Valuation Flashcards
- What other advice apart from the market value/rent did you give
a. on the security of the loan to the property and whether there was a risk of vacancy
b. The current market for that location
c. Future performance prospectives, refurbishment, covenant strength, likely to renew
- What is a yield?
a. A measurement of a return on an investment expressed as %
- What does a yield include?
a. Factors in risk and prospect of an investment
- What are the four main basis of valuation?
a. Market value
b. Market rent
c. Fair value
d. Investment value
- What is the definition of Market value
a. the estimated amount for which an asset or liability should exchange on the valuation date
b. between a willing buyer and a willing seller in an arm’s length transaction,
c. after proper marketing
d. and where the parties had each acted knowledgeably, prudently and without compulsion.
- What is the definition of Market rent
a. the estimated amount for which an interest in real property should be leased on the valuation date
b. between a willing lessor and a willing lessee
c. on appropriate lease terms in an arm’s length transaction,
d. after proper marketing
e. and where the parties had each acted knowledgeably, prudently and without compulsion
- What is the definition of fair value
a. The price that would be received to sell an asset or paid to transfer a liability
b. in an orderly transaction between market participants at the measurement date
- What is the definition of investment value
a. the value of an asset to a particular owner or prospective owner
b. for individual investment or operational objectives.’
- What is an All Risks Yield? How do you calculate it?
a. It is used on a fully let at market rent property and reflects all the prospects and risks attached to the particular investment.
b. Annual rent / Property value X 100
- What is a Equivalent Yield?
a. Average weighted yield when a reversionary property is valued using an initial and reversionary yield
- What is a reversionary yield
a. Reversionary Yield is the anticipated yield to which the initial yield will rise (or fall) once the rent reaches the
i. Market rent/current price
- Why were the international valuation standards brought into the red book?
a. Promote consistency internationally
- Red book date
a. Released 2021, effective Jan 22
- What are the main updates of the Red Book
a. Must be clear that you are carrying out a RBG valuation.
b. More advise on using profits method for Self-storage, flexible work space and purpose built student housing
c. Sustainability which includes added definitions, high focus on sustainability credentials when inspecting/reporting
d. Higher focus within secured lending which must provide the lender commentary on maintainability of income and future cost liabilities. Due diligence within the report to include storm and flood risks, EPCs and the changing regulations.
- What are the 5 exemptions to RBG Valuations
a. Negotiations/litigation
b. Statutory function
c. Internal purposes
d. Agency/brokerage work
e. Evidence as an expert witness
- How do you become a registered valuer?
a. Must take valuation to level 3 and pass APC to become chartered
b. To register as a valuer you must provide the RICS with
i. Type of valuations
ii. Purpose
iii. Number of
iv. Firms total fee income from RBG valuations in last year
v. Data sources used
vi. Quality assurance audit procedures
vii. History of any negligence claims
- Can you sign valuation reports
a. No, only a chartered surveyor and registered valuer
- Why is PII important?
a. Protects the clients surveyors and 3rd parties against negligence claims
- What is the RICS document for PII
a. RICS Practice Statement Risk, Liability and Insurance 2021
- What is the difference between PII and liability cap?
a. Liability cap is A tailored cap which sets out how much the client can sue me for in the event of a claim
b. PII is what you are covered by your insurers
What is negligence
Negligence is a tort and actionable in the civil courts. Is typically the failure to act with due care causing harm to someone else.
Harm can include personal injury, damage to property, and economic loss.
- Where is PII cover stated
a. In the Terms of engagement
- What is my companies PII cover?
a. My company has a minimum cover set in place which is in line with the RICS minimum requirements for PII insurance but I am unable to provide you with the actual figure as this is confidential
b. The company can only be sued up to the PII cap
- What are the RICS minimum PII cover thresholds?
a. Turnover £100,000 or less = £250,000
b. Turnover £100,001 - £200,000 = £500,000
c. £200,001 + = £1,000,000
d. If new business, estimate turnover and adjust in due course
- What is the difference between Initial Yield and Net Initial Yield
a. Initial Yield is the existing return on the investment
i. Rental income / Capital Value
b. Net Initial Yield takes in costs into account
i. Net rental income (less non-recoverable) / Capital Value + Purchasers costs
- What are purchasers costs?
a. Include Stamp duty, agent fees and legal fees which is up to 6.8%
- What are the 5 methods of valuation?
a. Comparable – finding similar properties to obtain a market rent and value
b. Investment – Where there is a rental income stream to value
i. The rental income is capitalised to produce a capital value.
ii. Others include Layer/hardcore method and conventional method
c. Profits – trade related businesses with a monopoly you would review 3 years accounts to obtain the value
d. Residual – value the land, and the property once finished less costs to build
e. Depreciation Replacement Cost – properties with no comparable or income. Cost to re-build less the depreciation.
- What is included in terms of engagement?
a. This is in VPS 1 (IVS 101)
i. ID and status of valuer
ii. ID of client
iii. ID of any other intended users
iv. Asset to be valued
v. Currency
vi. Purpose of valuation
vii. Basis of valuation
viii. Valuation date
ix. Extent of investigation
x. Assumptions
xi. Confirmation of RBG/IVS compliance
xii. Fee basis
xiii. CHP
- What is contained in particular for a report for secured lending?
a. Mentions EPC’s that are missing, expired due to expire.
b. Essentially informs the lender if they will be able to get their money back should the landlord default. It provides them with risks to flooding EPC’s
- What in particular drives value for an industrial unit?
a. Site cover
b. Access
c. Number of roller shutters
d. Eaves height
- Why was the tenant in Crawley considered a secure covenant?
a. UK Government department and therefore the investment market’s perception considers this to be an undoubted covenant
- Why is Gov department an undoubted covenant?
a. Because unlike a business, the government are unlikely to default on the rent
- How many years had the tenant in Crawley been in occupation?
a. 9
- How many year unexpired for the tenant in Crawley?
a. 4.5
- What comparable evidence did you collate for Crawley?
a. For market rent I used around 10 – 15 comparable found in the local area
b. I then used around 5 recent investment comps to gain investment value. These were all occupied by secretary of state and located in towns such as Bristol, Milton Keynes and St Albans
- What was the market rent and Yield used for Crawley
a. £25 per sq ft
b. 6.5% initial yield?
- Did you factor in the refit to your valuation?
a. Yes, when looking at the valuation should the tenant vacate following the end of the lease I increased the yield slightly, factored in refurbishment costs and applied a longer void period.
- What was included within statutory requirements and due diligence
a. Business rates
b. Tenancy schedule
c. EPCs
d. Flood risk
e. Contamination
f. Planning permissions
g. Reviewing leases
h. Noting rent reviews
- What comparable evidence did you use for Luton?
a. The majority of the property was recently let and therefore rental evidence came from this
b. Investment evidence similar locations such as Gravesend, Watford and Maidenhead
- What is the covenant strength for the property in Luton?
a. There was multiple tenants with a variety of ratings. Overall, it was considered that the overall strength was average and the tenant will meet lease obligations, payment of rent. But their was also increased risk of tenant default.
- What were the pros and cons for Luton?
a. Pros
i. Established industrial location
ii. Variety of unit sizes to suit local market
iii. Close to motorway links and airport
b. Cons
i. Small service yard
ii. Vacant units with associated non-recoverable costs
- What were the valuation stats for Luton?
a. 4.5% equiv yield
b. £12 market rent
c. 35.5m
- What were the pros and cons for Crawley?
a. Pros
i. Good transport links,
ii. Prominent town
iii. Secure covenant
b. Cons
i. Secondary office location
ii. Needs refurb
iii. Short term income due to lease ending in 4.5 years
- What sort of rents might you expect to get for similar offices in Crawley now?
a. For a similar property it is around £20 - £25
- What sort of rents might you expect to get for similar industrial units in Luton now?
a. £10-£15
- What sort of yield would you expect for Luton now?
a. 6-7%
- What sort of yield would you expect for Crawley now?
a. South east market is 8.25% single and 11% multi let
- What is the current office market like?
a. Office market shrunk since covid
b. Investors want high quality
c. Less appetite for refurb/development as high build costs
d. Increased inflation and interest rates caused further shrinkage
e. Optimism of future due to inflation dropping in August
- What is the current industrial market like?
a. During and after covid market boomed
b. Becoming more standard of normal yet still robust
c. Construction dropping due to high build costs
d. Yields have increased due to inflation and interest rates
- Did you factor in the refurb into the yield?
a. Yes I applied a slightly higher yield due to the higher risk that someone would have to invest money for the refurbishment
- Did you use refurb costs for Crawley? What were they?
a. Yes, £100 per sq ft
- Crawley valuation stats
a. 16,500 sq ft
b. Occupied 1 tenant Job Centre
c. Market value £4,250,000 / £258 per sq ft (lettable area 15,00 sq ft)
d. 6.5% EY
e. Market rent £25 per sq ft
- What was my approach for the valuation in Crawley?
a. Used the comparable method to ascertain a market rent and a guide to the yield/ market value. I then used the Augus Enterprise to ascertain the market value which used a term a reversion.
- How did you establish the tenant had a secure covenant for Crawley?
a. It was leased to the government which are viewed as being strong as they wouldn’t default on rent payments etc. It is also more likely for them to renew their lease
- How did the strong covenant impact the valuation for Crawley?
a. I reduced the yield slightly due to there being less risk
- Did you factor in refit costs into the valuation for Crawley?
a. Yes for the valuation of Crawley, I ran two scenarios. The first assuming lease renewal and the second assuming vacation and refurb costs. Assumed 1 year vacant possession to allow for refurb works, time to market and negotiate.
- What was the purpose of the valuation for Luton?
a. Secured lending
- Advantages and disadvantages for Luton?
a. A lot of recent lettings which meant there was interest. It was newly built with sustainability in mind.
b. Disadvantages was it was in a slightly secondary location
- What makes a good comparable
a. Same type/ use
b. Same town/ nearby
c. Same/similar tenure
d. Similar tenancy
e. Similar strength of tenant
f. Similar property size
g. Similar condition
h. Recent transaction
- What is included within the ethical standards of the red book?
a. Highest professional ethical standards
b. Be objective and independent
c. Must be competent, qualified and registered
- What is the purpose of the Red book?
a. To provide mandatory best practice and guidance
b. To ensure highest levels of assurance and maintain public trust in valuation services.
What is an assumption
Valuer accepts something is true without investigation
Tenant remain in occupation
What is a special assumption
accepts to be true and accepted as fact even though it is not
planning permission granted.
Net effective rent
Actual rent paid over the period once rent free deducted
Term 5 years
Rent free 6 months
Rent £50k
Term - rent free (5-0.5=4.5)
True term X rent (4.5X£50k= £225k
Amount received over true term/term (£255k/5=45k p.a)
Term and reversion
Initial yield to term reversionry yield to reversion
Term
YP for x years at x%
Reversion
YP in perp
PV of £1 deferred XYears
