1
Q
What does the front cover of the Red Book look like?
A
- Global - prominent grey and red RICS written on it - RICS Valuation Global Standards, effective from 31st January 2022 - 296 pages
- UK supplement - white background, effective from 14th January 2019, issues November 2018 - 148 pages
2
Q
Which sections of the Red Book are mandatory?
A
- Professional Standards:
- PS1 - Compliance with standards (example IPMS or Ethics) where a written valuation is provided
- PS2 - Ethics, competency (qualifying professional to undertake work)
- Valuation Performance Standards:
- VPS 1 - Terms of Engagement
- VPS 2 - Inspection, investigation and records
- VPS 3 - Valuation reports
- VPS 4 - Bases of value, assumptions and special assumptions
- VPS 5 - Valuation approaches and methods
3
Q
What are the contents of the Red Book?
A
- 2 Professional Standards (PS’s)
- 5 Valuation Performance Standards (VPS’s)
- 10 Valuation Practice Guidance Applications (VPGA’s)
- Part 6 - Internal Valuation Standards (IVS)
4
Q
Give me some examples of the VPGA’s, there are 10
A
- Valuation for inclusion in Financial Statements
- Valuation of interests for Secured Lending
- Valuation of businesses and business interests
- Valuation of individual trade related properties
- Valuation of plant and equipment
- Valuation of intangible assets
- Valuation of personal property, including arts and antiques
- Valuation of real property interests
- Identification of portfolios, collections and groups of properties
- Matters that may give rise to material valuation uncertainty
5
Q
What is the UK supplement of the Red Book?
A
- Specific adoption for use in the UK where the Global Edition falls short
6
Q
Can you give me some examples of guidance in the UK supplement of the Red Book that is different to the Global Edition?
A
- There are 15 UK Valuation Practice Guidance Applications (VPGA’s) including:
- Valuation of Local Authority Assets for account purposes
- Valuation of Charity Assets
- Valuation for Residential Mortgage purposes
- Valuation for Capital Gains, Inheritance, Stamp Duty and Enveloped Dwellings Tax
7
Q
How does the Red Book define Market Rent?
A
- Estimated value of an asset which is to be leased on the valuation date
- Between a willing lessor and a willing lessee on appropriate lease terms
- In an arms length transaction after proper marketing
- Where both parties have acting knowledgeably, prudently and without compulsion
8
Q
How does the Red Book define Market Value?
A
- The estimated amount for which an asset or liability should exchange on the valuation date
- Between a willing buyer and willing seller
- In an arms length transaction after proper marketing
- Where both parties have acted knowledgeably, prudently and without compulsion
9
Q
How does the Red Book define Fair Value?
A
- Broadly similar to market value
- The price which would be received for an asset, or paid to transfer a liability in an orderly transaction
- Between market participants at the measurement date
- The definition is from IFRS 13
10
Q
Tell me the 5 methods of valuation
A
- Comparative
- Residual
- Profits
- Investment
- DRC
11
Q
Tell me how you would undertake a profits valuation
A
- Used for valuation of trade related properties such as pubs, bars, nightclubs
- Assess the fair maintainable turnover (FMT) through 3 years worth of accounts by a reasonably efficient operator (REO)
- Make an assessment of the gross profit from the FMT
- Assess the Fair Maintainable Operating Profit with allowances made based on the REO
- Assess the market value of the property (using comparative method)
- Capitalise the FMOP at an appropriate yield to reflecting the risk and return of the operator
- Allowances to be made for a new operator who would make improvements to the business
12
Q
Tell me how you would undertake a residual valuation
A
A residual valuation is based on the concept that the value of a property with development potential is derived from the value of the property after the development, minus the costs of undertaking said development
- Gross development value - Gross development cost = residual land value
- It is a form of development appraisal to understand the development potential of a building and/or assess the price to be paid for the land
- DCF’s can be used for phased developments
- Inputs of a GDV:
- Valuation of the properties based on the clients requirements using comparable method with a market approach (do they wish to sell or lease) - taken at the valuation date
- For freeholds, comparable yields used to understand market value
- An allowance for tenants incentives as required
- Inputs of GDC:
- Site preparation e.g. clearance, remediation, landfill tax, contamination etc
- Planning costs e.g. S106, community infrastructure levy, affordable housing for LPA’s, planning consultant, environmental impact assessment
- Building costs e.g. Q.S bill of quantities, BS estimate, BCIS cost, contractor quotes
- Professional fees e.g. architects, consultants, CDM cost
- Contingency
- Finance for scheme (holding charges, interest )
- Developers profit (15-20% of GDV)
- Sensitivity analysis also required:
- Simple sensitivity in key areas such as fees, GDV estimates and finance rate
- Scenario analysis such as changing timings, content, modifying design
- Software can also be used for sensitivity analysis
13
Q
Can you tell me what a yield is?
A
- A measure of investment return, reflecting a percentage of capital invested compared to market rent
- Yields also reflect relevant risk associated with an asset including:
- Prospects for rental and capital growth
- Quality of the location and covenant
- Use of the property and future use
- Lease terms
- Obsolescence
- Risk of voids
- Security and regularity of income
- Liquidity - ease of sale
14
Q
Can you tell me different types of yields?
A
- All risks yield - based on a fully let property, let at a market rent, reflecting all the prospects and risks attached to the investment
- Gross yield - the yield adopted not adjusted for purchasers cost e.g. auction result
- Net yield - the resulting yield minus purchasers costs
- Running yield - the yield at one moment in time
- Initial yield - simple income yield for initial income
- Reversionary yield - a yield for a property below market rent, market rent divided by current price on an investment
15
Q
Why do yields differ based on asset type?
A
- Expresses investment return and the prospects for rental and capital growth
- An assessment of risk and security of income have key factors:
- Location and covenant
- Use of the property
- Lease terms
- Obsolescence of the property
- Risk of voids
- Security and regularity of income
- Ease of sale
16
Q
If you had an investor of X, what would you advise they invest in and why?
A
- Compare yield rates for different asset classes
- Look at the capital they wish to invest and the type of covenant which can be attracted based on the asset
- High Street retail is a falling market with yields between 6-8% with retail warehouses around 6-7% reflecting a better prospect of return
- Look at current trends - currently a lot of service based operators which pushes up demand for warehouse space
17
Q
What are the terms of engagement for a valuation?
A
- Contained in VPS 1:
- Status of valuer
- Client
- Other intended users
- Asset or liability being valued
- Currency
- Purpose of the valuation
- Basis of value adopted
- Valuation date
- Nature of the work including investigation and any limitations
- Nature and source of information relied upon
- All assumptions and special assumptions
- Format of the report
- Restrictions on use and distribution of the report
- Confirmation the valuation will comply with IVS
- The basis of the fee
- The firm, including complaints handling procedure and a copy available upon request
- A statement regarding monitoring by the RICS
- A statement of any limitation of liability agreed
18
Q
Tell me what statutory due diligence you would need to consider for a valuation?
A
- Asbestos register
- Business rates
- Any contamination
- Equality Act compliance such as disabled access
- Environmental matters
- EPC rating
- Fire safety compliance
- Highways
- Legal title and tenure
- Public rights of way
- Planning history
19
Q
What personal checks do you need to carry out before commencing a valuation?
A
- A competency check
- Any conflicts of interest with the instructing party
- Check the terms of engagement - set out in writing your confirmation to carry out the work based on the terms in VPS 1 of the Red Book
20
Q
Tell me how you would carry out a comparative valuation
A
- Competence check
- Check Terms of Engagement, Conflicts of Interest, PII
- Understand what type of valuation it is - market rent, capital valuation
- Conduct lease analysis if applicable
- Take measurements and areas for the property you’re valuing
- Search and select relevant comparable evidence, judgement using the hierarchy of evidence. Analyse comps based on proximity to property, use, pitch, how recent it is etc
- Verify details from counterpart by confirming with occupier or checking the lease
- Report an opinion of market rent to client, issue invoice
- Capital valuation:
- Prepare ERV as above
- Capitalise at appropriate yield based on factors effecting the property
- Obtain yield details from sale information and market reports
21
Q
What guidance is there for comparable evidence?
A
- RICS Guidance Note - Comparable evidence in Real Estate, 1st Edition, October 2019
- General principles are evidence needs to be:
- Comprehensive
- Similar and possibly identical
- Recent
- The results of an arms length transaction
- Verifiable with the occupier
- Consistent with the market - special purchaser is someone who will overpay for space due to special interest
- The results of underlying demand
- If there is limited evidence, expand the search and make allowances for market conditions
- Real Estate markets are not fully transparent so treat information with caution e.g. unrepresented tenants
22
Q
Tell me how you would carry out an investment valuation.
A
- It is used when there is an income stream to value
- Check competence, conflicts of interest, PII
- Issue terms of engagement
- The rental income is capitalised to produce a capital value
- The valuation assumes there is implicit growth (market conditions dictate possibility of growth and are reflected in the yield)
- Conventional method:
- Rent received (market rent) multiplied by the years purchase = market rent
- Evidence key to determining ERV & yield
- Other methods include term & reversion (under rented) and hardcore & layer (over rented)
- Term & reversion:
- Used for reversionary investments such as when the property is under rented
- The current term is capitalised until the event at an initial yield
- Reversion, depending on the market rent is capitalised at a reversionary yield (yield at reversion to perpetuity)
- Usually the reversionary yield would be higher than initial due the risk of change in market conditions
- Hardcore & Layer:
- Used for over rented investments
- Bottom slice is market rent
- Top slice is passing rent until next lease event
- Higher yield applied to top slice to reflect the additional risk
- Different yield used depending on comparable evidence and the relevant risk
23
Q
Can you tell me how you would carry out a DRC/Contracts valuation.
A
- Depreciated replacement cost used where there is no direct market evidence for specialist properties
- Examples such as schools, hospitals, museums, military bases
- Used for owner occupied properties for accounting purposes
- Inappropriate for Red Book valuation for secured lending
- Methodology:
- Value the land in its existing use
- Calculate the cost to replace the building (using BCIS) plus fees less a discount for depreciation and obsolescence
- Different types of obsolescence:
- Physical - wear and tear
- Functional - the design or spec of the building no longer fulfils the current function
- Economic obsolescence - changing market conditions for the use of the asset
24
Q
What are the six steps used when collecting comparable evidence?
A
- Search and select comparable’s (agents board, online databases, tenant details)
- Confirm/verify information with a party directly involved in the transaction
- Assemble comparables in a schedule
- Interpret the evidence using the hierarchy of evidence
- Analyse comparables to form an opinion of value such as rent free analysis
- Report value and prepare file note
25
What is the hierarchy of direct evidence outlined in the RICS Comparable Evidence in Real Estate Valuation, 2019
* Contemporary, completed transactions of near identical properties for which full and accurate information is available (may include the subject property)
* Contemporary, completed transactions of other, similar real estate assets for which full and accurate information is available
* Contemporary, completed transaction of similar real estate for which full data may not be available
* Similar real estate being marketed where offers have been made but a binding contract has not been completed
* Asking prices (with careful analysis)
26
What is the hierarchy of other sources outlined in the RICS Comparable Evidence in Real Estate Valuation, 2019?
* Transactional evidence from other real estate type and locations
* Other background data (e.g. interest rates, stock market movements and returns which can give an indication for real estate yields)
27
How would you calculate Years Purchase? What does this show?
* Divide 100 by the yield figure e.g. 100/7 = 14 years purchase
* It shows the number of years required for the income to pay the purchase price
28
How do you estimate the amount to depreciate the property by when using the DRC method of valuation?
* Physical obsolescence - result of deterioration/wear and tear over the years of use
* Functional obsolescence - where the design or specification of the asset no longer fulfils the function for what it was originally designed for
* Economic obsolescence - due to changing market conditions for the use of the asset
29
What does PS1 of the Red Book Cover?
* Compliance with standards where a written valuation is required
* A red book valuation is not required when:
1. For agency and brokerage
2. When acting as an expert witness
3. Performing statutory functions e.g. rating
4. Providing internal valuation advice
5. Valuing for the purpose of a negotiation
30
What does PS2 of the Red Book cover?
* Ethics, competency, objectivity and disclosures
* Ethics:
* Comply always with the IVSC and the RICS ethics, Rules of Conduct and Conflicts of Interest of which they are bound
* A member means a Fellow, Member, Associate or Honour Member of the RICS
* Members must be competent to carry out the work
* RICS valuers are also subject to monitoring through the RICS Value Monitoring scheme
* A valuer must always confirm that they have the knowledge and competence to carry out work in the market or area of which they are operating
* A Conflicts of Interest check must be carried out prior to commencing, a confirmation is required within the valuation work that this has been completed
31
What's Hope Value?
* The value derived from expected changes in the market, affecting the property
* Examples:
* The future prospect of planning permission being obtained for the land where no current planning exists
* The realisation of marriage value
32
What's Marriage Value?
* Created by merging two assets next to each other e.g. buying a neighbouring piece of land or property
33
How would you value Long Leasehold interests?
* If it is occupied - deduct the ground rent from rent received to reach a net rental income
* Capitalise for the remaining lease term at an appropriate yield
* If unoccupied - capitalise the remaining term by an appropriate yield
* A LLH property is viewed as a wasting asset
* Conventional method would use a dual rate table to adjust a LLH to a FH using a sinking fund
* Sinking funds are rarely used to practice so a single rate would would be used, discounted for the risk
* A DCF can also be used
34
What is contained in VPS 1?
* Terms of engagement:
1. Identification and status of the valuer
2. Identification of the client
3. Identification of other intended users
4. Identification of the asset or liability being valued
5. Valuation currency
6. Purpose of the valuation
7. Basis of value adopted
8. Valuation date
9. Nature and extent of the valuers work - including investigations - and any limitations
10. Nature of source of information being relied upon
11. All assumptions and special assumptions
12. Format of the report
13. Restrictions of distribution, publication of the report
14. Confirmation that the valuation will be undertaken in accordance with the IVS
15. The basis of which the fee will be calculated
16. Where the firm is registered for regulation by RICS, reference to firms Complaints Handling Procedure
17. A statement that the compliance with these standards may be subject to monitoring by the RICS
18. A statement setting out any limitations on liability that have been agreed
35
What is contained in VPS 2?
* Inspections, investigations and records, such as:
* The information relied upon
* If measurement is required, the basis of measurement under RICS Property Measurement
* Where revaluation without reinspection has occurred, statement confirming this has occurred. The valuer must be sure no material changes to the asset have occurred which require re-inspection
* Records - the value will note the details of any inspections, investigations and accurately record them
* An audit trail must be followed
* Records must be kept in an appropriate business format and for a period of time which is appropriate for the nature of the valuation (usually 6 years)
36
What is contained in VPS 3?
* Valuation reports
* The report must reflect the requirements for Terms of Engagement as set out in VPS 1, including:
* Identification and status of the valuer
* Identification of the client and other intended users
* Purpose of the valuation
* Identification of the asset or liability being valued
* Basis of value adopted
* Valuation date
* Extent of investigation
* Nature and source of the information relied upon
* Assumptions and special assumptions
* Restrictions on use, distribution and publication of the report
* Confirmation that the valuation has been undertaken in accordance with the IVS
* Valuation approach and reasoning
* Amount of the valuation or valuations
* Date of the valuation report
* Commentary on any material uncertainty in relation to the valuation where it is essential to ensure clarity on the part of the valuation user
* A statement setting out any limitations on liability that have been agreed
37
What is contained in VPS 4?
* Bases of value, assumptions and special assumptions
* Bases of value include:
* Market rent
* Market value
* Investment value
* Equitable value
* Synergistic value
* Liquidation value
* An assumption is made where is is reasonable for the valuer to accept that something is true without the need for specific investigation or verification
* These need to be made in writing
* Used where facts cannot be fully verified
* Often linked to limitations on investigations
* A special assumption is made by the valuer where an assumption either assumes facts that differ from those existing at the valuation date or that would not be made by a typical market participant, such as:
* Where a bid has been made by a special purchaser or is anticipated
* A past change in the physical aspects of the property
* An impending change in the physical aspect of the property
* The treatment of alterations and improvements carried out under the terms of a lease
* Change of use planning has been or will be granted
* Proposed development has been completed
38
What is contained in VPS 5?
* Valuation approaches and methods
* Valuers should consider
* The nature of asset or liability
* The purpose, intended use and context of the particular assignment
* Any statutory or mandatory requirements
* The three main categories of valuation approach are:
1. The market approach
2. The income approach
3. The cost approach
* Further information on the application of approaches and methods can be found in IVS 105
39
Tell me the recent changes to the Red Book
* A list of core principles for standard setting has been added to the introduction, including:
* Purpose (objective)
* Valuation standards
* Development and revision of standards
* Jurisdiction
* The glossary has been extended
* Two additional clauses to explain what is meant by compliance with the standards and when a departure is made
* Other changes indicating an individual or group of individuals responsible for preparing a valuation must be appropriately qualified, competent, unbiased and act ethically
* Changes to wording in:
* IVS 101 - Scope of work
* IVS 104 - Bases of value
* IVS 105 - Valuation approaches and methods
* IVS 200 - Businesses and business interests
* IVS 230 - Inventory
* IVS 400 - Real Property Interests
40
What's Stamp Duty and what are the thresholds?
* Stamp duty is a tax paid on property transactions including FH prices, NPV for LH's and premiums
* Up to £150,000 - zero
* Between £150,001 - £250,000 - 2%
* The remaining portion over £250,000 - 5%
* NPV's for LH
* £0 - £150,000 - 0%
* £150,001 - £5,000,000 - 1%
* The next portion over £5,000,000 - 2%
* Non residential property is defined as:
* Commercial property e.g. shops, offices,
* Property that isn't suitable to be lived in
* Forests
* Agricultural land
* Any other land or property that isn't part of a dwelling
* 6 or more residential properties bought in a single transaction
41
You mention in your submission the latest International Valuation Standards were released in 2020, were they?
* No, this is a mistake in my submission
* The latest Red Book was released in November 2021, effective from 31st January 2022
* Changes include:
* A list of Core Principles for standard setting and valuation has been added to the introduction
* The Glossary has been extended
* Amendments to IVS 101, 104, 105, 200, 230 and 400
* Emphasis on agreeing clear unambiguous terms of engagement
* More detailed commentary required on sustainability/ESG in VPGA 8
* An addition to the 2020 red book, not a brand new red book
42
You attended a CPD lecture on valuation during Covid-19, can you tell me about this.
* The pandemic had a profound affect on the property market and almost reset the market
* When looking at comparable evidence, the weighting of it if pre-pandemic would be reduced as it was a reflection of a different market
* Now, dependant on the pitch, I have seen a pattern of declining high street value but stable local parade values
43
I note you undertook valuations for a sale a leaseback
* These were undertaken using the investment method of valuation with a market approach
* A mistake in my submission states these were comparative but it was investment
* The investment was a Ladbrokes, Coral covenant on a 10 year lease with a break and rent review at 5
* I used this is a basis for valuing the market rent with an all risks yield multiplied to give an estimated market value for the inclusion in an auction
44
You mention you used an auction for the sale and leaseback, can you tell me why you used this method of sale.
* Quick - subject to hitting the reserve (10% yield on ERV)
* Legally binding
* Arms length transaction with proper marketing through the auction house's marketing platform
* Open room where buyers can put forward offers
* Transparency of process for auditors when selling FH assets
45
Can you tell me some other methods of sale other than auction?
* Private treaty - between two parties
* Open market with an agent
* Auction
46
Why do you think there have been changes to the Red Book?
* To reflect the changes to the International Valuation Standards
* Such as:
* Clearer terms of engagement
* The terms, quasi, partial or non red book should be documented clearly in the Terms of Engagement
* More details commentary on sustainability and ESG in VPGA 8
* Changes to definitions of IVS's and expansion of the Glossary
