Valuation

Question 1

Three methods of valuation

Answer 1

Market Approach (comparable)
Income Approach (investment, profits)
Cost Approach (DRC)

Residual is a hybrid of all

Question 2

RICS guidance on Comparable Method

Answer 2

Comparable evidence in real estate valuation (1st edition) (professional standard)

Question 3

What does RICS Comparable evidence in real estate valuation (1st edition) (professional standard) outline

Answer 3

Principles of the use of comparable evidence. Encourages consistency of the use of comparable evidence. Addressed the availability of comparable evidence in challenging marketing conditions. Potential sources of comparable evidence and relative importance.

Question 4

Ideal comparable evidence

Answer 4

Comprehensive
Identical or similar to subject
Close to valuation date
Arms length transaction
Verifiable
Consistent with local practice
Active market with multiple bidders

Question 5

What to do in lack of evidence cases

Answer 5

Material Uncertainty (VPGA 10)

Question 6

Hindsight evidence when to use

Answer 6

Red Book: Only use evidence available to a valuer on the date of a valuation
Chifley Holdings Ltd v HMRC 2024 basket of evidence. Disregard events not known at date of valuation. Comparable evidence after date can provide assistance to the valuer as long as it is weighted correctly.

Question 7

Hierarchy of Evidence

Answer 7

1. Direct comparable (Cat A)
2. General market data (Cat B)
3. Other sources (Cat C)

Question 8

Analysis of evidence

Answer 8

Establish a common measurement
Make adjustments
Stand back and weight evidence

Question 9

Types of Yield

Answer 9

All Risk Yield
Net/Gross Yield
Equivalent Yield
Equated Yield
Reversionary Yield

Question 10

All Risks Yield

Answer 10

Growth Implicit, takes account of all risks, derived from a rack rented investment

Question 11

Net/Gross Yield

Answer 11

Initial rental income divided by purchase price exclusive or inclusive of notional purchasers costs

Question 12

Equivalent Yield

Answer 12

The average weighted yield between term and reversionary income

Question 13

Equated Yield

Answer 13

Growth explicit the cash flow discounted at this rate equates to the purchase price also known as IRR

Question 14

Reversionary Yield

Answer 14

Reversionary income divided by purchase price

Question 16

What is Hope Value?

Answer 16

Prospect of future development or marriage/synergistic value if reflected in market and not special purchaser.

Question 17

Which case states Hope Value should be properly reflected in a valuation for taxation purposes?

Answer 17

Palliser v HMRC (2018) 88.4% share of maisonette inherited from his father and modernised and requiring refurbishment and it was decide that it should include the prospect of improvement

Question 18

What was the Keighley DWP property?

Answer 18

A piece of land on the outskirts of Keighley in West Yorkshire. Originally a large plot of land split into small parcels and sold at auction. The subject land was segregated by a small wire fence and used as an allotment.

Question 19

Why did the Keighley case have no hope value?

Answer 19

The land was poor quality, in an agricultural area, and it was very unlikely that planning permission would be granted.

Question 20

What was the HMPPS property?

Answer 20

A brick built 1950s property in a residential area. At one point it had been a large residential dwelling but had been extended over the years. 11 bedrooms and associated parking.

Question 21

What was the condition of the HMPPS property?

Answer 21

The property was in reasonable condition commensurate with its age, but had been extended on a number of occasions and had an internal refurbishment and new windows and doors fitted within the last year.

Question 22

What was the value of the land in Keighley?

Answer 22

The land was valued at 3 dates 2018 2021 and 2024 the valuations were £840 for 2018 and 2021 and £1,050 for 2023 based on an increase in the market.

Question 23

Why did land values increase in 2021?

Answer 23

Demand for agricultural land increased post-covid part due to investors seeing a shift in global regulatory accountability for environmental impact and seeing farmland as a real asset investment opportunity high in ESG (Environmental Social and Corporate Governance) value.

Question 24

What ESG benefits does the farmland have?

Answer 24

Agricultural soils have potential to sequester 5 gigatons of CO2 annually until 2050. Buying land can be used to offset the carbon footprint of a company.

Question 25

How did you value the HMPPS property?

Answer 25

Comparable basis at a value per bedroom. Reviewed recent sales in the surrounding areas and HMOs this provided a range of values between £20-25k per bedroom. Based on comparability I adopted £20,000 per bedroom accounting for the local area and other value significant factors.

Question 27

How did you value the car park?

Answer 27

Due to a lack of rental evidence, the car park was valued on a percentage of Fair Maintainable Receipts.

Question 28

How did you establish fair, maintainable receipts (FMR) for the car park?

Answer 28

Gathered receipts from the occupier and reviewed these based on comparable evidence to see if they were reasonable accounting for location size and other factors.

Question 29

How is the car park value determined?

Answer 29

Price per space basis. This enables direct comparison of sites of different sizes. A standard space is taken as the norm.

Question 30

What is the standard size of a parking space?

Answer 30

2.4 meters wide by 4.8 meters long

Question 31

What percentage of receipts did you adopt?

Answer 31

The levels are agreed with the representatives at revaluation. Poor 30-35% Average 35%-40% Good 40%-45% Prime 45% Prime+ 50%

Question 32

How did you establish the rateability of the Car Park?

Answer 32

ABET Actual as used for parking Beneficial as gained income Exclusive as signs and notices indicated ownership Not too Transient fixed payment booths and signage fenced off.

Question 33

What advice did you provide on the car parking?

Answer 33

I spoke to the ratepayer who questioned some values based on the adopted % of FMR I explained my reasoning by justifying the adopted % based on the occupancy, location, quality of the car parks and compared these with car parks in other locations and they accepted the valuation.

Question 34

What is an informal valuation?

Answer 34

Provides a general estimate of the properties value also referred to as a calculation of value.

Question 35

Why did you provide an informal valuation?

Answer 35

It was requested by the client. I caveated the report with the details that I had not been able to fully check all relevant detail and that the valuation could be subject to change and would provide a more detailed valuation if requested.

Question 36

What were the ranges of Yield for this type of property?

Answer 36

It varied depending on a range of factors, but comparable properties were between 7 and 12% within the local area

Question 37

What Yield did you adopt?

Answer 37

9% based on the closest comparable at 10%, the subject, however, had a stronger covenant strength and was in a slightly better location.

Question 39

What would you have done if the property was over-rented?

Answer 39

Hardcore and Top slice method. Value divided horizontally, the hardcore is valued into perpetuity at a net initial yield. The top slice is capitalised to the next lease event at a net initial yield with a risk adjustment. Yield based on market comparable evidence.

Question 40

What if the property was under-rented?

Answer 40

Term and Reversion. Income flow is divided vertically. The term (passing rent) is capitalised until the next lease event at an initial yield. Reversion to market rent valued in perpetuity at a reversionary yield. The term is valued at a sharper yield to reflect the risk.

Question 42

What is DCF and when would you use it?

Answer 42

A valuation technique that uses expected future cash flows in conjunction with a discount rate to estimate the present fair value of an investment. For investment valuations with guaranteed income for a specific term.