Valuation

Question 1

Talk me through how you used the term and reversion method to value the telecommunications mast

Answer 1

To calculate the initial term I capitalised the rent, of £6000, for the remaining 3 year term of the lease at an appropriate yield of 8%.

To calculate the value thereafter, I multiplied the market rent, of £1500 by a yield of 8% in perpetuity.

I used a lower rent after the initial term expired due to the changes in the telecoms market introduced by the new Electronic Communications Code in 2017.

Question 2

What is the definition of market value?

Answer 2

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 where the parties had each acted knowledgeably, prudently and without compulsion.

Question 3

What is the definition of market rent?

Answer 3

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 arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

Question 4

What is the definition of market value for tax?

Answer 4

‘The price which the property might reasonably be expected to fetch if sold in the open market at that time, but that price must not be assumed to be reduced on the grounds that the whole property is to be placed on the market at one and the same time.’

Question 5

What is the definition of marriage value?

Answer 5

An additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum of the separate values

Question 6

What is a special assumption?

Answer 6

An assumption that either assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date.

Question 7

Tell me some of the headings used in a valuation report

Answer 7

1. Identification and status of the valuer
2. Client and any other intended users
3. Purpose of the valuation
4. Identification of the asset to be valued
5. Basis of value
6. Valuation date
7. Extent of investigation
8. Nature & source of information relied on
9. Assumptions and special assumptions
10. Valuation figure(s)
11. Date of valuation report

Question 8

What is the method used to decide which comparables are the most appropriate?

Answer 8

Comparables Heirarchy

Question 9

What are the 5 methods of valuation?

Answer 9

Investment
Comparables
Residual
Profit
Depreciated Replacement Cost

Question 10

Talk me through the comparables hierarchy

Answer 10

Review comparables based on 3 categories

A) direct comparables of contemporary
- near-identical properties completed
- similar assets with data completed
- similar assets which full data may not be available but completed
- similar assets that haven’t completed
- asking prices

B) General market data that can provide guidance
- information from published sources
- Other indirect evidence
- Historic evidence
- Demand/supply data

C) Other sources
- transactional evidence from other types and locations
- other background data (e.g. interest rates etc)

Question 11

What are the 5 exemptions from the Red Book?

Answer 11

1. Expert witness
2. Arbitration
3. Internal purposes
4. Agency
5. Negotiation or litigation

Question 12

What is the documentation that governs how we carry out valuations?

Answer 12

RICS Valuation – Global Standards. Effective from 31 January 2022

Question 13

Why is it important that valuations are correct and to a high standard?

Answer 13

To avoid the surveyor or firm being sued for public indemnity
To protect the repuation of the firm and the RICS
To provide accurate figures for tax and lending purposes for banks and HMRC

Question 14

What is the structure of the Red Book?

Answer 14

2 professional standards
5 VPS’
10 VPGA’s
UK guidance notes

Question 15

Can you give me examples of when you would use each method of valuation?

Answer 15

Comparable
- in hand agricultural land, in hand residential properties

Investment
- assets held as investments e.g. let offices

Residual Method
- building plots and development sites

Profits Method
- assets where the value is linked to the profit

Depreciated Replacement Cost Method
- church

Question 16

What is the CGT base date?

Answer 16

31st March 1982

Question 17

What are the dates of valuation for each type?

Answer 17

Probate = date of death
Lending = date of inspection/report
CGT = Date of disposal

Question 18

Who can undertake valuations?

Answer 18

RICS registered valuers

Question 19

What does VPS stand for? What are they?

Answer 19

Valuation technical and performance standards (mandatory)

Specific, mandatory (unless otherwise stated) requirements and
related implementation guidance

Question 20

What are the 5 VPS’s?

Answer 20

VPS 1 – Terms of engagement (scope of work)
VPS 2 – Inspections, investigations and records
VPS 3 – Valuation reports
VPS 4 – Bases of value, assumptions and special assumptions
VPS 5 – Valuation approaches and methods.

Question 21

What does VPGA stand for? What are they?

Answer 21

RICS global valuation practice guidance - advisory

Question 22

Name some of the VPGA’s

Answer 22

VPGA 1 – Valuation for inclusion in financial statements
VPGA 2 – Valuation of interests for secured lending
VPGA 5 – Valuation of plant and equipment
VPGA 6 – Valuation of intangible assets

Question 23

What are PS1 and PS2?

Answer 23

Professional Standards
1 - Compliance with standards where a written valuation is provided
2 - Ethics, competency, objectivity and disclosures

Question 24

Talk me through the timeline of a valuation

Answer 24

1. Receive instruction
2. Check competence
3. Conflict check
4. Issue ToE
5. Receive signed ToE
6. Gather info
7. Undertake due diligence
8. Inspect and measure
9. Research market
10. Undertake valuation
11. Draft report
12. Get someone to proof read
13. Finalise and sign report
14. Report to client
15. Issue invoice
16. Ensure valuation file in good order to be archived

Question 25

What is ‘All Risks Yield’?

Answer 25

The remunerative rate of interest used in the valuation of fully let property let at market rent reflecting all the prospects and risks attached to the particular investment

Question 26

What are the Parrys Tables?

Answer 26

Parrys tables are a set of tables used to calculate either the value of a £ or the years purchased value. They are a commonly used tool throughout the property industry for valuation purposes.

Question 27

What is meant by an internal and external valuer?

Answer 27

Internal - internal use only and no third party reliance

External valuer - no material links with the assets or clients to be valued

Question 28

What were the changes to the Global Standards 2021 (Red Book Global) in 2022?

Answer 28

• valuations have to be clear if they are RBG compliant or not. Cant be a mix
• reference to the use of profit methods such as self storage and student housing
• definition of sustainability and ESG
• sustainability and ESG should be integral part of considering valuation for secured lending
• indirect and direct valuation relevance such as storm or flood risk and reslience of carbon emissions

Question 29

Explain what the Profits Method involves?

Answer 29

This method is used for an asset such as a hotel or a pub that produces an income/profit.

Can use an audited set of accounts to calculate the turnover that the property can generate and covert it into a capital value

Question 30

Explain what the Residual Method involves?

Answer 30

This is calculated by subtracting the development costs from the gross development value.

Development costs include construction, planning, services, roads, planning gain and developers profits.

Question 31

Explain what the Investment Method involves?

Answer 31

• used when there is an income stream to value
• rental income is capitalised to produce a capital value

Can use term and reversion

Commonly used for land with an agricultural tenant

Question 32

Explain what the Comparables Method involves?

Answer 32

Using information from similiar properties to understand the market data and understand price buyers / tenants are willing to pay

Question 33

Explain what the Depreciated Replacement Costs Method involves?

Answer 33

• should only be used where direct market evidence is limited or unavailable for specialised properties
• sewage works, submarise base, oil refineries etc
• owner occupied property

Value of land in its existing use (assume PP)
Add current cost of replacingthe building plus fees less a discount for depreciation and deterioration

Question 34

Why did you use an interest rate of 8% for the telecoms mast valuation?

Answer 34

Because this the expected return on investment on a telecoms mast for both term and reversion. Additionally, this is a relatively risky investment for the rate of return.

Question 35

What is marriage value?

Answer 35

If the combined value of the assets are worth more than the sum of the assets seperate

Question 36

Would leasing the land at Shawfair impact the capital value?

Answer 36

Yes, the land would be valued under term and reversion as there is a sitting tenant.

Question 37

Are there any tax benefits to contract farming at Shawfair?

Answer 37

No as Shawfair LLP is a business that pays corporation tax and is not subject to IHT

Question 38

What are some reasons for carrying out a valuation?

Answer 38

Tax purposes
Secure lending
Financial Reporting
Investment portfolio performance
Takeovers & mergers
Stock Exchange
Purchase & Sale

Question 39

What were the changes to legislation surrounding telecoms masts in 2017?

Answer 39

• a new Electronic Communications Code 2017 was introduced as part of the Digital Economy Act 2017
• new code aimed to make it easier, cheaper and faster for network operators to deploy and maintain communications infrastructure.
• The new Code introduced a “no scheme” valuation approach. Resulted in lower rents for site providers, as the value of the land is assessed without considering its value to the operator.
• Operators gained enhanced rights to upgrade and share their equipment without additional payment to landowners and stronger rights to assign Code agreements to other operators.

Question 40

Can you talk me through the structure of the Red Book / RICS Valuation - Global Standards

Answer 40

• 2 Professional Standards (mandatory)
• 5 Valuation Practice Statements (mandatory)
• 10 Valuation Application (advisory)
• UK guidance notes for specific matters

Question 41

How did you assess which comparables were best? How did you make adjustments?

Answer 41

I used the comparables hierarchy to evaluate which properties were most similar to the property and then weighted the comparables against the property I was valuing

Question 42

What is the definition of fair value

Answer 42

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

Question 43

What is the difference between fair value and market value?

Answer 43

Market value is the actual price an asset would sell for in the marketplace whereas fair value is a more theoretical value that estimates what an asset should be worth based on objective analysis of its benefits and costs.

Question 44

Which piece of legislation governs Inheritance Tax?

Answer 44

Inheritance Tax Act 1984

Question 45

What is the difference between ToE for secured lending and normal ToE?

Answer 45

ToE for secured lending is a letter of instruction from the bank as pre agreed ToE between Savills and all large banks