Valuation Flashcards
Why is the Red Book important?
Promotes high standards set by RICS.
It underpins the financial market
Can provides formal bank valuations to influence the property market.
Are your void periods in the Office accommodation, Guildford, explicit or implicit?
Depends, when they is a short time until expiry they are explicit as they are specifically inputted in. When lease term is longer, they are implicit as they are reflected in the yield.
What rate do you apply on a basement/first floor?
A/20 for basements and first floor depends on how usable the space is but A/10 potentially.
How would you zone a return frontage unit? And zone a L shaped unit?
Add a percentage to the overall ITZA calculation (based on comparable evidence) for return frontage. For L shaped unit, apply zone B1 to the ‘hidden’ part of shop and apply A/3 rate.
How do you zone a retail unit? What would you do if there was a wall when you were halving back?
Zoning is a valuation technique used to compare retail units that are different sizes. To zone a shop, you need to take measurements every 6.1m deep to create zones and multiply each zone by its width. You then need to take a halving back approach based on the concept that the space becomes less valuable the further away from the frontage it is, and half each zone.
If there was a wall when halving back – check whether structural or cavity. If cavity, disregard it as new tenant may remove it.”
What is considered a good eaves height in an industrial building
8m minimum
What is considered a good site coverage?
40%
Why did you put a higher yield on the top slice in regards to the Office in the City of London
Because the top slice has smaller rental growth potential and a higher risk due to only getting that income at the beginning. You only apply a higher yield to the part of the passing rent which is over rented.
How do you work out the WAULT? (Weighted Average Unexpired Lease Term)
Add up the total contracted income between now and the expiry dates and divide by the total annual income
Why did you use the hardcore method for the office in the City of London and not the term and reversion approach?
I determined that the unit was overrented. The term and reversion method could not be used as I was applying a yield to the market rent and a yield to the overrented portion of the passing rent whereas the term and reversion method applied a yield to the passing rent and to the market rent. A higher froth rate was applied as the over rented portion had a higher risk due to only getting that income until lease expiry.
Did you value each unit separately or did you use a blended yield for Office in Guildford?
I valued each unit separately as there were significantly different tenant strengths that would not be reflected by a blended yield. Some of the units were arranged differently over multiple floors, for example, and therefore valuing them individually could reflect these varying levels of attractiveness more effectively. Valuing it separately also allowed for the scenario where an individual unit was sold off on a long leasehold.
What use class is a gym?
E class
How do you exercise professional scepticism?
Having a questioning mind that critically assesses all evidence that is used in a valuation to ensure it is accurate. Taking a step back and making sure the information you are provided with makes sense and can be relied upon.
What is a litigation purpose valuation?
When there is a legal dispute involving a property, a registered valuer may have to submit a report on the MV or MR of the property involved.
If your comparables are dated but there are no others, what would you do?
I could use modelling to bring the comparables up to date. I could use historic prices, forecasts and other research showing market movement to bring it up to date.
Why do you use a gross yield for residential properties?
As you do not know what the non-recoverable costs will be – so just looking at a gross income (not net).
What is the difference between a term of engagement and a terms of business?
A terms of engagement is specific to the instruction setting out scope, fee, timescale etc whereas the terms of business set out the overall business relationship between two parties and how to terminate it etc
What are permitted development rights?
The right to conversion of a property (e.g. office to residential) without full planning permission. Would review the regulations and planning permissions to ensure property is eligible for the rights and ensure they do not have an article 4 condition against it (pd restricted)
What is included within the RICS Valuation- Global Standards 2022?
The 2022 version includes
-Alignment with international valuation standards (IVS)
-Mandatory professional standards
-Valuation reporting
-Ethical requirements
-Risk management
-Compliance with local laws
-Digital and tech integration, and sustainability.
The most up-to-date version is the 2023 version, which took effect on 31.01.2024. Key features include alignment with IVS 2024, enhanced guidance on sustainability and ESG, updates on tech integration, and managing valuation risk.
What is included within the Red Book UK National Supplement 2023? (NEW?)
Provides UK specific guidance to complement the RICS Global Standards:
-UK Legislation and Regulations
-Property-specific guidance e.g. office, resi…
-Regulatory framework- alines with UK financial regulations
-UK valuation Practice Guidance- covers Loan security values, investment values
-Ethical and professional standards
What is included in the Independent Review of Real Estate Investment Valuation 2022?
Key components in the report commissioned by RICS and led by Peter Pereira Gray:
- Industry challenges and contact: market uncertainty, liquidity, and transparency issues.
- Stakeholder expectations: investor confidence, regulatory scrutiny.
- Recommendations for improved practices: valuer independence, valuation frequency and rotation, transparency and reporting: standardized reporting, disclosure of assumptions, scenario analysis.
- Use of tech and data: data and digital innovation, valuation automation.
- Training and competency of valuers: skills and training, enhanced qualifications.
- Governance and oversight: strengthening RICS oversight, independent regulatory function.
- Long-term trends in real estate: ESG and sustainability, market disruptions.
What are the five methods of valuations?
Investment, profits, DCF, Comparable, Residual
If you undertook a valuation for accounting purposes with an office accommodation, Guildford was it a Red Book Valuation?
This one was not a Red Book valuation. You are not required to provided a red book valuation for accounting purposes, but if the client required to provided one you can.
What are main points within a Terms of Engagement?
- Valuer’s identification and status
- Client’s identification
- Intended users’ identification
- Asset to be valued
- Currency
- Purpose of valuation
- Basis of value
- Valuation date
- Extent of investigation
- Nature and source of information to be relied upon
- Assumptions and special assumptions
- Report format
- Restrictions for use
- Confirmation of Red Book Global/ IVS compliance
- Fee basis
- Complaints handling procedure
- Statement that the valuation may be subject to compliance by RICS
- Limitation on liability agreed
What do you do when you commence a valuation instruction?/ When undertaking a valuation what do you check?
Competence- are you competent to undertake work, correct skills, understanding and knowledge (SUK).
Independence- Think first and then check any conflicts or personal interests.
ToE- set out in writing your full confirmation of instruction to the client. conform the competence of valuer, extent and limitations of the valuer’s inspection must be stated.
Talk me though how you undertake an investment valuation?
Used when there is an income stream to value.
Rental income is capitalised to produce a capital value.
Conventional method assumes growth implicit valuation approach. Implied growth rate is derived from market approach. An implied gorwth rate is derived from the market capitalisation rate (Yeild).
Define MV?
-The valuation date
-Between a willing buyer and a willing seller
-In an arm’s length transaction
-After proper marketing
-When the parties had each acted knowledgeably, prudently and without compulsion
What is the difference between a Term and Reversion approach and a Hardcore approach?
Term and reversion- used for reversionary investment (market rent more than passing) e.g. underrented. Term capitalised until next review/ lease expiry at an internal yield. Reversion to market rent valued in perpetuity at a reversionary yield.
Layer/hardcore method- used for over-rented investments (passing rent more than market rent). income flow divided horizontally. Bottom slice= market rent. Top Slice= Rent passing less market rent until lease event. higher yield applied to top slice to reflect additional risk. different yields used depending on comparable investment evidence and relative risk.
When undertaking the valuation for a Secondary School, Tring, how did you determine the MV was correct?
I undertook comparable research to determine my MV. This was from a range of achieved sales within the surrounding area of the school. To sense check my valuation I determined the residential value of the school
What steps do you have to take when completing a valuation for a loan security purposes?
Further to a standard property valuation you have to:
-Understand lender’s requirements- clarify loan type, loan-to-value ration, security considerations
- Review legal and title docs- title review and leases and tenancy agreements
-Assess planning and zoning compliance- Planning permissions and development potential
-Evaluate the property liquidity
-Perform a risk assessment- market risk, sector-specific risk, environmental risk
- Submit to lender and state whether property is a secure loan?
Talk me though the comparable method of valuation
Search and select comparables
Confirm details and analyse headline rent to give a net effective rent as appropriate
Assemble comparables in schedule
Adjust comparables in schedule
Adjust comparables using the hierarchy of evidence (RICS PS: Comparable evidence in real estate valuation 2019)
Analyse comparables to form option of value
Report value and prepare title note.
What adjustments did you make when determining the MV for a secondary school in Tring
I adjusted the comparables to reflect differences in age, size, condition, location, and any other relevant factors.
Define MR?
-Estimated amount for which an interest in real property should be leased.
-On vals date
-Between willing lessor and willing lessee
-On appropriate lease terms
-Arm’s length transaction
-After proper marketing
-When the parties had each acted knowledgeably, prudently and without compulsion
Define rack rented?
Refers to a property that is being rented out at its full market rent, meaning the highest possible rent that a tenant is willing to pay under current market conditions. Essentially, it reflects the fair rental value of the property in an open market, without any discounts, concessions, or reductions.
Why did you use a 12-month rent free period when valuing an office in Guildford
Market Comparables, lease term and size of property (lease length- longer leases ususally longer rent frees), Tenant covenant strength, other incentives/ alternatives (cash or capital contribution, blended rent)
What are the VPS’s outlined?
VPS1- Terms of Engagement
VPS2- Inspection, investigation and records
VPS3- Valuation reports
VPS4- Bases of value
VPS5- Valuation approaches and methods
What does VPS stand for?
Valuation Performance Standards
How do you perform a DRC (Depreciated Replacement Cost Valuation)
Also known as the Contractor’s Method and should only be used where direct market evidence is limited for specialised properties.
2 steps:
-value of land in existing use (assume planning permission exists)
-add current costs of replacing the building plus fees less a discount for depreciation and obsolescence/ deterioration (use BCIS and then judge level of obsolescence)
What are the different types of obsolescence when performing a DRC?
Physical obsolescence- result on deterioration/ wear and tear over years
Functional obsolescence- where design or specification of the asset no longer fulfils function
Economic obsolescence- due to changing market conditions for the use of the assessment
What is SONIA
SONIA is Sterling Over Night Indexed Average. Is an overnight rate, set in arrears and based on actual transactions in overnight indexed swaps for unsecured transactions in Sterling market. SONIA is a risk-free rate meaning no bank credit risk is included. (Interest rate!)
What is SONIA current rate
4.95% for Sep 2024
What are the three choices of interest rate that can be used for finance costs
Bank of England base rate plus a risk premium
Actual costs that the developer is able to borrow at
SONIA
What is the current Base rate?
5%
What are the 3 valuations approaches set out by the IVS 105
Income- Investment method, profits method, residual
Cost approach- DRC
Market approach- Comparable method
What is a Froth rate?
Froth rate is the level of excess or unsustainable growth in the property market. High froth rate implies a risk that property values could decline if market adjusts to more realistic levels.
