1
Q
What is an internal valuer?
A
- Employed by a company to value their assets
- Valuation for internal use only
- No third-party reliance
2
Q
What is an external valuer?
A
Has no material links with the asset to be valued or the client
3
Q
What are the THREE steps you should undertake prior to commencing a valuation?
A
CIT:
1. Competence - check you have the correct level of skills, understanding and knowledge
2. Conflict of Interest - check you are able to act independently on the instruction
3. Terms of engagement - issue to the client and receive written confirmation
4
Q
Why do you undertake statutory due diligence for valuations?
A
Confirm that there are no material matters which could impact on the valuation
5
Q
What types of statutory due diligence checks would you undertake when valuing a property?
A
- Asbestos register
- Business rates / Council tax
- Contamination
- Equality Act Compliance
- Environmental matters (high voltage power lines, electricity sub-stations, telecoms masts etc.)
- EPC rating if available
- Flooding
- Fire safety compliance
- Health and safety compliance
- Highways (check roads adopted with the local highways agency)
- Legal title and tenure (check boundaries, ownership, any deeds of covenant, easements, rights of way, restrictive covenants, wayleaves)
- Public rights of way (from an OS sheet)
- Planning history and compliance (check any onerous planning conditions, whether the property is in a conservation area / listed and subject to a s. 106 agreement or CIL)
6
Q
What are the FIVE main methods of valuation?
A
- Comparable method
- Investment method
- Profits method
- Residual method
- Depreciated replacement cost method
7
Q
What are the THREE valuation approaches set out in IVS 105?
A
- Income approach - converting current and future cash flows into a capital value
- Cost approach - reference to the cost of the asset whether by purchase or construction
- Market approach - using available comparable evidence
8
Q
What are the SIX steps used when collecting comparable evidence?
A
- Search and select comparables (agent’s boards, online databases)
- Confirm / verify information with a party directly involved in the transaction
- Assemble comparables in a schedule
- Interpret comparables using hierarchy of evidence
- Analyse comparables to form an opinion of value
- Report value and prepare file note
9
Q
When would you use the investment method of valuation?
A
Used when there is an income stream to value
10
Q
How does the conventional investment method work?
A
- Rent received (or Market Rent) x Years Purchase = Market Value
- Assumes growth implicit valuation approach
11
Q
When would you use a Term and Reversion method? How does it work?
A
- Used for reversionary investments i.e. where Market Rent is more than passing rent
- Term capitalised until next rent review / lease expiry at an initial yield
- Reversion to Market Rent valued into perpetuity at reversionary yield
12
Q
When would you use the Layer / Hardcore method? How does it work?
A
- Used for over-rented investment i.e. where passing rent is more than Market Rent
- Income flow divided horizontally
- Bottom slice = Market Rent
- Top slice = passing rent - Market rent until the next lease event
- Higher yield applied to the top slice to reflect additional risk
- Different yields used depending on comparable investment evidence and relative risk
In the over rented scenario the Top Slice is YP for a term of years until reversion
For the under rented scenario the Top Slice is YP deferred until Reversion
13
Q
What is a yield?
A
- Measure of investment return, expressed as a percentage of capital invested
- Calculated as income divided by price x 100
14
Q
How would you calculate Years Purchase? What does this show?
A
- Divide 100 by the yield
- Number of years required for the income to repay the purchase price
15
Q
What factors would you considering when determining a yield?
A
- Prospects for rental and capital growth
- Quality of location and covenant
- Use of the property
- Lease terms
- Obsolescence
- Voids
- Security and regularity of income
- Liquidity
16
Q
What is an All Risks yield?
A
Yield which encompasses all the prospects and risks attached to a particular investment
17
Q
What is a True yield?
A
Assumed rent is paid in advance (traditional valuation practice assumes rent is paid in arrears)
18
Q
What is a Nominal yield?
A
Initial yield assuming rent is paid in arrears
19
Q
What is a Gross yield?
A
Yield not adjusted for purchasers’ costs
20
Q
What is a Net yield?
A
Yield adjusted for purchasers’ costs
21
Q
What is an Equivalent yield?
A
Average time weighted yield reversionary property is valued using an initial and reversionary yield
22
Q
What is an Initial yield?
A
Simple income yield for current income and current price
23
Q
What is a Reversionary yield?
A
Market Rent divided by current price on an investment that is under rented
24
Q
What is a Running yield?
A
Yield at one moment in time
25
When would you use the profits method of valuation?
Used for the valuation of trade related property where the value of the property is directly linked to the profit generated by the business e.g. pubs, petrol stations, hotels, guest houses, children's nurseries, leisure, healthcare properties and care homes
26
What do you require to conduct the profits method of valuation?
Accurate and audited accounts for 3 years
27
How would you use the profits method of valuation to value a new business?
Use estimates / business plan
28
What is the methodology for the profits method of valuation?
Annual turnover (income received)
Less costs/purchases
= Gross profit
Less reasonable working expenses and services
=Adjusted net profit known as the Fair Maintainable Operating Profit (FMOP)
Expressed as EBITDA (earnings before interest, taxation, depreciation and amortisation) is capitalised at an appropriate yield)
Capitalised at appropriate yield (YP multiplier) to achieve market value
29
How should you verify a value obtained using the profits method of valuation?
Cross check with comparable sales evidence if possible
30
When would you use the depreciated replacement cost method of valuation?
Where direct market evidence is limited or not available for specialised properties e.g. sewage works, lighthouses, oil refineries, docks, schools, submarine base etc.
31
What is the purpose of the depreciated replacement cost method of valuation?
* Used for owner-occupied properties
* For accounts purposes for specialist properties
* For rating valuations of specialist properties
32
What are the TWO steps of the depreciated replacement cost method of valuation?
1. Value land in its existing use (assume planning permission exists)
2. Add current cost of replacing the building plus fees (used BCIS). Then make a discount for depreciation and obsolesce / deterioration
33
How do you estimate the amount to depreciate the property by when using the depreciated replacement cost method of valuation?
1. Physical obsolescence - result of deterioration / wear and tear over the years
2. Functional obsolescence - where the design or specification of the asset no longer fulfils the function for what it was originally designed
3. Economic obsolescence - due to changing market conditions for the use of the asset
34
Why are building cost reinstatement valuations/estimations required
Building insurance purposes
35
What do building cost reinstatement valuations/estimation show? What would they be based on?
* Cost of the reinstatement of the building without a profit
* Use of RICS Building Cost Information Service (BCIS) adopting GIA for commercial properties and GEA for residential
* Add VAT, demolition costs, professional fees, planning and building regulation fees and inflation allowance if applicable
36
Why does a replacement cost figure provided for insurance purposes, whether separately or within a valuation report, not have to be Red Book Global compliant?
It is not a "written opinion of value"
37
What is hope value?
The value arising from any expectation that future circumstances affecting the property may change
Hope value may arise from:
* Future prospect of securing planning permission for the development of land, where no planning permission exists at the present time
* The realisation of marriage value arising from the merger of two interests in land
38
What must charities do when seeking to buy or sell property?
Obtain a Section 119 of the Charities Act 2011 valuation
39
What must a valuer do when conducting a valuation on behalf of a charity?
* Follow guidance contained in UK VPGA 8
* Comment whether the purchase or sale is in the charity's best interest
* State whether the terms agreed are the best that can be reasonably obtained
* Basis of valuation must be Market Value or Market Rent
* Valuer must follow Section 119 of the Charities Act 2011
40
What are the typical purchasers costs deducted from the gross market value?
* Stamp Duty Land Tax: at prevailing rate
* Agent's fees: 1% of purchase price (+ VAT)
* Legal fees: 0.5% of purchase price (+ VAT)
41
What is marriage value? How do you calculate the level of marriage value?
* Created by the merger of interest - can be physical or tenurial
* Undertake a before and after valuation and calculate the level of marriage value created
42
How is marriage value typically split between parties?
Typically split the marriage value create 50:50 or on a pro-rata (proportionate allocation) basis using the value of the individual interests
43
How would you value a long leasehold interest?
Deduct ground rent from the gross rent to calculate the net rent received. Then can either:
-Capitalise at a yield for the remaining length of the lease
-Use a dual rate to adjust the valuation to set up a sinking fund, so it is comparable to freehold investments
-Discounted cash flow (DCF)
-Capitalise into perpetuity at an adjusted yield to reflect the additional element of risk for the wasting asset
44
What is the significance of rent received and rent receivable when calculating the value of a long leasehold interest?
* Ground rent can be calculated on a geared basis, using the rent from the leasehold interest
* Rent "received" will be where ground rent is payable on rent actually received by the leaseholder
* Rent "receivable" will be where the ground rent payable is based on the potential return as opposed to the actual return i.e. the tenant takes on the risk of voids
45
What is a premium in relation to a transaction?
A capital payment made by one party to another
46
In what instances do premiums commonly arise?
* Key money paid by an in-going tenant of a retail property to secure a prime shop
* Sum of money to represent fixtures and fittings within a building, paid by an in-going tenant
* Sum of money paid by an in-going tenant for a leasehold interest, to represent the positive difference between the passing rent and the market rent of the property. This is the profit rent
* In the event that there is a negative difference, a reverse premium may be paid by the out-going tenant to the new tenant
* The sum of money paid by a landlord to a tenant for the surrender of a leasehold interest and the granting of a new lease
47
What is the WAULT?
Weighted average unexpired lease term remaining to the first break or expiry of a lease
Weighted by the contracted rent
48
What is a ransom strip?
Piece of land which controls the access to another piece of land
49
What is the generally accepted valuation for ransom strips?
* 15-50% of the development value unlocked by the inclusion of the ransom strip within the proposed development scheme
* In some cases a fixed sum has been awarded
* Upper Tribunal (Lands Chamber) assesses each case on its own facts
* Stokes v Cambridge (1961)
50
What is the rate of stamp duty for the transfer of non-residential and mixed-use property?
Up to £150,000: Zero
£150,001 - £250,000: 2%
+ £250,000: 5%
51
What is the rate of stamp duty for the transfer of residential property?
Up to £250,000: Zero
£250,001 - £925,000: 5%
£925,001 - £1,500,000: 10%
Over £1,500,000: 12%
52
What is the rate of stamp duty for the transfer of a second residential property?
You’ll usually have to pay 3% on top of SDLT rates if buying a new residential property means you’ll own more than one.
53
What is ATED? What does it aim to stop?
Annual Tax on Enveloped Dwellings (ATED)
Aims to stop on-shore and offshore individuals using companies to avoid SDLT for residential property. Current threshold is £500,000
54
How is SDLT calculated on the granting of new leases and premiums payable?
Calculated on the Net Present Value (NPV) of the leases (using RPI as a discount rate). For commercial property the rate paid on the NPV is:
Up to £150,000: Zero
£150,001 - £5,000,000: 1%
+ £5,000,000: 2%
Calculator available on the HMRC website
55
How are break clauses accounted for in SDLT calculations for the transfer of leasehold properties?
They are excluded from the calculations
56
Explain the principle of Zoning?
* Used for retail properties to create a unit of comparison for different sized buildings
* Rationale – the rental value of the property reduces away from the street i.e. the area at the front of the shop is most valuable to a retailer as it will generate most sales
* Zone A closest to the window is most valuable with the value deceasing with distance from the frontage.
* Halving back principle with 6.1m (20 ft) zones
57
On which retail pitches are 30ft zones used?
Some London retail streets (e.g. Oxford Street, Regent Street and Bond Street) and certain prime shopping streets in Scotland)
58
How are basement and first floor areas usually treated in retail properties?
A/10 depending upon the comparable evidence
59
What types of unit will allowances typically be made for when zoning?
Those with split levels, excessive front to depth ratio and hard frontages (e.g. banks) depending on the comparable evidence
60
How are return frontages typically dealt with?
* 2.5-10% uplift depending on the comparable evidence and footfall
* Use mirror zoning i.e. zone from both frontages
61
What is natural zoning?
When the property zones reflect physical changes in the building such as steps
62
What is masking?
The valuation of 'hidden' / obscured areas
63
How does the Red Book Global define a Special Purchaser?
A particular buyer for who a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market
64
How does the Red Book Global define Special Value?
An amount that reflects particular attributes of an asset that are only of value to a special purchaser
65
Provide examples of when a Special Purchaser would arise?
* Tenant purchasing the freehold interest
* Association with the property e.g. owning an adjacent property
66
How does Market Value reflect Special Value?
Ignores any price distortions caused by Special Value
67
What is a net effective rent?
This is the rent that would be agreed between the parties for a letting of the premises on the relevant terms and conditions, but without incentives forming part of the transaction
Calculated as post fit-out, pre-incentive i.e. the difference between an allowance for tenant fit-out (usually 3 months) and the rent free period
68
What are the THREE approaches used for calculating net effective rent?
1. Straight line method
2. Straight line method assuming time value of cash flow using a yield
3. Use of DCF
69
What is a party wall?
Stands astride the boundary of land belonging to two or more different land owners
70
What is included in the Party Wall Act 1996?
* Provides a framework for resolving disputes relating to party walls, boundary walls and excavations near neighbouring buildings
* Provides a building owner who wishes to carry out various sorts of work to an existing party wall with additional rights
* Must inform all adjoining owners of your intentions to undertake works on the party wall
71
What is a right of light? When does it arise?
* Arises after twenty years uninterrupted enjoyment of light without the consent of a third party by way of an easement with a prescriptive right
* If a right to light infringed, an injunction can be granted or damages awarded
72
What scheme did the RICS introduce in October 2011 for the regulatory monitoring of all valuers carrying out Red Book valuations?
RICS Valuer Registration Scheme (VRS)
73
What are the THREE aims of the RICS Valuer Registration Scheme (VRS)?
1. Improve the quality of valuation and ensure the highest possible professional standards
2. To meet the RICS requirement to self-regulate effectively
3. To protect and raise the status of the valuation profession as the leading expertise in valuation
74
What should clients be able to expect from a RICS valuation following the introduction of the RICS Valuer Registration Scheme (VRS)?
* Openness and transparency
* RICS protection and international valuation standards
* Expertise and clear reporting
* World class regulations
75
Which newly qualified members are eligible to apply for the RICS Valuer Registration Scheme (VRS)?
* Those who have completed the APC valuation competency to Level 3 qualify for registration
* There is an alternative route post qualification to be a Registered Valuer for candidates who have taken Valuation to only Level 2. This includes undertaking more valuation experience (up to 100 days) and a case study submission.
76
Who is registration mandatory for under the RICS Valuer Registration Scheme (VRS)?
* Those undertaking valuation work in compliance with the Red Book Global
* Registration is not mandatory for work excluded from the Red Book Global
77
What information must be provided under the RICS Valuer Registration Scheme (VRS)?
* Type of valuations
* Purpose of valuations
* Number of valuations
* Firm's total fee income from Red Book Global valuations in the last year
* What data sources used
* Quality assurance audit procedures in place
* History of any negligence claims and notifications
78
How do the RICS monitor those signed up to the Valuer Registration Scheme (VRS)?
* Publishes a register of registered valuers
* Monitor valuers through the submissions of their firms annual return
* Risk based reviews, ranging from desktop investigations to site based Regulatory Review Visits (RRVs), dependent on the risk identified
* Head of Regulation has the power to remove a valuer from the scheme
79
What are the different types of ground rent?
* Fixed
* Geared (rent received/receivable)
80
What would a lender be concerned about with regards to the valuation of an over rented property?
The quantum of the over-rent i.e. how much the rent would decrease by at the next break option or lease expiry
81
What is the generally acceptable upper limit for ground rent when it is calculated on a rent received or receivable basis?
10-15% of the passing rent or market rent
82
What are the issues associated with the layer / hardcore method of valuation?
* Subjective yield selection - based on peceived tenant covenant strength and length of the over rent. Has to be done intuitively.
* Double-counting - as the ARY applied to the bottom layer will be growth implicit, the size of the over rent will reduce over time
* Unrealistic split of income - risk of non-receipt is attached to the whole income
83
Are you qualified to comment on covenant strength?
No, I am able to comment on how the market would likely perceive the tenant covenant
84
When making a discount to the rent for masking in a property, how much discount would you generally apply?
Would generally discount at the rate between the zone the floorspace is in and the rate of the zone behind i.e. if in the second zone, would discount at A/3 or if in the third zone, would discount at A/6
85
Can you undertake valuation work on behalf of a lender that you are already instructed by on other loan security work? In what instances might you be conflicted due to a relationship with the lender?
Yes, it is permitted to undertake multiple loan security valuations on behalf of the same lender. You may, however, be conflicted if your firm had open litigation with that lender or were involved in their corporate restructuring, for example.
86
How would you carry out a valuation differently if you were instructed today as a result of Covid-19?
Impact of Covid-19 on valuation:
Would be unable to inspect the property so would have to make this restriction on information clear in the ToE and the report
Include a material uncertainty clause in accordance with VPGA 10. Use wording recommended by the RICS
Increase length of void periods as reletting is likely to take longer, particularly for retail and leisure uses
Market rent and yield selection would be impacted, although unlikely to be the transactional evidence to support this. Would judge market sentiment from agents
Ensure I had the correct PII in place that would cover valuation practice in the current environment and that I had capped liability
87
What is a material uncertainty clause?
* Used when the degree of uncertainty falls outside any parameters that might normally be accepted
* Does not mean to suggest that the valuation cannot be relied upon
* Less certainty can be attached to the valuation that would otherwise be the case
88
Main difference between EUV and MV
The term 'existing use value' (EUV) describes what property or land is worth in its current form. In other words, the price that it can be sold for on the open market, assuming it will only be used for the existing use for the foreseeable future.
The term 'market value' refers to the price that property or land can actually be sold for on the open market.
89
How is SDLT charged?
SDLT is charged on an incremental basis at different rates depending on the portion of the purchase price that falls into each rate band.
90
Does SDLT apply to the whole of the UK?
Wales - Land Transaction Tax
Scotland - Land and Building Transaction Tax
91
Do you have an example of how EUV may differ from MV?
Generally there is minimal or no difference between the EUV and market value of property or land, however, there are some instances where there will be a difference. For example, there may be an expectation that it will be possible to get planning permission to develop the land, or that it may be possible to change the use of property. This will give it a higher value, known as 'hope value'.
92
What does CIPFA Code mean?
Code of Practice on Local Authority Accounting
93
What does CIPFA stand for?
The Chartered Institute of Public Finance and Accountancy
94
BCIS meaning?
Building Cost Information Service Construction Data
95
What can be stated within your valuation when contamination is present?
A valuer may not be competent to advise on the nature or risks of contamination or
hazardous substances, or on any costs involved with their removal. However, a valuer who
has prior knowledge of the locality and experience of the type of property being valued can
reasonably be expected to comment on the potential that may exist for contamination and
the impact that this could have on value and marketability.
96
Can a valuation be relied upon when there is contaminated land?
The valuer should state the limits on the investigations that will be undertaken and state
any sources of information or assumptions that will be relied on.
Valuation
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