Case Study Flashcards
(115 cards)
1
Q
Were there any special assumptions
A
No
2
Q
What has superseded RICS Valuation - Global Standards (2017)
A
RICS Valuation - Global Standards (2020)
3
Q
What are the changes to the Red Book Global
A
- PS1: ‘Written’ means any valuation by paper/electronic/digital means
- PS2: Reinforces the point that valuers must be independent and objective and have ‘professional scepticism’ when reviewing data and info
- VPS1: Additional reference to IVS 220 about ‘non-financial liabilities’ which need to be referred to as aspects of an asset/liability to be valued in the Terms of Engagement
- VPS3: Reinforces the need for valuation reports to state clearly to users of the reports what the valuation approach was and relevant reasoning leading to findings (particularly applies to relevance and significance of sustainability matters)
4
Q
How do you become an RICS Registered Valuer
A
- Need level 3 valuation for those qualified after 01/01/12
- Annual fee paid to RICS on registration
To register, info is required regarding valuation work undertaken:
- Type, purpose and number of valuations
- Firm’s total fee income from Red Book Global valuations in last year
- What data sources used
- Quality assurance audit procedures in place
- History of any negligence claims and notifications
5
Q
How did you undertake C of I check
A
I checked using Salesforce as per AY routine and input the Property and the Borrower to see if any conflicts. If there were I would then consult with those people flagged.
6
Q
Did you meet the time frames of the Service agreement? What are the set time frames of the service agreement?
A
Service Agreement states within 10-15 working days of receiving the instruction or from the time you have received all the requested information.
We had delays in getting information on tenancies from the Borrower which delayed timeframe - however then completed within 10-15 working days once we had received all information.
7
Q
Talk me through the Finsbury Park/Hackney retail market
A
- Prime yields for high street retail yields are around 4.5% whilst secondary locations can expect yields ranging from 6-8%
- Blackstock Road is made up of mainly independent traders, with a high proportion of cafes, restaurants and takeaways.
- Whilst the retail market has struggled in recent times, we consider areas such as Blackstock Road to be more resilient as this is a destination shopping area where community groups come from other areas to shop and dine.
8
Q
Can you talk me through the wider construction of the property? What type of foundations would you expect to see?
A
Commercial:
- Fully glazed frontage
- Wooden casement window
- Fire door out back.
Resi:
- Solid brick construction with dormer roof, casement windows and pitched (slate) roof
- Victorian era - checked with building surveyors.
9
Q
Run me through the inspection - what did you consider?
A
- My personal safety - the AY H&S procedures for site inspection and had regard to RICS Guidance Note: Surveying Safety (2018)
- Inspection of the local area - good location, transport links
- External inspection - no obvious structural defects, commercial and resi access from Blackstock Road (separate door for resi. Commercial unit had fully glazed frontage
- Internal inspection - Commercial unit had ceramic tiled floor, kitchen, storage room and toilet. Resi flats were all in good condition and had one double bedroom each, bathroom and open plan kitchen/living room. Flat C was a maisonette.
10
Q
Why did you measure in GIA for commercial
A
Unit was operating as a restaurant - GIA is standard practice for these as per RICS Code of Measuring Practice 2015. (Be aware - Kitchen and storage could have been stated as best practice)
11
Q
Why have you not measured on NIA for commercial?
A
Unit was operating as a restaurant - GIA is standard practice for these as per RICS Code of Measuring Practice 2015.
12
Q
How would your valuation have changed if the property was held Leasehold?
A
Methodology:
- Rent received less ground rent = Net Rental Income
- Capitalise net rental income at an appropriate yield for the remaining length of the lease = Market Value
13
Q
What is an AST? What rights do these grant tenants?
A
Assured Shorthold Tenancy:
- Agreement used by landlord to let residential property to private tenants
- Typically for 6 months but can be for longer
- After this period, the landlord can evict the tenant without legal reason
14
Q
What are the weaknesses of CoStar
A
Need to verify to ensure information is accurate as can be errors
15
Q
What makes for good comparable evidence?
A
Similarities in:
- Physical characteristics
- Location
- Use
- Tenure (& lease terms if appropriate)
- Timescale
16
Q
Why would you not rely on historic data? How did you determine a suitable parameter to widen your search?
A
Market may have changed therefore recent market evidence is most useful. Widened to ensure that enough relevant evidence could be gathered. Not further than 1.5 mile radius
17
Q
How would you have devalued for net effective rents?
A
3 methods:
- Straight line method
- Straight line method assuming time value of cash flow using a yield
- Use a DCF
Straight line method:
- Either until end of the lease or until the next lease event
- Deduct rent free from the remaining lease term, multiply by the rent, divide by (lease term less fit out 3 months) = effective rent
18
Q
Why would you not devalue for net effective? Are they the same thing?
A
- Used headline rent for valuation as look at comparables on headline basis as secondary retail units like this have minimal rent free.
- So net is your headline rent.
19
Q
Why is return frontage a driver in value?
A
- 2.5-10% uplift depending on the comparable evidence and footfall
- Use mirror zoning i.e zone from both frontages
20
Q
What do you understand by the term ‘rack-rented’
A
Passing rent = Market Rent
21
Q
How would your valuation have changed if the property was over-rented/under-rented?
A
Would have applied either the term & reversion/hardcore topslice valuation technique. to get to Market Value
22
Q
How did you devalue the auction comps to get NIY?
A
Deducted purchasers costs (as per the SDLT bands):
- Stamp duty (5%)
- Legals (0.8%%)
- Agents (0.2%)
- VAT (inclusive)
23
Q
What is the danger in relying on evidence from auctions?
A
- There may be a special purchaser or an insolvency sale/distressed sale
- The sale price is gross of costs
- However, the market evidence suggested that this was the appropriate method for similar properties to the subject property.
24
Q
Are auctions an arms length transaction? Is it an appropriate method to determine Market Value?
A
Not typically an arm’s length transaction as has not been openly marketed - the seller’s are typically distressed sellers looking for a quick sale. Typically the local market evidence of secondary retail assets, with small lot sizes such as the subject property, suggested that sales of similar assets were from auctions. Therefore this was the best method of sourcing evidence.
25
How would your yield have changed if the property was let to a stronger retail covenant?
Would have sharpened and therefore reduced compared to current value.
26
Why have you applied 6.5% yield when you say it is similar to comparable 338 Hornsey Road (NIY 6.15%)? Why not say 6.25%?
- Based off the market evidence.
- Although unit in reasonable (albeit basic) condition and specification, benefitted from good location on the high street, excellent transport links and long unexpired term.
27
What were the purchasers costs owing to the value of the property? How much did you deduct to get to your £300,000 overall figure for commercial unit?
Deducted purchaser's costs of 3.2757% from the gross value.
Comprised Stamp duty (1.4757%), Agents fee (1%) and Legal fees (0.8%)
28
Are you well positioned enough to provide advice on the residential element?
Yes - I have completed residential valuations based off market evidence such as this before.
29
Why would the lot be sold as one as opposed to individual commercial/residential?
For landlord:
| - Cost of transaction is cheaper - rather than paying multiple sales fees.
30
Were the mixed-use comparables auction comparables too?
Yes
31
How did you devalue to establish net yield of the mixed-use investments?
Didn't do this as we were comparing on a GIY basis
32
How would you value the Property assuming VP?
For commercial:
- Account for void costs (3 months) and rent free (6 months)
- Capitalise your market rent into perpetuity using an equivalent yield (c7.5% given we used 6.5% with tenant)
- Legals (5%) and reletting (10%) fees need to be accounted for.
For resi:
- The same
33
What specifically does VPGA2 say regarding Conflicts of Interest?
Potential scenarios that could be a conflict:
- Longstanding professional relationship with borrower
- Valuer gains a fee from introducing the transaction to the lender
- If financial interest in the property/prospective borrower
- If valuer is retained to act in disposal of development on the subject property
34
What does the Red Book Global state about applying scrutiny to the valuation? Was this an update?
PS2: Reinforces the point that valuers must apply independence and objectivity to their work and 'professional scepticism' when reviewing information and data i.e. be aware evidence may be misleading
35
What constitutes suitability for secured lending?
- Consider the SWOT of the asset and then assess this in regards to how liquid the asset would be on the market were the borrower to default
36
How would your valuation change owing to the recent Covid pandemic?
Likely caused uncertainty in the retail, residential has remained fairly resilient. Retail may impact the yield - may be slightly higher therefore reducing value. Or may advise as a weakness the uncertainty of Covid when doing SWOT analysis as something that the lender should take into consideration when deciding their LTV ratio.
37
Where can I read about material uncertainty?
RICS Practice Alert: Covid 19 and Valuation.
| - Issued March 2020, updated in May 2020 and November 2020.
38
What is material uncertainty?
- Market activity is impacted as at the valuation date, consider can attach less weight to previous market evidence (i.e. pre Covid) for comparison purposes to determine Market Value.
- Therefore, less certainty and higher degree of caution should be attached to the valuation than normal
39
Are you in a position to provide advice on re-letting prospects? Shouldn't this come from a letting agent
I identified this as a strength of the property due to the benefits of its location and proximity to Finsbury Park Station and this was confirmed when speaking to letting agents during inspection of the locality.
40
Why are the houses here relatively affordable?
Houses are relatively affordable at MV of £250,000. Other 1 bed houses in the Finsbury Park area can range from £350k-£600k. In more central London or south London the same property could go for £400k to £800k.
41
What were the EPC ratings for Flats A and B
Flat A - EPC rating B - expires 07/09/19
| Flat B - EPC rating D - expires 07/09/19
42
Do you have to renew EPCs?
Yes
43
Did you send a draft report to your client? How does this impact your ability to be independent and objective?
No - if you did you would have to remain independent and objective regardless of their feedback.
44
Talk me through the methods of communication you used in this report?
Used communication via email and telephone to organise inspection, speak to agents to confirm comparables and understand the local market and keep the client updated on timescales.
45
If a client presented you with a key piece of comparable evidence, how would you deal with this?
Would say that you have already reviewed the market evidence as role as valuer in an objective and independent way
46
You mention that you would speak to more residential agents in person on the day of inspection as they can be more willing to assist you. Does this mean that you did not establish accurate information?
I spoke to some agents on the day of inspection but I would ensure that in future I spoke to more. I am confident that I established accurate information but it would have come at greater ease and potentially quicker time frame rather than chasing agents over the phone who may be less willing to talk.
47
Why are some of the comparables shops rather than restaurants?
- Similar characteristics: location, covenant strength, quality and sizes
- The investment comps are broadly from the surrounding area where the yield is mostly driven by location
- Subject property occupies a space that would otherwise be occupied by a A1/A2 operator so similar
48
What was the LTV ratio of the loan that you were valuing against?
60%
49
Why didn't you use the profits method of valuation for the restaurant?
- Valued the property as a FH investment, had an income stream, and there were comparables of similar evidence that had been transacted on the market which are therefore more reliable than trade information which would be used in the profits method
50
Did you take into account the potential rental growth in the restaurant sector in general or for this type of restaurant in particular?
Rental and capital growth are not made explicit in the valuation as used conventional investment method of valuation. these are implicit in the capitalisation rate (aka All risks yield)
51
Were planning conditions imposed on the times that the business could be open to the public? How would this affect the valuation?
Would impact on the rent and therefore the valuation - however this was not the case in this example.
52
What was the use clause in the lease?
A1 - had switched to A3 with prior approval which they had got consent for.
53
Did you take into account that not everyone wants to live above a noisy/smelly restaurant in your determination of Market Rent for the resi?
Yes - took into account when looking at comparables.
| - Those on quieter residential roads/purpose built residential blocks were viewed as superior to the subject property.
54
Why did you not zone the property?
- Front of the shop is no more valuable to a restauranteur than the rest of the ground floor, comparable evidence of properties in similar condition in the area suggested that they were not zoned
- More usual for restaurants in the area to be compared on GIA basis and valued ‘overall’
55
Why have you not built in voids in your valuation/ why no explicit voids?
- Not necessary as its too speculative a time in the future/too far in the future when capitalising into perpetuity
- Would have minimal impact on the valuation
56
Did you apply any costs?
No - there were no costs like these included
57
What were the purchasers costs deducted to go from GIY to NIY?
6%
- I recognise that two of the investment comparables sold for less than £250k would not have had the full 5% SDLT applied when converting from the GIY to the NIY and so would have slightly higher NIY respectively (this has been done in error).
- However, my analysis of these comparables remains the same in terms of how the subject property yield would compare.
58
Have you just changed the investment comparables to suit your valuation rather than actually checking the NIY with the agent?
- No, the investment comparables were all auction comps which typically gives the GIY. I verified the sale price and GIY with the agents and calculated NIY myself based off this, however I made an error on the two comparables identified.
- Nonetheless, my analysis in the report remains the same as the subject yield would still be below the now slightly higher revised yields of these two comparable properties and they are still within a suitable yield range for comparison purposes.
59
Did you value the residential on a VP basis?
Yes - hence no need for KEL Sigma valuation
60
Why is the valuation date of your KEL Sigma valuation the same day as your inspection date?
As per the Service agreement with the client - the valuation date is the date of inspection
61
Where would I find info on terms of the loan?
In the instruction letter (normally say exact amount and additionally specify the term e.g. 24 months/36months)
Can work out the LTV ratio from this.
62
What was the LTV for this property
60%
63
What are the terms of the Service
- Valuation date is date of inspection
- Have 10-15 working days from date of inspection/date all information has been provided by the Borrower to complete the report.
64
What is a nominal yield?
Initial yield assuming rent paid in arrears (i.e. paying for Q2 at the start of Q3)
65
What is true yield?
Assumes passing rent is paid in advance not in arrears. (i.e. paying for Q3 at the end of Q2)
66
Any lease restrictions on the use?
Made enquiries on the planning portal and found no appeals. Nothing mentioned in the lease which was restrictive.
67
Why are the rents different for the residential Flats A-C but they all are valued at £250,000?
Regarding rents:
- They are all let on ASTs which had been agreed within the last 6 months of the valuation date. Having regard to the market evidence I determined that they were rack-rented.
Regarding values:
- I spoke to an agent who knew the local market and the Property itself, who advised that in reality these would all achieve the same sales values as they had same specification and condition - despite the fact that they were on different floors. Were Flat C a 10th floor flat for example, then there would need to be an adjustment in Market Value to reflect this.
- I analysed the market evidence and determined that this was true for comparable properties and therefore an adjustment was not needed.
- (If they still disagree) I could potentially have slightly altered the ratio but still with an overall Market Value of £750,000.
68
How many covers was the restaurant?
12 covers
69
Was the restaurant licensed?
No - it was an unlicensed restaurant - no alcohol.
70
What were the terms of the loan for this loan security valuation?
- Loan was for re-financing
- 5 years
- LTV 60%
71
Was the property let on an FRI lease?
Yes
72
How did you determine what the tenant fit out was and to what value?
Provided with license to alterations showing what alterations the tenant had made
- The property was let in shell condition and I used comparables reflected similar fit out.
73
Talk me through how you got to 6.5%
(Compare two comps together - one above and one below to identify that would fit in middle)
74
How did you reflect the hierarchy of evidence?
(update)
| see my comment in key issue 1
75
What type of evidence was this according to the RICS Guidance Note
(update)
| RE 2.3
76
What is a flaw of rent review evidence?
- Rent review clause not necessarily reflective of Market Rent
- Can be UORR clause
77
MV residential - did you value on a psf basis or a cap val basis?
Cap val basis
78
Can you give me SWOT analysis of the property
Strength:
- Good location, unexpired term on commercial unit
Weakness:
- Covenant strength not as strong as some other commercial units - however, typical for much of the retail on the same parade.
Opportunity:
- Could improve the specification further of the residential to command higher rent - however a present it is still to a good specification
Threat:
- UK retail undergoing structural change, with effects felt more in secondary/tertiary retail rather than prime - however the subject unit is on a prominent destination retail parade and is the closest end to transport links, so expected to fair better (and is a restaurant).
79
What fitting condition were your commercial unit comparables in?
Shell condition.
| - Kitchen remained
80
Did the restaurant have extractor fans?
Yes - part of tenant fit out.
81
Why are mixed-use investments attractive to investors?
Attractive to investors:
- Mixed use/commercial stamp duty is less than residential so the one single lot of mixed use provides lower stamp duty for purchaser. Landlord likely to get a higher
- Multiple income streams are attractive. If fall in the market of the commercial unit - would also have the potential to convert to resi too.
82
What were the EPC ratings for the residential flats?
Flat A - B expiring September 2019
Flat B - D expiring September 2019
Flat C - C expiring April 2026
83
What was the EPC for the commercial unit?
EPC rating D expiring January 2026
84
I your opinion do you think it would be acceptable if your company had been instructed to value it over a 15 year period?
Must be a policy on rotation and a statement of quality control included in the Terms of Engagement
- RICS recommends a minimum 7 year rotation
85
Did you have sight of the Freehold title? Any onerous clauses/restrictions on redevelopment/easements?
No
86
Are you aware of any legislation governing the EPC's?
MEES
87
Did you run a Creditsafe report on the commercial tenant?
No - it was a Private Individual - Creditsafe not suitable for that.
88
How did you assess the tenant covenant strength?
As this was a Private Individual, I had to assess this based off information from the client:
- Tenant had previously occupied the property several years and had consistently payed rent. Recently had re-signed a 16 year lease with the landlord.
- The tenant had built up some Goodwill in the area and benefited from a high footfall in a strong high street location.
- This was all considered in the yield used.
Could also potentially use analysis of accounts on Companies House:
- But I am not a qualified accountant.
89
What are the limitations of D&B report on 5A1?
Doesn't show liability of the lease e.g. Woolworths
90
Were you instructed to provide VP valuation?
Yes
91
How did you determine what marketing void to adopt?
3 month void and 6 months rent free
92
What voids and rent free did you use in your VP valuation?
3 month void and 6 months rent free
93
How did you determine what marketing void to adopt?
Spoke to local agents
94
Did you comment in your assessment of MV who the property would likely appeal to if it was offered to the market?
Private investors/high net worth's
95
What voids and rent free did you use in your VP valuation? What associated letting and legal costs did your VP valuation take into account?
- 3 month void and 6 months rent free
| - 5% legal and 10% re-letting costs
96
If you had valued this in May/June this year, is there anything else you would have included in your report?
Could have included material uncertainty clause or could have included a deduction on rent if the tenant is currently not paying income - I would have to check this with my valuation colleagues as I have not been in the valuation team for a while now.
97
Was the residential rent gross rent or net rent?
Net rent (not inclusive of any management fees or anything like that)
98
What condition are shops typically let in? Why?
Shell - ready for retailers fitting out works
99
Why might a Borrower default?
If value of the property drops below the value of the loan, or if the borrower were to become bankrupt e.g. due to failed investment
100
Why is a restaurant typically measured on GIA basis?
As per Code of Measuring Practice 2015
- In addition to this, the kitchen space is a valuable part of the property for restaurants and therefore need to be included in the measurements.
101
How would you check your competence?
Check your Skills, Understanding and Knowledge
102
How would you check the Private Individuals credit rating from their company accounts?
Balance sheet and Profit and Loss:
- Use the 'profits test'
- Net profit needs to be 3 x rent, if it is then it passes
- However, not certified accountant so would need to verify.
- Could take into account whether they had been paying rent previously from information from the client.
103
What do you know about banks and lending when there is food stores involved?
Some banks won't lend on properties that have fast food on ground floor (normally with late hour service) with residential above
- This is because the grease etc can negatively impact the property if there is poor extractor fan setup etc and can diminish the demand for resi occupiers.
- The subject property was a restaurant that also offered take away however closed at 5
104
Why did you not use net effective rent?
- Used headline rent for valuation as look at comparables on headline basis as secondary retail units like this have minimal rent free.
- So net is your headline rent.
105
For your ERV calculation for your yield comparable evidence, did you use headline rents or take into account the incentives?
Used headline rents.
106
What defects might a Victorian building such as this property have?
Dry rot/wet rot, tile slippage on roof, damp penetration at roof/ground floor level, structural movement etc.
107
Did you compare the residential MV with as investment as well as just on capital value?
Yes
- The total MV of £750k produced a GIY of 5.64% based on the passing/Market rent of £43,200 pa
- This was in line with typical yields for residential investments of this nature in the location
108
Did you make any adjustment for bulk discount on the three residential units?
No
109
Did you give advice as to time period a sale might be achieved?
Yes - within 6 months
110
What is an AST?
Assured Shorthold Tenancy:
- Agreement used by landlord to let residential property to private tenants
- Typically for 6 months but can be for longer
- After this period, the landlord can evict the tenant without legal reason
111
Did you take purchaser's costs off the property?
Yes from the commercial, no from the residential.
112
Was this inside or outside the 1954 Act
Inside - but this has little impact on the value for this as the subject property had a long unexpired term and so whether inside or outside less important as not considering expiry voids.
113
Were your investment comparables inside or outside the 1954 Act?
Inside
114
Did you apply a bulk discount?
No:
- Comparable mixed-used evidence showed that similar investments had not incorporated a bulk discount.
- If I had applied a bulk discount to my subject property then would not have been in line with the mixed use yield evidence
115
Did you account for the different use of space in the different restaurant comps. e.g. different sized kitchens etc
Yes - this was implicitly accounted for on an overall basis. In how the comparable was deemed superior or inferior, and could explain why some comparables may have had higher/lower overall rates.
