Valuation Difficult Topics

Question 1

• What do the RICS Valuation Global Standards outline?

Answer 1

Mandatory requirements to promote best practice and high standards.

Series of sections:
- PS – Professional Standards
- VPS – Valuation Performance Standards
- VPGA – Valuation Applications
- IVS – International Valuation Standards

Question 2

• Can you provide any examples of sections of the Professional Standards section of the Global Standards?

Answer 2

PS1 – Compliance with standards for written valuation:
o 5 types of valuation non-red book compliant

PS2 – Ethics, competency, objectivity and disclosures:
o Abide by Rules of Conduct
o No conflict of interest
o Comply with Terms of Engagement

Question 3

• Can you provide any examples of sections of the Valuation and Technical Performance Standards (VPS) section of the Global Standards?

Answer 3

• VPS1 – Terms of Engagement
• VPS2 – Inspections
• VPS3 – Valuation Reports
• VPS4 – Bases of Value and Assumptions
• VPS5 – Valuation Approaches and Methods

Question 4

• Can you provide any examples of sections of the Valuation Applications (VPGA) section of the Global Standards?

Answer 4

• 10 in total
• VPGA1 – Valuation for inclusion in financial accounts
  o Fair Value
• VPGA2 – Valuations for secured lending
• VPGA10 – Matters giving rise to material uncertainty

Question 5

• What do you know about the RICS Global Standards UK National Supplement?

Answer 5

• UK jurisdiction only
• Supplementary document to make the Red Book more user friendly
• Not an alternative to the Red Book
• Most of the advice is guidance and the document is not mandatory
• Series of VPGAs, some of them new
• New section for valuation for commercial lending VPGA 10

Question 6

• What do you know about the UK VPS3: Regulated Purpose Valuations?

Answer 6

• Within the UK National Supplement
• Talks about the reliance of third parties on valuation reports
• For purposes of:
  o Company accounts reporting
  o Stock exchange listings
  o Takeovers and mergers
• Not loan security reports as they are not third party relied

Question 7

• What does the Guidance Note Comparable Evidence in Real Estate detail?

Answer 7

• Guidance Note
• Provides advice on assessing and adjusting comparables
• “Valuer should use professional judgement on a case-by-case basis”
• Provides hierarchy of comps validity:

o Category A:
 Direct comps
 Full data available

o Category B:
 Market data from published sources
 Indirect evidence
 Historic evidence

o Category C:
 Other real estate types
 Other background info (interest rates, market changes)

Question 8

• What is the Peter Pereira Gray Review 2021?

Answer 8

• Commissioned by RICS Standards & Regulations Board
• Hope that changes will increase public confidence
• Made 13 recommendations:
  o Separation of valuations from advisory activities within firms
  o Developing a time-specific mandatory rotation process for valuers
  o Developing a Valuation Compliance Officer within firms
  o DCF as the principal model applied in investment valuations
  o Review of post-qualification requirements and regular revalidation of valuers

Question 9

• Is there a margin of error on a valuation figure in terms of negligence?

Answer 9

• Margin of Error:
   K/S Lincoln & Others v CBRE (2010) judge ruled 5% to be appropriate for standard residential property, 10% for one-off commercial property and 15% for property with exceptional features

Question 10

• What is a ransom strip?

Answer 10

• Inaccessible piece of land
• Value of ransom strip is 15 to 50% of development value unlocked
• The Upper Tribunal assesses each case
• Stokes v Cambridge is key case with 33% awarded

Question 11

• What is Zoning?

Answer 11

• Valuation analysis method
• Retail properties of higher value
• 9.14m (30ft) zones used in some prime London, NI and Scotland
• Usual rates:
  o Zone A = 1
  o Zone B = 2
  o Zone C = 4
  o Remainder = 8
  o FF = 10
  o Flat rate can also be applied
• ‘End allowances’ used for split level, hard frontages
• Natural zoning = places like steps
• Mirror zoning = shops with two main frontages
• Return frontage = add percentage to the Zone A to reflect additional

Question 12

• What can you tell me about Stamp Duty Land Tax?

Answer 12

• Residential and non-residential properties
• Non-residential or mixed-use properties:
  o Up to £150,000 = Nil
  o Up to £250,000 = 2%
  o Over £250,000 = 5%
• Residential properties:
  o Up to £250,000 = Nil
  o Up to £925,000 = 5%
  o Up to £1,500,000 = 10%
  o Over £1,500,000 = 15%
• Calculator on HMRC Website

Question 13

• What can you tell me about Surrender and Renewal Valuations?

Answer 13

• LL or tenant wants to surrender lease and agree new lease on new terms
• Calculate premium to reflect change in value
• Need to value before and after
• Understand the valuation of the premium

Question 14

• Valuations for Charities?

Answer 14

• UK VGPA 8 sets out advice regarding charities

Question 15

• What do you know about Rights to Light?

Answer 15

• Can be compensation if right to light is damaged
• RICS guidance note on it
• Landmark case at Toronto Square in Leeds to reduce the scale of two floors that were added to an existing office property

Question 16

• How and why do you provide Reinstatement Values?

Answer 16

• For insurance purposes (without profit)
• GIA Commercial
• GEA Residential
• Add VAT, demolition and professional fees etc
• Red Book compliance not required

Question 17

• How would you value a Long Leasehold asset?

Answer 17

• Ground Rent deducted from Gross income to calculate Net Rent
• Capitalised by yield for length of lease
• Sinking rate, dual rate adjusted yield can be used
• However, in practice – more likely to use an adjusted yield to cover this

Question 18

• What are typical Purchaser’s Costs?

Answer 18

• Good practice to deduct purchaser’s costs to produce Net Value
• SDLT = required rate
• Agent’s fees = 1% of purchase price plus VAT
• Solicitor’s fees = 0.5% of purchase price plus VAT

Question 19

• What is the formula for WAULT?

Answer 19

Calculate total rental income remaining
/ Current Rent for Each Tenant

Question 20

• What is a typical rent-free period?

Answer 20

• Usually 3-month fit out
• Straight line method = reduction until lease break/end
• Straight line assuming timbe value of cash flow
• Use in DCF

Question 21

• RICS Valuer Registration Scheme (VRS)?

Answer 21

• Monitoring scheme for all members carrying out Red Book valuations
• Members can use term ‘RICS Registered Valuer’
• Must have completed to Level 3 or alternate route for Level 2
• Must provide annually:
  o Type of valuations
  o Total number of valuations
  o Firms total fee from Red Book valuations
  o History of any negligence

Question 22

• What is, and how do you use the profits method?

Answer 22

• Profits Method is an income approach to valuation and is used for properties where the value of the property is inextricably linked to the performance of the business. It assessed the profitability and trade of the business to provide value.
• Requires audited accounts from 3 years and forecasts
• Turnover
• Less Costs
• = Gross Profit
• Less Reasonable Working Expenses
• = Unadjusted Net Profit
• Less Operator’s Remunerations
• = Adjusted Net Profit (EBITDA)
• EBITDA = Earnings before interest, taxation, depreciation and amortisation
• These things removed because they won’t necessarily be transferred to a new owner
• Adopt market-based multiplier (YP) to capitalise

Question 23

• What is, and how do you use the DRC method?

Answer 23

• DRC Method is a cost approach to valuation and is seen as the last resort to other methods, i.e. when there is no comparable evidence.
• It includes providing a reinstatement valuation for the property and then depreciating this by its economic life.
• Examples: Ancient monuments, sewage works, aquariums
• Method:
  o Value of the land with planning for existing use
  o Current reinstatement cost inc fees (depreciate for deterioration)

 Physical obsolescence - Economic life of the property
 Functional obsolescence – specification no longer suitable
 Economic obsolescence – challenging market

Question 24

• Why do you apply a capital rate psf to owner-occupied properties?

Answer 24

If the property is owner-occupied, it is not possible to value the property using the income approach as it is not income producing.
The cost approach is a last resort of valuation approach and therefore the comparable approach is used.
Despite adopting a hypothetical lease, which for some properties like residential, is not the most accurate reflection of Market Value, a rate psf is used as it reflects the quality of the property against comparables of differing size.

Question 25

- Is residential comparable evidence provided on an NIA basis?

Answer 25

- Floorplans provided within particulars don’t often specify the measurement basis but provide measurements on a room by room basis including hallways and WCs etc, therefore most likely reflecting GIA - EPC measurements are on a GIA basis - GIA measurements should be amended circa 15% to reflect NIA areas.

Question 26

How do you use the DCF Method?

Answer 26

- A modern method of valuation which explicitly states the growth and value of the investment based on several income streams (cash flow). Method: - List the events and dates - Insert in time order - Assume relevant void periods etc (assume worst case scenario) - Insert rent at each stage, relevant YP and PV - Filter down the table to receive Net Present Value - IRR also returned

Question 27

What is the definition of Market Value?

Answer 27

- Estimated amount an asset would exchange on the valuation date, between a willing buyer and willing seller, in an arm’s length transaction, after property marketing and acting knowledgeably and without compulsion.

Question 28

What is the definition of Fair Value?

Answer 28

- Orderly transaction with market participants at the measurement date.

Question 29

What is the definition of Market Rent?

Answer 29

- Willing lessor and lessee.

Question 30

What is investment value?

Answer 30

- Value to a particular owner

Question 31

What type of valuations is the Red Book not applicable for?

Answer 31

- Litigation - Statutory Function - Internal purposes - Agency - Expert Witness

Question 32

What does goal seek on the NPV show?

Answer 32

- It shows the remaining amount of value left once the target yield is met

Question 33

Is a DRC valuation suitable for Loan Security and Red Book compliant?

Answer 33

- No - Only for financial accounts - Market Value = the alternate use value, which would be far lower

Question 34

What are the key changes in the new Red Book?

Answer 34

- Must be clear whether the valuation is Red Book compliant (can't be partially) - Valuers should have regard to sustainability factors on inspection - Sustainability should be regarded to within valuations

Question 35

What should you consider when undertaking a desktop valuation?

Answer 35

- Has anything changed with the property - Has this been agreed in the Terms of Engagement - Is desktop suitable for the reason for the valuation - Must caveat the report about this assumption/basis

Question 36

What advice could be given if a WAULT is low?

Answer 36

- Short term remaining on the income - Likelihood that a new tenant will be required soon - This is reflected in the Term and Reversion approach - Could increase the rent of the property if market doing well