Valuation Flashcards
(195 cards)
1
Q
What are the 5 methods of valuation
A
- Comparable method
- Investment method
- Residual method
- Cost method
- Profits method
2
Q
Summarise the Comparable method
A
Comparable method: This approach involves comparing the property being valued with similar properties that have recently been sold in the same area. The valuer analyzes the differences in size, location, condition, and other features to arrive at a value.
3
Q
Summarise the Comparable method
A
Comparable method: This approach involves comparing the property being valued with similar properties that have recently been sold in the same area. The valuer analyses the differences in size, location, condition, and other features to arrive at a value.
4
Q
Summarise the investment method
A
Commonly used for commercial property valuations.
Involves estimating the net rental income that is likely to be generated over a set period, typically ten years.
Valuer then applies a yield rate to the income to arrive at capital value.
5
Q
Summarise the residual method
A
Similar to the investment method - used for valuing development projects. Estimates the future value of completed development, deducts the cost of development and the developer’s profit - arrives at a residual value.
6
Q
Summarise the cost method
A
This involves estimating the cost of rebuilding the property from scratch, taking into account construction materials, labor costs, professional fees. Used when there are few comparable sales and the property has unique characteristics.
7
Q
Summarise the profits method
A
Used to value businesses that are closely tied to a specific property, such as hotels. The valuer estimates the profit that the business is likely to generate and applies a capitalization rate to arrive at value.
8
Q
What are the main bases of valuation?
A
- Market Value
- Investment Value
- Fair Value
- Rental Value
- Residual Value
- Depreciated Replacement Cost
- Existing Use Value
9
Q
What is the market value?
A
This is the estimated amount that a property should sell for in an open and competitive market, between a willing buyer and a willing seller.
10
Q
What is the investment value?
A
This is the value of a property to a particular investor, based on their individual investment criteria.
11
Q
What is fair value?
A
This is the value at which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.
12
Q
What is rental value?
A
Rental Value: This is the amount of rent that a property is likely to generate, based on its market rental value.
13
Q
What is residual value?
A
Estimated value of a property or development project, taking into account all costs, including construction costs, fees, and profits.
14
Q
What is depreciated replacement cost?
A
Estimated cost of replacing a property, taking into account its current age, condition, and obsolescence.
15
Q
How do you decide which valuation method to apply?
A
Work with a registered valuer to come to a conclusion.
Be aware of the purpose and client requirements and relevant guidance.
Consider Red book valuation and read up on RICS requirements.
16
Q
When and why would you use one of the 5 methods?
A
First of all - I would work with registered valuer to arrange
Two possible answers:
If valuing a pub I would use the profits method. Why? - Because it’s the RICS stipulated method for valuing a business tied to property.
When valuing a leasehold flat for the purpose of advising a lender, I would use the comparable method where data made this possible. Comparable is widley regarded as the preferred valuation method.
17
Q
Why is it important to record accurate information during a building inspection?
A
To comply with RICS standards
18
Q
What is a years purchase multiplier?
A
Factor used to convert rental income into a capital value.
19
Q
Give me an example of a good covenant and how this might impact a valuation.
A
A good covenant is a legally binding agreement that ensures a property owner will fulfill their obligations.
For example, a long-term lease on a property could be seen as a good covenant and may have a positive impact on the valuation.
20
Q
How would you distinguish limitations on liability in your valuations?
A
Limitations on liability in valuations would be clearly stated in the valuation report, highlighting any specific exclusions or assumptions made.
21
Q
How would you distinguish limitations on liability in your valuations?
A
Limitations on liability in valuations would be clearly stated in the valuation report, highlighting any specific exclusions or assumptions made.
22
Q
Where in your valuation report do you state any limitations on liability?
A
Limitations on liability would be stated in the assumptions and basis of valuation section of the report.
23
Q
What relevance does Hart v Large have on your valuation practice?
A
I’m not a valuer
But would expect valuers to be more vigilant in advising further investigations for visual defects and clearly setting out scope of survey
24
Q
What aspect of Hart v Large allowed the judge to award damages without applying the SAAMCO cap?
A
The fact he failed to recommend further investigations into defects issue
25
What is the SAAMCO cap?
provides that a claimant can only recover loss that falls within the scope of the duty of care assumed by the negligent defendant professional adviser.
26
Under the SAAMCO cap, is a valuer liable for losses due to a downturn in the market?
Under the SAAMCO cap, a valuer is not liable for losses due to a downturn in the market, only for losses directly caused by their negligence.
27
Under the SAAMCO cap, is a valuer's liability usually limited to the overvaluation on the valuation date?
liability is limited to the losses directly caused by their negligence and not the full value of the property.
28
Is there a difference between being negligent when undertaking a survey/valuation and providing negligent advice?
There is a difference between being negligent in undertaking a survey/valuation and providing negligent advice.
Negligent advice involves giving incorrect or incomplete information, while negligence in a survey/valuation involves errors or omissions in the report.
29
What is the Red Book?
The Red Book is the RICS Valuation - Global Standards
31 Jan 2002
which provides guidance on the best practices for valuation professionals.
The Red Book sets out the standards that valuers should follow. Red Book valuations are often requested in instances where a tax calculation or formal legal proceedings are involved
30
Why does the Red Book exist?
The Red Book exists to ensure consistency and transparency in valuation practices worldwide.
31
Tell me about a factor which may impact value.
Factors that may impact value include location, condition, size, age, and the intended use of the property.
32
What is your duty of care as a surveyor when undertaking a valuation?
As a surveyor, my duty of care when undertaking a valuation is to exercise reasonable skill, care, and diligence in providing an accurate and impartial assessment of the property.
33
Why is independence and objectivity important when valuing?
Independence and objectivity are important when valuing because they ensure that the valuation is not influenced by personal biases or external factors, and that it provides an accurate and impartial assessment of the property.
34
What is the UK valuation guidance called?
The UK valuation guidance is called the RICS Valuation - Global Standards.
35
Why does the UK guidance exist?
The UK guidance exists to ensure that valuations undertaken in the UK are consistent with international best practices and to provide guidance to RICS members on how to undertake valuations.
36
Which sections of the Red Book are mandatory and which are advisory?
VPS 1-5 and PS1-2 - MANDATORY
VPGAS - Advisory
37
What does PS1-2/VPS1-5/VPGAs relate to?
PS1-2, VPS1-5, and VPGAs relate to the mandatory and advisory requirements for valuation professionals, including ethical and professional standards, valuation bases and methods, and the application of valuation approaches.
38
What type of advice does the Red Book cover?
The Red Book covers advice on the best practices for valuations of various types of assets, including real estate, plant and machinery, and intangible assets.
39
If you provide preliminary advice / draft valuation report, what should you state in writing to your client?
If I provide preliminary advice or a draft valuation report, I should state in writing to my client that it is not a final valuation, and that it is subject to change based on further information or analysis.
40
What type of valuations might be relied upon by a third party?
Valuations that might be relied upon by a third party include those that are prepared for
1. accounting,
2. taxation
3. lending
4. legal purposes.
41
Tell me what the definition of MR/MV/investment value/fair value?
- Market Rent (MR) is the estimated rental value of a property at a specific point in time.
- Market Value (MV) is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.
- Investment Value is the value to a particular investor based on their specific requirements, and may be higher or lower than market value.
- Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
42
What is the difference between an assumption and a special assumption?
An assumption is a proposition that is taken for granted, such as market conditions or zoning regulations
A special assumption is an assumption specific to a particular valuation assignment and may differ from market norms
43
What sources of information would you consider when preparing a valuation report?
comparable sales data,
rental information,
planning documents,
building plans,
local market reports
industry publications.
44
If you have previously valued an asset, do you need to make any additional disclosures and what might they be?
Yes, additional disclosures may be required to explain any changes in
1. market conditions,
2. methodology
3. assumptions,
4. Errors
45
What must be included in your terms of engagement / valuation report? Where is this covered in the Red Book?
In the RICS Red Book, the requirements for the terms of engagement and valuation report content are covered in VPS 1 and VPS 3, respectively.
Terms of Engagement (VPS 1):
1. Client - Other Users
2. Purpose
3. Bases of Value and Date
4. Limitations of the investigation and the scope of work.
5. Assumptions / Special Assumptions
6. Disclosing any conflicts of interest.
7. fee basis
8. PII Cover
9. Specifying the report format and delivery date.
10. Stating any complaints handling procedures
11. Providing a statement of compliance with the RICS Red Book.
Valuation Report (VPS 3):
1. Identifying the client and any other intended users.
2. Clearly defining the purpose of the valuation.
3. Specifying the basis of value and the date of valuation.
4. Describing the property or asset being valued.
5. Describing the extent of the investigation and the scope of work.
6. Outlining the sources of information, including verification and reliance.
7. Describing any assumptions, special assumptions, or departures from the RICS standards.
8. Providing the valuation, including any caveats or qualifications.
9. Disclosing any conflicts of interest.
10. Providing a statement of compliance with the RICS Red Book.
In summary, the terms of engagement provide a clear framework for the valuation process, while the valuation report documents the process, assumptions, and final valuation, ensuring transparency and compliance with RICS standards.
46
What RICS guidance relates to the use of comparable evidence?
VPGA 9 of the Red Book.
47
What are the 3 approaches under VPS5?
The three approaches under VPS5 are the
income approach
market approach
cost approach
48
What is the Valuer Registration Scheme?
The Valuer Registration Scheme is a registration program established by RICS for valuers to show that they are qualified and competent.
49
Are there any instances where certain sections of the Red Book may not apply?
Yes - but I would refer to valuer for advice
50
What is the basis of value under UK GAAP FRS 102?
The basis of value under UK GAAP FRS 102 is the fair value.
51
What is a SORP?
A SORP is a Statement of Recommended Practice which provides guidance on financial reporting to a specific industry.
52
When would you use EUV?
EUV (Existing Use Value) is used when determining the market value of a property as it currently exists, particularly in compulsory purchase cases.
53
What is the definition of EUV?
Existing Use Value (EUV) is the estimated market value of a property, assuming its current use continues without any potential alternative uses being considered.
54
What additional criteria apply to secured lending valuations?
terms and conditions of the loan being secured
55
What information should you specifically request for a secured lending valuation?
information on the amount,
term
repayment schedule of the loan,
the identity of the lender,
any specific requirements of the lender.
56
What is a regulated purpose valuation?
a valuation carried out for a regulated financial institution
57
What additional disclosures must be made for a regulated purpose valuation?
the purpose of the valuation,
the identity of the lender,
the intended use of the report.
58
What is the basis of value for a statutory valuation?
The basis of value for a statutory valuation is usually the market value.
59
What might a statutory valuation relate to?
A statutory valuation might relate to property for taxation purposes or for compulsory purchase purposes.
60
What is the definition of the statutory basis of valuation?
The specific legal basis
on which a valuation is carried out
for a statutory purpose.
61
Is the basis the same for all statutory valuations?
No, the statutory basis of valuation can differ depending on the specific legislation in question.
62
What is a yield?
The "yield" of a property tells you how much of an return you are likely to get on your investment
63
What is a Net Initial Yield?
The ratio of net income
to the property's value
at the beginning of the investment period.
64
What is a reversionary yield?
The ratio of net income to the property's value at the end of the investment period.
65
What is an equated yield?
The weighted average of the Net Initial Yield and the reversionary yield.
66
What is an equivalent yield?
A hypothetical yield
produces the same net present value
as a specific cash flow.
67
How would a yield reported from an auction differ from a Net Initial Yield?
A yield reported from an auction is a gross yield, which is calculated based on the sale price of the property and its rental income. The Net Initial Yield is calculated
68
What purchaser’s costs do you deduct from a valuation?
Stamp duty land tax
Legal fees
Survey costs
Lender fees (if applicable)
69
When do you deduct purchaser’s costs from a valuation?
When calculating net yield
70
When do you deduct purchaser’s costs from a valuation?
When calculating a net yield, which considers the net cost of acquiring the property
71
How would you value a property in uncertain market conditions - does the Red Book give any guidance?
Use multiple valuation methods
Assess market trends
And recent comparable sales
Red Book: Emphasises the importance of professional judgment and experience
72
How could you value a long leasehold interest?
Comparables with similar lease terms
73
How does a term and reversion differ from a DCF?
Term and reversion: Considers current rent and reversionary rent separately
DCF: Considers all future cash flows, including rent
74
What is the difference between a growth explicit and a growth implicit yield?
Growth explicit yield: Assumes specific growth rates
Growth implicit yield: Assumes growth rates are embedded
75
Give examples of each of these types of yield.
Growth explicit yield: A yield that considers a 2% annual rental growth
Growth implicit yield: A yield derived from market comparables
76
How would you value an under/over rented investment property?
Use term and reversion method
Assess market rent and compare to actual
77
When would you use a dual rate investment calculation?
properties with distinct income streams or growth rates
78
Where can you find yield evidence from?
Property transactions and auction results
Commercial property databases
Property research reports
79
What is the hierarchy of evidence?
Direct comparables (most reliable)
Adjusted comparables
Market trends and sector data (least reliable)
80
What would you do if comparable evidence was limited?
Use alternative valuation methods
Consider adjusted comparables or market trends
81
What is NPV?
Net Present Value: The difference between the present value of cash inflows and outflows over a period of time
82
What is IRR?
Internal Rate of Return
83
What is a term and reversion?
A valuation method that considers current and future rental income separately
84
What is a hardcore and topslice?
Hardcore: The stable, long-term income portion of a property investment
Topslice: The additional, short-term income portion of a property investment
85
What is a Discounted Cash Flow (DCF)?
estimates the present value
of future cash flows
from a property investment
86
What is a short-cut DCF?
A simplified DCF method, using a single discount rate and assuming constant growth rates
87
When would you use a DCF?
When valuing properties with complex or variable income streams
88
What are the advantages of a DCF?
Considers time value of money
Allows for variable income and growth assumptions
89
What are the disadvantages of a DCF?
Requires many assumptions
Sensitive to changes in input
90
What is a YP/PV/YP in perpetuity?
Years' Purchase (YP) or Present Value (PV): The factor used to convert a perpetual income into a capital value
91
What is marriage value?
The increase in property value resulting from the combination of two or more interests
92
When would you include an element of hope value in a valuation?
When there is potential for future development or a change in use that could increase the property's value
93
Can you include hope value in a secured lending / mortgage valuation?
Generally not, as hope value is speculative and lenders prefer more conservative valuations
94
How does market value differ from investment value/fair value?
Market value: The price at which a property would sell in the open market
Investment value: The value of a property to a specific investor
Fair value: The value used for financial reporting, considering the property's highest and best use
95
What is a dual capitalization rate and when would you use one?
A dual capitalization rate considers two distinct income streams or growth rates
Use it for properties with different income characteristics, such as short-term and long-term leases
96
Is the profits/DRC method used for specialized or specialist property?
Profits method: Specialist property
Depreciated Replacement Cost (DRC) method: Specialized property
97
What type of properties would you use the DRC method for?
Properties with unique features or uses, such as schools, hospitals, or power plants
98
What is intangible goodwill?
The value of a business beyond its tangible assets, such as reputation, customer base, and brand
99
What is turnover / gross profit / net profit?
Turnover: Total revenue generated by a business
Gross profit: Revenue minus cost of goods sold
Net profit: Revenue minus all expenses, taxes, and costs
100
What are the steps to providing a profits valuation?
Analyze financial statements
Determine Fair Maintainable Turnover and Operating Profit
Assess Reasonably Efficient Operator performance
Calculate divisible balance
Apply appropriate capitalization rate
101
What is Fair Maintainable Turnover?
The sustainable level of turnover a business can achieve under normal trading conditions
102
What is a Reasonably Efficient Operator?
A hypothetical operator who runs the business efficiently, without exceptional skills or disadvantages
103
Does the assessment of the REO include personal goodwill and trading potential?
No, the assessment of the REO excludes personal goodwill and focuses on the property's trading potential
104
What is personal goodwill?
The value attributed to the personal skills, reputation, or relationships of a business owner
105
What is trading potential?
The future income-generating potential of a business or property
106
How do you calculate the tenant's proportion of rent in a profits valuation?
Determine the divisible balance (profit available for distribution)
Apply an appropriate percentage to represent the tenant's share
107
What is EBITDA?
Earnings Before Interest, Taxes, Depreciation, and Amortization:
A measure of a company's operating performance
108
What is Fair Maintainable Operating Profit?
The sustainable level of operating profit a business can achieve under normal trading conditions
109
How do you calculate the divisible balance?
Subtract the tenant's proportion of rent and any other deductions from the Fair Maintainable Operating Profit
110
What accounts information would you want to review for a
profits valuation?
Income statements
Balance sheets
Cash flow statements
111
Do RICS provide any guidance on RLVs or valuing development property?
Yes, RICS provides guidance through the RICS Valuation - Global Standards (Red Book)
112
What is an RLV?
Residual Land Value: The value of land after accounting for development costs, developer's profit, and other expenses
113
What is a development appraisal?
A financial feasibility analysis of a development project, estimating costs, revenues, and profitability
114
How else can you value development land?
Comparables approach
Market approach
115
What does a development appraisal show?
Feasibility and profitability of a development project
Risks and opportunities
116
What are the key things you need to consider when appraising/inspecting a development site?
Location
Site size and constraints
Planning permission
Infrastructure and utilities
Environmental and geotechnical issues
117
What is GDV/NDV?
Gross Development Value (GDV): The total estimated value of a development project upon completion
Net Development Value (NDV): GDV minus selling costs and fees
118
What do development costs include?
Construction costs
Professional fees
Planning and legal fees
Finance costs
Infrastructure and utility costs
119
When do you apply VAT when assessing development costs?
d
Apply VAT to applicable costs, such as construction and professional fees, if the developer is not VAT-registered
120
Where can you source build costs from?
Quantity surveyors
Contractors' estimates
Construction cost databases
121
What are typical finance costs?
Interest on loans
Loan arrangement fees
Legal and administration fees
122
What would you apply finance costs to and on what basis?
Apply to development costs, usually on a time-weighted basis
123
What is an S curve?
A graphical representation of cumulative costs over time, showing a slow start, acceleration, and slow end
124
What factors influence the decision to use an S curve when applying finance costs?
Project complexity
Timing and phasing of costs
Cash flow profile
125
Is there a quick rule of thumb which can be used when applying finance costs?
Yes, for simple projects, apply a fixed percentage of development costs
126
What do holding costs typically include?
Property taxes
Insurance
127
What is viability?
The financial feasibility of a development project, considering costs, revenues, and risks
128
When would a cost approach be used?
For specialized or unique properties with limited market comparables
129
What type of buildings would a cost approach be used for?
Schools, hospitals, power plants, and other unique properties
130
What are the 3 components of the cost approach?
Land value
Gross Replacement Cost (GRC)
Depreciation
131
How do you assess the value of the land?
By using comparable land sales, adjusting for location, size, zoning, and other factors
132
How do you assess Gross Replacement Cost?
Estimate the cost of constructing a new building with the same utility, using current materials, labor, and design standards
133
What costs would you consider within GRC?
- Construction costs
- Professional fees
- Site preparation and infrastructure costs
134
What would you do if the building could be replaced with a modern equivalent?
Estimate the cost of constructing the modern equivalent and adjust for depreciation and functional obsolescence
135
How would you deal with depreciation/obsolescence?
Estimate the loss in value due to physical deterioration, functional obsolescence, and external obsolescence, and deduct it from the Gross Replacement Cost
136
What types of obsolescence are there?
Physical deterioration: wear and tear, damage
Functional obsolescence: outdated design, layout, or features
External obsolescence: negative impacts from external factors (e.g., economic, environmental)
137
What are the three ways to deal with depreciation?
Age-life method: based on the effective age and economic life of the property
Breakdown method: separate estimates for physical deterioration, functional obsolescence, and external obsolescence
Market extraction method: compare sales of similar properties with varying levels of depreciation
138
Is the cost approach a market valuation?
Not directly; it estimates the value based on the cost to replace the property, but it can be a useful method for specialized properties where market data is limited
139
How might onerous lease terms impact capital or rental value?
They could reduce value due to restrictions, increased risks, or reduced marketability
140
What liabilities may be created through valuation?
Professional negligence, breach of contract, or misrepresentation
141
What is a liability cap and when would one be used?
A liability cap limits the financial liability of a valuer in case of a claim; it can be used in valuation engagements to manage risk
142
Explain why the RICS is carrying out an Independent Valuation Review.
To review and improve valuation standards and processes, ensuring quality, transparency, and public trust in the profession
143
What caselaw relates to margins of error?
K/S Lincoln v CBRE Hotels (2010)
Hyde and another v Nygate and another (2021)
144
Explain your understanding of K/S Lincoln v CBRE Hotels (2010).
A case where the court considered the appropriate margin of error in a hotel valuation and concluded that a 10% margin was reasonable given the circumstances
145
Explain the precedent set in Hyde and another v Nygate and another (2021) in relation to the valuation of high-profile development sites.
The court held that a 20% margin of error was appropriate for complex, high-profile development sites, given the significant uncertainties involved
146
What does the Court of Appeal decision Scullion v BOS (Trading as Colleys) tell you about a mortgage valuer’s liability?
The decision clarified that a mortgage valuer's duty of care may extend to the borrower, depending on the specific circumstances and the foreseeability of reliance on the valuation
147
How could you value an HMO using the investment method?
Estimate the potential rental income, deduct expenses, and capitalize the net income using an appropriate yield to derive the property value
148
What were you specifically looking for in relation to the HMO use?
Compliance with regulations, licensing, room sizes, safety features, and amenities
149
What is statutory overcrowding?
What legislation relates to this?
A situation where the number of occupants exceeds the permissible limit based on room sizes and layout
Housing Act 1985 (Part X)
150
What is an Article 4 direction?
A planning restriction that removes permitted development rights, requiring planning permission for specific changes in use or development
151
How might gross and net yields differ for HMOs?
Gross yield considers total rental income, while net yield accounts for expenses, such as maintenance and management costs
152
What RICS guidance are you aware of relating to HMO valuation?
RICS does not have specific guidance for HMOs, but general valuation principles and guidance, such as the Red Book, would apply to HMO valuation
153
What category of buy-to-let valuation does a HMO fall within?
HMOs typically fall within a specialized buy-to-let valuation category due to their unique characteristics and regulatory requirements.
154
What are guaranteed rents / cash backs in lieu of rental income and how can these impact upon value?
Guaranteed rents or cash backs are pre-agreed rental payments or incentives offered by landlords to attract tenants. They can impact value by affecting the perceived rental income and property risk.
155
How can Market Rent impact upon the underwriting of a loan?
Market rent affects the property's income potential and value, influencing the loan amount and repayment terms.
156
What is a trustee mortgage valuation?
A trustee mortgage valuation is a valuation conducted for a trustee or fiduciary responsible for managing a property on behalf of a beneficiary.
157
What is affordable/market rent?
Affordable rent is a reduced rental rate for eligible tenants, typically below market rent.
Market rent is the prevailing rental rate for a property in the open market.
158
Tell me about the requirements in relation to your terms of engagement/inspection.
Terms of engagement should include scope of work, basis of valuation, fees, and any assumptions, limitations, or special instructions.
159
What is the basis of value?
The basis of value is the foundation upon which a valuation is conducted, such as market value, investment value, or replacement cost.
160
What is reinstatement cost and when would you be asked to provide it?
How would you calculate it?
Reinstatement cost is the estimated cost to rebuild a property in the event of total loss. It's often used for insurance purposes. It can be calculated using cost manuals, such as the BCIS, or by consulting a quantity surveyor.
161
Q: What are the 3 categories of BTL investments?
A: The 3 categories of BTL investments are: standard BTL, HMOs, and more complex properties (e.g., multi-unit blocks).
162
What type of RICS surveys include a valuation?
What level of valuation advice does a Level 2 Home Survey include?
What guidance does the RICS provide in relation to this?
RICS surveys that include a valuation are Level 2 Home Surveys and Level 3 Building Surveys.
Level 2 Home Surveys provide market value and reinstatement cost.
RICS guidance for these valuations can be found in the RICS Home Survey Standard.
163
Q: Tell me about your use and understanding of AVMs. Does the RICS provide any guidance on this? What is an AVM? What is an advantage and a disadvantage of using an AVM?
AVMs (Automated Valuation Models) use algorithms to estimate property values based on data inputs. RICS provides guidance on AVMs in the RICS Valuation – Global Standards (Red Book).
Advantages: speed and cost-efficiency.
Disadvantages: less accurate than manual valuations, not suitable for unique properties.
164
What valuation considerations would you take into account when valuing a purpose-built for renting property?
A: Valuation considerations for a purpose-built renting property include rental income, market comparables, location, property condition, vacancy rates, and operating expenses.
165
What factors influence yields?
Factors that influence yields include property location, property type, market conditions, lease terms, and tenant quality.
166
What is Net Operating Income?
Net Operating Income (NOI) is the income generated from a property after deducting operating expenses, but before accounting for debt service or income taxes.
167
How might the release of a large number of new build properties impact the local market?
The release of a large number of new build properties might increase supply, potentially leading to lower prices or rents, longer marketing periods, or changes in the balance between supply and demand.
168
Can 'hope value' be considered in valuations falling under UK Appendix 10?
Hope value, which refers to the potential for future development or changes in property use, can be considered in valuations under UK Appendix 10, provided it is supported by market evidence and meets the requirements outlined in the RICS Valuation – Global Standards (Red Book).
169
Q: How is marriage value calculated?
Marriage value is calculated as the difference between the combined value of the leasehold and freehold interests before and after the lease extension or enfranchisement. It is typically split 50/50 between the leaseholder and the freeholder.
170
What is the deferment rate?
The deferment rate is the rate used to discount the future value of the freeholder's reversionary interest to its present value.
171
What right did the Leasehold Reform, Housing and Urban Development Act 1993 introduce?
The 1993 Act introduced the right for leaseholders to extend their lease or collectively purchase the freehold of their property (collective enfranchisement).
172
What is the basis of a new lease for a flat under the 1993 Act?
The basis of a new lease for a flat under the 1993 Act is a 90-year extension to the existing lease, with the ground rent reduced to a peppercorn (effectively zero).
173
What is the basis of valuation in Schedule 13 for the new lease premium under the 1993 act?
The basis of valuation in Schedule 13 for the new lease premium under the 1993 Act involves calculating the landlord's interest, compensation for the loss of ground rent, and the reversionary interest, as well as any marriage value.
174
How long can a lease be extended for?
Under the 1993 Act, leaseholders of flats can extend their lease by an additional 90 years, while leaseholders of houses can extend by 50 years.
175
Is a premium payable upon the grant of an extended lease?
Yes, a premium is payable upon the grant of an extended lease, which is determined by factors such as the landlord's interest, ground rent, and reversionary interest, as well as any marriage value.
176
What are the additional qualification criteria if the long leaseholder of a house wishes to extend their lease (rather than acquire the freehold)?
In addition to the standard qualification criteria, the leaseholder must have owned the property for at least two years, and the original lease must have been for more than 21 years.
177
What are the ways to calculate a modern ground rent?
Modern ground rent can be calculated using various methods, such as a fixed amount, a percentage of the property value, or a formula linked to inflation.
178
What precedent was set in the Sportelli v Cadogan Estate (2008) case?
The Sportelli case established the principle of using a "generic" deferment rate when valuing the freeholder's reversionary interest in lease extension or enfranchisement cases.
179
What valuation approach should be used to assess the value of the freeholder’s loss (or landlord’s diminution in value)?
The valuation approach to assess the freeholder's loss typically involves calculating the present value of the lost ground rent and the reversionary interest, as well as any marriage value.
180
Explain the impact of Cadogan Square Properties Ltd v Earl Cadogan and Cadogan v Erkman.
Cadogan Square Properties Ltd v Earl Cadogan (1996) and Cadogan v Erkman (1997) are two UK court cases related to leasehold enfranchisement.
They helped establish legal principles regarding the valuation methodology for calculating the premium payable in leasehold enfranchisement cases, including the consideration of relativity graphs and deferment rates.
181
What precedent was set by the Zucconi and Deritend cases in relation to relativity?
Zucconi v Westminster City Council (1996) and Deritend Investments Ltd v CMS Cameron McKenna (1997) are two UK court cases that helped establish the use of leasehold relativity graphs as a basis for determining the appropriate discount rate in leasehold valuations.
182
What is an adverse differential?
An adverse differential refers to the difference between the actual value of a leasehold property and the value it would have if the lease were longer or the property was freehold.
This difference results from the diminishing value of a leasehold interest as the lease term decreases.
183
What is leasehold relativity?
Leasehold relativity is the relationship between the value of a leasehold property and the value of an equivalent property with a longer lease or freehold title
184
What methods are available to value a leasehold property and when/why might you adopt each?
The main methods to value a leasehold property are the Comparable Method, the Income Approach (such as the yield method or discounted cash flow), and the Residual Method.
The Comparable Method is generally used when there are sufficient recent transactions of similar properties in the area.
The Income Approach is used when the property generates a steady income, and the Residual Method is applied when valuing a property that requires significant development or refurbishment.
185
When would you use a leasehold relativity graph?
A leasehold relativity graph is used in the valuation of leasehold properties when determining the appropriate discount rate to apply, particularly during lease extensions or enfranchisements.
186
Q: What does the legal case of Ryb v Conways (2019) say about the valuation of property affected by Japanese Knotweed
A: Ryb v Conways (2019) clarified that surveyors have a duty to inspect and report the presence of Japanese Knotweed if it is visible during a routine property inspection. The case highlighted the importance of properly assessing the impact of Japanese Knotweed on property values.
187
What valuation approach does the RICS recommend is taken when valuing property affected by Japanese Knotweed?
The RICS recommends using a risk-based approach when valuing property affected by Japanese Knotweed, considering factors such as the presence, severity, and management of the infestation and its potential impact on property value, insurability, and marketability.
188
What is the House Price Index and how would you use it when valuing a residential property?
The House Price Index (HPI) is a measure of the changes in residential property prices over time. It can be used to analyze market trends, adjust comparable sales data for changes in market conditions, and provide context for property valuations.
189
When analysing comparable evidence, how would you apply the concept of adjusted value?
To apply the concept of adjusted value, compare the subject property to the comparable properties and adjust the comparable properties' values to account for differences in factors such as size, location, age, condition, and features. This helps create a more accurate and reliable basis for estimating the subject property's value.
190
What residential design features do you consider add value in your locality?
Residential design features that may add value in a locality include energy-efficient upgrades, modern kitchens and bathrooms, open floor plans, outdoor living spaces, smart home technology, and high-quality finishes and materials.
191
What does the Red Book say about terms of engagement?
A: The RICS Red Book requires valuers to agree on written terms of engagement with their clients, covering key elements such as the scope of work, the purpose and basis of the valuation, and any limitations or assumptions.
This ensures that valuers comply with professional standards and maintain transparency and consistency in their work.
192
What does the Red Book say about inspections?
The Red Book requires valuers to conduct inspections as part of the valuation process, ensuring they gather sufficient and reliable information about the property. Valuers must determine the extent of the inspection based on the purpose of the valuation, the property type, and the level of detail required. The inspection should be documented and any limitations or assumptions made should be noted in the valuation report.
193
What does the Red Book say about reporting requirements?
The Red Book sets out reporting requirements for valuers, including providing a clear, accurate, and concise valuation report that covers the scope of work, the purpose and basis of the valuation, the property details, the valuation date, any assumptions or limitations, and the valuation figure. The report should be consistent with the terms of engagement and comply with any relevant professional standards and regulations.
194
What are the differences between a desktop and a full valuation report?
A desktop valuation report is based on available data and does not involve a physical inspection of the property, whereas a full valuation report includes an on-site inspection.
A desktop valuation may be quicker and less expensive but is typically less reliable and comprehensive than a full valuation report, which provides a more accurate and in-depth analysis of the property's value.
195
Q: Tell me about how you ensure that information relied upon in your valuation is appropriate and reliable?
A: To ensure information relied upon in a valuation is appropriate and reliable, valuers should:
1. verify the accuracy and relevance of the data,
2. use multiple sources when possible,
3. evaluate the quality and credibility of the sources, and cross-check information against other sources.
3. In addition, valuers should be aware of any limitations or assumptions made in their analysis and disclose these in the valuation report.
