Valuation

What maters may give rise to material valuation uncertainty?

- Anything that might make the valuation appear misleading - a valuer should draw attention to and comment on any issues of material uncertainty detailing the risk and should not rely on just a standard caveat.

What are the key features of a marriage value?

- Created by a merger of interests - Surveyor must undertake a before and after valuation to calculate the marriage value - Typical negotiated outcome is to split the marriage value 50:50 or divide it to the value of the respective interests.

Regulated purpose valuations fall into 5 separate categories, what are they?

- Financial statements - Stock exchange listings - Take overs and mergers - Collective Investment schemes - Unregulated property unit trusts (secured lending valuations are not regulated as they are not relied upon by third parties or public bodies)

What are they key features of a building cost reinstatement valuation?

- For building insurance purposes and analyses the cost of replacing the building without profit. - Surveyors use the BCIS to adopt a gross internal floor area cost - Surveyor must remember to add VAT, demolition costs, professional fees, planning costs etc. - It is a written opinion of value not subject to the red book

Can you give some examples of a valuation conflict?

- Having a longstanding professional relationship with the borrower - gaining a fee for introduction to the lender - A personal financial or business interest in the property or borrower.

What is the purpose of a development appraisals?

- It is a tool to financially assess the viability of a development scheme. - It can be used to establish a residual site value. - They can also be used to assess the profitability of a proposed scheme along with a sensitivity analysis. - A valuation is one of the possible outcomes of a development appraisal.

How would you find relevant comparables? What sources would you use?

- Look for agency signs in the area or other local sales or lettings that have completed - Call local agents for information on deals completed or properties being marketed - Consider Auction results (but be cautious) - In house records/ database such as EIG / Focus / CoStar

What should valuations for secured lending include?

- Must include comments about the material difference between a valuation with and without special assumptions - Should acknowledge sustainability factors

What is the conventional investment method?

- Rent received or market rent multiplied by the years purchase = Market Value - Importance of comparables for rental yield

It is usual valuation practice to deduct the likely costs of purchase from the gross market value to provide a net market value of a property. What are these costs usually assumed to be?

- Stamp Duty Land tax (at the relevant rate) - Agent's fees - say 1% of the purchase price plus VAT - Solicitor's fees - Say 0.5% of the purchase price plus VAT

What are the key features of a hope value?

- This is a valuation completed on the expectation that circumstances affecting the property will change in future (such as the grant of planning permission or the possible merger or marriage value arising. - A market value can include an element of hope value but this must be limited to the extent that it reflects offers made by prospective purchasers.

How would you deal with a conflict of interest for secure lending valuations.

1. Any previous, current or anticipated involvement with the prospective borrower must be disclosed to the lender. This usually means in the last two years but may be longer. 2. If valuer or client considers there to be a conflict that cannot be managed then the instruction should be declined. 3. The valuer remains responsible for the decisions and any client consent to act must be in writing and included in the terms of engagment/valuation report.

What things might you check in order to complete statutory due diligence on material matters impacting the value of a property? (There are 13)

1. Asbestos register 2. Business Rates 3. Contamination of land 4. Equality act compliance 5. Environmental matters 6. EPC rating 7. Flooding 8. Fire Safety 9. Health and Safety 10. Highways/private roads 11. Legal title and tenure/covenants and easements 12. Public rights of way 13. Planning history

To assess the building costs what sources of information might you refer to?

1. Client information 2. Spons Building Costs book 3. Quantity Surveyor Estimate / bill of quantities 4. Building Surveyor estimate 5. RICS building cost information service usually based on GIA basis.

What are the three main steps to consider when accepting an instruction (Think CIT)

1. Competence 2. Independence 3. Terms of Engagement

What costs might be associated with development and site preparation? What might you need to obtain?

1. Cost of demolition, remedial works, landfill tax, installation of services, site clearance, leveling, fencing contamination of land. 2. Obtain contractor estimates for the cost of these works. 3. Cost of planning consent fees and build regs costs. Section 106 contribution to the support of local infrastructure (also know as a Community infrastructure levvy). Section 278 payments for highway works. Finally the cost of any environmental surveys etc.

What are the two main methods of project financing?

1. Debt financing - lending money from a bank 2. Equity financing - Selling shares in a company or partnership or using own money

What is the simple methodology to find market value for DCF?

1. Estimate the cash flow (income less expenditure) 2. Estimate the exit value 3. Select the discount rate 4. discount cash flow at the discount rate 5. Value is the sum of the completed discounted cash flow to provide NPV

What must be confirmed in writing under the VPS 1 Terms of Engagement (IVS 101 Scope of Work)

1. Identification and status of the valuer 2. Client 3. Intended users 4. Asset to be valued 5. Currency 6. Purpose of valuation 7. Basis of valuation 8. Valuation date 9. Extent of investigation 10. Nature and source of the information relied on 11. Assumptions and special assumptions 12. format of the report 13. Restrictions for use 14. Confirmation of Redbook / IVS compliance 15. Fee basis 16. Complaints handling procedure 17. Statement that the valued is subject to compliance by the RICS 18. Limitations on liability agreed.

How do you calculated IRR?

1. Input the current market value as a negative cash flow 2. Input projected rents over holding period as a positive value. 3. Input porjected exit value at the end of the term assumed as a positive value 4. Discount rate (IRR) is the rate chosen which provides a NPV of Zero 5. If NPV is more than zero then the target rate of return is met.

What are the valuation monitoring requirements?

1. Inspections by RICS professional regulation team. 2. Annual declaration for all members to include: - Length of time valuer has acted for the client for regulated valuation purposes - The extent and duration of the firms relationship with the client. - In the last financial year whether % fee income from the client is less than or more than 5% of the total fee income. - Whether since the end of the last financial year, this has changed or is likely to change. There must also be a policy on rotation and a statement of quality control to be included in Terms of engagement (minimum 7 year rotation recommended). When purchased or an introducing fee obtained by an agent, that firm cannot value the property within the next 12 months.

What factors may affect yield?

1. Location 2. Quality of covenant 3. Use class 4. Lease terms 5. Obsolescence 6. Voids 7. Security and regularity of income 8. Liquidity (ease of sale) 9. Prospects for rental and capital growth

Talk me through the method for approaching a residual site valuation. what are the factors to consider when determining the Gross development value? (7)

1. Market Value of completed proposed development at today;s date / date of valuation 2. Use plans of needed and measure on CAD 3. Valued at current date assuming present values and market conditions. 4. Comparable method of valuation used to establish rents and yields. 5. All risks yield used. 6. An allowance of a rent-free period or tenant incentives and marketing void can be assumed. 7. Purchaser's costs will usually be deducted for commercial valuations.

When using the Profits Method what is it essential to use?

1. Must have accurate and audited accounts if possible. (audited are better than management accounts) 2. Use estimates / business plan 3.Adjust for maturity of business and any unacceptable or exceptional items of expenditure.

Do you know what the hierarchy of evidence is?

1. Open Market Lettings 2. Lease renewal 3. Rent reviews 4. Third party determinations 5. Sale and leasebacks 6. Inter-company transactions

What professional fees, contingency and marketing fees might you need to consider?

1. Professional fees between 10-15% of total construction costs to include architects, consultants project managers structural engineers etc (this would be a lower % if its a very large project) 2. Contingency between 5% - 10% of total construction costs depending on the level of risk. 3. Normal sales fee of 1-2% of total GDV and normal letting fee of around 10% of annual rent.

What is the time line of a valuation instruction? take me through step by step. (Up to 16 steps)

1. Receive instructions from the client 2. Check competency 3. Check independence / conflicts of interest 4. Issue terms of engagement 5. Receive terms of engagement back 6. Gather information: Leases/title docs etc 7. Undertake due diligence - check matters that may adversely impact value 8. Inspect and measure 9. Research market and assemble, verify and analyse comparables 10. undertake valuation 11. Draft report 12. Have valuation report peer reviewed 13. Finalise and sign report 14. Report to client 15. Issue invoice 16 ensure valuation file in order before filing

What are the limitations for residual valuation methodology and financial modelling?

1. Requires accurate information and input in order to yield useful results. 2. Does not consider timing or cashflow. 3. very sensitive to minor adjustments 4. Implicit assumptions hidden and not explict 5. Always needs to be cross checked with comparable valuations where possible.

Describe the steps you would take when using the comparable method? (6 steps)

1. Search and select comparables 2. Confirm / Verify details and analyse headline rent to give net effective rent. (Use RICS red book 2014 UKGN 6-Analysis for guidance) 3. Assemble comparables in a schedle 4. Adjust comparables using a hierarchy of evidence 5. Analyse comparables to form an opinion of value 6. Report value and prepare file note.

What special requirements are there for valuations carried out on behalf of a charity?

1. The charity commission requires the trustees to obtain a section 119 of the Charities Act 2011 valuation when the charity is seeking to buy or sell property 2. The valuer must follow the acts requirements 3. The surveyor must comment as to whether the purchase or sale is in the charities best interest. 4. The report must state whether the terms agreed are best and can reasonably be obtained by the charity 5. The red book specifies other matters to be included in the report 6. The basis of valuation to be Market Value or Market Rent.

How would you value a long leasehold interest? what is the ground rent

1. The ground rent is deducted from the gross income to calculate the net rent received. 2. This is capitalised at a yield for the length of the lease to create a market value.

If completing a desktop valuation (no inspection) what four requirements are set out in the red book?

1. The nature of the restriction must be agreed in writing in the terms of engagement 2. The possible valuation implications of the restriction confirmed in writing before the value is reported. 3. The valuer should consider whether the restriction is reasonable with regard to the purpose of the valuation. 4. The restriction must be referred to in the report.

What is the Hardcore method of valuation and when should this be used?

1. Used for over rented investments (passing rent more than market rent) 2. Income flow divided horizontally 3. Bottom slice = Market Rent 4. Top Slice = rent passing less market rent 5. Higher yield applied to top slice to reflect additional risk 6. Different yields used for different scenarios having regard to comparable investment evidence and relative risk

What is term and reversion method and how should this be used?

1. Used for reversionary investments (market rent more than passing rent - Under rented) 2. Term capitalised under next review / lease expiry at an initial yield. 3. Reversion to market rent valued in perpetuity at a reversionary yield

Explain when it would be appropriate for the investment method to be used?

1. Used when there is an income stream to value 2. The rental income is capitalised to produce a capital value 3. Conventional method assumes growth implicit valuation approach. 4. An implied growth rate is derived from the market capitalisation rate (yield)

What is the Profits Method used for?

1. Valuations of trade related property where there is a 'monopoly' position 2. Used where the value of the property depends upon the profitability of its business and its trading potential. 3. Used for pubs, petrol stations, hotels, guest houses, nurseries, leisure and health centres and care homes.

What is the basic calculation (methodology) for a depreciated replacement cost.

1. Value of land in its existing use (assuming planning permission exists) 2. Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence/deterioration (use BCIS guide to determine obsolescence).

What is a depriated replacement cost valuation?

1.It is not a basis of valuation but a method 2.Can only be used where direct market evidence is limited (specialised properties) 3. It is used for owner occupied property mainly for accounting purposes or rating valuations of specialist properties.

Describe the simple methodology?

=>Annual turnover (income received) less costs/purchases = gross => Less reasonable working expenses = Unadjusted net profit => Less operator's remuneration = Adjusted net profit known as fair maintainable operating profit (this can be expressed as the earnings before interest, tax, depreciation and amortisation) =>Capitalised an appropriate yield (YP multiplier) to achieve market value (cross checked with comparable sales evidence.)

What is the meaning of 'return' on investment?

A 'return' is used to describe the performance of a property, it is measured retrospectively or using a DCF

What is a premium? when might it be used?

A capital payment from one party to another. - paid by an ingoing tenant to secure a prime location - a figure representing fixtures and fittings - a figure paid by an ingoing tenant for a leasehold interest to represent the positive difference between the passing and market rent (known as a profit rent) - if there is a negative different a reverse premium may be paid by an outgoing tenant tothe new tenant. - The sum paid by a landlord to a tenant for the surrender of a leasehold interest and the grant of a new lease.

What is a yield?

A measure of investment return, expressed as a percentage of the capital invested.

What is the current loan to value ratio?

About 60%

When completing a valuation for secure lending purposes what additional guidance for the bank should be supplied?

Advice on whether to agree to the loan or in the case where the borrower defaults: - Disclosure of any involvement in the terms of engagement or information that has subsequently been discovered or any arrangements for the avoidance of a conflict of interest or a statement that the valuer was not involved. - The valuation methodology - Where there has been a recent sale or agred price the extent to which the price has been accepted as market value. - Comment on environmental considerations - Comment on the suitability of the property for management purposes. - Any circumstances of which the valuer is aware that would affect the price. - Any other factors that potentially conflict with the definition of market value.

What is the a dual rate table used for?

As a leasehold interest is a wasting asset dual rate tables adjust a leasehold valuation to be on the same basis as a freehold by using a sinking fund. In practice few leaseholders use a sinking fund and therefore in practice a single rate yield is often used duly discounted to reflect the element of risk for the wasting asset A DCF calculation could also be used.

What is the definition of True Yield?

Assumes rent is paid in advance not in arrears (Traditional valuation practice assumes rent is paid in arrears)

What is the definition of Equivalent yield?

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

What profit might a developer expect to make in order for the project to be viable?

Between 15-20% perhaps more if the market is particularly volatile in order to mitigate against the risk of overspend.

Why do you need to be careful using auction results as comparable information?

Care needs to be taken when using auction results as there may be a special purchaser or insolvency sale. The sale price is also gross of costs.

What are the 5 methods of valuation?

Comparable Profits Investment Residual Depreciated replacement cost

Describe the principles of using the depreciated replacement cost method?

Cost of a new building Less allowance for depreciation Plus value of the land = The value of the property.

What is a discounted cashflow?

DCF involves projecting estimated cashflows over an assumed investment holding period plus an exit value at the end of that period. The cash flow is then discounted back to the present day at a discount rate (desired rate of return) that reflects the perceived level of risk.

What is the definition of an internal valuer?

Empolyed by a company to value the assets of the company. The valuation is for internal use only and there is no 3rd part reliance

What is the simple equation to determine residual site value?

Gross development value less total development costs less profit. (inputs taken at the date of valuation)

What is the simple equation to determine Development appraisal?

Gross development value less total development costs less site value (inputs taken at the date of valuation)

What is the RICS definition of an external valuer?

Has no material links with the asset being valued or the client

What are the three ways you can approach a valuation?

Income Approach Cost Approach Market Approach

Which methods are used for these three approaches?

Income Approach - Investment / Residual / Profits Cost Approach - Depreciated replacement costs Market Approach - Comparable method

What are the three valuation approaches under VPS 5?

Income approach - converting current and future cashflows into capital value Cost approach - reference to the cost of the asset whether by purchase or construction (DRC method) Market approach - use of comparable evidence

How is the Yield of a property calculated?

Income divided by price x 100

What is the definition of Nominal Yield?

Initial yield assuming rent is paid in arrears

What are the keys points within this guidance?

It include information on: - The principles of the comparable evidence - Sources of comparables, such as market evidence, data bases, the press, indices and historic evidence. - The hierarchy of evidence - Recording comparable information - Analysis of comparable information - Lotting - Dealing with a shortage of evidence MAKE SURE YOU KNOW International Valuation Standard IVS 105 regarding comparables.

What is the definition of Reversionary Yield?

Market rent divided by current price on an investment let at a rent below the market rent

What is the danger using older comparables?

Market sentiment became increasingly important over the last few years when there was a lack of transactional evidence. The date of the evidence is crucial given volatile market conditions.

What is NPV used for?

NPV can be used to determine if an investment give a positive return against a target rate of return. If the NPV is positive, the investment has exceeded the investors target rate of return. If negative its not achieved the target rate of return.

What is NPV?

Net Present Value - the sum of the discounted cash flows of the project

What are the relevant valuation Information papers? (5)

No 1 - Valuation of owner occupied property for financial statement No 2 - Capital and rental valuation of restuarants, bars pubs and nightclubs No 4 - Valuation of medical surgeries No 10 - The depreciated replacement cost method No 12 - The valuation of development land

How is stamp duty applied on the grant of a new lease? (long leasehold)

Payable on the premium payable calculated on the Net Present Value of the lease discounted at the RPI.

What are the three types of obsolescence?

Physical Functional Economic

Is there RICS guidance for surveyors on process for identifying comparables?

RICS Information Paper on Comparable Evidence in Property Valuation 2012 has been withdrawn but provides a useful guide

What guidance should you read on the profits method?

RICS Red Book, 2014 Valuation Practice Guidance note 4: Valuation of individual trade related properties.

What is the new Valuation standard issued by the RICS?

RICS Valuation - Global Standards, 2017

What RICS guidance should you read about development property?

RICS Valuation information paper No 12 (2008) - The valuation of development land International Valuation Standard 410 "Development Property "

What did the autumn budget 2017 do to aid first time buyers?

Removed stamp duty on first homes costing up to £300,000 and a 5% SDLT on the band between £300,000 & £500,000

What is senior debt and mezzanine/secondary debt?

Senior debt is the first level of borrowing which taken precedent over secondary funding which is the amount required over an above the normal LTV lending.

What are the three forms of a sensitivity analysis?

Simple - analysis of key variables Scenario - Changing to consider various specific situations Monte Carlo - using probability theory with software such as 'crystal ball'

What is the definition of Initial Yield?

Simple income yield fr current income and current price

How should the three elements of the project be financed?

Site Purchase - to include the purchasers costs and borrowing calculated using a compound (rolled up) method on a straight line basis. Construction Costs - calculated by assuming all the construction costs required in the first half of the total construction period creating an 'S' Curve. It is a usual assumption to halve the interest that would be borrowed over the construction period. Holding Costs - Cover voids until the disposal of the scheme on a straight line basis using compound interest.

What other guidance is there on Valuation liability?

The RICS Guidance note on Risk, Liability and insurance in valuation work.

What is 'Market Value'?

The estimated amount for which an asset or liability should exchange: - On the valuation date - Between a willing buyer and seller - In an arms length transaction after marketing - Where parties have acted knowledgeably, prudently and without compulsion.

What is Fair Value?

The price that would be received to sell an asset or fair to transfer a liability in an orderly transaction between parties participants at the measurement date. It is generally consistent with 'market value'

What is the definition of Initial Rate of Return (IRR)

The rate of return at which all future cash flows must be discounted to provide a NPV of zero. The IRR is used to assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions.

What is the definition of 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

What is the definition of net yield?

The resulting yield adjusted for the purchasers costs

What is investment value?

The value of an asset to a particular owner for individual investment or operational objectives. This may differ from market value and is sometimes measured against the investors own criteria.

What is the definition of Running Yield?

The yield at one moment in time

What is the definition of Gross Yield?

The yield not adjusted for purchasers costs (such as auction results)

What is Years Purchase and how is it calculated?

This is the number of years required for the income of the property to re-pay its purchase price. It is calculated by dividing 1 by the yield. i.e. 1/0.06 (6% yield would be 16.66 years)

What is profit errosion?

This term relates to the length of time it will take for the development profit to be erroded by holding charges (excessively long voids) meaning the development makes a loss.

What is Overage?

This the arrangement made for the sharing of any extra receipts received over and above the profits originally expected and is usually apportioned between the parties i.e.. landowner/developer/vendor.

What is a discounted cashflow used for?

Used where the projected cash flows are explicitly estimated over a finite period. Such as for: - Short leasehold interests and properties with income voids - Phased development projects - Non - standard investments (say with 21 year RRs) - Over rented properties and social housing

Can a draft valuation be provided to a client?

Yes but it must be marked as a draft for internal purposes only which cannot be relied upon and any changes between the draft and the formal valuation must be stated.

What new rules were introduced under the Autumn Statement 2015 on SDLT?

higher rates of SDLT are imposed on the purchase of a second homes or buy to lets at 3% above the standard rate.

What about the stamp duty bands for residential properties?

£0- £125,000 Nil £125,001 - £250,000 2% £250,001 - £925,000 5% £925,001 - £1,500,000 10% Over £1,500,000 12%

What is the current tax bands for stamp duty for commercial and mixed use properties?

£0-£150,000 Nil £150,001-£250,000 2% Over £250,000 5%