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
CCT:
- Competence - check you have the correct level of skills, understanding and knowledge
- Conflict of Interest - check you are able to act independently on the instruction
- 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
- DRC
7
Q
RICS Guidance on Comparable evidence?
A
RICS Comparable evidence in real estate valuation, 2019
8
Q
When would you use the investment method of valuation?
A
Used when there is an income stream to value
9
Q
How does the conventional investment method work?
A
- Rent received (or Market Rent) x Years Purchase = Market Value
- Assumes growth implicit valuation approach
10
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
11
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
12
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
13
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
14
Q
What is an All Risks yield?
A
Yield which encompasses all the prospects and risks attached to a particular investment
15
Q
When would you use the profits method of valuation?
A
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
Hotels
16
Q
What do you require to conduct the profits method of valuation?
A
Accurate and audited accounts for 3 years
17
Q
How would you use the profits method of valuation to value a new business?
A
Use estimates / business plan
18
Q
What is the methodology for the profits method of valuation?
A
EBITDA (earnings before interest, taxation, depreciation and amortisation) is capitalised at an appropriate yield
19
Q
When would you use the depreciated replacement cost method of valuation?
A
Where direct market evidence is limited or not available for specialised properties e.g. Schools, Hospitals, Power Stations
20
Q
What is the purpose of the depreciated replacement cost method of valuation?
A
- Used for owner-occupied properties
- For accounts purposes for specialist properties
- For rating valuations of specialist properties
21
Q
When did the new RICS Valuation - Global Standards become effective as of?
A
31st January 2022
22
Q
What does PS1 of the Red Book Global cover?
A
Requirements on when a valuation has to be Red Book Global Complaint
23
Q
PS2 of Red Book?
A
Ethics, competency, objectivity and disclosures
24
Q
VPS1 of Red Book
A
Terms of Engagement
25
VPS2 of Red Book
Inspections and Investigations
26
VPS3 of Red Book
Valuation Reports
27
VPS4 of Red Book
Bases of Vale, Assumption and Special Assumptions
28
VPS5 of Red Book
Valuation approaches and Methods
29
What is a Special Assumption, as defined in the Red Book Global?
Supposition taken to be true and accepted as fact, even though it is not true
30
What is the difference between Fair Value and Market Value?
* RICS view that Fair Value is generally consistent with the definition of Market Value
* Fair value relates to the actual worth of an asset and would be the mutually beneficial value between the buyer and the seller
* Market value is the price which the asset will exchange between parties in the market and is influenced by market forces
31
What is hope value?
The value arising from any expectation that future circumstances affecting the property may change
32
Provide some examples of where hope value may arise.
- Securing Planning
- Marriage Value
33
What is marriage value?
Element of value created by the combination of two or more
assets or interests where the combined value is more than the sum of the
separate values.
34
What is a ransom strip?
Piece of land which controls the access to another piece of land
35
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
36
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%
37
What is the threshold for Inheritance Tax?
£325,000
38
What is Market Value?
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
39
When is the Redbook not required?
- Providing agency or brokerage advice for an acquisition or disposal
- Acting as an expert witness
- Performing statutory functions
- Providing a valuation purely for internal purposes, without liability and without communication to a third party
- Providing valuation advice in the course of negotiations or litigation where the valuer is acting as an advocate
40
Example of Special Assumption?
A property without planning can be valued as if it does have it
41
Valuation ToE?
- ID and Status of Valuer
- Assets to be valued
- Purpose of valuation
- Basis of value
- Valuation date
- Assumptions and Special Assumptions
- Restrictions on use
42
What is a special purchaser?
A particular buyer for whom a particular asset has a special value because of advantages arising from its ownership that would not be available to other buyers in a market.
43
Kings Langley, Hertfordshire
I assisted a colleague in the undertaking and writing of a Redbook Valuation of a commercial property for Inheritance Tax purposes, using an investment approach and verified by analysis of comparable transactional evidence.
This was a telecoms mast site. I used the investment method of valuation. The remaining term was 6 months before the rent would be reduced under the new code. I capitalised the rent passing for the remaining term at a yield of 5%. I then assessed the new market rent, and capitalised that in perpetuity at the same yield.
44
Follow up to Kings Langley
Why did you choose this yield and why in perpetuity?
Yield was chosen quite low owing to the strength of the Tenant's covenant in being a multi-billion pound company.
In perpetuity because once reviewed there is no reason for the Tenant to terminate.
45
Great Easton, Leicestershire
-I assisted in the writing of a Red Book residual method valuation of a derelict barn in a rural village.
-This involved a residual land valuation and development appraisal to determine the GDV for loan security purposes.
-I calculated the GDV based on comparable sales evidence. Then deducted the BCIS build cost and I verified in-house building surveyors.
I also deducted:
- developers profit at 20%,
- agents fees at 1.5%
- professional fees at 7%
- finance at 8%
-This gave me my residual site value.
46
Great Easton
What else might you include?
5% contingency
47
Great Easton follow up
why did you choose 20% developers profit?
What did you deduct your developers profit from?
20% is standard
Deduct developers profit from GDV.
48
Great Easton, difference between development appraisal and residual valuation
- development appraisal is a series of calculations to establish the viability of a proposed development based upon the client’s inputs, and it can assume a site value
- a residual valuation is a specific valuation of a property to find the market value of the site based on market inputs, it is a form of development appraisal.
- It can be based upon a traditional residual valuation or the DCF method.
49
What are the 3 approaches to Valuation?
Market
Income
Cost
50
What is the Market Approach?
Based on comparing the subject asset with identical or similar assets
(or liabilities) for which price information is available, such as a comparison with market
transactions in the same, or closely similar, type of asset (or liability) within an appropriate
time horizon.
51
Was is the Income Approach?
Based on capitalisation or conversion of present and predicted
income (cash flows), which may take a number of different forms, to produce a single
current capital value.
52
What is the Cost Approach?
Provides an indication of value using the economic
principle that a buyer will pay no more for an asset than the cost to obtain
an asset of equal utility, whether by purchase or construction
53
What is the Hierarchy of Evidence?
- Category A – direct transactional evidence
- Category B – general market data providing guidance rather than a direct indication of value, such as evidence from published sources, commercial databases, indices, historic evidence and demand/supply data
- Category C – other sources, such as transactional evidence from other property types and locations and other relevant background data
54
What are the sections of Valuation reports?
1. Executive Summary
2. Introduction
3. Location and Description
4. Legal and Title
5. Planning and Statutory
6. Environmental
7. Valuation
8. Restrictions and signatures
55
What is the definition of Market Value for Inheritance Tax?
s.160 Inheritance Tax Act 1984
“the value at any time of any property shall for the purposes of this Act be the price which the property might reasonably be expected to fetch if sold in the open market at that time."
56
What is Transaction Cost?
Cost of purchasing an asset
- Stamp Duty
- Agent's
Solicitor Costs
57
What are the professional standards for Valuation as per the Red Book?
1. Requirements on when a valuation has to be Red Book Global Compliant
2. Ethics, competency, objectivity and disclosures
58
What are the Valuation and Technical and Performance Standards (VPS)?
TIVBV
1. Terms of Engagement
2. Inspections, investigations and records
3. Valuation reports
4. Bases of Value, Assumptions and Special Assumptions
5. Valuation Approaches and Methods
59
What makes a bad comparable?
Something still on the market
Different location
Different use or type
WJ - APC Technical Qs 2023
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