Valuation And Loan Security Flashcards
Can you describe the timeline of a valuation instruction
1.Firstly I would receive instructions from the client.
2. Is check competence and independence ensuring no conflicts
3. Id issue Terms of engagement and receive a signed copy from the client
4. Id then undertake due diligence and gather information such as tenancy schedules
5. Inspect and measure
6. Research market and analyse comps
7. Undertake valuation and draft report
8. Have valuation checked by another surveyor
9. Finalise and sign the report
10. Report to client and invoice
11. Ensure file is in good order for archiving
5 Methode of valuation
Comparable
Investment
Profits
Residual
Depreciated replacement cost
3 approaches of valuation
Costs
Income
Market
What are the 5 VPS in the red book
VPS1 Terms of engagement
VPS2 Inspections, investigations and records
VPS3 Valuation Reports
VPS4 Bases of value Assumptions and Special Assumptions
VPS5 Valuation Approaches and Methods
Market value definition
The estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arms length transaction, after proper marketing where the parties have each acted knowledgeably, prudently and without compulsion
Market rent definition
The estimated amount for which an interest in 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 and where the parties had each acted knowledgeably, prudently and without compulsion
Fair value definition
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 PS1 in the RICS Red Book
Compliance with standards where a written valuation is provided
Application is when does the valuation have to be red book compliant
Red book exceptions include
Advice for negotiation or litigation
Statutory return or tax purposes
Agency purposes
Internal purposes not communicated to any third party
Expert witness
An IRC is not a written opinion of value
What is PS2 in the red book
Ethics, competency, objectivity and disclosures
Members undertaking valuations must act within accordance of the RICS Rules of conduct
Application: should apply professional scepticism when reviewing information and data before relying upon it
Talk me through a term and reversion calculation
Yes first of all I would calculate the term period by applying an appropriate yield until the lease comes to an end or the next break option.
Then I’d apply a higher yield reflecting the higher risk of achieving market rent. And capitalise this into perpetuity before deferring if for the relevant period of time. To build in void costs etc.
To calculate the deferred multiplier I do 1/1.X for how many years it has to be deferred for
How long after a building becomes vacant so you have to pay business rates
You don’t have to pay business rates for the first 3 months after it becomes unoccupied
Industrial properties get a further 3 month relief totalling 6 months
Talk me through a hardcore and layer valuation
Used for over rented properties we split the passing rent into 2 categories the hardcore which income which is stable and typically the market rent which is capitalised at a lower yield and the top-slice which is the over-rented section of the rent which is capitalised until the next break period at a higher yield showing the increased risk of the property being over-rented. The sum of these 2 figures provides market value
What are the 3 categories of evidence in the hierarchy of evidence- comparable evidence in real estate valuation 1st edition 2019
Category A direct comparables
Category B general market data
Such as historic evidence and information provided by published sources or commercial databases like house price indices
Category C other sources of data
Transactional evidence from other real estate types and locations
Other background data such as interest rates and stock market movements
What is a yield
A measure of investment return expressed as a percentage of capital invested
Calculated by income/price x100
All risks yield definition
Used in the valuation of fully let properties at market rent reflecting all the risks and prospects attached to the particular investment
Gross yield
The yield not adjusted for purchasers costs
Net yield
The resulting yield adjusted for purchasers costs
Equivalent yield definition
Average weighted yield when a investment property is valued using an initial and reversionary yield
Blend between the initial and reversionary yield
Initial yield definition
Passing income / current price
Reversionary yield
Market rent / market value
Difference between initial and reversionary yields
Initial yield reflects the current income return based on existing rent whilst reversionary yield reflects the potential income return based on the estimated rent after lease expirations
What is WAULT and how do you calculate it
Weighted Average Unexpired Lease Term
Total rent remaining/ Annual rent
So add up all the rents until the next break or expiry then divide by passing annual rent and it will give a figure in years
What are commercial stamp duty rates
0-150k is 0%
150-250k is at 2%
Anything above 250k is at 5%
How is stamp duty changing for residential properties
Adding an extra band back in so instead of getting 0% on the first 250,000 it will be on the first 125,000 and 2% for 125-250k,
When it comes into effect I will familiarise myself with this
Stamp duty has recently increased on second homes
Stamp duty has increased by 2%
Raised from 3% to 5% for anything up to £250,000
8%to10% from 250k to 925k
13% to 15% from 925k to 1.5M
And 15% to 17% anything higher than 1.5M
What are office capital values in your area
In the Leeds area office capital values range from 80-200 psf given the size specification and locality of the subject.
Prime office values range from 300 all the way up to 500psf in Leeds city centre although I have not worked on office blocks like this
What are office rents in your area
Between £10-15 psf in the suburbs of Leeds like headingley, kirkstall etc but prime rents are closing in on £40 psf so I’d say between 30-40psf for prime office rents in Leeds city centre
Office yields in your area
On my patch which consists of more secondary stock I see yields ranging from 7.5-9% I understand prime office yields in Leeds could be as low as 6 or 6.5%
What are industrial rents in your area
Typically for the type of stock i deal with it’s between £5-8 psf but prime industrial yields in the Yorkshire area 10-13 psf
Prime industrial locality - Thorpe park, cross green industrial estate
What are industrial capital values in your area
Secondary stock between 70-90 psf
Modern warehouses that are well presented 100-120 psf
What are industrial yields in your area
Prime between 5-6% stuff I deal with is between 7-8% usually
What are retail rents in your area
Between 40-60 psf for retail units in prominent locations in the suburbs of Leeds such as headingley and kirkstall and outside of the city centre
Prime city centre retail can be 200 psf and previously before Covid as high as 300 psf ITZA
Some mixed use standard stock I deal with a shop with a flat above in tertiary localities are usually 15-20 psf ITZA
What are retail yields in your area
City centre 6-7%
All depends on the unit Itself size locality specification and the tenant in situ
Usually around 9-10% I deal with
Retail capital rates psf
Headingley and secondary locations typically range from 100-200 psf.
We don’t get much prime retail stock to value but I believe it’s around 400 psf in Leeds city centre
What’s happening in the industrial market
Although we’re passed the pandemic boom the fundamentals of industrial unit still remain strong and we expect continued rental and capital value growth in the industry.
Fundamentals include rising land values, constrained supply pipe line and high occupier demand
What’s happening with the office market in Leeds
Demand remains strong for grade A sustainable offices with high bream ratings in the city centre. However, yields have been softening over the recent years for more secondary office stock due to the increase in people working from home since Covid
How is the retail market in your area what changes have you seen
The retail market remains stagnant there is still demand for prime retail units on desirable pitches and it’s the secondary stock that have experienced a decline in demand.
In Leeds specifically there has been a lot of change converting older vacant offices and retail units into residential apartments or mixed-use units adapting to market needs
What is the profits method
When would you use it and how do you do it
Not my area of expertise and is usually used on trading premises such as pubs, hotels, care homes etc. it is used when the value of the property depends upon the profitability of the business.
Calculated by multiplying the net profit EBITDA (earnings before interest taxation depreciation and amortisation) by a multiplier to achieve market value and can sometimes be cross checked with comparable sales evidence
What is a dcf
A discounted cash flow is a form of the income approach to valuation. It’s a model that seeks to determine the value of a property by examining its future net income or projected cash flow from the property and then discounting the cash flow to arrive at an estimated current value of the property.
It provides a net present value NPV and if this figure is positive it exceeds the investors target rate of return and if negative it has not achieved the target rate of return
I have not completed one of these since my time at university and would not feel comfortable advising on one. If I were in a position where I had to do a dcf i would seek help from one of my colleagues who has experience doing DCFs so I could learn from him and once I had completed a few and believed I could advise on them myself I’d start undertaking dcf valuations myself
What is DRC method of valuation
Depreciated replacement cost used for specialised properties with limited comparable evidence includes lighthouses, castles and submarine bases
Calculated by value of land in its current use plus the cost to replace the building taking a discount for its current condition
NOT SUITABLE FOR RED BOOK LOAN SECURITY VALUATIONS-Red book 2021 compliance
When did the red book become effective
31st January 2022
Structure of the red book
Part 1 introduction
Part 2 glossary
Part 3 professional standards (PS)
Part 4 Valuation technical and performance standards (VPS)
Part 5 valuation applications (VPGA)
Part 6 International valuation standards (IVS)
What is VPS1
Terms of engagement
Must include
1) identification and status of valuer
2) identification of client
3) identification of any other intended users
4) The asset to be valued
5) currency
6) purpose of valuation
7) bases of value
8) valuation date
9) Extent of investigation
10) nature and source of info to be relied upon
11) format of the report
12) assumptions and special assumptions to be made
13) fee basis
14) CHP made available
15) confirmation of red book compliance
16) statement that the valuation may be subject to compliance by the RICS
17) limitation on liability agreed PII
VPS2 inspections, investigations and records
inspections, investigations and records
Valuers must take steps to verify necessary information being relied upon for a valuation
When conducting a desktop valuation: restriction must be agreed in terms of engagement
Possible valuation implications confirmed in writing
Valuer should consider whether restriction is reasonable with regard to the purpose of the valuation
The restriction must be referred to in the report
Proper records must be held of the inspections and investigations. Storing of site notes
Revaluations just also be agreed in terms of engagement and referenced in report
VPS3 Valuation reports
Reports must include
Identity and status of valuer
Client and other intended users
Purpose of val
Identification of asset
Basis of value
Valuation date
Nature and source of info relied upon
Assumptions and special assumptions
Restrictions on use, distribution and publication
Instruction undertaken in accordance with IVS standards
Valuation approach and reasoning
Valuation figure
Date of valuation report
Comment on market uncertainty
Preliminary valuation advice- must be marked as a draft and stated to be used for internal purposes only
Any changes made must be noted on file with reasoning provided
VPS4
Bases of value
Definitions of market rent
Market value
Fair value
Investment value
Equitable value-not used in uk
Liquidation value- not used in uk
Investment value definition
Value of an asset to a particular owner for individual investment or operational objectives
VPS5
Valuation approaches and methods
Valuers are responsible for choosing and justifying their valuation approach and use of model
In some cases, more than one approach may be appropriate
VPGA2-
Valuations for secured lending
Any previous, current or anticipated involvement with the prospective borrower or the property to be valued must be disclosed to the lender
Previous involvement-last 2 years
Red book national supplement 2023
Came effective on 1st May 2024
Provides extra guidance for UK VPGAs
UK VPGA10 incorporates new ESG principles into commercial secured lending
UK VPS3 Regulated purpose valuations
For valuations such as financial reporting,
Stock exchange
Takeover and mergers
Collective investment schemes
Used where the valuation is to be relied upon by a third party or the public
When a property is purchased or a fee has been accepted through the firm they cannot value it for 12 months
A maximum single engagement period of 5 years and a minimum 3-year break after rotating
A max period of 10 years before rotation of valuation firm
Margin of error on a valuation
Standard residential property 5%
One-off commercial property 10% and if there are exceptional features could be as high as 15%
What is hope value
The value arising from any expectation that future circumstances affecting the property may change
Such as future prospect of securing planning permission for development of land
What is marriage value
Created by a merger of interests
Can undertake a before and after valuation and calculate the difference in marriage value
Stamp duty on new leases
0-150k is 0% (125k if resi)
150k to 5M is 1%
Over 5M is 2%
Net present value on a lease- total rent payable over a lease term divided by an annualised discount rate
What is the BofE base rate
4.75%
How to calculate a net effective rent
Rent left to be payable divided by number of years in the lease
For example 10,000 per year on a 5 year lease with 6 month rent free
5,000 year 1
10,000 year 2,3,4,5
45,0000 total divided by 5= £9,000 per year
£9,000 net effective rent
What are the aims of the VRS Valuation registration scheme
To improve the quality of valuation and ensure the highest professional standards
To meet the RICS requirement to self-regulate effectively
To protect and raise the status of the valuation profession as the leading expertise in valuation
When would a property not be suitable for loan security
If it’s a leasehold property with less than 50 years remaining
If the property is smaller than 30sqm except London
If the property has contamination issues or Japanese knotweed but quite often we would report this and caveat the report to say if cost of works is substantial it may materially impact our valuation
What is happening to the red book
Updating and becomes effective January 2025
Updated to reflect increasing technology and ESG standards and also to keep up with the recent IVS standards published in January 2024
What is included in the UK national supplement
UK PS 1
UK VPS1-3
UK VPGA1-17 with UKVPGA10 loan security
If you were approached by a customer or broker saying the job is yours if we match or do better than a competitors fee what would you say
I would decline in doing so as fee cutting is unethical
What factors do you take into account when quoting fees
The difficulty of the job and what comparable evidence will be available
Distance to property
Complexity of subject
Estimated value of subject as higher value stock comes with a bigger risk on our PI
When did last business rate come to effect
April 2023
What should comparable evidence be to be relevant
Similar to subject
Comprehensive (multiple pieces of evidence)
Recent
Arms length transaction
Verifiable
Open market
What information is needed for the VRS
Type of valuations
Purpose of valuations
Number of valuations
Firms total fee income from red book Vals in last year
What data sources are used
Quality assurance audit procedures in place
History of any negligence claims
What is the red book
It is a set of mandatory global standards and guidance issued by the RICS for property valuation. It ensures valuations are performed consistently, ethically and in compliance with internationally recognised best practices
Disadvantages of KEL
May struggle with complex scenarios
Require staff training to understand the systems
Input dependency, human error may occur putting data in wrong which will effect value
Like any technology, valuation software can be prone to bugs or errors which can go unnoticed,
Cybersecurity risks could risk data breaches of confidential information
Cost of software typically expensive
Lvl2 valuation Wakefield
2 industrial units, internal accounts applied a GIY as found some quite good investment evidence on EIG sold at auction. (Converted the costar evidence into giy from niy as niy Is sharper.)
Typo meant to say market value not fair value (but fair value is the definition) and when it’s used for IFRS not something I undertake
Lvl 2 valuation new builds in dewsbury
15 new build houses hanging heaton, new build premium etc. part complete but we valued on the assumption that they were complete in line with our terms of engagement
4 main house types different rate psf for each based on plot size and size of dwellings
Industrial unit brighouse
Higher market value with vacant possession than with a lease in place
Had 2 years remaining on lease from an occupier across the road
Multi-let unit in wyke Bradford
One of the units was inferior to the others this was slightly older and over-rented with lower eaves height. Hardcore and layered this
Capitalised niy for other 2 units
Loan security purposes val lvl2 retail unit Leeds city centre
Ground floor and basement zoned the property and came to conclusion it was over rented so did a hardcore and layer valuation.
Built in void period by slightly increasing the yield
(sense checked by how much rent would be deducted from MV)
Office unit lvl 2 loan security val
North Leeds in chapel Allerton
Recently signed 5-year lease had 3 month rent free so calculated net effective rent
Applied standard NIY and cross checked against comparable evidence on a rate psf basis
Block of flats in Bradford
8x 1-bedroom apartments fully let with signed ASTs provided, pretty poor but dates and liveable specification.
Found block evidence for apartments and applied a gross yield.
I also then provided individual values for each apartment on a rate psf basis using comparable evidence and applied a 10% discount for investors which came out at a similar figure to the subject of around £375,000
Hmo valuation headingley
Sorry the property is situated in article 4 area as headingley is in article 4.
10 bedroom hmo upon inspection but only had planning permission to be used as a 6-bed hmo and a license for a 6-bedroom HMO. We therefore valued the property as a 6-bed using 6-bed comparables and provided an MV2 for a 10-bed based on the assumption that planning will be granted and a license will be available to a purchaser
