Valuation

Question 1

Tell me what the 5 methods of valuation are.

Answer 1

1. Comparable
2. Investment
3. Residual
4. Profits
5. Depreciated Replacement Cost

Question 2

Swan Close
What did you include in TofE?

Answer 2

・In TofE, I included
a) Identification and status of the valuer
b) Identification of the client(s)
c) Identification of any other intended users
d) Identification of the asset(s) or liability(ies) being valued
e) Valuation (financial) 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 limitations thereon
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 for regulation by RICS, reference to the firm’s complaints handling procedure, with a copy available on request
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.

・I used T&R because the units were under rented

Question 3

Swan Close
Why did you use a term and reversion?

Answer 3

Because the property was under rented

Question 4

Tell me about how you would value a building using the profits/contractors/investment/comparable/residual method of valuation.

Answer 4

・Comparable Method
Select comparables, verifying with agents. Analyse and adjust comps for net effective rent. Display in matrix. Value property. Stand back and look

・Investment Method
Term and reversion for under-rented properties. Capitalise the value of the term at passing rent and reversion at market rent into perpetuity deferred for x years using YPs to reflect riskiness of each yield. Add values together. Deduct costs @6%. Stand back and check.
Hardcore and layer method is an alternative (capitalise term & reversion into perpetuity at equivalent yield + reversionary top slice at an equivalent yield deferred for x years). Hardcore and top slice for over-rented properties (Capitalise market rent into perp + top slice for x years)

・Profits Method
Use 3 years’ company accounts to find ‘fair maintainable operating profit (FMOP) for a reasonably efficient operator. FMOP X YP = Capital value. For rental value, ½ FMOP = market rent (FMOP – cost of working capital = Divisible balance, which is split 50:50 between L & T, hence rent)

・Residual Method
Residual land value = GDV – all costs to develop (including profit). Costs include: Profit, fees, S.106 payments/CILs, Finance (finance rate X ½ total cost^n). Undertake sensitivity analysis (what if completion delayed or construction costs go up)

・Depreciated Replacement Cost
Last resort as cost doesn’t = value. Establish replacement cost modern equivalent. Depreciate for age and obselesence. Add site value

Question 5

When and why would you use one of these methods?

Answer 5

・Comparable - Owner occupied property
・Investment - Used when there is an income stream to value
・Residual - Used to find site value and / or profitability of a development scheme
・Profit - Where the value of a property depends on the profitability of its business and trading potential, rather than physical attributes (pubs, hotels etc)
・DRC - Used as last reort where there is no direct comparable evidence for specialised properties like lighthouses or oil refineries

Question 6

What is a years purchase multiplier?

Answer 6

・The reciprocal of the yield. Yield at 12.5% = YP of 8. Used to determine CV by multiplying net annual income.

Question 7

Give me an example of a good covenant and how this might impact a valuation.

Answer 7

・A stronger covenant will have a lower yield thus a higher YP and higher CV.

Question 8

What is PI Insurance (PII)?

Answer 8

・Professional Indemnity Insurance
・Insurance that covers cost of compensating clients from loss or damage due to negligence

Question 9

Why do surveyors need PII?

Answer 9

・Protects the firm from financial loss it can’t pay and clients from suffering financial loss due to negligence

Question 10

Tell me about the RICS requirements in relation to PII.

Answer 10

・Minimum level of indemnity based on firm’s turnover
・Minimum policy wording and ensure policy wording is written on a full civil liability basis
・Each and every claim basis or aggregate plus unlimited round the clock reinstatement basis

Question 11

How did the decision in Hart v Large affect PII?

Answer 11

・Mr Large’s PI insurance was limited to £250k so Mr Large was liable for a big chunk of the damages.
・The case has increased the cost of PII

Question 12

What level of PII cover does your firm have?

Answer 12

・SHW’s is >£10m - has to be at least £1m since turnover is over £200k

Question 13

How would you distinguish limitations on liability in your valuations?

Answer 13

Liability cap

Question 14

What relevance does Hart v Large have on your valuation practice?

Answer 14

・Normally damages awareded in the difference between the surveyor’s valuation and the actual value of the property (SAAMCO cap)
・In hart v Large, the court deviated and awarded significantly more damages for disruption to lives etc.
・Where there may be unseen defects, valuation reports should state that the bvaluation amount is based on the assumption that a property doesn’t have any defects and that a Professional Contractors Certificate should be obtained to verify this.

Question 15

What is the SAAMCO cap?

Answer 15

・If negligent, the valuer is liable by the amount the property was overvalued

Question 16

Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?

Answer 16

・No, just the amount it was overvalued at the valuation date

Question 17

Under the SAAMCO cap, is a valuer’s liability usually limited to the overvaluation on the valuation date?

Answer 17

・Yes

Question 18

Camberwell - Talk me through the zoning of the retail unit.

Answer 18

・I zoned the property by going from the front to the rear by 6.1m

Question 19

Camberwell - How did you establish your ITZA rate?

Answer 19

・I established iTZA rate from recent comparables on the High Street
・Rate of £60.34

Question 20

Camberwell - What type of yield did you use to capitalise the retail unit?

Answer 20

・I used NIY from comparable evidence gathered

Question 21

Camberwell - What purchasers costs did you deduct?

Answer 21

・6% purchase costs

Question 22

What information did you have to be able to advise the property was suitable for secured lending purposes?

Answer 22

・The lease terms of the commercial unit and ASTs for the residential
・The property’s condition, location and quality
・Occupational and investor demand
・Volatility of property performance and rental and capital values
・The valuation amount

Question 23

Croydon - what did you factor into your valuation with regards to condition and specification of each flat?

Answer 23

・I noted specification of kitchenware appliances, bathroom sets etc.

Question 24

Croydon - Why did you apply a blanket rate per sq ft to each flat type?

Answer 24

・The flat types were very much the same, varying simply by orientation and by floor
・I applied a blanket rate for each type and was then able to adjust thereafter

Question 25

Croydon - What type of ajdustments did you make and why?

Answer 25

・I made adjustments upon orientation, whether it was dual aspect and by floor

Question 26

Croydon - What advice did you include within your valuation report?

Answer 26

・I advised the client of the different MV's of the flat types - mainly due to floor level and orientation

Question 27

Tell me why terms of engagement are important.

Answer 27

・Mandatory under VPS 1 ・Apply the IVS 101 Scope of Work to ensure compliance with IVS ・Agree the format and details of the proposed valuation report ・Agrees restrictions on use, distribution and publication of the report

Question 28

What checks do you undertake before accepting a valuation instruction?

Answer 28

・Conflicts of interest ・Competence in undertaking the instruction

Question 29

How do you ensure you know who your client is when undertaking a valuation instruction?

Answer 29

・Confirm instructions and identifying the client in writing prior to undertaking any workk ・KYC - Obtain ID and proof of address

Question 30

Are there any additional requirements when undertaking a valuation in which the public has an interest or third parties may rely?

Answer 30

・Regulated purpose valuations must disclose relationship with the client and the valuer's previous involvement ・Rotation policy ・Time as signatory ・Proportion of fees the client makes up for the valuing firm

Question 31

Are there any additional requirements for loan security valuations?

Answer 31

・VPGA 2 ・Must disclose any previous involvement in the property with the borrower (in last 24 months) ・The lender may specify the basis of value and any special assumptions

Question 32

Talk me through an example of when you have agreed terms of engagement with a client.

Answer 32

Swan Close, Croydon ・I confirmed instructions in writing and attached TofE ・I included: valuation purpose (audit for their pension scheme), basis of value (MR), asked if there had been any recent tranasctions, comfirmed no conflict of interest, confirmation that we had valued the property before, confirmation of fee

Question 33

What are the key elements included within terms of engagement?

Answer 33

A) Identification and status of the valuer B) Identification of the clients C) Identification of any other intended users D) Identification of the asset or liability to be valued E) Valuation currency F) Purpose of the valuation G) Basis of value adopted H) Valuation date I) Nature and extent of the valuer’s work – including investigations and any limitations J) Nature and sources 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) Reference to the firm’s complaint handling procedure, with a copy available upon request (where the firm is RICS registered) Q) A statement that 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

Question 34

What does the Red Book say about terms of engagement?

Answer 34

・TofE should convey a clear understanding of the valuation requirements and process and should be readable in layman's terms

Question 35

What does the Red Book say about inspections?

Answer 35

・VPS2 - inspections, Investigations and Records ・Inspections and investigations must always be carried out to the extent necessary to produce a valuation that is professionally adequate for its purpose ・Must take reasonable steps to verify any information relied upon ・Any limitations or restrictions on inspection must be recorded in Terms of Engagement and the report ・Proper records of the inspection should be kept in a business format and be retrievable in the event of a future enquiry

Question 36

What does the Red Book say about reporting requirements?

Answer 36

・VPS3 - Valuation Reports ・The report must clearly and unambiguously set out the conclusions of the valuation ・Reports must deal with all the matters agreed between the client and valuer in TOEs ・List of matters that must be addressed is similar to TOEs but must also include: ・Valuation approach and reasoning ・Amount of the valuation (stated in words & numbers) ・Commentary on any material uncertainty

Question 37

What are the differences between a desktop and a full valuation report?

Answer 37

・Desktop valuation doesn't require inspection ・Lots more assumptions ・Less reliable

Question 38

Tell me about how you ensure that information relied upon in your valuation is appropriate and reliable?

Answer 38

・Where possible, information provided by the client e.g title and tenant info is checked with verifiable sources like land registry and the lease itself

Question 39

Staff accommodation - What due diligence did you do as part of your valuation?

Answer 39

・Undertaking planning checks ・Understanding reading the ASTs

Question 40

Staff Accommodation - What considerations did you have from inspection that impacted the valuation?

Answer 40

・Condition of the properties ・Specifications of the properties ・Factors such as: location, driveways, gardens, property size

Question 41

Staff Accommodation - Talk me through your analysis of comparable evidence.

Answer 41

・I analysed comparable evidence on condition of properties, transaction dates

Question 42

Staff Accommodation - What did you Include within your valuation report?

Answer 42

As per VPS3 ・Identification and status of the valuer ・Identification of the client and any other intended users ・Purpose of the valuation ・Identification of the asset(s) or liability(ies) valued ・Basis(es) of value adopted ・Valuation date ・Extent of investigation ・Nature and source(s) of the information relied upon ・Assumptions and special assumptions ・Restrictions on use, distribution and publication of the report ・Confirmation that the valuation has been undertaken in accordance with the IVS ・Valuation approach and reasoning ・Amount of the valuation or valuations ・Date of the valuation report ・Commentary on any material uncertainty in relation to the valuation where it is essential to ensure clarity on the part of the valuation user ・A statement setting out any limitations on liability that have been agreed.

Question 43

Staff Accommodation - How would you have approached the valuation different, If there was no special assumption of VP?

Answer 43

・If MR - Would have valued MR using comparable evidence ・If MV subject to leases - Capitalised the rent / MR into perpetuity

Question 44

What would you do if you received a notice of a PII claim from a client or their solicitor?

Answer 44

・Do not respond other than to acknoweldge receipt of the notice and inform my line manager / insurance provider

Question 45

Is there a difference between being negligent when undertaking a survey/valuation and providing negligent advice?

Answer 45

・Determines whether you can be sued under breach of contract or negligence ・Can only be sued under breach of contract if the person was a party to the contract

Question 46

What is run off cover?

Answer 46

・Cover after the firm ceases to operate (minimum of 6 years)

Question 47

What is the Red Book?

Answer 47

・RICS Valuation - Global Standards 2021 ・A set of RICS mandated ghlobal standards that set out procedural rules and guidance for written valuations

Question 48

Why does the Red Book exist?

Answer 48

・To set a global standard for how valuations are done ・Ensure best quality valuation advice is provided ・Protect the public interest and confidence in the profession by upholding standards

Question 49

In a scenario where rents are static and the capital value increases, would you expect yields to increase or decrease?

Answer 49

・Yields decrease

Question 50

What does heterogenous mean in terms of comparable evidence?

Answer 50

・It will be rare that comparable evidence is the exact as the subject and will be different in some nature

Question 51

What does the term 'tone of value' mean to you?

Answer 51

・Tone of value = General prices in that location for similar type of property

Question 52

What liabilities may be created through valuation?

Answer 52

・The valuing firm takes on some liability for being sued in breach of contract or tort of negligence

Question 53

What is a liability cap and when would one be used?

Answer 53

・Limits damages that a client can claim to an agreed amount

Question 54

Explain why the RICS are carrying out an Independent Valuation Review.

Answer 54

・In 2021, the Standards & Regulations Board commissioned an independent review of investment valuations and one of the recommendations was increased valuer rotation to better mitigate conflicts of interest

Question 55

Explain what you understand by the term, margin of error.

Answer 55

・10% either side of a valuation is permitted - established in Singer & Friedlander v John D Wood & Co [1977]

Question 56

What caselaw relates to margins of error?

Answer 56

・Singer & Friedlander v John D Wood & Co [1977]

Question 57

What is your duty of care as a surveyor when undertaking a valuation?

Answer 57

・Valuers owe a duty to take all reasonable skill and care when undertaking a valuation ・Both in contract and in tort (for negligence)

Question 58

To whom do you owe this duty of care?

Answer 58

・To clients, but they may also owe a duty of care to third parties where the court decides a duty of care was assumed to a third party

Question 59

Why is independence and objectivity important when valuing?

Answer 59

・PS2 - Ethics competency, objectivity and disclosures: Valuation work often has particular complexity and sensitivity to confidentiality and conflicts of interest. Independence and confidentiality is vitally important in ensuring valuations are doen correctly - can't allow to be influenced by the client or show the client the valuation before completed

Question 60

Tell me something about the UK National Supplement

Answer 60

・VPS3 - Regulation purpose valuations: supplementary requirements Additional requirements for UK valuations for the purpose of financial reporting, takeovers and mergers etc. If the valuing firm acquired the property for the client, the cannot value the same property within 12 months unless another firm has valued it since the transaction. Must disclose whether proportion of total fees payable by the client to the firm make up either less than 5% of the total fees, or if more than 5%, an indication within a 5% range.

Question 61

Which do you follow - the latest IVS or the Red Book Global?

Answer 61

・The Red Book - this incorporates IVS and is mandatory for RICS members

Question 62

Which sections of the Red Book are mandatory and which are advisory?

Answer 62

・Mandatory - PS1, PS2, VPS-15 ・Advisory - VPGA 1-10

Question 63

What does PS1-2/VPS1-5/VPGAs relate to?

Answer 63

・Professional Standards PS1 – Compliance with standards e.g IVS, and IPMS PS2 – Ethics, competency, objectivity and disclosures ・Valuation Technical and Performance Standards VPS1 – Terms of Engagement VPS2 – Inspections, investigations and records VPS3 – Valuation reports VPS4 – Bases of value & Assumptions VPS5 – Valuation approaches and methods ・Valuation Practice Guidance Applications VGPA1 – For inclusion in financial statements VGPA2 – Secured lending VGPA3 – Business and business interests VGPA4 – Individual trade related properties VGPA5 – Plant and Equipment VGPA6 – Intangible assets VGPA7 – Personal property, e.g art & antiques VGPA8 – Real property interests (notes the importance of inspection for factors that impact value, condition, services, planning etc) VGPA9 – Identification of portfolios, collections and group properties VGPA10 – Matters that may give rise to material valuation uncertainty

Question 64

If you provide preliminary advice / draft valuation report, what should you state in writing to your client?

Answer 64

・The opinion is provisiona nd subject to the completion of the report ・The advice is for the client's internal purposes only ・Declaration of any fundamental matters that aren't reflected

Question 65

What type of valuations might be relied upon by a third party?

Answer 65

・Valuations included in published financial statements ・Valuations for secured lending purposes may also be relied upon by the borrower ・A valuation listed on the stock exchange ・Valuations prepared for stakeholders and mergers

Question 66

Tell me what the definition of MR/MV/investment value/fair value?

Answer 66

・Market Rent: The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and willing lessee in an arm’s length transaction, after proper marketing, where both parties act knowledgably, prudently & without compulsion. ・Market Value: the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and willing seller in an arm’s length transaction, after proper marketing, where both parties act knowledgably, prudently and without compulsion. ・Investment Value (IFRS): The value of an asset to a particular owner or prospective owner for individual investment operational activities. ・Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (Not dictated by the current state of the market, and unlike market value, is accepted by the IFRS & GAAP)

Question 67

What is the difference between an assumption and a special assumption?

Answer 67

・Assumption - Where it is reasonable for a valuer to accept something is true without the needs for specific investigation (snagging to be rectified) ・Special assumption - Where the valuation report assumes facts that either differ from facts as at the valuation date or that would not be made by typical market participant in a transaction at the valuation date. (Must be confirmed in wirting with the client beforethe report is issued and the instruction should be turned down if the valuer deems it unrealistic and invalid)

Question 68

If you have previously valued an asset, do you need to make any additional disclosures and what might they be?

Answer 68

・Relationship with client and previous involvement ・Rotation policy (RICS recommends 7 years) ・Time as signatory (time the signatory has held the post and their relationship with client) ・Proportion of fees (% of the firm's fees that were made up by work for this client in the last year)

Question 69

If your firm is too small to have a rotation policy or valuation panel, what else can you do to ensure objectivity?

Answer 69

・In 2021, RICS and the Standards and Regulations Board commissioned an independent review of investment valuations and one of the recommendations was increased valuer rotation to better mitigate conflicts of interest ・If the firm is too small, periodically have another independent member review the valuations at intervals of 7 years or less

Question 70

When might a conflict of interest exist in relation to a valuation instruction?

Answer 70

・Valuing for a lender where advice is also being provided to the borrower ・Where the valuer has previously valued the same asset, for the same purpose, or for the property's purchase within the last 12 months ・Valuing both parties' interest in a leasehold transaction

Question 71

What else might you include in a valuation report for secured lending purposes?

Answer 71

・Comments on the maintainability of income, dictated by VPGA 2 Investment Valuations ・Summary of occupational leases ・Statement of current rental income and comparison to MR ・Assumption or comment on covenant strength ・Comment on maintainability of income over the loan period - references to break clauses, expiries etc ・Comment on redevelopment potential or refurb at the end of occupational leases Profits Method ・Impact of closure of the trading business Residual / Development ・Comment on costs and contract procurement ・Comment on development viability ・Sensitivity analysis ・Comment on anticipated development length

Question 72

What additional criteria apply to secured lending valuations?

Answer 72

VGPA 2 ・Most lenders will have specific requirements in terms of special assumptions (assuming VP or limited marketing period of 90 days) ・Must disclose any previous involvement with the property or borrower (last 24 months) ・Should enquire as to whether the property has recently been sold

Question 73

What is a yield?

Answer 73

・A measure of investment return, expressed as a percentage of capital invested ・Income divided by price x 100

Question 74

What factors impact yield on an investment property?

Answer 74

・Property type ・Lease term ・Covenant strength ・Wider economic environment and market conditions

Question 75

What is a Net Initial Yield?

Answer 75

・Rent / Price + Purchasers Costs

Question 76

What is a reversionary yield?

Answer 76

・The yield adjusted to Market Rent after a lease event adjusts the current passing rent to OMR

Question 77

What is an equivalent yield?

Answer 77

・A weighted average between the term and reversionary yields

Question 77

What is an equated yield?

Answer 77

・The yield on a property investment taking into account growth in future income (more holistic than just applying a reversionary yield that assumes MR at the present time into perpetuity)

Question 78

How could you value a long leasehold interest?

Answer 78

・Market Rent minus ground rent, capitalised for x years (or into perp if effective freehold) ・Apply a YP dual rate where a sinking fund is theoretically created to extend the long leasehold when required

Question 78

How would you value a property in uncertain market conditions - does the Red Book give any guidance?

Answer 78

VGPA 10 - Matters that may give rise to material valuation uncertainty ・Where the valuation coincides with an unforeseen macro-economic event, for example there may be a lack of empirical comparable evidence data to base the valuation on ・The context of the valuation and reference to the uncertainty should be expressed in the report ・Material uncertainty should be expressed qualitatively in words, rather than in the valuation figure itself (unless sensitivity analysis is appropriate)

Question 79

How does a term and reversion differ to a DCF?

Answer 79

・T&R only captures constant incomes and expenditures ・DCF captures irregular patterns of income and expenditure of an asset, and appreciates the time value of money

Question 80

What is the difference between a growth explicit and a growth implicit yield?

Answer 80

・Growth implicit = ARY (assumes no change in rental income over time) ・Growth explicit = DCF (models cash flows period by period)

Question 81

How would you value an under/over rented investment property?

Answer 81

・Under rented - T&R ・Over rented - Hardcore and top-slice

Question 82

When would you use a dual rate investment calculation?

Answer 82

・Where there is a sinking fund there are two rates - Remunerative rate - the yield of the property Accumulative rate - the rate of interest in the sinking fund

Question 83

What is the hierarchy of evidence?

Answer 83

・Category A: Direct transactional evidence ・Category B: General market data providing guidance rather than a direct indication of value, such as evidence from published sources, historical evidence, demand/supply data ・Category C: Other sources, sucgh as transactional data from other property types and locations and other relevant background data

Question 84

What is IRR?

Answer 84

・Internal Rate of Return - The dicount rate that makes the NPV of all cash flows equal to zero. ・The annual rate of growth that an investment is expected to generate

Question 85

What is a Discounted Cash Flow (DCF)?

Answer 85

・Form of valuation that calculates an investment's value based on the ability to receive a predicted future cash flow

Question 86

What is a short-cut DCF?

Answer 86

・The shortcut DCF valuation can allow for a more considered reflection of the target rate and growth rate, analysed from the capitalisation rate, than the income capitalisation method. ・It enables the valuer to report on the broad assumptions behind the market pricing rather than just the current cap rate. ・It does rely on an assumption of either target rate or growth rate, but this assumption does not make much difference to the valuation solution as an increase in target rate generates a similar increase in implied growth rate.

Question 87

When would you use a DCF?

Answer 87

・When valuing a property where expenditure and income may be in irregular patterns

Question 88

What are the advantages of a DCF?

Answer 88

・Appreciates the costs and income can vary over time periods ・Projections can be tweaked to provide different results in different situations - refurb costs higher than expected or the building is worth less at the end of the term

Question 89

What are the disadvantages of a DCF?

Answer 89

・Uses estimates, not real figures so discount rate and cash flows need to be estimated carefully ・Future cash flows rely on a variety of factros such as demand and the state of the economy and cannot be quantified exactly

Question 90

What is a YP/PV/YP in perpetuity?

Answer 90

・The present value of the right to receive £X for 'n' years at 'i' compound interest

Question 91

What is marriage value?

Answer 91

・Additional value created by the combination of two or more assets or interests where the combined value is more than the sum of separate values

Question 92

Can you include hope value in a secured lending / mortgage valuation?

Answer 92

・Not unless EUV is specified

Question 93

How would you value a ransom strip?

Answer 93

・Caselaw: Stokes v Cambridge [1961] ・The owner of the ransom strip is entitled to 1/3 fo the increase in the value of the adjacent land for providing access to the development

Question 94

What is a dual capitalisation rate and when would you use one?

Answer 94

・A separate capitlisation rate is applied to different elements of the property with different levels of risk assigned e.g. freehold and leasehold

Question 95

What is turnover / gross profit / net profit?

Answer 95

・Turnover - Revenue generated from a business' activities ・Gross Profit - Profit after costs of the goods / services have been paid ・Net Profit - Profit left after all expenses have been paid (tax etc.)