Valuation (Level 2) Flashcards
What 3 standards relate to Valuation?
- RICS Valuation - Global Standards (2022) ‘Red Book Global’
- International Valuation Standards - incorporated into Red Book Global
- UK National Supplement (2024)
Explain your understanding of the rotation rules for valuation contained within the RICS Red Book Supplement
no more than 10 executive years, effective from May 2024
What Professional Indemnity Insurance (PII) is required when undertaking a valuation?
depends on company turnover
typically £1m
What does the Red Book apply to?
All members and regulated firms MUST comply with Parts 3 and 4 of the global Red Book.
Part 3 – PS 1 and 2
Part 4 – VPS 1-5
What is the structure of the Red Book Global 2022
Introduction
Glossary
Professional Standards (PS)
Valuation Technical and Performance Standards (VPS)
Valuation Applications (VPGA)
The International Valuation Standards (IVS)
Purpose of Red Book?
Consistency
Objectivity
Transparency
(COT)
Who signs off Red Book report?
RICS registered valuer
Who is to be named in a Red Book report?
Anyone with a material supporting role in the valuation
How many Professional Standards are there?
2
Are Professional Standards mandatory?
Yes
Name the Professional Standards
PS 1 - Compliance where written valuation provided
PS 2 - Ethics, competency, professional scepticism, disclosures (Conflicts of Interest), difference between internal and external valuers
What are the exemptions to PS 1
5 exemptions
- Valuation for internal purposes
- Litigation, negotiation e.g. rent review
What is the difference between an internal and external valuer? PS 2
Internal - employed by company, for internal use only, no 3rd party reliance
External - no links with asset or client
What is VPS?
Valuation Professional Standards
Is VPS mandatory?
Yes
What are the VPS?
VPS 1 - Terms of Engagement
VPS 2 - Investigation, inspections, records
VPS 3 - Valuation Reports
VPS 4 - Basis of Value, assumptions, special assumptions
VPS 5 - Valuation Approaches and Methods
What is included in the Terms of Engagement (VPS 1)
18 items
- Identification and status of the valuer
- Identification of client
- Identification of any other intended users
- Identification of the asset(s) being valued
- Valuation currency
- Purpose of valuation
- Basis(es) of value adopted
- Valuation date
- Nature and extent of the valuer’s work
- Source(s) of information relied upon
- Assumptions and special assumptions
- Format of the report
- Restrictions on use, distribution and publication of the report
- Confirmation that the valuation will be undertaken in accordance with the IVS
- Fee calculation
- Reference to the firm’s complaints handling procedure, with a copy available on request
- A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations
- A statement setting out any limitations on liability that have been agreed
What are the requirements of Inspection, Investigations, records (VPS 2)
Restrictions or limitations recorded in the Terms of Engagement (VPS 1) and the report (VPS 3)
Proper record of inspections kept in appropriate business format
Desktop due diligence, location maps, historic file records, leases, flood risk, risk assessment, access arrangements
What is included in valuation reports (VPS 3)
16 Minimum Requirements:
- Identification and status of valuer
- Client and any other intended user
- Purpose of valuation
- Identification of the asset to be valued
- Basis of value
- Valuation date
- Extent of investigation
- Nature and source of information 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
- Statement setting out any limitation
What are the main basis of value under VPS 4?
Market Rent
Market Value
Investment Value
Fair Value
What is Market Rent? (VPS 4)
‘The estimated amount for which an interest in real property should be leased’
* on the valuation date
* between a willing lessor and a willing lessee
* on appropriate lease terms
* in an arms length transaction
* after proper marketing
* where parties acted knowledgeable, prudently and without compulsion.
What is Market Value? (VPS 4)
‘Market Value ‘
‘The estimated amounts for which an asset or liability should exchange’
* on the valuation date
* between a willing buyer and willing seller
* in an arm’s length transaction
* after proper marketing
* where parties acted knowledgeably, prudently and without compulsion
What is Investment Value? (VPS 4)
‘The value of an asset to a particular owners or prospective owner for individual investment or operational objectives’
* may differ from Market Value
* sometimes used as measure of worth to reflect the value against the client’s own investment criteria.
How would you calculate Investment Value (worth)?
In much the same methodology as any other valuation, however would make a subjective estimate for a client using their inputs, not market inputs.
What is Fair Value? (VPS 4)
‘Fair Value’
‘The estimated price an asset would change hands between knowledgeable parties, considering market conditions, but not necessarily in an open market’
* Basis of value now required if IFRS adopted by client
* Consistent with definition of Market Value
What is Liquidation Value?
‘The amount that would be realised when an asset or group of assets are sold on a piecemeal basis. Liquidation value should take into account the costs of getting the assets into saleable condition as well as those of the disposal activity’
* Not used in UK
What is an assumption?
An assumption is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation or verification
What is a special assumption?
A special assumption is made by the valuer where an assumption either assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant in a transaction on that valuation date.
What is the difference between an Assumption and a Special Assumption (VPS 4)?
Both must be agreed with the client prior to reporting an opinion of value.
Assumption – reasonable to accept as fact in the context of the valuation assignment without specific investigation or
verification.
Special Assumption – an assumption that either assumes facts that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant. E.g. a bid from a special purchaser has been made.is expected.
When can an assumption be made (VPS 4)?
Only assumptions that are reasonable and relevant having regard to the purpose for which the valuation assignment is required should be made. All assumptions that are to be made in the conduct and reporting of the valuation assignment must be identified and recorded in the Terms of Engagement (VPS1).
When can a special assumption be made (VPS 4)?
Special assumptions may only be made if they can reasonably be regarded as realistic, relevant and valid for the particular circumstances of the valuation. In order to provide the client with the valuation required.
What are the three main valuation approaches (VPS 5)
- Income
- Market
- Cost
How many VPGA’s are there?
10
What does VPGA stand for?
Valuation Practice Guidance Applicationa
What VPGA’s are relevant to your role?
VPGA 1 - vital for inclusion in financial accounts
VPGA 2 - valuation for secured lending
VPGA 8 - valuation of real property interests (ESG + sustainability).
VPGA 10 - matters that give rise to valuation uncertainty
Under VPGA 2, how do you deal with conflicts of interest in secured lending valuations?
Any previous, current or anticipated involvement with the prospective borrower/property must be disclosed to lender (‘previous involvement’ = past 2 years, but can be longer)
Confirm that they are acting as ‘independent valuers’
VPGA2 gives examples of such involvement resulting in conflict of interest include:
A longstanding professional relationship with prospective borrower/owner of property
When valuer will gain fee from introducing the transaction to the lender
If there is a financial interest in the property holding or prospective borrower
When valuer is retained to act in the disposal/letting of the completed development on the subject property
In addition to the min. valuation report requirements, what must also be reported for loan security valuations?
Disclosure of any conflicts in terms of engagement and arrangements to manage the conflict (last 2 years)
Valuation method adopted, supported with the calculation
When a recent transaction at the property has occurred/provisionally agreed price disclosed, the extent to which that information has been accepted as Market Value
Comment on the suitability of the property for lending
Any circumstances of which the valuer is aware that could affect the price
if the property is, or is intended to be, the subject of development or refurbishment for residential purposes, the impact of giving incentives to purchasers
Potential and demand for alternative uses
Occupational demand for the property
When might a property not be suitable for secured lending?
Short leasehold interest, high flood risk, tenant break option very soon (cannot guarantee income for any period of time)
Is VPGA mandatory?
No - advisory
What is IVS? What is purpose
International Valuation Standards
Promote and maintain high level of public trust in valuation practice by establishing requirements for valuers
What is the structure of IVS?
Asset Standards
General Standards
What are the core principles of valuation?
- Ethics
- Competency
- Compliance
- Basis of Value
- Date of Value
- Assumptions and Conditions
- Intended use
- Intended user
- Scope of Work
- Identification of Subject of Valuation
- Data
- Valuation Methodology
- Communication of Valuation
- Communication of Valuation
- Record Keeping
What are the general standards?
IVS 101 – Scope of Work
IVS 102 – Investigations and Compliance
IVS 103 - Reporting
IVS 104 – Bases of Value
IVS 105 – Valuation Approaches and Methods
What is IVS 101?
Scope of Work (Terms of Engagement)
18:
1. Identification and status of the valuer
2. Identification of client
3. Identification of any other intended users
4. Identification of the asset(s) or liability(ies) being valued
5. Valuation currency
6. Purpose of valuation
7. Basis(es) of value adopted
8. Valuation date
9. Nature and extent of the valuer’s work – including investigations – and any limitations thereon
10. Source(s) of information upon which the valuer will rely
11. All assumptions and special assumptions to be made
12. Format of the report
13. Restrictions on use, distribution and publication of the report
14. Confirmation that the valuation will be undertaken in accordance with the IVS
15. Fee calculation
16. Reference to the firm’s complaints handling procedure, with a copy available on request
17. A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations
18. A statement setting out any limitations on liability that have been agreed
What is IVS 102?
Investigations and Compliance
Inspection
Compliance with standards
Record keeping
What is IVS 103?
Reporting
- the scope of the work performed
- intended use,
- intended users,
- the purpose,
- the approach or approaches adopted,
- the method or methods applied,
- the key inputs used,
- the assumptions made,
- the conclusion(s) of value
- the date of the report (which may differ from the valuation date).
What is IVS 104?
Basis of Value
- Market Value
- Market Rent
- Equitable Value
- Investment Value
- Synergistic Value
- Liquidation Value
- Far Value
- Fair Market Value
What is IVS 105?
Valuation Approaches and Methods
Approaches
- Income
- Market
- Cost
Methods
1. Investment
2. Comparable
3. Residual
4. DRC
5. Profits
What is the investment method?
Used when income stream to value (tenants)
Rental income capitalised to produce capital value.
Includes assessing rental values (market rent) and a market-based yield.
The investment method can reflect income streams which are under-, rack- and over-rented by incorporating risk within the yield choice (i.e. an all risks yield).
What types of investment method are there?
Term and reversion
Hardcore and Layer
Hardcore and Topslice
DCF
Tell me about Term and Reversion?
Investment method
Traditional, implicit approach
For under-rented properties / Reversionary investments
Reduce yield to reflect low MR
- capitalise passing rent using YP at discounted yield for remaining years
- capitalise reversion using market rent into perp using YR at full market rate discounted using present value.
- Add together
- Stand back and look
Tell me about Hardcore and Layer?
Investment Method
Reversionary Investments
Under-Rented
It is used for REVERSIONARY (under-rented) properties.
Typically used by the institutional investment market, and used when the reversion is close in time.
Income flow is divided horizontally. Both the hardcore (PR) and layer (MR-PR) are valued into perpetuity, but the layer is deferred to the next lease event.
An Equivalent Yield is applied to both the hardcore and layer.
Argus Val Cap uses this method.
Tell me about Hardcore and Topslice
It is used for OVER RENTED investments.
Income flow is divided horizontally. The hardcore (MR) is valued into perpetuity at a net initial yield.
The top slice (PR-MR) is capitalised to next lease event at a net initial yield with a risk adjustment.
There is a yield differential; top slice at an inflated yield to reflect higher risk of over-renting.
Different yield type can be used based on market comparable evidence.
NO PV of £1 needed as both layers of income are being received NOW.
What is growth implcit?
rental growth built into the choice of yield, not explicitly modelled in calculation.
The Yield adopted assumed many of assumptions that are made explicit in a DCF approach and the risks are hidden in the selected yield
Tell me about the DCF method?
Investment method
Growth explicit
Assumptions made
Cash flow explicitly modelled incorporating assumptions.
Short leasehold interests
Properties with income voids
Over-rented properties
Why do we discount in a DCF?
To reflect the time value of money. The discount rate will always reflect the investor’s perception of risk. Also known as the capitalisation rate.
Simple Methodology to find Market Value?
- Estimate cash flow (income less expenditure)
- Estimate exit value at end of holding period
- Select discount rate
- Discount cash flow at discount rate
- Value is the sum of the completed discounted cash flow to provide the NPV
What is the PV of £1 formula?
PV of £1 = 1
÷
(1+i)n
‘i’ is the yield that the valuer thinks is appropriate.
‘n’ is the term in years (to next rent review)
What is the Years Purchase?
The relationship between the income and the capital value.
The number of years it will take for the annual income to add up to the capital value, when taking into account the time value of money (i.e. that it’s decreasing). i.e. the right to receive £10,000pa for 4 years won’t = £40,000 payment today.
What is the Years Purchase into perpetuity formula?
Used for valuing the reversionary rent into perpetuity.
100 ÷ i
i.e. 100/6.75 = 14.8
How would you carry out a DCF?
estimate the cashflow (income less expenditure)
estimate the exit value at the end of the holding period
select a discount rate
discount the cashflow using the discount rate to give an NPV (which is the Market Value)
What is NPV?
- Sum of discounted cashflows of the project
- Used to see if investment gives possible return as TRR
- When positive = has exceed TRR
- When negative = has not achieved TRR
What is IRR?
- Rate of return all future cashflows must be discounted so NPV = 0
- IRR used to assess total returns
What Guidance Note related to DCF?
RICS Guidance Note on ‘Discounted Cash Flows for Commercial Property Investment’ 2010.
How would you calculate the IRR?
DCF
- Input MV as a negative CF
- Input projected rents over holding period as positive
- Input projected exit value at the end as positive value
- Discount rate IRR is the rate to make NPV = 0
Tell me about the comparable method?
(RICS Guidance Note, Comparable Evidence in Real Estate Valuation, 2019)
6 steps
- Search and select comparable
- Confirm details and analyse headline rent to give net effective rent
- Assemble comparables in schedule
- Adjust comparables using hierarchy of evidence
- Analyse comparables to form opinion
- Report value and prepare file note
Where there is a lack of evidence, surveyor should use professional judgement under Guidance Note.
What is the hierarchy of evidence?
- Category A – Direct comparables, completed transactions
- Category B – General data that can provide guidance
- Category C – Background data
How do you find good comparables?
- Inspection of area, agents marketing boards
- Local agents
- In-house database records
- Market sentiment
Why do we make adjustments to comparables when using the comparable method?
To express the comparable in like terms to the subject
How do you analyse comparables?
Display key findings
Research if transaction is open market
Size
Location
Date
Specification
Condition
Layout
Price
Tell me about the Profit Method?
Purpose
* Valuations of trade related property where value depends on profitability of company
* E.g. pubs, hospitals, hotels
* Basic principle = value depends on profit generated, not physical building
* Must have accurate and audited accounts for last 3 years
Simple Methodology
* Capitalise EBITDA by appropriate yield to achieve market value
* Cross check with comparables if possible
Tell me about the Residual Method?
Purpose
* Used to determine the residual site value
* Used to assess viability of development scheme
* Output is market value of the land
* Requires assumptions around input costs
Methodology
* First assess highest value use of land
* Calculate value of finished scheme i.e. gross dev. Value (GDV) based on market comparable
* Deduct development costs (developer profit finance costs)
* Residual Value = GDV – total costs (inc profit)
Fees
* Professional fees = 10-15% of total construction costs
* Purchaser fee = 6-7% (stamp duty, legal costs, agency)
* Contingency = 5-10% of construction costs
* Developers profit = 15-20% of GDV
Tell me about the Depreciated Replacement Cost Method
Purpose
* Used for owner-occupied property or specialised property
* E.g. airports
Methodology
* Value of land in existing use
* Add current costs of replacing the building plus fees less a discount for depreciation.
IS the DRC Method Red Book Compliant?
It is NOT suitable for Red Book compliant valuations for secured lending
It can be used to calculate Market Value for specialised properties only for valuations for financial statements
What is a Yield?
- Measure of investment return (expressed as % of capital invested)
- Yield = Income / Price x 100
What is All Risk Yield?
Remunerative rate of interest used in the valuation of fully let property
Why are secondary yields softer?
Reflect risk
What is Equivalent Yield?
Average weighted yield between the term and reversion - so effectively same yield could apply to both, into perpetuity.
Weighting takes into account the value of the passing rent and the reversionary rent and for how long the term subsists
Smoothes out the income stream
What is Initial Yield?
Simple income yield for current income and price
What is the difference between the Gross Yield and the Net Yield?
Gross: Yield calculated on Gross price before Purchasers Costs have been deducted.
Net: Yield calculated on the Net price (i.e. it’s been adjusted for Purchaser’s Costs).
What is reversionary yield?
MR / Current price on investment let below MR
How do you calculate Years Purchase?
YP = 1 / yield
YP = number of years for its income to repay its purchase price
What is the UK National Supplement (May, 2024)
The new UK National Supplement has been updated following the independent Valuation Review led by Peter Pereira Gray. Concerns raised by the Review included valuation reliability, valuer independence and market dynamics.
Why is there a need for UK guidance as well as global standards (Red Book)
Global valuation standard is to enable consistence and transparency globally, whilst UK guidance is specifically for the UK market, align with the UK jurisdiction an practice
To incorporate VPGA’s on aspects specific to the UK such as inheritance tax and CGT
What steps would you take before commencing a valuation instruction?
Competence PS 2
Conflict of Interest PS 2
Terms of Engagement (VPS 1)
What’s the timeline of the valuation process?
- 16 step process (don’t need to know, just remember key points)
- Receive instruction
- Check competence
- No COI
- Issue ToE to Client
- Receive signed ToE from Client
- Gather information
- Undertake DD
- Inspection + Measure
- Research market
- Undertake valuation
- Draft response
- Check by another surveyor
- Finalise, signed
- Report to client
- Issue invoice
- File for archiving
What statuatory Due Dilligence is necessary prior to undertaking valuation?
- Asbestos regulations
- Business rates
- Contamination
- Equality Act 2010
- EPC
- Flood risk
- Fire Safety
- H&S
- Title Deed
- Planning history
What’s mentioned in IVS 105?
Valuation Approaches and Methods
- Income
- Cost
- Market
What is the RICS Valuer Registration Scheme (VRS)?
Regulatory monitoring scheme for all valuers carrying out Red Book Global valuations from October 2011.
Three aims of the scheme
* Improve quality of valuation and ensure high standards
* Meet RICS requirements to self-regulate effectively
* To protect and raise the status of the valuation professional as the leasing expertise in valuation
Clients should expect following from valuation
* Openness and transparency
* RICS protection and IVS
* Expertise and clear reporting
* World class regulation
Any valuer registered to scheme can state ‘RICS registered vauer’.
Must have done valuation to level 3.
As per the VRS, what should clients be able to expect from an RICS valuation?
Openness and transparency
RICS protection and International valuation standards
Expertise and clear reporting
‘World class regulations’ RICS 2010
What is a ransom strip?
A piece of land which controls the access to another piece of land
What is zoning?
A valuation technique NOT a method of valuation
Used for comparison of retail properties to create a unit of comparison for different sized buildings
Rationale: the rental value of the property reduces away from the street
‘Halving back’ principle with 6.1 m (20 ft) zones. Zone A-D then Remainder
Some London retail streets (Oxford, Regent and Bond Street) or certain prime shopping streets in Scotland – 9.1m (30 ft)
How would you treat basements and first floor areas when zoning?
Dependent on comparable evidence (check table breakdown to see how treated), however usually Area/10, then multiplied by ITZA. Depends on space usage, quality and accessibility.
How would you treat a return frontage?
Usually add a 10% uplift but dependent upon the comparable evidence and shopper’s footfall. Must consider quality of pitch for each frontage (highly reliant on footfall).
What is ‘natural zoning’?
When the property has unusual physical characteristics, might adjust the conventional zoning depths
What is ‘mirror zoning’?
A technique that can be used for a shop with two main frontages
What is ‘masking’?
The valuation of ‘hidden’ or obscured areas within the retail unit
What is special value?
“an amount that reflects particular attributes of an asset that are only of value to a special purchaser”
This could arise from the physical, functional or economic association of the property with another i.e. adjoining property
Special value may be generated when transaction is NOT arm’s length where there is a special purchaser
What is a Special Purchaser?
a particular buyer for whom a particular asset has special value because of advantages not available to other buyers in the market e.g. a tenant purchasing his freehold interest
What is a party wall?
It stands astride the boundary of land belonging to two or more different land owners
There are Chartered Surveyors who specialise in party wall disputes
Party Wall Act 1996 – provides framework for resolving disputes in relation to party walls.
The Act provides a building owner who wishes to carry out work to an existing party wall with additional rights beyond ordinary common law rights
Party wall owners MUST inform all adjoining owners if intend to undertake any works to party wall
What is WAULT?
Weighted Average Unexpired Lease Term. Calculates to the first break or expiry weighted by the contracted rent.
Often used when valuing multi-let properties.
What differences are there between the Red Book and IVS?
IVS are produced by the IVSC (council) which is an international body
RICS Red Book adopts the IVS and provides an implementation an application framework for members and firms
How do you calculate a YP from a yield?
If it’s YP into perpetuity (which is 100/yield):
Then 100 / the yield = YP
What guidance note provides advice to valuers on valuer’s liabilities, PII liability caps and Terms of Contract?
RICS Guidance Note on Risk, Liability and Insurance in Valuation Work, 2nd Ed 2018
Provides advice of liability caps, 3rd party reliance, PII
If the Net Initial Yield was higher than the equivalent yield, would it be reversionary or over-rented? What if they’re the same?
If NIY is lower than the equivalent yield = REVERSIONARY
If NIY is higher than the equivalent yield = OVER-RENTED
If the yields are the same = RACK RENTED
PII – why is it required? Case law?
Rule 9 of Rules of Conduct for Firms
Regulated firms need to ensure they have adequate and appropriate professional indemnity insurance
Requires firms to put in place run-off cover
Scullion v Bank of Scotland: the Court of Appeal’s decision that a surveyor who provides advice on value to a lender does not owe the borrower a duty of care.
Why would you undertake research on flooding risks?
This may detrimentally impact on the marketability and valuation of the property as it may be difficult to or expensive to obtain insurance – use Environment Agency website to check the flooding risk
How would you analyse rent free periods and headline rents?
The process of devaluing a headline rent with a rent-free period to equal a net effective rent
3 months fit out is typically deduct from rent-free period as its market standard
Main approach:
1. Straight line method (either until lease expiry or next rent review/lease event)
Could:
2. Use of DCF
What is the headline rent?
The rent payable under lease terms after all incentives have expired, such as a rent-free period.
It is an artificially inflated value. Does not represent the true market rental value, however helps to sustain the capital value of the property particularly as rent reviews are upwards only.
Tenant agrees to this as they benefit from a relief period via the incentives.
What is net effective rent? How is it calculated?
The headline rent minus any incentives, to lease expiry or next lease event.
Rent x (Term – Rent Free)
÷
Full Term
How do you choose which investment method approach you will use?
Depends on several factors, including:
Establish if over- under- or rack-rented
Company preferences and software
The reversion in terms of time and rental value
Industrial Cardiff - What value did you use?
Under VPGA 2 this valuation was for secured lending purposes
Industrial Cardiff - What costs were included?
Agency fees / Legal fees = 15%
SC Shortfall = £0.40p psf
Business Rates
No Capex
Industrial Cardiff - Why did you value the Market Value?
Under VPGA 2 / VPS 2 - the basis of value for secured lending was Market Value
Industrial Cardiff - What method did you use to value?
I used the Hardcore / Layer Method
This was used as the investment was reversionary (under-rented investments). The passing rent was £260k and the market rent was £270k
The hardcore refers to the base, reliable income stream or passing rent that is assumed to be relatively safe in nature.
When PR < MR, there is potential for the property to generate more income in the future; This potential is what we call the layer of income (MR - PR).
Both the hardcore (PR) and layer (MR-PR) are valued into perpetuity, but the layer is deferred to the next lease event.
An Equivalent Yield is applied to both the hardcore and layer. This is known as the cap rate.
The cap rate (yield) takes into account factors such as the location, quality of the property, tenant strength, and market conditions
Used Argus - Hardcore/Layer is standard practice
Industrial Cardiff - What what the size of the industrial estate
two units comprised of circa 25,000 sq ft each
Industrial Cardiff - What was the propertys condition?
the property was in relatively good condition with no outstanding capex required
Industrial Cardiff - What was the initial yield?
7%
Industrial Cardiff - Why did you apply the same equivalent yield to both units?
the units were both in very similar spec, and condition, they had a similar unexpired term
Industrial Cardiff - What equivalent yield did you estimate?
6.75%
Adopted same for both units as very similar terms, and spec. If this was different, could adopt a split yield
Using investment evidence comparables
Industrial Cardiff - Why did you not use Term and Reversion?
Could have been appropriate however, Hardcore and Layer was standard practice at Savills
Industrial Cardiff - what rent free did you assume?
6 months
Industrial Cardiff - what void did you assume?
9 months
Industrial Cardiff - what was the contracted rent?
£260k
Industrial Cardiff - what was the market rent?
£270k
Industrial Cardiff - what was the WAULT
2 years
Industrial Cardiff - what was the year of construction?
1970
Industrial Cardiff - where was the propertry?
Industrial park with 6 units
5 miles north of Cardiff city centre
Industrial Cardiff - what was the construction?
steel frame construction.
Eaves height of 9m which is very good (anything above 8m is good)
Industrial Cardiff - What due dilligence enquiries did you undertake?
Under VPS 2, due dilligence included:
- Asbestos regulations
- Business rates
- Environemntal Risk - acceptable risk
- EPC - copy received
- Flood risk - very low
- H&S
- Title Deed
- Planning history
Industrial Cardiff - Talk me through the conflict of interest check
Under PS 2 of the Red Book Global 2022 I carried out a conflict of interest check
Aligned with Conflict of Interest, 2017, professional standard
Using internal database that revealed no existing conflict.
Savills internal system called DWS
Industrial Cardiff - What did your terms of engagement include?
VPS 1
18 items
- Identification of valuer
- Identification of client
- Identification of any other intended users
- Identification of the asset(s) being valued
- Valuation currency
- Purpose of valuation
- Basis(es) of value adopted
- Valuation date
- Nature and extent of the valuer’s work
- Source(s) of information relied upon
- Assumptions and special assumptions
- Format of the report
- Restrictions on use, distribution and publication of the report
- Confirmation that the valuation will be undertaken in accordance with the IVS
- Fee calculation
- Reference to the firm’s complaints handling procedure, with a copy available on request
- A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations
- A statement setting out any limitations on liability that have been agreed
Industrial Cardiff - Why did you investigate other vacant properties?
To get an understanding of potential void periods
Industrial Cardiff - Who was the client?
Lloyd’s Bankk
Retail, Leeds - What is Fair Value?
‘The price received to sell an asset in an orderly transaction between market participants at the
measurement date.’
Retail, Leeds - Why did you adopt Fair Value?
Accounting purposes - under VPGA 1
Retail, Leeds - Who was the Client?
GMPF
Retail, Leeds - What was included in AML checks?
Fair Value is consistent with the definition of Market Value under the Red Book Global.
Fair Value is “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”
Retail, Leeds - What is the difference between Market Value and Fair Value?
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Retail, Leeds - How did you incorporate zoning into your market values?
I spoke to agents to provide a breakdown of Market Rent IZTA A
Retail, Leeds - Talk me through your valuation methodology?
I used the Hardcore / Layer Method
This was used as the investment was reversionary (under-rented investments). The passing rent was £450k and the market rent was £455k
The hardcore refers to the base, reliable income stream or passing rent that is assumed to be relatively safe in nature.
When PR < MR, there is potential for the property to generate more income in the future; This potential is what we call the layer of income (MR - PR).
Both the hardcore (PR) and layer (MR-PR) are valued into perpetuity, but the layer is deferred to the next lease event.
An Equivalent Yield is applied to both the hardcore and layer. This is known as the cap rate.
The cap rate (yield) takes into account factors such as the location, quality of the property, tenant strength, and market conditions
Used Argus - Hardcore/Layer is standard practice
Retail, Leeds - What was the equivalent yield?
7.3%
Retail, Leeds - What was the WAULT?
the WAULT was 3 years.
Retail, Leeds - What was the reversionary yield?
7.5%
Retail, Leeds - How did you estimate the equivalent yield?
Inputted property data, such as current rental income, lease terms, outgoings and any future reversionary rent
Enter comparable properties sales data to be used as benchmarks, including sales prices, rental income, other attributes such as location and age.
Argus determines the NIY by dividing NOI/Sale Price
Equivalent yield is essentially a blend of initial yield and reversionary yield (expected yield once property reaches
Equivalent yield calcuated on Argus (weighted average yield) that reflects bot the current income and the futre rental growth
Based on the comparables’ yields, adjusted for differences, and considering the income profile of the subject property, ARGUS estimates the equivalent yield.
This yield reflects a single, blended rate that incorporates the different income streams (current and reversionary) and future expectations.
Retail, Leeds - How can the equivalent yield be influenced by longer leases or voids?
If the property has secure long-term leases or upward-only rent reviews, the equivalent yield may be lower, as investors are willing to accept a lower return for lower risk.
Conversely, properties with short leases or void periods might attract a higher equivalent yield due to the increased risk.
Retail, Leeds - What was the passing rent?
£450k
Retail, Leeds - What was the valuation
£4.7m Fair Value
Retail, Leeds - Can you describe the property?
located on prominent position on the prime thoroughfare of Briggate extending to 10,786 sq ft
