Valuation

Question 1

Could you tell me about any case law relating to Duty of care, and what was the outcome?

Answer 1

Smith vs Eric Bush (1990) - Surveyor instructed by bank owes a duty of care to a to a modest residential purchaser, who would not be expected to instruct their own survey.
Scullion vs Bank of Scotland (2010) - Surveyor instructed by bank does not owe a duty of care to a commercial purchaser, who would be expected to protect their own interest by seeking their own advice.

Question 2

Explain the key points from the Red Book for valuations

Answer 2

What it does - Sets out the professional and international valuation standards (terms of engagement, inspection, etc), the valuation techniques and their applications.
What the comparable evidence methods are - COT (Consistency, Objectivity, Transparency).

Question 3

For what purposes might a valuation be required?

Answer 3

Loan security
Rating
Accounts
Land and tenant functions (rent review/lease renewal)
Tax - inheritnace tax
Advice

Question 4

What are the 5 methods of valuation included in the ‘Red Book’?

Answer 4

Comparable
Investment
Residual and dev appraisal
Profits
DRC

Question 5

What is the hierarchy of comparable evidence?

Answer 5

1. Open market lettings (A)
2. Lease renewals
3. Rent reviews
4. Third party determinations
5. Sale and leasebacks
6. Inter-company transactions

Question 6

How might you value a hospital?

Answer 6

Land value and Depreciated Replacement Cost due to the lack of comparable evidence.

Question 7

What would be the purchasers costs for a £20 million transaction?

Answer 7

Agency fees, solictors fees, stamp duty - currently 6.8% (Agency 1% + Legal fees 0.5% + VAT = 1.8%, Stamp Duty = 5%)
On some large sales transactions it will be a lower percent, around 5.4%.

Question 8

What would be your main considerations when determining a cap rate?

Answer 8

Comparable information
Risks involved:
Covenant Strength
Diversification of income
Lease Length

Question 9

What is the definition of ‘fair value’?

Answer 9

Red Book:
‘The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.’ (This definition derives from International Financial Reporting Standards IFRS 13.)

Question 10

What is the definition of ‘investment value’ or ‘worth’?

Answer 10

The value of an asset to the owner or a prospective owner for individual investment or operational objectives

Question 11

What’s the difference between an assumption and a special assumption?

Answer 11

An assumption is made where it is reasonable for the valuer to accept that something is true without the need for specific investigation.
A special assumption is a basis on which to value a property, agreed with the client prior to the valuation. (e.g. under VP/fully let/finished construction).

Question 12

Can you give me an example of a matter which may give rise to material valuation uncertainty?

Answer 12

For particular types of assets or liabilities it may prove to be extremely difficult to form an opinion of value due to the particular characteristics, or even uniqueness, of the asset or liability. It may prove very difficult to assess how potential purchasers in the market would react to a significant change in circumstances (e.g. a potential planning permission) having regard to the special assumptions made.

Heavily restricted access to the required information for the valuer, and the adoption of reasonable assumptions cannot sufficiently address the subsequent valuation matters that arise, then the valuation will attach more variability and uncertainty than would normally be expected.

Unpredictable effects on the market can be triggered by relatively one-off factors, such as unforeseen financial, macro-economic, legal, political or natural events. Where a valuation date occurs during, or immediately after, such an event, it may prove extremely difficult for the valuer to collect consistent, or even any, empirical data in order to arrive at a value with the required level of certainty attached to it. Furthermore, the valuer may be faced with hardly any comparable evidence due to the unprecedented set of circumstances with which to base a judgement. In this case, valuers should still be able to make a judgment, but they must clearly state the context and impediments that were faced to arrive at the valuation figure.

Question 13

How do you approach the valuation of a property with an F rated EPC?

Answer 13

A The property must achieve an EPC rating of ‘E’ or better to be let or sold. Therefore, I would review the EPC report to determine the required works and the estimated costs if available.

Question 14

How would you approach the valuation of a building with cladding?

Answer 14

EWS1 forms are a requirement for many lenders when considering multi-storey buildings with cladding as security. I would seek further guidance if I was in this situation as I have limited experience on the matter.

Question 15

What is ARY?

Answer 15

All Risk Yield - incorporates all risks and costs.

Question 16

Define External and Internal Valuer’s

Answer 16

External Valuer – no material links with the asset to be valued or the client
Internal Valuer – employed by the company to value assets of the company. For internal use only

Question 17

Describe the steps prior to commencing a valuation instruction

Answer 17

1. Are you competent to undertake the instruction? Correct level of skills, understanding and knowledge. Determine the purpose of the valuation
2. Independence – Check for any conflicts
3. Signed terms of engagement – Confirmation of instructions, confirm competence of valuer and extent and limitations of the valuers inspection must be stated. Agree on assumptions and special assumptions. Minimum requirements are set out in PS1 of the Red Book
4. Check that valuers firm holds sufficient PII to cover the potential liability stemming from the instruction

Question 18

What is the purpose of statutory due diligence?

Answer 18

Background checks such as EPC rating, council tax, flooding, highways, tenure and title to check there are no material matters that could impact value on the valuation

Question 19

Describe the process / timeline for a valuation?

Answer 19

1. Receive an instruction
2. Check competence and independence so no conflicts
3. Issue ToE inline with VPS1 of Red Book (if compliant)
4. Receive ToE from client
5. Gather information – leases, title documents, OS plans
6. Undertake due diligence – check there are no matters that could impact the valuation
7. Inspect and Measure in line with Property Measurement and Surveying Safely
8. Research market and assemble, verify and analyse comps
9. Undertake valuation and draft report. Potentially cross check using another method if appropriate. Get report peer reviewed by RICS Registered Valuer
10. Issue to client and issue invoice.
11. Ensure valuation file is in good order for archiving

Question 20

Describe each step of the comparables method?

Answer 20

1. Search and select comparables, which are in a similar location, similar size / construction type to the Subject property
2. Confirm and verify details with agents to ensure reliable and work out price per sqft/sqm
3. Put comparables into a schedule and adjust comparables using the hierarchy of evidence. Most weight to completed transactions, recently sold
4. Analyse and adjust comparable evidence (adjust for size, location, condition etc)
5. Report value and prepare file note

Question 21

Name guidance note on comparable method, and describe it

Answer 21

RICS Guidance Note – Comparable Evidence in Real Estate Valuation, 1st Edition, 2019
• Outlines principles in the use of comparable evidence
• When limited available comparable evidence, notes that the valuer should use professional judgement to assess evidence on a case by case basis
• Provides Hierarchy of Evidence information

Question 22

Describe hierarchy of evidence?

Answer 22

Hierarchy of Evidence – certain types of evidence usually take precedence over others
Category A Evidence (Direct Comparable Evidence)
• Recent completed transactions of near identical properties, possibly the subject property itself, with full and accurate data is available
• Similar real estate being marketed where offers may have been made but a binding contract has not been completed
• Asking Prices, with careful analysis
Category B Evidence (General market data)
• Information from published sources
• Indices – HPI index for housing
• Historic evidence
Category C Evidence (Other sources)
• Transactional evidence from other real estate types and locations

Question 23

Name the types of investment valuation methods

Answer 23

Term and Reversion, Hardcore Layer and DCF

Question 24

What are the sections in the Red Book?

Answer 24

1. Introduction
2. Glossary
3. Professional Standards
   PS1: Compliance with standards and practice statements where a written valuation is provided
   PS2: Ethics, competency, objectivity and disclosures
4. Valuation technical and Performance Standards (mandatory unless otherwise stated)
   VPS 1 Terms of engagement
   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
5. Valuation applications
6. International Valuation Standards 2017
   (CHECK THIS ANSWER)

Question 25

In Red Book - Global Standards, name main points in PS2 (Ethics, competence, objectivity and disclosure)

Answer 25

Professional and ethical standards: - Members undertaking valuations must act in accordance with the Rules of Conduct 2022. Member qualifications: - Individuals must be appropriately qualified to accept responsibility for a valuation - Have appropriate academic / professional qualifications - Membership of a professional body Independence, objectivity and the identification and management of conflicts of interest - Valuer and firm must act objectively and independently always and not be influenced by any situation which could threaten professional objectivity - No member should advice/represent a client where doing so would involve a conflict of interest. Members should keep records of the obtaining of informed consent, any measures taken to avoid conflicts of interest arising. Terms of Engagement - Members must understand client’s requirements and comply with the minimum terms of engagement. Members must be able to demonstrate professional competence

Question 26

In Section 4, VPS3 Valuation reports, name some of the minimum requirements to be stated within a Red Book compliant valuation

Answer 26

Minimum requirements to be stated within the report are (a) Identification and status of the valuer (b) Identification of the client and any other intended users (c) Purpose of the valuation (d) Identification of the asset(s) or liability(ies) valued (e) Basis(es) of value adopted (f) Valuation date (g) Extent of investigation (h) Nature and source(s) of the information relied upon (i) Assumptions and special assumptions (j) Restrictions on use, distribution and publication of the report (k) Confirmation that the valuation has been undertaken in accordance with the IVS (l) Valuation approach and reasoning (m) Amount of the valuation or valuations (n) Date of the valuation report (o) Commentary on any material uncertainty in relation to the valuation where it is essential to ensure clarity on the part of the valuation user (p) A statement setting out any limitations on liability that have been agreed.

Question 27

What is Hope Value?

Answer 27

Value arising from any expectation that future circumstances affecting a property may change, for example, prospect of planning permission for development of land, where no planning permission currently exists or the realisation of marriage value arising from merger of two land interests

Question 28

Define Marriage Value

Answer 28

Created by a merge of interests. A valuation is undertaken before and after the merge and the marriage value level is created - Negotiation outcome – split marriage value created 50/50 to the value of the individual interests

Question 29

Describe the Valuer Registration Scheme

Answer 29

* Regulatory monitoring scheme for all valuers carrying Red Book valuations from October 2011 * Aims – improve quality of valuations, ensure best professional standards and meet RICS requirements to self regulate effectively * To be registered – type, purpose, number of valuations, firms total fee income from valuations, data sources used, history of negligence claims

Question 30

Describe covid-19 and valuation uncertainty

Answer 30

* RICS issues a practise alert in March 2020 and updated in May 2020 re COVID uncertainty * RICS members should be aware of VPGA 10 and VPS 3 in the Red Book in the decision making process. If material uncertainty is declared, it should be explicitly state

Question 31

What is the principle of zoning? Provide a practical example of a shop which you have zoned.

Answer 31

More value is given to the front of the shop (A - D/remainder 6.1m).

Question 32

How do you value an over-rented office building?

Answer 32

Hardcore Top Slice Method - because - capitalise market rent into perp, capitalise top slice to next review

Question 33

How would you devalue a letting of a shop which has a rent free period of 6 months?

Answer 33

Value at today's date with no rent free period, defer for six months.

Question 34

What would you do if you suspected contamination in the grounds of a property which you are valuing?

Answer 34

Refer to specialist, and value with the assumption its not contaminated.

Question 35

What statutory enquiries do you need to undertake when carrying out a valuation of a shop?

Answer 35

EPC, Contamination, Asbestos, Planning, Flood Plain, Environmental Issues, Title Deeds, Any leases, Business Rates, Equality Act compliance, Fire Safety.

Question 36

What is the margin of error for valuers?

Answer 36

The generally accepted margin of error is a maximum of 15%.

Question 37

Can you explain the difference between a viability assessment and a residual valuation?

Answer 37

Relates to development appraisal. Residual determines the site value at market rates, viability assesses the clients requirements specifically.

Question 38

Define Market Value

Answer 38

The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

Question 39

Define Market Rent

Answer 39

The estimated amount for which an asset or liability should be let on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

Question 40

What other bases of valuation are there within the red book? And what section covers this?

Answer 40

Fair value under IFRS 13. | Investment Value

Question 41

How long can you rely on a previous inspection when revaluing a property, you have previously inspected?

Answer 41

Revaluation without a reinspection should not be undertaken unless the valuer is satisfied that there have been no material changes to the physical attributes or the nature of it's location since the last inspection. The Red Book recognises the need for regular valuations and that inspecting every time may be impractical. The ToE must confirm the assumption made.

Question 42

What is an effective full repairing and insuring lease?

Answer 42

The tenant is responsible for repairing and insuring the property.

Question 43

What types of properties are valued on a profits method?

Answer 43

trade related properties/leisure. For example: pubs, care homes, golf courses, hotels.

Question 44

In simplistic view, what are the steps in a DRC Valuation?

Answer 44

Determine the cost of building a modern equivalent of the property, and discount it to the date it was built. Add land value?

Question 45

When was the Red Book last updated?

Answer 45

31st January 2022

Question 46

Tell me about a recent piece of valuation case law.

Answer 46

Hart v Large. The surveyor is responsible to identify significant structural/defective issues, the surveyor does not have to advise on the matter but make a recommendation to seek professional advice.

Question 47

How do you arrive at a decision of the property being ok for secured lending purposes?

Answer 47

Stability and security of tenure, as well as saleability.

Question 48

Describe some uncertainty advice you have given to a client?

Answer 48

When valuing with the SA of VP, I advised of the uncertainty of the saleability in that circumstance due to the specific nature of the property and its rural location.

Question 49

How did you explain your valuation approach and methodology to your client? Do they have any preferences for how this is conveyed?

Answer 49

With lending clients/banks, I adhere to the SLA's in place. In general, these require a detailed description of the property and commentary on the approach I made and the resultant valuation.

Question 50

What background checks have you done on valuations?

Answer 50

Checked the CQC registration for operating doctors surgeries and care homes, planning website for planning history. Flood map, rates, mining, EPC, radon.

Question 51

What factors influence a residual valuation?

Answer 51

Planning costs, construction costs, developers profit, cost of borrowing, period until completion.

Question 52

What is a typical build cost per sq m you’d use in your calculations?

Answer 52

It depends on the particular building and required works. I would check BCIS.

Question 53

Talk me through a Term and Reversion you have you undertaken in your experience?

Answer 53

Abatement period on Lennard Road surgery. I applied an all risk yield to the term with abated rent, then for the reversion and discounted to arrive at a present value.

Question 54

Tell me about a recent piece of valuation case law.

Answer 54

Hart v Large. The surveyor is responsible to identify significant structural/defective issues, the surveyor does not have to advise on the matter but make a recommendation to seek professional advice.

Question 55

How do you arrive at a decision of the property being ok for secured lending purposes?

Answer 55

Stability and security of tenure, as well as saleability.

Question 56

What method of valuation did you use on the Grace Dieu Manor School Valuation?

Answer 56

comparable approach with other sales of schools with VP, cross checked with an assessment of the trading potential of the school.

Question 57

Tell me about a recent piece of valuation negligence case law in loan security? What was the principle?

Answer 57

Smith vs Eric Bush (1990) - Surveyor instructed by bank owes a duty of care to a to a modest residential purchaser, who would not be expected to instruct their own survey. Scullion vs Bank of Scotland (2010) - Surveyor instructed by bank does not owe a duty of care to a commercial purchaser, who would be expected to protect their own interest by seeking their own advice.

Question 58

Describe how you carry out conflict of interest checks in loan security?

Answer 58

I check for previous instructions with the property and the banks customer using my companies database of previous instructions.

Question 59

Describe some uncertainty advice you have given to a client?

Answer 59

When valuing with the SA of VP, I advised of the uncertainty of the saleability in that circumstance due to the nature and location of the property.

Question 60

How did you explain your valuation approach and methodology to your client? Do they have any preferences for how this is conveyed?

Answer 60

With lending clients/banks, I adhere to the SLA's in place. In general, these require a detailed description of the property and commentary on the approach I made and the resultant valuation.

Question 61

What is the typical yield for industrial units in Northampton?

Answer 61

The average yield is about 6.3%, but as low as 4.6%.

Question 62

How does the District Valuer assess the CMR for a doctors surgery?

Answer 62

The district valuer takes into account the local property market, as well as the specific market/demand for doctors surgeries. The doctors surgery provide a CMR1 1a and 2 form providing information relating to the use of the property, how often each room is used and for what purpose. This influences the rate of reimbursement.

Question 63

Are you competent to advise on reinstatement costs, how would you go about it?

Answer 63

GEA or GIA. Generally GEA is used when assessing construction costs, BCIS refers to GIA for commercial properties. Competent to provide reinstatement costs as a guide and without liability, where it's possible to use BCIS. We provide informal guideline figure and recommend further advice from a building surveyor. E.G: It is important to note that the assessment given hereafter is an informal guide only. Please refer to the Report Assumptions section for clarification. The estimated cost for insurance purposes of reinstating the property with an equivalent structure as at the date of our inspection is estimated to be in the region of £975,000. Given the [nature/age/construction/listing] of the property, the above should be seen as a guide for secured lenders only and specialist advice in respect of an appropriate level of reinstatement cover should be obtained.

Question 64

What basis of measurement do letting agents use?

Answer 64

They vary a lot, if possible try to find plans to check.

Question 65

What wording is used when reporting a material uncertainty?

Answer 65

Following the practice alert of July 2021: "The COVID-19 pandemic and measures to tackle it continue to affect economies and real estate markets globally. Nevertheless, as at the valuation date property markets are mostly functioning, with transaction volumes and other relevant evidence at levels where enough market evidence exists upon which to base opinions of value. Accordingly - and for the avoidance of doubt, our valuation is not reported as being subject to ‘material valuation uncertainty’ as defined by VPS 3 and VPGA 10 of the RICS Valuation – Global Standards. This explanatory note has been included to ensure transparency and to provide further insight as to the market context under which the valuation opinion was prepared. In recognition of the potential ‘for market conditions to move rapidly in response to changes in the control or future spread of COVID-19 we highlight the importance of the valuation date" Material uncertainty practice alert was completely removed in March 2022 as it is perceived that there is sufficient evidence since the change in market conditions caused by COVID-19.

Question 66

How would you undertake a profit based valuation of a guest house?

Answer 66

Assess the FMT expected by an REO. Where appropriate, assess the gross profit resulting from FMT. Assess the FMOP expected by an REO. FMOP may be capitalised for for full trading valuation with relevant evidence. Valuer may consider expected improvements in trade from the incoming operator, or required expenses for repair/decoration. To assess property only, the FMOP should be adjusted to consider the capital invested by the T (the divisible balance). That is then divided between the L and T depending on risk and reward of each party.

Question 67

How long can you rely on a previous inspection when revaluing a property, you have previously inspected?

Answer 67

Valuation report provides information only, being the valuation at the valuation date. Three months is a typical length of time you may expect to rely on a report.

Question 68

Other than your case study can you briefly talk me through a valuation you have undertaken?

Answer 68

Lennard Road Surgery, valued on the special assumption of the works being complete. Valued with NRR as per the DV's assessment, using the term and reversion method for the abated period

Question 69

Can you tell me about the example in your submission? (Chequers Drive Surgery)

Answer 69

Complex tenure situation and outdated leases made the property unappealing and risky to potential investors. Additionally risk of lift installed in leasehold area with no licence for alterations to prevent reinstatement.

Question 70

Can you tell me about the example in your submission? (Barnet Hill Academy)

Answer 70

Providing Market Rent for a school premises. I inspected and measured the building, obtained comparable evidence and applied the comparable and profit methods of valuation.

Question 71

How would you carry out a DCR valuation?

Answer 71

Depreciated replacement cost method of valuation for financial reporting 1st edition, November 2018 ‘The current cost of replacing an asset with its modern equivalent asset less deductions for physical deterioration and all relevant forms of obsolescence and optimisation.’