Valuation Flashcards
What is an internal valuer?
”- Employed by a company to value the assets of the company/enterprise
- Valuation for internal use only
- No third-party reliance “
What is an external valuer?
The valuer has no material links with the asset to be valued or the client
What three steps do you need to undertake for valuation work?
“1. Assess your competence
2. Independence - check for any conflicts/personal interests - Who and Why?
3. Agree terms of Engagement “
What should be included in Terms of Engagement for Valuation?
”- Set out in writing your full confirmation of instructions to the client prior to starting work and receive written confirmation of instruction
- Confirm the competence of the valuer
- The extent and limitations of the valuer’s inspection must be stated”
What are the 5 main methods of valuation?
“1. Comparative method
2. Investment method
3. Profits method
4. Residual method
5. Contractors method (Depreciated replacement cost)”
What is net effective rent and how is it calculated?
…
What are the different types of methodologies you would use with the investment method?
“1. Conventional
2. Term and reversion
3. Layer/hardcore
4. DCF “
What statutory due diligence do you need to carry out before a valuation?
”- Asbestos register
- Business rates/council tax
- Contamination
- Equality Act 2010 compliance
- Environmental matters (electricity sub stations, power lines etc)
- EPC Ratings if available
- Flooding
- Fire safety compliance
- Health and safety compliance
- Highways (check roads adopted with the local highways agency)
- Legal title and tenure
- Public rights of way”
What is the 16 step timeline of a valuation instruction?
“1. Receive instruction (purpose of valuation)
2. Check competence (SUK)
3. Check independence (conflicts of interest)
4. Issue terms of engagement (CIT)
5. Receive terms of engagement signed by the client
6. Gather information - lease, OS maps etc
7. Undertake due diligence (anything that would adversely impact upon value)
8. Inspect and measure
9. Research market and assemble, verify comparables
10. Undertake valuation
11. Draft report
12. Have valuation and report considered by another surveyor for checking purposes
13. Finalise and sign report
14. Report to client
15. Issue invoice
16. Ensure valuation file in good order order for archiving”
What three valuation approaches are set out in the IVS 105?
“1. Income approach - converting current and future cash flows into a capital value
2. Cost approach - reference to the cost of the asset whether by purchase or construction
3. Market approach - use comparable evidence”
What are the 6 steps of the comparative method of valuation?
“1. Search and select comparables
2. Confirm / verify the details and analyse headline rent to give net effective rent
3. Assemble comparables in schedule
4. Adjust comparables using the hierachy of evidence
5. Analyse comparables to form opinion of value
6. Report value and prepare file note”
What guidance note outlines the principles in the use of comparable evidence?
RICS Guidance Note ‘Comparable Evidence in Real Estate Valuation’ (1st Edition, 2019)
How would you find relevant comparable information?
”- Inspection of an area to find recent market activity by seeking agent’s boards
- Visit/speak to local agents
- Auction results (beware that these are gross prices)
- In house records/databases and websites, such as EGI and Focus
“
Why must care be taken if using auction comparables?
There may be a special purchaser or an insolvency sale. The sale price is gross of costs.
What is key when there is no comparable evidence?
Market sentiment
What is the investment method of valuation?
”- Used when there is an income stream to value
- The rental income is capitalised to produce a capital value
- Conventional method assumes growth implicit valuation approach
- An implied growth rate is derived from the market capitalisation rate (yield)”
What is the conventional investment method?
“Rent received/market rent multiplied by the Years purchase (YP) = Market Value
You need good comparables for rent & yield”
What is the Term and Reversion method?
”- Used for reversionary investments (ie when underrented)
- Term capitalised until next lease expiry/rent review at an initial yield
- Reversion to market rent valued in perpetuity at a reversionary yield”
What is the Layer/Hardcore method?
”- Used for overrented investments
- income flow divided horizontally
- Bottom slice = Market Rent
- Top slice = Rent passing less Market Rent until next lease event
- Higher yield applied to Top slice to reflect additional risk
- Different yields used depending on comparable investment evidence and relative risk”
What is ‘Yield’?
A measure of investment return, expressed as a percentage of capital invested
How is Yield calculated?
Income divided by price x 100
Why are there different yields for different uses of property?
…
What are current primary and secondary yields for all major use classes?
Prime retail 6% to secondary upwards of 8%
Shopping centres 7.50% to upwards of 9%
Warehouse/industrial 3.00% to 5% upwards
Offices 3.75% to 6.75%
How is Years Purchase calculated?
Dividing 100 by the yield.
What is Years Purchase?
Number of years required for income to repay it’s purchase price
Risk is the major factor when determining yield - what factors can affect risk?
”- Prospects for rental and capital growth
- Quality of location and covenant
- Use of property
- Lease terms
- Obsolescence
- Voids
- Security and regularity of income
- Liquidity (ease of sale)”
What is obsolescence?
Loss of value of real estate property due to factors that are external to the property
What is ‘return’ and how is it calculated and measured?
”- Describes the performance of the property
- Measured retrospectively
- Use a DCF to find the internal rate of return”
Why is there a yield gap between prime and secondary yields ?
“Reflects risk:
Obsolescence
Longer voids
Lower rental growth prospects
Higher maintenance
Lower quality covenant”
What is the All Risks Yield (ARY) and what does it reflect?
- The remunerative rate of interest used in the valuation of fully let property let at Market Rent reflecting all the prospects and risks attached to the particular investment
- Rental valuation of an investment as an annual percentage of the property cost
What is True Yield?
Assumes rent is paid in advance not in arrears (traditional valuation practices assumes rent is paid in arrears)
What is Nominal yield?
Initial yield assuming rent is paid in arrears
What is Gross yield?
The yield not adjusted for purchasers’ costs
What is Equivalent yield?
Average weighted yield when a reversionary property is valued using an initial and reversionary yield
What is initial yield?
Simple income yield for current income and current price
What is reversionary yield?
Market rent (MR) divided by current price on an investment let at a rent below the MR
What is the running yield?
The yield at one moment in time
What is a Discounted Cash Flow (DCF)?
”- A growth explicit investment method of valuation
- DCF valuation involves projecting estimated cash flows over an assumed investment holding period, plus an exit value at the end of that period, usually arrived at on a conventional ARY basis.
- The cash flow is then discounted back to the present day at a discount rate that reflects the perceived level of risk
- Separates out and explicitly identifies growth assumptions rather than incorporating them within an ARY”
What is a Discounted Cash Flow (DCF) used for?
”- Used for a number of valuations where the projected cash flows are explicitly estimated over a finite period, such as for:
1. Short leaseholds and properties with income voids and complex tenures
2. Phased development projects
3. Non standard investments (say with 21 year rent reviews) “
What is a simple methodology when trying to find the market value via a DCF?
“1. Estimate the cash flow (Income less expenditure)
2. Estimate the exit value at the end of the holding period
3. Select the discount rate
4. Discount cash flow at discount rate
5. Value is the sum of the completed discounted cash flow to provide the NPV”
What is Net Present Value (NPV)?
” The sum of the discounted cash flows of the project
“
What can NPV be used to determine?
If an investment gives a positive return against a target rate of return
What does a positive and negative NPV equal?
”- Positive: the investment has exceeded the investor’s tagret rate of return
- Negative: it has not achieved the investor’s target rate of return “
What is Internal rate of return (IRR)?
The rate of return at which all future cashflows must be discounted to produce a NPV of Zero
What is IRR used for?
To assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions
What technique can be used to calculate the IRR if no software programme is available?
Linear interpolation
How do you calculate the IRR?
“1. Input the current market value as a negative cash flow
2. Input projected rents over holding period as a positive value
3. Input projected exit value at the end of the term assumed as a positive value
4. Discount rate (IRR) is the rate chosen which provides a NPV of Zero
5. If NPV is more than 0, then the target rate of return is met”
Do the RICS have a guidance note for DCF?
RICS Guidance Note ‘Discounted cash flow for commercial property investments in 2010’
What is the purpose of the Profits method of valuation?
”- Used for valuations of trade related property, where there is a ‘monopoly’ position
- Used where the value of the property depends upon the profitabilty of its business and its trading potential
- Used for pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure and healthcare properties and care homes”
What is the purpose of the Profits method of valuation?
”- Used for valuations of trade related property, where there is a ‘monopoly’ position
- Used where the value of the property depends upon the profitabilty of its business and its trading potential
- Used for pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure and healthcare properties and care homes”
What is the purpose of the Profits method of valuation?
”- Used for valuations of trade related property, where there is a ‘monopoly’ position
- Used where the value of the property depends upon the profitabilty of its business and its trading potential
- Used for pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure and healthcare properties and care homes”
What is the basic principle of the Profits method of valuation?
The value of the property depends on the profit generated from the business, not the physical building or location
What do you need to carry out a Profits method of valuation?
”- Accurate and audited accounts for 3 years
- For a new business, estimates/business plan
- Adjust for maturity of business and any unacceptable or exceptional items of expenditure”
What is the simple methodology for carrying out the Profits method of valuation?
”- Take annual turnover (income)
Less cost/purchases
= Gross profit
Less reasonable working expenses
= Unadjusted net profit
Less operator’s remuneration
= Adjusted net profit known as the Fair Maintainable Operating Profit (FMOP)
This can be expressed as EBITDA - Earnings before interest, taxation, depreciation and amortisation
- Capitalise at appropriate yield to achieve market value
- Cross check with comparable sales evidence if possible “
What is a development appraisal used for?
”- A tool to financially assess the viability of a development scheme
- Can be used to establish a residual site value
- Can be used to assess the profitability of a proposed scheme plus sensitivity to changing inputs”
What is a development appraisal?
”- A calculation or series of calculations to establish the value/viability/profitability/suitability of a proposed development based upon the client’s inputs
- Can assume a site value or calculate a site value
- Provides guidance as to the viability of the proposed development “
What is a residual site valuation?
”- Method of valuing land based on its development potential
A form of development appraisal
- Can be based on a simple residual valuation or the DCF method
- All inputs are always taken at the date of valuation”
- GDV subtract TDC (Build costs+Fees+Profit)
What is the purpose of the residual site valuation?
Specific valuation of a property holding to find the market value of the site based on market inputs
What is the methodology for a Residual Site Valuation?
“Gross Development Value (GDV) (Capital Value of a Completed Scheme)
- Market Value of completed proposed development at today’s date/date of valuation
- Use plans if needed and measure on CAD (take measurements if you can)
- Valued at current date assuming present values and market conditions
- Comparable method of valuation used to establish rents and yields
- All Risks Yield used
- An allowance of a rent-free period or tenant’s incentives and marketing void can be assumed
- Purchaser’s costs are usually deducted for commercial property valuations”
What are total development costs (TDC)?
”- Site preparation including: Demolition, remediation, landfill tax, provision of services, site clearance, levelling and fencing
- Obtain a contractor’s cost plan for these works”
What are examples of planning costs?
”- Section 106 (Town and Country Planning Act 1990) - a legal agreement for planning obligations to gain a planning consent
- Community Infrastructure Levy (CIL) is charged by most LPAs
- Local planning policy will set out the required percentage of affordable housing required for a new residential developments
- Section 278 payments for highway works
- Planning application and building regulation fees
- Cost of a planning consultant
- Cost of any specialist reports required by the LPA “
What is a Section 106 agreement?
A legal contract between property developers and local planning authorities that outlines obligations that the developer must undertake to reduce impacts on nearby communities
What are examples of building costs?
”- Client information
- Spons Architects and Builders Price Book
- Quantity Surveyor estimate /bill of quantities/cost plan
- Building Surveyor estimate
- RICS Building Cost Information Service (BCIS) usually based on a GIA basis
- BCIS obtains updates from QS/BS sources and recent contract prices/tenders agreed”
How much are professional fees and what are some examples?
”- 10-15% plus VAT of total construction costs for the professional fees for architects, M&E consultants, project managers, structural engineers etc
- CDM Principal Design costs
- Architects usually the largest proportion “
What % contingency should you build in to your appraisal?
5-10% construction costs depending upon level of risk and inflation
What are the three elements of finance a developer will need to borrow money for?
“1. Site purchase (including purchaser costs) - compound interest
2. Total construction and associated costs - half costs taken over the length of the build programme
3. Holding costs to cover voids until the disposal of the scheme (rates, rent, service charge) - compound interest”
What is Developer’s profit?
”- % of GDV or total construction cost
- Or alternatively profit required is to base it on the return upon capital employed “
How do you calculate the site value?
Deduct the TDC from the GDV
What are the two main methods of funding when it comes to development finance?
“1. Debt finance - lending money from a bank
2. Equity finance - selling shares in a company or a joint venture partnership”
What is typical Loan to Value ratio?
Typically in the region of 60%
What is senior debt?
The first level of borrowing which takes precedence over secondary /mezzanine funding
What is mezzanine funding?
Additional funding for additional monies required over the normal LTV
Is VAT payable on all professional fees?
Yes
What are the limitations of residual valuation methodology and financial modelling?
”- Accurate information and inputs important
- It does not consider timing of cash flows
- Very sensitive to minor adjustments
- Implicit assumptions hidden - not as explicit as DCF
- Always needs cross checking with comparable site valuation if possible “
What is a sensitivity analysis required for?
Key variables such as GDV, build costs, and the finance rates to show range of values
What does RICS Guidance Note ‘Valuation of Development Property’, 1st Edition 2019 (effective from 1st Februaury 2020) supplement?
IVS 410
What does IVS 410 provide a detailed overview of?
Valuation of development property
What is the Depreciated replacement cost (DRC) method of valuation also known as?
The Contractors method
When the DRC method of valuation be used?
”- Direct market evidence is limited or unavailable
- Specialised properties including sewage works, light houses etc”
Whats the purpose of the DRC method of valuation?
”- Owner occupied property
- Accounts purposes for specialised properties
- Rating Valuations for specialised properties”
What is the simple methodology of the DRC valuation method?
”- Value of land in it’s existing use (assuming planning permission exists
- Add current cost of replacing the building plus fees less a discount for depreciation & obsolescene/deterioration”
What are the different types of obsolescence?
”- Physical (wear and tear)
- Functional (design no longer fulfills function)
- Economic (changing market conditions for use of the asset)”
How should the DRC be used?
”- It is not suitable for Red Book Global compliant valuation for secured lending purposes
- Can be used for the calculation of Market Value for specialised properties but only for valuations for financial statements
- A DRC valuation undertaken in the private sector should be accompanied by a statement that it is subject to adequate profitability of the business
- Re public sector should be accompanied by a statement that it is subject to the prospect and viability of the continued occupation and use”
What is the guidance note for the DRC method?
RICS Guidance Note on Depreciated replacement cost method of valuation for financial reporting, 2018
What is the latest Red Book and when is it effective from?
RICS Valuation - Global Standards 2021 (Red Book Global), effective 31st January 2022
What was the previous edition of the Red Book?
RICS Valuation Global Standards 2020
What are the contents and structure of the Red Book?
“Part 1 - Introduction
Part 2 - Glossary
Part 3 - Professional Standards (PS)
Part 4 - Valuation technical and performance standards (VPS)
Part 5 - Valuation applications (VPGA)
Part 6 - The International Valuation Standards (IVS)”
What are the main changes from the previous edition of the Red Book?
“1. Need for compliance with RBG and adequate Terms of Reference to reflect this (PS 1 and VPS 1)
2. Valuation for financial reporting purposes (VPGA 1 - references to IFRS 13 and 16)
3. Reference to the use of the profits method for certain trade-related property valuations (VPGA 4), eg flexi workspace
4. Sustainability and ESG factors
- definitions in glossary
- inspections and reporting, VPS 2 and VPS 3. Valuers should have regard to ESG and sustainability factors and should form integral part of valuation approach
- Valuation for secured lending purposes (VPGA 2). Note that ESG and Sustainabilty factors should form integral part of valuation approach
- Direct and indirect valuation reference, and physical and transition risks (VPGA 8)
- Definitions and scope of valuations contained within the IVS”
What is PS 1 in the Red Book?
Compliance with standards and practice statements where a written valuation is provided
When does a valuation have to be Red Book Global compliant?
Mandatory use for all valuation except for 5 exceptions
What are the 5 exceptions when a valuation doesn’t have to be Red book compliant?
“1. Advice is expressly provided in preparation for or during the course of negotiations or litigation
2. The valuer is performing a statutory function except for the provision of a valuation for inclusion in a statutory return to a tax authority
3. The valuation is provided for a client purely for internal purposes, without liability, and not communicated to any third party
4. The valuation is provided as part of agency and brokerage work in anticipating receiving instructions to dispose of, or acquire, an asset except when a purchase report is required which includes a valuation.
5. The valuation advice is provided in anticipation of giving evidence as an expert witness”
What is PS 2 in the Red Book Global?
Ethics, competency, objectivity and disclosures
What does Red Book Global PS 2 Professional and Ethical Standards cover?
”
- Members undertaking valuations must act in accordance with the RICS Rules of Conduct
“
What does Red Book Global PS 2 Independence, objectivity and the identification and management of conflicts of interest cover?
”- The valuer and firm must act objectively and independently always and not be influenced by any situation which could threaten professional objectivity
- In this respect, they should apply ‘professional scepticism’ when reviewing information and data before relying on it
“
What does Red Book Global PS 2 Terms of Engagement cover?
Members must understand the client’s requirements and comply with the minimum terms of engagement. Members must be able to demonstrate professional competence
What is VPS 1? (IVS 101 Scope of work)
Terms of Engagement
What should be confirmed in writing to the client before commencing a Red Book Global Valuation, according to VPS 1?
“a. Identification and status of the valuer
b. Identification of the client
c. Identification of any other users
d. The asset to be valued
e. Currency
“f. Purpose of the valuation
g. Basis of value
h. Valuation date
i. Extent of 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
n. Confirmation of 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”
“
What is the Red Book Global definition of Assumption and Special Assumption?
”- Assumptions: Made where it is reasonable for the valuer to accept that something is is true without the need for specific investigation
- Special assumption: A supposition that is taken to be true and accepted as fact, even though it is not true”
What is VPS 2?
Inspections, investigations and records
What does VPS 2 state about inspections?
Valuers must take the steps to verify the necessary information being relied upon for a valuation to ensure the information is professionally adequate to for its purpose
What does VPS 2 state about restricted information/desk top valuations? Ie, no inspection undertaken.
“1. The nature of the restriction must be agreed in writing in the terms of engagement
2. The possible valuation implications of the restriction confirmed in writing before the value is reported.
3. The valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation.
4. The restriction must be referred to in the report. “
What does VPS 2 say about a revaluation without inspection?
”- Must not be undertaken without an inspection unless the valuer is satisfied that there have been no material changes to the property or nature of it’s location
- Must be confirmed in the Terms of Engagement and in the valuation and in the valuation report. “
Is a restricted information/desk top valuation a Red Book Global Valuation?
Yes, unless for one of the specific purposes set out in PS1.
What does VPS 2 say about record keeping?
“-Proper records must be held of the inspections and investigations and of other key inputs in an appropriate business format
- Focus on ESG and sustainability “
What does VPS 3 relate to?
Valuation reports (IVS 103 Reporting)
What does VPS 3 state are the minimum requirements to be stated in 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
i. Assumptions and special assumptions
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
o. Comment on market uncertainty
p. Statement setting out any limitations on liablity that have been agreed”
What does VPS 3 state about draft valuation advice?
”- Can be given, but must be marked as draft for internal purposes only
- Cannot be relied upon and on no account can it be published or disclosed
- A draft report provided to a client must state that it is draft and subject to the completion of the final report
- A draft valuation can be discussed with the client but the valuer is not to be influenced by the client in anyway in respect of the final valuation figure stated in the report
- Any changes made to a preliminary valuation must be noted on file and reasons provided
- Any additional information supplied by the client as a result of the discussion regarding the draft report must be stated in the report. “
What does VPS 4 Red Book Global cover and state?
” - Bases of Value, Assumptions and Special Assumptions
- The valuer must determine the basis of value that is appropriate for every valuation to be reported. “
What are the six bases of value defined in VPS 4?
“1. Market Value
2. Market Rent
3. Fair Value (IFS 13)
4. Investment Value
5. Equitable Value (IVS 104)
6. Liquidation value
“
What is the Red Book Global VPS 4 definition of 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 arms length transaction
- After proper marketing
- Where the parties had each acted knowledgeably, prudently and without compulsion”
What is the Red Book Global VPS 4 definition of Market Rent?
“The estimated amount for which an interest in real property should be leased:
- On the valuation date
- Between a willing lessor and a willing lessee
- On appropriate lease terms
- In an arms length transaction
- After proper marketing
- When the parties had each acted knowledgeably, prudently and without compulsion “
What is the Red Book Global VPS 4 definition of Fair Value (IFRS 13)?
“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:
- This basis of valuation is now required if the International Financial Reporting Standards have been adopted by the client
- It is adopted by the International Accounting Standards Board
- The RICS view is that this definition is generally consistent with the definition of Market Value “
What is the Red Book Global VPS 4 definition of Investment Value ?
“The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives
- May differ from Market Value
- This is sometimes used as a measure of worth to reflect the value against the client’s own investment criteria”
What does VPS 5 Red Book Global cover?
Valuation Approaches and Methods (IVS 105)
What does VPS 5 Red Book Global state?
”- Valuers are responsible for choosing and justifying their valuation approach and use of model
- In some cases more than one approach may be appropriate”
What does Part 5 of the Red Book Global cover?
VPGAs (Valuation Practice Guidance Applications )
What is VPGA 1?
“Valuation for inclusion in financial accounts
- Fair value will be adopted for all IFRS adopted accounts”
What is VPGA 2?
Valuations for secured lending
What does VPGA 8 cover?
”- Covers investigations and valuations with emphasis on ESG and specific environmental constraints and sustainability issues
- Identifies ESG and Sustainability issues including the need to consider direct, indirect, physical and transition”
What are ESG and Sustainability direct, indirect, regulatory and transition valuation factors?
“Direct - Storm or flood
Indirect - Resilience or carbon emissions
Physical - Heat/wildfire
Transition - Regulatory change or carbon emissions”
What does VPGA 10 cover?
Matters that may give rise to material valuation uncertainty
What does VPGA 10 state?
”- Overriding requirement is that a valuation report must not be misleading
- The 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”
What does Part 6 International Valuation Standards cover?
”- ‘General Standards’ address matters such as Terms of Engagement approaches to and 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 “
When is the RICS Valuation - Global Standards (UK National Supplement, 2018) effective from?
14th January 2019
What is the relationship between the Red Book Global and the UK National Supplement?
”- The UK National Supplement augments the Red Book Global requirements for valuations in the UK and is not a substitute for it
- Provides specific requirements for members on the application of RICS Valuation - Global Standards to valuations undertaken subject to UK jurisdiction. It contains 18 Valuation Practice Guidance Applications (UK VPGAs) regrouping many to become more user-friendly.
- Most of the advice is not mandatory but is for advisory guidance “
What were the key changes to the RICS Valuation - Global Standards (UK National Supplement, 2018)?
”- Easy to read and more user-friendly with clear advice on what is and is not mandatory
- Makes it clear that the UK National supplement augments the Red Book Global for valuations which are subject to UK jurisdiction
- Not a substitute for the Red Book Global but provides mandatory statements and advice for UK valuations
- 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
- There is a new section on valuation for commercial lending “
What is the format of the RICS Valuation - Global Standards (UK National Supplement, 2018)?
“Contents
- Valuations for financial reporting
- UK Professional and Valuation Standards - mandatory
- UK Valuation Practice Guidance Applications - advisory
- Summary of changes from Red Book UK 2014 (revised 2015)
“
What are the Valuation Monitoring Standards?
“1. Inspections by RICS professional regulation team
2. Annual declaration for all members now in place to declare valuers relationship with the client
3. In the last financial year whether percentage fee income from the client is less than or more than 5% of the total fee income
4. There should be a policy on the rotation of valuers when the asset is regularly valued - The RICS recommend a 7-year maximum rotation policy”
What happens if a property is purchased or an introductory purchase fee is accepted by the valuer’s firm?
It cannot be valued for a regulated purpose valuation for 12 months by the same firm
What independent review looked at real estate investment valuations, December 2021?
Peter Pereira Gray, commissioned by the RICS Standards and Regulation Board
What were the findings of the ‘Independent review of real estate investment valuations’ (December 2021)
”- 13 recommendations
- These findings may have far reaching consequences for valuers and their firms
- RICS hopes that the changes brought about following the recommendations will increase trust in the profession and the confidence that clients will have in the quality of the valuation process”
Name some recommendations from the ‘Peter Pereira Gray Independent review of real estate investment valuations (December 2021)’
“Recommendation 1 - Commissioning and Receiving Valuation Reports should work with appropriate stakeholders in standardising governance arrangements for commissioning and receiving valuation reports for high risk and regulated valuations
Recommendation 3 - Rotation RICS should develop a time-specific, mandatory procurement and rotation process for valuers
Recommendation 11 - Post qualification Requirements and Revalidation RICS should review it’s post qulaification requirements for valuers
Recommendation 13 - There is a need for further specific RICS guidance to clarify RICS’ expectations around the culture and behaviours expected of RICS professionals in the pursuance of valuation activities”
What is the RICS Guidance Note that relates to Sustainability and ESG?
RICS Guidance Note: Sustainability and ESG in commercial property valuation and strategic advice, 3rd edition, December 2021 - effective from 31st January 2022
What does the RICS Guidance Note: Sustainability and ESG in commercial property valuation and strategic advice, 3rd edition, December 2021 - effective from 31st January 2022, cover?
”- Provides a useful glossary of relevant terms and factors which valuers should incorporate into their valuation approaches:
Terms of Engagement
Valuation Purposes
Inspection
Reporting
- Provides advice relating to:
Sustainability characteristics
Considerations and risks
“
What is a Margin of Error when it comes to valuation?
The permissible range allowed by courts
What is the leading case in valuation in relation to margin of error and what was its findings?
Singer & Friedlander Ltd v J.D Wood (1977) Margin of error will be narrower for a relatively straight forward valuation case and wider for a more complex case
What were the findings in K/S Lincoln and Others v CB Richard Ellis (2010)?
It related to the valuation of 4 hotels in 2005. Judge stated that an appropriate margin may be +/- 5% for a residential property, +/-10% for one off commercial properties and +/- 15% if there were exceptional features of the property
What accepted margin of error did Dunfermline Building Society v CBRE 2017 assume?
+/-15%
What is Hope Value?
“The value arising from any expectation that future circumstances affecting the property may change
- For example, the future propsect of securing planning permission for the development of land, where no planning permission exists at the present time”
When a charity is seeking to buy or sell property what valuation must be obtained?
The Charity Commission requires the trustees of a charity to obtain a Section 119 of the Charities Act 2011 valuation
What is Marriage Value?
”- Created by a merger of interests - can be physical or tenurial
- Requires a before and after valuation to create the level of marriage value created
- Typical negotiated outcome is to split the marriage value created 50:50 or divide it pro-rata to the value of the individual interest”
What are the rates of SDLT for non-residential/mixed use property?
“£0 - £150,000 = nil
£150,001 - £250,000 = 2%
Over £250,001 = 5%”
How is SDLT charged?
- On an incremental basis at different rates depending on the portion of the purchase price that falls into each rate band
What is the Scottish equivalent of SDLT?
Land and Building Transaction Tax (LBTT)
What is the Welsh equivalent of SDLT?
Land Transaction Tax ( LTT)
Where else is SDLT payable on and how is it calculated for this purpose?
”- On the grant of new leases and premiums payable
- Calculated on the NPV of the lease discounted at the RPI at certain rates
- NPV is defined as the total rent payable over the term of the lease, reduced by an annualised discount rate
- Break clauses are excluded from the calculations”
What are the SDLT rates for the grant of new leases and premiums payable?
”- NPV of up to £150k (£125k for resi) = Zero
- NPV of up over £150k (£125k for resi) = 1%
- NPV over £5,000,000 = 2%”
What is the Red Book Global’s definition of a Special buyer?
A particular buyer for whom a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market
What is the Red Book definition of special value?
The amount that reflects particular attributes of an asset that are only of value to a special purchaser
What are building cost reinstatement valuations / estimations?
”- For building insurance purposes
- Cost of reinstatement of the building without a profit
- RICS BCIS adopts a GIA for commercial properties and GEA for residential properties
- Add VAT, demolition costs, professional fees, planning and building regulation fees
- A replacement cost figure which is provide for insurance purposes is not a ‘written opinion of value’ - Red Book Global compliance not required”
What is a premium in relation to leasing/letting?
“A capital payment made from one party to another
- eg, a money paid by a tenant of a retail property to secure a prime shop”
What are purchasers costs usually estimated at?
“SDLT - At the prevailing rates
Agent’s fees - say 1% of the purchase price plus VAT
Solicitors fees - say 0.5% of the purchase price plus VAT”
What is WAULT?
“Weighted average unexpired lease term - remaining to the first break or expiry of a lease across asset weighted by the contracted rent
Calculation undertaken when valuing an asset or considering appropriate investment yield comparablesfor multi-occupied individual investments or portfolios “
How do you devalue a headline rent with a rent free period to produce a net effective rent?
”- Detract a 3 month fitting out period from the rent free
1. Straight line method - until the end of lease or next review/lease event
2. Straight line method asuming time value of cash flow using a yield
3. Use of DCF”
What is Zoning?
”- A valuation technique used for the comparison of retail proeprties to create a unit of comparison for buildings of different sizes
- Rental value reduces away from the street
- Utilises the halving back principle with 6.1 metre (20 foot) zones
- 9.14 metre (30 foot) zones are used in some prime retail streets
- Basement/first floor is normally A/10 depending on comparables”
How do you value a ransom strip?
”- Upper Tribunal (Lands Chamber) suggests that value of a ransom strip could be 15% - 50% of the development value unlocked by the inclusion of the ransom strip within the proposed development
- In some cases a fixed sum has been awarded”
Name some discounts/end allowances when zoning
”- Quantum for size
- Shape
- Split levels
- Excessive frontage to depth ratio
- Hard frontages
- Return frontage “
What is natural zoning?
Property zones reflect physical changes in the building such as steps
What is mirror zoning?
Shop with two main frontages
What is masking?
Technique used for the valuation of hidden/obscured areas
What is HUT linked with Zoning?
“H - Halving back principle
U - A Zone rate is a Unit of comparison
T - Masking is the technique used for the valuation of hidden/obscured areas”
What is a Party Wall?
Stands astride a boundary of land belonging to two or more different land owners
What act covers Party Wall awards?
Party Wall Act 1996
What does the Party Wall Act 1996 cover?
”- A framework for resolving disputes in relation to party walls.
- If you are a party wall owner you must inform all adjoining of your intention to undertake any works to the party wall. “
Is there an RICS document covering Rights of Light?
Yes - RICS Guidance Note on Rights of Light, 2016
When does a right to light arise?
After 20 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 is infringed what are the remediations?
An injunction can be granted, or damages awarded
What Covid 19 valuation guide did the RCIS issue and what was the latest version?
”- RICS Covid 19 Global Valuation Practice Alert, March 2020
Latest version
- July 2021 (explained the need that inspections and use of data do not lead to unacceptably reduced standards of services and a considered assessment of that income in light of covid 19 and it’s aftermath may be required)
- States that members should be fully aware of VPGA 10 and VPS 3 within the Red Book Global Standards in the decision making process”
What is the RICS Valuer Registration Scheme (VRS)?
A regulatory monitoring scheme for all valuers carrying out Red Book Global valuations from October 2011
What are the 3 aims of the RICS Valuer Registration Scheme (VRS)?
“1. To improve the quality of valuation and ensure the highest possible professional standards
2. To meet the RICS requirements to self regulate effectively
3. To protect and raise the status of the valuation profession as the leading expertise in valuation “
Read RICS Guidance Note Comparable Evidence in Real Estate Valuation 1st Edition 2019
October 2019
Read the Red Book
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Mention Risk when discussing yields
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Tell me about a recent valuation case law
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What are big drivers of valuation?
”- Location
- Lease terms
- Size
- Accommodation
- Quality
- Specification
- State of repair
- Potential to develop”
Did the solihull lease allow for residential use? If so would your approach to valuation differ?
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Why did I not Zone on an overall basis?
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What other lease terms affect value at rent review and lease renewal?
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Does covenant strength play a part in valuation in a lease renewal?
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What would you do if you had no comparable evidence?
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How do breaks affect landlords’ investment value? Why?
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What is EVA, Hurdle Rate, IRR and Capitalised lease value?
“EVA - Economic Value Added - measure based on the residual income technique
Hurdle Rate - Minimum acceptable rate of retunr on an investment
IRR - a metric used in financial analysis to estimate the profitability of potential investments. Discount rate that makes the NPV of all cash flows equal to 0 in a discounted cash flow analysis”
Would the car parking have any impact on the valuation?
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What is Part 3 of the Red Book?
Professional Standards (PS 1)
What does PS 1 relate to?
Compliance with standards where a written valuation is provided
What does PS 2 relate to?
Ethics, competency, objectivity and disclosures
What is part 4 of the red book?
Valuation technical and performance standards
What is VPS 1?
Terms of engagement
What is VPS 2?
Inspections, investigations and records
What is VPS 3?
Valuation reports
What is VPS 4?
Bases of value, assumptions and special assumptions
What is VPS 5?
Approaches and methods
What is part 5 of the red book?
Valuation approaches and methods
What is VPGA 1 ?
Valuation for inclusion in financial statements
What is VPGA 2?
Valuation of interests for secured lending
What is VPGA 3?
Valuation of business and business interests
What is VPGA 4?
Valuation of individual trade related properties
What is VPGA 5?
Valuation of plant and equipment
What is VPGA 6?
Valuation of tangible assets
What is VPGA 7?
Valuation of personal property, including arts and antiques
What is VPGA 8?
Valuation of real property interests
What is VPGA 9?
Identification of portfolios, collections and groups of properties
What is VPGA 10?
Matters that may give rise to material valuation uncertainty
What is part 6 of the red book?
International valuation standards
How do you value rent free granted after the break?
Depends on the circumstances. Be consistent with how the comparable evidence has been devalued. At Boots we would devalue to the lease expiry for the purposes of the approval papers.
What is the residual method of valuation and how is this applied?
- The main aim of the residual valuation is to establish how much a purchaser should pay for a development site.
- The gross development value is established first of all and there after all the costs associated with undertaking the development are then deducted.
- This leaves a surplus amount remaining which is also known as the residual value.
- This represents how much the developer can afford to pay for the development site or property
- The GDV or gross development value forms a key part of the calculation and this is the aggregate market value of the development based on the special assumption that the development is compete at the date of valuation
- The costs considered and deducted from the GDV will include - site preparation, construction, sales and marketing, contingency, financing fees and developers profit
What is the profits method and how is this undertaken?
- The profit method is derived from trade related properties where the value is derived from the business and its trading potential.
- This trading potential is the profit that a reasonably efficient operator would expect to realise from occupying this property
- Examples of when the profits method would be used would include the hotels, schools, cinemas and theatres
- The common characteristics of these properties is where the property has been designed for specific use and the value is linked to what the owner can generate from the property
- The value therefore reflects the trading potential of the property and it includes the property interest, business and locational good will and fixtures and fittings all reflected as a single figure
What is the depreciated replacement cost method of valuation and how does this work?
- The depreciated replacement cost method provides an indication of value based on the buyer paying no more or no less than the cost to obtain the asset based on the current equivalent
- This involves calculating the replacement cost of the asset with its modern equivalent including deductions for physical deterioration and all other relevant forms of obsolescence.
- This method is known as the method of last resort and is used when it is impractical to use all other valuation methods
- The cost approach is used to value unusual properties where there is no active marker such wharfs, refineries
- Capital value is determined by calculating the cost of building the equivalent asset and the purchase land value
- Replacement building cost should be calculated using new and cost effective building materials and techniques
- Total value of the new property is then adjusted for deterioration using evidential information and recent transaction values to calculate the land purchase cost
What are the different Purposes of Valuation?
- Valuation for financial reporting
- Valuation for commercial secured lending purposes
- Valuation for compulsory purchase and statutory compensation
What is the Red Book?
The RICS Red Book contains mandatory rules and best practice guidance for members who undertake asset valuations
What’s the difference between a residual valuation and a development appraisal?
- A development appraisal is not a red book valuation
- Residual method is to determine market value
- Determine whether profit levels are acceptable
- Residual does not take into account time
When would you use the discounted cash flow method?
- No comparable market transactions
- ## Multiple investments to be compared side by side
How would you value a property when there are no comparables?
DCF
What are the VPGAs?
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 valuation uncertainty
RICS Valuation - Global Standards: UK Supplement 2017, issued 2018, effective Feb 2019 structure?
Part 1 introduction
Part 2 UK Professional and Valuation Standards - mandatory
- 1 UK Professional Standards
- 2 UK Valuation Technical and Performance Standards
VPS 1 - Terms of Engagement and Reporting
VPS 2 - Terms of Engagement for Scotland
VPS 3 - Regulated purpose valuations
Part 3 UK VPGAs
- VPGA 1 Valuation for financial reporting
- VPGA 2 Valuations for other regulated purposes
- VPGA 3 Valuation for assessing adequacy of financial resources
- VPGA 4 Valuation of local authority assets for accounting purposes
- VPGA 5 Valuation of central governments
What is a reversionary investment?
Where a property is not let at market rent
What is discounting?
Where projected future cashflows are brought back to present day value
How do you value a ransom strip?
% of the development value
- Stokes v Cambridge
What would you keep on the valuation file?
Terms of engagement
Valuation report
Inspection notes
Photos
Changes to red book, sustainability, ESG focus and secured lending
