation for inclusion in a statutory return to a tax authority
Internal purposes, without liability and not communicated to any third party
Agency and brokerage work in anticipation of receiving instructions to dispose of or acquire and asset (except where a purchase report is required which includes a valuation)
Expert witness"
46
What does PS2 of the Global Red Book cover?
Ethics, competency, objectivity and disclosures
47
"What does PS2 of the Global Red Book state with
regards to Professional and Ethical Standards?"
All members undertaking valuations must act in accordance with the RICS Global Professional and Ethical Standards, 2015 and be bound by the RICS Rules of Conduct, 2007 (as amended)
48
"What does PS2 of the Global Red Book state with
regards to independence, objectivity and the identification and management of conflicts of interest?"
"Valuers and firms must act objectively and independently
Should apply “professional scepticism” when reviewing information and data before relying on it
Identify and manage conflicts of interest"
49
"What does PS2 of the Global Red Book state with
regards to Terms of Engagement?"
"Members must understand the client’s requirements and comply with the minimum terms of engagement
Members must be able to demonstrate professional competence"
50
"What is the hierarchy of evidence for establishing
Market Rent?"
1) Open market lettings
2) Lease renewals
3) Rent reviews
4) Third party determinations
5) Sale and leasebacks
6) Inter-company transactions"
51
What does VPS 1 of the Red Book Global cover?
Minimum matters that must be confirmed in writing to the client prior to commencing a valuation
52
According to VPS 1, what matters must be confirmed in writing to client prior to the commencement of valuation?
" Identification and status of the valuer
b. Identification of the client
c. Identification of any other intended users
d. The asset to be valued
e. Currency
f. Purpose of the valuation
g. Basis of value
h. Valuation date
i. Extent of investigation
j. Nature and source of the information to be relied upon
k. Assumptions and special assumptions to be made
l. Format of the report
m. Restrictions for use, distribution and publication
n. Confirmation of the Red Book Global / IVS compliance
o. Fee basis
p. Complaints handling procedure to be made available
q. Statement that the valuation may be subject to compliance by the RICS
r. Limitation on liability agreed"
53
"What is an Assumption, as defined in the Red Book Global?"
Supposition taken to be true and accepted as fact without the need for specific investigation
54
"What is a Special Assumption, as defined in the
Red Book Global?"
Supposition taken to be true and accepted as fact, even though it is not true
55
What does VPS 2 of the Red Book Global cover?
Inspections, Investigations and Records
56
"According to VPS 2, what does it state with regards to the necessity to inspect properties?"
Valuers must take the steps to verify the information being relied upon for a valuation to ensure the information if professionally adequate for its purpose
57
"If a valuer undertakes a desktop valuation, is it still Red Book Global compliant?"
Yes, as long as it does not meet any of the criteria outlined in the PS 1
58
"When a valuer conducts a valuation on the basis of restricted information or without a physical
inspection, what FOUR factors should they do?"
"Nature of the restriction must be agreed in writing in the Terms of Engagement
Possible valuation implications of the restriction confirmed in writing before the value is reported
Valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
he restriction must be referred to in the report"
59
"According to VPS 2, is it permitted for a valuer to
conduct a revaluation without re-inspecting the property?"
Must not be undertaken unless the valuer is satisfied that there has been no material changes to the property or nature of its location since its last inspection (this must be confirmed in the Terms of Engagement and in the valuation report)
60
"What does VPS 2 state with regards to the holding
of records?"
A proper record must be kept of inspections and investigations, and of other key inputs in an appropriate business format
61
What does VPS 3 of the Red Book Global cover?
Minimum requirements to be stated within a valuation report
62
According to VPS 3, what are the minimum
requirements to be stated within a valuation report?"
a. Identification and status of the valuer
b. Client and any other intended users
c. Purpose of valuation
d. Identification of the asset to be valued
e. Basis of value
f. Valuation date
g. Extent of investigation
h. Nature & source of information relied upon
i. Assumptions and special assumption
j. Restrictions on use, distribution and publication
k. Instruction undertaken in accordance with IVS standards
l. Valuation approach and reasoning
m. Valuation figure(s)
n. Date of valuation report
o. Comment on market uncertainty
p. Statement setting out any limitations on liability that have been agreed"
63
"According to VPS 3, is preliminary valuation advice able to be given?"
Can be given but must be marked as a draft, for internal purposes only, which cannot be relied upon and on no account, can it be published or disclosed
64
According to VPS 3, can a draft report be provided to a client?
"Yes, although the valuer is not to be influenced by the client in any way with respect to the final valuation figure stated in the report
A draft report provided to a client must state that it is a draft and it is subject to the completion of the final report
Any changes made to a preliminary valuation must be noted on file and reasons provided"
65
What does VPS 4 of the Red Book Global cover?
Basis of Value, Assumptions and Special Assumptions
66
"What is the definition of Market Value according to VPS 4 of the Red Book Global?"
"The estimated amount for which an asset or liability should exchange
* On the valuation date
* Between a willing buyer and a willing seller
* In an arm’s length transaction
* After proper marketing
* Where the parties had each acted knowledgeably, prudently and without compulsion"
67
"What is the definition of Market Rent according to
VPS 4 of the Red Book Global?"
"The estimated amount for which an interest in real property should be lease
* On the valuation date
* Between a willing lessor and willing lessee
* On appropriate lease terms
* In an arm’s length transaction
* After proper marketing
* Where the parties had each acted knowledgeably, prudently and without compulsion"
68
"What is the definition of Fair Value (IFRS 13)
according to VPS 4 of the Red Book Global?"
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
69
When would you be required to report Fair Value?
Used when undertaking valuations for inclusion in financial statements, if the International Financial Reporting Standards have been adopted by the client
70
"What is the difference between Fair Value and
Market Value?"
"RICS view that Fair Value is generally consistent with the definition of Market Value
Fair value relates to the actual worth of an asset and would be the mutually beneficial value between the buyer and the seller
Market value is the price which the asset will exchange between parties in the market and is influenced by market forces"
71
"What is the definition of Investment Value
according to VPS 4 of the Red Book Global?"
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives i.e. the measure of worth to reflect the value against the client’s own investment criteria
72
"What is the definition of Equitable Value (IVS 104)
according to VPS 4 of the Red Book Global?"
"The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties
Not used in the UK"
73
"What is the definition of Liquidation Value
according to VPS 4 of the Red Book Global?"
"Used for a group of assets sold on a piecemeal basis considering the cost of getting the assets into a saleable condition
Not used in the UK"
74
What does VPS 5 of the Red Book Global cover?
Valuation Approaches and Methods (IVS 105)
75
"What does VPS 5 of the Global Red Book state with regards to Valuation Approaches and Methods?"
"Valuers are responsible for choosing and justifying their valuation approach and use of model
More than one valuation approach may be appropriate in some cases"
76
What do the VPGAs in the Red Book Global cover?
Valuation Applications (Valuation Practice Guidance Applications)
77
What does VPGA 1 of the Red Book Global cover?
Valuation for inclusion in financial accounts
78
"According to VPGA 1, what must you do when
valuing for inclusion in financial accounts?"
Where the entity has adopted IFRS, the basis of value will be Fair Value
79
What does VPGA 2 of the Red Book Global cover?
Valuations for secured lending
80
What does VPGA 2 state with regards to dealing with conflicts of interest for secured lending valuations?
"Any previous, current or anticipated involvement with the prospective borrower or the property to be valued must be disclosed to the lender
“Previous involvement” is defined as normally being within the past two years but under certain circumstances it can be longer
If the valuer or the client considers that any involvement creates a conflict that cannot be avoided, then the instruction should be declined"
81
"What examples does VPGA 2 give of involvement
that may result in a conflict of interest?"
Having a longstanding professional relationship with the prospective borrower or owner
When the valuer will gain a fee from introducing the transaction to the lender
If there is a financial interest in the property holding or prospective borrower
When the valuer is retained to act in the disposal or letting of the completed development on the subject property"
82
"According to VPGA 2, whose responsibility is to
decide whether or not to proceed with an instruction?
What should they have regard to?"
"Valuer’s responsibility to decide whether or not to accept the instruction
Should have regard to RICS Rules of Conduct"
83
According to VPGA 2, if it is agreed that any potential conflict can be avoided by introducing arrangements, what must be done?
The arrangements must be recorded in writing and included in the terms of engagement and valuation report
84
"According to VPGA 2, as well as the minimum
requirements of a valuation report, what additional information must the report include?"
"Disclosure of any conflict of interest identified in the terms of engagement, or that has been subsequently discovered, including the arrangement that have been made. Alternatively a statement that the valuer is not involved
Valuation methodology adopted, supported where appropriate or requested, with the calculation
Where a recent transaction on the property has occurred or been provisionally agreed, the extent to which that information has been accepted as Market Value
Where the enquiry does not reveal any information, the valuer will make a statement to that effect in the report
Comment on any environmental considerations
Comment on the suitability of the property for mortgage purposes
Any circumstances the valuer is aware of that could affect the price
Any other factor that potentially conflicts with the definition of Market Value or its underlying assumptions"
85
"According to VPGA 2, what must you do if your
valuation for secured lending purposes is subject to a Special Assumption?"
"Must be a comment on any material difference between the reported value with and without that special assumption
"
86
"According to VPGA 2, how should you take account of sustainability factors?"
Comment on the maintainability of the income over the life of the loan in a broader sustainability context (e.g. environmental risks, matters of design, accessibility)
87
"According to VPGA 2, what should you comment on in relation to the end of the occupational lease?"
Any potential for redevelopment or refurbishment
88
What does VPGA 8 of the Red Book Global cover?
"Valuation of real property interests
* Covers inspections and investigations, with particular emphasis on environmental constraints and sustainability issues"
89
What does VPGA 10 of the Red Book Global cover?
Matters that may give rise to material valuation uncertainty
90
"What does VPGA 10 state that valuation reports
must not be?"
Misleading
91
"According to VPGA 10, what should a valuer do/not do when it comes to material uncertainty?"
"Valuer should clearly draw attention to, and comment on, any issues resulting in material uncertainty in the valuation on the specified date relating to the risk surrounding the valuation of the asset
A standard caveat should not be used"
92
"What does part 6 of the RICS Valuation - Global
Standards (“Red Book Global”) cover?"
International Valuation Standards, 2020
“General Standards” addressing matters such as terms of engagement, approaches to, bases and methods of valuation as well as reporting
“Asset Standards” which provide requirements relating to specific types of asset, such as real property and development property"
93
"What is the relationship between the Red Book
Global and the RICS Valuation - Global Standards (UK National Supplement, 2018)?"
The UK National Supplement augments the Red Book Global requirements for valuations in the UK and is not a substitute for it
Provides requirements for members on the application of the RICS Valuation - Global Standards in the UK jurisdiction"
94
"What were the key changes introduced in the UK
National Supplement, 2018?"
"More user friendly with clear advice on what is and is not mandatory
New UK VPGAs have been included for the valuation of central government assets, local authority assets and registered social housing providers’ assets
For financial reporting valuations, there is greater differentiation between UK GAAP and IFRS requirements
New section on valuation for commercial lending (UK VGPA 10)
95
"What are the FOUR parts of the UK National
Supplement, 2018?"
"Introduction
UK Professional and Valuation Standards (Mandatory)
UK Valuation Practice Guidance Applications (Advisory)
Summary of changes from Red Book UK, 2014 (revised 2015)"
96
What does UK VPS 3 of the UK National Supplement cover?
Regulated purpose valuations
97
"According to UK VPS 3, what are regulated purpose valuations?"
Valuations relied on by third parties who have not commission the valuation and are subject to valuation monitoring
98
"According to UK VPS 3, what are the FIVE regulated purpose valuations?"
"Financial reporting (company accounts)
Stock Exchange listings / inclusion in prospectuses and circulars
Takeovers and mergers
Collective investment schemes
Unregulated property unit trusts"
99
"According to UK VPS 3, are valuations for secured
lending purposes considered a regulated purpose valuation?"
No
100
"According to UK VPS 3, how does the RICS monitor regulated purpose valuations?"
"Inspections by RICS professional regulation team
Members must declare the length of time the valuer has acted for the client for regulated valuation purposes and the extent and duration of the firm’s relationship with the client
Whether in the last financial year, the percentage of the fee income from the client is more or less than 5% of the total fee income
Whether this has changed since the end of the last financial year or will likely change"
101
"According to UK VPS 3, what does the RICS
recommend with regards to valuer selection for regulated purpose valuations?"
Should be a policy in place on the rotation of valuers when the asset is regularly valued
RICS recommends a 7-year maximum rotation policy"
102
"According to VPS 3, when is a valuer unable to act
on behalf of a client in relation to regulated purpose valuations?"
Where the property was acquired by the client within the last 12 months and the valuer’s firm received an introductory fee or negotiated the purchase on behalf of the clien
103
"Why are building cost reinstatement
valuations/estimations required?"
Building insurance purposes
104
"What do building cost reinstatement
valuations/estimation show? What would they be based on?"
"Cost of the reinstatement of the building without a profit
Use of RICS Building Cost Information Service (BCIS) adopting GIA for commercial properties and GEA for residential
Add VAT, demolition costs, professional fees, planning and building regulation fees and inflation allowance if applicable"
105
"Why does a replacement cost figure provided for
insurance purposes, whether separately or within
a valuation report, not have to be Red Book Global compliant?"
it is not a “written opinion of value”
106
What is hope value?
The value arising form any expectation that future circumstances affecting the property may change
107
"Provide some examples of where hope value may
arise."
"Future prospect of securing planning permission for the development of land, where no planning permission exists at the present time
The realisation of marriage value arising from the merger of two interests in land"
108
"What must charities do when seeking to buy or sell property?"
Obtain a Section 119 of the Charities Act 2011 valuation
109
What must a valuer do when conducting a valuation on behalf of a charity?
"Follow guidance contained in UK VPGA 8
Comment whether the purchase or sale is in the charity’s best interest
State whether the terms agreed are the best that can be reasonably obtained
Basis of valuation must be Market Value or Market Rent
Valuer must follow Section 119 of the Charities Act 2011"
110
"What are the typical purchasers costs deducted from the gross market value?"
"Stamp Duty Land Tax: at prevailing rate
Agent’s fees: 1% of purchase price (+ VAT)
Legal fees: 0.5% of purchase price (+ VAT)"
111
"What is marriage value? How do you calculate the
level of marriage value?"
"Created by the merger of interest - can be physical or tenurial. Undertake a before and after valuation and calculate the level of marriage value created"
112
"How is marriage value typically split between
parties?"
Typically split the marriage value create 50:50 or on a pro-rata basis using the value of the individual interests
113
How would you value a long leasehold interest?
Deduct ground rent from the gross rent to calculate the net rent received. Then can either:
* Capitalise at a yield for the remaining length of the lease
* Use a dual rate to adjust the valuation to set up a sinking fund, so it is comparable to freehold investments
* Discounted cash flow (DCF)
* Capitalise into perpetuity at an adjusted yield to reflect the additional element of risk for the wasting asset"
114
"What is the significance of rent received and rent
receivable when calculating the value of a leasehold interest"
"Ground rent can be calculated on a geared basis, using the rent from the leasehold interest
Rent “received” will be where ground rent is payable on rent actually received by the leaseholder
Rent “receivable” will be where the ground rent payable is based on the potential return as opposed to the actual return i.e. the tenant takes on the risk of voids"
115
What is a premium in relation to a transaction?
A capital payment made by one party to another
116
In what instances do premiums commonly arise?
"Key money paid by an in-going tenant of a retail property to secure a prime shop
Sum of money to represent fixtures and fittings within a building, paid by an in-going tenant
Sum of money paid by an in-going tenant for a leasehold interest, to represent the positive difference between the passing rent and the market rent of the property. This is the profit rent
In the event that there is a negative difference, a reverse premium may be paid by the out-going tenant to the new tenant
The sum of money paid by a landlord to a tenant for the surrender of a leasehold interest and the granting of a new lease"
117
What is the WAULT?
"Weighted average unexpired lease term remaining to the first break or expiry of a lease
Weighted by the contracted rent"
118
What is a ransom strip?
Piece of land which controls the access to another piece of land
119
What is the generally accepted valuation for ransom strips?
"15-50% of the development value unlocked by the inclusion of the ransom strip within the proposed development scheme
In some cases a fixed sum has been awarded
Upper Tribunal (Lands Chamber) assesses each case on its own facts"
Stokes v Cambridge: When a value of 1/3 of the uplift in the development site value was awarded to owner of RS
120
"What is the rate of stamp duty for the transfer of
non-residential and mixed-use property?"
"Up to £150,000: Zero
£150,001 - £250,000: 2%
+ £250,000: 5%"
121
What is ATED? What does it aim to stop?
"Annual Tax on Enveloped Dwellings (ATED)
Aims to stop on-shore and offshore individuals using companies to avoid SDLT for residential property. Current threshold is £500,000"
122
"How is SDLT calculated on the granting of new
leases and premiums payable?"
"Calculated on the Net Present Value (NPV) of the leases (using RPI as a discount rate). For commercial property the rate paid on the NPV is:
Up to £150,000: Zero
£150,001 - £5,000,000: 1%
+ £5,000,000: 2%
Calculator available on the HMRC website"
123
How are break clauses accounted for in SDLT calculations for the transfer or leasehold properties?
They are excluded from the calculations
124
Explain the principle of Zoning?
Used for retail properties to create a unit of comparison for different sized buildings
Rationale – the rental value of the property reduces away from the street i.e. the area at the front of the shop is most valuable to a retailer as it will generate most sales
Zone A closest to the window is most valuable with the value deceasing with distance from the frontage.
Halving back principle with 6.1m (20 ft) zones"
125
In which retail pitches are 30ft zones used?
Some London retail streets (e.g. Oxford Street, Regent Street and Bond Street) and certain prime shopping streets in Scotland
126
"How are basement and first floor areas usually
treated in retail properties?"
A/10 depending upon the comparable evidence
127
"What types of unit will allowances typically be
made for when zoning?"
Those with split levels, excessive front to depth ratio and hard frontages (e.g. banks) depending on the comparable evidence
128
How are return frontages typically dealt with?
"2.5-10% uplift depending on the comparable evidence and footfall
Use mirror zoning i.e. zone from both frontages"
129
What is natural zoning?
When the property zones reflect physical changes in the building such as steps
130
"How does the Red Book Global define a
Special Purchaser?"
A particular buyer for who a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market
131
"How does the Red Book Global define Special
Value?"
An amount that reflects particular attributes of an asset that are only of value to a special purchaser
132
"Provide examples of when a Special Purchaser
would arise?"
"Tenant purchasing the freehold interest
* Association with the property e.g. owning an adjacent property"
133
How does Market Value reflect Special Value?
Ignores any price distortions caused by Special Value
134
What is a net effective rent?
This is the rent that would be agreed between the parties for a letting of the premises on the relevant terms and conditions, but without incentives forming part of the transaction
Calculated as post fit-out, pre-incentive i.e. the difference between an allowance for tenant fit-out (usually 3 months) and the rent free period"
135
What are the THREE approaches used for calculating net effective rent?
"Straight line method
Straight line method assuming time value of cash flow using a yield
Use of DCF"
136
What is a party wall?
Stands astride the boundary of land belonging to two or more different land owners
137
What is included in the Party Wall Act 1996?
"Provides a framework for resolving disputes relating to party walls, boundary walls and excavations near neighbouring buildings
Provides a building owner who wishes to carry out various sorts of work to an existing party wall with additional rights
Must inform all adjoining owners of your intentions to undertake works on the party wall"
138
What is a right of light? When does it arise?
"Arises after twenty years uninterrupted enjoyment of light without the consent of a third party by way of an easement with a prescriptive right
If a right to light infringed, an injunction can be granted or damages awarded"
139
"What schemed did the RICS introduce in
October 2011 for the regulatory monitoring of all valuers carrying out Red Book valuations?"
RICS Valuer Registration Scheme (VRS)
140
"What are the THREE aims of the RICS Valuer
Registration Scheme (VRS)?"
Improve the quality of valuation and ensure the highest possible professional standards
To meet the RICS requirement to self-regulate effectively
To protect and raise the status of the valuation profession as the leading expertise in valuation"
141
"What should clients be able to expect from a RICS
valuation following the introduction of the RICS Valuer Registration Scheme (VRS)?"
"Openness and transparency
RICS protection and international valuation standards
Expertise and clear reporting
World class regulations"
142
Which newly qualified members are eligible to apply for the RICS Valuer Registration Scheme (VRS)?
"hose who have completed the APC valuation competency to Level 3 qualify for registration
There is an alternative route post qualification to be a Registered Valuer for candidates who have taken Valuation to only Level 2. This includes undertaking more valuation experience (up to 100 days) and a case study submission"
143
"Who is registration mandatory for under the RICS
Valuer Registration Scheme (VRS)?"
"Those undertaking valuation work in compliance with the Red Book Global
Registration is not mandatory for work excluded from the Red Book Global"
144
"What information must be provided under the
RICS Valuer Registration Scheme (VRS)?"
Type of valuations
Purpose of valuations
Number of valuations
Firm’s total fee income from Red Book Global valuations in the last year
What data sources used
Quality assurance audit procedures in place
History of any negligence claims and notifications"
145
"How do the RICS monitor those signed up to the
Valuer Registration Scheme (VRS)?"
Publishes a register of registered valuers
Monitor valuers through the submissions of their firms annual return
Risk based reviews, ranging from desktop investigations to site based Regulatory Review Visits (RRVs), dependent on the risk identified
Head of Regulation has the power to remove a valuer from the scheme"
146
What are the different types of ground rent?
"Fixed
* Geared (rent received/receivable)"
147
"What would a lender be concerned about with
regards to the valuation of an over rented property?"
The quantum of the over-rent i.e. how much the rent would decrease by at the next break option or lease expiry
148
"What is the generally acceptable upper limit for
ground rent when it is calculated on a rent received or receivable basis?"
"10-15% of the passing rent or market rent
"
149
What are the issues associated with the layer / hardcore method of valaution
"Subjective yield selection - based on received tenant covenant strength and length of the over rent. Has to be done intuitively
Double-counting - as the ARY applied to the bottom layer will be growth implicit, the size of the over rent will reduce over time
Unrealistic split of income - risk of non-receipt is attached tot he whole income"
150
Are you qualified to comment on covenant strength?
No, I am able to comment on how the market would likely perceive the tenant covenant
151
"When making a discount to the rent for masking in a property, how much discount would you generally apply?"
Would generally discount at the rate between the zone the floorspace is in and the rate of the zone behind i.e. if in the second zone, would discount at A/3 or if in the third zone, would discount at A/6
152
"Can you undertake valuation work on behalf of a
lender that you are already instructed by on other loan security work? In what instances might you be conflicted due to a relationship with the lender?"
Yes, it is permitted to undertake multiple loan security valuations on behalf of the same lender. You may, however, be conflicted if your firm had open litigation with that lender or were involved in their corporate restructuring, for example.
153
What is a material uncertainty clause?
"Used when the degree of uncertainty falls outside any parameters that might normally be accepted
Does not mean to suggest that the valuation cannot be relied upon
Less certainty can be attached to the valuation that would otherwise be the case"
154
According to VPS 2, what does it state with regards to the necessity to inspect properties?
Valuers must take the steps to verify the information being relied upon for a valuation to ensure the information if professionally adequate for its purpose
155
According to VPGA 2, what must you do if your valuation for secured lending purposes is subject to a Special Assumption
Must be a comment on any material difference between the reported value with and without that special assumption
156
How do you calculate using term and reversion
Term: (1) PV= 1/(1-i)^N (2) Term Rental value x PV
Reversion: (1) YP= 1/yield (2) YP 2 year=1/(1+i)^n (3)
Deferred YP: YP x Yp 2 year
(4) Capital value: Deferred YP x rental value
Generally used when asked to value an interest with rent renewals and under rented properties.
157
When inspecting the site in Eastleigh did you have regard for any guidance
VPS 2 and PS2
158
Please define fair value
e price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
159
What part of the RED book relates to terms of engagement ?
VPS 1
160
What part of the red book relates to market uncertainty ?
VPGA10
Material uncertainty must be explicitly stated.
161
What is VPS
Valuation Technical Performance standards
162
What methods did you utilise in TW
Comprabalbe and Investment
163
How do you calculate a residual valuation ?
GDV-TDC-Profit= site value using market inputs
164
ow did you carry out a valuation ?
a. Receive instructions from the client
b. Check competence. Skills, understanding and knowledge
c. Check independence
d. Issue terms- Competence, Independence, Terms
e. Receive signed terms of engagement
f. Gather due diligence info and carry it out. Check no matters that could adversely impact
g. Inspect and measure
h. Research market and assemble, verify and analyse comparable
i. Undertake valuation
j. Draft report
k. Get senior surveyor to review
l. Finalise and sign report
m. Send report to client
n. Issue invoice
165
How do you calculate using the hardcore method ?
Calculate Hardcore- (1) Years purchase x Existing rent
Calculate incremental rent= (1) work out deferred YP (2)Difference in existing rent and market rent (3) Deferred YP x difference in rent
Capital value= Hardcore + incremental
166
Describe Profits Method
ross earnings- Expenses = profit
Profit @ 50% = Annual rental value
Annual rental value x yield = Capital value
Stand back and look.
Need to have knowledge of particular property.
167
Describe DRC Method
odern equivalent - obsolescence + value of site = value
O not guess the percentage on Obsolescence and this comes with experience.
168
What are the most sensitive inputs to a residual valuation?
ntrest rates
GDV
Build costs
169
What is obsolescence
he process of becoming obsolete or outdated and no longer used.
170
On TW, you visited site and completed a checklist of key features. What were those elements and how would they influence the residual land valuation?
round conditions
EPC
Access
Restrictive covenants
171
What should comparable evidence be ?
omprehensive – ideally several cases
* Very similar – ideally identical
* Recent – reflecting the current market
* At arm’s length in the open market
* Verifiable – as far as practicable
* Reflecting demand – i.e. an active market
172
hat does land registry house prices exclude
Sales that have not been lodged with HM Land Registry
Sales that were not for value
173
ell me of another way that you could calculate term and reversion
erm- use discounted cashflow to work out term
Reversion
Deffered Yp % x years perpetuity = new yp
New YP x market rent = capital value
Used for under rented property
174
PGA 10 - What is the material uncertainty clause?
aterial uncertainty clause is used where the level of uncertainty is expected to be higher than normal circumstances.
The RICS and my company provided advisory wording to include within ToE and my valuation reports during the March – September period. The advice to use this clause has now been lifted, but it is still important to ensure that the uncertainty is assessed on a case by case basis.
175
IVS-What are general standards?
“general standards” - set requirements for all valuations, of any asset and for any purpose.
176
IVS - What are asset standards?
asset standards” - provides requirements relating to specific types of assets. Must be followed in conjunction with the general standards.
177
an you name some of the IVS asset standards?
IVS 300 - Plant and Equipment
IVS 410 - Development Property
178
Can you name some of the IVS general standards?
IVS 104 - Bases of Value
IVS 105 - Valuation Approaches and Methods
179
Where do you find information on the valuation methods?
IVS 105 - Valuation Approaches and Methods
180
What is a SWOT analysis?
trengths, weakness, opportunity, and threat analysis of the asset being valued.
Allows my client to understand the potential considerations that might impact on the asset value across the lifetime of the loan.
S = location, condition
W = location, condition
O = redevelopment, extension
T = Covid, Brexit, competing stock
181
How would you comment on the terms of the loan?
only comment on the terms of the loan in the context of my valuation advice.
For example, I would typically look at:
the length of the loan.
amount of the loan (LTV).
182
What market trends are you currently aware of?
183
hat might have been in a title which may impact suitability of loan?
f the long leasehold was less than 80 years.
184
hat do banks lend on?
GDV
Cost
MV
185
hat do you consider when commenting on the suitability of a loan?
SWOT
MV
Level of competition
Liquidity
186
How do you minimise risk when carrying out a LSV?
Detailed notes
Clear audit trail
Liability in place
Up to date with CPD
Use of ‘professional skepticism’
187
hat is relevant case law on loan security valuation and negligence?
ase Law: Nykredit Mortgage Bank vs Edward Erdmann 1997
188
What is the Case Law: Nykredit Mortgage Bank vs Edward Erdmann 1997?
he House of Lords held that, where a mortgage lender sues a valuer for negligence, the lender’s loss is suffered at the first moment that the loan is not fully secured
This will occur when the amount outstanding on the mortgage (that is, the capital debt plus whatever interest has accrued) first exceeds the value of the lender’s rights (that is, the value of the security plus the value of the borrower’s undertaking to repay the loan)
189
Who does a Surveyor have a duty of care to?
uty of care to the client/lender.
However, in some case law also a duty of care to potential purchaser.
190
What is a reinstatement cost estimate?
he cost of reinstating the building without making a profit. For building insurance purposes.
191
How is a reinstatement cost calculated?
Total build cost
+
Demolition (5% of build cost)
+
Fees @ 15%
+
VAT @ 20%
192
xplain the Hardcore & Top Slice technique
Establish Market Rent via comps
Establish passing rent by lease review
Establish Market yield using comps + risk analysis
Capitalise the Market Rent into perp using a market yield
Capitalise the top slice until next lease event (adjust yield to reflect risk)
Add together
Stand back
Used where the rent passing is higher than market rent (NET INITIAL YIELD
193
xplain the DCF technique
vestor has a target rate - DCF (set out in a table)
Purchase price in row one - no discount
Display net income in a table
Multiply by PV £1 at a target rate for yrs until received (future money)
Assume an exit value at say 10 years with a capitalisation at Market Yield
Add up all the discounted cash flows in end column
If NPV is more than 0 target rate is met
(can also be used to establish internal rate of return - EQUATED YIELD via analysis
194
DRC Method?
stablish replacement cost modern equivalent
Depreciate for age and obsolescence
Add site value
= Capital value
or 5. Depreciate at a statutory decap rate for rating
= Rental value
195
ow do you calculate the net effective rent?
ou have three options
Straight line - add actual income up and divide by lease length
YP approach/ Time value of money
DCF
