Valuation Flashcards
(149 cards)
1
Q
What is stamp duty?
A
Stamp Duty is a tax you might have to pay when buying a property or a piece of land
2
Q
When does the new Red Book 2025 apply from?
A
31 January 2025.
3
Q
Why has the red book been updated (2025)?
A
Reflect the changes to the latest version of IVS
Incorporate changes from the RICS Valuation Review
Future proof valuation practice, e.g., updates relating to technology and ESG
Help valuers to provide the highest standard of service
Simply and clarify guidance for valuers
Build public trust in valuations provided by RICS Registered Valuers
4
Q
Did you value in accordance with the new red book?
A
No - it was in accordance with previous
5
Q
What are the 2 types of valuer?
A
An internal valuer is employed by the company to value the assets for internal purposes only, there is no third-party reliance.
An external valuer has no material link with the company or assets.
6
Q
What three things should you consider as first steps before undertaking a valuation?
A
- Competence – do you have correct knowledge/skills
- Independence – no conflicts of interest
- Terms of Engagement – full confirmation of instruction, confirm competence of valuer.
7
Q
Why should you undertake Statutory Due Diligence
A
to check there are no material matters which could impact upon the valuation.
8
Q
What are some examples of statutory DD?
A
- EPC rating
- Flooding (EA website)
- Fire Safety Compliance
- Health and Safety Compliance
- Legal Title and Tenure
- Planning history (any onerous conditions such as listed/conservation area)
- Asbestos register
- Contamination
9
Q
Describe the timeline of a valuation
A
Preamble:
- Receive instruction from the client
- Check competence
- Check independence (no Conflicts of interest)
- Issue terms of engagement (inc. Scope of works, fee, PII, CHP)
- Receive Countersigned terms
Due Diligence
- Gather information – leases, title, planning doc, OS plans etc.
- Undertake statutory due diligence (listed previously)
- Inspect and measure
- Research market / analyse comps
Valuation & Reporting
- Undertake the Valuation
- Draft Report
- Have another Surveyor review your work
- Finalise and sign report
- Report your valuation to the client
Completion
- Issue invoice
- Ensure filing in good order for audit/archiving
10
Q
what are the 5 methods of valuation?
A
- Comparative Method
- Investment Method
- Profits Method
- Residual Method
- Contractors Method (Depreciated Replacement Cost - DRC)
11
Q
What are the Three Valuation Approaches and Methods According to International Valuation Standards (IVS) 105
A
- The Income Approach (Converting Current and Future Cash flows into Capital Value) – i.e. investment, residual, profit.
- The Market Approach (Using Comparable Evidence in the Market) – i.e. comparable
- The Cost Approach (Considering value with reference to the Cost of Replacement or Purchase) – i.e. DRC method
12
Q
Describe the Methodology of the Comparable Method of Valuation?
A
- Search and select comps
- Verify information (triangulated approach, analyse headline rent)
- Assemble comps into Schedule
- Adjust comparables according to a hierarchy of evidence
- Analyse comparable evidence to form opinion of value
- Report value and prepare file note
13
Q
What RICS document concerns the comparable method?
A
RICS Professional Standard ‘Comparable Evidence in Real Estate Valuation’ – 1st edn, 2019.
14
Q
What does RICS PS ‘Comparable Evidence in RE Valuation’ state?
A
- Outlines principles of use comparable evidence.
- Provides advice in dealing with situations where limited availability of evidence.
- Sets out non-prescriptive hierarchy of evidence
- Notes valuer should use professional judgement to assess evidence
15
Q
What is category A of the hierarchy of evidence?
A
Direct comparables
o Completed transaction of nearly identical property where full information is available, or may not be full information but it is reliable information available.
o Similar asset but offers made, and no binding contract.
o Asking prices (treat with caution)
16
Q
What is category B of the hierarchy of evidence?
A
general market data
o Information from published sources/commercial databases
o Indirect evidence (i.e. indices)
o Historic evidence
o Demand/supply data for rent, investment
17
Q
What is Category C of hierarchy of evidence?
A
other sources
o Transactional evidence from other real estate types/locations
o Other background data (interest rates, stock market movement)
18
Q
How would you find relevant comparables?
A
Inspect local area to find recent market activity by seeking agent’s boards,
speak to local agents,
third party databases, auction sites,
inhouse records (Egi).
Evidence must be ‘contemporary’ – i.e. recent! The date is important
19
Q
When is the investment method of valuation used?
A
Used when there is an income stream to value.
Income is capitalised at a yield to provide a capital value.
Conventional approach assumes growth is implicit.
An implied growth rate is derived from the market capitalisation rate (yield).
20
Q
What is an implied growth rate?
A
An implied growth rate is the rate at which an asset’s value is expected to grow, based on the market’s expectations.
21
Q
What is a term and reversion valuation, when is it used?
A
- Used for reversionary investments (i.e. Market Rent more than passing rent). i.e. when the property is under-rented.
- Term is capitalised until next review/break/lease expiry at an initial yield.
- Reversion to Market Rent is capitalised into perpetuity at a reversionary yield.
22
Q
What is a layer and hardcore method, when is it used?
A
- Used for over rented investments (passing rent more than market rent)
- Income flow divided horizontally.
- Bottom slice – market rent
- Top slice – rent passing minus market rent until next lease event
- Higher yield applied to top slice to reflect additional risk in achieving market rent.
- Different yields used depending on comparable investment evidence and risk .
23
Q
What is Years Purchase? How do you calculate Years Purchase in perpetuity?
A
A Years purchase shows us how many years would be required for the income to repay the purchase price. It is calculated by dividing 100 by the yield.
100/i where ‘i’ is the yield
24
Q
What is key concept to consider when discussing yields?
A
RISK
25
What is a Yield?
A yield is a measure of investment return, expressed as a percentage of capital invested.
Formula is Income / (Price x 100).
26
What is an All Risks Yield?
The remunerative rate of interest used in the valuation of fully-let property, let at market rent, reflecting all the prospects and risks attached to the particular investment.
27
What is True Yield?
Assumes rent is paid in advance, most traditional valuation assumes that rent is paid in arrears.
28
What is Nominal Yield?
Initial yield assuming rent is paid in arrears
29
What is Gross Yield?
Yield is not adjusted for purchaser’s costs (such as an auction result)
30
What is Net Yield?
The resulting yield adjusted for purchaser’s costs
31
What is Equivalent Yield?
Average weighted yield when a reversionary property is valued using an initial and reversionary yield.
32
What is Initial Yield?
Simple income yield for current income and current price.
33
What is Reversionary Yield?
Market Rent (MR) divided by current price on an investment let at a rent below the MR.
34
What is Running Yield?
The yield at one moment in time.
35
what is a NIY
the current annualised rent, net of costs, expressed as a percentage of capital value, after adding notional purchaser's cost
36
How does a discounted cash flow work?
- Growth explicit investment method of valuation
- Projects estimated cash flows over an assumed investment holding period
- with an exit value at the end of this period
- The cash flow is then discounted back to the present day at a discount rate (known as desired rate of return) to reflect the perceived level of risk.
- Approach separates out and explicitly identifies growth assumptions rather than incorporating them within an ARY.
- A method that sets out inflows and outflows
37
What is a growth explicit method of valuation?
An explicit discounted cash flow model uses predicted input changes, such as growth, rather than existing values.
38
what is the concept behind a DCF?
A method for estimating the value of an asset by discounting its future cash flows.
It's based on the idea that money is worth more today than it will be in the future.
39
Why is a DCF important?
DCF considers the time value of money, which is the idea that money is worth more today than it will be in the future
DCF can help identify the most important factors that drive an investment's valuation
40
What RICS document concerns DCFs?
RICS Guidance Note on ‘Discounted Cash Flows for Commercial Property Investments’ (2010)
41
What is the methodology to find MV via DCF?
1. Estimate the cash flow
2. Estimate the exit value at the end of the holding period
3. Select a discount rate
4. Discount cash flow at discount rate
5. Value is the sum of the completed discounted cash flow to provide the NPV
42
Define NPV
* Net Present Value is the sum of all the discounted cash flows of the project.
* Can be used to determine if an investment gives a positive return against a target rate of return.
o NPV positive = investment has exceeded investor’s target rate of return
o NPV negative = it has not achieved the investor’s target rate of return
43
Define IRR
“The rate at which all future cash flows must be discounted to produce an NPV of 0”.
IRR used to assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions.
44
How is IRR calculated?
1. Input current MV as a negative cash flow
2. Input projected rents over holding period as a positive value
3. Input projected exit value at end of term assumed as positive value
4. Discount Rate (IRR) is the rate chose which provides a NPV of 0
5. If NPV is more than zero, then target rate of return is met.
45
When is the Profits Method used?
* valuations of trade related property
* Used where the value of the property depends upon profitability of its business and its trading potential.
46
What is the basic principle of the profits method?
value of the property depends on the profit generated from the business, not the physical building or location.
47
What are examples of when you'd use the profits method?
pubs,
petrol stations,
hotels
leisure,
healthcare properties
48
How Many Years of Audited Accounts would you ideally like to see for a Profits Method Valuation?
3 years
(Audited accounts are superior to management accounts)
49
If it is a new business (profits method), how would you value it?
Use estimates/business plan for new business
50
What is the method of the profits method?
Annual turnover (income received)
LESS costs/purchases
= Gross Profit
LESS reasonable working expenses
= Unadjusted Net Profit
LESS operator’s remuneration
= Adjusted net profit known as the Fair Maintainable Operating Profit (FMOP)
Capitalised at appropriate yield (datamultiplier) to achieve Market Value
Cross Check with comparable sales evidence
51
What is EBITDA?
Earnings before interest, taxation, depreciation and amortisation.
52
Simple profits method?
To simplify:
1. Annual Turnover
2. Capitalised
3. Cross check
53
Hotel profits method
Revenues - expenses = Operating profits
Operating profit - undistributed operating expenses = GOP
GOP - other expenses (mgt, insurance, tax etc)
= EDITDA / NOI
54
What is a Development Appraisal?
- Tool to financially assess viability of development scheme.
- Used to assess viability/suitability/profitability of proposed scheme and its sensitivity to changing inputs or assessing viability of different uses, rents, yields, S106, CIL etc.
- Can be used to establish residual site value or can assume site value.
- Can be based on client inputs.
55
Examples of when to use a Dev Appraisal
- Analysis to consider whether the level of required planning obligations is viable.
- Assessing whether a development is viable based on the level of profit achieved
- Assessing the best and highest use for a property
56
What is a Residual Valuation?
- Valuation to appraise the value of development site/land to find market value.
- It is based on market inputs.
- It is ONE moment in time, at the valuation date, for a particular purpose.
- Inputs are taken at valuation date.
- Can be simple residual valuation or DCF method.
57
What are the main groupings of development costs?
Site preparation
planning costs
Building costs
Professional fees
Contingency
Marketing fees
Finance
58
What are some examples of site prepartion?
Demolition,
remediation works,
site clearance
59
what are some examples of planning costs
o Town and Country Planning Act 1990 – S106 payments
o CIL
o Affordable Housing – local planning policy will set out affordable requirements via social, intermediate and key worker housing.
o S278 – highways
o Planning application fees
o Cost of specialist reports (e.g. Environmental Assessment)
60
what are some examples of build costs
Sources of build costs:
Client information
In house cost consultancy team estimates
RICS Building Cost Information Service (BCIS) usually based on GIA,
Spons Architects’ and Builders’ Price Book.
61
what are some examples of professional fees?
o 10-15% + VAT of construction cost
o This includes architects, M&E, Project managers, structural engineers.
o CDM (Construction: Design and Management) Principal Designer
62
What is the finance rate?
blended rate (cost of debt + risk)
(5%-7%)
63
what is s106?
Legal agreement between local authority and developer for planning obligations (e.g. affordable housing, local training) to gain planning consent.
It is site-specific, and is a figure that can be negotiated.
64
How would you estimate S106 in your appraisal?
Look at past schemes that have been developed, and look on planning website to see the S106 figure agreed as a benchmark/comparable analysis.
65
What is CIL
Community Infrastructure Levy charged by Local Planning Authorities for new development area (on the uplift on GIA). It is not necessarily site specific, and can be used on local infrastructure such as schools and healthcare.
Generally, paid 60 days after commencement of development. (for 1st installment).
CIL is excluded for existing floorspace, charities, social housing.
66
How is CIL calculated?
Multiplying the NEW floorspace that a development will be creating by the relevant CIL rate set out in the Local Authority CIL Charging Schedule.
67
What is contingency?
Allowance for risks of unforeseen costs. It is for additional costs/future needs that may arise.
68
Roughly what are build costs for PBSA?
£80,000 - £200,000 per bed
69
What are some limitations of residual valuations?
1. Relies on accurate inputs
2. It does not consider timing of cash flows
3. Sensitive to minor changes
4. Implicit assumptions hidden and not explicit (unlike DCF).
70
When you accept Dev Appraisal instruction, what will you firstly do?
- Conflict of interest check
- Terms of Engagement
- Investigation – site inspection, market research, public data
- Understand client requirements (profit they want to achieve, cost of finance, timings)
- If you are developer, what are you targeting? How much do you want to make?
71
For high-rise building near an airport, how should you consult?
- CAA – civil aviation authority.
72
What choice of interest rates are there?
* SONIA rate (Sterling Overnight Index Average)
* Bank of England base rate plus premium
* Rate at which developer can borrow the money.
73
Define Development Profit
The amount by which, on completion or partial completion of a development, the estimated income of a development exceeds the total outlay.
74
What is a common basis of value for Development sites.
- Market Value
- Sometimes Marriage/Hope Value for special assumption/assumption
- Any assumptions/special assumptions must be clearly stated.
75
What RICS document concerns Development Land?
RICS Professional Statement on ‘Valuation of Development Property’ – 1st ed (2019)
It supplements the International Valuation Standards (IVS) 410 on ‘Development Property’
76
How does the document define Development Land?
Interests where redevelopment is required to achieve the highest and best use, or where improvements are either being contemplated or are in progress at the valuation date.
77
If a Development is complex, what is the best method.
DCF over basic residual model.
78
What other recent documentation was released regarding development appraisals?
RICS Professional Standard ‘Financial viability in planning: conduct and reporting’ (1st edn, 2019).
79
RICS Professional Standard ‘Financial viability in planning: conduct and reporting’ (1st edn, 2019).
This is a revision of the RICS Professional Guidance, Financial Viability in Planning 2012.
Accounts for the updated NPPF and PPG in 2018.
The Professional Statement is informed by NPPF and PPG (Planning Practice Guidance).
It concerns Financial Viability Assessments and what must be included to support the statutory planning process.
80
When should you use the depreciated replacement cost method of valuation?
- When there is limited or unavailable direct market evidence for specialist properties.
- Examples include lighthouses, oil refineries, submarine base and docks.
81
what is the purpose of the DRC?
- Used for owner occupied property
- For accounts purposes for specialised properties.
- Also used for rating valuations of specialist properties
82
How is DRC Calculated?
Two steps:
1. Value of the land in its existing use (assume planning permission exists)
2. Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence/deterioration. (Use BCIS then judge level of obsolescence).
83
What does the Red Book say about DRC Method of Valuation?
- This method of valuation is NOT suitable to be Red Book compliant valuations for secured lending.
- It can be used for calculation of Market Value for specialised properties only for valuations for financial statements.
84
What must a valuer include when reporting a DRC valuation?
- They must state the value for any readily identifiable alternative use if it is higher than the current use if appropriate, or if appropriate a statement that the market value would be lower on cessation of the business use.
85
What RICS guidance concerns DRC?
RICS Guidance note on Depreciated Replacement Cost Method of Valuation for Financial Reporting 2018
86
Key changes from previous red Book (2022)
* Terms of reference must be clear and unambiguous over whether a valuation is red book compliant or not (PS1 and VPS 1).
* Valuation for financial reporting (VPGA 1) – reference IFRS 13 or IFRS 16, to provide Fair Value.
* Profits method (VPGA 4) – reference to use of profits method for certain trade-related property valuations, with non-exhaustive list of properties including self-storage and flexi-workspace.
* Sustainability and ESG brought to the forefront:
87
What is PS in the Red Book?
Professional Standard.
These are MANDATORY.
88
What are the 2 Red Book ‘Professional Standards’
1. PS1 – Compliance with standards and practice statements where a written valuation is provided.
2. PS2 – Ethics, Competency, Objectivity, Disclosures.
89
What does PS1 apply?
It states when a valuation must be Red Book Compliant.
90
What are the FIVE situations in which a valuation does not have to be Red Book Compliant?
1. When providing an Agency or Brokerage Service in anticipation of receiving instruction to dispose of, or acquire
2. When valuation advice is provided in anticipation of giving evidence as an Expert Witness
3. Performing a Statutory Function
4. Providing Valuation to a Client for Internal Purposes - no liability
5. When expressly provided in preparation for or during the course of negotiations or litigation
91
Is a replacement cost figure, provide for insurance purposes a ‘written opinion of value’
no
92
What does the PS2 of the Red Book make Mandatory?
1. Compliance with RICS Global Rules of Conduct
2. Act objectively and independently – not influenced by situation that could threaten objectivity.
3. Must act with professional scepticism – review data before relying on it.
4. Reiterates rules surrounding conflicts of interest.
5. Comply with minimum Terms of Engagement (VPS 1) and understand client’s requirements. Must demonstrate professional competence.
93
What does the PS2 of the Red Book make Mandatory? (short remeber)
Rules
Objectively
Scepticism
Conflicts
Terms of engagement
94
What is the rotation policy in PS2?
It refers to a policy of rotating the valuing firm or valuing member, in order to maintain objectivity. The RICS recommends that this is done, as it is good business. The time period of rotation will depend on frequency of valuation, control/review procedure in place such as ‘valuation panels’, and good business practice. It is not mandatory, but considered good practice to rotate valuers at intervals not exceeding 7 years.
95
What does VPS stand for?
Sustainability
A holistic approach to long-term value creation that considers the environment, society, and economy. It aims to reduce negative environmental impacts and ensure that business practices don't harm future generations.
ESG
A framework that measures a company's performance in three areas: environmental, social, and governance. It's used by investors and other stakeholders to assess a company's impact and risk.
It is MANDATORY.
96
What are the 5 VPS standards?
1. VPS1 – Terms of Engagement
2. VPS2 – Inspections, Investigations and Records
3. VPS3 – Valuation Reports
4. VPS4 – Bases of Value, Assumptions and Special Assumptions
5. VPS5 – Valuation Approaches and Methods
97
What is VPS 1?
Terms of Engagement (IVS 101 Scope of Work)
98
When must VPS 1 standards be carried out?
These minimum matters must be confirmed in writing to the client PRIOR to commencing Red Book Valuation.
99
Name some requirements of Terms of Engagement (there are 18!)
a. Identification and status of the valuer
b. Identification of the client(s)
c. Identification of any other intended users
d. Identification of the asset(s) or liability(ies) being valued – if portfolio then lotting of assets should be considered.
e. Currency
f. Purpose of the valuation
g. Basis(es) of value adopted.
h. Valuation date
i. Extent of investigations
j. Nature and source(s) of information upon which the valuer will rely
k. All assumptions and special assumptions to be made
l. Format of the report
m. Restrictions on use, distribution and publication of the report
n. Confirmation that the valuation will be undertaken in accordance with the IVS/Red Book Compliance.
o. Fee Basis
p. Complaints Handling Procedure to be made available.
q. Statement that the valuation may be subject to compliance by RICS.
r. Limitation on liability agreed.
100
Define assumption
An assumption is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation. E.g. assumed condition of property.
101
Define special assumption
A special assumption is a supposition that is taken to be true and accepted as fact even though it is not true. E.g. planning consent/vacant possession.
Assumptions and special assumptions must be agreed in writing at commencement of the instruction.
102
What does VPS 2 state main purpose of inspection/investigation?
The valuer must take reasonable steps to verify the information relied on for a valuation to ensure the information is professionally adequate for its purpose.
103
Are Desk-top Valuations (i.e. without inspection) Red Book Compliant?
Yes, these can be considered a Red Book compliant valuation (unless for reasons set out in PS1).
However, when valuer is instructed to undertake valuation with restricted information or without physical inspection, valuer must consider these 4 factors:
1. Agree the nature of the restriction in writing in the Terms of Engagement.
2. Possible valuation implications of the restriction confirmed in writing before the value is reported.
3. Valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation.
4. Restriction must be referred to in the report.
104
Can you undertake a Re-Valuation of a property without Re-Inspection?
In accordance with VPS2 of the Red Book, it is not advised to revalue without re-inspection.
HOWEVER, you can re-value a property without re-inspection providing you as the valuer are satisfied there has been no material change to the property or nature of its location that will impact the property’s value. This should be stated in the Terms of Engagement.
105
What are minimum requirements to be included in Valuation Report (as stated in VPS 3)? There are 16!
1. Identification and Status of valuer
2. Client and any other intended users
3. Purpose of valuation
4. Identification of assets to be valued
5. Basis of value
6. Valuation Date
7. Extent of investigation
8. Nature and source of information relied upon
9. Assumptions and Special assumptions
10. Restrictions on use, distribution and publication
11. Instruction undertaken in accordance with IVS standards
12. Valuation approach and rationale
13. Valuation figure(s)
14. Date of valuation report
15. Comment on market uncertainty
16. Statement setting out limitations on liability that have been agreed.
106
Does a valuer have to sign a valuation report?
Yes
according to VPS3 of the Red Book, a valuer must sign a valuation report
and make clear that they are objectively able to value the property.
The RICS does not allow a firm to sign a valuation, it is signed off by an individual.
107
What must you do and Consider when Providing Preliminary (or Draft) Valuation Advice as outlined in VPS 3?
- Mark the report draft
- It is for internal purposes only – it cannot be relied upon, and it cannot be published/disclosed.
- Any changes to the preliminary valuation must be noted on file and reasons provided.
- Any additional information supplied by the client as a result of discussing the draft report must be stated in the report.
108
What is VPS 4?
Bases of Value, Assumptions and Special Assumptions
109
What are the 6 Bases of Value in VPS 4?
1. Market Value
2. Market Rent
3. Fair Value
4. Investment Value (or worth)
5. Equitable Value
6. Liquidation Value
110
What is VPS 5
Valuation Approaches and Methods (IVS 105).
111
What does VPS 5 state?
Valuers are responsible for choosing and justifying their valuation approach.
In some cases, more than one approach might be appropriate.
It outlines market, income and cost approach.
112
What does VPGA stand for?
Valuation Practice Guidance Applications – VPGAs
113
How many VPGAs are in the Red Book?
10 VPGAs
(18 VPGAs in National Supplement)
114
What are some VPGAs that you know?
VPGA 1 – Valuation for inclusion in financial accounts
VPGA 2 – Valuation for Secured Lending
115
What is VPGA 1?
Valuation for inclusion in financial accounts.
Note Fair Value is adopted for IFRS accounts. ‘Performance standards’ must be adhered to.
116
What is VPGA 2?
Valuation for Secured Lending.
117
Within VPGA 2, a large focus is on conflict of interest. What does it state?
Any previous involvement with prospective borrower/property to be disclosed to the lender. Previous involvement usually mean within past 2 years.
If previous involvement creates a conflict that cannot be avoided, the instruction should be declined. It is valuer’s responsibility to decide whether to accept/decline instruction.
118
What are some of the Examples Listed in VPGA 2 of the Red Book of situations where an instruction should be declined on the basis of Previous Involvement?
* Having a longstanding professional relationship with prospective borrower/owner.
* When the valuer will gain a fee from introducing the transaction to the lender.
* If there is a financial interest in the property holding, or prospective borrower.
* When the valuer is retained to act in the disposal or letting of the completed development on the subject property.
119
If the Valuer and Client Make Arrangements to Manage a Potential Conflict of Interest, where should these Arrangements be Recorded?
These should be recorded in the Terms of Engagement and in the Valuation Report.
120
In Addition to those Points Listed in VPS3, what has to be Included in a Valuation Report for Secured Lending Purposes According to VPGA 2 of the Red Book?
- Disclosure of Involvement identified in ToE. If valuer has no involvement, statement to that effect is to be made.
- Valuation Methodology Adopted
- If there is a Recent transaction of the Property - the extent to which that information has been accepted as evidence of value.
- Comment on the suitability for Secured Lending Purposes
- Potential and demand for alternative uses, or any foreseeable changes in current mode of occupation.
- Disrepair or deleterious or harmful materials
- Environmental or economic designation
- Environmental issues – flood risk, historic contamination.
- Past, current and future trends – volatility in the market
- Current marketability of the interest and whether this is likely to be sustainable over the life of the loan.
- Details of comparable transactions relied upon.
- Sustainability and ESG factors – impact market influence
121
If a special assumption is used in valuation for secured lending, what else needs to be reported in the valuation?
Difference between reported market value with AND without special assumption.
122
For secured lending, when valuing a property that is/will be owner-occupied, what should you consider?
(not in APC success notes, but in Red Book)
Special assumptions that may arise:
- Planning consent
- All necessary licences and consents are in place
- Property changed in a defined way (e.g. removal of equipment)
- Property is vacant.
123
What is the RICS Valuation Global Standards UK National Supplement (2018)
- Published 2018, but effective 2019.
- It ‘augments’ the Red Book Global requirements.
- It contains 18 VPGAs to become more user-friendly.
- For UK jurisdiction
- Advice is not mandatory, but guidance.
124
What is contents of RICS Valuation Global Standards UK National Supplement (2018)
1. Introduction
2. UK Professional and Valuation Standards – mandatory – 3 VPS
o UK VPS 1 – ToE Red Book Compliance
o UK VPS 2 – ToE Supplementary provisions in Scotland
o UK VPS 3 – Regulated purpose valuations – supplementary requirements
3. UK Valuation Practice Guidance Applications – advisory
o 18 VPGAs
4. Summary of changes from Red Book UK 2014 (revised 2015).
125
Name some of the UK VGPAs.
1. VPGA 1 – Valuation for financial reporting
10. VPGA 10 – Valuation for commercial secured lending purposes
11. VPGA 11 – Valuation for residential mortgage purposes
126
What does VPS3 of the UK National Supplement (2018) Cover? Can you give some examples of these types of Valuation?
VPS3 of the UK National Supplement covers Regulated Purpose Valuations.
These are valuations that are relied upon by third parties who did not commission the valuation and they are subject to valuation monitoring.
These may include valuation for 5 purposes:
* Financial Reporting (company accounts)
* Stock Exchange Listings
* Takeovers and Mergers
* Collective Investment Schemes
* Unregulated Property Unit Trusts
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Are Valuations for Secured Lending Purposes Regulated Purpose Valuations?
No these are not regulated purpose valuations as they are not relied upon by a third party, or in public interest.
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What review was undertaken in December 2021?
- RICS commissioned Independent Review of Real Estate Investment Valuations
- Undertaken by Peter Gray
- Review made 13 recommendations to increase trust in profession and ensure quality in valuation for clients
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what were some of areas following the Peter grat review?
o Separation of valuation from advisory activities in respect of use of data
o Developing time-specific mandatory rotation process for valuers
o Developing Valuation Compliance Officer role for firms.
o Independent review of real estate investment valuations
o Review of post-qualification requirements for valuers
o Ensure diverse and inclusive valuation profession
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What have the RICS issued on Sustainability?
Issued a RIC Global Professional Standard ‘Sustainability and ESG in commercial property valuation and strategic advice’ (2021)
Provides terms and factors relating to terms of engagement, inspection, reporting and valuation purposes.
It also touches on relevant sustainability characteristics, considerations and risk which should be analysed when viewing comparable evidence.
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Define Hope Value?
The value arising from any expectation that future circumstances affecting the property may change.
E.g. planning permission achieved where no planning permission exists at present time, or marriage value from merging two sites.
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Define Marriage Value
- Created by a merger of interests – can be physical or tenurial
- Typical negotiated outcome is to split marriage value created 50:50, or divide it pro-rata to value of individual interest.
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How to calculate SDLT for Commercial Property?
£0 - £150,000------------------- 0%
£150,001 - £250,000 --------- 2%
Over £250,000------------------ 5%
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How to calculate SDLT for Resi Property?
£0 - £250,000 -------------------0%
£250,0001 - £925,000 ---------5%
£925,001 - £1,500,000 --------10%
Over £1,500,000----------------12%
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What is SDLT?
It is a tax payable by the purchaser on a land or property transaction in England and N Ireland.
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How is SDLT charged?
Charged in incremental basis at different rates depending on portion of the purchase price that falls into each rate band.
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What equivalent SDLT is there in Scotland and Wales?
- Scotland – Land and Building Transaction Tax (LBTT)
- Wales – Land Transaction Tax (LTT)
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SDLT is also payable on the grant of new leases, how is it calculated for commercial property?
It is calculated by taking the NPV of the lease, and applying the following bands:
NPV Up to £150,000--------- 0%
NPV of £150,001 - £5,000,000--------- 1%
NPV over £5,000,000--------- 2%
NPV is the total rent payable over the term of the lease, reduce by an annualised discount rate.
Break clauses are excluded from the valuation.
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What is Special Value?
May be generated when the transaction is not at arm’s length and there is a special purchaser for the property because the special purchaser has advantages arising from its ownership that would not be available to other buyers in a market.
E.g. tenant purchasing freehold interest.
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What is a Building Cost Reinstatement valuation?
* For building insurance purposes
* Cost to reinstate building without a profit
* Use BCIS (adopt GIA for commercial, GEA or resi)
* Add VAT, demolition costs, professional fees, planning and building reg fees, inflation allowance.
* It is NOT a ‘written opinion of value’ – therefore Red Book Compliance is not required.
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What are standard purchaser's costs?
SDLT – prevailing rate
Agent Fees – 1% of purchase price plus VAT
Solicitor Fees – 0.5% of purchase price plus VAT
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What is net effective rent?
Devaluation of headline rent, taking into account rent-free periods.
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What is Headline Rent?
Rent that is payable after any incentive (such as rent-free period) has expired.
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Why is the method of Zoning used in retail?
- Used for COMPARISON of retail properties to create a unit of comparison for different size buildings.
- The rental value of the property REDUCES away from the street.
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Yield as at Oct 2024
West end office: 4.00%
City of London office: 4.75%
Prime industrial: 5.25%
Prime High Street retail: 6.75%
Good secondary: 9.00%
Secondary: 12%
Resi Zone 2 prime: 4.15%
Zone 3-6 secondary: 4.5%
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What is liability?
Liability is a state of being responsible for something, such as a debt, financial obligation, or legal risk.
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What elements of the Red Book are mandatory?
PS - Professional standard
VPS - Valuation Professional standards
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What is the margin of error for valuation?
- Singer & Friedlander v J.D.Wood (1977) demonstrated that it will be narrower for a relatively straightforward valuation case and wider for more complex case.
- K/S Lincoln v CBRE (2010) – regarding valuation of hotels, judge said appropriate margin for error:
o +/- 5% for standard residential property
o +/- 10% for one-off commercial property
o +/- 15% if exceptional features of the property
- Dunfermline Building Society v CBRE (2017) assumed an acceptable error margin of 15%.
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