Valuation - L3 Flashcards
Define Market Value
The amount for which an asset or a liability should exchange for on the valuation date, within an arm’s length transaction, following proper marketing between a willing buyer and a willing seller and where the parties act knowledgeably, prudently and without compulsion.
Define MV in terms of taxation, and explain the practicalities of that difference.
The price which the property might reasonably be expected to fetch if sold in the open market at that time, but that price must not be assumed to be reduced on the grounds that the whole property is to be placed on the market as one and the same time.
Practically, the following may apply-
Prudent lotting (if it would be practical to lot, to maximise income)
Market flooding is to be ignored (lots of one asset marketed at the same time)
Take into account any special purchasers.
In what circumstances do you not have to comply with the RICS Redbook?
Brokerage and Agency
Internal Purposes only
Expert witness
Court proceedings
When performing statutory functions
What are the five methods of valuation?
Comparable, Investment, Profits, Residual and Depreciated Replacement Cost.
Explain what the Residual method is and when you would use it?
This method is usually used to value development land.
1.) Establish Gross Development Value (value of completed development)
2.) Deduct costs (construction, planning, professional fees etc)
3.) Deduct developer profit (usually 20%)
4.) Take into account interest over construction period (PV of time to complete project @ yield)
5.) = what someone will pay for that land as is
Explain what the Depreciated Replacement Cost is and when you would use it?
DRC is used where there is a specialist building and no market (hospital or church for example).
1.) Establish the cost of constructing a contemporary version, then plus 10% for professional fees and the base value of the land.
2.) Deduct the obsolescence (physical, functional and economic obsolescence)
3.) Quantify that obsolescence (takes an experienced valuer, very subjective)
Explain how you would carry out the profits method and when you would use it?
The profits method is used where the rent or market value of a property is derived from the income it can generate.
1.) Establish fair maintainable operating profit, capable of being generated by a reasonable operator.
2.) Establish the fair maintainable turnover
3.) Deduct turnover from profit. 50% of this figure should be what the MR is.
4.) MR x VP for the term @ % yield.
Explain how you completed the valuation of the hotel lease.
I used the investment method (term and reversion).
1.) Established reversion using comparable evidence, then applied PV in 87 years time at a 8% yield to reflect not obtaining VP for that time.
2.) Split the term into the know rent reviews.
First 13 years @ £250 = PV @ 8% for 12 years (x£250)
Second 25 years @£500 = PV @8% for 25 years (x£500), but then PV @ 8% in 13 years to reflect not receiving that income for another 13 years.
Repeat then add term and reversion together.
Explain how you carry out the comparable method?
Collate similar property transactions (location, character, size) that have completed recently. Sort and analyse them based on the above. Apply the values to establish an opinion of value.
Hierarchy of evidence -
Category A = Direct transactions
Category B = General Market Data
Category C = Other sources
RICS Professional Standard - Comparable evidence in real Estate Valuation (October 2019)
What are the physical and non-physical factors that affect value?
Physical =
Location
Character
Condition
Size
Construction
Access
Non-physical =
Planning (policy and permissions)
Designations (NP etc)
Lease terms
Ownership shares
Restrictive covenants
Overage
What is VPS1?
Is a mandatory Valuation technical and performance standard that relates to what should be included within terms of engagement.
1 - Identification and status of valuer
2 - Identification of the client
3 - Identification of other users
4 - Identification of the asset or liability being valued
5 - Valuation currency
6 - Purpose of valuation
7 - Basis of value adopted
8 - Valuation date
9 - Nature and extent of the works
10 - Nature and sources of information upon which the valuer is to rely on
11 - All assumptions and special assumptions to be made
12 - Format of the report
13 - Restrictions to use, distribution and publication
14 - Confirmation of accordance with IVS
15 - Basis on which the fee will be calculated
16 - Complaints handling procedure
17 - Potential for RICS monitoring
18 - Limitations to liability
Why is PII important?
Protect clients from any financial loss that the firm cannot meet.
Protect the firm from losses they cannot meet.
Should be acquired through the RICS as the broker, be on an each and every basis and cover is dependant on turnover.
£100k or less = £250,000 of cover
£100k - £200k = £500,000 of cover
over £200k = £1,000,000 of cover
My firm has £10,000,000 due to extent of work and valuations we do.
How did the AOC affect value?
An agricultural occupancy condition is a planning condition restricting a property to only be occupied by someone working in agriculture.
This limits the amount of people who are eligible significantly, and limits mortgage providers.
Comparable evidence suggests a discount of between 20-30%, in this case we applied 25% as the house was adjacent to the farm, therefore someone purchasing the whole was likely to be able to comply with the AOC.
Talk me through how you valued the easement consideration.
Established existing value of the property (comparable method), then tried to establish uplift relating to improved access but this was very difficult to quantify so used 5% based on comparable easement valuations. £45,000
Deducted cost of establishing access and associated fees (planning) £15,000
Applied Stoves vs Cambridge (one third). £10,000
Explain the Stokes v Cambridge case.
Stokes vs Cambridge 1961
A case whereby releasing the access rights on the ransom strip unlocked development value on other land. But, it also unlocked development opportunity of land owned by Cambridge who also owned the ransom land, therefore this encouraged them to take a lower consideration of one third of the uplift.
Courts noted that if the ransom owner has no interest in the access being granted, up to 50% of the uplift can be demanded.
What is a Charities Act valuation?
The Charities Act 2011 (as amended in 2022), states that a charity must seek the guidance of a Chartered Surveyor (Registered Valuer) prior to disposing property or interest in property (lease over 7 years). The Valuation Report is for the Charitable Trust, not the beneficiaries to the charity.
What should be included within a Charities Act valuation?
Comply with Redbook and then go onto advise on sale methods, any repairs that need doing, lease terms etc
What is adverse possession?
Adverse possession requires factual possession of the land, with the necessary intention to possess and without the owner’s consent. 10 years for registered land and 12 years for unregistered land.
