Valuation 1 Flashcards
1
Q
Tell me what the 5 methods of valuation are.
A
comparable method
profits method
residual method
contractors method
investment method
2
Q
Tell me about how you would value a building using the profits/ contractors/ investment/ comparable/ residual method of valuation.
A
Professional Standards-
RICS Global Redbook 2022 and
UK Supplement 2019.
RICS Comparable evidence in Real estate Valuation 2019
RICS Property Measurement 2018
UK valuations for Multi storey, multiple occupation residential buildings with cladding. 2022
Comparable method of valuation- I would inspect and measure a specific property using IPMS 2 residential.
I would record my site note, inspection and measurements and look for comparable properties as similar to the subject as possible that have completed recently.
I would use a property matrix to record my comps and try to get between 3-5 properties.
I would confirm the sale or sold details be calling agents or looking at land registry.
If there were slight differences between comparable I would make adjustments to make the comps similar to the subject. I would apply a hierarchy of evidence,
and rank the best comparable first with the least last.
This would give me valuation figure and I would sense check my findings before issuing my final figure.
3
Q
How do you decide which valuation method to apply?
A
Comparable method-
Using comparable data, based on the subject property’s characteristics to assess the value.
Most common method of valuation.
I.e. Mainly residential sales such as Houses.
Provides an estimated market value.
Contractors Method/DRC-
Cost method of valuation for unique properties or developments
E.g. airports, shipbuilding yards, public sector buildings.
The current cost of replacing the asset - deductions for physical deterioration.
Investment/ Income Method-
Determining the market value of a freehold or leasehold property from its potential to generate an income.
Annual Rental income x Yield = Value
There are two types:
Traditional and DCF
Profit Method-
Used for Trade related properties where the value is derived from the business and its potential profitability.
E.g. pubs, restaurants
The method estimates the business’s gross profits and deducts all working expenses.
Residual Method-
Used to value land with development potential.
Residual value= GDV - Total Development costs
4
Q
When and why would you use one of these methods?
A
Comparable method-
Using comparable data, based on the subject property’s characteristics to assess the value.
Most common
E.g. Houses, shops
Provides an estimated market value.
Contractors Method-
Cost method of valuation
E.g. airports, shipbuilding yards, public sector buildings.
The current cost of replacing the asset - deductions for physical deterioration.
Investment Method-
Determining the market value of a freehold or leasehold property from its potential to generate an income.
The Future rental income, which discounted back to the present day = Net Present Value
Profit Method-
When no comparable/sales data is available
E.g. pubs, restaurants
The method estimates the business’s gross profits and deducts all working expenses.
Residual Method-
Used to value property with development potential or vacant land.
Residual sum is the value the developer can spend on the property in its undeveloped form.
5
Q
What is a years purchase multiplier?
A
Year’s purchase (Y.P.) value is calculated by assuming a suitable rate of interest prevailing in the market.
Used in the investment method of Valuation
6
Q
Give me an example of a good covenant and how this might impact a valuation.
A
A covenant is a provision, or promise, contained in a deed to land.
I.e. Maintain the boundaries by erecting a fence. This would have a positive affect on value as its improving the saleability of the property.
7
Q
What is PI Insurance (PII)?
A
Professional Indemnity Insurance
8
Q
Why do surveyors need PII?
A
Covers the cost of compensating clients for loss or damage resulting from negligent services or advice provided
9
Q
Tell me about the RICS requirements in relation to PII.
A
Minimum required PII based on turnover of firm
£100,000 or less = £250,000 minimum cover
£100,001 to £200,000 = £500,000
£200,001+ = £1 million
This should be fully retroactive!
10
Q
How did the decision in Hart v Large affect PII?
A
It made surveyors more aware of their PPI requirements and ensured surveyors have adequate cover after they retire.
As well as recommending further investigation where required
11
Q
What level of PII cover does your firm have?
A
£200,000+ = £1 million
12
Q
How would you distinguish limitations on liability in your valuations?
A
A liability cap limits the amount of damages that can be claimed by a client in the event of loss.
Liability caps must be written explicitly into a firm’s Terms of Engagement and must be reasonable to be enforceable.
13
Q
Where in your valuation report do you state any limitations on liability?
A
VPS1- Terms of engagement
VPS3 -p) A statement setting out any limitations on liability that have been agreed
14
Q
What relevance does Hart v Large have on your valuation practice?
A
Being clear and advising clients on the survey level and scope of inspection, limitations and caveats
Recommending justifiable further investigation
Considering whether any new information provided after inspecting or reporting affects their original advice, and updating their advice if it is justified to do so
15
Q
What aspect of Hart v Large allowed the judge to award damages without applying the SAAMCO cap?
A
The Court found that the Defendant should be responsible for all losses caused by the inadequacy of the advice as he didn’t request (the PCC (Negligent advise)) Whereas if Large did request the PCC it would have fell into the SAAMCO cap (Negligent information).
16
Q
What is the SAAMCO cap?
A
Used as a “tool” to determine the difference between losses arising from negligently provided information and losses arising from a transaction itself
17
Q
Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?
A
Valuers are not generally liable for additional losses suffered by their clients by market depreciation in the property between the date of the valuation and the date of the claim.
18
Q
Under the SAAMCO cap, is a valuer’s liability usually limited to the overvaluation on the valuation date?
A
Yes.
19
Q
What would you do if you received a notice of a PII claim from a client or their solicitor?
A
Notify insurer immediately. Send a copy of the letter, unanswered, to your firm’s broker or insurers .
Await further instructions before answering or entering into discussions.
It can be helpful to send your firm’s insurer a draft of what you might want to say to the client, seeking their approval.
20
Q
Is there a difference between being negligent when undertaking a survey/valuation and providing negligent advice?
A
Hart v Large (Duty Of Care)
Not recommending further investigation when it should have been whereas negligent advice is giving poor or inaccurate advice when your are expected to give a professional level of service.
21
Q
What is run off cover?
A
Run-off cover is a form of PII that protects firms or members against claims after they cease trading.
It must have at least £1m cover and last for 6 years from ceasing practice.
22
Q
What is the Red Book?
A
Red Book 2022 is a mandatory professional standards for RICS Valuers when undertaking valuations.
23
Q
Why does the Red Book exist?
A
To ensure Consistency, objectivity and transparency amongst all RICS valuers worldwide to deliver a better report for our clients.
24
Q
Tell me about a factor which may impact value.
A
Home size
Location.
Age and condition
Economic factors.
25
What is your duty of care as a surveyor when undertaking a valuation?
Provide the highest levels of assurance to promote and maintain public trust in valuation professionalism and quality.
26
To whom do you owe this duty of care?
Clients or third parties.
27
Why is independence and objectivity important when valuing?
Promote and maintain a high level of public trust
Rules of conduct 2022
28
Is there a separate UK Red Book?
What is the UK valuation guidance called?
UK National Supplement 2019
29
Why does the UK guidance exist?
To provide advice on specific requirements and supporting guidance on the application of the global Red Book to UK valuation work.
30
When was the Red Book last updated?
January 2022.
31
What changes were made?
IVS 101 Scope of Work - Valuers preparing valuations for their own employers are now referred to as 'employed valuers'. Valuers preparing valuations for a third-party client are called 'engaged valuers'.
IVS 104 Bases of Value - A section on 'allocation of value' has been added.
IVS 105 Valuation Approaches and Methods - wording has been reinstated to clarify that market, income and cost approaches are not exclusive and may be used in any combination.
IVS 400 Real Property Interests - the Introduction has been amended to provide additional clarification of what this standard covers, including the valuation of agricultural land and unregistered land.
32
Which do you follow - the latest IVS or the Red Book Global?
The Red Book Global Standards 2022 however, these are in line with the International Valuation Standards.
33
Which sections of the Red Book are mandatory and which are advisory?
Mandatory
PS1 -PS2
VPS1-5
Guidance
VPGA 1-10
34
What does PS1-2/VPS1-5/VPGAs relate to?
PS 1 – Compliance with standards where a written valuation is provided
PS 2 – Ethics, competency, objectivity and disclosures.
VPS 1 – Terms of engagement (scope of work)
VPS 2 – Inspections, investigations and records
VPS 3 – Valuation reports
VPS 4 – Bases of value, assumptions and special assumptions
VPS 5 – Valuation approaches and methods.
VPGA 1 – Valuation for inclusion in financial statements
VPGA 2 – Valuation of interests for secured lending
VPGA 3 – Valuation of businesses and business interests
VPGA 4 – Valuation of individual trade related properties
VPGA 5 – Valuation of plant and equipment
VPGA 6 – Valuation of intangible assets
VPGA 7 – Valuation of personal property, including arts and antiques
VPGA 8 – Valuation of real property interests
VPGA 9 – Identification of portfolios, collections and groups of properties
VPGA 10 – Matters that may give rise to material valuation uncertainty.
35
What type of advice does the Red Book cover?
Global professional and ethical standards, Valuation, technical and performance standards.
Provide further implementation guidance.
36
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
it is essential that the preliminary or provisional status is made clear, pending issue of the formal and final report, and this should be written in the report and term of engagement.
37
What type of valuations might be relied upon by a third party?
Valuation of an asset:
Published financial statement
Stock exchange, or similar body
Publication, prospectus or circular
Investment schemes, which may take a number of forms in individual jurisdictions
Takeovers or mergers.
38
Tell me what the definition of MR/MV/investment value/fair value?
Market Rent- The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
Market Value-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 and where the parties had each acted knowledgeably, prudently and without compulsion
Investment Value- The value of an asset to the owner or a prospective owner for individual investment or operational objectives
Fair Value- 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.’
39
What is the difference between an assumption and a special assumption?
An assumption is believed to be true (i.e. assumed to be connected to all mains services).
A special assumption is an an assumption which is untrue at the time of valuation. (I.e. The property has planning permission when it hadn't been granted at the time of inspection).
40
What sources of information would you consider when preparing a valuation report?
Inspection and Measurement of property along with accurate notes and stored correctly.
Basis of Value
Assumptions and Special assumptions
Sustainability and ESG
Sold prices
Market Data
Agent Details
EPC
41
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
A statement should be made in the terms of engagement and in the report if there has been previous involvement in the asset being valued.
42
If your firm is too small to have a rotation policy or valuation panel, what
else can you do to ensure objectivity?
Arrangement for the valuation to be periodically reviewed at intervals not greater than seven years by another member, who would assist in demonstrating that the member is taking steps to ensure that objectivity is maintained and thus may retain the confidence of those relying on the valuation.
43
When might a conflict of interest exist in relation to a valuation instruction?
If a member has valued the asset for the same purpose, or has been involved with the purchase of the same asset for the client either within the period of 12 months
preceding the valuation date
44
What must be included in your terms of engagement / valuation report?
The firm’s policy on the rotation of the
valuer responsible for the valuation.
A statement of the length of time the
valuer has continuously been the signatory to valuations provided to the client for the
same purpose as the report and, in addition, the length of time the valuer’s firm has continuously been carrying out the valuation instruction for the client.
45
Where is this covered in the Red Book?
PS2 - Section 5.6
46
What is a restricted valuation service and can you provide one?
A restricted Valuation could be a valuation in a very short time frame where it might not be possible to establish all the facts.
Yes, you can provide a valuation, as long as you discuss the issues and limitations with the client before accepting. A restricted service will also include any limitations on assumptions made in accordance with VPS 2.
47
How do you deal with limitations on inspection or analysis?
Any limitations or restrictions on the inspection, must be identified and recorded in the terms of engagement and also in the report.
48
Can you revalue a property without inspecting?
No, unless the valuer is satisfied that there have been no material changes to the physical attributes of the property, or the nature of its location, since the last assignment.
49
What RICS guidance relates to the use of comparable evidence?
RICS Comparable Evidence In Real estate 2019
50
What is an internal valuer?
A valuer who is in the employ of either the enterprise that owns the assets, or the accounting firm responsible for preparing the enterprise’s financial records and/or reports.
51
Can an external valuer provide an internal purposes valuation?
An external valuer can provide an ‘internal purposes’ valuation, but it has to be, in the
terms of engagement and written advice to be absolutely clear about non-disclosure to third parties, and about the exclusion of liability
52
What happens if market conditions change between the valuation date and report date?
It may be appropriate for the valuer to draw the client’s attention to the fact that values
change over time and a valuation given on a particular date may not be valid on an earlier or later date.
53
Is special value from a special purchaser reflected in MV?
No, As Market Value is the price that would most likely be achievable for an asset across a wide range of circumstances and not for a special purchaser.
54
Where does the definition of fair value come from?
International Accounting Standards Board
(IASB)
55
Does this differ from MV?
(international Financial Reporting Standards)IFRS 13- no difference between
them in terms of the valuation figure reported.
56
When is fair value used?
Where the entity has adopted IFRS, the basis of value will be fair value and IFRS 13 Fair Value Measurement will apply.
57
What are the 3 approaches under VPS5?
Market Approach
Cost Approah
Income Approach
58
What is the Valuer Registration Scheme?
Monitors all registered RICS members who carry out valuations within the scope of RICS Valuation Standards “Red Book” in order to ensure consistent standards.
59
Are there any instances where certain sections of the Red Book may not apply?
Yes, but only 5 in relation to VPS1-5:
(ALIES)
1. Agency advice
2. Litigation Purposes
3. Internal Purposes
4. Acting as Expert witness
5.Performing Statutory Functions
60
What are these and which sections don’t apply?
The mandatory application of VPS 1 to VPS 5 would not be appropriate, If they are providing an agency service in respect of the purchase or sale of one or more assets and advice given in the process. I.e. Real estate.
61
What is the basis of value under UK GAAP(General Accepted Accounting Practise) FRS 102?
Fair Value
62
What is a SORP?
Statements of Recommended Practice (SORP)
are developed in the public interest and set out current best accounting practice.
63
When would you use EUV?
EUV (Existing Use Value)- measures the value that a property has for the operational business function being delivered from it at the valuation date, with the assumption that the business function will continue irrespective of who the future owner is.
64
What is the definition of EUV?
Existing Use Value
65
What additional criteria apply to secured lending valuations?
VPGA 2- Valuation of Interest for Secured Lending
PS1-2
VPS1-5
Plus:
Material Impact of Valuation Uncertainty
BCIS
Treatment of Incentives
66
What information should you specifically request for a secured lending valuation?
Terms of engagement must incorporate the minimum requirements of VPS 1 paragraph 3.1.
-Any special assumptions
-Any recent transaction or agreed price on any of the property to be valued.
-Terms of the lending facilities.
-All relevant disclosures.
67
What is a regulated purpose valuation?
A set of valuation purposes defined by RICS upon which third parties or the public rely
68
What additional disclosures must be made for a regulated purpose valuation?
a) in relation to the firm’s preceding financial year the proportion of the total fees, if any, payable by the client to the total fee income of the valuer’s firm expressed as either less than 5% or, if more than 5%, an indication of the proportion within a range of 5 percentage points and
b) where, since the end of the last financial year, it is anticipated that there will be a material increase in the proportion of the fees payable, or likely to be payable, by the client, the valuer must include a further statement to that effect, in addition to (a).
69
What is the basis of value for a statutory valuation?
Market Value
70
What might a statutory valuation relate to?
Charities and trusties
71
What is the definition of the statutory basis of valuation?
Market value or Market rent
72
Is this the same for all statutory valuations?
No, i.e. Where they have the benefit of certain tax exemptions or is a special purchaser.
73
What is a yield?
Income on an investment over a period of time.
74
What is a Net Initial Yield?
Net initial yield represents the income return in investment.
i.e. Net annual income / Total costs = Net Yield
Total costs - purchase, repairs, etc.
75
What is a reversionary yield?
Reversionary Yield is the anticipated yield, which the initial yield will be once the rent reaches the ERV (estimated rental value) and when the property is fully let.
76
What is an equated yield?
The equated yield is the yield on a property investment which takes into account growth in future income.
77
What is an equivalent yield?
The weighted average of the Net Initial Yield and Reversionary Yield and represents the return a property will produce based upon the timing of the income received.
78
How would a yield reported from auction differ from a Net Initial Yield?
Net Yield is the (rental) return of the property but taking into account the costs involved in buying and owning the property whereas, Gross yield is a basic calculation of the expected return on investment.
79
What purchaser’s costs do you deduct from a valuation?
All out-of-pocket costs and expenses incurred by Purchaser:
SDLT
Solicitors.
Legal fees.
Survey fees.
Mortgage fees.
80
When do you deduct purchaser’s costs from a valuation?
When Calculating the Net Yield.
81
How would you value a property in uncertain market conditions - does the Red Book give any guidance?
Where material uncertainty exists, it will normally be expressed in qualitative terms,
indicating the valuer’s confidence in the valuation opinion offered by use of a suitable form of words.
Must comment on, any issues resulting in material uncertainty in the valuation as at the specified valuation date.
Agree a special assumption with the client in Terms of Engagement.
82
How could you value a long leasehold interest?
Investment value basis-
Leasehold Relativity Model.
83
How does a term and reversion differ to a DCF?
Discounted Cashflow - used to determine the value of an investment based on its return in the future.
Term and Reversion- used to value real estate projects with specific lease structures.
84
What is the difference between a growth explicit and a growth implicit yield?
Implicit models reflect any expectation in the growth of market rents or capital value in the yield.
Explicit models on the other hand allow for any growth expectation in the cash flow and discount this at a required rate of return, which is usually higher.
85
Give examples of each of these types of yield.
Growth Implicit- Years Purchase
Growth Explicit- Discounted Cashflow
86
How would you value an under/over rented investment property?
The Layer Method of Valuation-
Term and Reversion method or
Hardcore & Topslice
87
When would you use a dual rate investment calculation?
This will occur in land and property with leasehold interests that will expire on a specific date.
88
Where can you find yield evidence from?
Comparable Properties, Rents, Agents
89
What is the hierarchy of evidence?
Hierarchy of evidence
A. Open market transaction data/ direct comparables
B. General market data / databases
C. Transactional evidence from other locations
90
What would you do if comparable evidence was limited?
Valuers can also look further afield and at a wider range of evidence or indicators where direct comparables are limited.
Valuers should, therefore, ensure clients understand that unusual market conditions may lead to uncertain valuations, but that this will help them to make better informed business decisions.
91
What is NPV?
Net Present Value
92
What is IRR?
Internal Rate Of Return
93
What is a term and reversion?
Investment Method used to value real estate projects with specific lease structures where they are UNDER RENTED.
94
What is a hardcore and topslice?
It is used for OVER RENTED investments.
Income flow is divided horizontally.
95
What is a Discounted Cash Flow (DCF)?
Growth explicit investment method of valuation
Used when there is a lack of comparable or market evidence. I.e. New build developments, lack of comparable information.
96
What is a short-cut DCF?
Allow for a more considered reflection of the target rate and growth rate, analysed from the capitalisation rate, than the income capitalisation method.
97
When would you use a DCF?
Used for a number of valuations where the projected cash flows are explicitly estimated over a finite period e.g.
Short leasehold interests
Properties with income voids
Phased development projects
Non-standard investments (say with 21 year rent reviews)
Under or Over-rented properties
98
What are the advantages of a DCF?
Can be used where the comparable transaction evidence was sparse.
Information and assumptions are revealed and justified to a much greater extent than when using implicit models.
99
What are the disadvantages of a DCF?
Where some very specialist locations with particular brand characteristics. Here, a direct comparison market approach might be more appropriate.
100
What is a YP/PV/YP in perpetuity?
YP-The amount yielded by the annual income of property
PV-The Present Value (PV) of the right to receive £1 at the end of each year in perpetuity.
YP- Used for valuing the reversionary rent into perpetuity (ongoing basis).
101
What is marriage value?
The increase in the value of the property following the completion of the lease extension
102
When would you include an element of hope value in a valuation?
Development Property- existing use value, reflecting the prospect of some more valuable future use.
103
Can you include hope value in a secured lending / mortgage valuation?
Yes, but any assumptions or special
assumptions should be set out clearly in the valuation report
market value subject to assumptions/special assumptions – will often be the appropriate basis of valuation.
104
How would you value a ransom strip?
Stokes v Cambridge Corporation [1961]
i.e. the owner of the strip is entitled to one-third of the increase in the value of the adjacent land just for providing access to the development.
105
How does market value differ to investment value/fair value?
Market Value- 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 and where the parties had each acted knowledgeably, prudently and without compulsion.
Investment value- The value of an asset to the owner or a prospective owner for individual investment or operational objectives.
Fair Value- 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.’
106
What is a dual capitalisation rate and when would you use one?
Leasehold valuation- The assumption that the leasehold purchaser will set aside a sum out of profit rent, which is then invested in an annual sinking fund (ASF) to recoup the leasehold interest purchase price at the end of the term.
107
Is the profits/DRC method used for specialised or specialist property?
Profit method- Specialist property
DRC- Specialised Property
108
What type of properties would you use the profits method for?
hotels, golf courses, petrol stations, care homes and some restaurants.
109
What type of properties would you use the DRC method for?
owner-occupied or specialised property that is rarely sold on the open market.
i.e. Oil Refineries & Airports
110
When would you use the profits method?
Types of properties are only usually sold as part of a business and are designed specifically for the intended use.
111
What is intangible goodwill?
Where the value will depend on business profitability and trading potential is known as intangible goodwill.
112
What is turnover / gross profit / net profit?
Turnover- the amount of money taken by a business in a particular period.
Gross Profit- the selling price of your product minus the cost of producing it.
Net Profit- the money you get to keep after all expenses and taxes are paid.
113
What are the steps to providing a profits valuation?
Establish fair maintainable operating profit (FMOP) capable of being generated by a reasonably efficient operator (REO).
Based upon assessment and analysis of fair maintainable turnover (FMT), requiring sound knowledge of accounting principles and market norms for the specific industry sector.
A market-based profit multiplier is then used to convert FMT into a capital value.
114
What is Fair Maintainable Turnover?
The level of trade that a 'reasonably efficient operator' would expect to achieve on the assumption that the property is in good repair and suitably equipped.
115
What is a Reasonably Efficient Operator?
Someone with competence.
116
Does the assessment of the REO include personal goodwill and trading potential?
No.
117
What is personal goodwill?
Intangible value that arises from the efforts or reputation of a business owner or other individual.
118
What is trading potential?
The trade that could be achieved at an "optimum trade level" in the case of open and frictionless trade possible, given current trade.
119
How do you calculate the tenant’s proportion of rent in a profits valuation?
Net Profit divided in Half-
half is for the tenants work and the general running of the business, whereas the other half will then be the annual rent payable.
120
What is EBITDA?
Earnings Before Interest, Taxes, Depreciation, and Amortization
121
What is Fair Maintainable Operating Profit?
FMOP- that could be achieved at the property.
This is ascertained by making reference to recent trading information for the business (ideally profit and loss accounts for the last 3 years).
122
How do you calculate the divisible balance?
Taking the projected expenditure from income for the forthcoming year leaves a residual sum known as the divisible balance.
123
What accounts information would you want to review for a profits valuation?
profit and loss accounts
124
Do RICS provide any guidance on RLVs or valuing development property?
Valuation Of Development Property 2019
125
What is an RLV?
Residual Land Value=
Value of the completed development (net) minus the development costs, including developer's profit.
126
What is a development appraisal?
A financial appraisal of a development.
127
How do they differ?
A residual is based on the valuer's inputs and is for a practical purpose.
A development appraisal will be on costs provided by your client.
128
How else can you value development land?
Discounted Cash Flow (DCF)
129
What is the basic process of undertaking a RLV/development appraisal?
Estimated Value of completed Development - cost of development - developers profit = Residual Site Value
130
What does a development appraisal show?
Developers profit and is based on the client costings.
131
What are the key things you need to consider when appraising / inspecting a development site?
GDV
Build Costs
Planning Costs/ Professional Fees
Potential profit
132
What else should you consider?
Analysis of a scheme to consider whether the level of required planning obligations is viable
Assessing whether a development is viable or not based on the level of profit achieved
Assessing the best and highest use for a property or to compare different schemes or proposals
Assessing affordable housing requirements
133
Tell me about your due diligence when undertaking a development appraisal.
Build costs – these can be based on client figures, cost databases (e.g. BCIS or Spons) or input from a building or quantity surveyor. They will differ based on the use, specification, construction and location
Professional fees – these are typically 10-20% of the build cost, relating to fees for professionals such as an architect, quantity surveyor, structural engineer and CDM coordinator
Planning fees – including Section 106 and Community Infrastructure Levy (CIL) contributions
Marketing, letting and disposal costs
Contingency – typically 3-10% of build cost depending on the level of risk and market conditions
Finance costs – based on client figures or market rates. S curve to reflect the pattern of construction costs
Other site specific costs, such as demolition, site preparation or specialist surveys
Fixed land cost
134
What sources of information do you use when undertaking a development appraisal?
RICS Valuation of Development Property 2019
BCIS
Government Website- information
Comparables- Online resources, agents, Land registry.
Client information on costs.
Interest rates.
135
How can you assess development potential?
By obtaining the Gross Development Value (GDV)
136
What is GDV/NDV?
Gross Development Value/ Net Development Value
137
How do you calculate GDV?
GDV is essentially the value of the completed scheme.
Based on market comparables using an appropriate valuation method, e.g. comparable method for a residential dwelling or the investment method for an office or shop which is to be let out.
Based on Special assumption that the development is completed as at the date of valuation and using inputs from the current market to assess its prospective value.
138
What do development costs include?
Property related sales taxes like Stamp Duty
Land Tax, agent's fees, legal fees and VAT on fees.
139
When do you apply VAT when assessing development costs?
Included in the acquisition costs
140
Where can you source build costs from?
Building Surveyor or Quantity Surveyor and cross checked with the BCIS
141
What are typical finance costs?
Arrangement fees,
Varying interest rates,
Refinancing of loans on differing terms
Amortisation
142
What would you apply finance costs to and on what basis?
Development costs and acquisition costs.
Discounted Cashflow Model
Investment Value
143
What is an S curve?
The purpose of an s-curve is to reflect more accurately the incidence of the costs in a particular project and may require expert advice from other construction professionals involved with the development.
144
What factors influence the decision to use an S curve when applying finance costs?
Construction costs- As the development grows and changes it will require more expert advise and finances will have to be adjusted to account for this.
145
Is there a quick rule of thumb which can be used when applying finance costs?
A simplistic interest rate percentage is used on all (100% of) costs each year until
completion of the scheme.
146
What do holding costs typically include?
Potential additional costs for delays
147
How do you typically calculate developer’s profit?
Developer's profit is typically reflected as a percentage profit on cost.
148
What are some typical inputs (and %/£) in a RLV?
Developers Profits typically 15-25% profit
on cost.
149
What other criteria might be assessed in terms of performance measurement for a RLV?
Planning Risk
Construction Risk
Market Cycle Risk
150
What are the advantages/disadvantages of a RLV?
Advantages:
The GDV is traditionally assessed using reliable current market inputs for the type of property being constructed.
Disadvantages:
Residual value is very sensitive to small changes in the key inputs.
Residual method does not fully account for the time value of money and the opportunity cost of capital.
151
What is included in the development programme?
Sensitivity Analysis for fluctuations in the possible costs.
152
What is CIL?
Community Infrastructure Levy
153
What is S106?
S106 of the Town and Country Planning Act 1990.
Restrict the development or use of the land in any specified way.
154
What are the differences between CIL and S106?
CIL and S106 planning obligations are separate infrastructure funding sources.
S106 agreements address site-specific mitigation required to make a new development acceptable in planning terms.
Whilst CIL addresses the broader impacts of the development.
155
What is CIL charged on?
Developments which involve the creation of new dwellings.
156
What is Monte Carlo Simulation?
A risk analysis tool applied to situations that are uncertain or variable.
157
What is a sensitivity analysis?
Shows how residual land values vary depending on the key, most sensitive inputs into the residual. These can have a major effect on the residual result.
158
How do you carry out a sensitivity analysis?
I may produce a matrix showing how assuming a construction cost range
of +5% to -5% (of the construction rate per square feet chosen for the main valuation) affects the residual value.
This shows the developer/funder how sensitive the market value of the scheme is to small changes in the main inputs and is a good indication of the riskiness of the development and value produced.
159
What variables might you change and why?
- the construction cost per square feet or per square metre.
A small change in construction costs or the project timescale can result in disproportionately substantial change in value.
Sensitivity analyses are also often used by developers to obtain a simplistic view of how much changes in inputs will affect the developer's profit.
160
What factors affect sensitivity of a development appraisal?
- the rental rate per square feet or square metre;
- yield or sales rate per square feet or square metre used in the gross development
value (GDV);
- the construction cost per square feet or per square metre;
- the developer's profit percentage; and
- the finance rate.
161
Tell me about your understanding of incorporating affordable housing into development appraisals.
This would form part of a mandatory requirements by some local authorities to have a certain number of affordable housing properties per development.
162
Tell me about software you have used to provide a RLV.
Development appraisals can be carried out using spreadsheets or with proprietary software, such as ARGUS Developer.
163
What RICS guidance relates to the valuation of development property?
Valuation of Development Property 2019
164
Give me a limitation of this software.
Relies on human data imput.
165
What is viability?
The ability to work successfully.
166
When would a cost approach be used?
Depreciated Replacement Cost (DRC) method is used for owner-occupied or specialised property that is rarely sold on the open market.
167
What type of buildings would a cost approach be used for?
Oil Refineries, Airport, Hospitals
168
What is the supposition that a DRC is based upon?
The DRC method is based upon the assumption that the market will pay no more for the existing property than the amount it would cost to buy an equivalent site.
This is achieved by calculating the replacement cost of a new equivalent and making deductions for deterioration, etc.
169
What are the 3 components of the cost approach?
1. Obsolescence
2. Maintenance
3. Time value of money
170
How do you assess the value of the land?
Use the residual Valuation method
171
How do you assess Gross Replacement Cost?
Comprises the cost of replacing the land plus the cost of replacing the improvements to the land.
172
What costs would you consider within GRC?
* delivery and transportation
* installation and commissioning
* any unrecoverable duties or taxes
* setting up costs, where appropriate, such as planning fees and site preparation works
* professional fees related to the project
* a contingency allowance, if appropriate and
* finance costs, taking into account the likely pattern of payment
173
What would you do if the building could be replaced with a modern equivalent?
Discount depreciation costs from calculation.
174
How would you deal with depreciation/obsolescence?
Depreciation rates and estimates of the future economic life of an asset are influenced by market trends and/or the entity’s intentions.
It is recommended that the valuer
identify these trends and intentions, and be capable of using them to support the depreciation rates applied.
175
What types of obsolescence are there?
Physical obsolescence
Functional obsolescence and
Economic obsolescence.
176
What are the three ways to deal with depreciation?
a. physical deterioration
b. functional obsolescence and
c. economic obsolescence.
177
Is the cost approach a market valuation?
Yes but to be used in conjunction with the Depreciated Replacement cost valuation
178
How might onerous lease terms, e.g. restrictive user, break clause, impact
upon capital or rental value?
Many modern residential leases – that is, those drawn up since 2005 – are increasingly complex, and valuers should not be afraid to request legal interpretation of any specific terms whose implications are not easily discernible.
The value can be significantly affected by these, and they can also influence consumer confidence.
179
What liabilities may be created through valuation?
When undertaking or supervising valuation services by the provision of written valuation advice.
180
What is a liability cap and when would one be used?
A contractual agreement that a client can only claim damages up to the amount agreed, even if the law would otherwise award a greater sum in damages.
I.e. When a client is making a complaint regarding damages or poor service.
181
Explain why the RICS are carrying out an Independent Valuation Review.
To ensure that valuation services remain relevant and trusted.
182
Who is leading this?
Peter J. Pereira Gray (2021)
183
Explain what you understand by the term, margin of error.
For ‘standard’ residential property, the margin of error could be as low as +/- 5%
For a valuation of a one-off property, the margin of error will usually be +/- 10%
If there are exceptional features of the property, the margin of error could be +/- 15% or even higher in an appropriate case.
184
What caselaw relates to margins of error?
J Coulson in K/S Lincoln v CBRE Hotels (2010)
185
Explain your understanding of K/S Lincoln v CBRE Hotels (2010).
Whilst a valuer might be in breach of duty because he fell below the standard of a reasonable valuer in his methodology, that the valuer will not be liable in negligence if it can be shown that, notwithstanding the error, the valuation figure that he produced was within a reasonable bracket.
186
Explain the precent set in Hyde and another v Nygate and another (2021) in relation to the valuation of high-profile development sites.
RICS Financial Viability and Planning 2023.
187
How can a NIY of zero be achieved?
Net zero refers to a state in which the greenhouse gases going into the atmosphere are balanced by removal out of the atmosphere.
To reach net zero, emissions from homes, transport, agriculture and industry will need to be cut. In other words, these sectors will have to reduce the amount of carbon they put into the atmosphere.
Governments 2050, ten points included in the plan are:
1. Producing enough offshore wind to power every home, quadrupling how much the UK produces to 40GW by 2030.
2. Aiming to generate 5GW of low carbon hydrogen production capacity by 2030 for industry, transport, power and homes, and aiming to develop the first town heated entirely by hydrogen by the end of the decade.
3. Advancing nuclear as a clean energy source, across large scale nuclear and developing the next generation of small and advanced reactors.
4. Backing car manufacturing bases including in the West Midlands, North East and North Wales to accelerate the transition to electric vehicles, and developing infrastructure to better support electric vehicles.
5. Making cycling and walking more attractive ways to travel and investing in zero-emission public transport.
6. Supporting the aviation and maritime industries to become greener through research projects for zero-emission planes and ships.
7. Making our homes and public buildings warmer and more energy efficient, with a target to install 600,000 heat pumps every year by 2028.
8. Developing carbon capture technology, with a target to remove 10 million tonnes of carbon dioxide by 2030.
9. Planting 30,000 hectares of trees every year, while creating and retaining thousands of jobs.
10. Developing technologies needed to reach these new energy ambitions and make London the global centre of green finance.
188
In a scenario where rents are static and the capital value increases, would you expect yields to increase or decrease?
Decrease
189
What does heterogenous mean in terms of comparable evidence?
The valuer has to look further afield and across a wider range of indicators when
transactional evidence of directly comparable real estate is lacking.
190
What does the term 'tone of value' mean to you?
Tone Of Value is the difference between the lowest value comparable to the highest value comparable.
i.e. £120k - £140k.
191
What does the Court of Appeal decision Scullion v BOS (Trading as Colleys) tell you about a mortgage valuer’s liability?
Adequate Terms of Conditions
PII
Liability cap.
192
What are current mortgage rates (on a BTL mortgage)?
5%+
193
How have they changed over the past few years?
2 Years ago the lowest rate you could achieve was 3.05%.
194
What are current LTV ratios?
75% LTV for BTL.
195
How could you value an HMO using the investment method?
The Investment method would be used for mainly larger HMOs ( Cat 3).
Which would involve capitalising the sustainable rent at an appropriate yield based on local evidence.
196
What were you specifically looking for in relation to the HMO use?
Whether the property is a buy to let or HMO.
Market conditions locally.
HMO building regulations.
Local authority’s policy requirements on HMOs.
Article 4 directions
Selective licensing schemes.
197
How can you establish if a property is an HMO?
Category B- small house in multiple occupation (HMO) comprising a residential property let on a single AST to a group of individuals or on separate ASTs with a minimum of three tenants (forming two households) up to a maximum of six tenants sharing communal facilities.
Category c -Category 3: Larger licensable houses in multiple occupation (HMOs) with seven or more tenants and multiple units with an element of shared facilities held on a single title.
198
What are the minimum rooms sizes for an HMO?
Letting rooms to a single adult where the usable floor space must be at least 6.51sqm and 10.22sqm for a room occupied by two adults.
199
What is statutory overcrowding?
A property is statutorily overcrowded under part 10 of the Housing Act 1985 when either the Room Standard or the Space Standard is contravened
200
What legislation relates to this?
Part 10 of the Housing Act 1985
201
Tell me about any other legislative requirements relating to HMOs you
are aware of.
Homes (Fitness for Human Habitation) Act 2018 (relating to the basic requirements for a property to be fit for habitation at the beginning of and during a tenancy)
Housing Act 2004 (relating to the definition of an HMO)
Management of Houses in Multiple Occupation (England) Regulations 2006 (relating to a landlord’s duties to maintain and keep HMOs safe)
Licensing of Houses in Multiple Occupation (Mandatory Condition of Licences) (England) Regulations 2018 (relating to minimum bedroom sizes)
Part X of the Housing Act 1985 (relating to statutory overcrowding), although a more modern standard is found in Part 1 of the Housing Act 2004
Housing Health & Safety Rating System (HHSRS)
Regulatory Reform (Fire Safety) Order 2005 (as amended)
Fire Safety Act 2021
Building Safety Act 2022
Licensing of Houses in Multiple Occupation (Prescribed Definition) (England) Order 2018 (relating to mandatory HMO licensing requirements)
Parts 2 and 3 of the Housing Act 2004 (relating to additional and selective licensing)
Housing and Planning Act 2016 (relating to banning orders for landlords and agents)
Town & Country Planning (Use Classes) (Amendment) (England) Regulations 2020 (relating to residential use classes)
Leasehold Reform (Ground Rent) Act 2022 (relating to the abolition of ground rents for new, qualifying long leasehold properties)
202
What planning use do HMOs fall into?
C4- HMO's of 3-6 people
Sui Generis - 7 or more but not official classed.
203
Is there generally a premium attributable to HMO use over and above value as a single family house?
There will be a premium attributable over and above an owner occupied house given the alterations and adaptations made to a HMO property.
But depends on the local market and if there is demand.
204
Why did you use an investment method of valuation?
Valuers may then decide to use the investment method, where a Market Rent and Gross yield will need to be analysed to calculate the Market Value.
The investment method can also provide a useful cross check to the comparable method and provide further justification for the valuer’s opinion of value.
205
What is an Article 4 direction?
Local Authorities apply Article 4 to an area to control the type of residential market in certain locations, especially in areas close to hospitals and universities.
I.e. noise pollution, anti social behaviour, waste management
206
How might gross and net yields differ for HMOs?
Where properties that have been analysed for comparable yield evidence are similar, a gross yield may be appropriate.
For more complex or individual properties, a net yield approach may provide a more accurate assessment and allow all relevant expenditure incurred by the landlord to be factored into the calculation.
207
What RICS guidance are you aware of relating to HMO valuation?
Valuation of Buy to let and HMO properties 2nd edition 2022.
208
Was there any UK-specific guidance you also complied with?
UK Supplement Of the Red Book 2019
209
What category of buy-to-let valuation does a HMO fall within?
Investment Method of Valuation
210
What are some of the broader issues facing the HMO sector?
Buildings insurance and reinstatement cost, if requested by the client
Leasehold property ground rents and onerous covenants
Minimum Energy Efficiency Standard (MEES) and minimum EPC rating of E required to let a property, with a proposed increased target to C in 2025
Flood risk
Financial crime and red flags, e.g., of a property being let as an HMO but being presented as single occupancy
Refurbishment loan products
211
Tell me about the regulation of the HMO sector.
Housing Act 2004- relating to definition of HMO.
Management of Houses in Multiple Occupation (England) Regulations 2006 (relating to a landlord’s duties to maintain and keep HMOs safe)
Licensing of Houses in Multiple Occupation (Mandatory Condition of Licences) (England) Regulations 2018 (relating to minimum bedroom sizes)
Smoke and Carbon Monoxide Alarm (England) Regulations 2015
The Electrical Safety Standards in the Private Rented Sector (England) Regulations 2020
