Valuation And Loan Security

Question 1

Can you describe the timeline of a valuation instruction

Answer 1

1.Firstly I would receive instructions from the client.
2. Is check competence and independence ensuring no conflicts
3. Id issue Terms of engagement and receive a signed copy from the client
4. Id then undertake due diligence and gather information such as tenancy schedules
5. Inspect and measure
6. Research market and analyse comps
7. Undertake valuation and draft report
8. Have valuation checked by another surveyor
9. Finalise and sign the report
10. Report to client and invoice
11. Ensure file is in good order for archiving

Question 2

5 Methode of valuation

Answer 2

Comparable
Investment
Profits
Residual
Depreciated replacement cost

Question 3

3 approaches of valuation

Answer 3

Costs
Income
Market

Question 4

What are the 5 VPS in the red book

Answer 4

VPS1 Terms of engagement
VPS2 Inspections, investigations and records
VPS3 Valuation Reports
VPS4 Bases of value Assumptions and Special Assumptions
VPS5 Valuation Approaches and Methods

Question 5

Market value definition

Answer 5

The estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arms length transaction, after proper marketing where the parties have each acted knowledgeably, prudently and without compulsion

Question 6

Market rent definition

Answer 6

The estimated amount for which an interest in property should be leased on the valuation date between a willing lessor and willing lessee on appropriate lease terms in an arms length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion

Question 7

Fair value definition

Answer 7

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Question 8

What is PS1 in the RICS Red Book

Answer 8

Compliance with standards where a written valuation is provided

Application is when does the valuation have to be red book compliant

Red book exceptions include
Advice for negotiation or litigation
Statutory return or tax purposes
Agency purposes
Internal purposes not communicated to any third party
Expert witness

An IRC is not a written opinion of value

Question 9

What is PS2 in the red book

Answer 9

Ethics, competency, objectivity and disclosures

Members undertaking valuations must act within accordance of the RICS Rules of conduct

Application: should apply professional scepticism when reviewing information and data before relying upon it

Question 10

Talk me through a term and reversion calculation

Answer 10

Yes first of all I would calculate the term period by applying an appropriate yield until the lease comes to an end or the next break option.

Then I’d apply a higher yield reflecting the higher risk of achieving market rent. And capitalise this into perpetuity before deferring if for the relevant period of time. To build in void costs etc.

To calculate the deferred multiplier I do 1/1.X for how many years it has to be deferred for

Question 11

How long after a building becomes vacant so you have to pay business rates

Answer 11

You don’t have to pay business rates for the first 3 months after it becomes unoccupied

Industrial properties get a further 3 month relief totalling 6 months

Question 12

Talk me through a hardcore and layer valuation

Answer 12

Used for over rented properties we split the passing rent into 2 categories the hardcore which income which is stable and typically the market rent which is capitalised at a lower yield and the top-slice which is the over-rented section of the rent which is capitalised until the next break period at a higher yield showing the increased risk of the property being over-rented. The sum of these 2 figures provides market value

Question 13

What are the 3 categories of evidence in the hierarchy of evidence- comparable evidence in real estate valuation 1st edition 2019

Answer 13

Category A direct comparables

Category B general market data
Such as historic evidence and information provided by published sources or commercial databases like house price indices

Category C other sources of data
Transactional evidence from other real estate types and locations
Other background data such as interest rates and stock market movements

Question 14

What is a yield

Answer 14

A measure of investment return expressed as a percentage of capital invested

Calculated by income/price x100

Question 15

All risks yield definition

Answer 15

Used in the valuation of fully let properties at market rent reflecting all the risks and prospects attached to the particular investment

Question 16

Gross yield

Answer 16

The yield not adjusted for purchasers costs

Question 17

Net yield

Answer 17

The resulting yield adjusted for purchasers costs

Question 18

Equivalent yield definition

Answer 18

Average weighted yield when a investment property is valued using an initial and reversionary yield

Blend between the initial and reversionary yield

Question 19

Initial yield definition

Answer 19

Passing income / current price

Question 20

Reversionary yield

Answer 20

Market rent / market value

Question 21

Difference between initial and reversionary yields

Answer 21

Initial yield reflects the current income return based on existing rent whilst reversionary yield reflects the potential income return based on the estimated rent after lease expirations

Question 22

What is WAULT and how do you calculate it

Answer 22

Weighted Average Unexpired Lease Term

Total rent remaining/ Annual rent

So add up all the rents until the next break or expiry then divide by passing annual rent and it will give a figure in years

Question 23

What are commercial stamp duty rates

Answer 23

0-150k is 0%
150-250k is at 2%
Anything above 250k is at 5%

Question 24

How is stamp duty changing for residential properties

Answer 24

Adding an extra band back in so instead of getting 0% on the first 250,000 it will be on the first 125,000 and 2% for 125-250k,

When it comes into effect I will familiarise myself with this

Question 25

Stamp duty has recently increased on second homes

Answer 25

Stamp duty has increased by 2% Raised from 3% to 5% for anything up to £250,000 8%to10% from 250k to 925k 13% to 15% from 925k to 1.5M And 15% to 17% anything higher than 1.5M

Question 26

What are office capital values in your area

Answer 26

In the Leeds area office capital values range from 80-200 psf given the size specification and locality of the subject. Prime office values range from 300 all the way up to 500psf in Leeds city centre although I have not worked on office blocks like this

Question 27

What are office rents in your area

Answer 27

Between £10-15 psf in the suburbs of Leeds like headingley, kirkstall etc but prime rents are closing in on £40 psf so I’d say between 30-40psf for prime office rents in Leeds city centre

Question 28

Office yields in your area

Answer 28

On my patch which consists of more secondary stock I see yields ranging from 7.5-9% I understand prime office yields in Leeds could be as low as 6 or 6.5%

Question 29

What are industrial rents in your area

Answer 29

Typically for the type of stock i deal with it’s between £5-8 psf but prime industrial yields in the Yorkshire area 10-13 psf Prime industrial locality - Thorpe park, cross green industrial estate

Question 30

What are industrial capital values in your area

Answer 30

Secondary stock between 70-90 psf Modern warehouses that are well presented 100-120 psf

Question 31

What are industrial yields in your area

Answer 31

Prime between 5-6% stuff I deal with is between 7-8% usually

Question 32

What are retail rents in your area

Answer 32

Between 40-60 psf for retail units in prominent locations in the suburbs of Leeds such as headingley and kirkstall and outside of the city centre Prime city centre retail can be 200 psf and previously before Covid as high as 300 psf ITZA Some mixed use standard stock I deal with a shop with a flat above in tertiary localities are usually 15-20 psf ITZA

Question 33

What are retail yields in your area

Answer 33

City centre 6-7% All depends on the unit Itself size locality specification and the tenant in situ Usually around 9-10% I deal with

Question 34

Retail capital rates psf

Answer 34

Headingley and secondary locations typically range from 100-200 psf. We don’t get much prime retail stock to value but I believe it’s around 400 psf in Leeds city centre

Question 35

What’s happening in the industrial market

Answer 35

Although we’re passed the pandemic boom the fundamentals of industrial unit still remain strong and we expect continued rental and capital value growth in the industry. Fundamentals include rising land values, constrained supply pipe line and high occupier demand

Question 36

What’s happening with the office market in Leeds

Answer 36

Demand remains strong for grade A sustainable offices with high bream ratings in the city centre. However, yields have been softening over the recent years for more secondary office stock due to the increase in people working from home since Covid

Question 37

How is the retail market in your area what changes have you seen

Answer 37

The retail market remains stagnant there is still demand for prime retail units on desirable pitches and it’s the secondary stock that have experienced a decline in demand. In Leeds specifically there has been a lot of change converting older vacant offices and retail units into residential apartments or mixed-use units adapting to market needs

Question 38

What is the profits method When would you use it and how do you do it

Answer 38

Not my area of expertise and is usually used on trading premises such as pubs, hotels, care homes etc. it is used when the value of the property depends upon the profitability of the business. Calculated by multiplying the net profit EBITDA (earnings before interest taxation depreciation and amortisation) by a multiplier to achieve market value and can sometimes be cross checked with comparable sales evidence

Question 39

What is a dcf

Answer 39

A discounted cash flow is a form of the income approach to valuation. It’s a model that seeks to determine the value of a property by examining its future net income or projected cash flow from the property and then discounting the cash flow to arrive at an estimated current value of the property. It provides a net present value NPV and if this figure is positive it exceeds the investors target rate of return and if negative it has not achieved the target rate of return I have not completed one of these since my time at university and would not feel comfortable advising on one. If I were in a position where I had to do a dcf i would seek help from one of my colleagues who has experience doing DCFs so I could learn from him and once I had completed a few and believed I could advise on them myself I’d start undertaking dcf valuations myself

Question 40

What is DRC method of valuation

Answer 40

Depreciated replacement cost used for specialised properties with limited comparable evidence includes lighthouses, castles and submarine bases Calculated by value of land in its current use plus the cost to replace the building taking a discount for its current condition NOT SUITABLE FOR RED BOOK LOAN SECURITY VALUATIONS-Red book 2021 compliance

Question 41

When did the red book become effective

Answer 41

31st January 2022

Question 42

Structure of the red book

Answer 42

Part 1 introduction Part 2 glossary Part 3 professional standards (PS) Part 4 Valuation technical and performance standards (VPS) Part 5 valuation applications (VPGA) Part 6 International valuation standards (IVS)

Question 43

What is VPS1

Answer 43

Terms of engagement Must include 1) identification and status of valuer 2) identification of client 3) identification of any other intended users 4) The asset to be valued 5) currency 6) purpose of valuation 7) bases of value 8) valuation date 9) Extent of investigation 10) nature and source of info to be relied upon 11) format of the report 12) assumptions and special assumptions to be made 13) fee basis 14) CHP made available 15) confirmation of red book compliance 16) statement that the valuation may be subject to compliance by the RICS 17) limitation on liability agreed PII

Question 44

VPS2 inspections, investigations and records

Answer 44

inspections, investigations and records Valuers must take steps to verify necessary information being relied upon for a valuation When conducting a desktop valuation: restriction must be agreed in terms of engagement Possible valuation implications confirmed in writing Valuer should consider whether restriction is reasonable with regard to the purpose of the valuation The restriction must be referred to in the report Proper records must be held of the inspections and investigations. Storing of site notes Revaluations just also be agreed in terms of engagement and referenced in report

Question 45

VPS3 Valuation reports

Answer 45

Reports must include Identity and status of valuer Client and other intended users Purpose of val Identification of asset Basis of value Valuation date Nature and source of info relied upon Assumptions and special assumptions Restrictions on use, distribution and publication Instruction undertaken in accordance with IVS standards Valuation approach and reasoning Valuation figure Date of valuation report Comment on market uncertainty Preliminary valuation advice- must be marked as a draft and stated to be used for internal purposes only Any changes made must be noted on file with reasoning provided

Question 46

VPS4

Answer 46

Bases of value Definitions of market rent Market value Fair value Investment value Equitable value-not used in uk Liquidation value- not used in uk

Question 47

Investment value definition

Answer 47

Value of an asset to a particular owner for individual investment or operational objectives

Question 48

VPS5

Answer 48

Valuation approaches and methods Valuers are responsible for choosing and justifying their valuation approach and use of model In some cases, more than one approach may be appropriate

Question 49

VPGA2-

Answer 49

Valuations for secured lending Any previous, current or anticipated involvement with the prospective borrower or the property to be valued must be disclosed to the lender Previous involvement-last 2 years

Question 50

Red book national supplement 2023

Answer 50

Came effective on 1st May 2024 Provides extra guidance for UK VPGAs UK VPGA10 incorporates new ESG principles into commercial secured lending

Question 51

UK VPS3 Regulated purpose valuations

Answer 51

For valuations such as financial reporting, Stock exchange Takeover and mergers Collective investment schemes Used where the valuation is to be relied upon by a third party or the public When a property is purchased or a fee has been accepted through the firm they cannot value it for 12 months A maximum single engagement period of 5 years and a minimum 3-year break after rotating A max period of 10 years before rotation of valuation firm

Question 52

Margin of error on a valuation

Answer 52

Standard residential property 5% One-off commercial property 10% and if there are exceptional features could be as high as 15%

Question 53

What is hope value

Answer 53

The value arising from any expectation that future circumstances affecting the property may change Such as future prospect of securing planning permission for development of land

Question 54

What is marriage value

Answer 54

Created by a merger of interests Can undertake a before and after valuation and calculate the difference in marriage value

Question 55

Stamp duty on new leases

Answer 55

0-150k is 0% (125k if resi) 150k to 5M is 1% Over 5M is 2% Net present value on a lease- total rent payable over a lease term divided by an annualised discount rate

Question 56

What is the BofE base rate

Answer 56

4.75%

Question 57

How to calculate a net effective rent

Answer 57

Rent left to be payable divided by number of years in the lease For example 10,000 per year on a 5 year lease with 6 month rent free 5,000 year 1 10,000 year 2,3,4,5 45,0000 total divided by 5= £9,000 per year £9,000 net effective rent

Question 58

What are the aims of the VRS Valuation registration scheme

Answer 58

To improve the quality of valuation and ensure the highest professional standards To meet the RICS requirement to self-regulate effectively To protect and raise the status of the valuation profession as the leading expertise in valuation

Question 59

When would a property not be suitable for loan security

Answer 59

If it’s a leasehold property with less than 50 years remaining If the property is smaller than 30sqm except London If the property has contamination issues or Japanese knotweed but quite often we would report this and caveat the report to say if cost of works is substantial it may materially impact our valuation

Question 60

What is happening to the red book

Answer 60

Updating and becomes effective January 2025 Updated to reflect increasing technology and ESG standards and also to keep up with the recent IVS standards published in January 2024

Question 61

What is included in the UK national supplement

Answer 61

UK PS 1 UK VPS1-3 UK VPGA1-17 with UKVPGA10 loan security

Question 62

If you were approached by a customer or broker saying the job is yours if we match or do better than a competitors fee what would you say

Answer 62

I would decline in doing so as fee cutting is unethical

Question 63

What factors do you take into account when quoting fees

Answer 63

The difficulty of the job and what comparable evidence will be available Distance to property Complexity of subject Estimated value of subject as higher value stock comes with a bigger risk on our PI

Question 64

When did last business rate come to effect

Answer 64

April 2023

Question 65

What should comparable evidence be to be relevant

Answer 65

Similar to subject Comprehensive (multiple pieces of evidence) Recent Arms length transaction Verifiable Open market

Question 66

What information is needed for the VRS

Answer 66

Type of valuations Purpose of valuations Number of valuations Firms total fee income from red book Vals in last year What data sources are used Quality assurance audit procedures in place History of any negligence claims

Question 67

What is the red book

Answer 67

It is a set of mandatory global standards and guidance issued by the RICS for property valuation. It ensures valuations are performed consistently, ethically and in compliance with internationally recognised best practices

Question 68

Disadvantages of KEL

Answer 68

May struggle with complex scenarios Require staff training to understand the systems Input dependency, human error may occur putting data in wrong which will effect value Like any technology, valuation software can be prone to bugs or errors which can go unnoticed, Cybersecurity risks could risk data breaches of confidential information Cost of software typically expensive

Question 69

Lvl2 valuation Wakefield

Answer 69

2 industrial units, internal accounts applied a GIY as found some quite good investment evidence on EIG sold at auction. (Converted the costar evidence into giy from niy as niy Is sharper.) Typo meant to say market value not fair value (but fair value is the definition) and when it’s used for IFRS not something I undertake

Question 70

Lvl 2 valuation new builds in dewsbury

Answer 70

15 new build houses hanging heaton, new build premium etc. part complete but we valued on the assumption that they were complete in line with our terms of engagement 4 main house types different rate psf for each based on plot size and size of dwellings

Question 71

Industrial unit brighouse

Answer 71

Higher market value with vacant possession than with a lease in place Had 2 years remaining on lease from an occupier across the road

Question 72

Multi-let unit in wyke Bradford

Answer 72

One of the units was inferior to the others this was slightly older and over-rented with lower eaves height. Hardcore and layered this Capitalised niy for other 2 units

Question 73

Loan security purposes val lvl2 retail unit Leeds city centre

Answer 73

Ground floor and basement zoned the property and came to conclusion it was over rented so did a hardcore and layer valuation. Built in void period by slightly increasing the yield (sense checked by how much rent would be deducted from MV)

Question 74

Office unit lvl 2 loan security val

Answer 74

North Leeds in chapel Allerton Recently signed 5-year lease had 3 month rent free so calculated net effective rent Applied standard NIY and cross checked against comparable evidence on a rate psf basis

Question 75

Block of flats in Bradford

Answer 75

8x 1-bedroom apartments fully let with signed ASTs provided, pretty poor but dates and liveable specification. Found block evidence for apartments and applied a gross yield. I also then provided individual values for each apartment on a rate psf basis using comparable evidence and applied a 10% discount for investors which came out at a similar figure to the subject of around £375,000

Question 76

Hmo valuation headingley

Answer 76

Sorry the property is situated in article 4 area as headingley is in article 4. 10 bedroom hmo upon inspection but only had planning permission to be used as a 6-bed hmo and a license for a 6-bedroom HMO. We therefore valued the property as a 6-bed using 6-bed comparables and provided an MV2 for a 10-bed based on the assumption that planning will be granted and a license will be available to a purchaser