Valuation Case Specific questions Flashcards
(34 cards)
What was the need for the valuation of the plot to take place in 2018?
It took place prior to the development of the timber kit property which was installed.
Why did you use DRC method when valuing farm buildings and what valuation method is this?
DRC is the ‘Contractors Method’ of valuation.
DRC is used to value the tenants buildings within the AHA tenancy and improvements
I am aware this is not typical for DRC and it is used in more unique circumstances (e.g. police station)
Can you talk me through why you used an Investment method valuation when valuing the sale price of the AHA to your clients tenants?
Investment method values rental income streams, and the value to the landlord.
The sale price was calculated via the following:
1. The MV of the sitting tenant
2. The VP value of the holding
3. Deduct the MV from the VP value = reversionary value
4. Divide the reversionary value by two
5. Add this value to the MV with a sitting tenant to get the ‘indicative sale value’
6. Then adjust to take into account the tenants improvements and dilapidations and make the appropriate deductions to get to the final sale value
Why was your client looking to sell the AHA farm in the first place?
They were undertaking a ‘pilot’ of selling off the land to the sitting tenants, and were keen to assess the ‘appetite’ for this with the tenants. At the time they were looking to raise capital from the existing assets to deliver their corporate plan.
What was the appetite in the end for the farm sales?
The appetite was low due to:
- Client being a good landlord, undertaking regular maintenance of FE so tenants didn’t feel the urge to buy
- High interest rates on bank loans
- Farming not hugely profitable in the area, cash flow
How did you take the SSSI into consideration when valuing the land?
The SSSI has limitations of access due to ‘operations requiring consent’ could only be grazed for a limited number of months a year, and required consent in order to do so. I applied a discount to reflect this from the Non-SSSI land.
In terms of Nevie Farmhouse, can you talk me through the valuation figures with Vacant Possession?
My client was not focused on the exact current value of the asset in its current condition; the client had their own internal estate wide valuation.
The internal valuation suggested the value to be £75.000 with sitting tenant, and £150,000 with VP.
Did you take the value of the £ into consideration when projecting rental income for Nevie Farmhouse?
No, my client was only looking for preliminary figures and were not looking for that level of detail.
Had it been a client focusing more on economic return, I would have calculated the Net Present Value of the future income and apply a discounted cash flow
Did you discuss the change in value of the property with your client following on from the renovation work?
Yes, within the case sheet proposal I advised that if we were to invest £323,000 into the property, I advised that the value of the property value would increase from £150,000 to £360,000 at completion. However, this was an internal estimated value and could not be relied upon.
I advised my client that upon completion, we would provide an updated valuation and a revised EPC in order to truly measure the value generated.
Who helped you come to the figure of £360,000 for the completed Nevie Farmhouse?
I struggled to find local comparable evidence in the area for 4-5 bedroom energy efficient properties.
I approached our residential sales team who had experience of selling properties of this size in the area, and our rural valuation team. They discussed figures internally and agreed this was a fair and sensible figure.
My client was content with this, and I advised that this figure was simply a guide and could not be relied upon.
What do you take into consideration when valuing an 1991 Act tenancy with a sitting tenant?
Need to take into account the possibility of Vacant possession.
- Age, health condition of tenant
- Do they have any plans for succession (near/non near relatives)
-You can use Parrys life tables to help
You mentioned you gave a 50% reduction given that Nevie was occupied by a tenant. How did you come to this %?
- Nothing written on how this is to be valued
- Generally accepted 50% reduction in value.
- Dependent on external factors including the possibility of getting it back in hand.
- Figure was within my clients estate wide internal valuation
Tenant in 50s, still healthy and active.
Why did you not provide more accurate valuation figures for the property with VP and sitting tenant.
My client is unique, and was less focused on the exact figures with the sitting tenant or with VP. Their focus was to get the property back in hand, and to look at what opportunities to property held. That was my instruction.
I did still provide the figures and break this down to my client for transparency, to enable them to understand why it was not a good economic investment.
You suggest that it would take in excess of 21 years to see a ROI, would you normally advise this?
No, in this instance my client is very unique, and they were more focused on releasing the asset to re-purpose it to help meet their wider residential objectives.
If this were a different client, I would advise that this investment would not ‘stack up.’ I would advise them to consider investing elsewhere and would have pushed the ‘sale’ recommendation.
You mentioned you estimated a rent review increase of 5% over 3 years. Can you explain how you got to this figure and did you take into account ROI?
- I used a local average RR achieved across the board pre-covid.
- I wanted to manage expectations, and did not want to overpromise rent review return to my client. I felt an annual rent review which totalled 5% across 3 years was achievable.
- My client was less focused on ROI and therefore we did not look into detail
You said Nevie was valued at £75k with a sitting tenant. How did you come to this value? Did you make any changes to this?
This was undertaken by a valuer before my involvement, as part of the estate wide internal valuation.
The valuation was up to date, and had been undertaken recently.
However, I sense checked the valuation with comparables and came to the conclusion the value was still ‘current’
How did you calculate the DRC value of the buildings?
DRC is the cost to replace the building with new materials using modern construction methods. You then discount that against age and obsolescence
(e.g shed lifespan is 50 years, erected in 1990. 15 years remaining or 30% and deduct this from the cost of a new replacement shed)
Can you talk me through the investment method?
Investment method is used when there is an income stream to value, and that income is capitalised to generate a capital value.
Investment depends on a number of factors, the tenants covenant, the All Risk Yield and the Multiplier. The greater the risk, the higher the ARY
You can achieve the Yield (%) from comparable evidence and the tenant covenant
Give an example of an extremely safe investment, moderate and high risk?
Safe = Government bonds, ARY 1.5%
Moderate = M&S shop rental, not going to go bust any time soon, ARY 5%
High = small, local firm rental, limited income, ARY 11%
What is the RICS Red Book?
The Red Book is the short name for the RICS Valuation Global Standards.
The most recent version of the RICS Valuation Global Standards took effect from 31st January 2025.
The Red Book forms a set of mandatory standards for Royal Institution of Chartered Surveyors (RICS) members providing written valuations.
This aims to produce valuations that are consistent, objective, transparent in order to build confidence and trust in the RICS Valuation
If a new client approaches you and askes you to undertake a Secure Lending valuation, what are your next steps?
- Consider whether I am competent to undertake the proposed work, or anyone within my office.
If so….
- Undertake background KYC checks and on-board Client
- Undertake a Conflict of Interest Check
- Take instruction.
- Issue Terms of Business for Client to review and Terms of Engagement which will disclose scope of work and any Special Assumptions.
- I would refer to the VPGA2 guidance notes on Valuations for Secured Lending to understand my approach.
- Undertake an initial desktop exercise, and collate information from the client.
- Undertake a valuation inspection and measure property where required following the IPMS January 2023.
- Complete valuation report using Template, include appendices
- Instruct RICS registered colleagues to review/sign
- Issue to client
You say that you undertook an internal valuation of a 1991 Act Agricultural tenancy for your client. Can you talk me through the ToB?
My client had a farm sales policy in place, which outlined the key principals for an offer of sale, such as the LL and the TT were both willing buyers and sellers. Although this was for internal purposes between the LL/TT the process followed much of the RICS Red Book valuation structure.
What makes a good comparable?
What is the hierarchy of evidence?
Hiarchy of evidence relates to the ‘weighting’ comparable evidence carries:
- Category A - direct comparables of contemporary
- Category B - general market data
- Category C - other unverified sources / market commentary etc
