Valuation Summaries (Tech) Flashcards
What is the full title of the Red Book?
RICS Valuation - Global Standards Dec 2024, Effective 31st Jan 2025
Who are the International Valuation Standards Council?
non profit organisation that set the global standards for valuation
RICS are a member and sponsor of IVSC
Aztec West - how did you establish the GDV?
I established the market rent that would be achieved for the completed development using the comparable method of valuation. I cross referenced with my clients agents to ensure this was an accurate figure. I then capitalised this income into perpetuity at the market capitalisation rate.
Aztec West – what build costs did you adopt?
Site preparation costs
Costs of construction (building cost)
Construction fees (Archetects, engineers etc)
Cost of finance
Contingency to allow for fluctuations
Agent and Legal fees for disposing of the development
Acquisition costs – fees and stamp duty for acquisition
Aztec West - where does BCIS get their data from?
Cost and price information is collected by BCIS from across the UK construction industry, then collated, analysed, modelled, interpreted and made available to the industry to facilitate accurate cost planning.
Aztec West - what professional fees did you include and why?
Agent and Legal fees for disposing of the development
Acquisition fees @ 1.8% - 1% letting agents fee, 0.5% solicitors fees, 20% vat
Professional Fees for the build @ 10% of construction costs
Aztec West - what finance costs did you adopt and why?
It was assumed that the finance costs are incurred in equal monthly tranches over the preconstruction and construction periods (12 months) and interest is paid monthly at the effective rate of 7% pa. I have estimated the interest to calculate the whole debt incurred over the total development period and then halved it.
Aztec West – what profit did you adopt and why?
15% of the gross development value because there was only a moderate risk.
Developers profit can be calculated by either a percentage of total cost (22-25%) or a percentage of Gross Development Value (15-17%) Depends upon risk
The riskier the development, the greater the percentage
Aztec West - did you adopt a contingency? If not, why?
Yes, I adopted a contingency of 5% of construction costs.
Aztec - did you provide a sensitivity analysis? If not, why not?
Sensitivity analysis is a method of quantifying risk. Changes are made to individual inputs, e.g. build cost or sales values, to see how these affect the profitability or viability of the scheme. This can be used to provide reasoned advice to a client, including the modelling of various scenarios.
Yes, given the rising cost of materials. I included a larger contingency in relation to build costs and adjusted this to reflect 15% of build costs. My client’s profitability was still high.
Tell me about the development site in Aztec West?
planning permission for a restaurant / drive through unit having a GIA of 3200 sq ft which will give an NIA of 3000 sq ft.
Construction costs have been estimated at £90 per sq ft to develop the building. The preconstruction period is 3 months, and the construction period is 9 months. Finance is available at 7% per annum.
The market rent is £41 per sq ft and the capitalisation rate is 7%.
The site was grassland so there was no demolition costs, just site preparation works.
There were no comprehensive market comparables. As such, I proceeded to value via the residual method of valuation.
Investment - Bristol Let Unit - why did you use the comparable method to establish MR?
Valuing by comparison is the most reliable method of valuation. There was comprehensive amount of transactional data available which was similar to the subject property to be able to be undertake a comparable analysis and establish rent and determine a market rent.
Investment - Bristol Let Unit – talk me through your comparables. What key attributes did you consider?
Location
Physical characteristics such as specification, condition and size
Use
Tenure & lease terms where I had these available
Timing of the transaction
Investment - Bristol Let Unit - how did you make adjustments to your comparables?
The subject property was in a prime pitch on the promenade and in a good condition in comparison with some other of my comparables.
As such I adjusted some of my comparables in terms of location and condition.
I then made a net qualitative adjustment based on my professional judgement, mainly between 5-10%.
Investment - Bristol Let Unit - did you use a Hierarchy of Evidence?
Yes, I applied more weight to direct transactional evidence which were the open market lettings and lease renewals. Less weight applies to rent reviews and asking rents.
Investment - Bristol Let Unit – what RICS guidance did you adhere to when sourcing comparables?
The RICS Professional Standard - Comparable Evidence in Real Estate Valuation, 2019.
Investment - Bristol Let Unit – talk me through the term and reversion method.
The lease had 3 years left to run until the RR. As such, I capitalised the term income at the market capitalisation rate until RR.
I adjusted the yield downwards by 1% to reflect the security of income given the unit is underrated.
We capitalise the term income by multiplying the passing rent by the years purchase for the number of years to the reversion.
To establish the value of the reversion, I then assumed that market rent will be achieved on RR. I capitalised the market rent into perpetuity, deferred for a period of 4 years, at the market capitalisation rate to reflect the risks are greater in the reversion that in the term.
The sum of the values gave me a gross acquisition price, I then made allowances for acquisition fees and stamp duty land tax to give me the market value.
