Valuation Flashcards
(178 cards)
1
Q
What is the aim of the Red Book?
A
Aim to provide consistency and transparency in valuations. Building trust and confidence in RICS members valuations. Provides an essential quality control check without the need for legislation
2
Q
Do all valuations comply with the Red Book Global?
A
All valuations have to comply with PS1 and PS2
3
Q
What do you need to do before undertaking a valution?
A
Competence = Skills, Understanding, Knowledge
Independence = Conflict of Interest
Terms of Engagement
4
Q
Why do you undertake statutory due diligence?
A
Ensure there are no material matters which could impact values
5
Q
Examples of statutory due diligence
A
Asbestos Report Business Rates / Council Tax Contamination Equality Act 2010 Planning History Compliance (CIL, S.106, conservation area, listed, planning conditions) Environmental Matters (high voltage power lines, sub stations, telecoms mask) Flooding (Environmental Assessment) EPC Rating Health & Safety Fire Safety Highways (check local highway agency) Legal title and tenure (check the boundaries, ownership, restrictive covenants, easements, rights of way, wayleaves) Public right of way (check OS map)
6
Q
What are the 5 methods of valuation?
A
Comparable, Investment, Profit, Residual and Depreciated Replacement Cost method (Contractors)
7
Q
Talk me through the profits method?
A
Used for trade related businesses where the value depends on the profitability of the business. Eg. Leisure, pubs, nurseries
Annual turnover less costs and purchases = gross profit – less reasonable working expenses = unadjusted net profit – less operators remuneration = adjusted net profit = EBITDA
Capitalised at an appropriate yield to determine market value
8
Q
Talk me through the comparable method?
A
- Search and select comps
- Confirm/verify all details with relevant agents and analyse to get a net effective rent
- Assemble to produce a comps schedule
- Analyse comps having regard to the hierarchy of evidence
- Analyse comps to form opinion of value
- Report value
9
Q
What RICS Guidance is there on comparable evidence?
A
RICS Guidance Note ‘Comparable Evidence in Real Estate Valuation’ 1st Edition 2019
10
Q
What does RICS Guidance Note ‘Comparable Evidence in Real Estate Valuation’ 1st Edition 2019 say about the comparable method?
A
Advice on how to deal with situations with limited availability of evidence. The valuer should use a professional judgement to assess the relative importance of evidence on a case-by-case basis.
Sets out the hierarchy of evidence.
11
Q
What is the hierarchy of Evidence?
A
CAT A – direct comparables of contemporary:
- completed transactions of near-identical properties (and self-generated evidence)
- completed transactions of other assets
- completed transactions of similar real estate
- similar real estate under offer
- asking prices (only with careful analysis)
CAT B - general market data that can provide guidance
- eg. Info from published sources or commercial databases
- indices
- historic evidence
- demand/supply data for rent
CAT C – other sources
- transactional evidence from other real estate types and locations
- other background data eg. Interest rates, stock market movements
12
Q
How do you find good comparable evidence?
A
Inspect local area – marketing boards, local agencies
Speak to local agents
Inhouse records and databases – egi, costar
Look at auction results – note often a special purchaser or insolvency sale. Sale price is gross of costs
Market sentiment when lack of evidence
Date of evidence is crucial
13
Q
What is the investment method?
A
when there is an income stream to value
rental income is capitalised to produce a capital value
conventional method assumes growth implicit valuation approach
an implied growth rate is derived from the market capitalisation rate (yield)
14
Q
What are the different approaches under the investment method of valuation?
A
Initial Yield (conventional investment method)
Term and Reversion
Hardcore and Layer
Discounted Cash Flow
15
Q
What is the initial yield approach?
A
Rent * YP = market value
16
Q
What is term and reversion?
A
used for reversionary investments.
Term is capitalised until next review/lease expiry at an initial yield. (explicitly accounting for voids)
Reversion to market rent is valued in perpetuity at a reversionary yield. (softer yield to reflect risk)
17
Q
What is hardcore and layer?
A
used for over rented investments. Bottom slice is market rent, top slice is rent passing less market rent to next lease event. Higher yield is applied to top slice to reflect additional risk. Split yields used depending on comparable evidence and relative risk.
18
Q
What is a Discounted Cash Flow?
A
Growth explicit method of valuation. Involves projecting future cash flows over an assumed investment holding period, plus an exit value at the end of that period, usually arrived at on an ARY basis. The cash flow is then PV’d back at a discount rate that reflects the perceived level of risk.
19
Q
What is the difference between term and reversion and hardcore and layer?
A
Term and Reversion = Explicitly values voids but may undervalue an asset as applies a softer yield to the whole of the reversion
Hardcore and Layer = Implicitly values voids through the ARY.
20
Q
What is a yield?
A
a measure of investment return expressed as a percentage of capital invested
income divided by price * 100
21
Q
What is a years purchase?
A
number of years required for income to repay its purchase price
22
Q
What is incorporated in a yield?
A
Reflects the level of risk prospects for rental growth and capital growth quality of location and covenant use of the property lease terms voids security of regularity of income liquidity (ease of sale)
23
Q
What is a return?
A
Performance of a property
24
Q
What is an All Risk Yield?
A
a yield that reflects all the prospects and risks attached to a particular fully let property at market rent.
25
What is a True Yield?
assumes rent is paid in advance not arrears
26
What is a Nominal Yield?
initial yield assuming rent is paid in arrears
27
What is a gross yield?
the yield not adjusted for P. costs
28
What is a net yield?
yield adjusted for p. costs
29
What is a Equivalent Yield?
average weighted yield when a reversionary property is valued using an initial and reversionary yield
30
What is a running yield?
the yield at one moment in time.
31
What is a reversionary yield?
Market Rent divided by current price on an investment that is let below the MR.
32
When would you use a DCF?
Short leasehold interests – assets with income voids or complex tenures
Phased development projects
Alternative investments
Non-standard investments ie. 21 year rent reviews
Separates out and explicitly identifies growth assumptions rather than incorporating with the ARY.
33
What is a simple methodology for a DCF?
Estimate cash flow (income less expenditure)
Estimate the exit value at the end of the holding period
Select the discount rate
Apply the discount rate to the cash flow
Value = sum of the completed discounted cash flow to provide = NPV
34
What is the Net Present Value?
The sum of the discounted cash flow of the project. Used to determine if an investment gives a positive return against a target rate of return.
If NPV is positive = the investment exceeds the investors target rate of return
If NPV is negative = the investors required rate of return has not been achieved
35
What is an Internal Rate of Return?
The discount rate which the NPV equals 0. If the NPV is more than 0, then the target rate of return has been met. Therefore IRR is the minimum rate of return permitted.
Used to assess the total return from an investment opportunity making assumption for rental growth, reletting, and exit assumption. Can be calculated using linear interpolation if firm does not have appropriate software.
36
Talk me through the Depreciated Replace Cost Method?
Used for monopoly buildings where there is no/limited market evidence for specialised properties such as lighthouses, schools, sewage works
Value of the land in its existing use (assuming planning permission)
Less the current cost to replace the building and professional fees – less depreciation, deterioration and obsolescence
Physical (deterioration), functional (specification not fit for use), economic obsolescence
37
Is the DRC method suitable for Red Book valuations?
Not suitable for Red Book Global compliant valuations for secured lending. Suitable only for owner-occupied properties which require valuations for account purposes only.
38
What is the aim of the Red Book Global?
Aims to provide consistency, objectivity and transparency in valuations
To build public confidence and trust in RICS members’ valuations
Ensures valuers are working to the latest IVS
Provides an essential quality control check without the need for legislation
The changes made are effective from the 31st January 2020
39
What are the Key Parts of the Red Book Global?
Part 1 – Introduction
Part 2 – Glossary
Part 3 – Professional Standards (PS) (Mandatory Worldwide)
Part 4 – Valuation Technical & Performance standards (VPS) (Mandatory Worldwide)
Part 5 – Valuation Applications (Valuation Practice Guidance Applications – VPGAs)
Part 6 – International Valuation Standards 2017 (Mandatory)
40
Are all valuations Red Book compliant?
All valuations are compliant with PS1 and PS2 of the Red Book Global. PS1 outlines 5 type of valuations that are exempt
41
What is PS1?
Compliance with standards and practice statements where a written valuation is provided.
There are 5 exemptions:
Advice that is required for negotiation or litigation Statutory function (but is still required for a tax return)
Valuation is only used for internal purposes – not to be communicated to a 3rd party
Valuation is party of agency/brokerage work in anticipation of receiving the instruction to buy/sell the asset
Valuation advice when giving evidence as an expert witness
42
What does PS2 refer to?
Ethics, competency objectivity and disclosures
Members undertaking valuations must act in accordance with RICS Global and Professional and Ethical Standards (2015) and the RICS Rules of Conduct 2007, as amended in 2020
Valuers must act objectively and independently. Must not be in a position that threaten their objectivity
A valuer must apply ‘professional scepticism’ when reviewing date before relying on it
Members must demonstrate professional competence
Members must understand clients’ requirements and comply with the Terms of Engagements
43
What does VPS 1 refer to?
TOE must be confirmed in writing to a client prior to commencing a Red Book Global compliant valuation. The minimum requirement for VPS1 is (18 points);
a. valuer name and status
b. client name
c. name of any other intended users
d. asset or assets to be valued
e. currency
f. purpose of valuation
g. basis of value
h. valuation date
i. extent of investigation
j. nature and source of information to be relied upon
k. assumptions/special assumptions
l. format of report
m. restrictions of use, distribution and publication
n. confirmation of Red Book Global compliance
o. fee basis
p. CHP
q. statement that the valuation may be subject to compliance by RICS
r. limitation on liability agreed
44
What is the difference between an assumption and a special assumption?
Assumption = is where it is reasonable to accept that something is true without the need for specific investigation
A specific assumption = is something that is taken to be true and is accepted as a fact even though it is not. Must be agreed in writing in the TOE’s before commencing instruction.
45
What does VPS2 refer to?
Inspections, Investigations and Records
46
Are desktop valuations red book compliant?
Yes, unless one of the exceptions as set out in PS1
| Called restricted information valuations where no inspection is undertaken
47
What 4 factors should a valuer consider when undertaking a desktop valuation?
1. Nature of the restriction must be agreed in writing
2. Possible valuation implications confirmed in writing
3. Valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation
4. Restriction must be referred to in the report
48
Can a revaluation without re-inspection be Red Book Global compliant?
No, unless the valuer is satisfied that there has been no material changes to the property or location since last valuation and this must be confirmed in TOE
49
What does VPS 3 refer to?
Valuation Reports. Aligns with IVS 103 Reporting
Minimum requirements for a report are:
a. name and status of valuer
b. name of client and any other intended users
c. purpose of valuation
d. identification of asset to be valued
e. basis of value
f. valuation date
g. extent of investigation
h. nature and source of information to be relied upon
i. assumptions and special assumptions
j. restrictions on use, distribution and publication
k. instruction undertaken in accordance with IVS 103 Reporting
l. valuation approach and reasoning
m. valuation figure
n. date of valuation report
o. comment on market uncertainty
p. statement setting out any limitations on liability that have been agreed
50
What extra information do you include for a loan security report?
Suitability of loan, remaining life of the property, previous transactions at the property, valuation method, SWOT analysis, special assumptions
51
When might a property be unsuitable for a loan?
Wasting – less than 75 years on the leasehold interest
If the property has recently been purchased and the Market value is more than the purchase price
High risk of tenant default
Major structural or environmental issues with the property
Flood zone 3
52
What is preliminary (draft) advice?
Can be given but must be marked as draft, for internal purposes only, cannot be relied upon and cannot be published
Can be discussed with client but valuer is not to be influenced by the client
Any changes made to preliminary valuation must be noted on file and reasons provided
Any additional information supplied by the client as a result of the discussion regarding the draft report must be stated in the report
53
What is Market Value?
Market value is the estimated amount for which an asset should be exchanged at the valuation date between a willing buyer and willing seller, in an arm’s length transaction, after a proper marketing period where the parties had each acted knowledgably, prudently and without compulsion.
54
What is Fair Value?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a measurement date.
55
What dose Fair Value have to comply with?
VPGA 1 (Red Book Global, IFRS 13, FRS 102
56
What is an arms length transaction?
Where there is a transfer of liability and the buyer and seller act independently of one another
57
What is Market Rent?
The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and when the parties had each acted knowledgeably, prudently and without compulsion.
58
What is Investment Value?
The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives.’ May differ from market value.
59
What is Equitable Value?
The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties. NOT USED IN THE UK.
60
What is Liquidation Value?
The basis of value can be used for a group of assets sold in a piecemeal basis considering the costs of getting the assets into a saleable condition
Not used in the UK
61
What part of the red book global refers to bases of value?
VPS 4 - bases of Value, Assumptions and Special Assumptions
62
What part of the Red Book Global refers to the valuation approach?
VPS 5 - Valuation Approaches and Methods (IVS 105)
63
What are purchaser costs?
SDLT, Agent and Legal fees plus VAT
64
What are the gradings for SDLT?
£0 - £150,000 = 0%
£150,000 - £250,000 = 2%
£250,000 = 5%
65
What are the Gradings for residential SDLT?
```
£0 - £125,000 = Nil
£125,001 - £250,000 = 2%
£250,001 - £925,000 = 5%
£925,001 - £1,500,000 = 10%
Over £1,500,000 = 12%
```
66
What are the limitations of Argus?
Human error, only as good as the person inputting the information
67
What information would you require from a telephone enquirer who asked you to carry out a valuation?
What is the purpose of the valuation
Where is the property
Who is the valuation for
When do you need it for
68
If you had no yield information what would you do?
Look at alternative asset classes and make the appropriate discount.
Use indices – go back to basics, how is a yield constructed. The market would start at gilts then add say 2% for inefficiencies of investing in property – illiquidity and obsolescence
69
What are business rates?
A tax on non-domestic properties. Charities have 80% relief
Set at a multiplier of 0.512 where the rateable value is over £51,000
Set at 0.499 where the rateable value is less than £51,000
Less than £12,000 annual rent = rates relief
Between £12,000 - £15,000 = some rates but not the full amount
70
What properties are exempt from rates during Covid-19?
Retail, leisure, hospitality = 100% rates relief for 12 months from 01/04/2020 to 31/03/2021
Offices, factories and warehouses = no relief
71
Why is money worth more today than in the future
Due to uncertainty and inflation
72
What does the Red Book say about the valuer undertaking the valuation?
The valuer must be registered with the RICS Valuer Registration Scheme (VRS) if undertaking a Red Book compliant valuation
73
What different things would an investor consider compared to an owner occupier?
```
Investor = income stream, covenant length, lease terms
Owner-occupier = Would look on a gross yield
```
74
Did you reflect anything in your valuations given Covid-19?
Material uncertainty if necessary
Extent of investigations
Comment on market commentary about COVID and Government measures
75
What is material uncertainty?
Material uncertainty under VPGA 10 of the Red Book is a clause you would insert in times such as Covid-19 where there was substantially fewer transactions and limited evidence. Declaring market uncertainty means that the client should use a higher degree of caution when regarding our opinion of market value.
76
What is the timeline of a valuation instruction?
There are 16 steps. Receive instruction, check competence, check independence and run conflict of interest, issue terms of engagement, agree terms of engagement, gather information, statutory due diligence, inspect and measure, research market and assemble comparable, undertake valuation, draft report, get supervisor to check report, finalise and sign report, repot to client, issue invoice, ensure calculation file in good order for archiving
77
What does it mean if a EY is above both the IY and RY?
It means that it is rack rented but the rent is going up in the future before dropping back to MR.
78
What does it mean if the EY is below both IY and RY?
There is a rental decrease before the rent goes back to MR.
79
What does VPGA stand for?
Valuation Practice Guidance Applications (there are 10)
| Valuers are responsible for choosing and justifying their valuation approach and use of method
80
What does VPGA 1 refer to?
Valuation for inclusion in financial accounts
fair value will be adopted for all IFRS adopted accounts
prescribed “performance standards” must be adhered to
81
What does VPGA 2 refer to?
Relates to valuations for secured lending
82
What do you have to declare for a secured lending valuation which don't have to for an accounts valuation?
any previous, current or anticipated involvement with the prospective borrower or the property to be valued must be disclosed to the lender. Previous involvement being last 2 years or could be longer under certain circumstances. If the valuer or the client considers that any involvement creates a conflict that cannot be avoided then the instruction should be declined
if any potential conflict and can be managed, then must be recorded in writing in TOE and report with informed consent
83
What are the reporting procedures for secured lending which are in addition to an accounts valuation?
as well as minimum requirements for valuation reporting, additional info must be reported to give the lender more info regarding the instruction and be able to advise whether to agree to the loan
statement that the valuer is not involved
valuation methodology adopted, supported with the calculation
where a recent transaction on the property has occurred, the extent to which that information has been accepted as market value
comment on any environmental consideration
comment on the suitability of the property for mortgage purposes
any circumstances of which the valuer is aware that could affect price
any other factor that potentially conflicts with the definition of Market Value
84
What is the UK National Supplement to the Red Book Global?
Published Nov 18 effective from Jan 2019
Augments the Red Book Global requirements for valuations in the UK – not a substitute should be used in tandem
Provides advice on valuations undertaken subject to UK jurisdiction
Most of the advice is advisory and not mandatory
UK National Supplement is more user friendly than the Red Book Global
85
What are regulated purposes valuations (UK VPS 3)?
Valuations relied on by 3rd parties who have not commissioned the valuation and they are subject to valuation monitoring
86
What are the purposes of regulated purpose valuations?
```
Financial reporting (company accounts)
Stock Exchanged Listing
Takeovers and mergers
Collective investment schemes
Unregulated property unit trusts
```
87
Are secured lending regulated purpose valuations?
No, they are not replied upon by 3rd party or the public interest
88
What are valuation monitoring requirements?
Inspections by an RICS professional regulation team
Annual declaration for all members to declare the length of time the value has acted for the client and the extent and duration of the firms relationship with the client
To declare whether % fee income from the client is less of more than 5% of the total fee income – and if this has changed in the last financial year or is likely to change in the future
should be a policy in place on the rotation of valuers when the asset is regularly valued. RICS recommends a 7-year maximum rotation policy.
when a property is purchased by a company it cannot be valued for regulated purpose valuation for 12 months by the same firm
89
What is margin for error?
varies case by case depending on difficulty of the valuation
there is case law to support this eg. Titan Europe v Colliers – 15% margin of error upheld
but other case law 10% margin reinforced
90
What is hope value?
The value arising from any expectation that future circumstances affecting the property might change
eg. Future prospect of securing planning permission for the development of land OR the realisation of marriage value arising from the merger of two interests in land
91
What is marriage value?
Created by a merger of interests – can be physical or tenurial
Undertake a before and after valuation to calculate the level of marriage value created
Typical to split 50:50 or divide it pro-rata to the value of the individual interest
92
How would you approach the valuation for charities?
When a charity is seeking to buy or sell a property they must obtain a Section 119 of the Charities Act 2011
The valuer must follows the acts requirement
The value must comment if the purchase or sale is in the charities best interest
The terms must be the best that can be reasonably obtained for the charity
UK VPGA 8 sets out the advice
93
What is excluded from SDLT?
property left in a will
divorce
FH property purchases less than £40,000
94
How do you calculate the premium for surrenders?
calculate the change in leasehold interests before and after
| use premium to reflect that change
95
What is a special value?
The amount that reflects particular attributes of an asset that are only of value to a special purchaser
eg. Could arise from physical or economic association with some other property
could be generated when the transaction is not arm’s length eg. Tenant purchasing their FH interest.
96
How do you value long leasehold interests?
deduct ground rent from the gross income to calculate the net rent received
capitalise at a yield for the length of the lease = MV of Leasehold Interest
97
What is a premium?
Capital payment made from one party to another
98
What is profit rent?
A sum on of money paid by an ingoing tenant for a LH interest. The difference between the passing rent and market rent
Profit rent can be capitalised until next lease event to calculate the premium
99
What is WAULT?
The weighted average unexpired lease term remaining to the first break or expiry of a lease across asset weighted by contracted rent
100
What is the net effective rent?
Devalue a headline rent with a rent-free period to produce net effective
101
How do you calculate net effective rent?
assume fit out period, normally 3 months.
take rent free incentive less 3 month fit out period
then amortise over the term certain
divide by the rent and area for psf basis
102
What is the valuation of Ransom Strips?
A piece of land that controls the access to another piece of land
Value could be between 10% - 50% of development value unlocked by the inclusion of the ransom strip within the development
103
What is an RICS registered valuer?
must be registered with the VRS scheme
in order to register, must have completed APC with vals competency to L3. There are alternative routes if you haven’t that involve paying a fee to RICS.
the RICS monitor the valuer through the submission of their firm’s annual return
Registration is not mandatory for the valuation work excluded from the Red book global
104
What are the three aims of the RICS Valuer Registration Scheme (VRS)?
Improve the quality of valuation and ensure the highest possible professional standards
To meet the RICS requirement to self-regulate effectively
To protect and raise the status of the valuation profession as the leading expertise in valuation
105
What should clients be able to expect from a RICS registered valuer?
Openness and transparency
RICS protection and International valuation standards
Expertise and clear reporting
World class regulations
106
How long should a valuation file be retained?
minimum of 6 years in case of a claim for professional negligence
107
If a client dis-instructs you can they take the files?
They can take what is theirs yes – you should keep a copy
108
Kingston - How do you use Zone A to calculate rent?
Zone A rent is a unit of comparison. The first zone within a property and therefore at 100%. Use comparable evidence on a Zone A rent to determine market rent. Calculate the remaining rent using the halving back process.
109
How would you have valued the property had it been vacant?
Lack of evidence to use the comparable method.
Used the investment method. Deferred income to reflect voids, rent free. Then value Market Rent into perpetuity at a capitalisation rate
110
Kingston - how soft was the yield used for the reversion?
100 bps discount – 7.50% - to reflect the added risk of reletting the unit and a further fall in market rent
111
Kingston - Why did you then compare the resultant value to your comparable evidence?
Compared the blended yield to the comparable evidence – to cross check my valuation
112
Kingston - Why did you not use hardcore and topslice?
The greatest risk was the tenant vacating and therefore used the term and reversion method as it explicitly takes into account voids
113
Kingston - what was the tenants covenant strength?
A76
114
Kingston - would you have valued it differently if it was reversionary?
Would have still used the term and reversion
115
Kingston - what voids and rent free did you allow for?
12 months void and 12 months rent free
116
Kingston - What are the facts might you consider with the ongoing uncertainty in the retail market? And when I say that what I mean is, what other assumptions might you make because of the uncertainty alongside these cap rate adjustments?
Increase the void costs and rent free
| Depending on the number of recent lettings, decrease the market rent
117
Kingston - Did you include any CAPEX costs?
No as the shop is let in a shell and core and therefore minimal CAPEX would be required
118
Kingston - how do you zone?
Used 6ft zones from the building line through to the rear of the store
Halving back principal
119
How much vacancy is there in Kingston?
10.6% at the val date - increase from pre-covid levels
120
Kingston - what was the yield profile?
```
EY = 6.51%
RY = 7.15%
IY = 12.57%
```
121
Kingston - why was the EY less than the reversion and initial?
EY was less than IY and RY as there is less than 2 years on the lease and takes into account the upcoming void and rent free. Whereas the RY is 4 years off and IY is high due to the overrent nature of the property at the valuation date.
122
Talk me through your Level 2 example in Kingston?
Valuation of single-let retail unit for secured lending purposes
Used comparable method to determine market rent and a yield
Adopted the term and reversion approach to account for the upcoming void
Deducted purchase costs to determine my opinion of value
Advised my client that the property was suitable for secured lending
123
Kingston - How overrented was the property?
PR = £265 ZA
MR = £150 ZA
43%
124
Kingston - What was the construction of the property?
Solid brick wall
Flat roof
Double frontage
Built in the early 1900s
125
Kingston - what was the size?
2,453 ITZA
| 7,078 sq ft
126
Kingston - when did the lease expire?
December 2022
127
Kingston - What was the market value?
£4,850,000
£1,978 psf
Val date: 31st March 2021
128
South Elmsall - Why did you use the initial yield and not the all risk yield?
The property was rack-rented and it was a new letting, therefore did not include any voids.
The initial yield and the all-risk yield would have been the same.
129
South Elmsall - what section of the red book did this comply with?
VPGA 1 - Fair Value
130
South Elmsall - How did you form the opinion that the property was rack rented?
Self-producing evidence at the subject property – as it had recently let
Compared the property to comparable evidence and verified this with the relevant agents
131
What does perpetuity mean?
Cash flow with no end
132
What is the purpose of an accounts valuation?
Balance sheet, performance, shareholders
133
Am I competent to advise on Normanton / South Elmsall?
Skills, Knowledge, Understanding
134
Where is South Elmsall and what is the closest motorway junction?
NW Doncaster, NE Barnsley, S of Leeds and Wakefield, N of Sheffield and Rotherham
Closest to J38 of the A1 (M)
135
South Elmsall - what is the initial yield approach?
Capitalise the passing rent into perpetuity and then deduct purchaser costs
136
What is annuity?
A series of payments that have been discounted back to present day value. eg. future rent reviews
137
What is the present day value?
The value of an expected income stream as determined as of the date of valuation
Takes into account time value of money
138
What was the passing rent for South Elsmall?
£4.75 psf
139
South Elmsall - What was the capitalisation rate?
5.40%
140
What was the Fair Value for South Elmsall?
£12,975,000
| £82.48 psf
141
South Elmsall - did you account for any voids?
No - over 4 years remaining on the lease
142
Talk me through your level 2 example in South Elmsall?
Valuation of single-let industrial unit for accounts purposes
Used comparable method to determine market rent and a yield - self producing evidence = rack rented
Adopted the initial yield approach
Deducted purchase costs to determine my opinion of value
143
South Elmsall - What was the specification?
```
Grade A
Steel portal frame construction
Min 8m clear eaves height
Min 30 kN/sq m floor loacing
Plastic coated steel profiled cladding with brick
Full height loading doors
3 phrase electricity power (415 volts)
5 - 10% office content and WCs
Main services capped off
Approximate site cover - 40%
```
144
Talk me through your Level 2 example in New Malden?
Valuation for bi-annual accounting purposes
Multi-let retail parade consisting of 3 units
Used the comparable method to adopt appropriate market rents and yields
Adopted the hardcore and layer approach as the property was overrented. Used the split yield approach.
Varied yield dependent on lease length, covenant strength and how ovrrented.
145
New Malden - what were the lease terms for each unit?
Unit 1 - let to national occupier - 6 years remaining
Unit 2 - let to a local occupier - 14 years remaining
Unit 3 - let to a national occupier but less than a year remaining
146
New Malden - What yield did you apply to each unit?
Unit 1 - overrented to a strong covt. 8% for hardcore. 150 bps discount for 9.50% topslice
Unit 2 - local occupier - 14 years. rack rented. 8.50% into perp.
Unit 3 - National less than a year. 8.50% hardcore. 9.50% topslice
147
New Malden - What voids did you account for?
12 months voids
| 12 months rent free
148
New Malden - how did you account for the renewal?
Did not take it into account for the valuation as valued as the tenant was vacating and worse case scenario
149
New Malden - Why did you value the units individual and not as a parade?
Only 3 units with varying lease lengths and covenant strengths therefore important to value individually and have consideration of the overall blended yield
150
New Malden - Is there a section of the Red Book that refers to premiums for parades?
VPGA 9 – Identification of portfolios, collections and groups of properties
151
New Malden - are you qualified to comment on a lease renewal?
No would advise my client to seek advise from the lease advisory team.
Competent to advise on how a lease renewal affects the value
152
New Malden - Value fell due to decrease in market rent – was there anything else that negatively impacted market value?
Increase in vacant units on the high street – increase in voids
Softening of the capitalisation rate – negative market sentiment, less investor appetite
153
New Malden - what ERV did you adopt?
Looked at a global rent
£30,000 and £32,000 pa for smaller units
£175,000 pa for large unit
154
New Malden - What would the value had been the unit been renewed?
Increased in value by £50,000
155
How do you calculate WAULT?
The unexpired lease term weighted by contracted rent
156
New Malden - what was the EPC?
E113
157
How does the specification of a retail unit affect the valuation?
Shell and core - fit out/specification tends not to affect value
Type of frontage
158
New Malden - why did you not zone?
Limited evidence
159
New Malden - did your valuation include the uncertainty clause?
Yes - very limited comparable evidence
| Security for valuer caveat
160
New Malden - What was the Fair Value?
£3,240,000
£113 psf
Lease Renewal = £3,290,000
161
New Malden - What were the yields?
```
IY = 9.64%
EY = 8.005
RY = 7.29%
```
162
Edmonton - 15 months seems a long time for voids?
9 months voids and 6 months rent free – maximum for the larger units – worse case scenario
Smaller = 6 months void and 3 months rent free
163
Edmonton - are you competent to advise on a loan?
No but can advise on the suitability of the loan
164
Edmonton - Is the loan suitable for lending if there are a 15 months void?
Strong industrial market
| The marketability of industrial space
165
Edmonton - Why did you not use the comparable method for the vacant units?
Cross-checked the capital values per sq ft with VP sales
Accounted for void costs (service charge and business rates)
Capitalised at a softer yield
166
Edmonton - What ERVs did you apply?
Over 30,000 sq ft = £12.00 psf
Between 10,000 and 35,000 sq ft = £12.50 psf
Less than 10,000 sq ft = £13.75 psf
167
Edmonton - what yields did you apply?
Vacant Units = 4.50%
Less than 5 years term certain = 4.25%
More than 5 years term certain = 4.00%
168
Edmonton - What was the valuation date? Do you think it would differ if it was done today?
9th September 2020
Valuation would have increased – prime industrial yields have come inwards since the valuation and market rents have increased
169
Edmonton - what was the largest variant in yield?
50 bps differential – small given the strength of the industrial market
170
Edmonton - what was the EPC of the vacant units?
D 92
171
Edmonton - what were the covenant strengths like?
Average - some were below C 50
172
Edmonton - What method of valuation did you use?
Hardcore and layer
173
Edmonton - What was the site cover? Why was this important?
60% above the requirement for Grade A but this is in line with Greater London (comparables) and the new London regulations for new developments. Therefore did not discount.
174
Edmonton - how did the site coverage compare to comparables
Aligned
175
Edmonton - what was included in the void costs of the vacant units>
Service Charge
Leasing and legal
Business rates - had been vacant for longer than 6 months
176
Edmonton - what was the yield profile?
```
IY = 1.92%
EY = 4.28%
RY = 4.47%
```
177
Edmonton - why did you look at the capital value?
Compare to the sale of recent vacant possession comparables
| To see what the underlying site value was
178
Edmonton - What was the value?
£39,750,000
| Capital Value = £253 psf
