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Valuation Flashcards

1
Q

What are the five methods of valuation and when would you use them?

A
  • Comparative
  • Investment - used when there is an income stream to value.
  • Residual - used to value of development opportunity
  • Profits - used for trade related property.
  • DRC (contractors method) - used for specialised/owner occupied properties.
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2
Q

Talk me through a comparable valuation?

A
  1. Inspection and measurement
  2. Search the market for comparables
  3. Verify the comparables with agents (confirm net effectives)
  4. Put the comparables into a spreadsheet.
  5. make necessary adjustments
  6. Analyse and form an opinion of value
  7. Write valuation report
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3
Q

What does the Red Book say about comparable evidence?

A

IVS 105 states that comparables must be adjusted on a qualitative and quantitative basis
- Also states the valuer should document the reasons for the adjustments and how they were quantified

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4
Q

How would you undertake an investment method of valuation?

A

Capitalise the rental income to produce a capital value.

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5
Q

How would you capitalise rental income for investment valuation?

A

Multiply the income by a years purchase

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6
Q

What is a years purchase?

A

The number of years it takes for a property’s income to repay its purchase price.

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7
Q

How do you calculate Years Purchase from a yield and vice versa?

A

Years Purchase = 100/yield

Yield = 100/years purchase

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8
Q

What types of investment valuation methods are there?

A
  1. Conventional/initial yield (growth implicit)
  2. Term and reversion (growth implicit)
  3. Hardcore/layer method (growth implicit)
  4. Discounted Cash flow (growth explicit)
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9
Q

What is a conventional/initial yield method? (Not sure if this is correct)

A
  • It is used for properties let at market rent, on long leases.
  • Current rent (market rent) is capitalised into perpetuity
  • (Market rent multiplied by years purchase = market value)
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10
Q

What is term and reversion?

A
  • Used when Market Rent is more than Passing Rent
  • Rent is capitalised until the end of the term/next rent review
  • The reversion to MR is deferred and capitalised into perpetuity (usually using a higher yield)
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11
Q

What is the hardcore/layer method?

A
  • Used for over-rented properties
  • The income flow is divided horizontally
  • Top slice = passing rent less the market rent
  • Bottom slice = market rent
  • Top slice is capitalised until the next rent review/end of term
  • Bottom slice is capitalised into perpetuity
  • Higher yield applied to the top slice
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12
Q

What is a yield?

A
  • A measure of investment return, expressed as a percentage of capital.
  • Income divided by price x 100
  • Represents risk
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13
Q

What factors affect a yield?

A
  • Location
  • Covenant strength
  • Lease terms
  • Obsolescence
  • Prospects for rental growth
  • Voids
  • Liquidity
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14
Q

What are the different types of yield you can use in an investment method of valuation?

A
  • Initial yield - current income and current price
  • All risks yield - reflecting all prospects and risks attached to the particular investment
  • Equivalent yield - Average weighted yield when a reversionary property is valued using an initial and reversionary yield
  • Reversionary yield - Market rent divided by current price on an investment let at a rent below the market rent
  • Gross yield - Not adjusted for purchaser’s costs
  • Running yield - The yield at one moment in time
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15
Q

Why mate an investor take on a property with a higher yield?

A

If it had the potential for higher rental growth

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16
Q

What are the average yields for key sectors?

A 
Prime offices 3.5-4% 
Secondary offices - 5% 
Prime warehouse/industrial - 4% 
Secondary warehouse/industrial - 5% 
Prime retail - 4.5% 
Secondary retail (high street) - 10%
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17
Q

Would you value a vacant building using an investment method?

A

Yes, you would have to take into account rent free periods.

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18
Q

What is the DCF method of valuation?

A
  1. Estimate a cash flow over an assumed holding period (income less expenditure)
  2. Discount back to the present day using a discount rate (AKA a target rate of return) = NPV
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19
Q

When would you use a DCF?

A
  • Phased development projects

- Non-standard investments (21-year rent reviews)

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20
Q

What is net present value (NPV)?

A
  • The value of a present sum of money compared to what it could be worth in the future if invested at a specified rate.
  • In a DCF if the NPV is positive the investment has exceeded the investors target rate of return
  • If it is negative it has not
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21
Q

What us Internal Rate of Return?

How do you calculate it?

A

IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. The internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero

  1. Input current market value as a negative cash flow
  2. Input projected rents over holding period as a positive value
  3. Input projected exit value at the end of the term assumed as a positive value
  4. Discount rate (IRR) is the rate chosen which provides an NPV of zero
  5. If NPV is more than zero, then the target rate of return is met
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22
Q

How would you carry out a residual valuation?

A

Find comps then: (GDV-TDC-Profit = Land value)

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23
Q

What is the difference between a residual valuation and a development appraisal?

A

Residual: (GDV-TDC-Profit = Land value)

Development appraisal (profitability): (GDV-TDC-Land value = Developers Return)

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24
Q

What are the limitation to the residual approach?

A
  1. Relies on a number of accurate inputs from the valuer.

2. Very sensitive to minor adjustments

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25
Q

How would you undertake the profits method of valuation?

A
  1. Calculate the EBITDA (annual turnover LESS costs/purchases = GROSS profit. LESS reasonable working expenses = Unadjusted net profit LESS operators remuneration = FMOP
  2. Capitalise at an appropriate yield (from comparable transactions)
  3. Cross check with comparable sales evidence
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26
Q

What is the EBITDA and how do you calculate it?

A
  • Earnings before interest, taxation, depreciation and amortisation.
  • Annual turnover less costs, working expenses and operators remuneration.
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27
Q

What is amortisation?

A

Similar to depreciation but for non-tangible asset - e.g. a business’ copyright, or their franchise agreements.

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28
Q

How would you undertake a DRC valuation?

A
  1. Value land in its existing use (assume planning permission exists)
  2. Add current cost of replacing the building plus fees
  3. Less a discount for depreciation and obsolescence/deterioration (use BCIS and then judge the level of obsolescence)
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29
Q

Is the DRC method suitable for Red Book compliant valuations for secured lending?

A

No.

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30
Q

What needs to accompany a DRC valuation?

A

Public sector - statement that the valuation is subject to continued occupation
Private sector - statement that the valuation is subject to adequate profitability of the business.

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31
Q

What is the hierarchy of comparable evidence?

A
  1. Open market lettings
  2. Lease renewals
  3. Rent reviews
  4. Third party determinations
  5. Sale and leasebacks
  6. Inter-company transactions
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32
Q

How would you value a pub?

A

I do not have the experience to effectively value a pub however the profits method would be appropriate.

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33
Q

What steps would you take before completing a valuation? (CIT)

A
  1. Competence
  2. Conflicts of interest
  3. Terms of engagement
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34
Q

What statutory due diligence would you check that may have an impact on the asset’s value?

A
  1. Asbestos register
  2. Business rates/council tax
  3. Contamination
  4. Equality Act Compliance
  5. Environmental matters (power lines/telephone masts etc.)
  6. EPC rating
  7. Flooding
  8. Fire safety compliance
  9. Health and safety compliance
  10. Legal title and tenure
  11. Highways search
  12. Public rights of way
  13. Planning (history, compliance, conservation area etc.)
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35
Q

What is the purpose of the Red Book?

A

To provide a comprehensive set of global valuation standards and ensure consistency and best practice.

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36
Q

What are the different sections of the red book?

A

Part 1 - Introduction
Part 2 - Glossary
Part 3 - Professional Standards (PS) (Mandatory)
Part 4 - Valuation technical and performance standards (VPS) (Mandatory)
Part 5 - Valuation Practice Guidance Applications (VPGA (guidance)
Part 6 - The International Valuation Standards, 2017 (IVS) (mandatory)

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37
Q

What are VPS 1-5?

A

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

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38
Q

What was the purpose of the update from the 2015 Red Book to the 2017 version?

A
  1. To take into account of the significant changes to the International Valuation Standards (IVS) introduced in 2017
  2. Make it clear that Professional Standards (PS) and Valuation Technical and Performance Standards (VPS) are both mandatory and Valuation Practice Guidance Applications (VPGA) are advisory.
  3. Incorporates IPMS and changes to Conflicts of Interest
  4. Currency must be included in ToE.
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39
Q

What us included in a terms of Engagement for a Red Book Valuation VPS 1?

A

a) Identification and status of the valuer
b) Client and any other intended users
c) Purpose of the valuation
d) Details of property site being valued (Details)
e) Basis of value
f) Valuation Date (FD)
g) Extent of investigation (2 Up)
h) Natural and source of information to be relied upon (hinformation)
j) Restrictions on use, distribution and publication (JR)
k) Confirmation of Red Book/IVS compliance (Konfirmation)
l) Limitation on liability statement (Limitation)
m) Currency (millions)
n) Format of the report (nothing)
o) Fee basis :)
p) complaints handling procedure to be made available (CHP)
q) Statement that the valuation may be subject to compliance by the RICS (Q…..RICS)

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40
Q

What is included in a Red Book Valuation Report (IVVDC)

A

a. Identification and status of the valuer
b. Client and any other intended users
c. Purpose of the valuation
d. Details of the property/site being valued (Details)
e. Basis of value
f. Valuation date (FD)
g. Extent of investigation (2 UP)
h. Nature & source of information to be relied upon (hinformation)
i. Assumptions and special assumptions (issumptions)
j. Restrictions on use, distribution and publication (JR)
k. Confirmation of Red book / IVS compliance (Konfirmation)
l. Limitation on liability statement (Limitation)
13. Instructions undertaken in accordance with IVS standards
14. Valuation approach and reasoning
15. Valuation figure (s)
16. Date of valuation report
17. Comment on market uncertainty

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41
Q

When does a valuation not need to be ‘Red Book’ compliant? (AISLE)

A
  1. Valuation is provided for litigation negotiations
  2. For a statutory function
  3. For internal purposes (without liability and not communicated by a third party)
  4. Agency purposes (in anticipation of receiving instructions)
  5. Valuation provided in anticipation of giving evidence as an expert witness
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42
Q

What are the differences between assumptions and special assumptions?

A
  • Assumption - where a valuer can accept something is true without specific investigation.
  • Special Assumption - valuer takes something to be true even though its not (e.g. planning/vacant possession)
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43
Q

What does the Red Book say about Restricted Information (Desktop Valuations) (RIN)

A
  1. Nature of restriction must be agreed in writing in the Terms of Engagement
  2. The possible valuation implications must be confirmed in writing
  3. Valuer should consider if the restrictions are reasonable
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44
Q

What is the VPS Bases of Value Definition of Market Value?

A

Market Value (OBIAW) - 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 acted knowledgeably, prudently and without compulsion.
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45
Q

What is the VPS Bases of Value Definition of Market Rent?

A

Market Rent (OBOIAW) - 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 arms length transaction
  • After proper marketing
  • Where the properties had each acted, knowledgably, prudently and without compulsion.
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46
Q

What is the VPS Bases of Value Definition of Fair Value?

A

Fair Value (TIBA)

  • 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
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47
Q

What is the VPS Bases of Value Definition of Investment Value?

A

Investment Value (TFO)

  • The value of an asset to a particular owner (or prospective owner)
  • For an individual assessment
  • Or operational objectives
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48
Q

What is the definition of ‘Internal Valuer’ in the Red Book?

A
  • A valuer employed by the company to value the assets of the company
  • Valuations are for internal use only and are not for third party reliance
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49
Q

What is the definition of external valuer in the Red Book?

A

A valuer who has no external links with the asset to be valued or the client

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50
Q

What does the red book say about Draft Valuation Reports?

A
  1. Reports must be marked as Draft

2. They must not be relied upon or published (internal only)

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51
Q

How would you value a ransom strip?

A

Stokes v Cambridge (1961) - the value is one third of the uplift in value from the development - however, it is down to the court’s discretion.

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52
Q

What is zoning?

A
  • Zoning is a valuation technique not a method.
  • Calculate rent for Zone A
  • Apply this rate to half the floor area for each zone (each zone is 6.1m)
  • Zone A
  • Zone B = A/2
  • Zone C = A/4
  • Zone D is the remainder = A/8
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53
Q

What is a special purchaser?

A
  • Someone who buys an asset with a value to that specific purchaser.
  • E.g. an adjoining landowner or a tenant purchasing his freehold interest.
54
Q

What is marriage value?

A

Created by a merger of interest - can be physical e.g. adjoining land owner.

55
Q

What is Hope Value?

A

The value arising from an expectation that circumstances affecting a property may change in the future.

56
Q

What does the Red Book say about secured lending valuations (VPGA 2) (ISR)

A
  1. Any previous, current, or anticipated involvement between the valuer and the prospective borrower or the property must be disclosed to the lender (must be disclosed in ToE).
  2. If a valuation uses a special assumption the value must be reported with and without that assumption.
  3. Additional reporting requirements,
57
Q

What are the additional reporting standards for secured lending valuations? (VPGA 2)

A
  1. Comment on the suitability of the property for mortgage purposes.
  2. Comment on any environmental considerations
  3. Comment on any other factors that potentially conflicts with the definition of Market Value
58
Q

Talk me through the requirements/advice in relation to secured lending (red book) valuations (pre report)

A
  • The overriding objective is that the valuer should understand the lender’s needs and objectives, including the terms of the loan being contemplated, and the lender should understand the advice that is being given.
  • PS 2 section 3 is of increased importance, members must at all times act with integrity, independence and objectivity, and avoid conflicts of interest and any actions or situations that are inconsistent with their professional obligations - this is of increased importance for a secured lending valuation.
  • Any conflicts which can be managed must be stated in ToE
  • The valuer should request details of the lending facilities being contemplated by the lender.
59
Q

What does the red book say about valuations with special assumptions in VPGA 2 secured lending? What matters will frequently require consideration?

A

5.4. - Valuations with a special assumption must be accompanied by a comment on any material difference between the reported value with and without that special assumption.

In addition to matters set out in VPS 3 2.2, matters that will frequently require consideration and comment in a report for secured lending include:

  • The current marketability of the interest and whether it is likely to be sustainable over the life of the loan.
  • Comment on the suitability of the property as security for mortgage purposes, bearing in mind the length and terms of the loan being contemplated. Where the terms are not known, the comment should be restricted to general marketability of the property.
  • Any circumstances of which the valuer is aware that could affect the price
  • Any factor which conflicts with basis of value
  • Details of any significant comparable transactions relied upon and their relevance to the valuation.
60
Q

Can you tell me about the additional contents of a VPGA 2 secured lending report of the property is, or will be held as an investment?

A

Additional report contents should include:

  • Summary of the occupational leases
  • A statement of, and commentary on, current rental income, and comparison with current market rental value.
  • Where the property comprises a number of different units that can be let individually, separate information should be provided on each.
  • An assumption as to covenant strength where there is no information readily available, or comment on the market’s view of the quality, suitability and strength of the tenant’s covenant.
  • Comment on the maintainability of income over the life of the loan (and any risks to the maintainability of income), with particular reference to lease breaks or determinations and anticipated market trends - this may well need to be considered in a broad sustainability context.
  • Comment on any potential for redevelopment or refurbishment at the end of the occupational lease.
61
Q

What are some of the typical special assumptions made when providing a valuation report for secured lending (VPGA 2)

A

Typical special assumptions that may arise in valuing this category of real property include whether:

  • a different rent has been agreed or determined, e.g. after a rent review
  • Any existing leases have been determined, and the property is vacant and to let or;
  • A proposed lease on specified terms has been completed.
62
Q

What are the different valuation approaches in the Red Book (MIC)

A
  1. Market approach - (comparable)
  2. Income approach - converting income/cash into a capital value (investment, residual and profit)
  3. Cost approach - (DRC)
63
Q

What is the relationship between RICS Global Valuation Standards, 2017 and the UK national supplement, 2018

A

The UK Red Book, 2018 (effective January 14th 2019) supplements RICS Global Valuations Standards, 2017.

64
Q

What are the Red Book UK Professional and Valuation Standards - mandatory?

A

UK VPS 1: Terms of engagement (scope of work) and reporting: Red Book compliance
UK VPS 2: Terms of engagement (scope of work): supplementary provisions in Scotland.
UK VPS 3: Regulated purpose valuations: supplementary requirements

65
Q

What are Regulated Purpose Valuations?

A
  • Valuations relied on by third parties, who have not commissioned the valuation.
  • They are subject to valuation monitoring
66
Q

What are the 5 types of Regulated Purpose valuations? (FCUTS)

A
  1. Financial statements
  2. Collective investment schemes
  3. Unregulated property unit trusts
  4. Takeovers and mergers
  5. Stock Exchange listings
67
Q

What does the Red Book say about valuations for charities?

A
  • Valuer must follow the requirements of the Charities Act 2011
  • Valuer must comment as to whether the purchase or sale is in the charity’s best interest
68
Q

How is a long-leasehold interest valued?

A
  • Ground rent is deducted from gross income to calculate net rent
  • Net rent is capitalised to calculate Market Value
69
Q

What are SDLT thresholds for commercial property?

A

£0-£150,000 = 0%
£150,001 - £250,000 = 2%
Over £250,000 = 5%

70
Q

How is SDLT calculated for new leases?

A

The total across the term is NPV’d at RPI

NPV up to £150,000 = 0%
NPV over £150,000 = 1%
NPV over £5,00,000 = 2%

71
Q

What is SDLT for residential?

A 
Up to £125,000 = 0%
£125,001 - £250,000 = 2%
£250,001 - £925,000 = 5% 
£925,001 - £1,500,000 = 10%
Over £1,500,000 = 12%
72
Q

What is WAULT and when would you use it?

A
  • Weighted Average Unexpired lease Term

- Used when selecting an investment yield for a multi-tenanted property

73
Q

What is the RICS Valuer Registration Scheme?

A
  • A monitoring scheme for all valuers carrying out Red Book Valuations
  • To improve quality and raise status of valuers as a profession
74
Q

How would you account for contamination in a valuation?

A
  1. Do not provide any advice until a specialist report is commissioned.
  2. Caveat the advice with an appropriate disclaimer
  3. Deduct the remediation costs from the site’s GDV
75
Q

How do you value a premium for a surrender and renewal?

A
  • The cost of the premium relates to the change in value of the leasehold interest.
76
Q

How did the Red Book apply to your Biggleswade valuation?

A

PS1-2 were of mandatory application though I was excepted from VPS 1-5 as it was for internal purposes.

77
Q

What pre-instruction checks did you carry out Biggleswade? (CIT)

A
  1. Competence
  2. Conflicts of interest
  3. Terms of Engagement
78
Q

Why did you use an RLV? (Biggleswade)

A

Vacant land - development opportunity.

79
Q

How did you assess planning and development potential (Biggleswade)?

A
  • I gave consideration of published planning policies recognising that they heavily influence future additions to the supply of particular types of building (VIP 12).
  • I consulted national and local planning policy including the local plan and density matrix to be the main guide.
  • I used land and sale comps with planning to ensure that what the local plan is stating is in reality happening on the ground.
  • Consulted the planning team to ensure my assumptions were accurate.
80
Q

How did you calculate GDV (Biggleswade)?

A

I analysed comparable evidence to form an opinion of sales rates for new build apartments in the area.
- I then multiplied the sales rate by the area for each unit to calculate the total GDV of the scheme.
I had an awareness to the unit mix and sizing.
- I therefore gathered comparable evidence for one and two bedroom properties which I would then use to calculate a blended rate to use within the model.

81
Q

What evidence did you consider and why (Biggleswade)?

A

I considered 1, 2 bedroom new build evidence.

82
Q

What costs did you deduct (Biggleswade)?

A 
Transaction costs (SDLT, agent, and legal fees) 
Construction costs (contingencies, professional fees, build costs, planning costs)
Post construction costs (marketing costs, sales and legal fees, finance costs and developer's profit).
83
Q

What was the outcome (Biggleswade)?

A

• Best comparable was a new build scheme with a similar sales rate
• Total units on site: 30 (11 affordable = 36.7%)
• Site area 0.16Ha (0.4 acres)
• Build cost: £145 psf
• Build cost affordable: £115psf
• Sales rate: 1 bed £400psf /2 Bed £375psf
• Sales rate affordable: 1 bed £207psf/ 2 bed £192psf
• Private ground rents: £250/unit
• S106: £2,500 PER DWELLING
- Timescale (6+12=18) = 36 months
• Profit on GDV 20%
• GDV = £5.2m
• Final valuation figure: £1.2m
• 20% profit on GDV to take into account risk of planning (policy compliant scheme relatively low risk)

84
Q

How did you incorporate Affordable housing onto your valuation? (Biggleswade)

A

I consulted our conduction team for the build costs/rate and the affordable housing team at one of our agent firms and asked them for an estimation of sales rates for a scheme in Biggleswade which they provided me with an estimated rate.

85
Q

Talk me through your desktop valuation.

A
  1. I reviewed the lease
  2. I researched rental comparable evidence and investment comparable yields
  3. Verified comparable evidence
  4. I capitalised the Passing Rent until the end of the 1 year term @ initial yield of 5.5% (PV’d @ 5.5%)
  5. I capitalised the reversion back to market rent in perp at reversionary yield of 6.5% accounting for a suitable level of void and tenant incentive which I had established through market research (deferred using PV£ 27 months for remaining length of term + refurb (3 months + letting period 6 months + rent free 6 months)
  6. I added the two capital values together to get £708,14.
  7. I then multiplied this by two to account for the 2 units.
  8. Subtracted the capital refurbishment cost of £71,259 and letting cost of £4,751 (both PV’d 12 months) – only if asked
86
Q

What assumptions/yield did you use (west Thurrock)? What was the final valuation?

A
  • Size: 4,433sq ft
  • 12 months left on the lease
  • Current Rent: £36,00 (£8.12psf)
  • Market Rent: £48,763 (£11psf)
  • All Risks Yield (term): 5.5%
  • All Risks Yield (Reversion): 6.5%
  • Valuation figure: £708,142 x 2 = £1,416,284
  • Best comparable was an industrial unit of similar size in the same industrial park
  • Rental growth is strong for industrial market
87
Q

Did you adhere to the red book requirements for desktop valuations?

A

No as I was assisting an RICS registered valuer who had inspected the site. However I am aware that if I had been writing the report myself I would need to;

  1. Nature of restriction must be agreed in writing in the Terms of Engagement
  2. The possible valuation implications must be confirmed in writing
  3. Valuer should consider if the restrictions are
88
Q

How did your investment calculation reflect the income profile (West Thurrock)?

A

The property was slightly under-rented so I used a term and reversion method of valuation where I modelled rental uplifts at lease expiry. I capitalised the passing income at 5.5% and reversionary income yield at 6.5%

89
Q

How did you apply the Hierarchy of evidence?

A
  • I focussed on recently completed transactions for which full data was not available but which sufficient evidence could be obtained (comparable evidence RICS paper)
  • Open market lettings only.
  • Did not use any asking prices or historic prices
90
Q

How did you calculate net effectives?

A

Net effectives were available on Costar.

91
Q

How did you adjust the yield for West Thurrock?

A

Adjusted yield based on comparable evidence e.g. location, quality, eaves height, covenant strength, lease terms.

92
Q

How did you deal with Purchaser’s costs (West Thurrock?)

A

I assumed full purchaser’s costs of approximately 6.5% in my valuation (the valuation is basically the gross value minus purchaser’s costs and refurbishment costs). Purchaser’s costs are made up mainly of stamp duty (c.5%) and agents and legal fees.

93
Q

What factors affected value (West Thurrock)?

A

Lease terms, covenant strength (less so as there was only 12 months left), location (proximity to motorway), specification of the unit. eaves height, age of building etc.

94
Q

What else affects value other than covenant strength/location/value?

A

Condition/EPC rating/Business Rates/Legal Title/Asbestos/Planning use

95
Q

What are the purposes a valuation may be required?

A

Secured lending, disposal, acquisition, development opportunity.

96
Q

What are the VPS 4 bases of value?

A

Market Value – ‘The estimated amount for which an asset or liability should exchange’ (OBIAW)
• 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 knowledgably, prudently, and without compulsion

Market Rent – ‘The estimated amount for which an interest in real property should be leased’ (OBOIAW)
• On the valuation date
• Between a willing lessor and willing lessee
• On appropriate lease terms
• In an arm’s length transaction
• After proper marketing
• Where the parties had each acted knowledgably, prudently and without compulsion

Fair Value (TIBA) 
•	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.

Investment Value (TFO)
• The value of an asset to a particular owner (or prospective owner)
• for individual assessment
• or operational objectives.

97
Q

Whats the difference between market value and fair value?

A

Market value is in an arms length transaction after proper marketing.

98
Q

What is VPS 1?

A

Terms of engagement (minimum requirements)

99
Q

What is VPS 3?

A

Valuation report minimum requirements

100
Q

Why was the red book updated?

A
  1. Now takes into account the significant changes to the International Valuation Standards (IVS) introduced in 2017.
  2. Make it clear that Professional Standards (PS) and Valuation technical and performance standards (VPS) are both mandatory, and valuation Practice Guidance Applications are advisory.
  3. Now incorporates IPMS and changes to conflicts of Interest.
  4. Currency must now be included in ToE.
101
Q

What are the changes in the Red Book?

A

Changes include:

  • Glossary now defines valuer and valuation
  • The former exemptions to the use of the red book are now exceptions
  • It also includes the new requirements for members dealing with Conflicts of Interest and the adoption of IPMS.
  • When the use of the Red Book is not mandatory as set out in VPS 1, the emphasis is on the preparation of appropriate terms of engagement to suit the specific case in an acceptable business format.
  • VPS 1 includes 3 additional requirements for terms of engagement.
102
Q

Did you inspect the site in Biggleswade?

A

Yes. I noted factors affecting value including, heights of neighbouring properties, proximity to transport, proximity to amenities (e.g. high street 200m away)

103
Q

What was included in your Internal Terms of Engagement (Biggleswade)?

A

a. Identification and status of the valuer
b. Client and any other intended users
c. Purpose of the valuation
d. Details of the property/site being valued
e. Basis of value
f. Valuation date
g. Extent of investigation
h. Nature & source of information to be relied upon
i. Assumptions and special assumptions
j. Restrictions on use, distribution and publication
k. Confirmation of Red book / IVS compliance
l. Limitation on liability statement
m. Currency
n. Format of the report
o. Fee basis
p. Complaints handling procedure to be made available
q. Statement that the valuation may be subject to compliance by the RICS

104
Q

Why did you choose the residual method? (Biggleswade)

A

Because it was a vacant piece of land and offered strong development potential.

105
Q

How else could you measure the site? (Biggleswade)

A

Trundle Wheel

106
Q

What is a limitation of Promap?

A

It is sometimes difficult to see exactly where the boundary is. Inspection to clarify should first be undertaken.

107
Q

How did you analyse your comparables? (Biggleswade)

A

I analysed comparable evidence to form an opinion of sales rate for new builds apartments in the area. I then multiplied the sales rate by the area for each unit to calculate the total GDV of the scheme. I had awareness to the unit mix and sizing. Should there be any irregularities within the unit mix or sizing, I would price each individual unit using comparable evidence which provided me with a blended rate psf to use within the model.

108
Q

How did you establish profit? (Biggleswade)

A

Market assumption which I arrived at in consultation internal development team. If it already had planning may have reduced.

109
Q

How did you arrive at 35% affordable housing? (Biggleswade)

A

After consulting local planning policy

110
Q

What relevant information did you analyse (Biggleswade)?

A

Local and national planning policy, comparable sales evidence, BCIS

111
Q

How did the red book apply to your Biggleswade Valuation?

A

As it was for internal purposes VPS 1-5 didn’t apply.

112
Q

What pre-instruction checks did you carry out (Biggleswade)?

A

Competence and conflicts of interest

113
Q

What assumptions did you make for Biggleswade? What was the outcome?

A
  • Site: Vacant plot of land Biggleswade, Bedfordshire
  • Best comparable was a new build scheme with a similar sales rate
  • Total units on site: 30 (11 affordable = 36.7%)
  • Site area 0.16Ha (0.4 acres)
  • Build cost: £145 psf
  • Build cost affordable: £115psf
  • Sales rate: 1 bed £400psf /2 Bed £375psf
  • Sales rate affordable: 1 bed £207psf/ 2 bed £192psf
  • Private ground rents: £250/unit
  • S106: £2,500 PER DWELLING
  • Profit on GDV 20%
  • GDV = £5,129,276
  • Final valuation figure: £1.2m
114
Q

How did you incorporate affordable housing into your valuation?

A

Slightly lower build costs and the sales rate I arrived at after consulting one of our agent’s affordable housing team.

115
Q

What was the initial credit approval process?

A

It is something we do for that particular client – for their internal purposes. It’s just to assist the bank to see if the Property would work for them in terms of their LTV ratio etc. – they don’t actually lend based on the credit paper.

That’s why a full secured lending report is done later on with full due diligence on planning, legal etc – there is no loan drawdown until the full report has been approved and solicitors complete a Report on Title.

116
Q

Explain your use of the term and reversion method for West Thurrock.

A
  1. I reviewed the lease
  2. I researched rental comparable evidence and investment comparable yields
  3. Verified comparable evidence
  4. I capitalised the Passing Rent until the end of the 1 year term @ initial yield of 5.5% (PV’d @ 5.5%)
  5. I capitalised the reversion back to market rent in perp at reversionary yield of 6.5% accounting for a suitable level of void and tenant incentive which I had established through market research (deferred using PV£ 24 months for remaining length of term + refurb (2 months + letting period 6 months + rent free 6 months)
  6. I added the two capital values together to get £708,143.
  7. I then multiplied this by two to account for the 2 units.
  8. Subtracted the capital refurbishment cost of £71,259 and letting cost of £4,751 (both PV’d 12 months) – only if asked
117
Q

What if West Thurrock had been overrented rather than under rented?

A

I would have used the Hardcore/layer method

118
Q

How would your Biggleswade valuation differ without planning?

A

I would increase the profit %

119
Q

What yield did you adopt for the industrial unit valuation?

A

Initial yield and reversionary yield

120
Q

What does the red book say about desktop valuations?

A
  1. Nature of restriction must be agreed in writing in the Terms of Engagement
  2. The possible valuation implications must be confirmed in writing.
  3. Valuer should consider if the restrictions are reasonable
121
Q

What value add potential did the property offer?

A

The property was tired and the value add potential came from the potential to be refurbished and increase the market rent.

122
Q

Why did you feel you were competent to take on an industrial valuation in West Thurrock?

A

I felt that by immersing myself in the market and gathering comparable evidence, speaking to local agents that I could provide a competent valuation.

123
Q

Can you tell me a few things about the UK industrial market take up/supply/speculative development?

A
  • Q4 2018 take-up totalled 11.1 million sq ft, taking the annual total to 35.9 million sq ft, representing an increase of 30%.
  • E-retailers were the most active group in 2018 accounting for 26% of the annual take-up, with Amazon alone taking 5.3 million sq ft
  • This year there is 17% more space under construction (6.9 million sq ft) than the five year average, with more schemes likely to come forward during the course of the year.
  • The rise in speculative development will continue to test prime rents, with record rents recently being achieved in a number of submarkets, particularly in the South East but also in the prime regional markets
124
Q

Can you tell me a few things about the South East Industrial Market?

A
  • Performing very strongly
  • Occupier confidence has improved which in turn has seen increase in demand and take-up.
  • Current availability is 49% second hand and 51% speculative
  • Demand still outstripping supply and very low yields being achieved particularly for newly built stock.
  • Prime rents in the Eastern M25 industrial market grew 4.4% to the end of Q1 2019
  • The largest transaction in Q1 2019 was the 365,000 sq ft D&B commitment by Amazon at Goodman’s London Medway Commercial Park, Kingsnorth
125
Q

Can you tell me a few things about the Essex industrial market?

A
  • Supply fell to 1.5m sq ft at end of Q1 2019
  • Take up 2018 1.3m sq ft
  • Q1 2019 £360,000 sq ft take up
  • Prime industrial rents in Essex have seen growth of 2.5% up to the end of Q1 2019
  • Average prime headline rent in Thurrock now £10psf (average rent free 9 months)
  • Average capital values for prime stock around £190psf
126
Q

Can you describe the West Thurrock building for me?

A
  • Minimum eaves height 7m
  • Steel Portal Frame
  • Externally clad in a mixture of steel profile cladding and low height brickwork
  • Unit has first floor office area
  • Independent shutter access
  • Concrete external yard areas
  • Secured yard with palisade fencing
127
Q

What is the Hierarchy of comparable evidence?

A
  1. Open market lettings
  2. Lease renewals
  3. Rent reviews
  4. Third party determinations
  5. Sale and leasebacks
  6. Inter-company transactions
128
Q

How do you calculate net effectives?

A
  • Use straight line method
  • 3 month standard for fit out which market already assumed
  • Deduct rent free from total rental value
  • Divide new total over the term
129
Q

When would you use all risks yield?

A
  • Where reversion is unknown
  • factors in yield
  • factors in risk
130
Q

How do you account for purchaser’s cost in an investment method?

A

When you capitalise the income stream you get a gross yield divided by 1.068

131
Q

What factors affected your adjustments for West Thurrock?

A
  • Proximity to motorway
  • Specification
  • Condition
  • Site coverage (40% typical - anymore is over developed (bad)
  • Typical minimum eaves height 8m (newer building higher the eaves)

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