VALUATION Flashcards
In terms of valuation, do you know what the red book is?
The Red book contains mandatory rules, best practice and guidance for valuations for members of the RICS. The latest edition came into affect, 31st January 2022.
What documents does the Red book cover?
RICS Global standards, international valuation standards, RICS national supplement
Can you tell me some key sections of the Red Book?
Introduction, mandatory valuation standards, advisory valuations standards
What are the recent changes to the red book?
Implementation of Valuation Review recommendations
Alignment with development in other relevant global standards and regulations such as the new IVS
Adaption to evolving practices and processes for issues ESG and technological advancements
When will the changes to the Red Book Global Standards become effective?
31 January 2025
What are the basis’s of value under the red book?
Market value, market rent, investment value, fair value
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 arms length transaction after proper marketing and where the parties had each 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 arms length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
What is investment value?
The value of an asset to the owner or a prospective owner for individual investment or operational objectives.
Investment value is an estimate of value of a property to a particular owner or purchaser who may wish to analyse the potential performance against certain investment criteria, for example, a target rate of return, as opposed to those prevailing in the market. Often used in conjunction with DCF
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.
What is synergistic value?
Not defined in VPS 4. defined in IVS 2022.
The result of combination of two or more assets or interests where the combined value is more than the sum of the separate values. If the synergies are only available to one specific buyer, then synergistic value will differ from market value, as the synergetic value will reflect particular attributes of an asse that are only of value to a specific purchaser. The added value above the aggregate of the respective interests is often referred to as marriage value.
Could you tell me what the 5 methods of valuation are?
Comparable, depreciated replacement cost, residual, profits, investment
Can you talk me through the comparable method of valuation?
Look at the attributes of the subject property, search and select comparables based on factors of comparability, confirm and verify details and analyse, assemble the comparables in a schedule, adjust them using the hierarchy of evidence, analyse them to form an opinion of value, report value.
Is there any guidance to follow when considering comparable evidence?
RICS Guidance Note, Comparable evidence in real estate valuation, 1st edition 2019
This outlines the principles in the use of comparable evidence.
How many categories are there in the hierarchy of comparable evidence?
3– A to C
What are Category A comparables?
Direct comparables:
Completed transaction of near identical properties for which full and accurate information is available, this may include data from the subject property itself
Completed transactions of similar real estate for which full data may not be available, but for which enough reliable data can be obtained to use as evidence
Similar real estate being marketed where offers may have been made but a binding contract has not been completed
Asking prices (only with careful analysis)
What are category B comparables?
General market data that can provide guidance:
Information from published sources or commercial databases; its relative importance will depend on relevance, authority and verifiability
Other indirect evidence (e.g. indices)
Historic evidence
Demand/supply data for rent, owner occupation or investment
What are category C comparables?
Other sources:
Transactional evidence from other real estate types and locations
Other background data e.g. interest rates, stock market movements and returns which can give an indication for real estate yields
How did you find relevant comparables?
Inspection of an area to find recent market activity by seeking agents boards
Visit/speak to local agents
Auction results (these are gross prices) – take care as can be special purchaser or insolvency sale
In house records/databases and websites such as EGI
Market sentiment when lack of transactional evidence
Date of evidence is crucial
What is the hierarchy of rental evidence?
New Letting, Lease renewal, rent review (market rent basis), independent expert, opinion, arbitration, asking rents
Can you talk me through the depreciated replacement cost method?
Establish replacement cost – modern equivalent
Adjust replacement cost for age and obsolescence
Add in any site value
= cap value
Depreciate at statutory decapitalisation rate for rating
= annual equivalent/ trental value
What is obsolescence?
The process of becoming outdated and no longer used.
What are the different types of obsolescence?
Physical obsolescence is the result of deterioration/wear and tear over the years
Functional obsolescence is where the design or specification of the asset no longer fulfils the function for what it was originally designed
Economic obsolescence is due to changing market conditions for the use of the asset
Can you talk me though the residual method?
Aim is to establish how much a purchaser should pay for a site. Establish GDV and deduct all costs associated with undertaking the development. Deduct profit and this leave residual land value
What costs would you deduct in residual?
Site prep, construction, sales, marketing, contingency, financing fees
Can you talk me through the profits method?
Annual turnover (income received)
Less costs/purchases
= gross profit
Less reasonable working expenses
=unadjusted net profit
Less operator remuneration
= adjusted net profit know as Fair Maintainable Operating Profit
Capitalise at an appropriate yield (YP) to achieve market value
Cross check with comparable evidence if possible
Can you talk me through the investment method?
Rental income capitalised to produce a capital value.
Conventional method is rent received x YP = market value
How would you carry out your investment method if the property was under rented?
Using the term and reversion method. Term capitalised until the next review/ lease expiry at an initial yield. Reversion to market rent valued in perpetuity at a reversionary yield.
How would you carry out your investment method if the property was over rented?
Layer/hardcore method where income flow is 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.
How do you choose what yield to apply?
Based on comparable evidence
Risk is a major factor when determining yields but other factors are prospects for rental and capital growth, quality of location and covenant, use of the property, lease terms, obsolescence, voids, security and regularity of income, liquidity
Can you tell me some average yields in the current market?
Current yields as at Jan 2024 ; offices 4/5%, high street retail 7%, industrial 5-6%
What does it mean if a yield is all growth implicit?
Risks hidden in selected yield
On the comparable method, can you outline key factors that you would look at to see if it is comparable?
Physical similarity – age, condition, size
Use – same use, planning use class can offer some guidance on same use
Location – same location
Transaction date – closer to valuation date the more comparable transaction
Market conditions – interest rates
Quality and reliability of the source of evidence – details of the transaction
Type of transaction and sale conditions – lease terms
Amount of adjustment required – more adjustment, less reliable
Why would you use one method over another?
Lack of similar properties so depends on the type of property you are looking at
How would you value a property if it was under rented?
Term and reversion
When does the red book not apply?
Red book does not apply to estimated replacement cost figures for insurance purposes.
What is included in terms of engagement?
Identification and status of the valuer, confirmation of the client and any other users of the report to be produced, property to be valued including any tenancies, purpose of valuation, basis of value, valuation date, special assumptions, assumptions and the extent of investigations and any limitations on the scope of work.
How does residual valuation work? What are the steps/inputs?
Stage 1 – assess the best scheme of development for the land
Stage 2 – assess the value of the assumed development on completion,
Stage 3 – assess all the costs of completing the assumed development scheme.
Stage 4 – estimate residual land value
Gross development value less development costs and desired profit = capital value
What are the benefits and drawbacks of the comparable method?
Drawbacks could be limited transaction data, lack of up to date evidence, existence of a special purchaser, lack of similar evidence, limited market transparency
How would you value if there were no comparables?
Contractors method
Difference between assumptions and special assumptions
Assumption is where it is reasonable to accept that something is true without the need for specific investigation or verification.
Special assumption is where an assumption either assumes facts that differ from those existing or that would not be made by a typical market participant
Definition of market value and where would you find this definition
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 arms length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. Defined at VPS 4.
Definition of special purchaser and where would you find this definition
A particular buyer for whom a particular asset has a special value because of advantages arising from its ownership that would not be available to other buyers in a market. Found in the glossary of the Red Book
What valuations are not red book?
There are no exemptions from compliance with PS 1-2 when providing valuation advice. However, there are circumstances where VPS 1-5 may be unsuitable or inappropriate to comply with: Statutory basis, negotiation or litigation, internal purposes, agency, expert witness valuation
What is included within the terms of engagement?
Identification of any other intended users
Identification of the asset being valued
Valuation currency
Purpose
Basis of value
Valuation date
Nature and extent of work
Nature and source of information relied upon
Assumptions and special assumptions
Restrictions on use, distribution and publication
Bases on which fee is calculated
Where are the terms of engagement within the red book?
VPS1
What is an internal valuer?
Employed by company to value internal assets, no third party reliance
What is an external valuer?
Has no material links with the asset to be valued
What are the three steps to undertake prior to commencing with a valuation instruction?
Competence, Independence, Terms of Engagement
Why is due diligence undertaken?
To check there are no material matters, which could impact upon the valuation
What are some statutory due diligence checks?
Business rates, contamination, EPC, Flooding, Legal title and tenure
What are the six steps when undertaking the comparative method?
Search, verify, schedule, hierarchy, analyse, report
When would you use the investment method of valuation?
When there is an income stream to value
What is a yield?
A measurement of investment return. Expressed as a percentage of capital invested.
How do you calculate a yield?
Income/ price x 100
How do you calculate Years purchase?
100/ yield
What is years purchase?
Number of years required for its income to repay its purchase price
What are some key risks that should be considered when arriving at yield?
Quality of covenant, lease terms, voids, security, use of property, market sentiment
What is an all risks yield?
Yield which reflects all the prospects and risks attached to a particular investment
What is a true yield?
Assumes rent is paid in advance, not in arrears
What is a nominal yield?
Assumes rent is paid in arrears
What is a gross yield?
not adjusted for purchasers costs
What is a net yield?
adjusted for purchasers costs
What is an equivalent yield?
average weighted yield when reversionary property is valued using an initial and reversionary yield
What is an initial yield?
simple income yield for current income and current price
What is a reversionary yield?
market rent divided by current price on an investment let at a rent below the market value
What is a running yield?
the yield at one moment in time
What does your choice of investment method depend on?
Whether the rent is equal to market rent, under rented or overrented.
How do you convert from gross to net?
Deduct purchasers costs
What is included in purchasers costs?
SDLT, agent and legal fees
When would you undertake a term and reversion?
When the property is under rented
How yield impacts value?
If increase annual rent, yield increases
If increase yield, capital value decreases
If increase capital value, yield decreases
Why do we carry out conflict of interest checks?
Because as per the RICS rules of conduct valuers are to act with integrity. As part of this we need to identify actual and potential conflicts and not provide services where this is the case unless we do so in accordance with the current edition of Conflicts of Interest.
What is the current edition of conflicts of interest?
Effective 1 Jan 2018
How did you carry out a conflict of interest check?
Check for party, own interest or confidential information conflicts. Looking at previous work carried out. Do I have any personal connection with the property or client. Are we acting for another client
What is a red book valuation?
A formal opinion of value which can be relied upon by an instructing party. Signed off by someone who is part of the registered valuer scheme.
Where are the standards for red book valuations?
Red Book Global Standards
Do all valuations have to comply with the red book?
There is no circumstances where written valuation advice is completely exempt from the red book. Departure for the following circumstances only:
1. Providing agency o brokerage service in respect of the acquisition or disposal of one or more assets
2. Acting or preparing to act as an expert witness
3. Performing statutory functions
4. Valuation purely for internal purposes, without liability, and without communication to a third party.
Which parts of the red book are mandatory?
PS1-2 VPS1-5
What is a title plan?
Show a boundary of an area of land in a registered estate.
Why are terms of engagement issued?
Outline the conditions of the valuation. They also help to define the circumstance and context in which complaints can be made or managed.
When is term and reversion applied
When the rent is below market value
What is a development appraisal?
A financial appraisal of a development. Typically output is development profit although other output metrics can be used.
Please explain you understanding of the rotation rules for valuation contained within the RICS Red Book UK Supplement?
The RICS released an updated UK supplement of the Red Book in January 2022 to update its recommendations around mandatory rotation cycles for regulated valuations. The new rules mean that firms undertaking valuations for regulation purposes will not be able to repeat this service for more than 10 consecutive years. This will require a change or rotation to an alternative valuation firm with the aim of improving transparency and serving the public interest. The new regulations took effect May 2024 with the RICS providing a series of briefings to help the industry understand this new requirement.
Please explain you understanding of the RICS Discounted Cash Flow Valuations Guidance Note November 2023?
This guidance note has looked to provide further clarity around the difference between the Market Value and Investment Value definitions set out under RICS VPS 4. Investment value is defined as the valuation of property that is applicable to a specific investor as opposed to Market Value that is applicable to the wider market as a whole. The guidance note calls for the use of market based inputs when making an assessment of market value using the Discounted Cash Flow method rather than inputs that relate to Investment Value.
What are the different purposes of valuation?
Valuation for financial reporting
Commercial secured lending purposes
Capital gains, IHT, SDLT
What steps would you take following your valuation instruction?
Get details of property
Conflict check
Letter of instruction – singed
Purpose of valuation
Information gathering
Rating, planning, environmental
Inspection & measurement
Research market
Valuation
Write report
Check valuation
Report to the client
Invoice
FIRE STATION - Why did you value the fire station using the contractors method?
Lack of useful rental evidence. Contractors method endorsed by the Lands Tribunal in North Riding of Yorkshire County Council V Bell 1958.
FIRE STATION - Do agents get a say in the valuations of fire stations?
For the 2017 practice note, a GPCR was completed.
FIRE STATION - What was the age and construction of the fire station?
- Red brick with large roller shutter doors.
FIRE STATION - What is a GPCR?
Group pre challenge review is an option offered by the VOA to groups of property occupiers, owners or ratepayers. All participants must sign up to the terms of the GPCR. Exchange of information and discussions about the valuation basis take place when all in the goup have submitted their checks but before they submit their challenges.
FIRE STATION - Can you talk as through the key steps to get to that value?
Estimation of replacement cost
Estimation of adjusted replacement cost
Estimation of site value
Application of the statutory decapitalisation rate
Consideration of the results of stage 4 to see whether represent answer to statutory hypothesis
FIRE STATION - Can you talk me through how you valued the fire station?
Step 1 - estimated the replacement cost, having regard to the GIA of the fire station.
Step 2 - considered the age an obsolesce and made a 55.5% adjusted for age and obsolescence as per the practice note due to age of the fire station.
Stage 3 – land value – 15% of the adjusted replacement cost as this was for land values in the south east.
Stage 4 – apply decapitalisation rate . Fire stations are valued using the higher statutory decapitalisation rate which is 4.4% in England.
Stage 5 – stand back and look
FIRE STATION - What is the purpose of the VOA practice note?
Assist and provide guidance in valuing properties
FIRE STATION - What did the VOA practice guidance note say?
Sets out what to consider in each of the steps of the valuation and the rates to apply.
FIRE STATION - What do you look at when adopting an estimated replacement cost?
Building Costs, external works, location factors, contract size adjustment, professional fees and charges. The figure comes from a rate per m2 set out in the cost guide depending on the size of the fire station. Fire station as 360m2.
FIRE STATION -Where were the external works incorporated into the valuation?
Within the estimated replacement cost as a line entry at a £/m2 basis
They were also in the valuation at a % rate but this is what I removed
FIRE STATION - What were the external works?
Dill yard and forecourt (hard landscaping) and soft landscaping.
FIRE STATION - What are some typical external works for fire station?
Paths, paving, fences, gates, landscaping,
FIRE STATION - Why should external works be reflected in the valuation?
Because accounts for the value of the external space. Calculate the whole area and decuct the footprint of the building
FIRE STATION - When is it applicable to apply as a percentage rate over at a rate per m2?
If the value of the percentage rate is lower than the value from adopted a £/m2.
FIRE STATION - Why did you keep the rate per m2 and not the percentage?
Because the lower of the two approaches it to be adopted.
FIRE STATION - What adjustments did you make at the adjusted replacement cost stage?
Made adjustment for age and obsolescence. This case was 55%.
FIRE STATION - How did you decide on the age and obsolescence figure was 55%?
There are separate scales for age and obsolescence for fire stations. Other scales are for separate and distinct stores, temporary buildings, civils plant and machinery and rateable tanks.
FIRE STATION – What site value did you add in?
The value of the developed land. This was a % rate for the region which the fire station was located in. In this case it was 15% for the south east. Applied as a % of ARC.
FIRE STATION - What is a decapitalisation rate?
Percentage rate applied to the valuation to convert the capital value into an annual rental value.
FIRE STATION - What decapitalisation rate did you apply?
Fire stations should be valued using the higher statutory decapitalisation rate of 4.4% in England therefore I adopted this figure. The higher rate is 3.8% in Wales. A lower de-capitalisation rate is applied where the hereditament is predominantly used as a training facility. Lower rate 2.6% for England and 2.1% for Wales.
FIRE STATION - Why is a decapitalisation rate applied?
To convert the capital value into an annual rental value.
FIRE STATION - How did you agree to the valuation/challenge submission?
I sent correspondence to the agent outlining that I agreed with their challenge submission. I set out the new rateable value and when it was effective from.
FIRE STATION - What was the effective date of the valuation?
Complied list error so dated back to 1st April 2017. No transition required as could correct the RV.
FIRE STATION -Can you talk me through how you adjusted the figures for the obsolescence?
Had regard to the age of the fire station and the percentage adjustments from the age and obsolescence scale for fire stations
Can you give me types of obsolescence?
Physical – result of deterioration/ waear and tear over the years
Functional – where the design or specification of the asset no longer fulfils the function of what was originally designed
Economic – due to changing market conditions for the use of the asset
FIRE STATION - Which obsolescence did you make the adjustment for?
The adjustments was for all types of obsolescence
How did you arrive at the land value?
Practice note - % depending on region, this case 15%
Fire Station - Where is the land value part of the valuation?
Value adopted should reflect all advantages and disadvantages of the site, its location and assume site is cleared of all buildings, all services existing at AVD are available for connection, there is planning permission o the subject buildings and existing use, no development potential exists over and above that for the existing use.
Dawkins V Royal Leamington Spa case
KINGSWOOD - Can you talk me through your comparable evidence on Kingswood?
I looked at comparables sales of similar properties in the locality. Same size. Number of bedrooms. Age. Terraced.
KINGSWOOD - Can you talk me through your investment method in Kingswood?
I sought comparable rental evidence from external sources. I determined a market rent for the property based on this. I looked at yield evidence from auction and looked at property market reports. I determined that an appropriate yield of 5.5% yield. I capitalised the rent into perpetuity to give me a capital value.
KINGSWOOD - What would you have done if the rent was under rented?
Used term and reversion, and capitalised the current rent until the next review at an initial yield then used marker rent on the revision valued into perpetuity.
KINGSWOOD - How would under renting affect yield in valuation?
Under rented element – the term would have a lower yield as less risky.
KINGSWOOD - What was the construction of the property in Kingswood?
Constructed pre-1900. Pitched tile roof. UPVC double glazed windows. Rendered .Mid terrace
KINGSWOOD - What was the valuation date?
Date department of work and pensions requested in order to work out housing benefit/council tax support
KINGSWOOD - What was the purpose of the valuation in Kingswood?
Provided a market valuation of the property for the department of work and pensions in order for them to work out housing benefit/council tax support
KINGSWOOD - What external market reports did you have regard to?
Property market intel for Bristol which determined average rental yields in Bristol
KINGSWOOD - How did you ensure your evidence was reliable?
Used a number of different sources of evidence which helped to increase the reliability of the evidence.
KINGSWOOD - Why did you capitalise the projected rent into perpetuity?
Because I established the market rent.
KINGSWOOD - Why did you place more weight on the comparable method?
Because the comparable evidence was taken from propetys similar to the subject evidence. Some of the yield evidence was from transactions in different locations.
You valued freehold terraced house in Kingswood, how did you calculate yield evidence?
Yield = income / price x 100
To calculate YP in perp = 1/yield x 100
What is YP?
The number of years required for its income to repay its purchase price.
How did market repots feed into your decision as to what yield would be appropriate?
More weight on the comps as own evidence rather than average yield/ general trend in market
Fordingbridge - Why did you choose to adopt the comparable method?
There was evidence of car parking sales within the locality
Fordingbridge - What sources did you rely on?
Internal and external sources, auctions, rightmove
How can you ensure sources are reliable?
Cross check using different sources
Fordingbridge - How did you adjust and weight the comparables?
I adjusted them for their condition, their location, the date of the transaction, the amount of spaces.
Fordingbridge - What did you advise the client?
I advised them of the market value of the car parking spaces at the valuation date.
FORDINGBRIDGE - Who was the client on Fordingbridge?
HM Land Registry
FORDINGBRIDGE - What was the purpose of the Fordingbridge valuation?
To assist HM Land Registry in determining the amount of compensation payable to the claimant for the loss of parking space. Sought in accordance with Schedule 8 or the Land Registry Act 2002.
FORDINGBRIDGE - Other than market value what else did you advise on Fordingbridge?
Advised them on comarpable car parking spcaes, environmental factors observed such as being in low risk flooding area, that the property was not in an underground mining area
FORDINGBRIDGE - How did you determine comapable evidence?
Had regard to comparables at the valuation date, within the locality, condition of the spaces – tarmac or dirt
FORDINGBRIDGE - What assumptions did you make in your valuation on Fordingbridge?
That there were no unusual or onerous restrictions on the parking spaces. Unaffected by any statutory notice.
Wolfscastle - Apart from the market value what advise to you give to your client?
Which scheme would be more viable.
Gross Development Values
Build costs
Impact on values by sensitivity analysis
Wolfscastle – What was the proposed residential scheme?
Two options a 18 unit scheme or a 26 units scheme which included apartments.
Wolfscastle – You mentioned about them requiring demolition, how did you calculate the demolition costs?
Demolition costs were provided by the client within the abnormal.
Wolfscastle – Could you talk me though the steps of valuation process please?
Establish the gross development value of the scheme
Deduct development costs and profit
= residual land value
Wolfscastle – Could you tell me what level of fees you adopted?
6% design professional fees
Wolfscastle – You mention the level of profit, is that developers profit? What level of profit did you include?
18% profit
Wolfscastle - Is it always 18% profit?
No, profit is dependent on level of risk
Wolfscastle – what range of developers profit might be reasonable?
15-20%
Wolfscastle – you mention finance costs, can you tell me what level of costs you included for finance?
7%
Wolfscastle – so you got down to residual land value, what does that represent?
Determines the amount that can be paid for the land for a set development
Wolfscastle – you mention about sensitivity testing, can you tell me what that is?
A method of quantifying risk. Required to analyse key variables such as GDV, build costs, finance rate. Slight changes in key variables can have a large impact on profitability of a development
Wolfscastle – did you advise the client on the outcome of the sensitivity testing?
Preferred mix was 18 unit schme as this is in line with what I though a prudent developer would undertake. Ad
Wolfscastle – did you have regard to any RICS guidance?
RICS Valuation of development property, 1st edition 2019
Wolfscastle - Who was the valuation for?
Cardiff City Council
Wolfscastle - What advice did you give?
Residual land value of the development, advised them of GDV, the outcomes of fluctuations in build prices and GDV and how this would impact on the residual value.
What was the state of the pub? Construction? Age?
The pub was derelict and in a poor state of repair
How does the typography of the site have an impact on the valuation?
Can increase costs due to having to level out parts of the site. In this case where abonrmals for under build and retaining structures.
What planning policy did you have regard to?
Local development plan, affordable housing policy
Ashley Down - How did you determine comparable evidence?
Had regard to sold house prices in the area of comparable properties.
What is GDV?
Gross domestic value – capital value of the completed scheme
How do you work out GDV?
Market value x number of units
Where did you source build costs from?
Building Cost Information Service (BCIS)
Where do BCIS costs come from?
BCIS obtains updates from QS/BS sources and recent contract prices/ tenders agreed.
Are BCIS costs reliable?
Yes as they are obtained from market sources.
Wolfscastle - What was the proposed scheme?
Two proposed schemes – 18 units or 26 units
What is HCA DAT?
Homes and Communities Agency, Development Appraisal Tool.
Are you aware of any other appraisal tools?
Argus Developer
What was the total build cost figure made up of?
Build costs, professional fees, planning fees, marketing, contingency, fianince coss, specific site costs
What profit did you adopt?
18% on the open market, 6% profit on cost for the affordable
Who is included within professional fees?
Quantity siveyors, structural engineers, artictects.
What figure did you adopt for professional fees?
6%
What did you adopt for finance?
7% interest rate which assumes 100% debt funding
How did you time the finance?
Cash flow approach.
Wolfscastle - How long was the build period?
Year and a half
What was the marketing period?
3 months after start on site to 3 months post build completion
Wolfscastle - What was the result of the appraisal?
Residual land value for the development
What is residual land value?
Determines the amount that can be paid for the land for a set development
What is sensitivity testing?
A method of quantifying risk. Required to analyse key variables such as GDV, build costs, finance rate. Slight changes in key variables can have a large impact on profitability of a development
Why is sensitivity testing important?
Highlights how fluctuations can have impacts and therefore helps manage risk
What changes did you make in your sensitivity analysis?
Increase and decrease build costs, increase and decrease GDV by 5%
Why did you make these changes?
These are values that have a big impact on scheme viability.
What is the twin track approach?
Carrying out both a development appraisal and cross checking against comparable land sales
Why did you adopt the twin track approach?
As per RICS guidance – Valuation of development property, 1st edition, 2019
What conclusion did you arrive at after your sensitivity analysis?
That I would adopt blend of MQ and LQ build costs.
If you were led by comparable evidence, what was the purpose of advising the client on the sensitivity analysis?
To demonstrate what happens if construction costs rise or fall and market falls – to help in decision making
ASHLEY DOWN - You mention on Ashely Down that you issued the terms of engagement, what are some of the areas you covered in the terms of engagement?
Identification and status of the valuer, confirmation of the client and any other users of the report to be produced, property to be valued including any tenancies, purpose of valuation, basis of value, valuation date, special assumptions, assumptions and the extent of investigations and any limitations on the scope of work.
ASHLEY DOWN - You talked about carrying out a conflict of interest check, what did that involve?
Checking on internal database to see if we were caring out other work on the property of another client
Checking to see if I had any personal conflict
What act gives leasehold tenants the right to buy the freehold?
The Leasehold Reform Act 1967
ASHLEY DOWN - Talk me through the freehold reversion on flat in Bristol?
After all due diligence, I read the leases and extracted the key information. I researched into comparable evidence to form an opinion of market capital value of the flats at the valuation date. I capitalised the ground rents for the reminders of the existing terms adopting a yield of 6%. I then deferred the freehold value of the flats for the period of the remaining existing term at a yields of 5%. This gave me a present day value.
ASHLEY DOWN - What was the construction of the flats in Ashley down? Age?
Constructed between 1900-1918
ASHLEY DOWN - What did information did you have regard to when carrying out your conflict of interest check?
The property, address, client, search on internal database
ASHLEY DOWN - Who was the client on Ashley down?
The Government Legal Department
ASHLEY DOWN - What assumptions did you make in your valuation?
The tenants are qualified to serve notice to acquire the freehold under the Leasehold Reform, Housing and Urban Development Act 1993. Government legal department deems themselves bound by the provisions of the Act. The tenants have complied with their repairing obligations in there leases and there are no tenants improvements that would material affect the value of the property.
ASDHLEY DOWN - Where there any special assumptions?
No
ASHLEY DOWN - What information did you gather from the leases?
Start of the lease, lease lengths, ground rents
ASHLEY DOWN - Why was the lease information relevant?
Because this enabled me to carry out my investment valuation
ASHLEY DOWN - How did you search for comparables?
External and internal databases of similar age, size, location etc.
ASHLEY DOWN - Why did you need to look at comparable evidence?
To determine the market value of the flats to input into my reversion
ASHLEY DOWN - What was the valuation date?
Date of report
ASHLEY DOWN - What is marriage value?
The result of combination of two or more assets or interests where the combined value is more than the sum of the separate values. If the synergies are only available to one specific buyer, then synergistic value will differ from market value, as the synergetic value will reflect particular attributes of an asse that are only of value to a specific purchase
ASHLEY DOWN - Why didn’t marriage value apply?
Because the length of the remaining leases exceeded 80 years
ASHLEY DOWN - When would marriage value apply?
When there is 80 years or less left on the lease
ASHLEY DOWN - Can you give me an example of marriage value?
If a property is worth £150,000 before lease extended and is worth £200,000 after lease is extended. Marriage value would be £50,000.
ASHLEY DOWN – how would marriage value be calcalulated?
Freehold value – existing leasehold value split 50% between landlord and leaseholder.
ASHLEY DOWN - What did you advise the client?
I advised them of my opinion of the market value of the freehold as at the valuation date.
Ashley Down – why did you carry out a term and reversion valuation?
Because freehold property with a long lease is valued on an investment basis. The freehold interest has no value other than the rental income and the eventual value of the property at the end of the lease when ownership transfers back to the landlord.
Ashley Down – Could you talk me through your valuation process?
I valued two flats in Bristol for disposal purposes. After all initial due diligence, I read the leases and extracted the key information on each of the leases. I researched into comparable evidence to form a market value at the valuation date. This evidence helped me to carry out my term and reversion.
I capitalised the ground rents for the remainder of the existing terms. I then deferred the value of each flat, freehold with vacant possession for the period of the remaining existing term which gives a present day value. No marriage value because length of remaining terms of the flats exceeds 80 years.
Ashley Down – Could you tell me what yield you used for the term and revision?
6% on the term, 5% on the reversion.
Ashley Down – what type of yield was that?
All risk yield – reflects all risks, growth and return
Ashley Down – why did you apply those yields?
Set out in case law.
For term - 6-7% was adopted at Leasehold Tribunal Service. term yield is based on decisions from the Leasehold Tribunal and our general instruction is to use 6% although if it’s something more unusual we can adjust that based on decisions. 7% more appropriate on undesirable low ground rents with no reviews.
Sportelli case was 5% for reversion. Cadogan V Sportelli 2007
Block of flats in prime central London. Tenants were seeking to buy the freehold of their block under the Leasehold enfranchisement legislation. The only issue in the case was the deferment rate that should be applied. Landlord were claiming rate of 3.5% and tenants rate was a rate between 5.5 and 6.5% After 11 day trial with 8 expert witnesses Tribunal determined that the appropriate deferment for all houses should be 4.75%
Ashley Down – You mentioned term and reversion fo this valuation, when might you use a hardcore and layer method?
Where the property is over rented
Ashley down – how long were the leases?
125 years
What was the rent payable?
£250 per annum
Where the any rent review provisions? How long were the review?
No
You carried out term and reversion, how long was your term?
Until lease expiry – 90-120 years
Why does marriage value only apply when 80 years remaining?
This is what is stipulated in Schedule 13 of the Leasehold, Reform and Housing Urban Development Act 1993.
Equation for all risk yield
All risk yield (market rent/ market price) x 100
Equation for Gross yield
Gross yield (income / purchase price)
Equation for net yield
Net yield (income / purchase price + purchase costs)
Equation for initial yield
Initial yield (passing rent/ estimated value or price)
Equation for reversionary yield
Reversionary yield (market rent/ current price
Are you aware there is a new Leasehold Reform Act?
Leasehold Reform Act 2024
Increasing the standard lease extension from 90 years to 990 years. Abolishing ‘marriage value.
