Valuation - Summary of Experience Flashcards
1
Q
Explain the process of the term and reversion technique?
A
1) Capitalise passing rent until review(reversion) – PASSING RENT X YP for number of years to reversion
2) Take market rent to be received at reversion and then capitalise into perpetuity = market value (capitalisation = multiplying by the YP)
3) Defer this further at a PV of £1, for the period of the term
4) Reversion gets capitalised at market rented rate – term gets capitalised at a lower rate due to lower risk
2
Q
What accounts would you review for profits valuation?
A
Profit / Loss account - Audited accounts
- Need to see turnover and net operating profit (turnover LESS expenses)
3
Q
What could statutory due diligence include for a valuation?
A
- Asbestos register
- Business rates / council tax
- Contamination
- EPC rating
- Flooding
- Planning history and compliance
- Environmental matters
- Equality act compliance
4
Q
What is a true yield?
A
Assumes rent is paid in advance not in arrears (traditional valuation practice assumes rent is paid in arrears) (money produced by an investment considering effect of time value of money)
5
Q
What is a reversionary investment?
A
Investment let at a rent other than market rent (there is a review / reletting to get it to MR)
6
Q
Where did you locate your building costs in your residual valuation of Foundry Lane?
A
- Used the RICS building cost information service (BCIS), which is usually based on a GEA basis
7
Q
What do you understand by the expression weighting of comparable evidence?
A
Ranking comparables with greatest similarities so they have the most weight – Not all are as relevant and therefore have less weighting
8
Q
How did the all risks yield get its name?
A
- Accounts for all risks of the investment
9
Q
How would you determine the Market Value of an investment property let on internal repairing terms?
A
Market rent (net of outgoings e.g. external repairs, insurance) X YP = Market Value
10
Q
What is YP in perp?
A
Years Purchase into Perpetuity
- Property’s income where a stream of cashflows continue indefinitely
11
Q
What were the building fees at Foundry Lane?
A
10% of building cost
General professional fees:
- architect
- QS
- M&E Consultant
- Building Survyor
- Project Manager
12
Q
How is NDV calculated?
A
Deduct disposal costs from GDV
13
Q
What yield did you select at Foundry Lane, Horsham?
A
5%. This was increased slightly due to the poor condition of the property
14
Q
How did you gather your comparable evidence?
A
Internal database, confirmed with local agent and external database (EGI, Costar)
15
Q
Name the costs that a purchaser must incur when acquiring a property investment?
A
- Stamp duty land tax (bands 0%/2%/5%)
- Agents fees (1%)
- Legal fees (0.5%)
- Non-recoverable VAT on fees (0.3% or 20% of total)
16
Q
Please name the UK-Specific Bases of Value?
A
Existing use value, Existing value for social housing
17
Q
What techniques can be used to value an under-rented reversionary investment?
A
Term and reversion
Hardcore / layer
18
Q
What purchasers cost did you deduct from your valuation at Foundry Lane, Horsham?
A
- Agent fee
- Legal fee
- Stamp duty land tax
19
Q
What is the key difference between the UK national supp and red book?
A
Assists with the application of global standards within a local context
20
Q
How would you undertake the profits method?
A
1) Turnover LESS costs of receiving turnover (Operating/reasonable working expenses/operators remuneration) = net operating profit
2) Capitalise the net operating profit at the chosen yield to reach the market value
Can be expressed as the EBITDA
- Capitalised at appropriate yield to achieve market value
- Cross check with comparables if possible
21
Q
Is DRC suitable for Red Book compliance?
A
- 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
22
Q
What would you do if you had to value an investment property but could not find any evidence of yields?
A
Constructing a yield – looking at gilts and adding a risk premium (look at market/property risks and deduct growth)
23
Q
What is CIL?
A
Community Infrastructure Levy
- Charge that can be set by local authorities on new developments to raise funds for infrastructure and services in the community
24
Q
How do term and reversion and DCF differ?
A
DCF = useful for multi-let props with changing rental income
Term and reversion = simplified DCF (only two time windows are considered (term and reversion))
25
What is the simple formula for DRC?
Value of land in its existing use PLUS current cost of replacing building PLUS fees LESS discount for depreciation and obsolescence (use BCIS and judgement)
26
What is the conventional method of valuation?
Rent received OR market rent x YP @ chosen yield = Market value
- Get rent and yield from comparables
27
Please name the Red Book Global Bases of Value?
(VPS4) – Market value, market rent, investment value (worth), fair value
28
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)
29
Name the conventional methods of valuation.
- Profits/accounts
- Comparable
- Investment
- Residual
- Contractors - DRC
30
What is profit rent?
Difference between annual rent and rent achieved between lessee and lessor
31
What are the current SDLT bands?
As of 17th March 2016:
- 0% in first £150k
- 2% £150-250k
- 5% above £250k
32
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
33
What is Fair value?
Price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (consideration of market discounts do not come into play) – Usually no difference between this and market value
34
What do planning costs include?
- Costs of planning consultant
- Cost of planning application and building reg fees
- Community infrastructure levy
- Section 106 of town and country planning act 1990 payment
35
What is a running yield?
The yield at one moment in time (present income from a property expressed as % of market value)
36
When did the UK national supplement come into force?
1st May 2024
37
How would you assess if a premium could be charged on a lease assignment?
Check if it was over/underrented
If it was underrented:
- Capitalise profit rent (difference between passing and market rent) and YP (dual/dual-tax adjusted/single) rate
38
What is the market capitalisation rate?
All Risks Yield – Rate at which market capitalises the income
39
What is the planned site coverage at Foundry Lane?
40%
40
What are the major disadvantages of property over the other two major investment opportunities?
- Liquidity, transfer costs and management required
41
How would you value a shop unit for rent review with frontages on two roads i.e. it is a through unit?
Halve back from both frontages
42
What is a Regulated Purpose Valuation?
A valuation relied on by third parties who have not comissioned a valuation – e.g. financial reporting, takeovers and mergers or unregulated property unit trusts.
43
What is a nominal yield?
Initial yield assuming rent is paid in arrears (quarterly in advance gives a higher yield)
44
What was the GDV of Foundry Lane, how did you calculate it?
£2,053m = MR x YP in perp @ 5%
45
What developers profit did you allow for?
15% of GDV (based on risk)
46
What is an Asset Valuation?
Valuation for financial reporting. IFRS and UK GAAP (Generally Accepted Accounting Practice)
47
Where do you find comparable evidence?
- Local letting agents
- In house data bases
- External data bases e.g. Costar, EGI
48
What do your Valuation Files contain?
- TOE
- Conflict of interest check
- Inspection notes
- Comparables
- Valuation calculations
- Limitations of valuation
- Valuation report
- Environmental searches
49
What is extrapolation of comparable evidence?
Calculating a value outside of known data – considered statistically uncertain
50
When is DRC (Depreciated replacement cost) used in Asset Valuations?
To value specialised properties that are rarely sold on the open market – DRC is current cost to replacing an asset with its modern equivalent asset, less deductions for physical deterioration and all relevant forms of obsolescence and optimisation.
51
What effect does rent received quarterly in advance have on the yield?
It goes up
52
What is the Valuers Registration Scheme? is it a good thing?
Scheme that regulates and monitors valuations (Gives RICS registered valuer tag)
- Meets RICS self regulation requirements
- Raises status of valuation profession
- Improves quality of vals and ensures high standards
53
When is DRC used and what is its purpose?
When direct market evidence is limited or unavailable (SPECIALISED PROPS E.G. LIGHTHOUSES, SCHOOLS)
- Used for owner-occupier
- Accounts purposes for specialised prop
- Rating valuations for specialised prop
54
Did you make any adjustments to the yield at Unit 3, Merton Road?
No, no adjustment for reduced/increased risk required as let at market rate and no reversion or differing condition/location of properties (most props in area of similar condition)
55
Describe how Departure from the Red Book mandatory requirements may be possible?
May be possible but would have to be in agreement with client beforehand – Documented under TOE + valuation report
56
Assume a property is let with a 10 year term, 5 year break. How would you value?
Capitalise rent up to 5th year only, reflecting the certain term
-> then value the reversion
If over-rented, i may assume the tenant breaks and include void/marketing period in the valuation
57
What is a development appraisal?
A series of calculations to establish the value/viability of a proposed development based on clients inputs
- Valuation is a possible output
58
What makes good comparable evidence?
A property with same or very similar characteristics as the property you are valuing - e.g. location, size, term, tenant
59
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
60
In your comparables, did you give a headline or net effective rent?
These were headline rents
61
What is BCIS?
Building Cost Information Service
- Obtains monthly updates from quantity surveyors and building surveyor sources and most recent contract price tenders agreed
- Paid subscription service for members
- Calculated by a metre square basis
- Updates made monthly, quarterly, annually
62
What is interpolation and extrapolation?
Adjustments made to comparable evidence to value a property may be referred to as interpolation and extrapolation
- Extrapolation acceptable when interpolation not possible
63
How do you value a ransom strip?
1/3 of the increase in value of the development land resulting from the access given - This is the industry standard
64
What is Marriage Value?
Similar to synergistic value but add on that is an additional element of value.
65
What is a Special Purchaser?
Someone to whom an asset has a particular or higher value to – e.g. own the property next door.
66
Who are the International Valuation Standards Council?
Non-profit organisation acting as global standard setter for the valuation profession, whilst serving public interest.
67
What is the difference between Valuation Technical and Performance Standards (VPS) and Valuation Practice Guidance – applications (VPGA)?
compliance with VPS are mandatory, compliance with VPGA are advisory
68
What is the longest time-period before a valuation date that a transaction could be accepted as being comparable?
No time limit – but closer to valuation date the better (depends on the market)
69
What is PV?
Present value
- Current value of a future sum of money or stream of cash flows given a specified rate of return
70
What was the construction of Foundry Lane?
Old
- Brick/block shell
- Clad in aluminium
- Corrugated auminium roof - Previously removed asbestos
- Concrete screed floor
New
- Steel portal frame
- Insulated metal panneling
- Two storey ancillary office
- LED lighting throughout
71
What is Synergistic Value?
Where value of two combined assets higher than if they were sold/let separately.
72
What is a Special Assumption + three situations where they are appropriate?
Assumption that either assumes facts differ from those at valuation date or would not be made by a typical market participant in a transaction on that valuation date:
- Property vacant (occupied at valuation date)
- Property let on define terms (when vacant at valuation date)
- Planning consent has/will be granted
73
Why is the YP single rate table also known as the Present Value of £1 per annum?
- It tells us the present value of £1 to be received each year, for a given number of years
- Tells us present value of annual series of incomes – further in future = lower sum as it is against today’s terms
- £1 in future = not worth £1 today
74
What are the three principal sources of investment?
- Gilts, equities, properties
75
How do you calculate gross acquisition price?
PV of £1 in 12 months @ interest rate (slightly higher due to increased risk of receiving that money) X GRV
76
How is rental and capital growth accounted for in a conventional investment valuation?
Included within the all-risk yield calculation
77
What contingency did you allow for Foundry Lane and why?
5% of build costs based on risk and market conditions
78
What was the site value of Foundry Lane and how did you calculate it?
£561,000 = GDV subtract development costs, profit AND X PV of that sum for the period of development (12 months)
79
What would you include in a valuation report?
- Client name
- Valuation purpose
- Valuation subject
- Property info
- Basis of value
- Date of valuation
- Status of valuer
- Currency
- Assumptions / special assumptions
- Departures
- Source of info
- Valuation approach
- Competency
- Restrictions on publications
80
What is the margin for error on valuations?
Typically 10-15% (Friedlander v John D.Wood & Co)
81
What is another name for the all risks yield?
- Market capitalisation rate
82
What is the major attraction of property over the other two major investment opportunities?
- Can improve performance through proactive property management
83
Name three situations that can adversely affect the Certainty of valuations.
- Asset having characteristics that make it difficult to value (unique/unusual)
- Limited/restricted information
- Disrupted markets - financial/legal/political
84
What is the full title of the Red Book?
RICS Valuation - Global Standards 2022
85
How is GRV calculated?
Deduce build costs, interest, contingency and developers profit from NDV
86
What were the build costs for Foundry Lane, how did you calculate them?
£101 psf (£1087 psm) - These were found on BCIS, using location and use specific information
87
Describe three Assumptions that are usually made in producing a valuation?
Something that can be assumed to be true without investigation
- Property fit for occupation
- Premises free from contamination
- Title
- Assume no planning proposals are likely to affect valuation
88
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
89
How would you respond to a request to value a property from a Drive-by only?
1) Check competency to do so
2) Advise limited information can affect the certainty of the valuation – Note in TOE and valuation report
3) Ask for all relevant plans and documents to assist
90
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
91
What is the purpose of Zoning?
Used due to retail units having different depth and frontage ratios – Allows you to value account for this difference
92
How do you calculate a yield?
Annual rent / prop value X 100 = Yield
93
How did you / would you value an over-rented investment?
Hardcore / layer
94
What is the hardcore layer method used for?
Used to value reversionary investments (over-rented)
95
How would you respond to a request to value a property from a Drive-by only?
1) Check competency to do so
2) Advise limited information can affect the certainty of the valuation – Note in TOE and valuation report
3) Ask for all relevant plans and documents to assist
96
When would you use the profits method?
Used for valuations of trade related property
- Used for investment prop, when investment or comparable method can't be used
e.g. pubs, casinos, hotel, cinema
97
What editions of the Red Book have been in effect during APC training period?
Just the November 2021 version, effective of 31st January 2022
98
To what valuations does the Red Book apply?
All valuations except those listed as exemptions under PS1 (Internal, expert witness, agency/brokerage, statutory purposes (company accounts/business rates/tax), negotiation/litigation)
99
What was the market value at Unit 3 Merton Road?
£1.24m (£66,505 X 20 YP in perp @ 5%)
100
What is a gross yield?
- Income rent expressed as a percentage of the purchase price
101
Can you talk me through the method for completing comparable valuations?
1) Search and select comparables
2) Verify details and analyse headline rent to give a net effective rent
102
Which sections of the Red Book are mandatory?
Part3 - Professional standards
Part4 - Valuation Technical and Performance Standards (VPS)
103
What is GPV?
Gross present value - GPV worth to investor
104
What changes were made to the current edition of the Red Book?
- Reflects changes in the international valuation standards
- Reflects progress in international standard for ethics and measurement
105
Why would finance be needed in residual land valuation?
- Site purchase - Compound interest
- Total construction costs - interest taken at half of costs over length of the build programme
- Holding costs to cover voids until disposal - compound interest on a straight line basis
106
What is a contingency?
An allowance for potential costs that is factored into to the project's budget
107
What are the professional fees in a residual land valuation?
- 10/15% of total construction costs for architect, M&E consultants, project managers
108
What do consider Proper Marketing to be in the Market Value definition?
Property exposed to market in most appropriate way at the most appropriate time.
109
What was the construction of Unit 3?
- 1980s
- Brick and concrete
- Previously removed asbestos
- 2 storey ancillary office / kitchen / WC
110
What is a net yield?
- Rent expressed as a percentage of the gross acquisition price (includes purchasers costs e.g. acquisition and stamp duty)
111
What are the possible consequences if a valuer does not comply with a VPS?
Disciplined and if severe, struck off by RICS
112
How does risk affect yields?
Higher risk = higher yield
e.g. use of prop, lease terms, voids, quality of location or covenant
113
What is net-effective rent?
Actual rent cost with deductions related to incentives and concessions
114
When can a desktop valuation be undertaken for a client?
- Restriction agreed in TOE
- Implication of restriction agreed in writing
- Refer to restriction in report
115
What is the principle of the profits method?
Value of property depends on the profit generated from the business (NOT THE BUILDING/LOCATION)
116
What interest rate would be used in residual land valuation?
- London inter bank offer rate (LIBOR) - Variable lending rate plus premium to reflect interest rate achievable
- Bank of England rate plus premium
117
What yield did you select at Unit 3, Merton Road and why?
5% based on comparables and this was confirmed with the local letting agent.
118
Which sections of the red book are advisory?
Part5 - Valuation Applications (VPGA)
119
What is a ransom strip?
Land that gives access to development land - can't access development without using that land
120
What contigency did you use in your valuation?
5-10% of total construction costs depending on risk and market
- I used 5%
121
What do you understand by the stokes v cambridge case?
Compulsory purchase of a road widening scheme that resulted in 1/3rd of the increase in development land
- Determined that if a parcel of land would allow access to a neighbouring property, in a compulsory purchase of the land its owner is entitled to one-third of the resulting prop value
122
What were the disposal costs at Foundry Lane?
- Letting fees - 10% of market rent
- Sales fees - 1.5% of sale price
123
What is the Purpose of the Red Book?
Although the Red Book does not instruct how to value properties, it ensures consistency, objectivity and transparency with regards to mandatory obligations that are placed on valuers.
124
What does PS1 and PS2 relate to?
PS 1 - Compliance standards where written valuation is provided
PS 2 - Ethics, competency, objectivity and disclosures
125
How would you respond to a request for a pavement assessment only?
Valuation subject to restricted info -> pre-agreed and written into ToE and report
126
What are the main factors impacting property value?
- Number of tenants
- Location, tenure, lease terms
- Physical prop attributes
- Market conditions
127
Did you subtract any fees from market value at unit 3, merton road?
Yes
- Agents fees 1%
- Sols fees 0.5%
- VAT 0.3%
- SDLT
128
What is the timeline when receiving a valuation instruction?
1) Check competence upon receiving instruction, Conflicts of interest check - TOE and ensure signed copy
2) Gather information and undertake due diligence (leases, licences, title docs, planning info, OS maps)
3) Inspect and measure
4) Research market and assemble, verify and analyse comparables
5) Undertake valuation
6) Draft report, review with another surveyor and report to client
7) Issue invoice
8) Ensure files kept for archiving
129
How would you arrive at the Market Rent the first floor of a retail unit?
- Divide the ITZA/10 - If retail
- If storage space, spot figure per sqm
- Can also be calculated using comparable method if applicable e.g. office/store
130
What is WAULT?
Weighted average unexpired lease term
- This is remaining to first break/expiry
131
When is Fair Value the appropriate valuation basis?
Valuation for statutory functions such as reporting for company accounts/business rates/due diligence
132
What is a s.106?
Agreement between developer and local planning authority about the measures the developer must take to reduce impact on community
133
What is an Arm’s Length Transaction?
Transaction between parties with no prior relationship or connection.
134
When is the residual method of valuation used?
Valuation of land + properties with development/refurb potential
- Assesses the viability of a development scheme
135
Why is statutory due diligence done prior to valuation?
This is required to check there are no material matters which could impact upon the valuation
136
What is ITZA?
In terms of Zone A
137
What information would you require from a telephone enquirer who asked: Can you do me a valuation?
- Client/owner of prop
- Buyer of prop – For conflict-of-interest check
- Know what the property is and its location
- If I am competent to undertake
138
What is the fundamental difference between Market Value and Existing Use Value?
Existing use value used when there is no expectation of that use changing in the forseeable future. (Is sometimes market value)
139
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 reviews – Actual definitions of rent and assumptions/disregards as per the lease have to be used.
140
How did you determine developers profit in your valuation at Foundry Lane?
- 15% risk due to lower risk of development
141
What is the standard Zone depth?
6.1m / 20 feet (30ft on Oxford and Regent st)
142
What is the method for DCF?
1) Estimate cash flow (income - expenditure)
2) Estimated the exit value at end of holding period
3) Select discount rate
4) Discount cash flow at discount rate
5) Value is sum of completed discounted cash flow - Providing the NPV
143
How do you calculate divisible balance?
Amount to be shared between tenant and landlord (tenant as gross profit and remaining as rental value to the landlord)
- Gross profit LESS working expenses = divisible balance (OR NET PROFIT)
144
How do you calculate site value?
Gross acquisition price LESS agents fees, legal fees, SDLT
145
What rate is the remunerative rate set at?
1-2% above freehold market rent to reflect
- profit rent is top slice
- inconvenience of having landlord and lease
- Possibility of liability for dilaps
146
What valuations are Exceptions to the Red Book (PS1)?
Internal, expert witness, agency/brokerage, statutory purposes ( business rates, tax), negotiation/litigation
147
What is included within development costs?
- Demolition
- Building costs
- Site clearance
- Levelling
148
Define Market Value in your own words.
Amount asset is likely to exchange on the open market between a willing buyer and willing seller in an arms length transaction after a proper marketing period whereby both parties have acted knowledgably, prudently and without compulsion.
149
What is fair maintainable operating profit?
The analysis of accounts (profits method)
150
What is headline rent?
Rent payable after short-term incentive/rent free period has expired (inflated rent as ignores rent free)
151
What is a reversionary yield?
Market rent expressed as a percentage of the purchase price or market value (If not already let at the market rent)
152
What is the market rent at Unit 3?
£66,505 (or £21.45 psf)
153
What is the layout of the red book?
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)
154
When is Existing Use Value the valuation basis?
If the property is operational – Value of site or property in its existing use – different to market value on the expectation to gain planning permission to develop. (Also include that this basis may be used if it possible to get planning permission on the land)
155
What is IRR?
Internal rate of return
- The rate at which all future cash flows must be discounted to produce an NPV of 0
- Break-even discount rate at which value of cash outflows = cash inflow
- Simulated discount rate needed you need to apply to match your desired return
156
What is a building cost reinstatement valuation?
Cost of reinstating building without profit
- Used for insurance purposes
157
What is hope value?
The value arising from any expectation that future circumstances affecting the property may change
e.g. realising marriage value, future prospect of securing planning permission
158
What is NPV?
Net present value
- Sum of discounted cash flows of the project
- Used to determine if an investment gives a positive return against target rate
- If positive, investment exceeds target and vice versa
159
What are the possible consequences if a Valuer does not comply with a VPGA?
Can be sued for negligence
160
What information do you need to undertake the profits method?
Accurate and audited accounts (last 3 years if poss)
- Use estimates (business plan) if new business
- Adjust for maturity for business + any exceptional items of expenditure
161
Can you take me through your valuation at Foundry lane?
1) Agreed TOE with client + completed COI check
2) Inspected site, measured unit - In line with surveying safely and code of measuring practice
3) Undertook comparable method of valuation - got MR Yield
4) Capitalised MR into perpetuity - This gave me GDV
5) Deducted disposal costs from GDV = NDV
6) Deducted development costs and profit from NDV = GRV
7) PV of £1 X GRV = Gross acquisition price
8) Deduced purchasers costs from this to get site value
162
What is an equivalent yield?
The weighted average of initial yield/running yield (present income from property) and the reversionary yield
Expressed as the same yield throughout term and reversion
163
What is YP?
Years purchase
- Amount yielded by the annual income of the property
164
What is interpolation of comparable evidence?
Calculating a value that lies between two extreme points
165
How do you calculate GDV?
Market rent X YP into perp @ initial yield
166
How did you calculate the market rent at Foundry Lane?
Using market comparables - these were confirmed with the letting agent
167
How many comparables are needed to produce a valuation?
Enough comparable to establish a trend – As many as can be obtained
168
When did the current edition of the Red Book come into force?
31st January 2022
169
When is the investment method of valuation used?
Used when there is an income stream to value
170
Can you name some valuations that are carried out for a Statutory Function?
Preparing company account/financial accounts, mergers and takeovers, business rates, tax
171
Explain the process of the hardcore / top slice technique? (Underrented)
1) Split income horizontally
2) Capitalise MR into perpetuity at lower yield (Net initial yield)
3) The top slice value (froth) is capitalise till next lease event at higher yield due to higher risk
4) Bottom slice capitalised below market rent due to reduced risk – top slice capitalised above rate due to higher risk
NO PV OF £1 as you are receiving both of these incomes now!
172
Are there any upcoming changes to the red book?
- Consultation held in July/August 2024
- To be published in late 2024
- View to come effective in Jan 2025
173
What were the purchasers costs at Foundry Lane?
- Agents - 1%
- Legal - 0.5%
- VAT on fees - 0.2%
and SDLT
174
How do you calculate a tenants proportion of rent in a profits valuation?
A % of the net operating profit to arrive at market rent
- Usually 50%
175
What is the basic process of undertaking an RLV?
Value of completed development LESS development costs and developers profit = Land Value (GDV)
176
What is the market rent at Foundry Lane
£102,650 (or £14.06 psf)
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When would you use a DCF?
For a complex property
- You wanted to include assumptions not included within the yield e.g. long marketing periods
- Large-multi let props
- Phased development projects
- Properties with income voids or complex tenures
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What is the purpose of the UK National Supplement?
To be used alongside the Red book, providing country specific guidance within the UK – Ensures UK valuations consistent with UK accounting standards
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What interest rate did you use for Foundry Lane?
6% - Bank of England rate and adjusted plus 0.5% for risk
180
What is a bond investment?
- Fixed capital, fixed return for a fixed period
- Can be govt or corporate
181
What is top slice rent?
Difference between market and passing rent (overrage)
182
What is the difference between market value and investment worth?
Market value is what the market would pay and worth is individual value to an investor
183
What is a DCF?
Discounted Cash Flow
- Method of valuation that projects estimated cash flows over assumed holding period
- Cash flow discounted back to present day at a discount rate to reflect perceived risk
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What do you understand by the expression hierarchy of evidence?
Order in which recent transactions are weighted – most weight attached to:
1 Open market lettings
2 Lease renewals
3 Rent review
4 Independent expert determination
5 Arbitrator awards
6 Sale and Leaseback
185
How often should a firm valuing your properties be rotated?
RICS recommend every 7 years due to quality control measures
186
When would you use a dual rate investment calculation?
To value a leasehold interest with value - e.g. when lease has profit rent and unexpired term of 1 year
- Remunerative is rent for year
- Accumulative is appreciation in prop value
- Concept: comparing leasehold to freehold investments and need to recoup investment capital at end of leasehold investment period through use of sinking fund
187
Name a development appraisal?
Residual land valuation
188
What factors make up the all risks yield?
Property characteristics, covenant strength, rent, unexpired lease term, rental growth
189
What is an initial yield?
Net income at date of purchase expressed as a percentage of the purchase price (START OF INVESTMENT THIS IS WHAT YOU TAKE THE YIELD TO BE)
190
What is the difference between a Basis of Value and a Method of Valuation?
Basis = figure arrived at valuation
Method = technique used to arrive at that basis
191
What are the 5 VPS?
VPS 1 - Terms of engagement (scope of work)
VPS 2 - Inspections, investigations and records
VPS 3 - Valuation reports
VPS 4 - Bases of value, assumptions and special assumptions
VPS 5 - Valuation approaches and methods
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What is an equated yield?
The internal rate of return taking into account future growth (growth in future income) - Not applicable to reversionary situations
193
What makes a property transaction comparable to the property being valued?
Similarities in location, use, general property characteristics, timescale, tenure
194
What is the longest time period before a valuation date that a transaction could be accepted as being comparable?
The market defines this period (depends on property, location and state of the market)
195
Can you give me an example of interpolation?
e.g. Calculation a rent in-between £25 and £29 per sqft
196
How would you value a green-field site with planning permissions for residential development?
Comparable method but if no comparables then residual
197
In simple terms take me through a residual valuation?
- Calculate MV of completed development
- Deduct developers costs and developers profit
- This gives the land value
198
What is the ransom value?
Value attributable to a ransom strip
199
What is included in a reinstatement/replacement cost for insurance purposes?
Costs to demolish building, shore up and weatherproof adjoining buildings, cost to rebuild to buildings regs + any fees
200
Please can you give me some updates to the 2024 UK National Supplement?
- Regulated purpose valuations (UK VPS3) - Mandatory rotation policy - 5 years for individuals, 10 years for firms (for same asset) - This is only applies to large companies of over 250 employees or £36m in turnover
- ESG and sustainability are to form integral part of valuation approach and reasoning
- Mandatory to include file note of discussions with the client on draft reports or valuations
- For public sector valuations under IFRS - specifies use of existing use value instead of fair value
- 2 Year transitional period before new rules will be enforced
201
Can you tell me the lease terms for the Merton Road valuation?
- 5 year lease
- £66,505 rent
- IRI - Service charge common areas
- SIZE: 3100 sqft
202
What are proposed changes to the 2021 red book to be published in late 2024?
- RICS Valuation review - new content on modelling, methods and risks
- Technology updates and how AI may affect automated valuation models (AVMs)
- Integration of IVS published in January 2024 - focus on ESG, data and modelling
203
What valuations are undertake for statutory functions?
Business rates, taxation, compulsory purchase, advice for negotiation or litigation
204
Why did you use the ARY in your investment?
Agreed with TOE
205
What was the purpose of the valuation of Unit 3?
Was a feasibility for my client, the unit was currently let and also was a standalone unit
206
Is it mandatory to value in line with the Red Book if you are valuing under an exception?
For internal purposes it is not mandatory, but to maintain best practice I ensured I still adhered to the Red Book
207
What did the poor condition of Foundry Lane, Horsham mean?
Had previously removed asbestos, due to the age of structure, the client wanted to ensure a full redevelopment of the site to ensure it had the best potential of letting.
208
Can you talk me through the process of how you would value an overrented investment?
1) Split the income market rent and froth rent
2) Start by capitalising the market rent into perp @ ARY (Or NIY)
3) Then I would capitalise the froth rent for the unexpired term @ higher yield and apply PV of £1
4) Then I would add these two together to get the MV
209
What is a reverse premium?
Sum paid by the landlord to the assignee to induce the tenant to enter into the lease
210
What is net initial yield?
Current rent (net of costs) expressed as a percentage of purchase price
211
What is the last step of a residual valuation?
Searching for comparables to assess the land value against these
212
What is specialised property?
A property that doesn't change hands except as part of a wider transaction and has been specialised making it unique
213
What are the categories of comparable evidence?
Category A = Direct comparables
Category B = General market data (commercial databases or historic evidence)
Category C = Other sources (transactional data - other types of real estate)
214
What 6 factors does the ARY take into account?
- Construction
- Tenant covenant strength
- Rent
- Unexpired lease terms
- Other lease terms
- Anticipated rental growth
215
What is a risk premium made up of?
- Market risks (lack of rental growth
- Specific risks (Cost of ownership, management)
216
What is TEGOVA?
A pan-European association of 74 professional bodies working for standards, ethics and quality within real estate valuations
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217
What is a sensitivity analysis?
A model that shows the impacts that different inputs of independent variables have on a dependent variable
218
What is the current bank of England base rate?
5%
219
What is the difference between growth implicit and growth explicit valuations?
Growth implicit = Use of comparable evidence to inform rental value and a market yield to arrive at a capital value
Growth explicit = Make explicit assumptions around a variety of inputs to arrive at capital value
220
When you undertake a valuation as an exception to the red book, do you still have to comply?
You still have to comply with PS1 and PS2
221
What is the discount rate in DCF?
A discount rate can also refer to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flow
222
Where do you find zoning / ITZA?
ITZA - Red Book as it relates to valuations
Zoning - From the code of measuring practice
223
How do you calculate a basement value in zoning?
ITZA/10 or spot figure
224
What are the market risks in a risk premium?
- Illiquidity of sale
- Lack of rental growth
- Yield shift
- Locational, economic, physical and functional depreciation through structural change
- Legislative change
225
What are the specific risks in a risk premium?
- Covenant risk
- Void risk
- Cost of ownership and management
- Differing lease structures (e.g. rent review structure, lease breaks)
226
What inputs change in a sensitivity analysis?
rental figure, yield, build costs
227
What is featured within the international valuation standards (IVS)?
IVS are used as a framework for valuation in markets throughout the world in over 100 countries, bringing:
- Consistency
- Comparability
- Transparency
to valuing all assets and liabilities
228
What output difference do the gross and net yield have?
Gross yield capitalisation = Market value
Net yield capitalisation = Gross acquisitipn price
229
Where would you put a sublet in the hierarchy of evidence?
Depends if open market rent is achievable
- If open market, under lease renewal
- If not open market then under rent review
230
What valuation guidance are you aware of in relation to comparable properties?
RICS Guidance Note: Comparable Evidence in Real Estate Valuation, 1st Ed, 2019
- Comparable evidence = an item of info used during valuation process to support valuation of another item
- Provides guidance on what makes good comparable evidence and how the valuations work
- Format
- How it is found: Category A, B, C
231
You were acting for a landlord who asked you to determine market value of an overrented investment, how would you do this?
Hardcore / Layer method
232
What was located within your development costs?
- Demolition / Clearance costs
- Build costs
- Contingency
- Building fees
233
How did you assess your finance costs?
I used my clients borrowing rate of 6%, and made the calculation based on an S curve, which takes into account half the cost over the length of the building programme (12 months)
234
Can you get the market rent from the residual method?
No, I utilised comparable to ascertain the market rent value, which I then capitalised this at the appropriate yield
