VALUATION Flashcards
Why is the Red Book Important?
Promotes high standards set by RICS. underpins the financial market
can provides formal bank valuations to influence the property market.
What are the RICS Valuation Global Standards and the UK National Supplement (2018)?
Global Standards- ‘Red Book’
New version – 2023- effective May 2024
What are the new rules under the new UK Supplement 2023?
-ESG and Sustainability-VPGA 10
-New Rotation Rules - VPS3
-Depreciated Replacement costs- VPGA1
What is the most recent red book?
2022
What are the five methods of valuation?
Investment, Residual, Profits, Contractors, Comparable.
Explain the profits method of valuation?
-Value based on trading potential (hotels, pubs)
-dependant on profit
-not dependant on location
Method:
annual turnover -costs-working expenses-operators remuneration= adjusted net profit (Fair Maintainable Operating Profit)
FMOP capitalised at appropriate yield = MV
are comparable relevant with the profit method?
for cross check but not as essential.
How many years must you have audited accounts for to use the profits method?
3
When would you use the contractors method?
Absence of evidence
What is an example of the software you use?
KEL and Argus developer
What are some of the limitations of them KEL/Argus Developer?
-training needed
-no room for human error
-accuracy
-sensitive to minor adjustments
What are some of the main factors that influence value?
Size, location, condition, specification.
For the valuations mentioned, where you the internal or external valuer?
External- no links to asset or client.
What three steps when commencing a valuation?
-competence
-conflict of interest
-TOE
What due diligence did you carry out before your instructions?
to check no material matters could impact valuation:
council tax, EPC rating, flooding, fire safety, title and right of way
What are the four basis of Value?
Market Value, Market Rent, Investment Value and Fair Value
What are some examples of a high specfication?
Kitchen-grainate worktops, chrome ceiling light downers, branded appliances
wifi, usb
Why is the red book important?
provides valuations that influence property market.
I see you have only completed valuations that are Red book compliant. When would you not need to be red book compliant?
-communication and negotiation stage
-internal reporting
-agency (to acquire or dispose of an asset)
What are some of the different yield types?
ALL risks, true, nominal, gross, net initial, equivalent, reversionary, running
What is a yield?
measures the return on investment displayed as a %
income/price x 100
what does yield reflect?
risk
How you calculate perpuity?
1/i
what is an incentive void?
RENT free period
how much are purchasers costs?
6.8%
what is a special assumption?
something that isn’t the truth- must be reasonable
eg- development is complete
current base rate?
5.25%
when do you need to pay s106?
-to make a development acceptable for planners
-different for every scheme
-may include, fixing infrastructure or affordable housing
what is the difference between CIL and S106?
CIL= general levy on new development based on additional floor area
S106= between planners and developer to help with permission
what class use is:
Retail: A1
Residential: C1
Industrial: B2
How do you work out the WAULT?
Add total contracted income between now and expiry dates and divide by total annual income
How do you calculate professional fees?
2% sales
10% lettings
What is usually included within professional fees?
architect
project manager
M and E consultant
What finance rate did you use within your appraisal? where did you get this finance rate from?
BOE interest rate, add 1.4% approx for risk
what was base rate during time of your valuation?
2.5-3.5%
Tell me about a section of the red book?
VPS1 TOE (SCOPE OF WORKS)
VPS2 – Inspections, Investigations and Records
VPS3- Valuation Reports (Reporting)
VPS 4- Basis of Value- Assumptions and Special Assumptions
4 : Market Value, Market Rent, Fair Value, Investment Value
VPS5- Valuation Approaches/Methods
What is an example of a VPGA? (Valuation Practice Guidance Application)
VPGA1: Valuation for inclusion in financial accounts
VPGA2: Valuation for secured lending and guidance on dealing with conflict
VPGA3:
VPGA8: Valuation of Real Property Interests (Inspection + Investigation) focus on esg and sustainability. Consider direct and indirect valuation factors
VPGA10: Material Uncertainty -Valuers must raise any issues causing material uncertainty/ Requirement for valuation to not be misleading
What does previous involvement mean?
involvement with borrower within 2 years.
what are some examples of conflict under VPGA 2?
-longstanding relationship with borrower
-valuer will receive fee for introduction to lender
-valuer has financial interest in borrower
-value retained to act in letting or disposal
what are some of the recent red book changes?
VPG 4- Profits method
VPS 2- Inspection and reporting (ESG focused)
In your Enfield example, built in contingency of 10% , what fluctuations were there at the time?
contingency- reflects future event that can not be predicted- reflects risk
lots of fluctuations around build costs and unknowns to the property
What residual method was most appropriate for Enfield?
due to absense of direct comparable land sales to compare subject
land sales-difficult to analyse on basis the value is dependant on the density of development permitted on the land being transacted
Why do you need to pay CIL? How do you work out how much CIL was needed for your Enfield Valuation?
-Community infastructure Levy
-tarrif based charge applies to most new build developments within the borough
-money collected from Levy is used towards provision of essential infrastrucure etc
-for enfleid- £60psm across borough (centre) first adopted it in 2020
-additional sq ft of a property
How does S106 differ to CIL?
S106- agreement between developer and planning authority
-used to reduce impacts that arise from new development
-will differ between developments
-affordable housing, improving roads etc
was there no s106 for enfield?
prior approval of conversion not subject to s106. prior approval of 1st/2nd floor does not attract cil due to no additional floor area- prior approval for the additional floors will attract CIL liability of £100,069.
what are the typical percentages for professional fees?
10% of annual RV - lettings
2% of GDV-sales
What is a special assumption valuation?
somehting that is not true but is taken to be true
must be valid reasonable!
What are finance costs?
100% debt finance over purchasers costs, construction costs and holding period at the end
straight line basis on purchase costs
s curve on construction costs
straight line period at end of holding period
finance rate = base rate + risk factor (2-2.5%)
S curve: usual to assume half the interest would be borrowed for the construction period.
What is Argus Developer, what do you usually input?
valuation software to test viability of a project
inputs= costs/finance/fees
can use it to conduct sensitivity analysis
What is SDLT?
Stamp Duty- - required on all properties above £250,000
What market factors affected contingency at the time of your valuation..?
rising borrowing costs
high levels of inflation
strong demand for specialist labour/building products= increased costs and lower return
Why was the comparable method chosen for Chelmsford?
based on comparable evidence- in line with MR and MV
the comparables were adjusted to reflect age, size, condition and specfication
if comparables are dated and you had no others, what would you do?
historic prices, forecasts and other research to bring market up to date
If you were to zone the chelmsford units- how?
halving back approach
4 zones- A, B, C and remainder
6.1m
concept- space becomes less valuable the further back it is
*if wall when halving back:
1. check structural/cavity
2. if cavity- disregard (tenant may remove)
how did you decide to adjust your chelmsford examples?
size, location, spec
how did you build up the capital values of your retail units in chelmsford?
I used the comparable method to determine an appropriate yield, i then capitalised my MR at yield to give MV
Yield of 8% for chelmsford- what type of yield is this? when pricing the units, did you assume rent free, letting and voids?
capitalised rent at 8% yield (GIY)
made allowance for void of 6-9 months, rent free purchasers costs
what is the hierarchy of evidence used within the comparable method?
CAT A: direct/near identical
CAT B: general market
CAT C: other locations
what was your recommendation for chelmsford?
the property was viable for a loan
SWOT ANALYSIS for Chelmsford?
S- good loco, s106 agreed and signed, parking, outdoor space
W- no parking for retail, flats same size and layout, secondary retail pitch
O- good demand, secure pre lets for retail units, potential to alter layout of flats
T- interest rate votality, fixed price contract had not been signed, base rate increases, rise in inflaiton may effect buyers willingness to enter market
BOOKHAM- why was comparable/investment method chosen?
-yields of comparable properties considered
-investment with income streams to be valued/held as investment
-comprables adjusted to reflect size, location , covenant and lease terms
why didnt you use a blended yield approach for bookham?
tenants were different strengths- not reflected by blended yield
-valuing separately also allowed for sceaniro where an individual unit was sold off on long leasehold.
How did you determine your 12 month Bookham void?
spoke to local agents to get an opinion on the local market
looked at comparable lettings
compared my unit to comparables
evaluated the strengths and weaknesses to see if it would take longer/shorter to let
**applied an NIY of 5.25% into perpetuity (1/5.25)
why did you use hardcore approach and not term and reversion?
Considered upcoming covenant - Tesco (NO RISK)
15 year lease unexpired with no break
no risk on reversion
T and R could have also been used
used hardcore considering passing income on bottom slice to be 0
used top slice at yield of 5.25% x mR deferred 12 months into perp.
what rate did you defer the MR at in hardcore approach?
5.25%
could you not have used T and R?
Yes
the Kel software adopts hardcore
term and r for under renter rented
no reversion risk to consider for t and r
are your void periods for bookham implicit or explicit?
depends, when short time to expiry- explicit as they are specfically inputted in
when lease term is longer, implicit as they are reflected in the yield
why did you consider your properties to be under rented?
due to comparables on the street
explain how hardcore method works?
layer hardcore- over rented investments- income flow divided horizontally.
bottom slice= passing rent
top slice= market rent until next lease event
higher yield applied to top slice
different yields depending on comparable investment evidence and relative risk
how does term and reversion work and why would you use it?
when properties are under rented
term capitalised until rent review/lease expiry at an initial yield
reversion to mr is valued into perpetuity at reversion yield.
reversion yield was used to reflect higher risk of tenant (5 years until expiry)
why did you use T and R method for Bookham?
property was under rented
market rent > passing rent
term capitalised until next lease review expiry at 6%
reversionary at 7%
how might the interest rates in bookham impact rents and values?
higher interest rates= higher borrowing costs
= lower values
difference between hardcore and term and reversion?
hardcore- over rented properties
term and reversion- under rented properties
what did you include for your swot for bookham?
S:location, close to train, retail 1 and 2 occupied/income producing, agreement for tesco in place
W: extensive enabling works, investment under rented prior to tesco.
O: sign lease with tesco, complete works
T: interest rates, rise in cost of living, voids, any failure to comply with works
What is the definition of Market Value?
estimated amount that asset/liability should exchange
What is the definition of Market Rent?
estimated amount property should be leased
What are the four basis of value?
Market Value: estimated amount an asset or liability should exchange
-on valuation date
-between willing buyer/seller
-in an arms lengths transaction
-after proper marketing
-where parties had each acted knowledgeably, prudently and without compulsion
Market Rent: estimated amount a property is leased for
-on valuation date
-between willing buyer/seller
-in an arms lengths transaction
-after proper marketing
-where parties had each acted knowledgeably, prudently and without compulsion
Fair Value: price to pay for asset at measurement date
-adopted by international accounting Standards Board
Investment Value: value of asset to prospective owner / owner (worth)
-measure of worth
What valuation approach did you use when applying your yield in your Chelmsford example?
Market approach
capitalised opinion of yield (8%) on MR (allowed initial void, rent free and purchasers costs)
*Rent of £62,000/0.08=£776,000
Did you sense check your overall rents on a Zoned basis despite what the agents said?
For Chelmsford example- how did you decide on your letting voids and tenant incentives?
By speaking to local agents to see how the market was doing
Through comparable evidence
How did you adjust your comparables and on what basis?
size, location, specification
retail-comparables were generally in better locations- we adopted £22 psf (smaller) and £18 (larger)
residential.
Why did you adopt a contingency of 7.5% rather than 5% of 10% for your Digswell example?
-building was at an age asbestos might have been present
-adopted slightly higher contingency
-stated in report if asbestos was significant then separate allowance needed
How might your inputs change if you did not have planning permission?
-phasing- incorporated longer pre-construction period (6-12 months)
-finance costs - more time more interest may accrue
If the applicant provided you with a copy of their internal appraisal, would you apply their inputs in your Red Book valuation or not?
Yes- in terms of land value (what they paid), some will be pre agreed contracts and therefore will adopt those costs. Value of the units would be my own opinion on value.
What is included within a TOE for a valuation instruction?
VPS1 TOE
Identify Client
Identify Valuer/Intended Users
Valuation Date
Purpose, Basis, Method
Extent of Investigations
Info to be relied upton
Assuptions/SA
Report format
Valuation Currency
restriction on use
fee baisis
What might the developer in a project need finance for?
3 Types of Cost:
-purchasers cost
-total construction/associated costs
-holding costs to cover void periods
What is the method? How might you incorporate finance costs into a development appraisal?
3 costs: purchase, construction, holding
-straight line basis over development period
-s curve over construction
-curve to reflect when the money is drawn down
What is a swap rate?
Market interest rate for a fixed term.
reflects market expectations for future direction of interest rates at central banks.
How did you determine Tesco was a strong covenant?
Dunn and Bradstreet
5A (firm turnover +35m)
2 (low risk)
What is the difference between Market Rent and Contracted Rent?
MR- how much property would get if listed to rent today
contracted rent- how much rent is agreed / being paid
How would you model a single phased development in Argus over a multi phased?
Using different tabs with different timelines for each phase ie- staggered pre-construction period, construction, sales period etc for each phase.
What did you use to inform your finance rate of 7%? was this the debt rate? did you apply a credit rate?
BOE base rate, Sonia ETC. .
credit rates have not kept in place with debit rates
therefore the finance rate is effectively a blend, reflecting debit rates as well as the rates associated with the opportunity cost of committing equity to the scheme.
