Valuation - Summary of Experience Qs

Question 1

What are the five methods of Valuation and when should they be applied?

Answer 1

1. Comparable - best method but must have enough information
2. Investment - When the property is income producing
3. Residual - When you are looking at the value to bid on a piece of land for redevelopment
4. Profit - When the value of the property is based on the income the business generates and there is not necessarily a market for it i.e petrol stations, hotels.
5. Depreciated Replacement Cost - Method of last resort because there is no relationship between cost and value. Used when property is not traded on the open market, i.e ancient monument.

Question 2

Why are valuations undertaken?

Answer 2

Statutory reasons e.g
a) Rating
b) Council tax
c) Compulsory Purchase

Non Statutory e.g
a) Rental value
b) Purchase or Disposal
c) Secured Lending
d) Accounting

Question 3

What factors affect Value?

Answer 3

1) Location
2) Specification
3) Age
4) Tenure
5) Lease provisions
6) Local demand
7) Government Policy

Question 4

What does VPS 1 outline?

Answer 4

Terms of Engagement

Question 5

What are the minimum requirements under VPS?

Answer 5

1) Client
2) Valuer and Status
3) any other intended users
4) The Asset
5) currency to be used
6) Purpose of Valuation
7)Basis of value
8) Valuation Date
9) Extent of Investigation
10) Nature and source of information to be relied on
11) Assumptions and Special Assumptions
12) Format of report
13) Restrictions of use, publication and distribution
14) Confirmation of Redbook/IVS compliance
15) fee Basis
16) CHP
17) Limitation of liability agreed

Question 6

What due diligence did you carry out in your multi-let office in Windsor?

Answer 6

1) EPC Certificate
2) Abestos Register
3) Flood Risk
4) Planning History and Policy
5) Rateable Value
6) Title
7) Leases, rent review memorandum and additional documentation

Question 7

What is the definition of Market Rent?

Answer 7

The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion

Question 8

What is the definition of Market Value?

Answer 8

The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion

Question 9

What is a special assumption?

Answer 9

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 in a transaction on the valuation date.

Question 10

Why would a bank wish to have a special assumption of Vacant possession?

Answer 10

To understand what the property would be worth if the current occupational tenant went into liquidation/ vacates and the bank re-possess the property.

Question 11

What is a WAULT?

Answer 11

Weighted average unexpired lease term.

Question 12

What does a WAULT do?

Answer 12

It is an indicator of the average remaining life of the leases within their portfolios

Question 13

How do you calculate a WAULT?

Answer 13

1. Multiply the current rent by the remaining lease term for each of the tenants.
2. Sum the total of results from step 1.
3. Divide the result from step 2 by the sum of current rent for each of the tenants.

Question 14

What document do you have regard to when compiling comparable evidence?

Answer 14

RICS Professional Standard “Comparable Evidence in Real Estate Valuation” 2019

Question 15

Windsor - How did you deduce the market rent?

Answer 15

Using the comparable method

Question 16

Windsor - How did you deduce the market value?

Answer 16

Using the Investment Method

Question 17

What other types of technique could you use other than term and reversion?

Answer 17

Hardcore/top layer or traditional/rack rented technique

Question 18

What are some of the benefits of KEL?

Answer 18

• Quick and easy to use
• Generating reports is user friendly/industry standard and can be used for client reports
• Flexible – new methodologies continue to be added, such as the new turnover rent feature.

Question 19

What are some problems with KEL?

Answer 19

• Requires a large budget for access.
• Cannot see the formulas therefore you rely on input from the valuer.
• Can be slow to use.

Question 20

Windsor - What void period did you use?

Answer 20

6 months

Question 21

Windsor - What letting fees did you assume?

Answer 21

1%

Question 22

Windsor - What legal fees did you include?

Answer 22

0.5%

Question 23

What Stamp Duty did you assume?

Answer 23

4.45%

Question 24

What yield did you put on the first tranche of income?

Answer 24

7%

Question 25

What yield did you put on the second tranche?

Answer 25

7.5%

Question 26

Talk me through your valuation of the multi-let office building in Windsor.

Answer 26

1) Received instruction
2) Checked a) competency b) Independence via COI check c) Put together TOE in line with VPS 1
3)Obtained lease documentation and undertook DD
4) Arranged to inspect
5) Inspected and Measured
6) Took photos and records
7) Obtained and verified comparable data
8) Input dates into KEL (RR and LR)
9) 7% to Term
10) 7.5% to Reversion
11) added together, took off agency, legal costs and stamp duty
12) YP into perp at 7.5% deferred for 6 months for Special Assumption of Vacant Possession minus buyers costs.
12) Put together report, signed off by RV, Issued to client

Question 27

If you already factored in a rent free and void period into your term and reversion, why did you still account for risk in a higher yield?

Answer 27

The WAULT was 5.7 years. I still incorporated a higher yield because there is still a degree of risk associated with the second tranche of the income due to market factors such as the war in Ukraine, interest rates uncertainty etc.