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Abs APC > Loan Security Valuation > Flashcards

Loan Security Valuation Flashcards

1
Q
  1. What are the forms of lending?
A

a. Private placement – sale of stocks/bonds/securities to a private investor rather than on the open market
b. Mortgages – legal agreement where a lender lends money at interest in exchange for taking title of the debtor’s property
c. Bond issues – Investment securities that represents a loan made by an investor to a borrower (typically issued by governments or corporations; so the government or corporation gets the loan from an investor who buys the bond)

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2
Q
  1. What are the key points of the RICS Guidance Note Risk, liability and insurance, 1st edition 2021?
A

o Informs on principles of risk management, identification, assessment and controls
o Covers type and sources of liability professionals may face (negligence, health and safety, environmental)
o Providers an overview of insurance available in the industry
o Offers guidance on dispute resolution methods
g. Effective from April 2021

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3
Q
  1. What is included in the terms of engagement?
A

a. Identification and status of valuer
b. Identification of client
c. Identification of asset to be valued
d. Currency and fee
e. Purpose of valuation
f. Bases of value
g. Extent of investigation
h. Assumptions and special assumptions
i. Format of report
j. Complaints handling procedure to be made available
k. Limitation on liability agreed

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4
Q
  1. Define EUV-SH?
A

a. Refers to property value if it were to be used for social housing in perpetuity
b. Assumes hypothetical sale to another RP On the valuation date
c. On the assumption that there is a willing seller and a reasonable marketing period prior to valuation date and
d. that it will be used for social housing and any voids will be re-let on the same tenure and not sold as MV-VP
e. Vacant properties should be valued as EUV-SH if there is a letting demand
f. Vendor only disposes to similar organisations (RPs)
g. Subsequent sales must follow same assumptions

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5
Q
  1. Define MV-T?
A

a. Refers to property value if property was sold on open market with current tenancy in place
b. Assumes a hypothetical sale that is not bound by restrictions to use and can be sold on the open market
c. The sale would see an increase in rents to market levels

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6
Q
  1. What section in the RBG refers to secured lending?
A

a. VPGA 2

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7
Q
  1. What are the risks to lenders?
A

a. Cost of living crisis could lead to changes in government policy, rent freezes, rent cuts, or changes in the rent regime
b. Things like Hackitt review have lead to extensive fire safety investigations and works – the required scope of works might change over time
c. Global inflation can lead to higher costs of materials and labour to maintain stock at current levels

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8
Q
  1. Why do we value on MV-T?
A

a. If there is no restrictions to future use of the property and should the lender possess the property they can sell them on the market at this value

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9
Q
  1. What lender specific requirements might there be?
A

a. % of Internal inspections
b. No future staircasing for SO properties

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10
Q
  1. What factors affect risk for loan security?
A

a. Levels of demand
b. Age and condition of properties
c. Cost of living crisis could lead to changes in government policy, rent freezes, rent cuts, or changes in the rent regime
d. Things like Hackitt review have lead to extensive fire safety investigations and works – the required scope of works might change over time
e. Global inflation can lead to higher costs of materials and labour to maintain stock at current levels

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11
Q
  1. How do you establish a capitalisation rate in your DCF?
A

a. Income/MV
b. In our cashflow = Discount Rate less 25 basis points

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12
Q
  1. How do things like location, tenure and rent impact the security of the loan?
A

a. Affect demand
b. Affect income levels
c. Affect rents that are charged and therefore ability for tenants to pay
d. Essentially they impact the discount rate and therefore have different levels of risk associated with them

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13
Q
  1. When might a property not be suitable for secured lending?
A

a. Short leasehold interest
b. High flood risk
c. High contamination risk

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14
Q
  1. What does RBG VPGA 2 state about conflicts of interest?
A

a. Valuers must declare any potential conflicts of interest – personal or professional – to all relevant parties

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15
Q
  1. What 5 broad areas does VPGA 2 cover?
A

a. Conflict of interest
b. Taking instructions and disclosures
c. Basis of value
d. Special assumptions
e. Reporting and disclosures

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16
Q
  1. Name an example of previous involvement in Secured Lending?
A

a. Long-standing professional relationship with the borrower
b. Financial interest in asset or borrower

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17
Q
  1. What must you include in a secured lending report in accordance with VPGA 2?
A

a. Disclosure of any previous involvements or any arrangements agreed for avoiding a conflict of interest
b. Comment on suitability as security
c. Whether any deleterious materials have been noted
d. Comment on any flood risks or historic contamination
e. Past, current or future trends and volatility in the local market

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18
Q
  1. What is a liability cap?
A

a. Contractual agreement that a client can only claim damages up to the amount agreed

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19
Q
  1. And can lenders, for example, refuse a mortgage application where EWS1 form can’t be produced?
A

a. Yes, they can.
b. That’s up to their internal risk controls.

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20
Q
  1. For loan security, why are terms of engagement particularly important?
A

a. Because they all set out the basis of valuation, which may differ depending on the client because of lenders’ specific risk and lending requirements, they will likely have quite different requirements of various centrally more than standard Redbook valuations. So yeah, setting out special assumptions and requirements

21
Q
  1. What is a typical loan to value ratio?
A

a. 60-70% but it’s higher in affordable housing due to it being a secure investment

22
Q

Does our dcf include an exit value?

A

a. Yes, we capitalise the net income in the last year of the cashflow (Net rent in year 50 multiplied by Years Purchase). Capitalising the net income in the final year is the exit value effectively

23
Q
  1. What is the typical difference between EUV-SH and MV?
A

a. EUV-SH is around 30-35% of MV

24
Q
  1. What would you do if you were asked to do an LSV but the borrower didn’t disclose the lender?
A

a. You would have to include a statement in ToE and report that the valuation might not be appropriate as you can’t consider specific requirements

25
Q
  1. What is an MEC?
A

a. “A lender carve-out to affordable housing provisions, typically in S106 agreements. Should a RP be in a default situation, an MEC allows the lender to sell restricted units on the open market if the right steps are followed” – National Housing Federation
b. There are two types of MECs
* the first is an absolute MEC that does not impose any controls on the lender, nor is there any process to follow before selling on an unfettered basis
* The second prescribes a process to follow before the lender can sell on an unfettered basis. They must try and sell to an RP or local authority within a period of no more than 3 months at a price that allows them to fully redeem the mortgage, including associated interests and costs. If a sale is not possible in this time, the lender can sell on the open market
b. Without an adequate MEC, the property will be restricted to its current use

26
Q
  1. How does a defective MEC impact your valuation?
A

a. Restricts the property to be valued at EUV-SH

27
Q
  1. What might be included in a major repair?
A

a. Refitting a kitchen
b. Refitting a bathroom
c. Fixing an underfloor leak
d. Fixing a leak from the roof

28
Q
  1. Who calculates social rent?
A

Government

29
Q
  1. Are there any caps on the rent increases given the rate of CPI?
A

a. 7% as of April 2023
b. This does not include service charges, which have no cap

30
Q
  1. What legislation caps social rent increases at CPI + 1%?
A

a. Rent standard and guidance from:
i. Regulator of Social Housing
ii. Department for Levelling Up, Housing and Communities
iii. Ministry of Housing, Communities & Local Government
b. States that tenants must get 4 weeks notice of a rent increase
c. Normally increases happen in April

31
Q
  1. What is MV-T? I’ve never heard of this. What are some assumptions?
A

a. MV-T is when the property is unrestricted and can be sold on the open market
b. Assumptions include:
i. Major repair costs to get to market rent level
ii. Bad debts and voids (Higher due to more risk as rent is higher)
iii. Discount rates (higher than euv-sh)

32
Q
  1. What is the layout of your loan security red book report?
A

a. Identification and status of valuer
b. Client and any other intended users
c. Purpose of valuation
d. Basis of value
e. Valuation date and date of valuation report
f. Extent of investigation
g. Assumptions and special assumptions
h. Valuation approach and reasoning
i. Market commentary
j. Statement on limited liability

33
Q
  1. What are rent caps?
A

a. A limit on social rents

34
Q

Who carries out the EWS1 assessment, and what is their expertise?

A
  • The EWS1 form must be completed by a fully qualified competent member of a relevant professional body within the construction industry
  • Must have sufficient expertise to identify and assess the relevant materials within the external wall cladding and attachments, including whether fire resisting cavity barriers and fire stopping have been installed correctly.
35
Q

What risks should you advise lenders of when valuing for loan security?

A
  • Occupational demand risk
  • Risk of any material changes over the length of the loan
  • Environmental risk
  • Title issues
36
Q

What does VPGA 2 say about secured lending?

A
  • Informs what constitutes a conflict of interest
  • Bases of value and special assumptions
  • What must be included in reports
37
Q

How did you arrive at repair costs?

A
  • RPs publish their accounts, we can analyse and extract how much London based RPs are spending on their repairs
38
Q

When would a property not be suitable for loan security?

A
  • If it didn’t provide asset cover
  • Defaults on rent
  • Voids due to condition
  • Voids due to demand
39
Q

How does a LSV help mitigate risk for the lender?

A
  • Carrying out swot analysis
  • Sensitivity analysis
40
Q

What’s the difference between a bilateral and syndicate loan?

A
  • Bilateral – one lender
  • Syndicate – group of lenders
41
Q

What is intermediate rent?

A
  • Rent is a 1/3 or below of local household incomes
42
Q

What is social rent?

A
  • Government formula rent
43
Q

How can you value the portfolio without inspecting it all?

A
  • Paragraph 1.7 of VPS 2 (inspections, investigations and records) states that if it is agreed that inspections are limited the valuation will be on the basis of limited information and it must be stated in the ToE and valuation report.
44
Q

What is staircasing?

A
  • Buying more shares
45
Q

What detail is shown in the terms of the loan, when this data has been provided to you?

A
  • Number of units
  • Loan amount
  • Term
  • Loan to value covenant
  • Name of borrower
  • Repayment profile
46
Q

How else could you have valued the portfolio for your case study?

A
  • Growth implicit method but this wouldn’t be as accurate as it would be harder to reflect rental and cost growth within the yield
47
Q

Why do you apply a 10% drop in MV and MR for part of your sensitivity analysis?

A
  • Its not in our instructions, I did this to be helpful as there is uncertainty about the financial viability of RPs in the affordable housing sector at the moment, so we show the impact of certain events to our clients (Lenders). The sensitivity tests conducted were chosen by me, to show the client how certain events impact the value.
48
Q

What do you do if the sensitivity analysis shows the loan isn’t adequate for security?

A
  • We would just state the figure, as a sensitivity analysis for LSV was me going above and beyond to show the impact on the valuation of certain events that were picked by me. It’s hypothetical and up to the client to read and interpret how they wish.

Abs APC (18 decks)

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