What are the 5 methods of valuation?
- Investment
- Comparable
- Profits
- Depreciated replacement cost / Contractors
- Residual
When do you use the residual method?
Value of development land
When do you use the Profits method?
Income producing property such as a pub
When do you use the Contractors method –& why is it the method of last resort?
- Use it to value something like a church, bandstand or ancient monument
- Use it because something has special characteristics which make it not easily comparable.
- only when there are no comps basically
What basis of value would you use for a valuation that is for accounting purposes?
Fair Value
Valuation for Internal purposes – what is the relevance of the fact a valuation is for internal purposes?
It is an exception to the Red book.
If you want to undertake a valuation that is an exception to the red book, what do you have to do?
- Set it out in the TOE.
- Set out that your client has agreed to the fact that it is an exception
What are the basis of value as defined by the Red Book?
- Fair value
- Market Rent
- Market Value
- Investment value.
What is the definition of market value?
Estimated Amount for which a property should exchange on the valuation date between a willing buyer and willing seller in an arm’s length transaction after proper marketing and where the parties had each acted knowledgeable, prudently and without compulsion.
What is proper marketing – how do you define it ?
Marketing for the appropriate amount of time and selling via the correct/best method of sale for the property.
I understand you undertook a red book valuation in xxx – please talk me through it – what did you do?
- I started by checking competency, running a conflict of interest check and taking instructions & agreeing terms –
- Red book PS1 – competency = ‘having the appropriate knowledge and experience of dealing with this type of property’.
How do you check for conflicts?
- Circulate conflict on internal coi system
- Check emails , files etc
- A conflict is e.g. we are instructed to sell the property post valuation. Or we are doing a loan sec valuation for the bank but have already done work in past for the applicant.
What do TOE for a Red Book valuation include?
- Detail client
- Property details
- Valuation Date
- Fee
- PI cover
- Complaints handling procedure
- Basis of value
- Limitations
- Assumptions (e.g. property has relevant planning)
- Currency
- Special Assumptions (e.g. vacant possession when the property is tenanted atm).
What due diligence would you carry out prior to valuation?
- Asbestos register
- EPC certificate
- Flood risk assessment
- Planning
- Rateable value
“Comparables ranked in hierarchy of evidence to determine market rent and appropriate capitalisation rate.” – What is the hierarchy of evidence ?
- Open Market Letting
- Lease renewal
- Rent review
- Independent expert determination
- Arbitrator’s award
- Sale & leaseback
Why is lease renewal above RR in hierarchy
- Bc tenant can walk away
- The rent can go down (not upwards only).
Where would you put subletting in the hierarchy of evidence?
- Depends on alienation / onerous clauses
- This would probably go after open market letting if no onerous clauses / alienation.
What would an appropriate capitalisation rate be? – What factors determine capitalisation rate ?
- Covenant strength
- Lease length
- Other terms e.g. repairing / insurance liability
- Location/size/spec
How do you capitalise an income stream in order to come to a gross value?
- Multiply by y into perpetuity
- Years purchase = 100/yield
- Yield = factor of risk
How do you get a net value ?
Deduct purchasers costs from gross value. / Gross value minus purchasers costs.
What are purchasers costs?
- Stamp duty
- Land tax
- Agency fees
- Legal fees
- & VAT on Agency/legal fees^
If property is under-rented what valuation technique should you use?
- Term and reversion
How do you do a term & reversion valuation?
- Term = up until next RR / reversion
- Capitalise reversion into perpetuity
- Add term and reversion together
o To get value that the term & reversion is worth today, you x (multiply) it by the present value of £1.
What is differential in yield between term and reversion?
- Yield is adjusted based on risk for the reversion – so would be at a higher yield
