Valuation Flashcards
(139 cards)
1
Q
What are the 5 methods of Valuation?
A
Comparable Method
Investment Method
Profits Method
Depreciated replacement cost
Residual method
2
Q
How is the top slice of income calculated?
A
Top slice – Market rent less rent passing x YP in perp, deferred number of years to next review / break date.
3
Q
What’s the difference between net yield and gross yield?
A
Gross yield is the overall return on an investment without expenses and net yield is calculated as the profit from an investment after expenses have been taken away.
4
Q
What type of properties can you value using DRC ?
A
The cost approach is used to value unusual properties where there is no active market such as mosques, wharfs or refineries.
5
Q
What is a Grade A specification of building ?
A
Grade A – Latest Spec / New or Refurbished / BREEAM rating of good or above. Suspended ceilings, raised floors, A/C etc.
6
Q
Define Market Value.
A
VS 3.2 – Market Value
The estimated amount for which a property should exchange;
• On the date of valuation
• Between a Willing B and Willing S
• In an arms length transaction
• After proper marketing
• Wherein both parties had each acted knowledgeable, prudently and without compulsion.
7
Q
Define Existing Use Value
A
UKVS 1.3 EUV
The estimated amount for which a property should exchange;
• On the date of valuation
• Between a Willing B and Willing S
• In an arms length transaction
• After proper marketing
• Wherein both parties had each acted knowledgeable, prudently and without compulsion.
• Assuming that the buyer is granted vacant possession of all parts of the property required by the business
• Disregarding potential alternative uses
8
Q
Define Depreciated Replacement Cost.
A
GN6 – DRC method of valuation for financial reporting
The current cost of replacing an asset with its modern equivalent asset less deductions for physical deterioration and all relevant forms of obsolescence and optimisation
9
Q
What are the components of a fire insurance valuation?
A
An insurance reinstatement cost.
a) Measure the property and then apply unit costs
b) Cost rates from BCIS, quantity surveyors, spons etc
c) Must allow for demolition (removal of debris)
d) Must allow for professional fees
e) Allowance for VAT
f) Have regard to the quality and method of construction
10
Q
How would contamination affect your valuation?
A
If contamination is identified, 3 options for the valuer;
1) Adopt conclusions of experts report – ie cost of remediation
2) Adopt appropriate caveat / special assumption
3) Decline instruction as outside area of expertise
11
Q
How would the presence of deleterious materials affect value?
A
These are materials used during the construction of a building that degrade with age causing structural problems – materials include High Alumia Cement (typically 60’s / 70’s).
If they are present, valuer must report existence in valuation report. Likely to diminish value, depends on the circumstances. Seek professional advice if necessary.
12
Q
What are the differences between worth and price?
A
Price – The amount you are asking
Value – The amount in line with the market
Worth – The amount an individual would pay
13
Q
How would you conduct a worth valuation?
A
DCF method
Can include allowances for inflation, tax liability, irregular receipts or payments.
Can incorporate a specific client’s situation and investment requirements – such as rate of return.
2 basic approaches to DCF;
1) Present Value (either gross present value or net present value) – when a final capital value need to be found. This is calculated using a yield either based on market evidence or a ‘target’ figure specific to the clients requirements.
2) IRR (internal rate of return) – when the final capital value of the investment is known and the calculation finds what the rate of return will be based on the capital value.
14
Q
What is EIBOR, and what is the current rate?
A
Check online
15
Q
What is the current gilt rate and why is this important for valuations of overrented properties?
A
20 year is 3.1%
This is the secure form of investment. Gives guidance on the yield to apply.
16
Q
What are the different valuation bases?
A
VS 3.2 – Market Value
VS 3.3 – Market Rent
VS 3.4 – Worth or Investment Value
VS 3.5 – Fair Value
17
Q
What are the differences between external and independent valuations?
A
Independent – Impartial, say for accounting or secured lending purposes
External – can be external and for negotiations etc.
18
Q
What is the effect of covenant on valuations?
A
Effects the risk attached to the term and therefore the yield.
19
Q
When can you take account of hope value?
A
This is the value arising from the expectation that circumstances affecting the property may change in the future;
Eg.
Securing planning permission for development land
Realisation of marriage value arising from the merger of two interests in land
20
Q
Can you give examples of special purchasers?
A
A buyer for whom a certain asset has a special value because of advantages arising from its ownership that would not be available to general buyers in the market.
Example – An island site in Croydon where there are two freehold interests, one is to be sold, if the buyer was the owner of the adjacent site he would be a special purchaser as the two sites together are far more valuable than the aggregate of the two single sites
21
Q
How would you treat the valuation of an over-rented property?
A
Hardcore, Investment method
• Value the top slice to the years unexpired (ie Current rent x YP for x years at chosen ARY)
• The top slice yield will be risky because the rent is greater than what market achieves. In this instance the ARY will exclude growth because it is overrented and unlikely to realise any growth, but depends on the lease terms (such as upward only RR’s). You would adopt higher yield as riskier, and chance of T default.
• Value the core to perp (ie ERV x YP in perp at ARY)
• The ARY for the core will be lower to reflect the lower risk as the investor is more likely to achieve this market rent.
22
Q
What are the components of a residual valuation?
A
GDV less Total Development Costs = Residual Site Value
GDV – Market value of the proposed scheme
Less Development Costs which include;
Initial payments – Site survey / Clearance / Planning
Build Costs – BCIS / Comparable Constructions / QS
Professional Fees – tend to be approx. 10 – 15% of build costs
Finance Costs – Debt finance or Equity Finance. Finance /2 due to S – curve
Marketing Costs
Contingency – tend to be approx. 5 -10% of build costs
Developers Profit – between 15 – 20% of GDV depending on riskiness of scheme
Holding Costs – Costs incurred between construction completion to 1st letting / sale – includes management costs, empty rates etc.
Sales Costs – Letting / Sales agents, allow approx. 1% - 2% of purchase price
Leaves – Residual Value
23
Q
What are the weaknesses of residual valuations?
A
1) Unstable & extremely sensitive to minor adjustments
2) Does not take into account timing of cash flows
3) Heavily reliant on quality of information for inputs
4) Implicit assumptions remain hidden
24
Q
What are the cost of purchase for valuations, and what do they consist of?
A
Check
25
What are the main components of a valuation report?
a) Identification of the Client
b) Purpose of valuation
c) Subject of valuation
d) Interest to be valued
e) Type of property and use
f) Basis of valuation and definition
g) The date of the valuation
h) Identiy of the valuer – NEW
i) Currency of the valuation
j) Assumptions / special assumptions
k) Extent of investigations
l) Nature and source of information
m) Consent or restrictions to publications
n) Any limits
o) Confirmation valuation in accordance with appropriate standards
p) Opinion of value (In words)
q) Signature and date of the report
26
Define initial yield.
Current rent / current price paid – used when no rental growth in market
27
Define equivalent yield
An average yield when a reversionary property is value using an initial & reversionary yield
28
Define reversionary yield
Market rent / Current price paid of an investment let at a rent below market rent
29
Define all risks yield
Market rent / price paid
30
Define Net Yield
The resulting yield after adjustment for purchasers costs
31
Define True Yield
Yield assuming that rent is paid quarterly in advance, taking into account the frequency and timing of actual rent being paid.
32
What is an IRR and how is it calculated?
Internal Rate of Return – using DCF method
33
What is marriage value?
Now referred to as synergistic value
An additional element of value created by the merger of 2 property interests, physical or tenurial.
To calculate: undertake a ‘before’ valuation
Undertake an ‘after’ valuation
The difference is your marriage value
Usual to add 50% of the marriage value.
34
For what types of valuation must you use the Red Book?
All valuations unless stated in exceptions section VS1.2
35
Can you vary the instructions of the Red Book, and if so when?
Yes, in specific circumstances you can depart from the standards – but the reason why and effect must be cleary agreed with the client and specified in the terms of engagement and the report. Detailed in VS 1.2’compliance, regulation and the requirement to disclose departures.
36
Which recent cases are concerned with negligent valuations?
Lincoln & Others v CBRE Investors (2010)
Margin for error – reinforced general principle of +/- 10% in the valuation of 4 hotels.
37
How would onerous lease terms impact on the valuation of a landlords investment?
Likely to diminish the rental value and therefore if long term remaining the capital value.
38
How would structural defects be reflected in your valuation report?
Would have to be mentioned –
could adopt specialist report
Adopt special assumption or caveat
Decline instruction as outside area of expertise
39
A client asks you to value an oil refinery for him. You have no experience in this field. What would you do?
CIT – decline instruction
Advise he goes to RICS.org and the RICS find a surveyor service
40
How would you value a hotel?
Outside area of expertise – decline instruction.
But,
VIP No. 6 – Valuation of Hotels
Would assume it would be on a profits method
41
How would you value a port?
No experience – but,
• First place to look would be are there any comps
• Is there any rent passing
• Could carry out a profits method
• Could undertake a residual if it had development potential
• DRC
42
How would you value a lease surrender?
Determine the appropriate premium be assessing difference in;
• L existing interest – Current headlease income YP for the remaining years + reversion in x years
• T existing interest – Profit rent YP for remaining years
• L proposed interest – Freehold of the property ERV at YP in perp
• T proposed interest – say value of 125 year lease
43
If a client phone you and asked you to value an office for him what information would you require?
What is the valuation for
Why do you need a valuation
Where is the property
Who is the valuation for
When do you need it by
You will then need to decide whether it falls into your area of expertise.
44
How would you value something where there are no comparables?
Widen geographical search for comps – if still nothing then look to alternative methods
Profits
Residual
Contractors Method
45
What methods are there for valuing an income producing property?
Profits;
Gross turnover
Less
Costs of purchase
Less
Working expenses
Leaves
Divisible balance
Less
Tenants return on capital and allowance for fair wear and tear
Leaves
LL’s share (rent)
Capitalise at appropriate YP
Equals MV
46
How would you value a freehold investment with a break option in 12 months time?
Term & Reversion
Value to term certain, therefore;
Term
Income / Profit Rent £10,000
YP 1 year @ x%
Reversion
ERV
YP in perp @ x%
Deferred 1 year
Add Term and Reversion = MV
47
How might the listing of a building affect your valuation?
• Change of use may be restricted
• Planning assumptions more important
• If Leasehold maybe onerous repairing liabilities.
• If residual valuation– factor in to development potential
48
Advise a client who is about to grant a lease on ways of improving the security of his investment from a valuation point of view?
Term
Tenant Covenant Strength
AGA
Break Clauses
Security of Tenure
Upward only RR
49
Why do landlords grant incentives when agreeing leases?
To keep headline rent and therefore maintaining capital value.
50
Which Guidance Note in the Red Book is concerned with the analysis of incentives for comparable evidence?
VIP 8 – Analysis of Commercial Lease Transactions
51
What factors do you take in to account when you decide upon the yield to apply to a valuation?
• Quality of location
• Quality of T covenant
• Use of the property
• Likely rate of future obsolescence
• Risks of voids
• Ease of sale
• Prospects for rental growth
52
To be found guilty of negligence what must be proved?
• Breach of your duty of care
• Valuers must exercise care & skill expected of a reasonably competent surveyor
• Always check you are competent to undertake work
• When deciding is a surveyor has acted negligently – great importance place on whether surveyor has followed Valuation Standards, GN’s and VIP’s.
• Margin for error – generally 10 - 15% but dependant on case, narrower where the valuation is straightforward and there are lots of comps
53
How would you value a pub?
Outside area of expertise – refer enquiry to the RICS find a surveyor service.
VIP No. 2 – Capital and Rental Valuation of public houses, bars, restaurants and nightclubs in Engand and Wales
Profits based valuation
54
What is Ryde's Scale used for?
A scale of surveyors fees in respect of property taken under compulsory powers.
55
How would you value a leasehold property?
Leasehold interests are wasting assets as their value will eventually diminish to 0. To offset this, the investor in leaseholds could set aside part of the profit rent each year to be paid into a sinking fund that will recover the initial expenditure.
Sinking fund interest rates tend to be lower than ARY on a leasehold property investment – this gives rise to the dual rate approach.
Single Rate
Capitalise the profit rent for the remainder of the lease using a single rate that appropriately takes account for the fact that a lease is a wasting asset.
Income / Profit Rent of £80,000 pa for the next 5 years
Profit Rent £80,000 pa
YP for 5 years @ 8% = 3.99
Purchase price = £319,200
Dual Rate
Specifically takes account of a sinking fund – this guarantees that a suitable amount is put away so that you will have some money to re-invest at the end of the lease. You would apply ARY plus say 1% as it is a leasehold interest and a accumulative rate of say 2.5% for the sinking fund.
Income / Profit Rent of £80,000 pa for the next 5 years
Profit Rent £80,000 pa
YP for 5 years @ 7% & 2.5% = 3.84
Purchase price = £307,200
56
What is a running yield?
The yield at one moment in time
57
How would you account for a return frontage when calculating your ERV?
Depends on the circumstances – does the return frontage add value?
If yes, then depends on how beneficial the return frontage is – but generally speaking you would apply a premium of approximately 10%.
58
Where might you use 30 feet zones in measuring retail properties?
Oxford Street & Regent Street – narrow, deep shops and v. high value
59
What are the Exclusions from the Red Book?
VS 1.1 – Exceptions
Litigation – Advice given during the course of litigation
Arbitration – Advice during arbitration and similar disputes
Negotiation – Advice during negotiaitons
Internal – Internal Valuations
Certain Agency and Brokerage work (exemption does not apply if the client requires a purchase report)
Cost – A replacement cost figure is provided for insurance purposes.
60
When might you not have to exclude from those?
Litigation – Valuation is required
Brokerage / Agency – When a purchase report is to include a valuation
61
Why would you use a DRC?
Valuation for financial statements – UKVS 1
DRC for specialised property;
‘a property or asset rarely sold in the open market due to its uniqueness arising from the specialised nature and design, its configuration or size.’
62
What Basis?
Depends on purpose of valuation – but would most often be used for company accounts purposes. Then it depends on which accounting principles are adopted. But for IFRS compliance must value to Fair Value
63
Talk me through a DRC you have undertaken?
1. Measured & Inspected, received build date from client
2. Applied BCIS for theatres to the GIA – applied location factor, and adjusted for age and obsolescence using our scale. That gives the current replacement cost.
3. Need to then factor in the period of construction – this was estimated at 12 months – this was adjusted by using the TPI from the BCIS.
4. Then need to add professional fees at 15%
5. Then need to allow for finance costs for half the construction period – the S – Curve
6. Then add the land value
7. Total gives the value for capital accounting purposes.
64
Issues with DRC?
Look at GN 6 – DRC Method of Valuation for financial reporting
Look at VIP 10 – DRC Method
Issues;
How to allow for depreciation – functional, physical and external, is it accurate.
Does not take account of whether there is any market for the property
May be highly valuable due to specialist use attached and this is not reflected in the DRC.
65
You tell me you carried out a DRC – were there any additional requirements for your valuation report?
Yes, as it was a DRC in the public sector it was accompanied by a statement that the valuation is subject to the prospect and viability of the continued occupation and use, and paying due regard to the value of the total assets employed.
Also, the valuer must state the MV for any possible alternative use if higher and that the value on cessation of the business would be materially lower.
66
And what about a DRC in the private sector?
Well, it must be accompanied by a statement that the valuationis subject to the adequate profitability of the business paying due regard to the value of the total assets employed.
67
So, run me through the basic stages of a DRC?
1) Value the land in its existing use
2) Add the replacement cost of the infrastructure or a modern substitute
3) Adjust for depreciation – physical, functional and economic
You need to take account of
68
What is IRR?
IRR is all about the rate of return the investor can expect on the capital he or she invested to purchase a rental property based upon the anticipated sum total of future income streams. Namely: the sum total of future income divided by initial investment equals rate of return.
Rather than simply dividing the amount of those future income streams by the amount of investment, IRR applies a "discount rate" to the future income in order to compute the "present value" of those streams before dividing by the investment. This is the concept known as "time value of money".
It indicates in % terms the profitability / viability of an investment.
The investor may set there target IRR and this can be put into the DCF to determine what price should be paid for an investment.
69
How would you value a mixed use property?
Depends on how it is made up / purpose of the valuation / passing lease etc. If held FH as one asset then would look to divide the property between the different uses and value individually.
Look at comps etc.
70
Tell me about a rental valuation you have done for South Norfolk DC?
Offices at Diss business centre – rental value for rating purposes. No rent passing as Council own FH.
Key things here – date of valuation is 1/4/2008
CIT
Inspected
Measured
Undertook research of comps / other units
Analysed evidence at diss business centre for other units, sourced from other marketing agents. Confirmed with agent that no onerous lease terms affecting value. Analysed comps to find NEV.
71
Tell me about the capital valuation you undertook at Hornsey Street
o CIT
o Inspected
o Measured
o Client – NLWA, public sector
o Purpose of valuation – asset valuation for financial statement
o Fair Value was adopted as had to be IFRS compliant
o Method of Value – usually DRC for specialised but GN6 DRC states;
“If sufficient direct market evidence exists, it still may be possible to undertake a valuation of the specialised property using the sales comparison and / or income capitalisation approach.”
o EUV adopted as basis of value
o Assumptions – the rent struck was ‘arms length’ - as this is what we were informed by client.
o Other usual assumptions (deleterious materials, planning etc).
o Problem here, as the rent passing was RPI linked at therefore did not necessarily reflect the market rental value.
o Looked to provide a sensitivity analysis as there was market uncertainty.
o Spoke to industry experts and established that Waste transfer stations command a 25% premium – therefore looked at other industrial comps and adjusted.
o Also produced a DRC as we had detailed costing’s available.
o Produced a sensitivity analysis - capitalising the passing rent at appropriate yield (9%), looking at other market transactions and a DRC method of valuation.
o Had regard to GN1 as there was valuation uncertainty.
72
What are the mandatory Terms of Engagement?
a) Identification of the Client
b) Purpose of valuation
c) Subject of valuation
d) Interest to be valued
e) Type of property and use, and other intended users - NEW
f) Basis of valuation and definition
g) The date of the valuation
h) Identity of the valuer and whether he has any material involvement
i) Status of the Value
j) Currency of the valuation
k) Assumptions / special assumptions
l) Extent of investigations
m) Fees
n) Details of CHP
o) Confirm compliance with IVS where appropriate - NEW
p) Statement that the valuation will be subject to RICS monitoring
73
How do you value an industrial unit?
MV
Comparable method if FH
Investment method if leasehold
Use industrial yield
If for financial statement
Fair Value
EUV if occupied
MV if not occupied by client (ie held as an investment or surplus)
Use industrial yield
74
Do surveyors need to be compliant with the Red Book?
o VS 1 – yes
o VS 2 to 6 – yes unless specified in exceptions under VS1.2, but should still try to follow standards closely where possible.
o Can depart from standards but must be the nature and reason for departure must be specified in the T of E and valuation report
o In UK we must also adhere to the UKVS’s
75
What are the most recent amendments to the Red Book?
Check
76
What is an investment method of valuation?
Term & Reversion
Layer
Hard Core
DCF
77
When would you use a Layer method?
Where the rent passing is less than market rent, or where you want to take into account impact of upcoming rent review. For example
Bottom slice – Rent passing x YP in perp. at x %
Top slice – Market rent less rent passing x YP in perp, deferred number of years to next review / break date.
Top slice uses higher ARY to reflect the additional risk as it is the extra rent that you hope to get.
78
Explain the comparable method?
Find comps
Analyse to find ERV for your property
Capitalise using appropriate ARY
79
If you put in a sinking fund what would you do?
Use dual rate YP at approx. 3% annual sinking rate, but depends on what client is actually doing
80
What process would you follow in Red book?
o Depends on purpose of valuation
o If not excluded under VS 1.2 – then VS 2 – 6 and relevant UKVS’s
o Also have regard to GN’s especially GN1 where there is valuation uncertainty
o Appendix 6 – minimum contents of valuation report
o Other relevant appendices
81
What would you refer to for a loan security valuation?
VS 4 – applications
Appendix 5 – Valuations for commercial secured lending
82
What is the red book?
a) A guide to best practice! Helps maintain high standards and professional competence by promoting consistency for valuations.
b) It ensures compliance with IVS
83
What is a sale and lease-back?
101 When taking off purchaser’s costs would this always be 5.7625%?
Where a company sells a property to release capital and then lease
84
When taking off purchaser’s costs would this always be 5.7625%?
It is industry standard, but I suppose you could use actual costs if available
85
Give me an example of a regulated purpose valuation?
a) Valuations for financial statements
b) Takeovers and mergers
c) Collective investment schemes
d) Unregulated property unit trusts
86
What are the key disclosures a valuer has to make?
a) Length of time MRICS and how long he has been valuing the assets concerned
b) Proportion of total fees that the valuation provides to that company. If less than 5% - state less than 5%. If more than 5% state the % figure. If it is likely to be more in future years this must be stated.
87
How long should a valuer be a signatory to a Regulated purpose valuation?
7 Years
88
What are the additional requirements for valuations for secured lending purposes?
1) Potentional for alternative uses or changes of uses
2) Past current and future trens in the property market & demand for that type of property
3) Valuations methodology adopted
4) Any circumstances that could affect price paid
5) Comment on suitability of property for mortgage purposes
Have regard to Appendix 5
89
What specific guidance is there in VS 5?
VS 5 – Investigations
a) All inspections and investigations must be carried out to the extent necessary to produce a valuation which is adequate for its purpose
b) Verify 3rd party information – if this cant be done – must be stated in report
c) The extent of the inspection and investigation to be reported in T of E
d) Valuer has a duty of care to take reasonable care ti verify any information provided or obtained.
90
Can you value a property recently the subject of an acquisition you were involved with?
Not within 12 months unless another firm unconnected with the members firm has also provided advice at the same time or since the acquisition.
91
When you value property do you value annually in areas or quarterly in advance?
True yield assumes that rent is paid quarterly in advance, taking into account the frequency and timing of actual rent being paid.
Traditional valuation methods are based on the concept of rent being received annually in arrears.
Most modern leases require rent to be paid quarterly in advance.
92
When would you value to Fair Value?
For annual accounting purposes, usually in the public sector, as IFRS 13 states that vals must be to Fair Value. The new definition is closely linked to MV and therefore generally speaking the MV equates to FV.
Also could be used when agreeing value of lease surrender / extension – as it is not exposed to the wider market. This is likely to include marriage value.
93
How would you choose a discount rate?
a) Discount rate reflects the value of time. Should reflect the relative risk of the project and the returns that could be made elsewhere.
b) Would look at comparable evidence and adjust to reflect particular characteristics of the property and the tenant
c) Alternatively, could adopt a risk-free rate from gilts and add on a premium to reflect risk of the property / particular project.
94
What is the risk free rate?
3% ish
95
If you were doing a DCF what would the inputs be?
Depends on what it was for, but you would need;
Discount rate / IRR / equated yield
ERV
Floor areas
Details of any lease
Exit yield
Rental movements
96
What sort of growth rate would you use?
Depends on the market conditions – must be reflected in yields – should also consider the impact of lease terms – ie upward only RR.
97
What edition of the Red Book are we on?
Check
98
What is the full title?
Check
99
When did it come into force?
check
100
What is the structure of the Red book?
check
101
What are the possible consequences if a valuer does not comply with Valuation Standards?
He may be found to be in breach of his duty of care and therefore found negligent.
102
What are the possible consequences if a valuer does not comply with GN’s?
You can deviate from GN’s – but you may be required to explain why you have deviated.
103
Can you carry out a desk based valuation or ‘pavement’ assessment?
You may carry out a valuation from a ‘drive by’ or external appraisal. However, it must be noticed that the valuation is subjest to restricted information and this must be agreed by the clients in writing.
104
What are the global valuation basis?
Market Rent
Market Value
Worth / Investment Value
Fair Value
105
Provide three assumptions that are generally made in producing a valuation report?
o Title – the property has good title
o Condition – The property is in good structural condition
o Services – All services are working
o Planning – The property has the necessary planning consent
o Contamination – there is no contamination
o Hazardous / Deleterious Materials – You are not aware of the presence of any
106
What is a special assumption?
Different planning consent
Redevelopment potential – therefore development land
Building works have been completed
107
What is an assumption?
A supposition taken to be true – ie no presence of contamination etc.
108
Can you provide a valuation after the date you submit your report?
No, as it would be a forecase and therefore not Red Book.
109
What do you consider proper marketing to be in the MV definition?
Depends on the property at hand. Marketing that is sufficient to get the best reasonably obtainable price.
110
What is the difference between market rent and Estimated Rental Value?
MR – Standard lease assumptions – must state assumptions you have made.
ERV – has regard to the actual tenancy
111
How would the volatility of the market effect your valuation?
a) Lack of evidence makes the comparable method less reliable.
112
How would you overcome this in your valuation report?
Would have reference to GN 1 – Valuation Uncertainty
Provide a sensitivity analysis
Could provide a range of values
Would state the degree and nature of uncertainty
Would state that uncertainty may have impact on value reported.
113
How would you value in a market with little evidence?
a) Spread geographical location and then adjust
b) Look back in time and then adjust, maybe using index
c) May have to use another method of valuation in appropriate – ie profits, DRC etc?
114
Can a value be expressed as being within a defined range substantiate your answer?
Yes, if there is reason to do so but you must state that this is done, and because there is valuation uncertainty.
115
When would you use a DRC method?
A) When no other method available – ‘method of last resort’
B) No comps, no profit, not a development site.
C) For public sector asset valuations for specialised property.
116
Assume a property is let with a 10 year term, 5 year break – how would you value?
Capitalise term certain, therefore to 5th year. Would apply appropriate yield based on market conditions – if growth then use ARY, if no growth could use initial yield.
117
Excluding public sector - how would you value a property for accounting purposes?
If a stock exchange listed company I would use Market Value
If not a stock exchange listed company I would use EUV.
118
Why would you use EUV?
check
119
Can you discuss a draft with a client?
This is covered in VS 6
Yes, but must be clearly marked draft
You must not let the client influence your decisions
An departures from the initial draft must be reasoned in the revised report.
120
Where would you make use of a sinking fund?
a. Would use a sinking fund when valuing a L/H interest
b. Usually a portion of the rent will be channelled into a sinking fund so that at the end of the lease you have some financial recovery for your initial capital expenditure.
c. You then have money set aside at the end of the L/H term.
d. In practice valuers adjust yield by 1 – 2% (depending on the length of the lease) to reflect this.
121
When conducting a valuation why could your values be different from another surveyor – could you be negligent?
Valuation is an opinion – The red book offers guidance and not a technique, therefore it is possible that two different survyors will have different opinions.
The important thing is to be clear and state all assumptions and methods used within your report.
With regards to negligence: depending on the case and circumstances present there is a possible range of say +/- 10% - reinforced by Lincoln & Others v CBRE.
I would not be able to comment on whether I am negligent, but if it is unreasonable and beyond the acceptance of the court I could be negligible.
122
Give me examples of assumptions you have made, over and above lease terms, when valuing for rent review?
Assumption that tenant has complied with their lease
123
How would you calculate a shortcut DCF?
1) Find an ARY by analysing comparable evidence
2) Find a market rent by analysing comparable evidence
3) Set out cash flow
4) Determine target rate of return – add a risk element to the risk free rate
5) Value the term and the reversion
6) Add together to give valuation
124
If you have no yield information what do you do?
a. Go back to basics – what is a yield made of? The risk free rate (ie gilts) and then add a risk premium appropriate to the circumstances at hand.
b. The market would start at gilts (the safest form of investment) , these are risk free and the add a % to reflect the additional risk of the investment.
c. Risk premium depends on the asset / tenants covenant.
125
What is the ‘de minimis rule’?
In rating terms – if you have a house with a room that is used as a part time study, this does not form a composite hereditament as the study is considered de minimis.
126
What statutory due diligence is required for valuations?
a. Asbestos register
b. Business Rates
c. Contamination
d. DDA Compliance
e. Environmental matters
f. Flooding
g. Health & Safety / Fire Compliance
h. Highways
i. Legal Title & Tenure
j. Planning History & Compliance
127
How do you tell the difference between a fixture and a fitting?
a. Destruction Test – if it causes substantial damage when destroyed it is likely to be a fixture
b. Annexation Test
c. Valuation Test – Would the valuation of the property be significantly affected by removal? If yes, then a fixture / if no, then a fitting.
128
What elements of the red book are mandatory for valuations outside of 1.2 exclusions?
1. Valuation standards – Mandatory
2. Commentary that accompanies Valuation Standards –Mandatory
3. Appendices – Advisory
4. Guidance Notes – Advisory (Best Practice)
129
What advice does GN1 provide?
Valuation Uncertainty
The advice;
a) Brief client as to the degree of uncertainty in the report
b) State cause of uncertainty
c) Comment on robustness of your opinion
d) If necessary provide a range of values
130
What is the Valuer Registration Scheme?
All members undertaking red book valuations must be registered with the VRS.
Valuations are monitored and compliance audits carried out on registered members.
3 main aims;
1) Share best practice and raise standards of valuation
2) Give lending institutions more confidence in accuracy of valuations
3) Protect and raise the status of valuation professionals
131
You carry out a lot of public sector valuations I see – is there any requirement as to the classification of leases?
IAS 17 requires all leases to be classified as either a finance lease or an operating lease
132
What is an operating lease?
Other than a finance lease
133
What is a finance lease?
A lease that transfers substantially all the risks and rewards incidental to ownership of the leased asset to the lessee/
134
Why are traditional valuation methods under scrutiny?
UK valuation methods grew up in a market of long and secure leases
Due to the radical change in the investment market
Shorter lease lengths- 6.5 years in London down from 12 years in 2001
More break clauses
Different investment market
135
Why does this affect valuation?
The shorter lease lengths ensure that the realisation of future costs for the investor are far closer than traditionally.
The lack of transactions ensures that reliance on the limited yield evidence that exists is perhaps putting too much strain on traditional valuation methods.
The market is much more consistent with the rest of Europe and the US where they use the DCF approach.
136
Why would the DCF approach be better?
You can model the future costs, i.e. to account for break clauses and the cost of voids that is associated with this (re-marketing, business rates, energy costs etc).
There is greater risk to commercial investment under the new structure – there is no longer the guaranteed protection from upward only rent reviews.
137
What problems can you envisage with adopting a DCF?
DCF’s can be unstable when not constructed correctly
DCF’s are sensitive to key assumptions
As valuation assumptions are exposed in the valuation this could lead to problems in the event of litigation.
138
When do you account for the construction period when undertaking DRC?
The Red Book states that you should account of the construction period
CIPFA states that you should assume building is available immediately
Ultimately the valuers must comply with the Red Book
139
How would you adjust the build costs to reflect the construction period?
Look at the BCIS tender price indices which provides forecast indices and adjust in relation to how long the construction period is due to take.
