Valuation Extra Qs Flashcards
What is an internal valuer and how does this role vary from an external valuer?
Internal valuer is employed by the company whereas the external valuer has no material links with the asset to be valued or the Client
-> we always use external valuers
What is an internal valuer and how does this role vary from an external valuer?
Internal valuer is employed by the company whereas the external valuer has no material links with the asset to be valued or the Client
-> we always use external valuers
How are fees agreed for a Red Book Valuation?
Flat fee or % of property value (1-2%)
What are the main rules concerning regulated purpose valuations and what are they?
Monthly and quarterly fund valuations - regular
Regulated purpose valuations are relied on by 3rd parties who have not commissioned the valuation
5 purposes:
1. financial statements
2. stock exchange listing
3. Takeovers and mergers
4. Collective investment schemes
5. uregulated property unit trust
Secured lending is NOT a regulated purpose valuation as they are not relied upon by a 3rd party or in the public interest
What are the main rules concerning regulated purpose valuations and what are they?
Monthly and quarterly fund valuations - regular
Regulated purpose valuations are relied on by 3rd parties who have not commissioned the valuation
5 purposes:
1. financial statements
2. stock exchange listing
3. Takeovers and mergers
4. Collective investment schemes
5. uregulated property unit trust
Secured lending is NOT a regulated purpose valuation as they are not relied upon by a 3rd party or in the public interest
How often should a firm valuing your properties be rotated?
RICS recommend every 7 years due to quality control measures
How often should a firm valuing your properties be rotated?
RICS recommend every 7 years due to quality control measures
What is RICS monitoring and when do they do this?
RICS professional regulation team inspect and check:
- length of time acting for the Client for regulated valuation purposes
- Extent and duration of firms relationship with Client
- Whether % fee income from th Client is less than or more than 5% of the total fee income
What would happen if your incestment team had purchased a property and a fee had been paid and your valuation team valued the property?
Then it cannot be valued for regulated purpose valuation for 12 months by the same firm
What is the 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)
You are instructed to value a brownfield site, previously used as an oil depot. How would you deal with the matter of contamination in your report?
Not had experience so would take advice from a colleague
- Would undertake desktop survey to see previous use on the site
- Would not carry out valuation until contamination report is available
- Would carry out valuation and caveat advice -> special assumption of no contamination
- Would carry out valuation abd subtract remedial works from value
You are instructed to value a brownfield site, previously used as an oil depot. How would you deal with the matter of contamination in your report?
Not had experience so would take advice from a colleague
- Would undertake desktop survey to see previous use on the site
- Would not carry out valuation until contamination report is available
- Would carry out valuation and caveat advice -> special assumption of no contamination
- Would carry out valuation abd subtract remedial works from value
What are the rules concerning Client confidentiality for a Red Book valuation report?
General duty to treat information relating to a Client as confidential, where it is not in the public domain
Can you use the term ‘forced sale’ for a valuation assumption?
No it was abolished
- COnstraintes should be set out in the toE (i.e short marketing period)
Can you use the term ‘forced sale’ for a valuation assumption?
No it was abolished
- COnstraintes should be set out in the toE (i.e short marketing period)
Can you discuss a draft valuation report with your Client?
preliminary valuation advice can be givenm but must be marked as a draft and for internal purposes only, which cnanot be relied upon
WHat must you make sure of when undertaking a valuation?
- competance
- independance
- Terms of engagement
Tell me about an investment valuation which you have undertakn?
I used comparable and investment method to value an industrial unit (Unit 24 Bourne) for internal purposes
Looked at recent market leasing and investment comparable evidence to establish the rents and yields
Used the simple investment method as let at market rate
-> MR x YP in perp @5.5%
Tell me about an investment valuation which you have undertakn?
I used comparable and investment method to value an industrial unit (Unit 24 Bourne) for internal purposes
Looked at recent market leasing and investment comparable evidence to establish the rents and yields
Used the simple investment method as let at market rate
-> MR x YP in perp @5.5%
How would you choose which yield to adopt?
Market comparables:
- date of transactions
- location
- covenant within property
- use of property
-> increase yield for additional risk
if over-rented look at equivalent yield
WHat makes good comparable evidence?
A property with same or very similar characteristics as the property you are valuing
-> location, size, term, tenant etc
WHat makes good comparable evidence?
A property with same or very similar characteristics as the property you are valuing
-> location, size, term, tenant etc
What is the investment method of valuation?
used when there is an income stream to value
-> rental income is capitalised to give you the capital value
How do you calculate yield?
Puchase price/ Rent = YP, 100/YP = Yield
//
Rent/Purchase price x 100 = yield
How do you calculate yield?
Puchase price/ Rent = YP, 100/YP = Yield
//
Rent/Purchase price x 100 = yield
What is the simplest form of the investment method?
MR x YP in perp @ yield = MV
Talk me through the term and reversion method
Used for reversionary investment when the market rent is more/less than the passing rent
-> the term is capitalised until next review/lease expiry
Reversion to MR is valued in perpetuity at ARY (increased yield accounting for increased risk)
-> PV of £1 for term
Talk me through the term and reversion method
Used for reversionary investment when the market rent is more/less than the passing rent
-> the term is capitalised until next review/lease expiry
Reversion to MR is valued in perpetuity at ARY (increased yield accounting for increased risk)
-> PV of £1 for term
Talk me through the hardcore / layer method
Used for over-rented invetment -> income is divided horizontally
-> bottom slice = MR
-> top slice = passing rent less MR
- higher ARY applied to top slice for additional risk
- Both bottom and top slice YP in perp
What is the principle of zoning? Example of a shop you have measured?
Ive not measured a shop but would measure NIA
Zoning is a measurement technique based on halving back
-> 20ft zones (30ft zones for oxford street and bond street)
What is NPV?
Net Present Value -> Sums of all discounted cash flows
How would you value a hotel or pub or care home?
Profits method -> where profitability determines the value
How would you value using the profits method?
I would not - decline or pass to colleague
Purpose is to value specialist properties with insufficient market evidence
My understanding of the methodology is:
- Annual turnover less operating costs = unadjusted net profit
- less tenant remuneration/share = adjusted net profits
- -> Capitalise at appropriate yyield
When have you use the comparable method of valuation: give 3 examples
- produce the market rent of an office unit at the paddocks
- Establish rent and yield in an RLV at prospect house
- Investment valuations to establish the level of market rent and yield to adopt
What are normal purchasers costs and why are they deducted?
5.8% (SDLT 4%, agent 1%, legal 0.5%, VAT)
Deducted from gross purchase price to give net purchase price
Gross to net yield = gross yield / costs (1.058)
What does the Red Book say about hope value
Market value can include an element of hope value arising from the expectation that circumstances affecting the property may change in the future
However, amount must be limited to the extent that would be reflected in offers made by prospective purchasers in the open market
How would you devalue a letting of a shop which has rent free periods of 6 months
Establish whether the period was for an inducement or fot fitting out works
If i felt that a 3 month RF for fitting out was appropriate i would devalue the additional 3 months as an inducement to get net effective rent
How would you devalue a letting of a shop which has rent free periods of 6 months
Establish whether the period was for an inducement or fot fitting out works
If i felt that a 3 month RF for fitting out was appropriate i would devalue the additional 3 months as an inducement to get net effective rent
What statutory enquiries do you need to undertake when carrying out a valuation of a shop?
Planning enquiries (use)
Contamination / environmental enquiries (e.g floding)
Do you have to be a RICS registered valuer to produce a Red Book valuation?
yes
Do you have to be a RICS registered valuer to produce a Red Book valuation?
yes
How do you value a submarine base or lighthouse?
I wouldn’t -> not competant
However i understand you would use the depreciated cost replacement method:
- Value the site using comparable evidence
- How much would it cost to reinstate the property
- Less depreciation for obsolescence
- Take into account professional / planning / finance fees
What are the main drivers that impract upon property values?
- Location, tenure, lease terms
- Number of tenants in situ
- Physical attributes of property
- Tenant covenant strengths
- Market conditions
- Alternative uses / development potential
When can a desktop valuation be undertaken for a Client?
- Nature of restriction agreed in ToE
- Implications of restriction agreed in writing
- Is restriction reasonable?
- Specifically refer to restriction in reprt
What are the limitations of auction & results on the analysis of yields?
There may be a special purchaser
Whats the difference between Market Value and Investment Worth
Market value is what the market would pay and worth is individual to an investor
WHy might you use a dual capitalisation rate to value a leasehold interest
So the valuer can take into account the depreciating nature of the asset
How do you deal with deleterious materials in a valuation report?
Must be reported in the report
Common to make assumptions regarding existance of materials and recommend specialist advice
WHat steps can you take to reduce the risk of negligence when undertaking a valuation?
- ensure competance
- no conflicts interest
- ensure files are up to date
- ensure correctsteps taken and correct evidence is used
- have it checked / reviewed
How can resitrictive covenants affect value?
absolute covenant -> big impact
Qualified covenant -> little impact
How do you have regard to an EPC in your valuation report?
You have to state what it is
What is the Valuers Registration Schme? is it a good thing?
Scheme to regulate and monitor
- Improve quality of valuation and ensure high standards
- Meet RICS requirement to self-regulate
- Protect and raise the status of teh valuation profession as the leading expertise
Good thing -> strict regulation reduces negligence claims
What do you look for when inspecting for valuation purposes?
Any material matters that may impact value
How would you value a retail building?
Investment method
How would you go about calculating the market rent for a retail unit?
Use comparable evidence to find an appropriate Zone A basis
Tell me about the investment method approach and inputs to yield?
Assumed there was an income stream
Paid consideration to market rents and yields using comps, which could be discounted if necessary depending on rent frees, voids and marketing periods
If you are aware of certain special assumption, how is this incorporated into your valuation?
Made very clear in terms of engagement and in report
In portfolio valuation, woud you use fair value or market value?
Market value but depends on instructions
Why might fair value valuation be required?
If it was in accordance with International Financial Reporting Standards (IFRS)
What is the difference between depreciated replacement costs and reinstated valuation?
Reinstatement makes no allowance for depreciation and/or obsolescence
What sort of properties would be valued on DRC?
Unique properties when there are no comparables or income stream
When would you use a residual valuation?
Development project -> find site value
What do you take off before calculation of a residual valuaiton at the end?
Developers profit, finance cost, slaes costs
What do you take off before calculation of a residual valuaiton at the end?
Developers profit, finance cost, slaes costs
How do you calculate GDV?
Comparable evidence -> MR and Yield -> capitalise to get GDV
What is teh margin for errior on valuations?
Typically 5-15%
What is IAS 37?
International Accounting Standards
-> requires cost of surplus property to be shown on balance sheet as an operating cost
How would you carry out a valuation for insurance purposes?
Work out value of Land and cost of reinstating the property (BCIS website for costs) - adopting GIA costs, demolish, planning, building regulation fees
- no deductions for depreciation or obsolescence
- NOT Red Book compliant
If you are asked to value a piece of Land for a potential development but there is a right of ay (easement) over the Land. How would you do it?
Ransom strips -> Stokes v Cambridge Corporation -> 1/3rd of the uplift in development site
What lease terms affect value?
BARURS
- Break clause
- Alienation
- Repairing obligation
- User clause
- Rent review
- Scurity of tenure
What is the difference between a yield and a discout rate?
A yeild is the rental income divided by the purchase price -> inverse relationship
A discount rate is the required rate of return on an investment
What is the risk-free rate?
Return on 10-year gilts
Approx 3.62% at the moment
What is IRR?
Rate of interest (discount rate) at which all future cash flows must be discounted in order that the NPV of these cash flows is 0
What is a finance cost?
The interest that is charged on your development finance
What is a CPO and what is the purpose?
Compulsory Purchase Order
-> allows certain bodies to obtain land or property without consent of the owner. e.g building motorways / developing a town centre
What is an S-curve?
a pattern of distribution for construction costs to reflect that payments will not all be made upfront
What s a derivative?
Financial contract whos value is dependent on an underlying asset (e.g oil futures contract is dependent on market price of oil)
-> the derivative itself is a contract between two or more parties
What is the Vluer Registration and Monitoring Scheme (2009)
- mandatory from 30 April 2011
- Red Book - must be a registered valuer
- £100 P.A to register
- Have undertaken RICS formal valuation pathway
- Reinforce standards, consumer confidence, etc
What are the purposes of a valuation?
LARP LART
- Loan security
- Asset management
- Rent review
- Portfolio analysis
- Lease renewal
- Acquisition/disposal
- Rating
- Taxation
Give two examples of when MV and EUV would differ
Property has development potential
Additional value in different use
What’s the difference between fair value and market value?
Differs in that it does not include a proper marketing period or specific valuation date
When preparing a valuaion for UK GAAP financial statements, what bases can be used?
Non specialised property: Existing Use Value // Market Value
Specialised property: Depreciated Replacement Cost
What is the residual method of valuation?
used for property ripe for development or bare land
Used for developments - calculates land value and profits
-> GDV - costs - profits - purchasers cost = land value
Professional fees = 10-15%
Profits = 15-20%
Viability = NPV / IRR / Profit on cost
What information do you require from a telephone enquirer who asked for a valuation
Purpose of valuation
Property info
WHo the valuation is for
Timescales
-> ToE, conflicts of interest checks
What information do you require from a telephone enquirer who asked for a valuation
Purpose of valuation
Property info
WHo the valuation is for
Timescales
-> ToE, conflicts of interest checks
What is necessary ni a valuation report?
- Client name
- Valuation purpose
- Valuation subject
- Property info
- Basis of value
- Date of valuation
- Discolsure of material involvement
- Status of valuer
- Currency
- Assumptions, special assumptions, departures
- Extent of investigations
- Nature / source of info
- Restrictions on publications
- Exclusion of liability to parties other than Client
- Valuaiton approach
- COmpetancy
How would you respond to a request for a ‘pavement assessment’ only
Valuation subject ot restricted info -> pre-agreed and written into ToE and report
How could volatility of the market affect your valuation?
- Lack of evidence -> comparable method less reliable
- Uncertainty on using hisotric evidence if market is rapidly changing
What would you include in a Red Book Valuation to reflect uncertainty
If valuer forsees different values may arise under different circumsances -> should consider valuations with different special assumptions
-> sensitivity analysis to show how changes may affect
What factors determine yields?
GUTSVOLC
- Growth of prospects for rent (market conditions)
- Terms of lease
- Security of income
- Voids risk
- Obsolescence in future
- Location quality
- Covenant quality
Assume a property is let with a 10 year term, 5 year break. How would you value?
Capitalise rent up to 5th year only, reflecting the certain term
-> then value the reversion
If over-rented, i may assume the tenant breaks and include void/marketing period in the valuation
What is the difference between gross and net initial yield?
Net yield = after purchasers costs removed
Gross yield = includes purchasers costs
Do you value annually in arrears or advance?
Valuation is always in arrears or its forecasting
What basis would you use if valuing for account purposes?
Market Value
Existing Use Value
When conduting a valuation, why could your values be different from another surveyor -> could you be negligent?
Valuation is an opinion - Red Book there for guidance
How do you claim for damages over a valuation?
Difference between valuation you were given and correct valuation
Farley v Skinner - surveyor specifically asked to comment on affect of flight path -> said it would not cause any suffering
- turns out to be very noisy and would not have purchased if known
- £10,000 awarded for distress
How long should valuation files b retained?
6 years minimum
Lible for 12-15 years
What is an acceptable margin of error in valuation
KS Lincoln v CBRE (2010) = 10% margin
Typiclly 5-10%
What is an acceptable margin of error in valuation
KS Lincoln v CBRE (2010) = 10% margin
Typiclly 5-10%
Talk me through valuing leasehold interest
Single rate = capitalise profit rent for remainder of lease using single rate that appropriately takes account for the fact that a lease is a wasting asset (say 10-12%)
Dual rate= specifically takes account of sinking fund. guarantees that an amount is put away that you have a suitable amount to re-invest in new interesst at lease end
-> apply remunerative rate i.e. ARY of 5.5% plus 1% to represent that is a leasehold interest and an accumulative rate of say 3% to account for the sinking fund.
Dual rate can also be adjusted to take account for the tax chrged on the interest that is received in the sinking fund
