Valuation - Submission Examples

Question 1

(Islington example)

Was this a Red Book Valuation?

Answer 1

No

It was for agency purposes as the client was considering whether to sell the building.

Question 2

What are the exemptions from a Red Book valuation?

Answer 2

(ALIES)

Agency Purposes

Litigation

Internal Purposes

Expert Witness

Statutory Purposes

Question 3

(Islington example)

Why did you use the Comparative Method to value the property?

Answer 3

I used the comparative method of valuation because the property was owner-occupied (hence no income stream to value).

However, I used the investment method to cross-check my valuation.

Question 4

(Islington example)

How did you value it when you cross-checked it?

Answer 4

I used the investment method to cross-check, capitalising at an EQUIVALENT YIELD.

I did this because there is no passing rent (so the Net Initial Yield was irrelevant in this scenario).

Question 5

(Islington example)

Please can you describe the property to me?

Answer 5

1980s construction

15,000 sq ft

Lower Ground to 4th floor

Grade B specification

1 minute walk from Angel tube station

Question 6

(Islington example)

What was the appropriate price per sq ft you applied

Answer 6

£500 per sq ft

(Gave a Market Value of £7.5m)

Question 7

(Islington example)

How did you value it using the Comparative Method?

Answer 7

1. I sourced my comparables.
2. VERIFIED the details by speakng to relevant agents. This allowed me to devalue the headline rent to get the Net Effective Rent.
3. I then created a schedule of comparables.
4. Adjusted the comparables in relation to the Hierarchy of Evidence.
5. Analysed to form opinion of Market Rent (MR) and Market Value (MV).
6. I then stood back & looked. Reported the value and saved on file.

Question 8

(Islington example)

What RICS Guidance did you adhere to during this valuation?

Answer 8

RICS Professional Standard: “Comparable Evidence in Real Estate Valuation (2019)” - now a Professional Standard in 2023.

It specifically outlines the Hierarchy of Evidence.

Question 9

You talk about the Hierarchy of Evidence – are you aware of the RICS Guidance on Category A, B and C Evidence?

Answer 9

This is a framework for comparbles based on weighting:

Category A = DIRECT COMPARABLES

• Data from the subject property itself (the best)
• Completed transactions from near-identical properties.
• Contemporary, full and accurate information.

Category B = GENERAL MARKET DATA.

• Published sources / commercial databsases (e.g. CoStar).
• Historic Evidence
• Supply & Demand data

Category C = OTHER SOURCES

• Wider market data (interest rates, stocks & shares)
• MSCI

Question 10

(Islington example)

How did you ascertain the void, rent free and costs?

Answer 10

I spoke to office agency colleagues and local agents who specialise in this location.

I also considered comparable evidence.

Question 11

(Islington example)

When you are analysing your comparables - what is the hierarchy you give to rental evidence?

Answer 11

1. New Letting (Open Market Letting)
2. Lease Renewal
3. Rent Review

(Open market letting is not bound by the wording in the lease).

Question 12

(Islington example)

What would you have done if there was a lack of comparable evidence?

Answer 12

Look to use an alternative valuation method which is less reliant on comparable evidence (I cross-checked using the investment method).

Have to rely on historical data and ‘quoting prices’

Look down the Hierarchy of Evidence and consider Category B / C evidence.

Always consider market sentiment at the time where there is a lack of comparable evidence.

Also consider VPGA 10 “Matters that give rise to Material Uncertainty”

Question 13

(Camden example)

You also valued another multi-tenanted office building in Camden, and you did an approach per tenancy as I understand it, i.e. you valued it per floor.

What was the basis of valuation you used for that please?

Answer 13

FAIR VALUE (because it was for financial accounting purposes).

The International Financial Reporting Standards (IFRS 13) had been adopted by the client.

Question 14

(Camden example)

What method of valuation did you use to value the property?

Answer 14

As the property was let & income producing, I used the investment method to determine Fair Value.

Question 15

(Camden example)

How did you value the property in Camden?

Answer 15

Recieved instructions from the client.

Assessed competence, carried out CoI check, ensured ToE were signed and returned.

Then I REVIEWED THE TITLE DOCUMENTS (leases/lease packet, title documents, planning information, OS plans).

Undertook statutory due diligence checks (to check there were no material matters which could adversely impact on value).

Then I inspected & measured the property.

As the property was let & income producing, I used the investment method of valuation.

I applied split yields to reflect the risk profile of the current tenants.

The 1st floor tenant had 7 years unexpired on their lease and a Dun & Bradstreet check showed they were of good quality covenant. (applied yield of 6%).

The Ground floor tenant had 1 year remaining on the lease and the D&B check was more risky. (I applied a higher yield of 7% to reflect the risk).

I then provided my supervisor with a summary form to review.

Question 16

(Camden example)

What are the limitations to Dun & Bradstreet reports?

Answer 16

They are historic and look at past performance.

A company may look profitable but profits steadily decreasing year on year.

Question 17

(Camden example)

How would you value the property in a year’s time - once the Ground floor tenant vacates?

Answer 17

I would use an EQUIVALENT YIELD to factor in the void period.

Question 18

(Camden example)

When would you use an equivalent yield in valuation?

Answer 18

An average weighted yield when a reversionary property is valued using an initial and reversionary yield.

You would use it when there is short income or there is a void period, meaning a net initial yield would be irrelevant in this situation.

Question 19

(Camden example)

What yields did you apply?

Answer 19

The property was rack-rented (let at the current market) so I applied a Net Initial Yield of:

6% to the 1st floor tenant.

7% to the Ground floor tenant to reflect the additional risk.

Question 20

(Camden example)

What type of yield did you use for this example and why?

Answer 20

I used Net Initial Yield.

This is because the property was rack rented (equivalent yield & NIY the same).

Question 21

(Camden example)

Describe the property to me?

Answer 21

1980s construction

Two-storey office building in a quiet street.

4,000 sq ft total.

Grade B specification

1 minute walk from Camden tube station

Question 22

(Camden example)

What part of the Red Book Global applied to this valuation?

Answer 22

The property was for Accounts Purposes (VPGA 1).

Basis of Value was Fair Value (VPS 4) as International Financial Reporting Standrds (IFRS 13) were adopted by the client.

Question 23

(Camden example)

What is the definition of Market Value?

Answer 23

Market Value is the estimated amount which a property should EXCHANGE:

• On the Valuation date
• Between a willing buyer & a willing seller
• In an arm’s length transaction
• After property marketing

Where the parties have acted prudently, knowledgeably and without compulsion.

Question 24

(Camden example)

What is the definition of Fair Value?

Answer 24

Fair Value is the price that would be recieved to sell an asset in an orderly transaction between market participants at the MEASUREMENT DATE.

(The RICS’ view is that this definition is generally consistent with the definition of Market Value).

Question 25

(Camden example)

What is the difference between Market Value and Fair Value?

Answer 25

There is a subtle difference between Market Value and Fair Value - but it’s quite a key one.

The Red Book defines Market Value as:

The estimated amount which an asset or liability should exchange:

• On the valuation date
• Between a willing buyer & a willing seller
• In an arm’s length transaction
• After property marketing

Where both parties have acted prudently, knowledgeably and without compulsion.

Whereas, Fair Value is:

The price that would be recieved to sell an asset at the MEASUREMENT DATE.

(What this essentially means is Fair Value is the MUTUALLY BENEFICIAL VALUE” between buyer and seller).

(Whereas Market Value is influenced by market forces).

(RICS’ view is that Fair Value is generally consistent with Market Value).

Question 26

(Camden example)

Was this a Red Book Valuation?

Answer 26

Yes - it was for Financial Accounts purposes (as set out in VPGA 1 of the Red Book).

Question 27

(Camden example)

What did you include in your Terms of Engagement for this valuation?

Answer 27

Identification & Status of the Valuer (set out RICS Registered Valuer status).

Identification of the Client (intended user and any other intended users)

Identification of the Asset to be valued (the Property)

Currency to be used (financial)

Purpose of the Valuation (This was for Accounts)

Basis of Value (This was Fair Value)

VALUATION DATE

Extent of Investigation

Nature and source of information to be relied upon

Assumptions & Special Assumptions to be made.

Format of the report.

Confirmation that the valuation will be Red Book compliant / IVS compliant.

The basis on which the fee will be calculated.

Complaints Handling Procedure MUST be made available in ToE.

A statement setting out any limitations on liability.

Question 28

(Camden example)

What were the first 5 Terms of Engagement?

Answer 28

Identification & status of the Valuer (Set out RICS Registered Valuer status).

Identification of the Client (Intended user and any other intended users).

Identification of the Asset to be Valued (the Property)

Currency to be used (financial)

Purpose of the Valuation

Question 29

(Camden example)

What did you include in your Valuation Report for this example?

Answer 29

Identification & status of the valuer (set out RICS Registered Valuer status)

Identification of the Client (Intended user and any other intended users)

Identification of the Asset to be Valued (the Property)

Purpose of the Valuation

Basis of Value

DATE OF VALUATION

Extent of Investigation

Nature & source of information to be relied upon.

Assumptions & Special Assumptions to be made.

Confirmation that the valuation was undertaken in accordance with Red Book / IVS Standards.

Valuation Approach and Reasoning

Valuation Figure(s)

DATE OF VALUATION REPORT

Comment on market uncertainty

Statement setting out any limitations on liability that have been agreed.

Question 30

(Camden example)

How would you have valued this property if it was over rented?

Answer 30

Use the Hardcore Layer Method (used when property is over-rented, when the passing rent > market rent).

Divide the income stream horizontally.

Bottom Slice = The market rent.

Top Slice = The passing rent - the market rent until the next lease event.

Higher yield applied to the top slice to reflect additional risk (found from comparable evidence).

Question 31

What have you seen in the news recently that is highly topical with regards to Valuation?

Answer 31

RICS introduced mandatory ROTATION RULES in the updated UK National Supplement.

This addressed recommendations found in Peter Pereira Gray’s independent Review of Real Estate Investment Valuations.

The new mandatory rotation rules PREVENTS firms from valuing an Asset for more than 10 YEARS - requiring a change or “rotation” to a different valuation firm.

The reason for this is to improve transparency and aimed at improving the impartiality of valuers.

The new regulations will come into effect May 2024.