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2021 > Valuation (L2C) > Flashcards

Valuation (L2C) Flashcards

1
Q

How many methods of valuation are there and what are they?

A
  1. Comparative
  2. Residual
  3. Investment
  4. Profits
  5. Depreciated Replacement Cost
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2
Q

What are the bases of value?

A
  1. Market Value
  2. Market Rent
  3. Investment Value
  4. Fair Value
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3
Q

What are the different purposes for valuation?

A
  1. Secured Lending
  2. Tax
  3. Accounting
  4. Purchase Report
  5. Sale
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4
Q

What is the purpose of the Red Book?

A
  • Provides mandatory requirements and guidance
  • Provides procedural framework for best practice with flexibility to suit clients’ requirements
  • To protect the public
  • To enhance credibility
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5
Q

What are the main changes to the Red Book 2020?

A
  • Changed to ‘Red Book Global’
  • “written” report means valuation on paper, electronic or any digital means
  • Reinforces that valuer’s must apply ‘professional skepticism’
  • Valuers of development property must now apply two methods of valuation
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6
Q

What is the structure of the Red Book Global?

A
  • Part 1 - Introduction
  • Part 2 - Glossary
  • Part 3 - Professional Standards (PS) - mandatory for all members providing written valuations
  • Part 4 - Valuation technical and Performance Standards (VPS)
  • Part 5 - Valuation Applications (VPGA) - advisory, provide best practice
  • Part 6 - International Valuation Standards
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7
Q

What issues may cause material uncertainty?

A
  • Limited / restricted information
  • Unique asset characteristics
  • Disrupted market (COVID)
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8
Q

What is the purpose of Professional Standards 1? (PS1)

A
  • Sets out when valuations must be Red Book compliant

- Sets out 5 exceptions

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9
Q

What are the exceptions for valuations being Red Book compliant?

A

SAILE:

  1. Statutory function (CPO)
  2. Internal purposes
  3. Agency & brokerage
  4. Litigation
  5. Expert witness
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10
Q

What does PS2 cover?

A
  • Competency
  • Supervision
  • Ethics/independence/objectivity
  • Supervision
  • Disclosures
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11
Q

What must valuers do to act in accordance with PS 2?

A
  • Act in accordance with ethical standards / Rules of Conduct
  • Act objectively, avoiding conflicts
  • Keep appropriate records
  • Identify valuer responsible
  • Refer to conflicts in Terms of Engagement
  • Keep information confidential
  • Responsible valuer must have appropriate level of supervision
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12
Q

What is the function of VPS 1?

A

Minimum terms of engagement

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13
Q

What are the minimum terms of engagement as set out in the Red Book?

A
  • Name and status of valuer
  • Client
  • Identification of other intended users
  • Identification of asset
  • Valuation currency (2017)
  • Purpose of valuation
  • Basis of value
  • Valuation date
  • Extent of investigations and limitations
  • Nature and source of information
  • Assumptions and special assumptions
  • Description of report
  • Restrictions for use
  • Red Book compliance
  • Fee basis
  • Complaints handling
  • Statement that the report can be audited by RICS
  • Limit on PII liability (2017)
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14
Q

What is the purpose of VPS 2?

A

Inspections, investigations and records

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15
Q

What must valuers do according to VPS 2?

A
  • Inspect to the extent necessary
  • Verify information
  • Clarify necessary assumptions
  • Record limitations in Terms of Engagement report
  • Keep proper records
  • Keep clear and accurate records of inspections, investigations, key inputs and calculations
  • Retain file for 6 years
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16
Q

What is VPS 3?

A

Provides content for valuation reports

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17
Q

What needs to go into a valuation report (VPS 3)?

A
  • Identification of the status of the valuer
  • Client
  • Purpose of valuation
  • Asset
  • Basis of value
  • Valuation date
  • Extent of investigation
  • Nature and source of information
  • Assumptions and special assumptions
  • Consent and publication restrictions
  • Red Book compliance
  • Valuation approach and reasoning
  • Valuation figure
  • Date of valuation
  • Commentary on any material uncertainty (VPGA 10)
  • Limitations to liability
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18
Q

What is VPS 4?

A

Bases of value, assumptions and special assumptions

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19
Q

What are the bases of value?

A

Market value
Market rent
Investment Value
Fair Value

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20
Q

What is investment value?

A

The value of an asset to the owner, or prospective owner for individual or investment or operational objectives
*may differ from MV

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21
Q

What is fair value?

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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22
Q

What is Market Value / Rent?

A

The estimated amount that an asset or liability should be exchanged or leased

  • on the valuation date
  • between a willing buyer and seller
  • in an arms length transaction
  • with appropriate lease terms (MR)
  • after proper marketing
  • where both parties have acted knowledgeably, prudently and without compulsion
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23
Q

What is the difference between an assumption and a special assumption?

A
  • Assumption is something reasonable for valuer to assume without specific investigations (e.g. ground conditions)
  • Special assumption assumes circumstances are different to the truth eg vacant possession, planning approval, development completed etc.
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24
Q

What is marriage/synergistic value?

A

An additional value where two or more interests are combined to produce a value that is greater than the sum of the individual interests. Usually shared 50/50 of uplift.

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25
Q

What is a special purchaser?

A

Someone with the benefit of marriage value i.e. worth more to them than others

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26
Q

What is existing use value?

A

Market value disregarding other potential uses. Must report more valuable other use if there is one.

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27
Q

What is VPS 5?

A

Valuation approaches and methods. Valuers are responsible for choosing and justifying their valuation approach, having regard to the asset, the purpose and statutory requirements.

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28
Q

Talk me through the comparative method of valuation

A

Should use whenever possible

  1. Search comparables and create schedule
  2. Adjust weighting of comparables
  3. Analyse and form opinion of value
  4. Report value and prepare file
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29
Q

How does the residual method of valuation compare to a development appraisal?

A

Development appraisal = calculations to establish the viability of a scheme. Generally using investor specific inputs. Tool to financially assess the viability of a development scheme.
Residual valuation = uses market assumptions to establish site value at a specific point in time.

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30
Q

What is included in a residual valuation?

A
  • GDV
  • Construction costs
  • Professional fees
  • s106 / CIL
  • Sales / marketing
  • Contingency
  • Finance
  • Developer’s profit
  • Timescales
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31
Q

What is the investment method of valuation?

A

Assesses the potential return on investment through ongoing income from a property.

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32
Q

What is the profits method?

A
  1. Income - costs = gross profit
  2. Minus expenses and operators remuneration = adjusted net profit
  3. Capitalise at yield
  • Used for valuations of trade related properties e.g. pubs, hotels etc
  • Where the value of the property is dependent upon the profitability of its business and its trading potential
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33
Q

What is depreciated replacement cost?

A
  1. Value land in existing use
  2. Add current cost of replacing building plus fees
  3. Discount for depreciation
  • NOT Red Book compliant *Must report alternative use values where appropriate.
  • Used for owner-occupied property, for accounts purposes for specialised properties eg sewage works, lighthouses, docks etc.
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34
Q

What factors can affect value?

A
  • External market conditions
  • Interest rates
  • Building structure, condition and layout
  • Location
  • Passing rent, leases, tenancy (1954)
  • Vacant possession
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35
Q

What is ‘Years Purchase’?

A

The number of years required for income to pay the purchase price (100 divided by yield)

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36
Q

What is the contents of a valuation folder?

A
  • Introduction letter
  • conflict of interest check
  • Terms of engagement
  • Inspection notes
  • Planning, rating and environmental searches
  • Comparable analysis
  • Valuation calculations
  • Report
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37
Q

What due diligence would you need to undertake a valuation?

A
  • Asbestos register
  • Business rates / council tax
  • EPC
  • Flooding
  • Fire safety compliance
  • H&S Compliance
  • Legal title
  • Planning history
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38
Q

What are the steps for a valuation?

A
  1. Receive instructions
  2. Check competence
  3. Check independence/conflicts
  4. Issue Terms of Engagement
  5. Receive signed terms
  6. Gather information - leases, title docs etc
  7. Undertake DD - matters affecting valuation
  8. Inspect and measure
  9. Research market and analyse comps
  10. Undertake valuation
  11. Draft report
  12. Get report checked/verified
  13. Finalise and sign report
  14. Report to client
  15. Issue involice
  16. Ensure valuation report is in good order
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39
Q

What information would you need if you were called for a valuation?

A
  • What and where is the asset?
  • Is it let or vacant?
  • Who is the borrower or client?
  • What is the purpose?
  • Timescales
  • Conflicts
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40
Q

What is a yield?

A

The annual rate of return expressed as a percentage

  • Consider choice of yield adopted - found by comparable evidence
  • Risk is the major factor when determining yield in relation to:
    a. Prospects for rental and capital growth
    b. Quality of location and covenant
    c. Use of the property
    d. Lease terms
    e. Obsolescence
    f. Voids
    g. Security and regularity of income
    h. Liquidity - ease of sale
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41
Q

What are the different types of yields?

A
  1. Initial yield
  2. Net initial yield
  3. Reversionary yield
  4. Equivalent yield
  5. All risks yield
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42
Q

What is the initial yield?

A

Passing Rent expressed as a percentage of purchase price.

Work out by diving rent passing by purchase price.

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43
Q

What does it mean if a yield is low?

A

Low return on investment, low risk, room for growth

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44
Q

What is a Net Initial Yield?

A

Rent expressed as a percentage of gross price.

Rent passing divided by purchase price plus purchase costs

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45
Q

What is the reversionary yield?

A

Market rent expressed as a percentage of purchase price.

Market rent divided by purchase price

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46
Q

What is equivalent yield?

A

The weighted average between initial and reversionary yields (IRR without growth)

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47
Q

What is a true equivalent yield?

A

Takes into account that it is paid quarterly and in advance. IRR without growth

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48
Q

What is an equated yield?

A

A yield that takes into account future growth (IRR with growth)

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49
Q

What is an all risks yield?

A 
Yield taking into account all risks (market capitalisation rate) 
Accounts for:
- physical characteristics
- anticipated rental growth
- unexpired lease terms 
- Certainty and continuity of income
- tenants covenant strength
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50
Q

What is a good comp?

A
  • Similar characteristics
  • Location
  • Physical characteristics
  • Time
  • Use
  • Tenure
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51
Q

How do you find comps?

A
  • Office records
  • Agents/valuers
    -Land Registry
    -Rightmove
    -Estates Gazette i
    CoStar (commercial)
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52
Q

What is the difference between interpolation and extrapolation?

A 
Interpolation = value within data range, less risky
Extrapolation = Value outside data range, risky, use when not possible to interpolate
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53
Q

What is net present value?

A

The sum of the discounted cash flows of a project

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54
Q

What is a discounted cash flow?

A

A cash flow with discounted income to calculate the NPV eg. deferred payments on a sale proposal

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55
Q

What is the IRR?

A

The internal rate of return - the discount rate that makes the NPV of a project zero
- therefore, the expected compound annual rate of return that will be earned on a project or investment

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56
Q

What are finance costs? And what elements are there?

A 
Finance costs are the interest on the borrowed elements of the scheme. 
3 elements:
1. Site purchase
2. Construction costs (s curve)
3. Holding costs
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57
Q

What are the main methods of finance?

A
  1. Debt

2. Equity / cash

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58
Q

What are the different types of debt finance?

A
  1. Senior debt - typically 6%

2. Mezannine finance - typically 8-9%

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59
Q

What is a sensitivity analysis?

A 
Measures sensitivity of value to key inputs. 
Typically:
- Sales values/GDV
-Build costs
-Finance rates

on Land Value or Developer’s profit

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60
Q

What are the 3 types of sensitivity analysis? Describe each.

A
  1. Simple - yield, GDV, build costs, finance rates
  2. Scenario - eg phasing vs single phase
  3. Monte Carlo - probability theory using software
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61
Q

How do you value marriage value?

A
  1. Value both individually
  2. Value merged interest
  3. Difference is marriage value
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62
Q

What is hope value?

A

The difference between EUV and what the market may pay for a future transformation. The value by judging likelihood of more valuable option and likelihood of it occurring. Look at market comps and come to a reasoned decision.

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63
Q

What does the Charities Act 2011 state?

A

Charities must:

  • Obtain a written report from a qualified surveyor on the proposed sale
  • Properly market the site/property
  • Be satisfied that they have gained the best terms reasonably possible
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64
Q

What is a ransom strip?

A
  • A piece of land which controls the access to another piece of land.
  • 15% - 50% of uplift in value
  • Negotiated
  • Stokes vs Cambridge 1961 - 1/3 uplift in value
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65
Q

What are the typical purchasers’ costs?

A

Stamp duty - 5%
Agents fee - 1% of purchase price + VAT
Solicitors’ fees - 0.5% of purchase price + VAT

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66
Q

What is zoning ITZA?

A
  • A valuation technique used to compare retail prices with different shapes and frontages. The frontage of a shop is considered more valuable.
  • 6.1m / 20ft zones
  • Half each zone
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67
Q

What do you need to do to apply for the valuer registration scheme?

A
  • 250-word statement of experience
  • Supervisor declaration
  • 1,000 - 1,500 word case study of 3 worked examples
  • Relevant CPD
  • Fee
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68
Q

What sections of the Red Book does the RICS state valuers should be aware of in light of COVID-19?

A

VPGA 10: matters that may give rise to material valuation uncertainty.
Material uncertainty clause:
- If material uncertainty is declared, it should be explicitly stated. I keep a regular eye on the RICS website for any updates.
- Advisory wording relating to material uncertainty from March until September for ToE and valuation reports. Important uncertainty is assessed on case-by-case basis.

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69
Q

What is the Valuer Registration Scheme (VRS)?

A

RICS introduced this regulatory monitoring scheme for all valuers carrying out Red Book Global valuations from October 2011.
Schemes aims:
1. Improve valuation quality and ensure highest possible professional standards
2. Meet the RICS’ requirement to self-regulate effectively
3. To protect and raise the status of the valuation profession as the leading expertise in valuation.

Any valuer on the scheme can use the title ‘RICS Registered Valuer’. Have to do valuation to level 3 at APC or if do level 2, you can become a RV by undertaking more valuation experience (up to 100 days and case study submission).
- Registration is not mandatory for valuation work excluded from the Red Book.

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70
Q

Tell me about Stamp Duty Land Tax

A
  • SDLT now charged on an incremental basis at different rates depending on the portion of the purchase price that falls into each band:
    Freehold non-residential sales (land/commercial):
  • 0% on the first £150,000:
  • 2% on the next £150,001 - £250,000
  • 5% on the remaining amount (portion above £250,000)
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71
Q

What is PS1 within the Red Book Global?

A

PS 1 sets out when valuations must be Red Book compliant and the 5 exceptions:

  1. Internal Purposes
  2. Statutory Function (CPO)
  3. Agency & brokerage
  4. Litigation
  5. Expert witness
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72
Q

What is the proper name for the Red Book Global?

A

RICS Valuation - Global Standards

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73
Q

What is PS2 in the Red Book Global?

A

PS2 is focussed on ethics, competency, objectivity and disclosures. It states valuers must:

  • Act in accordance with ethical standards/Rules of Conduct
  • Act objectively, avoiding conflicts
  • Refer to conflicts in Terms of Engagement
  • Keep appropriate records
  • Keep information confidential
  • Identify valuer responsible
  • Responsible valuer must have appropriate level of supervision.
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74
Q

What does part 5 of the Red Book contain and what are the most important parts for you?

A

Part 5 of the Red Book contains 10 VPGAs, including:

  • VPGA 2: Valuations for secured lending
  • VPGA 8: Valuation of real property interests
  • VPGA 10: Matters that may give rise to material valuation uncertainty (valuation in markets susceptible to change): valuers should draw attention to the issue affecting the certainty, should consider using special assumptions and sensitivity analysis, degree of uncertainty caveat must be specific to each valuation.
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75
Q

What is the investment method of valuation?

A

It’s used for valuing commercial premises on the basis of a flow of rental income.

The appropriate technique depends on whether the unit is under-rented or over-rented.

  • Term and revision for under rented.
  • Layer/hardcore for over-rented.
  • Conventional method if let at market rent.
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76
Q

What is the conventional investment method?

A

Used for properties that are rack-rented (passing rent is roughly the same as the Market Rent).

  • Passing rent multiplied by the years purchase = market value
  • Importance of comparables for yield.
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77
Q

What is the layer/hardcore method?

A

Used for over rented investments (passing rent more than market rent)

  • Income flow divided horizontally
  • Bottom slice = market rent
  • Top slice = rent passing less Market Rent until next lease event
  • Higher yield applied to top slice to reflect additional risk
  • Different yields used depending on comparable investment evidence and relative risk.
78
Q

What is a return?

A

Used to describe the performance of a property.

- Use a DCF calculation to find the IRR

79
Q

How do you calculate a yield

A

Income/Price x 100

80
Q

What is an arms length transaction?

A

Where the seller and purchaser don’t know each other, there’s no personal interest and no special purchasers.

81
Q

What is the new guidance note on the Comparable Method?

A

Comparable Evidence in Real Estate Valuations, 2019 (effective 2019).

  • Provides guidance on the sources of comparable evidence, how to record and how to analyse.
  • Provides information on the hierarchy of evidence
82
Q

What is the hierarchy of evidence?

A
  1. Open Market Lettings
  2. Lease renewals
  3. Rent reviews
  4. Third party determination
  5. Sale and Leasebacks
  6. Intercompany transactions
83
Q

Can a valuation with a material uncertainty clause still be relied upon by a lender?

A

Yes, but there is less certainty and a higher degree of caution should be attached in relation to the report.

84
Q

Can you give preliminary (draft) valuation advice?

A

Yes, but it must be:

  • Marked as a draft, subject to completion of the final report
  • Marked for internal purposes only
  • Stated that it cannot be relied upon and can’t be published.
85
Q

VPS vs VPGA Red Book Global

A
  • VPS = Mandatory
  • VPGA = Advisory – but the VPGAs do include links and cross references to the material in the International Valuation Standards which are mandatory
86
Q

Name two examples where the valuation date may differ to the date of the valuation report

A
  • Inheritance Tax – date of death and you value all the assets individually to get best value
  • Fair Value – used for accounts – report at the date of measurement
87
Q

What is a desktop valuation?

A
  • No inspection

* Non-reliance

88
Q

What is a Fully Repairing and Insuring Lease (FRI) lease?

A
  • Places responsibility for the repair of the external, internal and structural format of the property with the tenant.
  • In theory tenant pays less rent – the more obligations you have on the lease the less you would pay
  • Effective FRI lease – landlord recovers insurance premium from the tenant
89
Q

What is an Internal Repairing lease?

A
  • Landlord responsible for repainting externally and insurance
  • tenant just responsible for demised area eg decoration and fixtures and fittings
  • If mulit-let then more likely to be IR
90
Q

How do different leases effect the value?

A
  • FRI Lease – more conditions in lease so typically pay less
  • Internal Repairing
  • Short lease
  • Long lease – more security
  • Break periods – whether there are break clauses – tenant can leave – 6 months notice

*The more onerous the lease on the tenant, then the less rent they will pay

91
Q

What is the 1954 Landlord and Tenant Act?

A

• If you are in the Act – then security of tenure
o Landlord has to offer you renewal at market rent
o More common to be inside the act
• If you opt out of the Act then no security of tenure

92
Q

What is the difference between an external and internal valuer?

A
  • Internal valuer performs the valuation for their employer

- External valuer carries out the valuation for a third party.

93
Q

What makes a good comparable?

A
  • Lease length
  • Size of property
  • Age of property
  • Location
94
Q

What should you do before accepting

A
  • Check competent
  • Independent
  • Set out Terms of Engagement
95
Q

Is a residual covered by the Red Book?

A
  • Yes, all inputs are taken at the date of valuation, so it is classed as a red book valuation.
96
Q

How would you reflect risk in a valuation?

A

In:

  • Yield
  • Contingency
97
Q

How would a restrictive covenant clause in the title affect a valuation?

A
  • Would depend on what the clause was

- It would affect the property in a particular way and limit the market it would appeal to

98
Q

What is an example of a restrictive covenant?

A
  • You can’t build within 2 meters of the road
99
Q

When was the Red Book effective from?

A

31 January 2020

100
Q

What is Existing Use Value?

A

The value of the property as it stands with no other assumptions made.

101
Q

What is a schedule of condition?

A
  • Limit tenants’ repairing obligations
  • Agreed by negotiation prior to commencement of lease
  • Reinstatement limited to schedule
  • Photographic evidence and plans required
  • Must be referred to in the lease.
102
Q

What does VPGA 1 refer to?

A

Valuations for inclusion in financial accounts - fair value will be adopted for all IFRS accounts. Prescribed ‘performance standards’ must be adhered to.

103
Q

Talk me through VPGA 2

A

VPGA 2 – Valuation for secured lending
• Should know the terms of the loan
• comment on suitability for mortgage purposes (collateral)
• Conflicts – previous involvement (with prospective borrower or property to be valued must be disclosed to lender – normally 2 yrs (also state in ToE)
• Valuer’s responsibility to decide whether or not to accept the instruction having regard to the principles of the RICS Rules of Conduct.
• Where a valuation for secured lending purposes is arrived at with the use of a special assumption, a comment must be made in the report on any material difference between the reported value with and without the special assumption.

104
Q

What does VPGA 8 cover?

A

Inspections and investigations, with particular emphasis on environmental constraints and sustainability issues.

105
Q

What does part 6 of the Red Book cover?

A

International Valuation Standards (Mandatory):

  • “General Standards” address matters such as terms of engagement, approaches to and bases and methods of valuation as well as reporting.
  • “Asset Standards” which provide requirements relating to specific types of asset, such as real property and development property.
106
Q

What is a ‘party wall’?

A

If it stands astride the boundary of land belonging to two or more land owners. There are party wall surveyors who specialise in it.

107
Q

What is a right of light?

A

RICS Guidance Note on Rights of Light, 2016:
- The right to light of a building arises after 20 years uninterrupted enjoyment of light without the consent of a third party by way of easement

108
Q

What does IVS 105 relate to?

A

IVS 105 relates to Valuation approaches and methods - there are 3 approaches:

  1. Income approach: converting current and future cash flows into a capital value (i.e. investment, residual and profits methods)
  2. Cost approach: references to the cost of the asset whether by purchase or construction (i.e. DRC method)
  3. Market approach: using comparable evidence available (i.e. comparable method)
109
Q

What is the UK National Supplement, 2019?

A
  • Sets out clarification that the UK Red Book Global UK National Supplement augments the Red Book Global for valuations in the UK and is not a substitute for it,
  • Most advice is mandatory not advisory
  • Provides specific requirements for members on the application of RICS Valuation - Global Standards and valuations undertaken subject to UK jurisdiction.
110
Q

What is secured lending?

A

The purpose of having a loan valuation completed is to establish whether the amount of the loan can be secured against the value of the property and, should you default on the loan, whether the lender can realistically recoup the amount.

111
Q

What does VPGA 2 say about how must previous involvement be dealt with?

A

Any previous, current or anticipated involvement with the prospective borrower, or the property to be valued, must be disclosed to the lender

112
Q

How is previous involvement defined in the Red Book?

A
  • As being within the last two years

* Under certain circumstances, this may be longer

113
Q

When may conflicts of interest arise with regards to previous involvement?

A
  • When the valuer has a longstanding relationship with the borrower
  • When the valuer is likely to receive a fee for introducing the transaction to the lender
  • When the valuer is also retained to act in the acquisition / disposal or letting of the subject property
114
Q

Who has responsibility for accepting / declining an instruction?

A

The valuer

115
Q

If it is agreed that a conflict of interest can be managed, how should this be dealt with?

A

The arrangements for managing the conflict must be recorded in writing and included in the Terms of Engagement and the valuation report

116
Q

What are the additional reporting requirements for a secured lending instruction?

A
  • Disclosure of any involvement; previous, current or future, or any agreed arrangements for managing a conflict of interest
  • Details of the valuation methodology adopted, supported with calculations where appropriate
  • The extent to which details of a recent transaction, or a provisionally agreed purchase price has been accepted as Market Value
  • A comment on the suitability of the property for secured lending purposes
  • Details of any circumstances which may affect the price
117
Q

Are you able to advise on the suitability of a property for loan security if you are not aware of the terms of the loan?

A

No

118
Q

What is an amortisation period?

A

The period over which a loan is paid off

119
Q

What is an amortised loan?

A

• One in which regular payments are made, to include:
o Interest on the unpaid balance
o Principal repayments

120
Q

What is an interest only loan?

A
  • One in which, for a set term, the borrower pays only the interest on the principal balance -> the principal balance remains unchanged
  • At the end of the term, the borrower may pay the principal sum
121
Q

When was the Valuer Registration Scheme introduced?

A

October 2011

122
Q

How many Registered Valuers are there worldwide?

A

15,000

123
Q

What are the three aims of the Valuer Registration Scheme?

A

1) To improve the quality of valuation and ensure the highest possible professional standards
2) To meet the RICS’ requirement for self-regulation
3) To protect and raise the status of the valuation profession

124
Q

What do clients expect from an RICS valuation?

A
  • Transparency
  • RICS protection
  • Compliance with International Valuation Standards
  • Expertise and clear reporting
125
Q

What requirements are necessary of a RICS Registered Valuer?

A
  • Valuation Level 3 (for members qualifying after 1st January 2012)
  • An annual fee paid to the RICS
126
Q

Is registration mandatory for valuation work excluded from the Red Book?

A

No

127
Q

What information must a valuer provide in order to register on the VRS?

A

Details of the:

1) Type of valuations carried out
2) Purpose of valuations carried out
3) Number of valuations carried out
4) Firm’s total fee income from Red Book valuations in the last year
5) Data sources used
6) Quality assurance and audit procedures in place
7) Historic negligence claims

128
Q

How do you find a RICS Registered Valuer?

A

• The RICS has a published register

129
Q

How do the RICS monitor valuers?

A
  • Through the submission of their firm’s annual return
  • Desktop investigations
  • Site visits
130
Q

Can a valuer be removed from the VRS?

A

• The Head of the Regulation has the power to remove a valuer from the Scheme

131
Q

How would you as someone taking valuations to level 2, become a RICS Registered Valuer?

A

By undertaking more valuation experience (up to 100 days and case study submission)

132
Q

What is your opinion of the Valuer Registration Scheme?

A
  • I think that the VRS is a good idea
  • Valuation is a highly skilled and specialist area, which I believe requires regulation to ensure that surveyors in this field have received the proper training
  • Thus reducing negligence claims
133
Q

If you were valuing a single-let £5m office building, and a single-let £50m office building, would the fee be the same?

A

• No, because the fee should be proportionate to the firm’s liability cap
• Risk and reward must be fairly apportioned
You may have standard Terms of Engagement agreed with a particular client, however, an appropriate fee should be evaluated for each and every instruction

134
Q

What is an upward only rent review?

A

Most leases have upward only rent reviews - if paying £50k at moment and have rent review in 2 years market rent is £40k but I have an upward only rent review - nil increase - rent won’t go down, not getting any reversionary income at that point.

135
Q

What is reversionary income?

A

When the market rent is adopted (future income)

136
Q

What is a reversionary yield?

A

What property will generate once gets into reversionary income.

137
Q

What is the difference between a secured lending valuation and a valuation for internal purposes?

A

Secured lending - considering loan against what you’re valuing - stating whether property offers good security. If they’re considering a loan over 5 years of £2m and you value the property at £2m, you will say it probably won’t offer good security if 100% of their capital is secured against the property.

If you had a property worth £2m and only lending £1m, reflecting loan to value of 50% - if default loan, you have an asset you should be able to sell and reclaim your loan back. Telling bank whatever it is you’re valuing holds good security for them.

138
Q

What level of PII does your company have?

A

£5m per asset which usually covers 100% of market value in most cases. Where need to extend PI, need internal sign off from head of professional services (Paul Avery). Various certificates up to £25m

139
Q

If you were valuing an industrial site in the centre of a town without planning, should I attach any element of hope into that valuation (owes to resi)

A

Cannot put hope value on market value. Particularly for secured lending - if say it’s going to get resi then 6 months later doesn’t get resi, your red book would be worth nothing.

140
Q

How do you adopt the comparative method for commercial units?

A

Yields, capital value per sq ft, what features looking for

141
Q

Why would you tweak your profit?

A

If risks in terms of market, deliverability / planning

142
Q

Why would you tweak your contingency?

A

If risks in terms of build costs and site specifics such as abnormals

143
Q

How do you distribute your build costs?

A

Costs at start of project are never going to be as high as they are at the middle of the project whilst putting infrastructure in / building houses. Once infrastructure is in, costs tail off slightly. Typically adopt an S-curve

144
Q

How do you do your residual appraisal on excel? How did you work out your finance?

A

Inputted GDV and total costs.

Put timescales into Argus to work back what my finance is.

145
Q

What is contained within VPGA 10?

A

VPGA 10 – Valuation in markets susceptible to change
• Valuer should draw attention to the issue affecting the certainty
• Should consider using special assumptions and sensitivity analysis
• Degree of uncertainty caveat must be specific to each valuation

146
Q

What does VPS 2 say about revaluation?

A

Revaluation (without re-inspection) – VPS 2
• Must not be undertaken unless the valuer is satisfied that there have been no material changes to property or nature of its location
• Must be confirmed in TofE and in valuation report

147
Q

What is an automated valuation model?

A

Automated Valuation Models
• Software systems that can provide valuations using mathematical modelling
• Mostly used for Resi
• Argus – weaknesses, loss of control, full detail cannot be seen.

148
Q

How did you undertake your valuation of Little Tofts, Capel St Mary?

A

I under took a red book for internal purposes to assist in end of option negotiations, where I was acting for the landowner.

I was provided with a cost schedule from my client.

Residual Value: £3,500,000
 Price per gross acre: £301,464 per acre
 Price per net developable acre: £463,576 per acre
 Price per blended plot: £35,000 per plot
 Price per open market plot only: £53,846 per plot

149
Q

What does price per gross acre mean?

A

Residual value divided by gross site area

150
Q

What does price per net developable acre mean?

A

Price divided by net developable acre (typically 75% of site area)

151
Q

What is the most accurate way of comparing land comparable evidence?

A

Price per open market plot - affordable housing requirements vary

Also price per net developable acre - some sites could have large areas of greenspace etc.

152
Q

Tell me about option agreements and determining the price

A

The terms of an option tend to relate to planning, with the agreement allowing time for a site to be promoted through the planning process and for relevant planning permission to then be obtained. Once this happens, a Price Notice is normally served to the landowner, which then triggers the price negotiation process and the purchase of the site through an Exercise Notice.

The purchase price mechanism typically reflects a percentage discount from the market value at the time of exercise, often also including additional deductions for an option fee and planning promotion costs. The process of agreeing a price can be difficult because there is no transaction that takes place whereby the market value is determined by competing bidders on the open market.

A negotiation therefore needs to be entered into to debate the value of the completed development, costs of the development and developer’s profit in order to assess the market value of the site. Local market conditions and comparable land transactions also need to be analysed when negotiating the value of a site. A purchase price can then be agreed between the landownder and option holder following this negotiation process.

If the landowner and option holder cannot agree on a purchase price there should be provisions in the agreement for dispute determination. This normally involves the appointment of a suitably experienced Independent expert or arbitrator who is also a chartered surveyor. The expert can either be agreed between the parties or appointed through the RICS.

Normally, written representations that detail the market-based evidence and appraisals used to support the assessment of market value and purchase price are submitted, by both the landowner and option holder, to the expert for consideration. There is then usually the opportunity to provide cross representations to the expert based on what the other side has submitted within their written representations.

The expert should then determine the purchase price, with the option holder then able to decide whether or not to purchase the site at the determined price.

153
Q

What are the key points within an option agreement?

A
  • First option period
  • Longstop date
  • Minimum price
  • Option fee (non-returnable and creditable against price)
  • Second option period
  • Landowner and developer obligations (eg developer to get planning)
154
Q

What information is required to register on the RICS Valuer Registration Scheme?

A
  • Type of valuations
  • Purpose of valuations
  • Number of valuations
  • Firm’s total fee income from Red Book Global valuations in last year
  • What data sources used
  • Quality assurance audit procedures in place
  • History of any negligence claims and notifications
  • Annual fee to RICS
155
Q

What section of the Red Book did you refer to when carrying out your valuation of the industrial park in Harpenden for secured ending purposes?

A

VPGA 2 - Valuation of interests for secured lending purposes

VPGA 2 covers:
• taking instructions and disclosures
• independence, objectivity and conflicts of interest
• basis of value and special assumptions and
• reporting and disclosures.

156
Q

What does VPGA 2 say about how must previous involvement be dealt with?

A

Any previous or current involvement with the borrower or the property or asset to be valued is to be disclosed to the lender prior to the acceptance of the instruction.
Disclosure should also extend to any anticipated future involvement.

Examples of involvement for valuer:
• long-standing professional relationship with the borrower or the owner of the
property or asset
• is introducing the transaction to the lender or the borrower, for which a fee is payable
to the valuer or firm
• has a financial interest in the asset or in the borrower
• is acting for the owner of the property or asset in a related transaction
• is acting (or has acted) for the borrower on the purchase of the property or asset
• is retained to act in the disposal or letting of a completed development on the subject
property or asset
• has recently acted in a market transaction involving the property or asset
• has provided fee earning professional advice on the property or asset to current or
previous owners or their lenders and/or
• is providing development consultancy for the current or previous owners.

157
Q

When may conflicts of interest arise with regards to previous involvement?

A

ah

158
Q

Who has responsibility for accepting / declining an instruction?

A

The valuer

159
Q

If it is agreed that a conflict of interest can be managed, how should this be dealt with?

A

ah

160
Q

What are the additional reporting requirements for a secured lending instruction?

A

ah

161
Q

Are you able to advise on the suitability of a property for loan security if you are not aware of the terms of the loan?

A

ah

162
Q

How many Registered Valuers are there worldwide?

A

ah

163
Q

What do clients expect from an RICS valuation?

A

ah

164
Q

What requirements are necessary of a RICS Registered Valuer?

A

ah

165
Q

Is registration mandatory for valuation work excluded from the Red Book?

A

No

166
Q

What information must a valuer provide in order to register on the VRS?

A

h

167
Q

How do you find a RICS Registered Valuer?

A

ah

168
Q

How do the RICS monitor valuers?

A

ah

169
Q

Can a valuer be removed from the VRS?

A

ah

170
Q

How would you as someone taking valuations to level 2, become a RICS Registered Valuer?

A

ah

171
Q

What is your opinion of the Valuer Registration Scheme?

A

zah

172
Q

If you were valuing a single-let £5m office building, and a single-let £50m office building, would the fee be the same?

A

ah

173
Q

When would you use fair value in a valuation?

A

Valuations for inclusion in financial accounts

174
Q

You mentioned you worked with a RICS registered valuer, can you explain the significance of that?

A

h

175
Q

Is there a minimum number of valuations you need to conduct every year to become a registered valuer?

A

h

176
Q

Re Harpenden - Did you adopt yield evidence? Was there a tenant in the property at the time?

A

Yes, I adopted yield evidence by looking at investment/capital value comps to establish a suitable yield.

177
Q

What about the impact of the lease terms on the value?

A

h

178
Q

Is there a particular term you would use if the tenant didn’t have security of tenure?

A

Outside the 1954 act?

179
Q

What methodology did you use?

A

I assessed rental comparable evidence and established the property was slightly over-rented (RP higher than MR). Therefore, I adopted the hardcore layer method

180
Q

You have talked about this office in Harpenden. Can you give me a flavour of what the property comprised? Whether it was tenanted/vacant

A

Two Grade A tenanted office buildings in a secondary location built in 2016

Got a copy of the leases to establish lease details - 5 years left on the lease (5 years unexpired) (10 year leases)

Both tenants strong covenants (determined from Dun & Bradstreet Credit Report - 3A1 (low risk of business failure)

181
Q

What does the hardcore layer comprise?

A
  • Rental comps to establish whether over rented, rack rented or under rented - slightly over rented so used layer hardcore)
  • Investment/capital value comps to establish suitable yield
  • Capitalised hardcore income (MR) into perpetuity using yield established from comps
  • Capitalised froth (over-rented element of RP) until end of lease at higher yield to reflect higher risk (after lease expires, risk this may not be achieved as higher than MR)
  • This then generated a value and I sense-checked this with comparable evidence on a capital value basis (per sq ft) and initial yield basis.
182
Q

You say you got the yield evidence from comparables. Can you elaborate how you extracted that information?

A

I found investment/capital value comps and set them out in a schedule. I found these on CoStar but verified the information (sale price, covenant, building, lease terms, area) by talking to agents. This enabled me to determine a suitable yield (net initial yield = rent passing divided by purchase price) for my property

183
Q

How would your valuation approach change if an office was vacant?

A

I would look up VP comps to establish £/sq ft for vacant office buildings

I would then look at on investment method also, but factoring in initial void period which will have holding costs (empty rates, letting fees and maintenance) and allow for a rent free period

Then I would apply market rent (established from rental comparables) and yield by investment/capital value comps. Taking into account risk that may not get a tenant immediately, I would push the yield out a bit to reflect risk.

184
Q

What types of yields are you aware of? What is an initial yield? What is a reversionary yields?

A

Initial yield - rate expressed as a percentage of purchase price

  • Reversionary yield - market rent expressed as % of purchase price
  • Equivalent yield - weighted average between initial and reversionary yields (IRR without growth)
  • Equated yield - yield that takes into account future growth (IRR with growth)
  • All risks yield - yield taking all risks into account
185
Q

What sort of capital values were being achieved in Harpenden?

A

Circa £190 - £200 per sq ft

186
Q

What is a running yield?

A

the annual income on an investment divided by its current market value

187
Q

What is the difference between the investment and residual methods?

A

Yield

188
Q

Do probate valuations have to be red book?

A

No

189
Q

When is the investment method of valuation used?

A

When there is an income stream to value, rental income is capitalised for capital value

This method involves reflecting risk, return and expectations of growth through the use of a yield. This yield is fed into the years purchase (YP) formula and the present value of £1 (PV £1) formula to produce the figures that the rent is multiplied by.

190
Q

How are valuation fees determined?

A

Either hourly rate or fixed fee.

191
Q

What’s the difference between measurement date and valuation date?

A

Valuation date is whatever you want it to be, whatever is stated in your terms of engagement.

192
Q

What type of yield did you use for Harpenden?

A

Equivalent yield as it’s time weighted. I also considered what the initial yield was against the comparables when Argus produces this.

2021 (22 decks)

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