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JR APC REVISION OCT 2024 > Valuation And Loan Security > Flashcards

Valuation And Loan Security Flashcards

1
Q

Can you describe the timeline of a valuation instruction

A

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

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2
Q

5 Methode of valuation

A

Comparable
Investment
Profits
Residual
Depreciated replacement cost

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3
Q

3 approaches of valuation

A

Costs
Income
Market

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4
Q

What are the 5 VPS in the red book

A

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

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5
Q

Market value definition

A

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

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6
Q

Market rent definition

A

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

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7
Q

Fair value definition

A

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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8
Q

What is PS1 in the RICS Red Book

A

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

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9
Q

What is PS2 in the red book

A

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

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10
Q

Talk me through a term and reversion calculation

A

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

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11
Q

How long after a building becomes vacant so you have to pay business rates

A

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

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12
Q

Talk me through a hardcore and layer valuation

A

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

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13
Q

What are the 3 categories of evidence in the hierarchy of evidence- comparable evidence in real estate valuation 1st edition 2019

A

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

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14
Q

What is a yield

A

A measure of investment return expressed as a percentage of capital invested

Calculated by income/price x100

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15
Q

All risks yield definition

A

Used in the valuation of fully let properties at market rent reflecting all the risks and prospects attached to the particular investment

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16
Q

Gross yield

A

The yield not adjusted for purchasers costs

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17
Q

Net yield

A

The resulting yield adjusted for purchasers costs

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18
Q

Equivalent yield definition

A

Average weighted yield when a investment property is valued using an initial and reversionary yield

Blend between the initial and reversionary yield

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19
Q

Initial yield definition

A

Passing income / current price

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20
Q

Reversionary yield

A

Market rent / market value

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21
Q

Difference between initial and reversionary yields

A

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

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22
Q

What is WAULT and how do you calculate it

A

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

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23
Q

What are commercial stamp duty rates

A

0-150k is 0%
150-250k is at 2%
Anything above 250k is at 5%

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24
Q

How is stamp duty changing for residential properties

A

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

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25
Q

Stamp duty has recently increased on second homes

A

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

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26
Q

What are office capital values in your area

A

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

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27
Q

What are office rents in your area

A

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

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28
Q

Office yields in your area

A

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%

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29
Q

What are industrial rents in your area

A

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

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30
Q

What are industrial capital values in your area

A

Secondary stock between 70-90 psf

Modern warehouses that are well presented 100-120 psf

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31
Q

What are industrial yields in your area

A

Prime between 5-6% stuff I deal with is between 7-8% usually

32
Q

What are retail rents in your area

A

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

33
Q

What are retail yields in your area

A

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

34
Q

Retail capital rates psf

A

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

35
Q

What’s happening in the industrial market

A

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

36
Q

What’s happening with the office market in Leeds

A

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

37
Q

How is the retail market in your area what changes have you seen

A

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

38
Q

What is the profits method

When would you use it and how do you do it

A

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

39
Q

What is a dcf

A

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

40
Q

What is DRC method of valuation

A

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

41
Q

When did the red book become effective

A

31st January 2022

42
Q

Structure of the red book

A

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)

43
Q

What is VPS1

A

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

44
Q

VPS2 inspections, investigations and records

A

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

45
Q

VPS3 Valuation reports

A

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

46
Q

VPS4

A

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

47
Q

Investment value definition

A

Value of an asset to a particular owner for individual investment or operational objectives

48
Q

VPS5

A

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

49
Q

VPGA2-

A

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

50
Q

Red book national supplement 2023

A

Came effective on 1st May 2024

Provides extra guidance for UK VPGAs

UK VPGA10 incorporates new ESG principles into commercial secured lending

51
Q

UK VPS3 Regulated purpose valuations

A

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

52
Q

Margin of error on a valuation

A

Standard residential property 5%
One-off commercial property 10% and if there are exceptional features could be as high as 15%

53
Q

What is hope value

A

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

54
Q

What is marriage value

A

Created by a merger of interests
Can undertake a before and after valuation and calculate the difference in marriage value

55
Q

Stamp duty on new leases

A

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

56
Q

What is the BofE base rate

A

4.75%

57
Q

How to calculate a net effective rent

A

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

58
Q

What are the aims of the VRS Valuation registration scheme

A

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

59
Q

When would a property not be suitable for loan security

A

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

60
Q

What is happening to the red book

A

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

61
Q

What is included in the UK national supplement

A

UK PS 1

UK VPS1-3

UK VPGA1-17 with UKVPGA10 loan security

62
Q

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

A

I would decline in doing so as fee cutting is unethical

63
Q

What factors do you take into account when quoting fees

A

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

64
Q

When did last business rate come to effect

A

April 2023

65
Q

What should comparable evidence be to be relevant

A

Similar to subject
Comprehensive (multiple pieces of evidence)
Recent
Arms length transaction
Verifiable
Open market

66
Q

What information is needed for the VRS

A

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

67
Q

What is the red book

A

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

68
Q

Disadvantages of KEL

A

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

69
Q

Lvl2 valuation Wakefield

A

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

70
Q

Lvl 2 valuation new builds in dewsbury

A

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

71
Q

Industrial unit brighouse

A

Higher market value with vacant possession than with a lease in place

Had 2 years remaining on lease from an occupier across the road

72
Q

Multi-let unit in wyke Bradford

A

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

73
Q

Loan security purposes val lvl2 retail unit Leeds city centre

A

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)

74
Q

Office unit lvl 2 loan security val

A

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

75
Q

Block of flats in Bradford

A

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

76
Q

Hmo valuation headingley

A

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

JR APC REVISION OCT 2024 (15 decks)

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