Valuation - Submittion

Question 1

Level 1

Answer 1

Level 1

Question 2

Level 1 Commentary

Answer 2

I am aware of the latest update to the RICS Valuation - Global Standards (Red Book, 2022)

and RICS Professional Standard Comparable Evidence in Real Estate Valuation (2019).

I have attended CPD which discussed the methods of valuation, particularly the comparable method, the residual method and the investment method.

I have gained an understanding of the purpose of the Red Book as well as understanding the Valuation Technical and Performance Standards (VPS), particularly VPS 1 regarding the terms of engagement.

Question 3

X2 Red Books

Answer 3

1. RICS Valuation - Global Standards (Red Book, effective 2022)
   –> Greater emphasis on sustainability
2. The Red Book UK National Supplement was published on 19 October 2023 and will become effective 1 May 2024.

Question 4

The relationship between Global Red Book and the UK national supplement

Answer 4

The UK national supplement supports the Global Red Book for valuations that are subject to UK jurisdiction but does not replace them.

Question 5

New Red Book UK National Supplement

Answer 5

RICS introduces mandatory rotation rules with UK supplement for coming Red Book
share 19 October 2023

Question 6

What is the New Red Book UK National Supplement advice on rotation rules

Answer 6

The new rules will prevent valuation firms from valuing an asset for regulated purposes for more than ten consecutive years, requiring a change or “rotation” to a different valuation firm.

Question 7

Investment method of valuation

Answer 7

Market rent x Years Purchase = Market Value

Question 8

How to calucate the Years Purchase

Answer 8

The YP in perpetuity is calucated as:

100 / yield (NOT A %) = Years Purchase –> this gives you the multiple (market cap rate)

Question 9

What does perpetuity mean

Answer 9

Continuous/forever

Why do we use it? Because it is a freehold valuation, assuming it will be forever - assume the rent will remain as it is

Question 10

Investment used?

Answer 10

The investment method is used where there is an income stream to value, i.e. the property is tenanted.

Question 11

What is a yield

Answer 11

A yield can be simply defined as the annual return on investment expressed as a percentage of capital value.

Question 12

Hardcore vs T&R

Answer 12

Term and reversion for under-rented income streams

Hardcore and topslice for over-rented income streams.

Question 16

Level 2

Answer 16

Level 2

Question 17

Level 2 Commentary - Investment Method

Answer 17

Investment Method – Office, St James’, London

I valued an office space in the St James’ submarket.

I agreed the terms of engagement and completed a conflict of interest check.

I used online platforms and local agents to collate relevant comparable evidence, similar to the subject property in terms of locations, submarkets, size and specification.

This enabled me to determine an appropriate market rent (VPS 4).

I determined an appropriate yield by speaking to local agents and collating relevant comparable evidence, paying specific attention to the specification of the office and its environmental, social, and corporate governance (ESG) credentials.

I used a term and reversion to determine the Market Value of the property. I deducted purchasers’ costs of 6.8%. Following this, I presented my findings to my client.

Question 18

What type of office space

• Stay away from in depth detail - just say single let office building

Answer 18

Single let Office Building in St Jame’s submarket

DESKTOP? didn’t visit property

10 year lease with Rent review every 5 years. This is 3 years away. So 3 year term certain.

6,000 sqft in total,

(Basement, ground and 3 upper floors)

Basement is vacant & Ground Floor is reception/common area

Three upper floors (single let to one tenant)

Passing rent at just over £100,000 p.a.

Question 19

THREE important first steps to first undertake

Answer 19

Competence:

–> Do you have the correct level of skills, understanding and knowledge.

–> Yes however I was under the supervision of a qualified chartered survey and registered valuer who oversaw my work and double checked my methods/reasoning.

Independence:

–> Check for conflicts of interest - using Tandem’s internal database

Terms of engagement:

• Set out in writing your full confirmation of instructions to the client before starting work and receive written confirmation of instruction.
• Confirm competence of the valuer
• The extent and limitations of the valuer inspection must be stated

Question 20

Internal purposes

Answer 20

I was instructed by my client to complete a valuation for internal purposes

Internal Valuer
–> Employed by cpmpany to value the assets of the company

—> Valuation for internal purposes only

–> No third party reliance

Question 21

Excluded from the red book

Answer 21

• Agency or brokerage
• Expert witness
• Performing statutory functions
• Internal purposes
• Negotiation or litigation purposes

Question 22

Steps of my valuation

Answer 22

1. Receive instruction
2. Check competence - i.e. i was familiar with the area / No conflict of interest
3. issued Terms of Engagement (received signed copy) - including assumptions and special assumptions.
4. Gathered information & Due Diligence - ensuring the property had a valid EPC, H&S/Fire safety compliance, Asbestos register
5. Inspect / Measure = but i did a desktop val?
6. Find / analyse comparables similar to subject property (Cat A) - direct indications of value
7. Undertake valuation –> T&R
8. draft report & checked, finalise, sign and give to client, issue invoice and filed appropriately

Question 23

Why do Terms of Engagement?

VPS 1 Terms of engagement (scope of work)

Answer 23

As per VPS 1 from the Red Book

Terms of engagement were issued to the client PRIOR to commencing work.

Setting out full confirmation of instruction / scope/ fee basis. Helps follow the correct procedure. Establish roles and responsibilities and avoid dispute

Received written confirmation of instruction from client.

Question 24

Terms of engagement

Answer 24

Included:

• Name and status of the valuer i.e., me
• Name of the client –> AIK
• The asset being valued –> office
• Currency –> £
• Purpose of the valuation –> assess how much the property would be worth
• Basis of value –> i.e., Market Value
• Valuation date –> May 2022
• Assumptions (True – i.e., one tenant in situ) and special assumptions (accepted as fact even though it is not true)
• Restrictions for use, distribution –> I.E. INTERNAL USE ONLY so
• Fee basis
• Complaints handling procedure

Question 25

FYI Full Terms of engagement from Red Book RICS Valuation – Global Standards ('Red Book Global Standards') effective 31st January 2022

Answer 25

Terms of engagement MUST address the following matters. A - Identification and status of the valuer B - Identification of the client(s) C - Identification of any other intended users D - Identification of the asset(s) or liability(ies) being valued E - Valuation (financial) currency F - Purpose of the valuation G - Basis(es) of value adopted H - Valuation date I - Nature and extent of the valuer’s work – including investigations – and any limitations thereon J - Nature and source(s) of information upon which the valuer will rely K - All assumptions and special assumptions to be made L - Format of the report M - Restrictions on use, distribution and publication of the report N - Confirmation that the valuation will be undertaken in accordance with the IVS O - The basis on which the fee will be calculated P - Where the firm is registered for regulation by RICS, reference to the firm’s complaints handling procedure, with a copy available on request Q - A statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations R - A statement setting out any limitations on liability that have been agreed.

Question 26

I completed Due Diligence & gathered information. Why is it important?

Answer 26

This is required to check that there are no material matters which could impact the valuation. --> For example have a very low/non-complaint EPC rating (could impact property value) and to ensure the building was compliant with H&S and MEES regulations. Due diligence is important to identify and assess risks, liabilities and problems before the valuation to avoid further future issues

Question 27

What DD did you consider?

Answer 27

Due Diligence includes: * Asbestos register * EPC rating * Health and Sagety compliance * Fire Safety compliance * Legal title and tenure (check the boundaries of the property, wayleaves, ownership) * Equality Act 2010 compliance

Question 28

Single tenanted/let with 5 year rent review

Answer 28

I was valuing a single let office space (one tenant). Rent review every 5 years. This is 3 years away so 3 year term certain. (of a 10 year lease)

Question 29

Used investment method and Why T&R?

Answer 29

Used as there was an income stream to the property Term and Reversion was used as the property was under-rented as per the market indication following my research. Term and Reversion valuation, the income is divided into a fixed income to review (the term) and an income from review to perpetuity (the reversion).

Question 30

Term and Reversion

Answer 30

Reversion to the market rent valued in perpetuity at a reversionary The term capitalisation until the next review / lease expiry at an initial yield. (If the current passing rent is less than the market rent, the investment is said to be 'reversionary'.)

Question 31

Assumption & Special Assumption

Answer 31

Assumptions - Valuer to accept that something is true without the need for specific investigation * e.g. The property is tenanted e.g. there is an active lease in place Special assumption - something taken to be true and accepted as fact * e.g. property without planning permission could be val on basis that it does have planning permission

Question 32

Consider ESG

Answer 32

ESG Good ESG credentials are now synonymous with prime office space. Can drive the value and differentiate it in the market Investors are becoming more sophisticated with ESG. Can impact the value of the property i.e. if the building has a non-compliant EPC, BREEAM rated Occupier requirements and office specification - i.e. tenants want nice/ESG / Sustainable buildings ESG have direct impact of value - mindful of legislation changes i.e. MEES Not taking action now could lead to value erosion to enhance value May need Capex to improve EPC

Question 33

ESG Guidance on Sus and Val RICS Global Guidance Note “Sustainability and ESG in Commercial Property valuation and strategy advice, 3rd edition (effective Jan 2022)”

Answer 33

* A per the Red Book (effective 2022), valuers should be aware of sustainability features and the implications these could have on property values in the short, medium and longer term e.g. MEES legislation impact the value of property. * RICS has issued a Global Guidance Note “Sustainability and ESG in Commercial Property valuation and strategy advice, 3rd edition (effective Jan 2022)” This includes a glossary of relevant terms and factors with valuers should incorporate into valuation approaches

Question 34

TERM

Answer 34

The term capitalisation until the next review / lease expiry at an initial yield. Used T&R as the property was under-rented after ascertaining the market value where the market value was higher than the passing rent.

Question 35

What was the passing rent

Answer 35

Passing rent - £100,000 p.a. (As stimulated in the lease) - 3 years left on the lease - so 3 year term certain

Question 36

Yield/ Capitalisation rate

Answer 36

* Selected 4% reflecting the risk of the property * Low risk as prime location in London. * Looked at the market evidence and reports, comparables and asked local agents * Cap rate 4% as there is guaranteed income (low risk)

Question 37

Initial Yield

Answer 37

* Used an initial yield - An initial yield is simple income yield for current income and current price.

Question 38

The Term Calculation

Answer 38

Term Current/passing rent = £100,000 p.a. (fixed income) 3 years left on the lease/ term certain, guaranteed income At a yield/cap rate of 4% - ^ Applied a discount rate factoring in the time value of money YP for the remaining 3 years (how long until the next rent review) at a yield of 4% - I calculated a multiplier of 2.77 (also from the parry's table) Therefore £100,000 x 2.77 = £ 277,509.10 TERM - £ 277,509.10

Question 39

REVERSION

Answer 39

Reversion to the market rent valued in perpetuity at a reversionary

Question 40

What happens at the reversion

Answer 40

Property reverts to market value after the lease event, in this case – rent review

Question 41

The Market Rent

Answer 41

Market rent: I determined the market rent using the comparable method. Market research was conducted using platforms such as internal property database, Coyote/Qube and online platforms, market reporting from CBRE and local agents to establish this value.

Question 42

I used Comparable Evidence

Answer 42

I focused on comparables which were similar to the subject property, prioritising evidence from ‘Category A – direct transactional evidence’ from RICS Professional Standard Comparable Evidence in Real Estate Valuation (2019). Understanding the importance that valuers should reflect markets, not lead them. i.e. * Same submarket * location * Size – square footage (8500 sqf) * Same ESG credentials i.e., EPC rating (C or above) * Open market transactions * Date of transaction / valuation – the more recent the better, focused on transactions from that year.

Question 43

What was the market rent

Answer 43

I established the market rent to be £120,000 p.a.

Question 44

Yield for reversionary

Answer 44

Reversion to market valued in perpetuity at a reversionary yield.

Question 45

What is a reversionary yield

Answer 45

- Reversionary yield --> MR divided by the Current Price on an Investment let at a rent BELOW MR Assume the lease continues indefinitely i.e., in perpetuity /forever

Question 46

What reversionary yield did you establish and why was it somewhat increased?

Answer 46

I established a yield of 4.5% - increased somewhat (by 0.5%) to reflect the risk involved. Higher to reflect the valuer perspective of risk to achieve that rent more risky in reversion as tenant may not be able to afford and impact their cov. Also market overtime so uncertainty (black swan events i.e. Covid which drastically impacted yields) i.e., considered the tenant cov strength of the tenant, can they pay that rent as market rent is higher

Question 47

What is the Reversion Market Rent / Yield

Answer 47

£120,000 p.a. / 4.50% = £ 2,666,667 Reversion = £ 2,666,666.67

Question 48

What is the Term And Reversion

Answer 48

Term And Reversion = £ 277,509.10 + £ 2,666,666.67 = £2,944,175.77

Question 49

Adjusting for purchaser costs SAY - Purchasers @6.8%

Answer 49

* Stamp duty: at the prevailing rate 5% * Agents fees: say 1% pf the purchase price +VAT * Solicitor’s fees – say 0.5% of the purchase price plus VAT Purchasers @6.8%

Question 50

The Final MARKET VALUE after deducting Purchaser Costs

Answer 50

The Adjusting and factoring in: £ 2,944,175.77 (MV) x 0.068 = £ 2,743,971.82

Question 51

Test

Answer 51

Test

Question 52

Test

Answer 52

Test