Valuation Flashcards
How do you adhere to the “Red Book” requirements?
RICS Valuation – Global Standards 31st Jan 2022
Internal purposes, for negotiations, not Red Book but follow best practice
Valuation:
PS1 & PS2 standards & ethics
- competent
- Red Book?
- independence, integrity, objectivity
- Rules of Conduct
- Conflict of Interest
VPS1 ToE if necessary
VPS 4 bases of value, assumptions
- market rent
VPS 5 valuation approaches, methods
- comparable method
VPS 2 inspections & investigations
- record inspection notes
- record investigations e.g. comps
VPS 3 reports
a) ID of valuer
b) ID of client
c) Purpose of val
d) ID of asset
e) Bases of val
f) Val date
g) Extent of investigation
h) Nature and source of info to rely on
i) Assumptions
l) Val approach and reasoning
m) Amount of vals
n) Date of val report
o) Commentary on any material uncertainty
VPGA8 real property
What are the latest updates to the “Red Book”? (CHECK 2023)
- Effective date 31st Jan 2022
- It’s about bringing the valuation risk caused by seismic shifts in the global real estate market to the forefront of the valuation thought process and reflecting this explicitly in reporting to the client.
- Sustainability and ESG are becoming the most significant drivers of investment decisions across global business. Valuation has to reflect the real world.
(Keep an eye on the RICS website – Valuation Standards section for periodic valuation notifications in between editions of the Red Book and IVS).
What is the structure of the Red Book?
PS1 standards
PS2 ethics
VPS1 ToE
VPS 2 inspections & investigations
VPS 3 reports
VPS 4 bases of value, assumptions
VPS 5 valuation approaches, methods
VPGA e.g. VPGA8 real property
UK National Supplement
UKPS1 standards and UK jurisdiction
UKVPS1 ToE and reporting, Red Book ref
UKVPS3 Regulated purpose vals
UKVPGA e.g. VPGA4 Val of LA assets
How do you apply PS1?
PS1 standards (mandatory)
Ask if it’s a Red Book valuation?
- compliance with statutory requirements
- IPMS
VPS 1 to 5 are mandatory except when:
1. statutory function
2. The valuation advice is expressly in preparation for, or during the course of, negotiations or possible litigation.
3. The valuation is provided solely for internal purposes, without liability, and is not communicated to any third party.
4. The valuation is provided in connection with certain agency or brokerage work in anticipation of instructions to dispose of, or acquire, an asset.
5. Anticipation of giving evidence as an expert witness.
How do you apply PS2?
PS2 ethics (mandatory)
Ask should I be carrying out the valuation?
- competent
- Conflict of Interest
- independence, integrity, objectivity
- Rules of Conduct
How do you apply VPS1?
ToE:
a) ID and status of the valuer
b) ID of the client(s)
c) ID of other intended users
d) ID of the asset(s) or liability(ies) being valued
e) Valuation currency
f) Purpose of the valuation
g) Basis(es) of value adopted
h) Valuation date
i) Nature and extent of the valuer’s work – including investigations – and any limits
j) Nature and source(s) of information upon which the valuer will rely
k) All assumptions and special assumptions to be made
l) Format of the report
m) Restrictions on use, distribution and publication of the report
n) Confirmation that the valuation will be undertaken in accordance with the IVS
o) The basis on which the fee will be calculated
p) Where the firm is registered by RICS, reference to the firm’s complaints procedure
q) A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations
r) A statement setting out any limitations on liability that have been agreed
How do you apply VPS2?
Inspection, investigations and records:
- investigation depends on nature of asset and purpose of val
- record inspection notes
- record investigations e.g. comps, analysis, valuation rationale
How do you apply VPS3?
Valuation reports:
a) ID of valuer
b) ID of client
c) Purpose of val
d) ID of asset
e) Bases of val
f) Val date
g) Extent of investigation
h) Nature and source of info to rely on
i) Assumptions
l) Val approach and reasoning
m) Amount of vals
n) Date of val report
o) Commentary on any material uncertainty
ensure that there is a logical and easy to understand link between the comparable evidence and valuation figure
How do you apply VPS4?
Bases of value, assumptions and special assumptions:
Basis of value = a statement of the fundamental measurement assumptions of a valuation
- Market value
- Market rent
- Investment value (or worth)
- Equitable value (previously, fair value)
- Synergistic value (marriage value)
Assumptions/special assumptions:
Assumptions = matters that are reasonable to accept as a fact in the context of the valuation assignment without specific investigation or verification
Special assumption = an assumption that either assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date
- usual scenario for ‘forced sale’ is market value with the special assumption of a constraint on marketing.
How do you apply VPS5?
Valuation approaches and methods
the market approach:
- comparing asset with similar assets such as comparison with market transactions
- comparable method
the income approach:
- based on capitalisation or conversion of present and predicted income (cash flows) to produce a single current capital value
- capitalisation of a conventional market-based income or discounting of a specific income projection can be appropriate depending on type of asset
- investment method
- profits method
the cost approach:
- based on economic principle that a purchaser will pay no more for an asset than the cost to obtain one of equal utility whether by purchase or construction
- Depreciated Replacement Cost method
- to some extent, residual method
What VPGA have you read? How have you applied this? (READ AND MAKE NOTES)
VPGA8: Valuation of real property interests
VPGA10: Matters that may give rise to material valuation uncertainty
What are the principles of valuation?
Depends:
What is being valued? (location, interest)
Why is it being valued?
What assumptions are required?
What methodology should be used? (basis, approach, method)
What questions should you ask when undertaking a valuation?
What is being valued? (location, interest)
Why is it being valued?
What is the valuation date?
What assumptions are required?
What methodology should be used? (basis, approach, method)
should I carry out the valuation?
am I competent?
do I have a conflict of interest?
can I act with independence and objectivity?
do I have appropriate insurance?
do I have the resources to meet client requirements?
have terms of engagement been agreed?
have AML checks been carried out?
have I/the firm valued the property before?
(if so, must disclose)
How do members comply with RICS Valuer registration?
May use designation and logo (individuals only, not firms)
Comply with monitoring.
Monitoring process:
- Desk Based Reviews select Registered Valuers randomly, review based on key docs e.g. ToE/reports, members receive an assessment report and areas for improvement, in case of low performance can trigger further action.
- Regulatory Review Visit, triggered, a visit to office to review systems and processes and a selection of valuation files/Remote Site Inspections, reviewer provides advice and guidance, formal follow-up.
Focuses on the valuation process rather than assessing whether the valuation figure is correct.
Adds value by bringing an external layer of assurance, complements a firm’s auditing requirements.
First launched in UK in October 2010.
Are departures from the Red Book permitted?
No departures are permitted from PS 1 or or PS 2, where a written valuation is provided.
These are mandatory in all circumstances.
- Where there are special circumstances which make it inappropriate to apply VPS 1 to 5, then you must confirm and agree with the client that there will be a departure.
- A departure should be clearly stated in the terms of engagement, valuation report, and any published reference to it.
- A member who makes a departure may be required to justify the reasons for this.
Who can undertake a valuation?
reg valuer / under supervision
competent (skills, experience)
with appropriate supervision
where no conflict of interest
acting with independence, objectivity
How do you ensure independence and objectivity?
conflict of interest check
give pro opinion, don’t bow to commercial pressure
rotate valuers
What are the requirements around disclosure of a valuation?
Where the valuation is of an asset which has been previously valued by the valuer, or their firm, for any purpose, then the following must be disclosed in the terms of engagement, the valuation report, and any published reference to the valuation:
- The relationship with the client and previous involvement
- Rotation policy
- Time as signatory
- Proportion of fees
What do you include in Terms of Engagement for a valuation?
a) ID and status of the valuer
b) ID of the client(s)
c) ID of other intended users
d) ID of the asset(s) or liability(ies) being valued
e) Valuation currency
f) Purpose of the valuation
g) Basis(es) of value adopted
h) Valuation date
i) Nature and extent of the valuer’s work – including investigations – and any limits
j) Nature and source(s) of information upon which the valuer will rely
k) All assumptions and special assumptions to be made
l) Format of the report
m) Restrictions on use, distribution and publication of the report
n) Confirmation that the valuation will be undertaken in accordance with the IVS
o) The basis on which the fee will be calculated
p) Where the firm is registered by RICS, reference to the firm’s complaints procedure
q) A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations
r) A statement setting out any limitations on liability that have been agreed
What inspections and investigations do you conduct for a valuation?
Depends on case and instruction
Typically,
investigate:
- property info:
H&S
stat comp
EPC
- location info:
access
transport
depends on type of asset
- comps
inspect:
- external, roof from street level
- internal, state if any room inaccessible/loft
- describe features and layout,
identify defects,
note factors affecting value
- usually don’t test services
What bases of value are there?
Market value/rent: (should always be quoted)
“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”
- an exchange between parties that are unconnected and are operating freely in the marketplace and represents the figure … at the valuation date, reflecting all those factors that would be taken into account in framing their bids by market participants at large and reflecting the highest and best use of the asset.
- This term brings a sense of realism to your valuation, as it takes aim at the use of an asset that maximises its productivity, and possible within reason, ensuring that it is both legally permissible and financially feasible.
Investment value (or worth):
“the value of an asset to a particular owner or prospective owner for individual investment or operational objectives”
Equitable value (previously, fair value):
“the estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties”
Fair value under 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”
- From this definition, we can see that the use of the term ‘market participants’ in a transaction in effect translates to the anonymity of parties in market value.
- In fact, in most instances you will find that the valuation figure reported under fair value and market value are the same
- The ‘fair value’ basis of value is significant for its wide adoption in many jurisdictions, often included within statutory mechanisms.
Synergistic value (marriage value):
arises from the combination of two or more assets to create a new asset that has a higher value than the sum of the individual assets
In some cases client may request valuer to identify any hope value reflected in val (pop term for the element of the diff between the val of land with benefit of current planning consent and val with an enhanced assumed consent reflected in MV of land), not a basis of value
How do you deal with assumption and special assumptions in valuations?
- confirm client instructions
- assess if reasonable
- inc in ToE
- in val report, clearly state all assumptions and comment on effect where material
- for e.g. dev appraisal could inc sensitivity analysis to show effect on property value of different assumptions as to future rent and yield
Assumptions = matters that are reasonable to accept as a fact in the context of the valuation assignment without specific investigation or verification
Special assumption = an assumption that either assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date
- usual scenario for ‘forced sale’ is market value with the special assumption of a constraint on marketing
- planning
How do you take account of sustainability in valuations?
- key question: which factors affect value
- inspection/investigation
- inspection identify physical factors, duty to report to client e.g. contamination and sustainability risk, potential/actual constraints on the enjoyment and use of property caused by environmental factors may result from natural causes (such as flooding), from non-natural causes (such as contamination) or sometimes from a combination of the two (such as subsidence resulting from historic minerals extraction).
- investigate sustainability/ESG factors such as: configuration and design including the use of materials and concepts increasingly associated with ‘wellness’;
accessibility and adaptability, including access and use by those with disabilities;
carbon emissions, energy efficiency, building ‘intelligence’ - valuation analysis: while valuers should reflect markets instead of leading them, they should also be aware of sustainability features and the implications these could have on property values in the short, medium and longer term.
- valuer may recommend making further enquiries and/or obtaining further specialist or expert advice in respect of these matters
What valuation approaches and methods are there?
VPS5
the market approach:
- comparing asset with similar assets such as comparison with market transactions
- comparable method
the income approach:
- based on capitalisation or conversion of present and predicted income (cash flows) to produce a single current capital value
- capitalisation of a conventional market-based income or discounting of a specific income projection can be appropriate depending on type of asset
- investment method
- profits method
the cost approach:
- based on economic principle that a purchaser will pay no more for an asset than the cost to obtain one of equal utility whether by purchase or construction
- Depreciated Replacement Cost method
- to some extent, residual method
What format should valuation reports take?
VPS3
Valuation reports:
a) ID of valuer
b) ID of client
c) Purpose of val
d) ID of asset
e) Bases of val
f) Val date
g) Extent of investigation
h) Nature and source of info to rely on
i) Assumptions
l) Val approach and reasoning
m) Amount of vals
n) Date of val report
o) Commentary on any material uncertainty
ensure that there is a logical and easy to understand link between the comparable evidence and valuation figure
How do you use comparable evidence?
- establish common measurement
- analyse comp data to provide meaningful comp evidence
- market evidence
inc direct transactional evidence, asking prices - hierarchy of evidence
Cat A direct comps
Contemporary, completed transactions of near-identical / similar properties for which full and accurate information is available
Similar real estate being marketed where offers may have been made but a binding contract has not been completed
Cat B general market data
Info from commercial databases
Demand/supply data for rent - analysis of evidence
ensure that there is a logical and easy to understand link between the comparable evidence and valuation figure
How would you deal with a valuation where there were few or no comparables? UNCERTAINTY VPGA10
Hierarchy of evidence:
Cat A - direct comps
- if no completed, agreed/asking (use contacts)
Cat B - general market data
- commercial databases
- indices
- historic evidence
- supply/demand data
Cat C - other sources
- other asset types and locations
- background data e.g. interest rates, stock market returns, can give indication of real estate yields
VPGA10 report uncertainty
What is the hierarchy of evidence?
Hierarchy of evidence:
Cat A - direct comps
- completed transactions near-identical/similar with full and accurate info
- completed transactions with enough reliable data
- similar property marketed, agreed STC
- asking prices
Cat B - general market data
- commercial databases/published sources
- indices
- historic evidence
- supply/demand data
Cat C - other sources
- other asset types and locations
- background data e.g. interest rates, stock market returns, can give indication of real estate yields
Within comps, new letting better than rent review or lease renewal or court/ADR-awarded
What is the UK National supplement?
The UK national supplement augments the Global Red Book for valuations that are subject to UK jurisdiction. The current edition became effective on 14 January 2019.
RICS are working on an update to the UK national supplement and aim to publish this in 2023.
Part 2 UK Pro and Val standards – mandatory
UKPS1: compliance with val standards within UK jurisdiction
UKVPS1: Terms of engagement and reporting, Red Book compliance ref to UKNS
UKVPS3: Regulated purpose vals supplementary requirements
UKVPGA e.g. UKVPGA4 Val of LA assets
How do you apply UKPS1?
UKPS1: compliance with val standards within UK jurisdiction
How do you apply UKVPS1?
UKVPS1: refer to latest editions of Red Book and UKNS in ToE and val reports
What UKVPGA have you read and how have you applied this?
UKVPGA4: Val of LA assets for accounting purposes
- Classification of assets:
PPE (IAS 16)
Leases (IAS 17)
Investment (IAS 40)
Assets held for sale (IFRS5)
Heritage assets
- Leases of land and bdgs are to be separated into land and bdg elements (land does not depreciate)
- The basis of all PPE assets is current value:
For operational, existing use value or DRC (see DRC method of val for financial reporting)
For surplus assets, fair value
Investment property at fair value
Assets held for sale at fair value less costs to sell
Heritage/community assets any method appropriate
- “proper accounting practice” under the terms of s21(2) of the Local Gov Act 2003
- Code applies to LAs, fire authorities and police bodies
- The financial statements of local authorities need to be prepared in accordance with the Code of Practice on LA Accounting in the UK published by CIPFA based on the IFRS
UKVPGA6: LA and central gov accounting EUV basis of value
- Market value plus assumption that assumes that
The buyer is granted
all parts of the property required by the business
(doesn’t mean empty, any parts occupied by third parties should be valued subject to those occupations;
if parts of the property are unused and can be occupied separately = surplus, if separation not poss, surplus parts have nominal EUV)
disregarding potential alt uses (but appropriate to take into account extension/refurb etc)
disregarding any other characteristics that would cause its market value to differ from that needed to replace the remaining service potential at least cost
(there are circumstances where it may be appropriate for the valuer to ignore factors that would adversely affect the market value but would not be characteristic of a replacement e.g. where the occupier holds the property under a lease and there are lease covenants that impose restrictions on assignment or alternative uses)
- Can value on basis of division into smaller parts for existing use
- EUV to be used only for valuing property that is owner occupied by an entity for inclusion in financial statements
How do you assess if you are competent to undertake a valuation?
have skills and experience?
with asset type/location, with methodology?
need supervision?
When do surveyors need supervision for valuations?
all valuations signed off by registered valuer
need supervision where lack skills or experience to carry out competently independently
What are the requirements around professional indemnity insurance for valuers?
PII in line with nature, proportionate to risks, RICS requirements, run-off cover
“Risk, liability and insurance”, 2021
GN, 1st ed
RICS have a list of insurers that’s renewed annually.
must be adequate and appropriate:
- on “each and every” claim basis or aggregate plus unlimited round the clock reinstatement basis
- RICS min policy wording at least, at min on a full civil liability basis
- min level of indemnity based on firm’s turnover previous year:
£100,000 or less = £250,000
£100,0001 to £200,000 = £500,000
£200,001 and above = £1,000,000
- maximum level of uninsured excess:
up to and inc £500,000 = greater of 2.5% or £10,000
over £500,000 = 2.5%
run-off:
- for consumer claims, requirement is for a limit of £1,000,000 in all for a period of 6 years from the expiry date of the policy in force at the time of cessation
(may be arranged and paid for on an annual basis)
- for non-consumer claims, must have adequate and appropriate run-off for a min of 6 years from cessation of practice
(may be arranged and paid for on an annual basis)
What did you learn on John Faulkner’s CPD on valuation?
Day 1 - Red Book
Day 2 - valuation methods
Day 3 - investment valuation
What are different purposes for valuations?
Agency/negotiations:
- leasing and letting
- purchase and sale
L&T/negotiations:
- rent review
- lease renewal
Statutory:
- compulsory purchase
- RTB
Regulated purpose:
- financial statements
- takeovers and mergers
What factors affect the value of a property?
depend on asset type
location
condition
lease terms / restrictive covenants
planning
What factors affect the value of an industrial unit?
location: access, proximity to motorways,
crime, service yard (deliveries, parking)
condition/spec: size, eaves height (min 8m), electricity 3 phase / gas, layout (office/mezzanine)
lease terms: FRI/IRI, length, contracted out/breaks, use (B2/B8/E), consents
service charge / rates / insurance
market: supply and demand, economics
What factors affect the value of an office?
location: prime?, transport, parking, amenities, view
condition/spec/fit-out: floorplate, raised floors, suspended ceilings, energy efficiency, security
lease terms: length, contracted out/breaks, rent review, repairs, use (E), consents
service charge / rates / insurance
market: supply and demand, economics
What factors affect the value of a shop?
location: prime?, transport, parking
condition/spec: size, shopfront, stores/kitchen
lease terms: length, contracted out/breaks, rent review, repairs, use (E/F), consents
rates / insurance
market: supply and demand, economics
What factors affect the value of a community building?
location: centre, need, transport, parking, crime
condition/spec: size, maintenance, energy efficiency, security
lease terms: length, contracted out/breaks, rent review, repairs, use (F), consents
social value: demand, economics
What factors affect the value of development land?
location: prime?, house prices, transport, parking, amenities, schools, aspect/view, crime
access, size, scaling and massing
planning
title: freehold/leasehold, restrictive covenants, easements
condition: brownfield, contaminated/remediated, demolition
economics: access to funding/loans, stability, inflation, interest rates
How do you carry out a development appraisal?
Red Book
“Valuation of development property”, 2019 GN, 1st ed
Site appraisal:
- factors affecting development
- access, boundaries, easements, encroachments
- trees, vegetation, contamination
- greenfield/brownfield
- location, transport, amenities e.g. schools
- aspect/view, topography, flooding
- report on title
- planning
- scheme design, scaling and massing
Financial appraisal:
- residual valuation / DCF
- software
- sensitivity analysis
GDV (comparable method)
minus GDC:
build costs (BCIS psm) median average plus allowance for externals 10% houses 5% high density flats
abnormals e.g. site attenuation rural/green space, remediation contamination, abnormal ground conditions that result in piling – developers may have more site specific info such as a cost plan
pro fees 7-8% (of build costs)
contingency 3-5% (of build costs + pro fees) up to 5% say listed bdg/constrained site
disposal fees 1.5-3% of GDV – 1-2% marketing housebuilders argue expensive inc show homes, some devs are stating overseas sales cost more plus 0.5-1% legal costs or say £800 per resi unit
finance cost 6-7% (of build costs + pro fees + contingency + disposal fees) – can be linked to base rate so creeping up, at moment 6.5-6.75% on larger resi schemes, maybe 7% more risky schemes
can be half of dev period
dev profit 15-20% of GDV – often adopt 17.5% large schemes, related to risk profile of scheme, could be whether there is grant funding, the expected sales programme etc.
If it’s a private rented sector scheme (PRS) or Build to Rent (BTR), and/or a forward funded scheme it is typical to accept 10% of GDV as the risk attached to sales at the end of the scheme is significantly reduced.
If the scheme is being developed for say housing associations the risk is considered even lower and the % can be reduced further.
= land value
(or inc land value and residual = profit)
minus purchaser’s costs (1.8%) plus SDLT
How do you carry out a residual valuation?
GDV (comparable method)
minus GDC:
build costs (BCIS psm) median average plus allowance for externals 10% houses 5% high density flats
abnormals e.g. site attenuation rural/green space, remediation contamination, abnormal ground conditions that result in piling – developers may have more site specific info such as a cost plan
pro fees 7-8% (of build costs)
contingency 3-5% (of build costs + pro fees) up to 5% say listed bdg/constrained site
disposal fees 1.5-3% of GDV – 1-2% marketing housebuilders argue expensive inc show homes, some devs are stating overseas sales cost more plus 0.5-1% legal costs or say £800 per resi unit
finance cost 6-7% (of build costs + pro fees + contingency + disposal fees) – can be linked to base rate so creeping up, at moment 6.5-6.75% on larger resi schemes, maybe 7% more risky schemes
can be half of dev period
dev profit 15-20% of GDV – often adopt 17.5% large schemes, related to risk profile of scheme, could be whether there is grant funding, the expected sales programme etc.
If it’s a private rented sector scheme (PRS) or Build to Rent (BTR), and/or a forward funded scheme it is typical to accept 10% of GDV as the risk attached to sales at the end of the scheme is significantly reduced.
If the scheme is being developed for say housing associations the risk is considered even lower and the % can be reduced further.
= land value
(or inc land value and residual = profit)
PV of land value?
minus purchaser’s costs (1.8%) plus SDLT
What factors affect the value of an industrial ground lease?
location: access, proximity to motorways,
quality/mix of estate
condition of bdg
tenant covenant strength
lease terms: length, use, consents
planning policy, surrounding development
market: supply and demand, economics
What case law is there around restrictive user clause?
Plinth Properties v Mott Hay & Anderson 1979 (restrictive user, 1/3)
- The rent review clause required the rent to be fixed on a hypothetical letting of the premises on the same terms. The lease restricted the use of the premises to offices for the lessee’s business of consulting engineers and made no provision for changes of use, even though assignment and underletting of the whole premises would be permitted with landlord’s consent not being unreasonably withheld. The landlord argued that the rent review should be fixed on the assumption that the landlord would be reasonable in permitting changes of use, but the tenant successfully argued that it had to be assumed that the landlord would enforce all his rights under the lease and that the rent should be discounted accordingly.
- Valued at approx. 1/3 less
How do you value a surrender and regrant?
Base yields on comparable evidence/market
LL existing interest = current yield property
LL proposed interest = higher as more risk
T existing interest = higher as less valuable
T proposed interest = lower as more valuable
Value T existing interest
ERV x YP for unexpired term at X%
Value T proposed interest
ERV x YP for proposed term at X%-say1
Value LL existing interest
Term: Rent x YP for unexpired term at X%
Reversion: Rent x YP in perp deferred for unexpired term at X%+say1
Value LL proposed interest
Rent x YP in perp at X%
Deduct existing interests from proposed interest
Deduct LL’s increase from T’s increase
if releases value, premium / 2
If doesn’t release value, premium nil
What is marriage value?
Synergistic value (marriage value):
arises from the combination of two or more assets to create a new asset that has a higher value than the sum of the individual assets
Valuation of LL existing interest (term and reversion)
Valuation of T existing interest (capitalise profit rent)
Total
Valuation of merged interests i.e. development value
Synergistic value = dev value – total existing value
Normal practice to split uplift / 2 (though LL could pay up to total of synergistic value)
How are asset valuations carried out for SCC’s accounts?
UKVPGA4: Val of LA assets for accounting purposes
- Classification of assets:
PPE (IAS 16)
Leases (IAS 17)
Investment (IAS 40)
Assets held for sale (IFRS5)
Heritage assets
- Leases of land and bdgs are to be separated into land and bdg elements (land does not depreciate)
- The basis of all PPE assets is current value:
For operational, existing use value or DRC (see DRC method of val for financial reporting)
For surplus assets, fair value
Investment property at fair value
Assets held for sale at fair value less costs to sell
Heritage/community assets any method appropriate
- “proper accounting practice” under the terms of s21(2) of the Local Gov Act 2003
- Code applies to LAs, fire authorities and police bodies
- The financial statements of local authorities need to be prepared in accordance with the Code of Practice on LA Accounting in the UK published by CIPFA based on the IFRS
UKVPGA6: LA and central gov accounting EUV basis of value
- Market value plus assumption that assumes that
The buyer is granted
all parts of the property required by the business
(doesn’t mean empty, any parts occupied by third parties should be valued subject to those occupations;
if parts of the property are unused and can be occupied separately = surplus, if separation not poss, surplus parts have nominal EUV)
disregarding potential alt uses (but appropriate to take into account extension/refurb etc)
disregarding any other characteristics that would cause its market value to differ from that needed to replace the remaining service potential at least cost
(there are circumstances where it may be appropriate for the valuer to ignore factors that would adversely affect the market value but would not be characteristic of a replacement e.g. where the occupier holds the property under a lease and there are lease covenants that impose restrictions on assignment or alternative uses)
- Can value on basis of division into smaller parts for existing use
- EUV to be used only for valuing property that is owner occupied by an entity for inclusion in financial statements
What is Existing Use Value?
UKVPGA6: LA and central gov accounting EUV basis of value
- Market value plus assumption that assumes that
The buyer is granted
all parts of the property required by the business
(doesn’t mean empty, any parts occupied by third parties should be valued subject to those occupations;
if parts of the property are unused and can be occupied separately = surplus, if separation not poss, surplus parts have nominal EUV)
disregarding potential alt uses (but appropriate to take into account extension/refurb etc)
disregarding any other characteristics that would cause its market value to differ from that needed to replace the remaining service potential at least cost
(there are circumstances where it may be appropriate for the valuer to ignore factors that would adversely affect the market value but would not be characteristic of a replacement e.g. where the occupier holds the property under a lease and there are lease covenants that impose restrictions on assignment or alternative uses)
- Can value on basis of division into smaller parts for existing use
- EUV to be used only for valuing property that is owner occupied by an entity for inclusion in financial statements
How do you apply RICS guidance on the application of the EUV basis of value in public sector accounting?
‘The estimated amount for which a property 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 acted knowledgeably, prudently and without compulsion, assuming that the buyer is granted vacant possession of all parts of the asset required by the business, and disregarding potential alternative uses and any other characteristics of the asset that would cause its market value to differ from that needed to replace the remaining service potential at least cost.’
Starting with an initial presumption that the EUV (the least cost replacement) will be the same as the market value, the valuer is to be aware of the impact of the disregards stated in the EUV definition. This means disregarding the potential alternative uses and any characteristics of the asset that would cause its market value to differ (higher or lower) from that needed to replace the remaining service potential at least cost. UK VPGA 6 provides some examples of the latter.
While the incumbent owner-occupier is not in the marketplace for the property, the assessment of deprival value requires that the continuing demand for the premises, in order to fulfil the existing business delivery function, has to be reflected. One means of accomplishing this is to envisage a hypothetical owner-occupier purchaser in the market at the valuation date and who will buy the property on that date, stepping into the shoes of the existing owner-occupier and carrying on delivery of the same business function in the same way. At the same time, it is necessary to take into account that the bid which the hypothetical owner-occupier would make would also reflect the vacant possession of those parts occupied by the owner.
Valuers are reminded that investment property and non-operational ‘surplus’ or ‘held for sale’ property is to be measured at fair value, arrived at in accordance with IFRS 13.
What is the difference between the hardcore layer and the term and reversion methods?
Harcore/layer method:
- capitalises present rent (hardcore rent) into perpetuity (theory, will receive for forseeable)
[lower than ERV as more certain,
for under-rented, yield based on comps]
- then capitalises the top slice rent (difference between the market rent and the hardcore rent) from reversion into perpetuity, this defers it as is appropriate
[yield for ERV,
for over-rented, yield based on comps]
(under-rented, defers until lease expiry,
top slice is potential gain from reversion
over-rented, from now until lease expiry,
top slice extra above MR until reversion)
- then add the 2 capitalised values
Term and reversion:
Term: Rent x YP for unexpired term at X%
[for under-rented, yield based on comps]
Reversion: Rent x YP in perp deferred for unexpired term at X%+say1
[for under-rented, yield higher as less certain]
- hardcore/layer method currently most popular
- arguably values risk better, less scope for error
How do you assess tenant covenant strength? How do you advise on this?
Would need simplified or standard due dil?
Legal entities - ltd company or individual
Nature of business - size, sector, age
Relationship with tenants
Research: Google (website), Companies House
Can you refuse a request to carry out alterations/improvements if the lease is subject to LL consent?
The question of what is unreasonable in this context is tricky as it depends on all of the circumstances and includes both subjective and objective elements, looking at the actual reason for the landlord refusing consent (subjective) and whether their refusal was reasonable on this basis (objective).
Generally, it has been considered that the purpose of requiring consent is to protect the landlord from the tenant carrying out any works which would damage their property interests, and therefore they cannot refuse on any grounds which have nothing to do with their property interests; damage to property interests does not just mean a reduction in their property value, it also includes any aesthetic, artistic, historic or sentimental considerations.
However, where the benefit to the landlord of withholding consent is disproportionate to the detriment of the tenant (i.e. it is of minor benefit to the landlord but greatly burdens the tenant), then it would be unreasonable to withhold consent.
Additionally, the landlord can require certain conditions for giving consent that will not be deemed unreasonable; the tenant can be required to pay for any reduction in value of the property or neighbouring property of the landlord, they could be asked to cover the cost of any legal or other expenses incurred in the landlord providing consent, or they may be required to reinstate the property to its original condition at the end of the term (but only where it is not an improvement which adds to the value of the property).
What is the market value/market rent for offices in your area?
What is the market value/market rent for industrial units in your area?
What is the market value/market rent for retail properties in your area?
What is the market value/market rent for community properties in your area?
sports grounds
grazing/agricultural
amenity land
community centres
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What is the market value/market rent for a 2B flat in your area?
What is the market value/market rent for a 2B house in your area?
What is the market value/market rent for a 3B house in your area?
What are residential values in your area? psm / psf
What are build costs for warehouses in your area?
