Valuation Flashcards
What are the 5 methods of Valuation?
- Comparative
- Investment
- Profits
- Residual
- Depreciated Replacement Cost (DRC)
What is the permissible margin of error for a Valuation?
Singer & Friedlander Ltd v J.D. Wood (1977):
- 10% either side of the correct figure
- Margin of error can vary
- Wider for more complex cases
- Narrower for straightforward cases
What is the best comparable evidence to use?
A recent deal on the subject property
(If it is u/o, it is useful but do not rely on it)
When do you use the comparative method?
- When valuing vacant possession
- When determining MR
- Common for residential assets
How can you corroborate information from transactions?
- Speak to agent
- Check online databases
- Check Land Registry
- Look at press releases/online articles
What is included in the ‘RICS (2019) GN: Comparable evidence in real estate valuation’?
Provides advice for when there is limited comparable evidence
Sets out a hierarchy of evidence (but valuer should use professional judgment on case-by-case basis)
- Category A (direct comparables)
- Category B (general market data)
- Category C (other sources)
What is zoning?
A valuation technique to compare retail properties that are sized differently
How big is each zone?
6.1m (20ft) - the traditional depth of a Victorian shop unit
30ft for Oxford/Regent St (+ Scotland)
What do you do when a shop has a return frontage?
A shop occupying a corner site has display windows to two streets
Add a % (depending on comparables) to end of ITZA calculation
What are current Prime Office yields?
City - 5.25%
West End (Mayfair/St James) - 4%
West End (Soho/Fitzrovia) - 4.5%
Major regional cities - 6%
What are current Prime Industrial yields?
Prime distribution (20 yr lease) - 4.75%
Secondary distribution - 5.50%
What are current Prime Retail yields?
Bond Street - 3%
Oxford Street - 4.50%
Regional cities - 7%
What is the current Bank of England base rate?
5.25%
What is the difference between a yield and a return?
Return is retrospective (past performance from ‘buy’ to ‘sell’ value)
Yield is forward-looking and based on income only (on a fixed term or into perpetuity)
What is Years Purchase?
How many years it takes to make purchase price back
100/Yield rate = YP (multiplier)
What is a running yield?
The yield at one moment in time
(annual income of an investment divided by its current market value)
What is an initial yield?
The annual rate of return on an investment expressed as a percentage
(Passing rent/Price paid) x 100
What is a net initial yield?
The initial yield including purchaser costs in the price paid
What is a reversionary yield?
When the MR is known as well as the purchase price - the rent to price paid expressed as a percentage
(MR/price paid) x 100
Describe the term and reversion approach of the investment method
Used for reversionary investments (i.e. when under-rented)
Term capitalised until next rent review/lease expiry at an initial yield
Reversion to MR valued in perpetuity at a reversionary yield
Lower yield on term as there is rental growth potential
Higher yield on reversion as riskier as do not know future lease terms
Describe the hardcore approach of the investment method
Used for over rented investments
Income flow divided horizontally (bottom slice = market rent/ top slice = passing rent)
Higher yield for top slice to reflect additional risk that you won’t get that rent forever
What is an equivalent yield?
The average weighted yield when a reversionary property is valued using an initial and reversionary yield (term and reversion yield combined)
Calculated by having the same yield for both term and reversion and coming to the same end value (goal seek function)
What is an all risks yield?
The remuneration rate of interest used in the valuation of a fully let property let at a market rent reflecting all the prospects and risks attached to the particular investment
What is the Red Book?
An established framework for uniformity and best practice in the execution and delivery of valuations and valuation reports
What is the Valuer Registration Scheme (VRS)?
Regulatory monitoring scheme for all valuers carrying out Red Book valuations
To improve quality of valuations and meet RICS requirement to self-regulate
Each year members have to submit a record of the type of valuations they do, on what assets, how many they do and their fee earnings
Members have to pay annual fee and have valuation related CPD every year
How is the Red Book structured?
- Professional Standards (PS 1/PS 2)
- Valuation Practice Standards (VPS 1-5)
- Valuation Practice Guidance Applications (VPGA 1-10)
What types of valuations are excluded from the Red Book compliance (PS 1)?
- Statutory Function Valuations (e.g. revaluing for rateable value)
- Internal purposes
- Agency/brokerage work to receive instruction to dispose/acquire
- In anticipation of giving evidence as expert witness
- Advice is provided during negotiations/litigation
What does PS 2 cover?
Ethics, competency and objectivity
Valuers should apply professional scepticism
Competent valuer must have:
- professional qualifications
- membership of professional body
- sufficient local/national knowledge of asset type and market
- compliance with country’s legal regulations
- compliance with VRS
What is included in a terms of engagement as stated in VPS 1?
- Identity and status of valuer
- Identity of client
- The asset to be valued
- The currency
- The purpose of valuation
- The basis of valuation
- Valuation date
- Extent of investigation (e.g. asbestos/Japanese knotweed may need further investigation)
- Information to be relied upon
- assumptions/special assumptions
- fee basis
- complaints handling procedure
- limitation on liability agreed
What does VPS 2 refer to?
Inspections, Investigations and Records
Valuers must take steps to verify the necessary information being relied upon
Revaluation of property doesn’t need re-inspection if there have been no material changes to property
Proper records must be kept of inspections
What should be considered when doing a desktop valuation?
The nature of the restriction must be agreed in writing (terms of engagement)
The possible valuation implications confirmed in writing
Valuer should consider whether restriction is reasonable with regard to purpose of valuation
Restriction must be referred to in report
What are the requirements to be stated in the report as per VPS 3?
The same as terms of engagement but also including valuation methodology, valuation figures and market commentary
What is included in VPS 4?
Bases of Value, Assumptions and Special Assumptions
What are the differences between assumptions and special assumptions?
Assumptions are made when it is reasonable for a valuer to accept that something is true without need for special investigation (e.g. planning, contamination, title)
Special assumptions are something that is taken to be true and accepted as fact, even thought it is not true
What is Market Value?
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion
What is 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 arm’s length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion
What is Investment Value?
The value of an asset to the owner or prospective owner for individual investment or operational objective
What is 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
Which VPGA’s are relevant?
VPGA 2 - Interests for Secured Lending
VPGA 8 - Valuation of Real Property Interests
VPGA 9 - Portfolios, Collections, Groups of Properties
VPGA 10 - Matters that may give rise to material valuation uncertainty
When is the Profits Method used?
For trade related properties (e.g. Hotels/Pubs)
When the value of the property depends upon profitability of its business/trading potential rather than physical building/location
Need accurate audited accounts from last 3 years
Determine EBITDA then capitalise at a yield (then cross check with cap value comps)
When is the DRC method used?
When direct market evidence is unavailable for specialised properties (e.g. lighthouse, submarine base)
Can only be used for owner occupied properties for accounting purposes/viability projects but never for loan security/selling property
Is calculated by determining the current cost of replacing an asset with its modern equivalent after taking away obsolescence (physical, functional, economical) and adding value of site
What affects risk of a property?
- Prospects of rental/capital growth
- Quality of location/covenant
- Lease terms/security of income
- Void costs/length
What is included in VPS 5?
Valuation Approaches and Methods
Valuers are responsible for choosing and justifying their approach
What is Equitable Value?
The estimated price for the transfer of an asset between parties that reflects the respective interests of those parties
May be different to MV as could be selling property to existing tenant for cheaper as it will save them on other costs (e.g. marketing)
What is Synergistic Value?
The result of a combination of two or more assets or interests where the combined value is more than the sum of the separate values
What is Liquidation value?
The amount that would be realised when an asset is sold on a piecemeal basis
Not used in the UK
What are some of the recommendations from Peter Pereira Grays 2021 independent review?
Develop a time specific rotation process for valuers
Appoint a valuation compliance officer within firms
DCF method should be the principal model for investment valuations
Introduce processes to raise concerns about poor ethics (e.g. pressure on valuers)
ESG a big focus - 2021 GN where sustainability credentials should be borne in mind when analysing comps
What is hope value?
Value from any expectation that future circumstances affecting the property may change
E.g. future prospect of securing planning permission
E.g. marriage value from merger of two interests (can be physical or tenurial. Typical to split marriage value created 50:50)
What is WAULT?
Weighted Average Unexpired Lease Term remaining to first break/expiry of lease
What are purchasers’ costs?
Need to deduce purchasers costs from gross market value to provide a net market value
Such as SDLT, agents fees, solicitors fees
How do you value long leasehold interests?
Ground rent is deducted from the gross income to calculate the net rent
This is capitalised at a yield for the length of the lease to create a MV
What are premiums?
A capital payment made by one party to another
E.g. money paid by an in going tenant of a retail property to secure a prime shop
E.g. money paid by an in going tenant to represent the fixtures and fittings within a building
Which UK VPGA relates to charity valuations and what does it state should be included
UK VPGA 8
Valuer must comment on whether purchase/sale is in the charities best interests (and whether the terms agreed are the best that can be reasonably agreed)
What is a special buyer?
Someone for whom an asset has special value because of advantages arising from its ownership that wouldn’t be available to other buyers
(e.g. owner of an adjoining property)
(E.g. a tenant buying the freehold interest… not an arms length transaction)
What are reinstatement costs?
For building insurance purposes only
The cost of reinstating a building without making a profit
What is net effective rent and how can you work it out from the headline rent?
The rent that would be agreed for a letting if no incentives were agreed
Straight line averaging:
Total contracted rent payable over a term/term length
What is SDLT?
Stamp Duty Land Tax is charged on an incremental basis depending on the purchase price (falls into rating bands)
Higher SDLT charged in additional resi properties (e.g. second homes/buy-to-let = 3% addition)
1st time buyers can claim relief with a nil rate up to £425k
Resi properties up to £250k/commercial properties up to £150k = no tax
Also payable on new leases
What does VPGA 8 cover?
Inspections and investigations, with particular emphasis on ESG and sustainability issues
Design of building and resilience to climate change
Carbon emissions/energy efficiency
Configuration to use of materials that are associated with wellness
Covers Title/Condition/Services/Planning/Sustainability
What does VPGA 9 cover?
Portfolios - is it worth more together or individually?
if a whole portfolio was placed on market at same time it may flood the market or opportunity to purchase group of properties may get a premium
What does VPGA 10 cover?
Valuer must draw attention to any issues resulting in material uncertainty in the valuation (e.g. market disruptor such as covid)
Overall requirement is report must not be misleading - must comment on any issues resulting in uncertainty at the valuation date
How do you calculate the WAULT?
Add up all the contracted income between now and the time the leases expire
Then divide by contracted annual rent
When would you use time weighting to work out net effective rent?
When rental incentives are given half way through lease
What are the stamp duty bands for commercial properties?
Up to £150k = 0%
£150-250k = 2%
£250k + = 5%
Resi schemes use commercial bands
