Valuation Flashcards
(161 cards)
1
Q
- What is the full title of the Red Book?
A
RICS Valuation Global Standards
2
Q
- When did the current edition of the Red Book come into force?
A
31st January 2022
3
Q
- Who are the International Valuation Standards Council?
A
Non-profit organisation that set the global standards for valuation
4
Q
- What editions of the Red Book have been in effect during your APC training period?
A
Only the current edition
5
Q
- What is the Purpose of the Red Book?
A
To ensure consistency, competency and transparency in the valuation process worldwide
It essentially states that to carry out a Red Book valuation - you must be competent, agree terms of engagement, inspect/measure and carry out appropriate investigations, analyse everything and produce your report
Must agree terms of engagement before issuing the report
6
Q
- What is the purpose of the UK National Supplement?
A
Supplements the Red Book. Countries often have their own national supplements . This one ensures UK valuations are consistent with UK accounting standards
7
Q
When was the most recent UK National Supplement published?
A
October 2023 - Effective May 2024
8
Q
What changes has the latest UK National Supplement made?
A
To VPS - Completely overhauled VPS 3:
As an example - As a mandatory requirement, a valuer cannot undertake a regulated purpose valuation if the property or properties were acquired by the client within 12 months of the valuation date and the valuer or their firm received an introductory fee or negotiated the purchase.
In simple terms, for a regulated purpose valuation of one asset:
A single ‘responsible valuer’ can be engaged for up to 5 years (before they must be rotated)
A valuation firm can be engaged for up to 10 years (before they must be rotated)
A valuation firm cannot agree to be engaged for more than 5 years (before they must be rotated)
A minimum 3 year period is required before re-engagement
Overhauled several of the VPGA’s - especially to do with the Existing Use value wording
9
Q
- To what valuations does the Red Book apply?
A
Red Book applies to all valuations unless a valuation is listed as an exception
10
Q
- What valuations are Exceptions to the Red Book?
A
- If for internal purposes (for client to know market value of their property)
- If for agency work prior to acquisition or disposal instructions (EG advertise at price X and if it does well, we’ll up the price but if it is not getting much interest then we will lower the price)
- If for stautory function (where the Law tells us what to do)
- If acting as expert witness (EG if you can’t agree a rent review or lease renewal, then you would give an expert witness report in court - arbitrator or judge would tell you what to do, not the Red Book)
- If in negotiation or litigation
11
Q
- Can you name some valuations that are carried out for a Statutory Function?
A
- Lease renewal EG reporting on rent at lease renewal - see s34 of LL & T Act 1954 to see rent definition (court determines the level of rent)
- Rating EG if giving a rating valuation there will be legislation to follow
- Also compulsory purchase
- Leasehold enfranchisement (for residential) – statutory – Buying the freehold or getting a long leasehold extension
12
Q
- What is the difference between Valuation Technical and Performance Standards (VPS) and Valuation Practice Guidance – applications (VPGA)?
A
- Compliance with VPS is mandatory
- Compliance with VPGA is advisory
13
Q
- What are the possible consequences if a valuer does not comply with a VPS?
A
- RICS may take disciplinary action (depends on extent of non-compliance / severity of breach)
- EG might have to sign a consent order to say you’ll get this sorted within a month or might get a fine
- Conducts, rules and professional ethics – VPS
14
Q
- What are the possible consequences if a valuer does not comply with a VPGA?
A
- VPGA is intended to embody best practice. The industry loses trust in the valuation you undertake as they do not adhere to professional standards
- If the valuation is inaccurate, you can be sued for negligence
15
Q
- Describe how Departure from the Red Book mandatory requirements may be possible.
A
The Red Book still applies to the valuation but the valuer details where they may not be able to follow one of the mandatory Red Book requirements.
This would have to be agreed with the client and justified.
As an example, a departure could be undertaking a desktop valuation of a property where it is unsafe to inspect and measure.
16
Q
- What information would you require from a telephone enquirer who asked: Can you do me a valuation?
A
- The location
- The type of property (to ensure competence)
- The purpose of the valuation and the client to ensure there isn’t a conflict of interest
- Competency is defined as having the valuation skills and the market knowledge
17
Q
- What do your Valuation Files contain?
A
- Conflict of Interest Check (not required for me because I already established this - for internal purposes)
- Agreed Terms of Engagement
- Inspection notes – Enquiries, photos, floor plans, planning permission etc.
- Comparable evidence
- Valuation calculations
- Copy of valuation report
18
Q
- What are the main contents of the Terms of Engagement for a Valuation?
A
- Valuer - name
- Client - name
- Property - address
- Purpose of valuation
- Basis of value
- Valuation date
- Nature and extent of the valuer’s work - including investigations - and any limitations thereof - the extent of these
- Assumptions/special assumptions - if you don’t make planning enquiries then you need to make planning assumptions
- The Fee –
19
Q
How is a fee for a valuation determined?
A
Usually on fixed fee basis, based on the amount of work required - can be done on an hourly or day rate
20
Q
- How would you respond to a request to value a property from a Pavement Assessment only?
A
This can be completed as an external inspection whilst still being red book compliant.
This is often done in cases where you firm has already carried out a valuation and you are doing a reassessment. If there have been no changes and you hold all of the correct documents then this could be done.
If you have enough information to provide a professionally adequate valuation as detailed above – usually requested by lenders or banks
21
Q
- Please name the Red Book Global Bases of Value.
A
- Market value
- Market rent
- Investment value
- Fair value
22
Q
- Please name the UK-Specific Bases of Value.
A
Existing use value - ‘Assets which are held for their service potential by institutional or government organisations (i.e. operational assets used to deliver either front line services or back office functions) should be measured at their current value in existing use’ Eg value for social housing or hospitals
23
Q
- What is the difference between a Basis of Value and a Method of Valuation?
A
- Method of Valuation = the valuation methods used to arrive at a figure eg comparable method, investment method, residual method, profits method and contractors method that we would then express as a Basis of Value, usually market value
- Basis Value = Red Book definition of Value (market value, market rent, investment value and fair value)
24
Q
- Describe three Assumptions that are usually made in producing a valuation.
A
- Title - freehold vs leasehold - there could be highly restrictive covenants
- Assume any parts of a property that are covered, are free from defects - ie condition is okay
- Assume property has full planning permission for existing use
- Assume property is free from hazardous substances or deleterious materials
- Assume property is free from contamination
- Assume the property has correct utilities connections
- Assumed good tenure can be shown with no irregular comings and goings
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22. What is a Special Assumption?
It’s an assumption where the facts differ from those existing at the valuation date
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23. Give three situations when it would be appropriate to make a Special Assumption.
* If property is vacant, we could assume it is let (and vice versa)
* If property is being developed, we could assume refurb has completed
* If property hasn't got planning permission, we could assume planning permission has been granted
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24. Define Market Value in your own words.
The estimated amount for which a property should be bought by a willing buyer from a willing seller following the proper marketing period in an arms length transaction – both parties acting without compulsion
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25. What do consider Proper Marketing to be in the Market Value definition?
* Selling a property via the most appropriate method of sale (private treaty is most common EG hanging 'to sale' sign outside)
* Allowing a property to be on the market for an appropriate period to get market value
* Adveritsing the property to the target market (regionally, nationally or internationally)
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26. What is an Arm’s Length Transaction?
When there is no connection/relationship at all between parties
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27. What is Synergistic Value?
The value of two or more merged interests is greater than the sum of the individual interests - say property A is worth 100k and property B is worth 100k, once combined they are worth 250k – This is the synergistic value
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28. What is Marriage Value?
* Two sites A & B adjoin each other, each have the same value. Once merged, the property is worth more. The marriage value is the increased amount of money the property is now worth.
* Often common to split this value between seller and purchaser, usually 50/50 but can depend on each parties stake in the property
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29. What is a Special Purchaser?
* Someone who can pay more than market value (EG they can pay the synergistic value) so they can enjoy the marriage value gain
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30. When is Market Rent not appropriate as a Basis of Value in providing a report on the rental value of a property and why not?
* Rent review - use rent definition in lease so not an open market letting
* Lease renewal – under s34 in LL&T Act - the court determines the market rent and lease terms
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31. When is Fair Value the appropriate valuation basis?
When valuing for accounting/financial reporting (no different to market value, just used when valuing for inclusion in company accounts) – the value of an asset in companies accounts for example
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32. What is a Regulated Purpose Valuation?
These valuations are undertaken for a specific legal or regulatory prupose such as determining the value of a property for taxation, insurance or financial reporting as detailed in VPS 3.
For example, if a property owner in the UK needs to calculate their property's value for tax assessment purposes, they may hire a valuer to perform a Regulated Purpose Valuation (UK VPS 3) to ensure compliance with legal requirements and provide an accurate determination of the property's worth.
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33. What is an Asset Valuation?
One undertaken for financial reporting purposes (another name for a regulated purpose valuation)
Found in the balance sheet under the heading of fixed assets
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34. When is Existing Use Value the valuation basis?
Owner occupied properties used by Local Authority and Central Government owner occupied properties – this is required by CIPFA (Chartered Institute of Public Finance Accountants)
Market value cannot be used because this is the 'highest and best use' of a property whereas these properties must be valued on their existing use
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35. What is the fundamental difference between Market Value and Existing Use Value?
Existing use value is value of building as it is; market value is highest and best use of an asset (can take into account development and re-development potential)
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36. When is DRC used in Asset Valuations?
For properties where there isn't enough comparable evidence
For specialised properties EG properties that would not sell other than as part of a sale of the business in occupation such as light houses
Asset valuations for specialised property that would not sell for the same value with vacant possession – for example you wouldn’t sell a football club with vacant possession as the club provided the value
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37. Name three situations that can adversely affect the Certainty of valuations.
* If there are very few or no comparables – an unusual property or one in a unique location
* If the valuer is unable to make full enquiries or investigations
* When there is market volatility such as during the beginning of the pandemic -
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39. How many different methods sale are there?
Auction, tender and private treaty (stick a sale board and invite bids)
42
1. Name the conventional methods of valuation.
Comparables Method, Investment Method, Residual Method, Profits Method and contractors Method
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When is the comparables method used?
The comparable method is the most widespread valuation method, typically to assess the market rent and market value of both commercial and residential properties. It can also be used to assess the market value of farms, farmland and land with development potential.
Candidates should be familiar with the principles outlined in the RICS guidance note Comparable evidence in real estate valuation 1st edition. Essentially, the comparable method can be used where there is a good body of recent, reliable comparable rental, yield or sales evidence. A comparable is defined as an item of information used during the valuation process as evidence to support the valuation of another, similar item.
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When is the investment method used?
The investment method is used where there is an income stream to value, i.e. the property is tenanted. This can include commercial, residential, retail, industrial and agricultural properties.
To use the investment method, candidates will need to be able to assess rental values (market rent) and a market-based yield. A yield can be simply defined as the annual return on investment expressed as a percentage of capital value.
The investment method can reflect income streams which are under-, rack- and over-rented by incorporating risk within the yield choice (i.e. an all risks yield) and by structuring the calculation appropriately, for example a term and reversion for under-rented income streams and a hardcore and topslice for over-rented income streams. This will require the valuer to reflect risk in each element of the calculation, e.g. increasing the yield above the market in the topslice to reflect the added risk of an above market rent being paid for a specified period, or reducing the yield in the term to reflect that a below market rent is being paid until the reversion is due.
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When is the residual method used?
The residual method is typically used for property or land with development potential. The output is market value of the land and it requires valuers to make a variety of assumptions around input costs.
Candidates need to understand the difference between a residual land valuation (i.e. output of market value of the land) and a development appraisal (i.e. output of profitability or viability).
Candidates need to understand the difference between a residual land valuation (i.e. output of market value of the land) and a development appraisal (i.e. output of profitability or viability).
To apply the residual method, candidates need to first assess the development potential of the land, i.e. highest value use. They then need to calculate the value of the finished scheme, i.e. gross development value (GDV) based on market comparables. All development costs are then deducted from GDV, including developer’s profit and finance costs
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When is the Depreciated replacement cost/contractor’s method used?
The depreciated replacement cost (DRC) method is used for owner-occupied or specialised property that is rarely sold on the open market. It is also known as the method of last resort and should not be used where there are market sales of comparable properties. It could, of course, be used as a check valuation against another method.
he DRC method is based upon the assumption that the market will pay no more for the existing property than the amount it would cost to buy an equivalent site, plus the cost of constructing an equivalent building.
The basic steps involved include assessing the cost to replace the land and the building – with a modern equivalent, including all associated costs – before making appropriate deductions for depreciation and obsolescence.
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When is the Profits method used?
The property derives it’s value from it’s use, for example a petrol station on a motorway is valuable because of it’s use, no other type of property would have the same value.
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2. What are contemporary valuation techniques?
Valuations where discounted cash flow methods are used
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How does a Discounted cash flow valuation method work in practice?
This is a growth explicit valuation method. This makes the assumption that the property will be let for a certain amount of time and grow at a predetermined rate for the entire period.
First you would find the net present value. This is the cash flow of the investment for each period eg until each lease event, discounted to present value of £1. You then subtract the sum of the initial investment from the sum of the property's discounted cash flow.
If the NPV is positive, the investment is likely worthwhile.
The Internal Rate of Return method is then used to calculate at a given discount rate what the minimum of investment the investor requires to break even. The investor can then compare this to the return rate of a another investment to determine which is better.
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3. What makes a property transaction comparable to the property being valued?
You are looking for similarities with the subject property!
* Similar size/physical characteristics
* Similar use class
* Location
* Tenure should be similar eg freehold with freehold, long leasehold with long leasehold
* Time scale (eg transactions that took place more recently are better comparables)
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4. How many comparables are needed to produce a valuation?
As many as possible but certainly enough to establish a trend
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5. What is the longest time period before a valuation date that a transaction could be accepted as being comparable?
The more recent transaction the better. You certainly would try and avoid using comparables from before the pandemic as the shifts in the market have been significant – call this a watershed moment
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6. What do you understand by the expression weighting of comparable evidence?
Ranking the comparable evidence with the greatest similarities having the most weight. This is subjective to the valuer as long as they can explain their reasoning and comply with the Red Book.
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7. What do you understand by the expression hierarchy of evidence?
This is ranking the evidence available by transaction type. The best evidence would be ranked in the following order:
* New letting
* Lease renewal
* Rent review
* Independent expert determination
* Arbiters award
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Why is a lease renewal better evidence than a rent review?
In a lease renewal the tenant has the ability to walk away from the lease and rent somewhere else. In a rent review, the tenant is still tied into the terms of the lease which is dictated by the lease terms
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8. What is interpolation of comparable evidence?
Calculating a value between two extreme data points. For example, if one unit was let at a £20 psf basis and the other on a £30 psf basis you could interpolate the rent psf could be £25 psf.
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9. What is extrapolation of comparable evidence?
Calculating a comparable value outside of the known data – this is statistically uncertain and must only be used if there is evidence the market is rising or falling – using market trends
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10. What is the purpose of Zoning?
Zoning is used to compare retail units with different sized frontages or different frontages to depth ratios. The value for retail units lies in their frontage. A unit with a
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What is the standard Zone depth?
6.1 metres or 20 sq ft. 9.1 metres (30 sq ft) is used on Oxford Street as the units are much bigger
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12. How would you assess the Market Rent of the first floor of a retail unit?
Zone X/10 when the first floor is in use for retail, if it’s used for storage then you could use an independent rate which is subjective to the valuer -
2nd floor X/20 and basement X/20
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How does zoning a unit work in principal?
1. Measure the unit to determine it's square footage.
2. Using comparable data, determine the market rent on a psf basis. Eg 1800 sq ft unit at £10 psf is a rent of £18,000 PA.
3. Divide the unit into zones at a depth of 20sq ft each.
4. Zone A will remain at £10 psf, Zone B will be £5 psf, Zone C £2.50 psf and so on
5. If there was first floor retail space this would be valuated at £1 psf. 2nd floor X/20 and basement X/20
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13. How would you assess the Market Rent of a ground floor unit with a return frontage?
This is quite dependent on the nature of the unit and the opinion of the valuer.
If this is a corner unit with good footfall, you could value this in terms of zone A by adding a 5% uplift to the Zone A rate and a 2.5% uplift to any of the return frontage within Zone B. For example, if zone A is £100 psf, you could add a 5% uplift.
In my case study the retail unit is valued on an NIA basis rather than zoned as the lettings agents have always done it this way and the client requested this.
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14. How would you assess the Market Rent of a ground floor with frontages on two roads i.e. it is a through unit?
You would Zone back from each frontage. However, one side might use a higher zone A psf rate than the other depending upon footfall.
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15. How would you determine the Market Value of an investment property let on internal repairing terms?
Read the lease to determine the rent, deduct the outgoings to get the net rent and then capitalise the net rent to get the market value. For an IRI lease, the landlord has to pay for all external repairs, extra management, etc which would be deducted.
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16. What factors make up the all risks yield?
* Buildings physical characteristics
* Tenants covenant strength
* Market rent to see if property is under or over rented (EG 7% market yield, would increase if over rented or decrease if under rented)
* Other lease terms - likely to be some uncertainty in net rent (EG unexpired lease term)
* Anticipated rental growth (links to location)
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What is the market capitalisation rate?
This is another name for the All Risks Yield, the rate at which the market capitalises the income
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18. How would you value a green-field site with planning permission for residential development?
Assuming there are no appropriate comparables eg planning permission was different, should use the residual method
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Describe how you have carried out (or would carry out) a Residual Valuation.
Take the estimated market value of a completed development, and deduct development cost and developers profit, to get the land value
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20. What costs did you deduct (are deducted) in your / a Residual Valuation?
* Demolition / site clean up fees
* Cost of construction (the building cost) -
* Fees for construction (architects, engineers, surveyors, environmental survey etc)
* Costs of finance
* Contingency to allow for fluctuations in these costs
* Agent and Legal fees on acquisition
* Fees and stamp duty land tax on aquisition when you buy the site
* Agent and Legal fees on disposal
Also need to know the:
Need to know the site area, the yield used, what type of building is being built, the percentages applied to the above
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Where did you get the build costs from for your residual valuation?
BCIS - Building cost information service
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21. How did you calculate (would you calculate) developer’s profit in your / a Residual Valuation?
Either 25% of the total development costs or 15% of the gross development value.
The profit percentages used would be based on risk, for example in my summaries of experience the I applied a 15% valuer of gross development value as The Range and several other retailers were interested in letting the unit once works were completed.
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22. What are the usual acquisition costs of a development site?
* (Purchase price of the site)
* Stamp duty land tax
* Acquisition agents fees
* Legal fees
* VAT on the agent and legal fees (If VAT registered)
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23. What is a ransom strip?
A small piece of land that for example would be required by the developer to access the road. As the developer cannot build an access road through this land, they would need to purchase it.
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26. What does the case of Stokes v Cambridge mean to you?
This was a compulsory purchase case that took place in 1961. It was determined that the value of the ranson strip is 1/3 of the uplift in the value of the development land
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25. How did you (would you) value a ransom strip?
The value attributable to a ransom strip
The industry standard ransom value is 1/3 (but can also be a percentage) of the of the uplift in the value of the development land -
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24. What is ransom value?
This could be valued as a percentage uplift of the value of the land purchased against the estimated market value of the developed site.
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27. What is the Profits Method also known as?
The accounts method because you’re looking at the property user accounts
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28. Name three property types that would be valued by the Profits Method.
Pubs, golf courses, hotel rooms
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29. Why are certain properties valued by the Profits Method?
The property derives it’s value from it’s use, for example a petrol station on a motorway is valuable because of it’s use, no other type of property would have the same value.
Specifically adapted to it’s use
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30. Explain and basic approach to the Profits Method.
The projected annual turnover (net of vat) minus the operating costs leaves the net operating profit which is then capitalised to get the market value.
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31. What valuation checks can be carried out on a valuation produced by the Profits Method?
You can look at the value per seat say in a cinema or per room in a hotel. If you know what each room/seat generates in income over a year then you can use this to estimate the remainder of the seats/rooms that are similar.
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32. When is the Contractor’s Method used in practice?
This is the method of last resort when no other valuation methods can be used.
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33. What is another name for the Contractor’s Method?
Depreciated Replacement Costs
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34. Explain the basic approach to the Depreciated Replacement Cost Method.
Gross replacement cost (cost of modern substitute building) minus depreciation, to get net replacement cost, then add site value to get DRC
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35. Explain what is included in a Reinstatement / Replacement Cost for Insurance Purposes
This is the costs to reinstate the building if it is damaged or replace it if it is destroyed. If it’s been destroyed, you would include the:
* demolition costs
* How much to shore up and repair surrounding buildings
* building costs (must be rebuilt to current building standards)
* professional fees.
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36. How would you value a property for which there are no comparables?
This is unlikely to ever be the case but if you had to you would use the contractor’s method
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1. Why is the YP single rate table also known as the Present Value of £1 per annum?
It tells us the PV of £1 to be recieved each year, for a given number of years
YP tells us present value of annual series of incomes - the further we go into the future, the lower the sum becomes in today's terms
£1 in the future is not worth £1 today - PV of £1 p.a. - discounting each year when it is per annum
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2. What are the three principal sources of investment?
Gilts, equities and properties
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3. What is a bond investment?
Fixed capital, fixed return for a fixed number of years
Can have Government bonds or Corporate bonds
EG put £1k into bond, it has 5 year lifespan, and get a return off the investment
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4. What is the major attraction of property over the other two major investment opportunities?
* With proactive positive management, you can improve performance. With a guilt or a company you have shares in - you can't improve it's performance easily
* EG refurbish units, regear leases etc.
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5. What are the major disadvantages of property over the other two major investment opportunities?
* Low liquidity - You can buy/share equities and guilts almost instantly, but with property it takes a long time to get into it
* Requires active management (easiest to let FRI)
* High transfer costs (agent fees)
* Not divisible - you can sell a certain amount of shares, you generally can't a portion of a shopping centre generally
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6. How did the all risks yield get its name?
Takes into account all the risks of the investment
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7. What is another name for the all risks yield?
Market capitalisation rate
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8. What is a gross yield?
The rent expressed as a percentage of the purchase price/ market value say rent was £10,000 PA and the property is worth £100,000, Gross yield would be 10%
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9. What is a net yield?
The rent expressed as a percentage of the gross acquisition cost (IE purchase price plus purchaser's costs which include agents fees, legal fees, VAT on fees, and stamp duty)
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10. Name the costs that a purchaser must incur when acquiring a property investment.
* Initial purchase price
* Stamp Duty Land Tax
* Agents Fees
* Legal Fees
* Non-recoverable VAT on Fees
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11. Quantify purchaser’s costs in percentage terms.
Stamp Duty Land Tax – You pay 0% tax for purchases under £150,000, 2% on the difference in value between £150,000 and £250,000 (eg £100,000), 5% on the cost above £250,000
Agents Fee’s – typically 1%
Legal Fees – Typically 0.5%
No recoverable VAT on agents and legal fees – 20% of 1.5% which is an extra 0.3% -
Total agents & legal fees plus VAT is 1.8%
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12. What would you do if you had to value an investment property but could not find any evidence of yields?
* You would construct a yield
* Look at gilts, as they are a risk-free investment, and then add a risk premium
* The risk premium takes into account the market risks and property risks
* Deduct growth (note: no growth if in recession)
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13. How is rental and capital growth accounted for in a conventional investment valuation?
* It's included in the all risks yield
* The greater the growth opportunity, the lower the yield
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14. What is a reversionary investment?
An investment that is let at a rent other than the market rent (EG overrented or underrented)
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15. What techniques can be used to value an under-rented reversionary investment?
Under rented – Term and Reversion
Over-rented – layer and hardcore
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16. Explain the process of the term and reversion technique?
First undertake a valuation to determine the property in question is under rented.
We capitalise the passing rent until review or reversion (at which point you would assume the rent rises to market rent)
Multiply the passing rent by the YP (need to know the ARY) for the number of years until the review/reversion
At the reversion point we capitalise the market rent into perpetuity by multiplying the market rent by the YP. For the reversion we would increase the ARY used by 1% to show the increased risk of the reversion as there is increased uncertainty of achieving market rent
After this you would multiply this by the present value of £1, as this letting is taking place in the future at a certain point in the future eg 3 years so we need to discount to the present day
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17. Explain the process of the hardcore / layer technique?
Capitalise the passing rent into perpetuity
Take the additional rent that we would expect to achieve at review/reversion and capitalise this into perpetuity
This would use a higher ARY due to the increased risk of achieving the market rent at reversion. If the property was over rented you would lose a decreased yield
Defer the income for the period of time until the reversion
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18. How did you / would you value an over-rented investment?
Using the hardcore/layer method.
Firstly, I capitalised the forth/top slice income/overage (current passing rent) until the lease event/reversionary point. I also ensured I deferred the income by using the PV of £1
Following the lease event, I reduced the yield and capitalised the lower market rent into perpetuity
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19. What is an initial yield?
The net income (or passing rent) at the date of purchase expressed as a percentage of the Purchase Price
Eg The passing rent is £40,000, the purchase price is £400,000 so the initial yield is 10%
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20. What is a reversionary yield?
The Market Rent expressed as a percentage of the Market Value (or Purchase Price)
Eg if the market rent was £60,000 but the passing rent was £40,000 (purchase price £400,000) the reversionary yield would be 15%
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21. What is an equivalent yield?
* the weighted average of the Initial Yield / Running Yield and the Reversionary Yield
* Weighted average = takes into account the importance, rather than treating each item equally
* The weighted average is always closer to the reversionary yield than to the initial yield
* It can also be described as the internal rate of return from an investment disregarding any rental or capital growth
EG the passing rent is £40,000 and the market rent is £60,000 and the purchase price is £400,000. The equivalent yield won't be 12.5% but closer to the reversionary yield of 15% because you will have collected more income at the passing rent until the reversion occurs (depending on when the lease event occurs to reversion)
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22. What is an equated yield?
* It is the overall rate of return, taking into account the growth
* It is the true investment yield
* It is the discount rate at which the DCF equals the purchase price of the investment
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23. What is a true equivalent yield?
* It is the yield, when taking into account that rent is receieved quarterly in advance (rather than the nominal yield which is generated when rent is received annually in arrears)
* (does not affect valuation)
EG Say you buy a property for £100,000 and the rent is £10,000, the yield is 10%. Upon purchase, you will have already collected one quarter of the rent, so in reality the market value will take less time to pay back eg 10.6%
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24. What do you understand top slice income to be?
* Additional rent expected at review/reversion when underrented
* Overage/froth
* Leasehold profit rent
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25. How is top slice income valued?
* Capitalised above the market rented rates to reflect the increased risk
* (ie at a higher rate than bottom slice income)
* The risk is on receiving the extra proportion of rent (not the rent that we are already receiving)
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26. How would you value a leasehold interest / ascertain if a premium can be charged for the assignment of a lease?
I would capitalise the profit rent ie the market rent minus rent paid
So if the tenant was paying £20,000 pa and the market rent is £30,000 PA and the lease event is in 2 years, the assignee will be benefitting from a saving of £10,000 PA for the next 2 years. Therefore, there is an argument to be made that the tenant could charge a premium based on a percentage of the profit rent saved by the tenant.
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27. What are the names of the two yields in the YP Dual Rate?
* Accumulative rate
* Remunerative rate
* Which is the sinking fund rate?
o Accumulative rate
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28. What effect does rent received quarterly in advance have on the yield and why?
It will increase the yield.
Instead of the income being paid annually in arrears, it is paid quarterly in advance which is more common. This means that the landlord will have been paid the funds further in advance which can be used for other investments/ will be gaining interest for them
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29. What is the fundamental difference between conventional investment valuation techniques and discounted cash flow techniques?
In conventional investment valuations, growth is implicit in the capitalisation rate (IE this is implicit within the All Risks Yield)
In a DCF, we make the growth explicit - we calculate what future values are going to be (IE we build in the growth and calculate what the future rent/future market value would be)
Note: RICS report on investment valuation report found that we should move towards using DCF techniques when valuing property investments
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How is growth calculated in a discounted cash flow?
We compound it using (1+i)^n or Parrys Amount of £1 Table
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How would you arrive at a discount rate when carrying out a discounted cash flow?
UK Government Stock (Gilts) form the basis of yields
Start with risk free rate and add on market risks and property risks
Take risk free rate and add the risk premium
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What is a risk-free rate?
the yield from UK gilts
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What do you understand by the expression risk premium?
The return over and above Government Stock, that the investor will require
The yield an investor would require that is over the yield from gilts
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Why do property investors require a risk premium?
Because there is more risk and more difficulty investing in property than there is investing in gilts (Government Stock/Government Bonds)
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Purposes of valuation?
Loan security
Investment
Taxation
Internal purposes
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Valuation exceptions to the Red Book?
Statutory purposes
internal
Agency work in anticipation of acquisition/disposal
Indepdent expert determination
Expert witness
Negotiation/Litigation
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Where does it tell us the definition of competence?
VPS 1 - the valuer must have the appropriate knowledge and experience of dealing with certain properties
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How do you check to ensure there is no conflict of interest?
Check work files to see if you have worked for the other party in the past
Send email around office or speak to line manager/partner in charge
Ensure you have all of the correct information from the client
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Where would you put contingency for a residual valuation?
2-5% of costs and professional fees
Could go up to 10% - it is risk dependent
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How do you present scenarios to your client after a residual valuation?
Sensitivity analysis
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What is a sensitivity analysis?
Shows how different values of an independent variable may affect a dependent variable.
For example, changing the percentage for contingency based on the risk will decrease the Gross Development Value
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What are the different types of funding available to a developer?
Senior debt
Mezzanine / bridging debt
If senior debt is 6-7%, the mezzanine debt would be more EG 8-10%
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Where does mezzanine debt sit in terms of charge?
Second charge, behind senior lender
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What accounts would you review for profits valuation?
Profit / Loss account - Audited accounts
- Need to see turnover and net operating profit (turnover LESS expenses)
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What could statutory due diligence include for a valuation?
Asbestos register
Business rates / council tax
Contamination
EPC rating
Flooding
Planning history and compliance
Environmental matters
Equality act compliance
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How is Net Development Value Calculated?
Deduct disposal costs from Gross Development Value
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How did you gather your comparable evidence?
Internal database, confirmed with local agent and external database (EGI, Costar)
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You are asked to value a hotel, what do you say?
I am not competent to value a hotel
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Is DRC suitable for Red Book compliance?
Not suitable for Red Book Compliant valuation for secured lending
Can be used to Calculate Market Rent for specialised properties in valuations for financial statements
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What is CIL?
Community Infrastructure Levy
- Charge that can be set by local authorities on new developments to raise funds for infrastructure and services in the community
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What is the conventional method of valuation?
Rent received OR market rent x YP @ chosen yield = Market value
Get rent and yield from comparables
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How is the dual rate method used say for a property generating income and appreciating in value?
Remunerative rate = income producing capability of prop (rental income)
Accumulative rate = applies to future capital appreciation (increase in prop value over time)
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Name the two professional valuations standards (PS)
PS 1 Compliance with standards where a written valuation is provided
PS 2 Ethics, competency, objectivity and disclosures
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What do planning costs include?
Costs of planning consultant/surveyor
Cost of planning application and building reg fees
Community infrastructure levy
Environmental Consultants
Section 106 of town and country planning act 1990 payment
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What is a Regulated Purpose Valuation?
A valuation relied on by third parties who have not commissioned a valuation – e.g. financial reporting, takeovers and mergers or unregulated property unit trusts.
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What is a nominal yield?
Initial yield assuming rent is paid in arrears
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What is an Asset Valuation?
Valuation for financial reporting. IFRS and UK GAAP (Generally Accepted Accounting Practice)
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What are the associated valuation approaches?
1) Income approach - converting current and future cash flows into capital value (investment, residual and profits method)
2) Cost approach - Reference to the cost of the asset whether by purchase or construction (DRC)
3) Market approach - Using comparable evidence
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In your comparables, did you give a headline or net effective rent?
These were headline rents
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How do you calculate gross acquisition price?
PV of £1 in 12 months @ interest rate X GRV
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What would you include in a valuation report?
Client name
Date of valuation
Valuation purpose
Property details
Basis of value
Methods of Valuation
Status of valuer & competency
Currency
Investigations Undertaken
Assumptions / special assumptions
Departures
Valuation Calculations & Comparables
Valuers Conclusion
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What are the VPGAs?
VPGA 1 - Valuation for inclusion in financial statements
VPGA 2 - Valuation of interests for secured lending
VPGA 3 - Valuation of businesses and business interests
VPGA 4 - Valuation of individual trade related properties
VPGA 5 - Valuation of plant and equipment
VPGA 6 - Valuation of intangible assets
VPGA 7 - Valuation of personal property including arts and antiques
VPGA 8 - Valuation of real property interest
VPGA 9 - Identification of portfolios, collections and groups of properties
VPGA 10 - Matters that may give rise to material valuation uncertainty
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What other refinements were made to the Red Book update in 2022?
More details on TOE when applying to exceptions from VPS
Definitions/commentary on sustainability/ESG
Clarifying/improving existing text
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What are the professional fees in a residual land valuation?
10/15% of total construction costs for architect, M&E consultants, project managers
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What is WAULT?
Weighted average unexpired lease term
- This is remaining to first break/expiry
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What is a s.106?
Agreement between developer and local planning authority about the measures the developer must take to reduce impact on community
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What investigations could you make when valuing a property?
1. Asbestos register
2. Business Rates
3. Contamination
4. Equality Act 2010 compliance
5. Environmental matters eg surrounding area
6. EPC rating
7. Flood risk
8. Fire safety compliance
9. H & S compliance
10. Highways - are they adopted?
11. Legal title and tenure - check boundaries, ownership, deeds of covenant, easements, restrictive covenants etc
12. Public rights of way through the land
13. Planning history & compliance - Is the property in a conservation area, any onerous planning conditions
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Can you name VPS 1-5?
VPS 1 - Terms of Engagement
VPS 2- Inspections & investigation records
VPS 3 - Valuation Reports
VPS 4 - Basis of Value, assumptions and special assumptions
VPS 5 - Methods of value
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How do you know if you are competent to undertake a valuation (or any work)?
SUKE
Skills - Do I have the right skills/qualifications
Understanding - Do I understand what is required
Knowledge - Do I have the required knowledge
Experience - Have I got the right level of experience
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What happened in the Martin Retail
Group v. Crawley Borough Council case?
At lease renewal, Crawley Borough Council tried to limit the user clause so the tenant couldn't sell alcohol to limit the competition with other retailers in the parade of shops. The judge ruled that this broke anti competition law and the LL couldn't do this.
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Can you always depart from the red book?
Need to look this up
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What is the net development value?
Gross Development Value minus the disposal costs
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What are the disposal costs when selling the completed development?
Agents fees
Legal fees
VAT
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How was the redevelopment in your summaries of experience financed?
Mezzanine debt - This is a combination of owner equity financing and borrowed debt - more risk but higher rewards
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