Valuation Flashcards

Question

What format should valuation reports take?

Answer 1

VPS3 Valuation reports: a) ID of valuer b) ID of client c) Purpose of val d) ID of asset e) Bases of val f) Val date g) Extent of investigation h) Nature and source of info to rely on i) Assumptions l) Val approach and reasoning m) Amount of vals n) Date of val report o) Commentary on any material uncertainty ensure that there is a logical and easy to understand link between the comparable evidence and valuation figure

Answer 2

1. establish common measurement 2. analyse comp data to provide meaningful comp evidence - market evidence inc direct transactional evidence, asking prices - hierarchy of evidence Cat A direct comps Contemporary, completed transactions of near-identical / similar properties for which full and accurate information is available Similar real estate being marketed where offers may have been made but a binding contract has not been completed Cat B general market data Info from commercial databases Demand/supply data for rent - analysis of evidence ensure that there is a logical and easy to understand link between the comparable evidence and valuation figure

Answer 3

Hierarchy of evidence: Cat A - direct comps - if no completed, agreed/asking (use contacts) Cat B - general market data - commercial databases - indices - historic evidence - supply/demand data Cat C - other sources - other asset types and locations - background data e.g. interest rates, stock market returns, can give indication of real estate yields VPGA10 report uncertainty

Answer 4

Hierarchy of evidence: Cat A - direct comps - completed transactions near-identical/similar with full and accurate info - completed transactions with enough reliable data - similar property marketed, agreed STC - asking prices Cat B - general market data - commercial databases/published sources - indices - historic evidence - supply/demand data Cat C - other sources - other asset types and locations - background data e.g. interest rates, stock market returns, can give indication of real estate yields Within comps, new letting better than rent review or lease renewal or court/ADR-awarded

Answer 5

The UK national supplement augments the Global Red Book for valuations that are subject to UK jurisdiction. The current edition became effective on 14 January 2019. RICS are working on an update to the UK national supplement and aim to publish this in 2023. Part 2 UK Pro and Val standards – mandatory UKPS1: compliance with val standards within UK jurisdiction UKVPS1: Terms of engagement and reporting, Red Book compliance ref to UKNS UKVPS3: Regulated purpose vals supplementary requirements UKVPGA e.g. UKVPGA4 Val of LA assets

Answer 6

UKPS1: compliance with val standards within UK jurisdiction

Answer 7

UKVPS1: refer to latest editions of Red Book and UKNS in ToE and val reports

Answer 8

UKVPGA4: Val of LA assets for accounting purposes - Classification of assets: PPE (IAS 16) Leases (IAS 17) Investment (IAS 40) Assets held for sale (IFRS5) Heritage assets - Leases of land and bdgs are to be separated into land and bdg elements (land does not depreciate) - The basis of all PPE assets is current value: For operational, existing use value or DRC (see DRC method of val for financial reporting) For surplus assets, fair value Investment property at fair value Assets held for sale at fair value less costs to sell Heritage/community assets any method appropriate - “proper accounting practice” under the terms of s21(2) of the Local Gov Act 2003 - Code applies to LAs, fire authorities and police bodies - The financial statements of local authorities need to be prepared in accordance with the Code of Practice on LA Accounting in the UK published by CIPFA based on the IFRS UKVPGA6: LA and central gov accounting EUV basis of value - Market value plus assumption that assumes that The buyer is granted all parts of the property required by the business (doesn’t mean empty, any parts occupied by third parties should be valued subject to those occupations; if parts of the property are unused and can be occupied separately = surplus, if separation not poss, surplus parts have nominal EUV) disregarding potential alt uses (but appropriate to take into account extension/refurb etc) disregarding any other characteristics that would cause its market value to differ from that needed to replace the remaining service potential at least cost (there are circumstances where it may be appropriate for the valuer to ignore factors that would adversely affect the market value but would not be characteristic of a replacement e.g. where the occupier holds the property under a lease and there are lease covenants that impose restrictions on assignment or alternative uses) - Can value on basis of division into smaller parts for existing use - EUV to be used only for valuing property that is owner occupied by an entity for inclusion in financial statements

Answer 9

have skills and experience? with asset type/location, with methodology? need supervision?

Answer 10

all valuations signed off by registered valuer need supervision where lack skills or experience to carry out competently independently

Answer 11

PII in line with nature, proportionate to risks, RICS requirements, run-off cover "Risk, liability and insurance", 2021 GN, 1st ed RICS have a list of insurers that's renewed annually. must be adequate and appropriate: - on "each and every" claim basis or aggregate plus unlimited round the clock reinstatement basis - RICS min policy wording at least, at min on a full civil liability basis - min level of indemnity based on firm's turnover previous year: £100,000 or less = £250,000 £100,0001 to £200,000 = £500,000 £200,001 and above = £1,000,000 - maximum level of uninsured excess: up to and inc £500,000 = greater of 2.5% or £10,000 over £500,000 = 2.5% run-off: - for consumer claims, requirement is for a limit of £1,000,000 in all for a period of 6 years from the expiry date of the policy in force at the time of cessation (may be arranged and paid for on an annual basis) - for non-consumer claims, must have adequate and appropriate run-off for a min of 6 years from cessation of practice (may be arranged and paid for on an annual basis)

Answer 12

Day 1 - Red Book Day 2 - valuation methods Day 3 - investment valuation

Answer 13

Agency/negotiations: - leasing and letting - purchase and sale L&T/negotiations: - rent review - lease renewal Statutory: - compulsory purchase - RTB Regulated purpose: - financial statements - takeovers and mergers

Answer 14

depend on asset type location condition lease terms / restrictive covenants planning

Answer 15

location: access, proximity to motorways, crime, service yard (deliveries, parking) condition/spec: size, eaves height (min 8m), electricity 3 phase / gas, layout (office/mezzanine) lease terms: FRI/IRI, length, contracted out/breaks, use (B2/B8/E), consents service charge / rates / insurance market: supply and demand, economics

Answer 16

location: prime?, transport, parking, amenities, view condition/spec/fit-out: floorplate, raised floors, suspended ceilings, energy efficiency, security lease terms: length, contracted out/breaks, rent review, repairs, use (E), consents service charge / rates / insurance market: supply and demand, economics

Answer 17

location: prime?, transport, parking condition/spec: size, shopfront, stores/kitchen lease terms: length, contracted out/breaks, rent review, repairs, use (E/F), consents rates / insurance market: supply and demand, economics

Answer 18

location: centre, need, transport, parking, crime condition/spec: size, maintenance, energy efficiency, security lease terms: length, contracted out/breaks, rent review, repairs, use (F), consents social value: demand, economics

Answer 19

location: prime?, house prices, transport, parking, amenities, schools, aspect/view, crime access, size, scaling and massing planning title: freehold/leasehold, restrictive covenants, easements condition: brownfield, contaminated/remediated, demolition economics: access to funding/loans, stability, inflation, interest rates

Answer 20

Red Book "Valuation of development property", 2019 GN, 1st ed Site appraisal: - factors affecting development - access, boundaries, easements, encroachments - trees, vegetation, contamination - greenfield/brownfield - location, transport, amenities e.g. schools - aspect/view, topography, flooding - report on title - planning - scheme design, scaling and massing Financial appraisal: - residual valuation / DCF - software - sensitivity analysis GDV (comparable method) minus GDC: build costs (BCIS psm) median average plus allowance for externals 10% houses 5% high density flats abnormals e.g. site attenuation rural/green space, remediation contamination, abnormal ground conditions that result in piling – developers may have more site specific info such as a cost plan pro fees 7-8% (of build costs) contingency 3-5% (of build costs + pro fees) up to 5% say listed bdg/constrained site disposal fees 1.5-3% of GDV – 1-2% marketing housebuilders argue expensive inc show homes, some devs are stating overseas sales cost more plus 0.5-1% legal costs or say £800 per resi unit finance cost 6-7% (of build costs + pro fees + contingency + disposal fees) – can be linked to base rate so creeping up, at moment 6.5-6.75% on larger resi schemes, maybe 7% more risky schemes can be half of dev period dev profit 15-20% of GDV – often adopt 17.5% large schemes, related to risk profile of scheme, could be whether there is grant funding, the expected sales programme etc. If it’s a private rented sector scheme (PRS) or Build to Rent (BTR), and/or a forward funded scheme it is typical to accept 10% of GDV as the risk attached to sales at the end of the scheme is significantly reduced. If the scheme is being developed for say housing associations the risk is considered even lower and the % can be reduced further. = land value (or inc land value and residual = profit) minus purchaser’s costs (1.8%) plus SDLT

Answer 21

GDV (comparable method) minus GDC: build costs (BCIS psm) median average plus allowance for externals 10% houses 5% high density flats abnormals e.g. site attenuation rural/green space, remediation contamination, abnormal ground conditions that result in piling – developers may have more site specific info such as a cost plan pro fees 7-8% (of build costs) contingency 3-5% (of build costs + pro fees) up to 5% say listed bdg/constrained site disposal fees 1.5-3% of GDV – 1-2% marketing housebuilders argue expensive inc show homes, some devs are stating overseas sales cost more plus 0.5-1% legal costs or say £800 per resi unit finance cost 6-7% (of build costs + pro fees + contingency + disposal fees) – can be linked to base rate so creeping up, at moment 6.5-6.75% on larger resi schemes, maybe 7% more risky schemes can be half of dev period dev profit 15-20% of GDV – often adopt 17.5% large schemes, related to risk profile of scheme, could be whether there is grant funding, the expected sales programme etc. If it’s a private rented sector scheme (PRS) or Build to Rent (BTR), and/or a forward funded scheme it is typical to accept 10% of GDV as the risk attached to sales at the end of the scheme is significantly reduced. If the scheme is being developed for say housing associations the risk is considered even lower and the % can be reduced further. = land value (or inc land value and residual = profit) PV of land value? minus purchaser’s costs (1.8%) plus SDLT

Answer 22

location: access, proximity to motorways, quality/mix of estate condition of bdg tenant covenant strength lease terms: length, use, consents planning policy, surrounding development market: supply and demand, economics

Answer 23

Plinth Properties v Mott Hay & Anderson 1979 (restrictive user, 1/3) - The rent review clause required the rent to be fixed on a hypothetical letting of the premises on the same terms. The lease restricted the use of the premises to offices for the lessee's business of consulting engineers and made no provision for changes of use, even though assignment and underletting of the whole premises would be permitted with landlord's consent not being unreasonably withheld. The landlord argued that the rent review should be fixed on the assumption that the landlord would be reasonable in permitting changes of use, but the tenant successfully argued that it had to be assumed that the landlord would enforce all his rights under the lease and that the rent should be discounted accordingly. - Valued at approx. 1/3 less

Answer 24

Base yields on comparable evidence/market LL existing interest = current yield property LL proposed interest = higher as more risk T existing interest = higher as less valuable T proposed interest = lower as more valuable Value T existing interest ERV x YP for unexpired term at X% Value T proposed interest ERV x YP for proposed term at X%-say1 Value LL existing interest Term: Rent x YP for unexpired term at X% Reversion: Rent x YP in perp deferred for unexpired term at X%+say1 Value LL proposed interest Rent x YP in perp at X% Deduct existing interests from proposed interest Deduct LL's increase from T's increase if releases value, premium / 2 If doesn't release value, premium nil

Answer 25

Synergistic value (marriage value): arises from the combination of two or more assets to create a new asset that has a higher value than the sum of the individual assets Valuation of LL existing interest (term and reversion) Valuation of T existing interest (capitalise profit rent) Total Valuation of merged interests i.e. development value Synergistic value = dev value – total existing value Normal practice to split uplift / 2 (though LL could pay up to total of synergistic value)

Answer 26

UKVPGA4: Val of LA assets for accounting purposes - Classification of assets: PPE (IAS 16) Leases (IAS 17) Investment (IAS 40) Assets held for sale (IFRS5) Heritage assets - Leases of land and bdgs are to be separated into land and bdg elements (land does not depreciate) - The basis of all PPE assets is current value: For operational, existing use value or DRC (see DRC method of val for financial reporting) For surplus assets, fair value Investment property at fair value Assets held for sale at fair value less costs to sell Heritage/community assets any method appropriate - “proper accounting practice” under the terms of s21(2) of the Local Gov Act 2003 - Code applies to LAs, fire authorities and police bodies - The financial statements of local authorities need to be prepared in accordance with the Code of Practice on LA Accounting in the UK published by CIPFA based on the IFRS UKVPGA6: LA and central gov accounting EUV basis of value - Market value plus assumption that assumes that The buyer is granted all parts of the property required by the business (doesn’t mean empty, any parts occupied by third parties should be valued subject to those occupations; if parts of the property are unused and can be occupied separately = surplus, if separation not poss, surplus parts have nominal EUV) disregarding potential alt uses (but appropriate to take into account extension/refurb etc) disregarding any other characteristics that would cause its market value to differ from that needed to replace the remaining service potential at least cost (there are circumstances where it may be appropriate for the valuer to ignore factors that would adversely affect the market value but would not be characteristic of a replacement e.g. where the occupier holds the property under a lease and there are lease covenants that impose restrictions on assignment or alternative uses) - Can value on basis of division into smaller parts for existing use - EUV to be used only for valuing property that is owner occupied by an entity for inclusion in financial statements

Answer 27

UKVPGA6: LA and central gov accounting EUV basis of value - Market value plus assumption that assumes that The buyer is granted all parts of the property required by the business (doesn’t mean empty, any parts occupied by third parties should be valued subject to those occupations; if parts of the property are unused and can be occupied separately = surplus, if separation not poss, surplus parts have nominal EUV) disregarding potential alt uses (but appropriate to take into account extension/refurb etc) disregarding any other characteristics that would cause its market value to differ from that needed to replace the remaining service potential at least cost (there are circumstances where it may be appropriate for the valuer to ignore factors that would adversely affect the market value but would not be characteristic of a replacement e.g. where the occupier holds the property under a lease and there are lease covenants that impose restrictions on assignment or alternative uses) - Can value on basis of division into smaller parts for existing use - EUV to be used only for valuing property that is owner occupied by an entity for inclusion in financial statements

Answer 28

‘The estimated amount for which a property should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing and where the parties had acted knowledgeably, prudently and without compulsion, assuming that the buyer is granted vacant possession of all parts of the asset required by the business, and disregarding potential alternative uses and any other characteristics of the asset that would cause its market value to differ from that needed to replace the remaining service potential at least cost.’ Starting with an initial presumption that the EUV (the least cost replacement) will be the same as the market value, the valuer is to be aware of the impact of the disregards stated in the EUV definition. This means disregarding the potential alternative uses and any characteristics of the asset that would cause its market value to differ (higher or lower) from that needed to replace the remaining service potential at least cost. UK VPGA 6 provides some examples of the latter. While the incumbent owner-occupier is not in the marketplace for the property, the assessment of deprival value requires that the continuing demand for the premises, in order to fulfil the existing business delivery function, has to be reflected. One means of accomplishing this is to envisage a hypothetical owner-occupier purchaser in the market at the valuation date and who will buy the property on that date, stepping into the shoes of the existing owner-occupier and carrying on delivery of the same business function in the same way. At the same time, it is necessary to take into account that the bid which the hypothetical owner-occupier would make would also reflect the vacant possession of those parts occupied by the owner. Valuers are reminded that investment property and non-operational ‘surplus’ or ‘held for sale’ property is to be measured at fair value, arrived at in accordance with IFRS 13.

Answer 29

Harcore/layer method: - capitalises present rent (hardcore rent) into perpetuity (theory, will receive for forseeable) [lower than ERV as more certain, for under-rented, yield based on comps] - then capitalises the top slice rent (difference between the market rent and the hardcore rent) from reversion into perpetuity, this defers it as is appropriate [yield for ERV, for over-rented, yield based on comps] (under-rented, defers until lease expiry, top slice is potential gain from reversion over-rented, from now until lease expiry, top slice extra above MR until reversion) - then add the 2 capitalised values Term and reversion: Term: Rent x YP for unexpired term at X% [for under-rented, yield based on comps] Reversion: Rent x YP in perp deferred for unexpired term at X%+say1 [for under-rented, yield higher as less certain] - hardcore/layer method currently most popular - arguably values risk better, less scope for error

Answer 30

Would need simplified or standard due dil? Legal entities - ltd company or individual Nature of business - size, sector, age Relationship with tenants Research: Google (website), Companies House

Answer 31

The question of what is unreasonable in this context is tricky as it depends on all of the circumstances and includes both subjective and objective elements, looking at the actual reason for the landlord refusing consent (subjective) and whether their refusal was reasonable on this basis (objective). Generally, it has been considered that the purpose of requiring consent is to protect the landlord from the tenant carrying out any works which would damage their property interests, and therefore they cannot refuse on any grounds which have nothing to do with their property interests; damage to property interests does not just mean a reduction in their property value, it also includes any aesthetic, artistic, historic or sentimental considerations. However, where the benefit to the landlord of withholding consent is disproportionate to the detriment of the tenant (i.e. it is of minor benefit to the landlord but greatly burdens the tenant), then it would be unreasonable to withhold consent. Additionally, the landlord can require certain conditions for giving consent that will not be deemed unreasonable; the tenant can be required to pay for any reduction in value of the property or neighbouring property of the landlord, they could be asked to cover the cost of any legal or other expenses incurred in the landlord providing consent, or they may be required to reinstate the property to its original condition at the end of the term (but only where it is not an improvement which adds to the value of the property).

Answer 32

sports grounds grazing/agricultural amenity land community centres

Answer 33

houses flats

Answer 34

You pay the tax when you: buy a freehold property buy a new or existing leasehold buy a property through a shared ownership scheme are transferred land or property in exchange for payment, for example you take on a mortgage or buy a share in a house Thresholds The threshold is where SDLT starts to apply. If you buy a property for less than the threshold, there’s no SDLT to pay. The current SDLT thresholds are: £250,000 for residential properties £425,000 for first-time buyers buying a residential property worth £625,000 or less £150,000 for non-residential land and properties Commercial: Property or lease premium or transfer value SDLT rate Up to £150,000 Zero The next £100,000 (the portion from £150,001 to £250,000) 2% The remaining amount (the portion above £250,000) 5% New leasehold sales and transfers When you buy a new non-residential or mixed leasehold you pay SDLT on both the: purchase price of the lease (the ‘lease premium’) using the rates above value of the annual rent you pay (the ‘net present value’) These are calculated separately then added together. If you buy an existing (‘assigned’) lease, you only pay SDLT on the lease price (or ‘consideration’). The net present value (NPV) is based on the total rent over the life of the lease. You do not pay SDLT on the rent if the NPV is less than £150,000. Net present value of rent SDLT rate £0 to £150,000 Zero The portion from £150,001 to £5,000,000 1% The portion above £5,000,000 2% (HMRC calculator) Residential: Property or lease premium or transfer value SDLT rate Up to £250,000 Zero The next £675,000 (the portion from £250,001 to £925,000) 5% The next £575,000 (the portion from £925,001 to £1.5 million) 10% The remaining amount (the portion above £1.5 million) 12%

Answer 35

comparable investment residual profits depreciated replacement cost

Answer 36

Capitalise passing rent or MR (net) x YP Term and reversion: Term (net) capitalised until review/lease expiry initial yield Reversion to MR valued in perp at reversionary yield Hardcore/layer method: income flow divided horizontally Over-rented or under-rented

Answer 37

Growth explicit investment method of valuation projects estimated cash flows over an assumed investment holding period, plus an exit value at the end of that period, usually arrived at on a conventional ARY basis cash flow then discounted back to present day at a discount rate (also known as desired rate of return) reflecting perceived risk Used for vals where projected cash flows explicitly estimated over a finite period Approach separates out and explicitly identifies growth assumptions rather than inc them within an ARY Simple methodology: - estimate cash flow (income less expenditure) - estimate exit value at end of holding period - select discount rate - discount cash flow at discount rate - value is sum of completed DCF to provide NPV NPV: - sum of discounting cash flow of a project - can be used to determine if investment gives positive return against target rate of return - when NPS positive, investment has exceeded investor's target rate of return IRR: - rate of return at which all future cashflows must be discounted to produce a NPV of zero - IRR used to assess the total return from an investment opportunity making some assumptions re rental growth, re-letting and exit assumptions - can use software to calculate IRR: - input current MV as negative cash flow - input projected rents over holding period as positive value - input projected exit value at end of term assumed positive value - discount rate (IRR) chosen which provides NPV of 0 - is NPV is more than 0 then target rate of return met CHECK IF CORRECT

Answer 38

A measure of investment return, expressed as a % of capital invested calculated by income divided by capital value x 100 YP is calc by dividing 100 by the yield (this is the no of years required for its income to repay its purchase price) Risk is the major factor when determining a yield: - location - covenant - use - lease terms - rental/capital growth

Answer 39

(net?) income / capital value x 100 All risks yield property let at MR reflecting all risks attached to particular investment True yield assumes rent paid in advance not in arrears (traditional val practice assumes arrears) Nominal yield initial yield assuming rent paid in arrears Gross yield yield not adjusted for purchasers' costs Net yield yield adjusted for purchasers' costs Initial yield at time of investment (net) income / capital value x 100 Equivalent yield average weighted yield when a reversionary property valued using an initial and reversionary yield Equated yield the yield on a property investment which takes into account growth in future income. (This is not applicable to reversionary situations, where the increase in income on reversion is to the market value as estimated at the present time.) Reversionary yield MR divided by capital value on an investment let at a rent below MR Running yield the yield at one moment in time

Answer 40

Residential: Residential land: Industrial land: rent psf: £0.50psf rent psm: £5psm capital £250K - £1m yield: Industrial: rent psf: £6.50psf - £8pf rent psm: £70psm - £86psm capital: £100psf / £1,000psm yield: 6% Office: rent psf: £7psf - £30psf rent psm: £75psm - £320psm yield: 6.3% Retail: rent psf: £7psf - £30psf rent psm: £75psm - 320psm yield: 8.1%

Answer 41

Building materials: CHECK increased £100-£400psm since 2020 warehouses £1,460psm offices £2,880psm shops £2,290psm housing £2,370psm (3 units or less)

Answer 42

Residential: Residential land: Industrial land: Industrial: Office: Retail

Answer 43

CPIH 8.9% CPI 10.1% RPI 13.5%

Answer 44

Certain properties are bought and sold on the basis of their trading potential and in such circumstances, it can be appropriate to use a profits method of valuation. Examples (whilst not an exhaustive list) include hotels, pubs and bars, restaurants, nightclubs, petrol stations, care homes, casinos, cinemas and theatres, and various other forms of leisure property. 3 years profit and loss accounts Calculate Gross Profit (Reasonably Efficient Operator) Gross Profit = Gross Earnings – Purchases Calculate Net Profit Net Profit = Gross Profit – Working Expenses Annual Rent = usually 50% of Net Profit Gross Profit = £475,000 – £190,000 = £285,000 CHECK CORRECT

Answer 45

based on the economic theory of substitution theory that a potential buyer is unwilling to pay more than the cost of acquiring a property of equal utility (modern equivalent) The concept of DRC is to consider the value based on what it would cost to replace it. A DRC requires the valuer to assess what a modern equivalent asset would cost to build, including the acquisition of a new site. These costs should include costs of finance over the build period and professional fees. The building element is then depreciated to reflect the differences between the existing property and the hypothetical modern equivalent replacement. The cost of the modern equivalent is depreciated under 3 main headings: OBSOLESCENCE? physical depreciation; functional depreciation; and external depreciation. The land value is based on what a prudent purchaser would pay for a replacement site. Build costs (BCIS) minus fees (15%?) minus external works (15%)? minus finance = Gross replacement cost depreciated by X % = Net replacement cost Land value finance on land purchase Net replacement cost + Land value = DRC Alowances - standard rates External Works 15% Plus Fees (Arch/QS/Eng) 15% Obsolescence Building Age - yrs % obsolescence 0 to 10 0% 11 to 19 5% 20 to 24 10% 25 to 29 15% 30 to 34 20% 35 to 39 25% 40 to 45 30% 46 to 49 35% 50 to 54 40% 55 to 59 45% 60+ 50% Buildings built 1900-1920 55% Pre 1960 60% We do not adjust our valuations for Depreciation – not even DRC’s!! – DRC’s are adjusted for obsolescence. The accountants take our valuation figures and depreciate them (i.e. write them off) over the Asset Life that we have provided. International Accounting Standard (IAS) 16 recognises that, with a few exceptions, land does not depreciate and therefore requires the land and buildings to be recognised separately. IAS 16 also provides that ‘each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately.’ These “parts” of a property are referred to as ‘components’. Whilst the general approach to componentisation is the same by all Local Authorities, each of our clients have developed & adopted a slightly different methodology - in particular different thresholds & different components. In Bolton, the policy on componentisation is to look at assets that have a building value greater than £1m. If any of the components within the asset has a value of more than £200K, the requirement is for this to be shown separately in the asset register. Componentisation is a process that takes place after the Building Value has been calculated & is not something I expect you to undertake. As noted above, land does not depreciate – therefore in Bolton they adopt an asset life for land of 999 years. In relation to buildings, the accounting code of practice advises that the ‘useful life’ to be used in the calculation of depreciation is the period of an asset’s expected utility to the authority. There are no specific provisions in the code that set out how useful lives are to be fixed. However, IAS 16 confirms that estimation is a matter of judgement based on the experience of the authority with similar assets and sets out the factors that should be considered: * expected usage of the asset, assessed by reference to its expected capacity or physical output * expected physical wear and tear, which will depend on operational factors (eg how intensively an asset is used and the adequacy of the repair and maintenance programme) * technical or commercial obsolescence arising from changes or improvements in production or service delivery or from a change in the demand for the product/service output of the asset * legal or similar limits on the use of an asset (e.g. the expiry dates of leases under which the asset is held). The physical life of an asset can be defined as how long the asset could be used for any purpose, ignoring any potential for refurbishment or reconstruction. The economic life can be defined as how long a succession of owners could use the asset for its designed purpose.

Answer 46

A yield measure of investment return, expressed as a % of capital invested calculated by (net) income / by capital value x 100 YP is calc by dividing 100 by the yield (this is the no of years required for its income to repay its purchase price) Years Purchase of a Reversion to a Perpetuity: This is a calculation of the Present Value (PV) of the right to receive £1 at the end of each year in perpetuity at a specified compounded interest, but receivable after the expiration of a specified term in years.

Answer 47

setting out the principles that the court must consider when assessing a negligent adviser's responsibility for a claimant's losses The SAAMCO principle was intended to provide a filter for eliminating losses that fall outside the scope of the defendant's duty. The application of the principle turned on guidance that, where a professional is responsible only for providing information on which a decision will be taken, rather than providing advice on the merits of the transaction overall, the professional's liability will be limited to the consequences of the information being wrong, and will not extend to any wider losses resulting from the transaction, even if those losses would not have occurred if the adviser had given the correct advice. This outcome was to be achieved by carrying out a cross-check against the relevant counterfactual scenario, i.e. would the losses still have been incurred, had the information been correct? If they would, those losses are not recoverable. The application of this part of the principle became known as the "SAAMCO cap." It was designed specifically for application in the glut of surveyor's negligence cases in the late 1990s, but subsequently came to be applied in a wide range of other situations. Supreme Court 2021 "a helpful model for analysing the place of the scope of duty principle in the tort of negligence", consisting of six questions to be asked in sequence The actionability question: Is the harm (loss, injury and damage) which is the subject matter of the claim actionable in negligence? The scope of duty question: What are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care? The breach question: Did the defendant breach his or her duty by his or her act or omission? The factual causation question: Is the loss for which the claimant seeks damages the consequence of the defendant's act or omission? The duty nexus question: Is there a sufficient nexus between a particular element of the harm for which the claimant seeks damages and the subject matter of the defendant's duty of care as analysed at stage 2 above? The legal responsibility question: Is a particular element of the harm for which the claimant seeks damages irrecoverable because it is too remote, or because there is a different effective cause or because the claimant has mitigated his or her loss or has failed to avoid loss which he or she could reasonably have been expected to avoid? The first, and most important, point arising from this list of questions, and the judgments as a whole, is that the scope of the duty is absolutely key. One must ask in every case: What was the purpose for which the advice was given? What risk was the advice meant to guard against? And do the losses that are now being claimed represent that risk coming to fruition? The second point to emerge very strongly from the judgments is the importance of precision in whatever counterfactual is put forward (if one is put forward at all). Lord Leggatt put this most clearly, saying that the point of the counterfactual test is not to consider whether, if the advice had been correct advice to give, the claimant would have acted in the same way, because "self-evidently it would". Rather, it is to consider whether, in that situation, the claimant's actions would still have resulted in loss. By putting the question in that way, one can home in on whether the loss claimed is attributable to the defendant's actions or is a consequence of risks which the claimant would have taken even if the true position had been as the defendant represented it to be.

Answer 48

Consistency, objectivity and transparency are fundamental to building and sustaining public confidence and trust in valuation. a Professional standards – centred on ethics and conduct, underpinned by knowledge and competence. b Technical standards – centred on common definitions and conventions, underpinned by consistent application through recognised approaches. c Performance or delivery standards – centred on rigour in analysis and objectivity of judgment, backed by appropriate documentation and clarity when reporting. Latest international standards. The 1972/73 property boom and the subsequent collapse of the property market gave rise to considerable public criticism and comment on the variety of valuation bases used and the format of reports. The accountancy profession had already started to set accountancy standards in the 1960s, and there was a perceived need to establish uniform standards for valuations

Answer 49

Revaluation without reinspection cannot be undertaken unless you are satisfied that there have been no material changes to the physical or locational nature of the property since the last valuation. See Section 2 of VPS 2 for further specific detail. the extent of the inspection should be appropriate for the service that is being provided

Answer 50

The mere fact that the provider of the valuation is an internal valuer does not bring the valuation assignment within the "internal purposes" exception – the focus here is on the ‘internal only’ purpose of the valuation and not the process or means of its delivery. It is therefore possible for an external valuer to provide an ‘internal purposes’ valuation, though where that is done, the need for the terms of engagement and written advice to be absolutely clear about non-disclosure to third parties, and about the exclusion of liability, becomes even more crucial. internal valuer: a valuer who is in the employ of either the enterprise that owns the assets, or the accounting firm responsible for preparing the enterprise’s financial records and/or reports. An internal valuer is generally capable of meeting the requirements of independence and professional objectivity in accordance with PS 2 section 3, but may not always be able to satisfy additional criteria for independence specific to certain types of assignment, for example under PS 2 paragraph 3.4. For some purposes, may set out specific criteria that the member must meet (i.e. they are additional to the general requirements below) in order to achieve a defined state of independence. Frequently such additional criteria provide a definition of the acceptable level of independence and may use terms such as ‘independent expert’, ‘expert valuer’, ‘independent valuer’, ‘standing independent valuer’ or ‘appropriate valuer’. It is important that the member confirms compliance with these criteria both when confirming acceptance of the instruction and in the report, so that the client and any third party relying on the report can be assured that the additional criteria have been satisfied.

Answer 51

valuations for taxation and/or probate purposes, including capital gains tax (CGT) and inheritance tax (IHT) valuations for bankruptcy valuations for divorce purposes or other legal proceedings valuations for business rates/council tax right to buy valuations compulsory purchase valuations Instructions may be received from clients requiring valuations of residential property for a number of reasons where the valuation is on a basis defined in law, and/or is required for a specific legal purpose. These valuation bases are not always defined in the Red Book Global Standards; the valuer must make sure that the valuation basis and the reason for the report are both clearly defined and fully understood. Depending on the nature of the instruction, conditions of engagement should be agreed prior to undertaking the valuation. Take care in correctly wording the report as valuation reports can be used as court documents, and specific wording may be required as part of the report. Basis of valuation for taxation purposes: market value

Answer 52

the degree of certainty will vary from case to case – that is, the probability that the valuer’s opinion of market value would exactly coincide with the price achieved were there an actual sale at the valuation date Ensuring user understanding and confidence in valuations requires transparency in the valuation approach and adequate explanation of all factors that materially impact the valuation. VPS 3 (reports), has added a specific requirement to comment on ‘material uncertainty’. However, ‘material’ for this purpose only means where the degree of uncertainty lies outside of any parameters that might normally be expected and accepted. On the basis of cases such as these, the UK the courts have held that residential valuations would normally be expected to have a tolerance of plus or minus 5%, whereas for commercial properties 10–15% is generally accepted. - the asset or liability itself may have very particular characteristics. - the quantification of how purchasers would reflect a potential significant change, such as a potential planning permission, may be highly dependent on the special assumptions made - information available to the valuer is limited or restricted e.g. desktop valuation - Markets can be disrupted by relatively unique factors. May be a reduced level of certainty that can be attached to a valuation, due to inconsistent, or an absence of, empirical data, or to the valuer being faced with an unprecedented set of circumstances on which to base a judgment VPGA 10 provides some commentary and guidance on reporting material uncertainty. Such comment should not be about the general risk of future market movements or the inherent risk involved in forecasting future cash flows – both of which can and should be considered and reflected as part of the valuation process. Material uncertainty should normally be expressed in qualitative terms. In most cases it is either inappropriate or impractical to reflect material uncertainty in the valuation figure quantitatively. In some limited circumstances a sensitivity analysis may be judged appropriate in order to illustrate the effect that clearly stated changes to specified variables could have on the reported valuation, which should be accompanied by suitable explanatory comment. In other cases, where the valuer can reasonably foresee that different values may arise under different but well-defined circumstances, an alternative approach would be for the valuer to enter into a dialogue with the client to consider alternative valuations using special assumptions. It would not normally be acceptable for a valuation report to have a standard caveat to deal with material valuation uncertainty. Unless specifically requested, the expression of values within a stated range is not good practice. In most cases the valuer has to provide a single figure in order to comply with the client’s requirements and terms of engagement. Similarly, the use of qualifying words such as ‘in the region of’ would not normally be appropriate or adequate to convey material uncertainty without further explicit comment, and is again actively discouraged. Where different values may arise under different circumstances, it is preferable to provide them on stated special assumptions. RICS issues guidance to valuers relating to specific circumstances affecting the market and potentially causing problems in producing valuations from time-to-time. The most recent being 2020, with specific advice and guidance on valuation in markets affected by COVID in Valuation practice alert – COVID-19.

Answer 53

Implicit valuation methods employ all-risks yields as input yields with most real-life complications wrapped up into/implied in the input yield(s) chosen. An alternative approach is to make all the cash-flow assumptions explicit. This requires the investor and valuer to articulate all cash-flow assumptions and attitudes to risk. Such an approach tends to be more applicable to complex investments or markets in which sophisticated investors operate. This methodology is usually referred to as a discounted cash-flow (DCF) method. This is something of a misnomer since the discounting of cash-flows is the basis of all investment valuation methods

Answer 54

acquisition of a leasehold interest in X years' time, whatever I have paid for the investment will be gone: the lease will come to an end, and I will therefore have nothing – no property interest and nothing to sell to recover my money. To deal with this problem, property valuers long ago developed the idea of the sinking fund. Instead of re-selling (or keeping) my investment at the end of ten years, as I can with a freehold, I put aside an annual sum out of whatever income I get, so as to reconstitute my capital. The only source for such contributions to my sinking fund is the income I get from the property during my lease. Most investors have to pay tax on income. HMRC do not regard sinking fund contributions as a cost . Dual rate without tax, dual rate with tax. the rate on the sinking fund will be different from the remunerative rate (rate of return). It is known as an “accumulative rate”, because it is the rate that is progressively added to the accumulating sinking fund. This must be a “risk-free rate” – not, in other words, a rate as high as the remunerative rate, which can expected to vary with market conditions, but one which gives me a certain return on my sinking fund to make sure that I definitely can reconstitute my capital when the lease comes to an end “dual rate years’ purchase (or YP)” calculation. There are two different rates at work, doing different things: the remunerative rate giving me my true return; and the accumulative rate enhancing my sinking fund. As regards the accumulative rate, the Lands Tribunal (as it then was – now the Upper Tribunal (Lands Chamber)) decided convincingly in Sportelli that the risk-free rate is 2.25%.

Answer 55

the present value of the cash flows at the required rate of return In general, projects with a positive NPV are worth undertaking while those with a negative NPV are not. the IRR of an investment is the discount rate that would cause that investment to have an NPV of zero. Another way of thinking about this is that NPV and IRR are trying to answer two separate but related questions. For NPV, the question is, “What is the total amount of money I will make if I proceed with this investment, after taking into account the time value of money?” For IRR, the question is, “If I proceed with this investment, what would be the equivalent annual rate of return that I would receive?”

Answer 56

A target rate of return/required rate of return/hurdle rate refers to the future value, or profit, that an investor expects from their investment. The higher the risk of an investment the higher the required rate of return by investors. Required Rate of Return or Discount Rate = Real Risk-free rate + Inflation + Risk Premium The internal rate of return (IRR) is the annual rate of growth that an investment is expected to generate. IRR is calculated using the same concept as net present value (NPV), except it sets the NPV equal to zero. Generally speaking, the higher an internal rate of return, the more desirable an investment is to undertake. An important difference between IRR and ROI (return on investment) is that ROI indicates total growth, start to finish, of the investment. IRR identifies the annual growth rate. The two numbers should normally be the same over the course of one year (with some exceptions. ROI is calculated by taking the difference between the current or expected value and the original value divided by the original value and multiplied by 100.

Answer 57

A ransom strip is a parcel of land needed to access a property or a site in order to unlock its development opportunity. This could be a piece of land required for access to development with insufficient rights or without any rights at all, land required for services or perhaps for a building to be developed. Although there is not a particular framework or guidance from the RICS or other regulatory bodies on how to value ransom strips, the starting point for landowners, developers and valuers is usually the case law of Stokes v Cambridge Corporation [1961] the owner of the strip is entitled to one-third of the increase in the value of the adjacent land just for providing access to the development.

Answer 58

Turnover is the total sales made by a business in a certain period. It's sometimes referred to as 'gross revenue' or 'income'. Gross profit is the profit a business makes after subtracting all the costs that are related to manufacturing and selling its products or services. Net profit is the sales income minus all the business costs. This is often shown as the formula: Sales - Direct costs = Gross profit - Overheads = Net profits. This is the figure that we usually mean when we refer to profit What is a good gross profit margin? This really depends on what you are selling, the market you operate in and what your other costs are. In retail it is traditionally around 50%. This might sound like a lot until you take into account your overheads such as rent. What is a good net profit margin? Again this depends on what sort of business you are in but 10% would be fairly normal. If the business owner is taking a low salary then you should be aiming for much higher than this figure.

Answer 59

FMT: “the level of trade that a 'reasonably efficient operator' would expect to achieve on the assumption that the property is in good repair and suitably equipped“ REO: The valuer must make adjustments for where the existing operator of the business is either above or below average in 'competence'.

Answer 60

EBITDA stands for earnings before interest, taxes, depreciation, and amortisation The EBITDA margin is a measure of a company's operating profit as a percentage of its revenue. EBITDA margin: (earnings before interest and tax + depreciation + amortization) / total revenue = operating profitability Calculating a company's EBITDA margin is helpful when gauging the effectiveness of a company's cost-cutting efforts. The higher a company's EBITDA margin is, the lower its operating expenses are in relation to total revenue. Some companies highlight their EBITDA margins as a way to draw attention away from their debt and enhance the perception of their financial performance. Companies with high debt levels should not be measured using the EBITDA margin. In addition, the EBITDA margin is usually higher than the profit margin. Companies with low profitability will emphasize EBITDA margin as their measurement for success.

Answer 61

RICS Valuation of Development Property 2019 PS ,1st ed development appraisal = test of financial viability, land can be inputted as development cost, can use DCF/software, Approach to calc the net present value (NPV) of the estimated costs and revenues over the duration of the dev project, the NPV will be a current estimate of the residual land value. residual land valuation = GDV - GDC (inc developer's profit) to arrive at land value (or land value can be input as cost to arrive at developer's profit) Basic method may be used for less complex assets or early in the dev process to consider optimum dev; a DCF may be used for more complex assets with phased construction or disposal where timing of events needs to be fully accounted for in the val. should also cross-check with comparable method sensitivity analyses included

Answer 62

flow of project costs after the site acquisition. They start off small, then as the project kicks off the costs increase and then the taper off again towards the end. When we look at these costs on a cumulative basis - on the amount borrowed for the development finance - you can see that it resembles an S shape tipped on its side. The interest on development finance is usually calculated on the drawn balance (how much money you are actually using). You would typically look at it that you would only need to pay full interest for half of the proposed development, as interest payments will be very low and the start and then will be high in the second half. It in theory evens itself out!

Answer 63

10-20% depending on risk of scheme ???

Answer 64

economic factors e.g. inflation, interest rates, property demand and values

Answer 65

Valuation of land for affordable housing, 2016 GN, 2nd ed

Answer 66

Review of Real Estate Investment Valuations The SRB accepted all recommendations from the review put forward by the review chair Peter Pereira Gray. The review recommendations are being implemented by the Valuation Review Implementation Committee (VRIC), a dedicated sub-committee set up by the SRB, alongside an RICS programme board. The Valuation Review was commissioned to future-proof practices in the valuation of real estate assets for investment purposes, as a result of feedback and rapidly changing market dynamics. There are structural shifts in investor and occupier demand for real estate – many accelerated by the impact of the pandemic. The RICS Standards and Regulation Board asked the Review Chair to examine the way valuation of real estate assets for investment purposes are conducted and make recommendations to ensure valuations remain relevant and trusted. the Valuation Review has primarily focused on valuations of real estate assets for performance measurement and decision-making purposes, upon which third parties place reliance. These are principally valuations for: - financial reporting - inclusion in prospectuses and circulars, and takeovers and mergers - unregulated property unit trusts - commercial investment property financing We received feedback from those who contributed to the review, that strengthening the guidance around discounted cash flow (DCF) will be beneficial. 13 recommendations: - creation of valuation regulatory quality assurance panel, under the jurisdiction of the RICS Standards and Regulation Board. - creation of a formal Valuation Compliance Officer role within regulated firms - further specific RICS guidance to clarify RICS’ expectations around the culture and behaviours expected I have also concluded that the discounted cash flow methodology should become the primary mechanism for deriving valuations going forward, that valuers should be subject to a mandatory rotation and revalidation programme, and that there should be improved standards for communications between valuer and client.

Answer 67

Generally, case law precedent refers to a margin of between 10% and 15% depending upon the facts.

Answer 68

The International Valuation Standards Council (IVSC) is the independent global standard setter for the valuation profession. We set International Valuation Standards which promote consistency and professionalism in the public interest. Trustworthy valuations contribute to financial stability and sustainable economic growth. HQ London Founded in Melbourne, Australia The latest edition is effective from 31 January 2022. RICS have updated the Global Valuation Standards (Red Book) to incorporate the changes to the IVS’s. This became effective on 31st January 2022, the same date as the effective date for the revised IVS’s. Our mission is to enhance the quality and credibility of valuation practices worldwide. We achieve this by: Creating robust International Valuation Standards (IVS) that ensure consistency, transparency, and comparability in valuations. Promoting the adoption of IVS and fostering valuation professionalism through Valuation Professional Organisations (VPOs) across the globe. There are more than 180 member organisations of the IVSC, operating in 137 countries worldwide. UK: RICS Savills JLL Deloitte EY ICAEW KPMG PwC Grant Thornton

Answer 69

The property is valued by discounting the expected future net income for a specific period at an appropriate discount rate (or total rate of return) to give the present value (PV) of the expected net income cash-flow. The final year’s income is valued by applying an exit yield, reflecting the valuer's view of the likely sale value achievable for the asset at the end of the analysis period. Market rents and costs are grown at appropriate market-derived projected growth rates, which are applied whenever costs are incurred or currently let units become vacant and re-let at market levels. The market rental growth rate is often different to the level at which costs are grown in the cash-flow as different factors to those simply reflecting inflationary costs affect the growth and contraction of market rents. Explained differently, in the DCF method, the projected cash-flows are explicitly estimated over a finite period – commonly 5, 10 or 15 years – the investor’s holding period for the asset or investment horizon, reflecting such matters as: income changes resulting from anticipated variations in market rents effects of obsolescence on rental growth and/or on required capital outlays income voids void costs (property outgoings and taxes on vacancies that may arise) re-letting costs (marketing, agents and legal fees) refurbishments and upgrades and an exit value at the end of the cash-flow period, reflecting both anticipated market conditions and the anticipated condition of the investment at the end of the cash-flow/holding period. The cash-flows are then discounted back to the present, not at the all-risks or equivalent yield, but at a discount rate reflecting a third-party investment purchaser’s overall target rate of return//hurdle rate of return. The final year's net income stream is also capitalised at an all-risks-yield or cap rate, known by many names, including the exit yield. This terminal value or exit value, which assumes a sale of the property at the end of the DCF holding period, is also discounted by the discount rate and added to the net present value (NPV) discounted sums of each year's cash-flow. There are several different methodologies for determining discount rates. These include the weighted average cost of capital (WACC) approach, the build-up method (using the capital asset pricing model) derived from a capitalisation rate/yield and, finally, from market participants themselves. Internally, individual investment entities may use the weighted average cost of capital (WACC) to determine their minimum IRR/discount rate thresholds. The WACC is a well-known finance calculation that works out the minimum return rate required to meet an entities’ investors’ equity requirements and repay any interest on debt/gearing/borrowings taken on by the entity. The difficulty with using a WACC in a market or fair value assessment is that the WACC is entity-specific and will vary depending on the company’s capital sources and the return requirements of these sources. This makes it very specific to the company and not necessarily a good proxy for the minimum hurdle rate IRR required by a market participant. Using a particular company’s WACC as the discount rate is unlikely to produce a market value but will instead produce an investment value or calculation of worth. Build-up method (the capital asset pricing model (CAPM)) use the interest rate on a 10-year government bond/gilt from the country/territory in which the asset is situated. Plus systemic risk (market risk). Plus specific risk (asset risk - predominantly driven by lease events e.g. tenant default and lease expiry). Determination of the appropriate adjustments to the target rate of return (discount rate) to reflect each of these risks is the subject of much discussion and research. It is commonly noted that the determination of many of these risk premia is highly subjective. Traditional finance theory suggests that the difference between a capitalisation rate/yield and a discount rate is growth in the cash-flow. Hence, many valuers determine their discount rates by taking their cap rate/yield and adding rental growth to this metric to derive their discount rate. Some valuers believe this should be the going in rate (the initial yield) or the first year’s forward yield (the yield on the first year’s net operating income NOI). Others would use the equivalent yield for this purpose. Some valuers use the exit yield as the core yield onto which to add growth. Another question that must be considered is whether the market rental growth rate alone is sufficient to add to whichever yield is chosen. Wouldn’t it be more accurate to analyse the cash-flow and determine the overall growth or contraction in rent over the period? The overall growth of rents/revenue in the cash-flow is more difficult to calculate than simply adding a relatively simplistic market rental growth rate to the chosen yield. But carrying out this calculation would produce a more accurate actual growth rate over the period to add to the initial or equivalent yield. Another valuable source for determining discount rates is directly from market participants themselves. Here, the valuer would need to gain an understanding from investors in the market as to what their minimum IRR requirements are for different types of real estate assets and how these would differ depending on cash-flow risks. This approach has the advantage of being based on the empirical requirements of actual investors in the market rather than on predictive economic theories. However, it may be difficult to reach any firm conclusion in a market with a small investor universe without reference to theory. A DCF involves discounting future income receipts to produce a present value. To balance the effect of discounting, growth must also be explicitly included in the DCF. Market rental growth will usually be applied to market rents on an annually compounding basis. These factors are quite different from those that determine inflation levels in the economy, so it should be noted that inflation is not an accurate proxy for market rental growth. Cost growth should also be determined separately to inflation as the specific categories of operating costs may grow more quickly or slowly than general inflation in the economy. Concerning exit yields, it should be noted that it is unlikely that the majority of assets’ exit yields will mirror current initial yields reflected in current market evidence. Exit yields must reflect that the assets valued are 5 or 10 years older than as at the date of valuation. This means that the assets will likely suffer physical, functional and economic obsolescence. As assets depreciate, they are more likely to suffer drops in market rental rates and occupancy. These discounted sums create a net present value (NPV), which is the market value of the property in the case of a valuation. Here, the NPV is the amount that a third party investor could afford to bid for the property on the assumption that they are achieving their minimum hurdle rate of return (the IRR/discount rate). Because every investor's expectations and required rate of return will differ, the DCF method is often used to derive an opinion of worth or investment value to a specific investor. DCFs have traditionally been used for analysing potential investment returns, comparing investment options for assets or scenario testing/sensitivity analysis. However, DCFs are very versatile and can be used in valuation by adopting assumptions that the valuer considers typical of third-party, arms-length investors in the marketplace. Used in such a way, DCFs can produce market value/fair value assessments. However, it should be noted that DCF inputs such as the discount rate, exit yield, rental and cost growth rates do not have strong empirical bases to prove the reasonability of the valuation. They are often highly theoretical/based on unproven assumptions about future performance and market conditions. Hence, they are less reliable than ‘hard’ transactional evidence in the form of achieved yields on completed sales. In carrying out an explicit DCF valuation, take care to avoid double-counting risks by reflecting them both in the cash-flows and in the discount rate. For example, if the cash-flow assumes all lease breaks and consequent voids, the discount rate can be lower since the risk – the downside – has already been reflected in the cash-flow.

Answer 70

DCF is a form of valuation that calculates an investment's value based on the ability to receive a predicted future cash flow. The use of DCF by valuers was a component of an independent Valuation Review commissioned by SRB and published in 2022. The review, made three key recommendations related to DCF. Two recommendations covered analytical approaches and their application within DCF valuations, while the third recommendation relates to standardised property risk advice. Economic uncertainty brought about by the COVID-19 pandemic and present geopolitical developments have created price fluctuations in property markets. These developments highlighted the importance of an increased focus on valuation and ensuring that assumptions made within valuations are explicit. Being more explicit regarding the assumptions contained within valuations will help those relying upon them have greater confidence in their accuracy. The consultation also includes proposed new global practice information on DCF valuations. To support these standards, RICS proposes developing a DCF Transition Hub on its website (www.rics.org), in addition to upskilling Chartered Surveyors globally for greater use of DCF in their work, with a particular focus on territories where DCF is currently underutilised. The DCF consultation closes on Wednesday 12 April (launched 1st March 2023)

Answer 71

There are a number of allowances, i.e. deductions or additions, that may be required to reflect the specific physical characteristics of the subject property. These should be derived from similar comparables and market experience. Typical examples include return frontages, double frontages, narrow frontages, large units (known as quantum), masking (i.e. columns interrupt the retail space) and hard frontages (i.e. lack of windows or glazed frontage, typically found in bank properties), columns

Answer 72

Zoning is traditionally used for valuing retail property, specifically high street units where the retail frontage is particularly valuable. Zoning is not typically used for larger retail units, e.g. department stores, or for supermarkets, convenience stores or retail warehouses. We use the term ‘relativity’, to explain the relationship of each subsequent zone to the first zone, otherwise known as Zone A. This could be expressed as A/1, A/2, A/4 and so on. For example: Zone A = A/1 Zone B = A/2, i.e. Zone B is half of Zone A Zone C = A/4, i.e. Zone C is a quarter of Zone A (or half of Zone B) Zone D (or remainder) = A/8, i.e. Zone D is 1/8 of Zone A (or half of Zone C) You may find that some surveyors report Zone D and then remainder, others will report Zone C and then remainder (i.e. no Zone D). This is generally related to how the evidence is analysed; i.e. if the comparable evidence analyses use Zone C and then remainder, then this is how the subject property should be analysed on a zoned basis. For ancillary areas such as first floors or basements, the relativity applied should be directly related to how the evidence is devalued. Sometimes surveyors will include these areas within the ITZA unit, others may apply a rental rate psm (or psf) to them. For example, a first floor could be valued at A/10, A/16 or A/20, or a flat rate of £1.50 psf could be applied. This will be based on the evidence and there are no set rules for the treatment of ancillary areas. The ‘standard’ depth of zone is 6.1m (i.e. 20 feet), but longer 9.14m (i.e. 30 feet) zones are used in some locations, e.g. prime Oxford Street in London. The comparable evidence can then be analysed on the same basis to provide supporting evidence, i.e. ITZA rental rates, to justify the surveyor’s opinion of the market rent. In some locations, for very small units (i.e. all or almost all Zone A space), a cross check using a global rent (i.e. £10,000 p.a.) may be appropriate.

Answer 73

Gray report recommendation (investment valuations): Valuation and Advisory Activities Valuers, with the support of RICS, should ensure that the separation of valuation from advisory activities within firms is consistently applied in respect of the use of valuation data and instructions. rules out accountancy-style separation of advisory and valuation but delivers package of major changes. However, there are also reasons to reject such a change that go beyond self-interest, says Claire Macken, head of UK commercial valuation, investor clients, at JLL. She points out that splitting off valuation from other property services has been tried elsewhere and didn’t work. “They did try that before in Italy,” she says. “There was a ministerial decree in 2015 that required real estate [companies] to basically choose between transactional or valuation services and all of the big firms went down that transactional route. “Then the quality of the valuations and accuracy of them was such that they reversed the decree in 2019.” The point, Macken adds, is that, while independent, conscientious valuers can still benefit from talking to colleagues in other teams to access the best market intelligence.

Answer 74

particular types of assignment where the mandatory application of VPS 1–5 may be unsuitable or inappropriate. Even though not mandatory in such circumstances, the adoption of the relevant standards is nevertheless encouraged where not precluded by the specific requirement or context. Valuers should be aware that exceptions are not usually specific to individual cases but cover particular categories, phases or aspects of valuation activity. In such cases members are reminded that they must not state that the valuation was performed in accordance with the IVS. The areas of exception in relation to VPS 1–5 are where a member is: * Providing an agency or brokerage service in respect of the acquisition or disposal of one or more assets – to which activity the RICS global practice statement and guidance note, Real estate agency and brokerage guidance, 3rd edition (2016) applies. This exception covers the provision of advice in the expectation of, or in the course of, an agency instruction to acquire or dispose of an interest in an asset. It also covers advice on whether a given offer should be made or accepted. However, the exception does not cover a purchase report that includes a valuation. Providing valuations to a client purely for internal purposes, without liability, and without communication to a third party. The internal purposes exception is designed to recognise that there are occasions where advice is sought from a valuer by a client – often by a regular portfolio valuation client – that will be without liability, and will not be released to third parties (for example, in connection with proposed asset management initiatives or proposed acquisitions). Where members undertake such work, it is vital that the terms of engagement and the written advice itself are quite explicit about the prohibition on disclosure to any other party and/or use for any other purpose and about the exclusion of liability. Such advice often does not attract an additional fee and this element of the valuation service may or may not be explicitly referred to in the terms of engagement for a regular portfolio valuation. The mere fact that the provider of the valuation is an internal valuer does not bring the valuation assignment within the exception – the focus here is on the ‘internal only’ purpose of the valuation and not the process or means of its delivery. It is therefore possible for an external valuer to provide an ‘internal purposes’ valuation, though where that is done, the need for the terms of engagement and written advice to be absolutely clear about non-disclosure to third parties, and about the exclusion of liability, becomes even more crucial. Providing valuations to a client purely for internal purposes, without liability, and without communication to a third party. The internal purposes exception is designed to recognise that there are occasions where advice is sought from a valuer by a client – often by a regular portfolio valuation client – that will be without liability, and will not be released to third parties (for example, in connection with proposed asset management initiatives or proposed acquisitions). Where members undertake such work, it is vital that the terms of engagement and the written advice itself are quite explicit about the prohibition on disclosure to any other party and/or use for any other purpose and about the exclusion of liability. Such advice often does not attract an additional fee and this element of the valuation service may or may not be explicitly referred to in the terms of engagement for a regular portfolio valuation. The mere fact that the provider of the valuation is an internal valuer does not bring the valuation assignment within the exception – the focus here is on the ‘internal only’ purpose of the valuation and not the process or means of its delivery. It is therefore possible for an external valuer to provide an ‘internal purposes’ valuation, though where that is done, the need for the terms of engagement and written advice to be absolutely clear about non-disclosure to third parties, and about the exclusion of liability, becomes even more crucial. Providing valuation advice expressly in preparation for, or during the course of, negotiations or litigation, including where the valuer is acting as advocate. The negotiations exception covers valuation advice on the probable outcome of current or impending negotiations, or requests for figures to be quoted in connection with such negotiations. It therefore recognises that: – Although there may not yet be an unresolved dispute, the advice is being provided expressly in preparation for, or during the course of, negotiations that may lead either to agreement or to the creation of an unresolved dispute, triggering (where the context allows it) a formal process of resolution (for example, reference to the courts, to arbitration, etc.). – The negotiation advice may, and often will, extend to advice on matters such as tactics and/or probable outcomes and/or options to achieve resolution without recourse either to litigation or to other formal procedures. Valuations are either compliant with Red Book Global Standards or not. Any appropriate exceptions to VPS 1–5 should be explicitly stated and explained in the terms of engagement and valuation report.

Answer 75

Performing statutory functions – where the relevant statutory provisions will define the task and also frequently govern the manner in which it is to be carried out. The emphasis in this exception is on the word function, i.e. the performance of a statutory role or duty involving the exercise or enforcement of powers that are expressly defined or recognised in legislation, normally involving the formal appointment of an individual to that specific role. The mere fact that a valuation is being provided in accordance or compliance with, or consequence of, legislation is not the point. For example, the provision of a valuation for inclusion in a statutory return to a tax authority, which involves compliance with the law but not the exercise or enforcement of it, does not fall within this exception. Specific examples of this type of work include: valuations for taxation and/or probate purposes, including capital gains tax (CGT) and inheritance tax (IHT) valuations for bankruptcy valuations for divorce purposes or other legal proceedings valuations for council tax right to buy valuations.

Answer 76

s123 Local Government Act 1972 exception short tenancies = terms/ assignments of 7 years or less GMCA draft constitution 2022: Assets for Disposal The disposal of assets is subject to statutory provisions, in particular the overriding duty under section 123 of the Local Government Act 1972 to obtain the best consideration that can be reasonably obtained for the disposal of land which includes the granting of leases in excess of 7 years. The General Disposal Consent (England) 2003 gives a Local Authority the ability to dispose of assets, or grant a lease in excess of 7 years for less than the best consideration reasonably obtainable, where:- The Authority considers that the purpose for which the land and property is to be disposed is likely to contribute to the promotion or improvement of the economic, social or environmental well-being of the whole or any part of its area or any persons resident or present in its area; and The difference between the full market value and the actual consideration payable does not exceed £2m RPs: Valuations The majority of registered providers are exempt charities. Trustees of exempt charities are subject to an overriding duty to act in the best interests of the charity. As part of this duty, trustees must ensure that they obtain the best value possible when disposing of property. Registered providers tend to rely on valuations to ascertain the value of the property. The Capital Funding Guide gives the following guidance that: “Where no validity period is given for a valuation it will be assumed that the independent RICS valuation is valid for 3 months. When an offer is made on a property by an applicant, the valuation current at the time of the offer will be assumed valid for 3 months from the date of the offer.”

Answer 77

Industrials REIT

Answer 78

An end to ultra-low rates mean borrowers can only afford smaller mortgages House prices soared after the UK came out of lockdown, turbo-charged by the lowest interest rates on record. Official borrowing costs were reduced to 0.1% at the start of the pandemic and remained at that level until December 2021. Indeed, the fact that house prices are now falling encourages potential buyers to sit tight in the hope that there will be further reductions in the months ahead. Commercial: The impact of rising interest rates on cyclical commercial property is also nuanced. It often depends on whether interest rate rises are ‘good’ interest rate rises (reflecting strong economic growth which will be supportive of cyclical property) or ‘bad’ interest rate rises (reflecting policy makers’ desire to slow down the economy sufficiently to induce a meaningful reduction in aggregate demand). In the first scenario, rising interest rates, in line with a strong economy, should have a limited impact on property returns as a strong economic backdrop is accompanied by strong occupier demand for buildings, which in turn leads to rental growth and higher valuations through normal demand/supply mechanisms. Tenants can also afford higher rents. In the second scenario, the opposite holds true, with policymakers slowing down the economy and triggering the associated change in demand for commercial property space. Similar, but slightly different, is the impact of the type of inflation. Demand-pull inflation is when demand outstrips supply due to high demand, pushing up prices. This is – initially at least – reflective of good economic conditions and will be favourable for commercial property. Cost-push inflation is when demand outstrips supply and pushes up prices. This is a relatively bad economic condition and will be bad for tenants, who will suffer from rising costs. This, in turn, will be bad for landlords at lease renewal time. If their existing and prospective tenants are suffering from rising costs, they will be less likely to agree to higher rents. For non-cyclical properties, they will be protected from rising inflation by the extent of the inflation linkage in their leases. Many also benefit from fixed uplifts, but these will likely have caps that excessively high inflation levels would breach. Cyclical commercial property has a greater correlation with GDP growth than inflation. Through the mechanisms described above, this is a material driver of short and medium-term returns. Non-cyclical property will be less defensive in a rising interest rate environment than we have been accustomed to when interest rates have not been on the up.

Answer 79

inflation is the rate at which prices are going up There are several different rates recorded by the economists: the consumer prices index (CPI), retail prices index (RPI), and CPIH (CPI including owner occupiers’ housing costs) RPI tends to be the highest. It is set to be scrapped in 2030 but is currently still used to set the student loan interest rate and annual increases in train fares. Inflation of 2% is generally considered good – this is the rate that the Bank of England and other central banks target. This rate is high enough to encourage people not to sit on all of their cash and wait for prices to go down but low enough to allow people to plan and wages to keep up. Banks generally react to rising inflation by adjusting interest rates upwards – the idea is that this will encourage people to save their money rather than spend it and reduce demand for goods and services. Traditionally, higher interest rates work when the economy is overheating and – the housing market apart – there is no evidence that it is. UK House Price Index: February 2023 Monthly house price inflation in the UK, calculated using data from HM Land Registry Average UK house prices increased by 5.5% in the 12 months to February 2023, down from 6.5% in January 2023. The average UK house price was £288,000 in February 2023, which is £16,000 higher than 12 months ago, but £5,000 below the recent peak in November 2022. Average house prices increased over the 12 months to £308,000 (6.0%) in England the housing market is starting to cool down a bit but it is far too early to say there is going to be a property crash. For that to happen, there would need to be a sharp rise in mortgage rates and unemployment rather than the more modest increases that are currently predicted. That said, the willingness of people to take on big financial commitments is understandably weak at present, which suggests that house prices are not going to do much in the next year or so. there is a limit to what the Bank can do, given the tools at its disposal. In essence, it can make the cost of borrowing more expensive by raising interest rates, or it can suck money out of the economy through a process known as quantitative tightening, which involves selling the bonds it has accumulated since the financial crisis of the late 2000s.

Answer 80

The basic residual method might be used for less complex assets or indeed early in the development process to consider optimum development; a discounted cash flow method may be used for more complex assets with phased construction or disposal where the timing of events needs to be fully accounted for in the valuation. Phasing of development and other issues of timing can be developed within a basic residual approach and is done so within some proprietary development appraisal software, but those assumptions can be more readily incorporated within a cash flow format.

Answer 81

Net initial yield Equivalent yield, as initial yield can be misleading if over-rented/in market where rents rapidly rising e.g. industrial or rapidly declining i.e. retail

Answer 82

Handbook of Rent Review

Answer 83

CoI ToE Due dil Senior colleague approved

Answer 84

Rack rent = the full value of the annual market rent of a property.

Answer 85

Every 2 years? IVS?

Answer 86

e.g. flat lease terms, below 8- years

Answer 87

IVSC Perspectives Paper: Defining and Estimating ‘Social Value’ 2020 Social value: The social benefits that flow to asset users (social investment) and the wider financial and non-financial impacts including the wellbeing of individuals and communities, social capital and the environment, that flow to non-asset users. Social investment: * Cash flows foregone by the asset owner, in the form of subsidised, reduced, or minimal access fees in relation to the assets employed. * Value foregone by the asset owner, in the form of sub-optimal (from a commercial perspective) uses of the assets employed. With regard to the wider social benefits that flow to non-asset users, these can include economic and non-economic components such as increased economic activity, as well as improved social and environmental outcomes. Social Assets: assets or projects that exist primarily for the social benefit they provide. The value of these assets rarely accrues solely to the providers of capital. Defining and Estimating ‘Social Value’ Part II 2022: IPSASB are in the process of considering “current operational value” as an alternative basis of value to “fair value” for financial reporting of public sector assets. The Working Group continues to hold the position that Social Value should be considered a valuation concept or framework in which a number of different Bases of Value and other elements play a part rather than a single Basis of Value. There is crossover between ESG and Social Value however the two concepts are separate. Social Value is about the contribution of the asset viewed from a non-owners perspective. An asset may have a different Social Value to different stakeholders and to quantify this the perspective will need to be clearly defined. Concerns in relation to the relevance of adopting the principle of highest and best use for public sector assets. Perhaps the most important element of a Basis of Value for the assessment of Social Value is determining the stakeholders (e.g. users and non-users living within 20km). National TOMS: Social Value Portal The National TOMs – Themes, Outcomes and Measures – is a framework for delivering excellence in measuring and reporting social value. Experts from the public and private sectors have created a set of social value measures designed to maximise impact in five key areas – jobs, growth, social, environment and innovation. National TOMs for real estate Social Value Portal has worked with industry including the UK Green Building Council (UKGBC) and British Council of Offices (BCO) to create a framework for delivering, measuring and reporting social value at every stage of the real estate lifecycle. Design, Planning, Construction

Answer 88

capitalisation most appropriate when the asset is operating at a stabilised level of growth and profits at the valuation date Investment value (worth) is commonly calculated using explicit DCF techniques and is normally prepared for investors who are seeking to judge not just current performance but also future. DCF may also be used to calculate, for example, fair value or market value the capitalisation model can be used to cross check a DCF and vice versa.

Answer 89

SDLT, agents and legal fees (standard is 1.5%) are deducted in order to arrive at net value

Answer 90

DCFs predict future cash flow in a growth explicit way; therefore it will make valuers mirror how market participants price assets. more training will be required amongst professionals.

Answer 91

Weighted average of initial yield and reversionary yield - HOW???

Answer 92

IVS 105 UKNS CHECK???

Answer 93

In the case of development property, valuation by comparison is potentially reliable if evidence of sales can be found and analysed on a common unit basis. Units of comparison normally revolve around the relationship between value and size, but other units can be utilised, such as site value per unit or habitable room and the relationship between site value and the value of the completed development. Analysis in simple unit terms can sometimes risk overlooking the many other factors that may determine the value in individual cases. In the valuation of development land, the planning status can have a particular impact and land transactions with planning permission or reasonable prospect of permission will increase the reliability of the comparable. Typically, comparison may be most appropriate where there is an active market and/or a relatively straightforward low-density form of development is proposed. Examples might include greenfield land in rural areas, where infrastructure costs are consistent and not excessive, small residential developments or small industrial/warehouse/retail warehouse estates. It is likely that the density, form and unit cost of the development will be similar. Less frequently, it may be possible to compare larger sites for housing or other developments on this basis.

Valuation Flashcards

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