Vals & Loan Sec Flashcards
What are the two types/definitions of valuer?
Internal valuer - employed by a company to value assets for internal use only
External valuer - has not material links with the asset of the client. Instructed to undertake work
What process should you go through prior to commencing an instruction?
Three steps
Check competence
Conflict of interest check - conflicts or personal interests
Set out terms of engagement - in writing, get signed
What statutory due diligence would you carry out for valuations?
Business rates/council tax
EPC rating
Flood risk (environment agency)
Contamination
Asbestos register/survey
Fire safety compliance
Planning history
Highways
Legal title and tenure
Public rights of way
What process would you go through during a valuation instruction?
Receive instructions
Check competence
Check independence and no conflicts of interest
issue terms of engagement and receive back signed by the client
Gather information - leases, title documents, floor plans, works etc
Inspect and measure
Research market and assemble
Undertake valuation
Draft report
Have valuation and report considered by a colleague
Finalise and sign off
Report to client
Issue invoice
Ensure file in good order for archiving
What are the 5 methods of valuation?
- Comparative method
- Investment method
- Profits method
- Residual method
- Depreciated replacement cost (contractor’s method)
What are the 3 valuation approaches under IVS 105?
Income approach - converting current and future cash flows into a capital value (similar to investment residual and profits methods)
Cost approach - reference to the cost of the asset whether by purchase or construction (i.e. DRC)
Market approach - using comparable evidence (i.e. comparative method)
What is the comparative method of valuation?
Using comparable evidence to ascertain a realistic value of an asset
Process:
Search and select comparables
Confirm/verify details and analyse
Consider hierarchy of evidence and adjust
Form opinion of value using best evidence available
What is the hierarchy of evidence?
Ranks the quality of comparable evidence and importance valuers should place upon each type
Category A - direct, contemporary comparables (ideally near-identical with full and accurate information, but weaker evidence can be used if considered carefully e.g. asking prices)
Category B - general market data e.g. commercial databases, indices, MSCI, historic evidence
Category C - other information e.g. evidence from other real estate types and locations, other background data such as interest rates/economy
What is the investment method of valuation?
Used when there is an income stream to value - rental income is capitalised at an appropriate yield
What is the difference between implicit and explicit valuations?
Implicit valuations imply assumptions around growth & costs within a yield (e.g. term and reversion)
Explicit valuation specify future expectations around growth, costs, inflation etc (e.g. DCF)
What is the term and reversion approach?
The term is capitalised at an initial yield until the next lease event (review/expiry)
The Market Rent is then capitalised in perpetuity at a reversionary yield
Typically used for under-rented properties
What is the Hardcore/layer approach?
Capitalise the market rent ‘bottom slice’ at an appropriate yield
Capitalise the ‘top slice’ which is the passing rent over and above the market rent, until the next lease event, at a higher yield to reflect the additional risk
Used for over-rented properties
What is Years Purchase?
The yield expressed as a number of years i.e. how many years for an asset’s income to total its purchase price.
Value divided by yield = YP
If the yield is 5% then YP = 20 i.e. 100/5
If the yield is 10% then YP = 10 i.e. 100/10
What is a yield?
The income/return of a property expressed as a % of capital invested/value
Income divided by price x 100
What factors impact a yield/what does a yield reflect?
Risk and Growth.
Prospects for rental growth
Future demand
Quality of location
Covenant
Use
Lease terms
Obsolescence
Voids
Security of income
Liquidity - ease of sale
All risks yield
an implicit yield used in an investment valuation that reflects all of the risks & growth prospects of the subject property
True yield
Assumes rent is paid in advance not in arrears (this is the reality but valuation practice assumes rent is paid in arrears)
Nominal yield
Assumes rent is paid annually in arrears
Gross yield
The yield of a property against the gross purchase price i.e. not adjusted for costs
Net yield
The yield of a property once the price has been adjusted for purchaser’s costs
Equivalent yield
Average weighted yield - considers the entire income flow as opposed to just initial or reversionary
Initial yield
Yield reflecting the initial rent (current income current price)
Reversionary yield
Yield reflecting the rent upon reversion against current price/value (future income current price)
Running yield
The yield at one moment in time
What’s your understanding of where yields are currently?
Offices:
West end prime - 4% (Mayfair) 4.5/4.75% (Soho/fitzrovia)
City prime - 5.5-5.75%
South east towns 7%-8% or 10%+ for secondary
FLIGHT TO QUALITY
Retail:
Prime towns 6.75%
Bond Street 2.75-3%
Oxford Street 4.5%
Supermarkets:
5-5.5% - morrisons higher than tesco/sainsburys
Industrial:
Prime c. 5%, can be stronger inside M25
Estates c. 5.25-5.5% prime or 6.5-7% secondary
Residential:
Prime London c. 5% (e.g. Zone 2 good quality)
What is the discounted cash flow (DCF) technique?
A form of investment method/income approach
Growth explicit
Take future incomes and expenses, including exit yield/price, and discounts those to arrive at a current value
used for valuations where cash flows are explicitly estimated over a period of time e.g. short leasehold interests, social housing, some alternative investments
Net Present Value (NPV)
The sum of discounted cash flows of the project, can be compared against target rate of return
Internal Rate of Return (IRR)
The rate of return/discount rate that makes the NPV of a project zero, used to assess the total return from an investment opportunity
What is the profits method of valuation?
Used for valuations of trade related property e.g. pubs, hotels, golf courses, nurseries
The value of the property depends upon the profitability of its business and trading potential
Must have accurate accounts if possible for 3 years, decide on a Fair Maintainable Operating Profit (FMOP) and capitalise at an appropriate yield
What is the Depreciated Replacement Cost (DRC) method of valuation?
Used for properties that don’t generate an income e.g. schools, hospitals, police stations OR where direct market evidence is limited/unavailable e.g. oil refineries, docks
Two steps:
- value of he land in its existing use
- Add the current cost of replacing the building plus fees, less a discount for depreciation (judge level of obsolescence)
Not suitable for Red Book secured lending valuations - typically owner-occupied for financial reporting
What is the Residual method of valuation?
A method to ascertain the current value of a development/potential development site.
GDV less costs = residual
Costs include build costs (+demolition, planning etc), professional fees (architects, project managers etc), contingency, marketing/sale fees, finance costs, developers profit
Check resulting residual with comparable site sales if possible
What’s included in the Red Book?
Guidance required for Red Book compliance valuations
Professional Standards (PS) (standards to adhere to)
Valuation Technical and Performance Standards (VPS) (what you must include, basis of value and approach)
Valuation Practice Guidance Applications (VPGA) (Types of valuation e.g. financial reporting, secured lending)
International Valuation Standards (IVS)
PS1
Compliance with standards and practice statements where a written valuation is provided
PS2
Ethics, competency, objectivity and disclosures
must act in accordance with RICS Rules of conduct
must act objectively and independently
identify and manage conflicts of interest, or reject instructions if you can’t
Must comply with minimum requirements for terms of engagement and demonstrate competence
In what circumstance does the Red Book not apply to valuations
MANDATORY except for 5 uses:
(ALIES)
Agency Purposes
Litigation or negotiation
Internal Purposes
Expert Witness
Statutory Purposes (except for tax returns/financial reporting)
What must be included in terms of engagement for a valuation?
/
What is does VPS1 cover?
VPS 1 - terms of engagement must include:
- name and status of valuer
- name of client
- any other intended users
- asset to be valued
- currency
- purpose of the valuation
- basis of value
- valuation date
- extent of investigation
- nature of information to be relied upon
- assumptions and special assumptions to be made
- format of the report
- restrictions for use, distribution and publication
- confirmation of Red Book Global compliance
- fee
- complaints handling procedure
- statement that valuation may be subject to compliance by the RICS
- Limitation on liability agreed
VPS 2 Inspections, Investigations and Records
Inspections, investigations and records
must verify information relied upon and keep records of inspections, due diligence, evidence etc
What needs to be considered for desktop/restricted information valuations?
Nature of restriction and possible implications agreed in writing
Consider whether restriction is reasonable with regards to the purpose of the valuation
The restriction must be referred to in the report
What needs to be considered for revaluations without re-inspection?
Must be no material changes since last inspection
must be confirmed in terms of engagement and report
VPS 3 Valuation Reporting
Valuation reporting - include:
- identification and status of valuer
- client and other intended users
- purpose of valuation
- asset being valued
- basis of value
- valuation date
- extent of investigation
- nature of information relied upon
- assumptions and special assumptions
- restrictions on use, distribution and publication
- instruction undertaken in accordance with IVS standards
- valuation approach
- valuation figures
- date of valuation
- comment on market
- limitations on liability agreed
Define Market Value
The estimated amount for which an asset 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 acted properly and without compulsion
VPS 4 Bases of Value
Market Value
Market Rent
Fair Value
Investment Value
Define Market Rent
The estimated amount for which a property should be leased:
On the valuation date
Between a willing buyer and a willing seller
AND On appropriate lease terms
in an arm’s length transaction
after proper marketing
where the parties acted properly and without compulsion
Define Fair Value
The price that would be received to sell an asset in an orderly transaction between market participants
The RICS view is that it is generally consistent with Market Value, but Fair Value is required for IFRS reporting
VPS 5 Valuation Approaches and Methods
Choose appropriately and justify
VPGA 1 Valuation for Inclusion in Financial Accounts
VPGA 1 Valuation for Inclusion in Financial Accounts
Fair value adopted for all IFRS accounts
VPGA 2 Valuations for Secured Lending
VPGA 2 Valuations for Secured Lending
Must identify and manage conflicts of interest, or turn down the instruction
Previous involvement must be disclosed
Reporting procedures include disclose an agreed price for the transaction if there has been one, comment on the suitability of property for mortgage, comment on environmental consideration
If a special assumption then comment on any material difference between the reported value with and without that special assumption
VPGA 8 Valuation of Real Property Interests
VPGA 8 Valuation of Real Property Interests
Covers inspections and investigations
particular focus on sustainability and ESG e.g. flood risk, alignment with regulations, resilience/carbon emissions
VPGA 10 Matters that give rise to Material Valuation Uncertainty
VPGA 10 Matters that may give rise to Material Valuation Uncertainty
Clearly draw attention to any issues resulting in material uncertainty
Examples could include uncertainty around ground rent proposals
What do you now about the new National Supplement?
Effective May 2024
Mandatory rotation for valuers - firm must be rotated every 10 years, individual must be rotated every 5 years, minimum 3 years break before valuing again
Improves independent nature of valuations
More focus on Sustainability - valuers should consider impact on value
UK VPS 3 Regulated Purpose Valuations (Valuation Monitoring)
UK VPS 3 Regulated Purpose Valuations (Valuation Monitoring)
These are valuations relied upon by third parties who have not commissioned the valuation and they are subject to valuation monitoring
e.g. financial reporting, stock exchange listings, takeovers and mergers
not secured lending
RICS can inspect
must declare how long you have represented the client
declare if percentage of total fee income from the client is over/under 5%
If a firm acts for the purchase of the property, they cannot value the property for regulated purposes within 12 months of the purchase
What is the margin of error permissible in court for a valuation?
most recent case +/- 15%
previously +/-10%
depends on complexity of valuation case
What are Stamp Duty rates for non-residential properties in England?
Zero up to £150,000
2% between £150,001 and £250,000
5% over £250,000
What are Stamp Duty rates for residential properties in England?
Zero up to £250,000
5% between £250,001 and £925,000
10% between £925,000 and £1,500,000
12% over £1,500,000
What is your understanding of Special Purchasers/Special Value?
The Red Book defines a special purchaser as ‘A particular buyer for whom a particular asset has special value because of advantaged arising from its ownership that would not be available to other buyer in a market’
Special Value reflects this value
E.g. location next to a property the business operates in
or marriage value/development potential
How do you approach building cost reinstatement valuations/estimations?
The cost of reinstating the building without a profit
use BCIS for build costs
GIA for commercial properties
Add VAT, demolitions costs, planning fees, professional fees, building regulation fees
Not a written opinion of value - a guide
What Purchaser’s costs should be accounted for?
Stamp duty at the prevailing rate
Agent fees - typically 1%
Solicitor fees - typically 0.5%
What is a WAULT and how do you calculate?
Weighted Average Unexpired Lease Term
Multiply the annual rent for each lease by the years remaining on the lease term
Sum these weighted terms
divide by the sum of annual rents to get the WAULT
Do to expiry & breaks
Describe Zoning
Valuation technique to analyse retail rents
6.1m zones, halve back each time
basements and first floors typically treat as A/10 depending on comparables
quantum adjustments can be agreed for size
return frontage typically 10% uplift on the portion that benefits from return frontage
Always check with local agents and prior agreements if possible e.g. previous rent reviews
How do you analyse rent-free periods/net effective rents?
Straight-line basis until expiry or break
Monthly rent * months received for / total months of term
take 3-month fitting out period from the rent-free before calculating if required
What is the difference between Market Rent and ERV?
Market Rent assumes vacant possession and is the amount of rent anticipated for the use of the property with reference to comparable evidence in the area
ERV takes into account the existing lease e.g. onerous terms. A rent review might only go to ERV which would be lower than MR
What is the RICS Valuer Registration Scheme?
to become a RICS Registered Valuer
RICS introduced monitoring scheme for all registered valuers
to improve standards
to meet RICS’ requirements to self-regulate effectively
To protect and raise the status of the valuation profession
Mandatory for Red Book Global valuations
Monitored through firm’s submission of annual return
How would you rentalise the reception of an office building?
50% if single tenant
zero if multi-let
In line with comparable evidence
How would structural defects be reflected in your valuation report?
Draw clients attention to them
Photo evidence and detailed description
Advise a structural survey should take place
Don’t comment on area outside of ones expertise
Seek and obtain cost input to remediate and include within the report
Provide some examples of Conflicts of Interest
Acting for the buyer and seller within the same transaction
Acting for two or more parties competing for an opportunity
Valuing for a lender where advice is also being provided to the borrower
Valuing a property that was purchased under advice from your firm
What are Interest Cover Ratios?
Also known as Debt Service Coverage Ratios
The ratio of rent to interest payments
Banks want 100-150% ICR, depending on risk associated with loan
What are current loan to value (LTV) ratios?
Typically 60%, although due to market uncertainties can be 40-60% in recent years. Depends on risk associated with loan, asset class etc.
What are interest rates currently?
BoE base rate cut to 5% in August. Many banks operate around 2% above the base rate but can be higher
Have you had to reflect any lender-specific loan criteria in your advice?
Some banks require rating of property’s location and construction from GOOD to WEAK
is the location/construction suitable for the property’s use?
Is the location/construction desirable for potential tenants?
Are there any risks associated with the property’s location/construction?
I would consider the local market e.g. retail the town, the high street, the position on the high street
Or industrial connections to major road networks, site cover ration, access etc
Office - transport connections or alternatively parking, obsolescence, the local market etc
To whom does a valuer owe a duty of care?
The client
The public
Other stakeholders
