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Valuation Flashcards

1
Q

What are the 5 methods of valuation?

A
  1. Comparative
  2. Investment
  3. Profits
  4. Residual
  5. Depreciated replacement cost (contractors)
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2
Q

What is the Red Book?

A

RICS Valuation Global Standards 30 November 2021, taking effect 31 January 2022

The Red Book is issued by RICS to promote and support high standards in valuation worldwide.

It details mandatory practices for members undertaking valuations.

It also offers a useful reference resource for valuation users and other stakeholders.

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3
Q

What are the International Valuation Standards?

A

A set of standards agreed between a number of international organisations (of which the RICS is one).

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4
Q

How do the International Valuation Standards effect the RICS Valuation Standards?

A

The IVS are a set of standards agreed between a number of international organisations (of which the RICS is one).

The Red Book is based on these standards and they are appended

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5
Q

What does the RICS Professional Standard Comparable Evidence in Real Estate Valuation 1st Edition 2019 say?

A
  • Outlines the principles in the use of comparable evidence
  • Provides advice for situations where there is limited evidence
  • sets out a non-prescriptive hierarchy but notes that “valuers should use professional judgement to assess the relative importance of evidence on a case by case basis”
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6
Q

What is market value?

A

The estimated amount for which an asset of 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

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7
Q

What is market rent?

A

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 arms length transaction after proper marketing and where the parties had each acted knowledgeably prudently and without compulsion

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8
Q

What is a hypothetical letting?

A

A letting at market rent and terms

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9
Q

What are the reasons a property may be valued?

A
  • loan security
  • accounting purposes (management accounts or balance sheets)
  • compulsory purchase
  • asset management
  • prior to purchase
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10
Q

What is UK VPS 3 minimum requirements to be states within a report?

A
  1. Identification and status of the valuer
  2. Client and any other intended users
  3. Purpose of valuation
  4. Identification of the asset to be valued
  5. Basis of value
  6. Valuation date
  7. Extent of investigation
  8. Nature and source of information relied upon
  9. Assumptions and special assumptions
  10. Restrictions on use, distribution and publication
  11. Instruction undertaken with IVS standards
  12. Valuation approach and reasoning
  13. Valuation figure(s)
  14. Date of valuation report
  15. Comment on market uncertainty
  16. Statement setting out any limitations on liability that have been agreed
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11
Q

What must be included in VPS1?

A
  1. Identification and status of the valuer
  2. Identification of the client
  3. Identification of any other intended users
  4. Identification of the asset of liability being valued
  5. Currency
  6. Purpose of the valuation
  7. Basis of value
  8. Valuation date
  9. Extent of investigation
  10. Nature and source of the information to be relied upon
  11. Assumptions and special assumptions to be made
  12. Format of the report
  13. Restrictions for use, distribution and publication
  14. Confirmation of red book/ IVS compliance
  15. Fee basis
  16. Complaints handling procedure to be made available
  17. Subject that the valuation may be subject to compliance by the RICS
  18. Limitation on liability agreed
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12
Q

What does VPS 2 cover?

A

Inspections, investigations and records

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13
Q

Why measure NIA?

A

The client requested to measure NIA as the rest of their portfolio was NIA. This was also local market practice and therefore more useful when analysing comparables. This was noted in our terms of engagement

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14
Q

What is a capitalisation rate?

A

The percentage rate applied to income

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15
Q

What statutory enquiries can be carried out?

A
  1. Asbestos register
  2. Business rates
  3. Contamination
  4. Equality Act 2010 compliance
  5. Environmental matters (high voltage power lines)
  6. EPC rating
  7. Flooding - environment agency website
  8. Legal tittle and tenure (boundaries, ownership, any deed of covenant, easements, right of way, restrictive covet)
  9. Public rights of way (OS map)
  10. Planning history
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16
Q

What is the hierarchy of data?

A

Category A - direct comparable of contemporary
- completed near identical transactions with full accurate information(may include the subject)
- completed transactions of similar real estate assets with full accurate information
-completed transactions of similar real estate for which full evidence may not be available
- similar properties where an offer has been accepted but not yet exchanged and completed
- asking prices (only w. careful analysis)

Category B - general market data that can provide guidance
- information from published sources and commercial databases
- historic evidence
- demand / supply data

Category C - other sources
-transactional evidence from other locations/ real estate types
- other background data (interest rates)

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17
Q

What is the term and reversion technique?

A

Term and reversion method
• Used for reversionary investments (Market Rent more that passing rent), i.e. when under-rented:
. Term capitalised until next review/lease expiry at an initial vield
. Reversion to Market Rent valued in perpetuity deferred for the period at a reversionary yield

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18
Q

What is a yield profile?

A

The capitalisation rate applied to the passing and market rent to reflect the risk of the asset

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19
Q

What does VPS 2 say about inspections?

A

Inspections and investigations must be carried out to the extent necessary to carry out a valuation. Valuers must take steps to verify information being relied upon to ensure its professionally adequate for its purpose

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20
Q

Comparative method 6 steps

A
  1. Search and select comparables
  2. Confirm/verify details and analyse headline rent to give a net effective rent
  3. Assemble comparables in schedule
  4. Adjust comparables using the hierarchy of evidence
  5. Analyse comparables to form opinion of value
  6. Report value and prepare file note
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21
Q

What material matters affect value in due diligence?

A
  • planning
  • local plan
  • flood risk
  • covenant
  • tenure
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22
Q

Office Taunton - how ensure the passing rent was open market rent?

A

As part of evidence I looked at other transactions to ensure those within the subject were in line with market rent

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23
Q

Office Taunton - where did you get investment data?

A

Locations with similar market conditions such as Wellington

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24
Q

What is the structure of RICS Valuations - Global Standards 2021 (Red Book)

A
  1. Introduction
  2. Glossary
  3. Professional Standards (PS)
  4. Valuation technical and performance standards (VPS)
  5. Valuation applications (VPGA)
  6. International Valuation Standards (IVS)
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25
Q

Key changes from previous Red Book?

A
  1. Terms of reference are to be unambiguous (not quasi/partial/non red book - it either is or isn’t)
  2. VPGA8 Sustainability and ESG factors - particularly definitions. Inspections and reporting, the future importance in relation to loan security
  3. A reference to the use of the profits method for certain asset classes (self storage/ flexible workspace)
26
Q

What is the hardcore layer method?

A
  • used for over rented investments (passing rent higher than market rent)
  • income flow divided horizontally
  • bottom slice = market rent
  • top slice = rent passing less market rent until next lease event
  • higher yield applied to the top slice to reflect additional risk
  • different yields used depending on comparable investment evidence and relative risk
27
Q

What is covered in VPGA 2?

A

Dealing with valuation interest for secured lending

  • any previous, current or anticipated involvement with the borrower or the property to be valued must be disclosed
  • previous involvement is normally within past 2 years but can be longer
  • if client or valuer considers creates a conflict that cannot be avoided then the instruction must be declined
28
Q

What is the Net Initial Yeild?

A

Analysis of a transaction giving the per centage return on an investment taking into account costs

29
Q

Reversionary yield

A

Yield on reverson at review in an investment valuation
Per centage return on an investment at Market rent

30
Q

What is the True Equivilatnt yield?

A

Per centage yeild when taking into account that in reality most income is received quarterly in advance instead of in arrears as most calculations are based

31
Q

What is the Equivilant yield (all risks yield)?

A

Overall average capitalisation rate reflecting risk involved

32
Q

Tell me about the site?

Single let office, south Bristol?

A
  • Long leasehold (92 years remaining) Ground rent £200 per annum
  • No EPC - advised one was instructed
  • Located on an office park constructed in 1990s
  • Brick, mid terrace two storey office, double glazing, dated condition with suspended ceilings with halogen lighting, perimeter trunking, and predominatly carpert floors
  • 8 parking spaces
33
Q

Where there any environmental issues you noted on site?

Single let office, south brisol

A

I was not provided with an asbestos survey and due to the age of the buidling recomeneded one be commisioned

34
Q

What was the valuation purpouse?

Single let office, South Bristol

A

Secured lending
The current tenent wished to purchase the long leasehold

35
Q

How did you approach the valuation?

Single let office, South Bristol

A
  • Considered 5 methods of valuation
  • As the client instructed to value with vacant possesion and due to the number of recent comparable VP transactions on the park, used the comparable method
  • obtained comparables from eg radius and costar
  • Spoke to agents to confirm transactions
  • Local similar transactions ranged between £138 and £174 psf depending on tenure, location, specification age and size.
  • Higher range were smaller, better located, superior tenure and better specification
  • lower were larger, same location tenure and specification but more historic transactions
  • Analysed transactions to reach capital value per square foot and multiplied by area to reach Market Value
36
Q

Could you have used any other method?

Single let office, South Bristol

A
  • Investment
  • void period and costs untill unit was let
  • Assume a hypothetical tenany
  • apply a yeild to income
  • not apopriote as unit was being sold to owner occupier

check

37
Q

What are prime office yeilds in Bristol?

A

5.75%

38
Q

Tell me about the site?

Owner occupied Industrial Site, Glastonbury?

A
  • Site was currerntlly owned and by a storage and distruoption opertator
  • Several warehouses and an office that could all be operated as self contained units
  • 5 warehouses mixture of specifications and ages (1970s - 2000s) including both steel and concrete frames, pitched profile roofs, roof lights , floucrescent stip lighting combination of roller shutter doors and concertina doors
  • Office?
  • EPC - no EPC as had not been constructed sold or let since regulations - recomend one is commisioned?

check

39
Q

Where there any environmental issues?

Glasto

A
  • Noted fuel tanks on site - however these were bunded, Customer informed us under ground fule tank that were doulble skinned. Did not note anything that would cause concern
  • Asbestos suspected is 2 of warehouses (older ones) - advised a specalist report was advised. Assumed that asbestos in good condition therefore would not have an effect on value
40
Q

What was the purpouse of the valuation?

Owner occupied Industrial Site, Glastonbury

A

Loan security

41
Q

How did you approach the valuation?

Owner occupied industrial site, Glastonbury

A
  • All of the units could be self contained so most simlar to multi - let site
  • Multi - let industrial sites dont trade on open market with VP
  • Used investment method
  • Assumed hypothetical lettings of induvidual units
  • Looked at comparables and confirmed detials with agents
  • Industrial Rents ranged bewtween £4.25 and £7.25 psf depending on location, age, specification and size .
  • Allocated different market rents to units based on specification age and size between £5 psf and £6 psf
  • Office rents ranged betwen £8.00 psf and £10 psf however due to isolated office location allocated £7 psf.
  • Used conventional technique
  • To determine cap rate assumed units let at MR to moderate covenent for 5 years term certian
  • looked at comparable evidence considering covenant, term certain, location
  • NIY ranged between 5.17% and 8.52% sharper yeilds for super locations, strong tenant covenets, longer WAULT superior specifications
  • Cap rates 8% indutrial 9% office as higher risk
  • Assumed void periods/ costs including business rates of 15 months for industrial (6 months grace) and 18 months offices (3 months grace)
  • letting costs including 6 months rent free for offices and 3 months rent free for industrial - agents and legal fees at 15% MR
  • purchasers costs - SDLT agents (1%) and legal (0.5%)
42
Q

Where there many other comparable properties in Glastonbury?

Owner occupied insutrial site, Glastonbury

A

No so had to look at a wider area
searched in Somerset towns including Wells, Frome and Shepton Mallet and made adjustments to reflect locations

43
Q

How did you reflect the unit was vacant?

Owner occupied industrial site, glastonbury

A

Assumed void periods of 15 months for industrial and 18 months for office

44
Q

Tell me about the site

Multi-let office Taunton

A
  • Purpouse built 2 story office block constructed circa 2002
  • Out of town office park consisting of similar properties
  • stell portal frame with brisk elevations under multiple pitched tiled roof. Double glazing with poweder coated aluminim frames.
  • internally communal entrance and services core within centre of building.
  • Ground floor single office
  • FF reconfigured to provide 3 offices
  • Specification - Suspended ceiling Catagoy II LED lighting, painted walls, raised carpet floors with floor boxes, hybrid VRV air conditioning, modern kitchen and WC’s, 8 person passanger lift.
  • externally brick paved car park for 46 cards including 2 disabled and 2 EV points.
45
Q

What are the valuation approaches and methods?
Which section of IVS

A
  • Outlined in IVS 105
  • Income approach – converting current and future cash flows into a capital value (Investment, Residual and Profits methods)
  • Cost approach – reference to cost of the asset (DRC)
  • Market approach – using comparable evidence (comparable)
46
Q

What is the DRC?

A
  • Depreciated Replacement Cost
  • Method of last resort
  • Only to be used where limited evidence for specialist properties
  • Used for owner-occupied properties
47
Q

When might you use DRC/ contractors method?

A
  • Used where limited transaction evidence for specalist properties
  • Ancient monument
  • Castle
48
Q

How do you value using the DRC?

A
  • Value exsisting use
  • Add current cost for replacing building fees
  • discount for physical, fuctional and economic obsolescence
49
Q

What is the proffits method?

A
  • Used for valuation of trade-related assets where there is a monoply position
  • used where value of the property is dependant on business profitability and trading potential
  • value depends on the profitability of the business not the building or location
50
Q

What are the 4 basis of value?

A

VPS 4

  1. Market Rent
  2. Market Value
  3. Fair Value (IFRS13)
  4. Investment value
51
Q

What is Fair Value?

A

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

  • Required if International Financial Reporting Standards have been adopted by client
  • RICS view definition generally consistent with Market Value
52
Q

What is investment value?

A

The value of an asset to a particular owner or prospective owner for individual investment or operational objective

  • May differ from MV
  • Sometimes used as a measure of worth to reflect the value against the clients own investment criteria
53
Q

What section of red book outlines basis of value?

A

VPS 4

54
Q

What is the guidance on comparable evidence?

A

RICS Proffesional Standard: Comparable Evidence in Real Estate Valuations 2019

55
Q

When stating a special assumption for secured lending what else must you include?

A

A comment on any material difference between the reported value with and without that special assumtion

56
Q

What are the exclusions of the red book?

A

PS1
- Advice provided in prepartion or during the course of negotiation or litigation
- valuer performing statutory functions (exept tax return)
- valuation for internal purpouses without liability and no third parties
- valuation part of agency work in anticiaption of receiving an instruction (exept purchase reports)
- valuation provided in anticipation of providing advice as an expert witness

57
Q

Case for duty of care when undertaking a bank valuation?

A
  • Hubbard v Bank of Scotland Plc
  • Duty of care to client not borrower
58
Q

What are the marging of errros for a valuation and case?

A
  • K/S Lincoln and Others v CB Richard Ellis (2010)
  • +/- 5% in standard residential
  • +/- 10% in one off commercial property
  • Exceptional features +/- 15%
59
Q

What is the commercial SDLT threshold?

A
  • £0 - £150,000 Nil
  • £150,001 - £250,000 – 2%
  • Over £250,000 – 5%
60
Q

What is often covered in a Bank Letter of Instruction on valuation for secured lending?

A
  • Borrower
  • Property
  • Purpouse
  • Details of loan
  • Who to report to
  • details of where to get info/ how can be accesed
  • what the report should contain (description, market commentary, area, tenancies, environmental, SWOT ….

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