Vals SoE Qs Flashcards
What are the key changes in the Red Book that will come into effect in January 2025, and how do you anticipate these will affect valuation practice?
A draft Red Book has been prepared for public consultation
Order of VPS’ are changing to align with IVS (e.g. VPS 3 valuation reports becomes VPS 6)
More focus on ESG e.g. VPGA 2 Valuation of Interests for Secured Lending includes reference to ESG regulatory compliance and aligning with a net zero pathway (reporting procedures)
References automated valuation models - any use needs to be upheld to Red Book standards
Could you describe the five main methods of valuation and give examples of when each should be applied?
Comparative Method - Using comparable evidence to ascertain market value - owner-occupied properties
Investment Method - Used when there is an income stream - capitalising the income with an appropriate yield - e.g. a let office or retail unit
Profits Method - Used for trade properties - ascertain a fair maintainable operating profit and capitalise using evidence - e.g. pubs, hotels, nurseries
Residual Method - Used for development sites - ascertain a GDV and take away development costs to produce residual site value
Depreciated Replacement Cost (DRC) - Also known as contractor’s method - value the land in its existing use, add the current cost of replacing the building and take away depreciation of the building - used for properties where direct evidence is not available, and typically properties that don’t generate income e.g. hospitals, schools
Why is it important that only a RICS Registered Valuer conducts a Red Book valuation?
The Red Book Global is designed to uphold the highest standards of valuation practice and the RICS Valuer Registration Scheme ensures valuers are regulated. Valuations must meet a high standard to uphold the profession and protect the public
How do external factors like EPC ratings and planning considerations impact property valuations?
Minimum Energy Efficiency Standards require all let properties to have a minimum rating of E. Regulation could become more apparent in the future and investors account for costs to upgrade properties within their purchase prices.
Also tenants are demanding more sustainable buildings
Planning permission could impact value as there is potential to add value or change the use of a property
L2 Bishop’s Stortford - Key Facts
Two restaurants
March 2024
One larger unit £20 psf passing
One smaller unit £24 psf passing
MR £21.50 larger and £25 psf smaller
Both long leases (2035) and national tenants
6.75% Equivalent Yield
L2 Bishop’s Stortford
In your experience with the valuation of the retail units in Bishop’s Stortford, how did you approach the analysis of comparable lettings and investment transactions? How did you adjust for specific property characteristics?
The units were high street restaurants
I looked for restaurant comparables and analysed floors areas using:
A/2 for first floor restaurant areas
A/4 for ancillary
I considered where the property was on the pitch - it was a secondary pitch in the town but a strong restaurant area with lots of national occupiers - the property benefitted from a good position and attractive frontage on that pitch.
Adjusted the comparable lettings info for size and location
Investment - I looked at restaurant sales to national occupiers in similar affluent south east towns. Adjusted for lease length and location
As this was an annual financial reporting valuation, I considered the valuation against the previous year. Our MR had increased slightly in line with local lettings. Agents advised pitch doing well and evidence supported this. Yield sheets and MSC suggested yields had moved out by c. 25bps and our valuation was in line with this.
L2 Bishop’s Stortford
Given the purpose of the valuation (financial reporting), how did you ensure that all necessary compliance and due diligence were thoroughly conducted in line with Red Book standards?
Valued the property on a Fair Value basis - The price that would be received to sell an asset in an orderly transaction between two parties - in line with IFRS
I confirmed no material changes has taken place since our last inspection e.g. structural works, fitout, lease agreements
Due diligence I checked no changes to EPC, planning, flood risk etc. New rates came in April 2023
L2 Industrial Unit - Cirencester - Key Facts
c. 1,500 sq. ft
Passing £8.50psf
MR £9.50psf
Mezzanine structure over all the warehouse space
Discounted this from my measurement as temporary
Checked with local agents this was appropriate
9 years remaining - no voids
7% equiv
L3 Hammersmith Flyover - Key Facts
Client considering whether to refurbish – they didn’t have a budget yet, also lack of demand for secondary stock in the area (agent)
No article 4 but office location
7-storey
Concrete construction with floor to ceiling glass windows
c. 30,000 sq. ft
Passing rent £30-£35 psf moving up the building
8 months left on lease - tenant advised vacating
Allowed for £125 psf refurb costs – Grade A refurb
12 month void & 12 month rent free (pre-let 10 year term)
MR £50-£55 psf moving up the building
Equivalent Yield 7%
Circa £500 psf
Drop in value of c. 15% against previous year (MSCI c. 18-20%)
Golders Green Retail - Key Facts
£65 psf ITZA
Evidence of £55-£70 on the pitch
rack-rented - strong location and return frontage
adjusted 10% for return frontage - confirmed with agents
2 years remaining on the lease
6 month income void as midpoint - no costs
7.5% equivalent
would have been 6.5% if stronger occupier
compared evidence of local occupier sales and national occupier sales
L3 - Hammersmith Flyover
When valuing the office building at Hammersmith Flyover, how did you incorporate refurbishment costs into your valuation? What role did BCIS data play in this process?
I incorporated a cost of £125 psf to refurbish the whole building. This was to bring the property up to what would be considered a grade A specification - raised flooring, suspended ceilings, VRF/VRV air-conditioning, end of journey facilities etc
I used BCIS to get a gauge on build costs and opted for the upper quartile range as it was Grade A specification. I cross-checked with out building surveyors who confirmed £125psf was a reasonable figure
L3 - Hammersmith Flyover
How did you determine the appropriate void and rent-free periods for the Hammersmith Flyover office valuation?
I used comparable evidence to determine an appropriate rent-free period - analysing the amount of rent free given against the term certain of comparable evidence. I then confirmed my findings with local agents.
I spoke with my building surveying team who advised a 12 month period to refurbish the property would be reasonable. I considered that a further 6-month void for marketing the property, with marketing beginning towards the end of the refurbishment period, would be reasonable. Again, I confirmed these timeframes with our in-house agency team.
L3 Golders Green
During the Golders Green retail unit valuation for loan security purposes, how did you assess the strength of the covenant and its impact on the yield adopted in your valuation?
I carried out a D&B check on the tenant which returned an N4 rating. I also considered that the company had been set up just a couple of years prior, at the start of the lease.
The tenant therefore represented a local covenant that would come with an element of risk to any investor.
The property benefitted from a good position on the pitch, so I adopted a yield of 7%, whereas had the tenant been a national occupier, this may have been 6.5%. This was in line with my comparable evidence.
L3 Golders Green
Can you describe the method of valuation you used for the Golders Green retail unit and explain why?
I adopted the investment method as the property was income producing. I capitalised the income stream adopting an equivalent yield of 7.5%, as the property was rack-rented. I allowed for a 12-month income void to reflect a midpoint of the tenant remaining in occupation, or vacating at lease expiry.
L3 Golders Green Retail
What did you look for in the lease?
Rent, incentives, term, break clauses, rent reviews, alienation, repairing obligations, insurance/service charge obligations
