Valuation & Loan Security Flashcards
What do you do before undertaking a valuation?
Consider: competence, independence (COI), Terms of Engagement
You have been instructed on a valuation, what do you do before visiting the site?
Pre-assessment due diligence: planning history, rights over property, H&S compliance, contamination, EPC ratings, rates/taxes
What are the methods of valuation?
- Comparative (Market approach)
- Investment (Income approach)
- Profits (Income approach)
- Residual (Income approach)
- Depreciated Replacement Cost (DRC) (cost approach)
What are the Valuation Approaches?
- Income approach - converting current and future cashflows into capital value (Investment, Residual and Profits Method)
- Cost approach - reference to the cost of the asset whether by purchase or construction (DRC method)
- Market approach - using comparable evidence available (i.e. Comparative method)
What is the hierarchy of evidence?
- Cat A: direct comparables (completed transactions, similar marketed properties)
- Cat B: general market data (commercial databases, indices, historic evidence)
- Cat C: other sources (interest rates/stock movements, agent discussions)
How do you undertake the Comparative method of valuation?
- Search and select comps
- Confirm/verify details and analyse headline rent to give NER as appropriate
- Assemble comps in schedule
- Adjust comparables using hierarchy of evidence
- Analyse comps to form opinion of value
- Report value and prepare file note
How do you undertake the Investment method of valuation?
Used: when income stream available to value
- Conventional Approach: market rent x YP = market value (importance of comps for rent and yield)
- Term and reversion: under rented, term capitalised until term certain (next review/expiry) at initial yield, then reversionary yield applied to market rent thereafter in perpetuity
- Hardcore: over rented; market rent at market yield in perp, over rent slice higher yield
How do you undertake the Profits method of valuation? and where do you use it?
Method: annual turnover – costs/purchases = gross profit; -working expenses = unadjusted net profit; - operators remuneration = adjusted net profit (EBITDA); then capitalised at appropriate yield to achieve market value.
Used: for trade related property (pubs, hotels, care homes), where there is a lack of comparable evidence
Requires: 3 years minimum audited company accounts
How do you undertake the Residual method of valuation? and where do you use it?
Method: Gross Development Value (GDV) – hard and soft costs of development = site value
Used: to determine residual site value; development appraisal (development viability)
How do you undertake the DRC method of valuation? and where do you use it?
Method: value of land in existing use + cost of replacing building (plus fees) – discount for depreciation and obsolescence
Used: when market comparisons are limited, specialised properties (school, church, lighthouse)
What types of Yields are there and what is the difference between them?
- Gross Yield: not adjusted for purchasers costs
- Net Yield: factoring purchasers costs
- Initial Yield: rack rented, simple income yield for current income and price
- Reversionary Yield: yield applied for reversionary period
- Equivalent Yield: weighted average yield using initial and reversionary yield
- Blended Yield: summed equivalent yield where multiple units in the same building
What are some factors that determine your yield?
- Determined by risk (higher risk, higher yield) factors: prospects of growth, use, quality of covenant, location, obsolescence, voids, liquidity (ease of sale)
What is Zoning?
Zoning is a valuation technique, not method; it is the concept that the front of a retail unit is more valuable than the back. the technique splits retail shopfront into 20ft (6.1m) zones, each zone back halves in value
What does the RICS Valuation - Global Standards 2021 (Red Book) Cover?
The Redbook covers all PS = Professional Standards, VPS = Valuation Performance/Technical Standards; VPGA = Valuation Practice Guidence Applications; IVS = International Valuation Standards
What are the key updates in the Red book?
- The need for compliance with the Red Book Global and adequate terms to reflect this
- Valuation for financial reporting purposes (VPGA1) - makes reference to IFRS13 and IFRS16 and the need to provide fair value measurments
- Reference to the use of Profits method for certain trade-related property valuations (VPGA4)
- Greater emphasis on Sustainability and ESG factors, particularly - how ESG and Sustainability factors should form an integrel part of the valuation approach (considering comments about costs to meet future changing regulations)
What are your typical fees in a Valuation?
Purchasers fees (average 5.8%), agent fees (1%), legal (0.5%), VAT (20%) plus Stamp Duty Land Tax.
- SDLT bands: 0-150k, 0%; 150-250k, 2%; >250k, 5%.
What software do you use in valuations?
Types: Kel, Argus Developer.
Benefits: decreases potential user error chances, automates calculations (can play with variables to compare outcomes)
Restrictions: Inflexible; cannot allow for 100% debt financing.
What are the Valuation Technical & Performance Standards (VPS)? - They are mandatory worldwide
VPS 1 - Terms of Engagement: The covers what must be included in standard ToE for valuation
VPS 2 - Inspections, Investigations and Records:
* Valuers must verify the necessary information that is relied upon for the valuation
* Proper records must be held on inspections and investigations
VPS3 - Valuation Reports: the minimum requirments to be stated within a valuation report
VPS4 - Bases of Value: This outlines the different bases of value and what they are used for
VPS5 - Valuation Approaches and Methods: Valuers are responsible for choosing and justifying their valuation approach and use of model, and in some cases, more than one approach may be appropriate
What is a restricted information valuation?
A restricted information valuation can be referred to as a desktop valuation where no inspection is undertaken.
Valuers must consider the following before undertaking these instructions:
1. The nature of the restriction must be agreed in the ToE
2. The possible implications of the restrictions must be confirmed in writing before value is reported
3. The valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
4. The restriction must be referred to in the report
What is the main law governing living conditions in the UK?
The Housing Act 2004, it introduced key regulations to ensure homes are safe, habitable, and not overcrowded.
What are some hazards that the Housing Act 2004 looks at in living conditions?
Damp & mould, Excess heat or cold, Fire risks, Poor sanitation, structural problems
What is a Diminution Valuation?
Diminution valuation is the decrease in a property’s value due to a specific event. The process involves: 1) Determining the pre-event value; 2) Determining the post-event value; and 3) Calculating the difference between the two.
What are the five exceptions to valuations having to be Red Book Global compliant?
- Providing agency or brokerage advice for an acquisition or disposal.
- Acting as an expert witness.
- Performing statutory functions.
- Providing a valuation purely for internal purposes.
- Providing valuation advice in the course of negotiations or litigation where the valuer is acting as an advocate.
What software do you use to check the covenant of a company?
CreditSafe
What is the Residual Method of Valuation and how is it applied?
The main aim of the residual method of valuation is to establish how much a purchaser should pay for a development site.
The gross development value is established first of all and there after all the costs associated with undertaking the development are then deducted. The remaining amount is then known as the residual value.
What are the different purposes of Valuation?
- Valuation for Financial Reporting
- Valuation for Commercial Secured Lending Purposes
- Valuation for Residual Mortgage Purposes
- Valuation for Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax
- Valuation for Compulsory Purchase and Statutory Compensation
What is the Red Book?
The RICS Red Book contains mandatory rules and best practice guidance for members who undertake asset valuations and property valuations.
Key points aim to underpin consistency, transparency, and confidence in valuations
What points would you expect to see covered in a Banks Letter of Instruction on a valuation for secured lending
What is included in your standard purchaser costs?
- Legal fees: Costs associated with conveyancing, such as solicitor fees and disbursements.
- Survey fees: Costs for carrying out surveys on the property.
- Stamp duty: Tax payable on the purchase of a property.
- Valuation fees:Costs for obtaining a mortgage valuation or a more detailed RICS valuation.
- Land registry fees: Costs for registering the ownership of the property with the Land Registry.
What is the margin for error in Valuation?
5% for standard residential, 10% for once-off commercial, and 15% if there are exceptional features to the property
What are the Stamp Duty Brackets?
For Residential: £0-£250,000 Nil, <£925,000 5%, <£1,500,000 10%, >£1,500,000 12%
For commercial: £0-£150,000 Nil, <£250,000 2%, >£250,000 5%
What are common purchaser costs %’s
Stamp Duty Land Tax - at the prevailing rate
Agent’s Fees - Say 1% of the purchase price plus VAT
Solicitors Fees - say 0.5% of the purchase price plus VAT
What are the instances where a valuers’ advice would be required?
- Loans/Mortgages: Assessing market value for lenders.
- Insolvency: Valuing assets for creditors.
- Development: Appraising site value and project viability.
- Leases: Evaluating security provided by tenants.
- Transactions: Determining market value for buyers and sellers.
