Valuation - Level 1

Question 1

What is the full name of the Red Book?

Answer 1

• RICS Valuation – Global Standards 2022
• Known as the red book

Question 2

What are the differences between 2018 and 2022 edition of the red book?

Answer 2

• Implement changes to drive evolving changes in ESG, Sustainability and technology

Question 3

What is the purpose of the Red Book?

Answer 3

• SICOB
• (S) To set out global standards
• (I) To achieve high standards of integrity
• (C) clarity and
• (O) objectivity
• (B) to adopt best practice in valuations

Question 4

What is the purpose of carrying out a valuation?

Answer 4

• SIFSS
• Statutory
• Internal
• Financial
• Secured lending
• Sales/acquisitions

Question 5

Are there exceptions to the red book?

Answer 5

• Acting as an expert witness
• Agency/brokerage purposes
• Statutory purposes
• Internal purposes
• Negotiation/litigation

Question 6

Can you tell me the 5 methods of valuation?

Answer 6

• Comparable
• Investment
• Residual
• Profits
• Depreciated Replacement Cost

Question 7

Discuss the conventional method of investment – Discounted Cash Flow

Answer 7

• Assumes growth implicit
• Yield is derived from comparable evidence
• Capital value = rent x yield purchase

Question 8

What are the bases of valuation?

Answer 8

• FIMM
• Fair Value
• Investment value - also known as worth
• Market Value
• Market rent

Question 9

What is fair value?

Answer 9

• The price that would be received to sell an asset, or transferred for a liability, in an orderly transaction between market participants at the measurement date
• Used if the international financial reporting standards have been adopted

Question 10

What is investment value?

Answer 10

• The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives

Question 11

Why is worth different to market value?

Answer 11

• Market value is the what you will obtain in the open market
• However a property may be ‘worth’ more to a specific buyer and they will be willing to pay a higher price to obtain it

Question 12

What is the definition of market rent/value?

Answer 12

• Estimate value a property will let/sell for
• On the open market
• At an arm length transaction
• Between a willing LL and willing tenant / buyer and seller
• After proper marketing
• Where both parties have acted knowledgably, prudently and without compulsion

Question 13

What are the 3 valuation approaches?

Answer 13

• Income – converting current and future cash flows into to capital value (investment, residual and profit)
• Cost – the cost of the asset whether by purchase or construction (DRC)
• Market approach – using Comparable evidence (comparable)

Question 14

What is included in the terms of engagement?

Answer 14

• Name of company
• Name of client
• Valuers name
• Purpose of valuation
• Property details
• Assumptions or special assumptions
• Basis of value
• Method of valuation used
• Calculation
• Currency

Question 15

What is included in the valuation files?

Answer 15

• Conflict of interest (COI) check
• Terms of engagement
• Inspection notes etc
• Planning, rating and environmental searches
• Comparable and analysis
• Valuation calculations with rationale
• Report

Question 16

Sources of comparable evidence

Answer 16

• Direct Transactional Evidence
• Publicly available info
• Database info
• Asking price– better for guidance

Question 17

What to do when there is a lack of comparable data?

Answer 17

• In reference to the RICS guidance note effective from 2019, widen you your search to include transactions in similar style locations.
• It is important to emphasise that the valuers experience, judgement and market knowledge comes more important.

Question 18

What do you understand of hierarchy of evidence?

Answer 18

• Attaching the greatest weight to the transaction type. In order below:
  o New Letting
  o Lease Renewal
  o RR
  o Independent expert
  o Arbitration

Question 19

What is an assumption and a special assumption?

Answer 19

• An assumption is something that the valuer believes to be true without carrying out their own investigations, eg the building is structurally sound
• A special assumption is something that may not be true at the time of the valuation but soon to be in place, eg planning permission will be granted

Question 20

What are examples of an assumption?

Answer 20

• Assume that they have a clean title.
• Assumed that the area is free from defects and hazards.
• Assumed there is valid statutory docs. A valid EPC and asbestos management survey.

Question 21

What are examples of special assumptions?

Answer 21

• That planning consent has been granted.
• That the property is vacant at valuation date rather than fully let.
• That the property is let of defined terms rather than vacant on the valuation date.

Question 22

When would you use the investment method?

Answer 22

• Used when there are income streams to value
• The rental income is capitalised to produce a market value
• Term and Reversion or Hardcore method used to calculate value

Question 23

Discuss the term and reversion method

Answer 23

• Used for properties which are under rented.
• The term is a lower yield when compared to the reversionary yield due to being secure income
• The term rent is capitalised by the PV of the income until next lease event at the initial yield
• The market rent is then capitalised at YP in perpetuity at the Reversionary yield and multiplied by the deferred rate of the reversionary yield

Question 24

Discuss the layer and hardcore method

Answer 24

• Used for properties which are over rented
• The income flow is sliced horizontally
• The bottom slice is the market rent
• The top slice is the passing rent
• The top slice has a higher yield to reflect the risk
• Market comparables are used to determine the risk

Question 25

When would you use the Profits method?

Answer 25

The profits method is used to value trade properties and involves obtaining company accounts

Question 26

Can you tell me how you would calculate a valuation using the profits method?

Answer 26

* Income – costs = gross profit * – expenses and operators remuneration = adjusted net profit. Capitalised at yield. * Often expressed as EBITDA (earnings before interest, taxation, depreciation and amortisation).

Question 27

How do you use the contractors method?

Answer 27

* Step 1 – Issue term of engagement * Step 2 – Obtain the estimated building costs. * Step 3 – I would account for depreciation. * Step 4 – I would then add the land value (20-30% of GDV?) * Step 5 – I would then find the profit on cost. * Step 6 – Final value is the depreciated replacement cost and land value minus the profit on cost.

Question 28

You mentioned company accounts. Can you tell me what would be included what these entail?

Answer 28

* Profit and Loss which states the properties income and expenditure * The balance sheet which provides details on the companies assets and liabilities * And finally the cashflow which details the amount of cash the company has in the bank at any given time

Question 29

What is the ARY?

Answer 29

* Used in the Val of a fully let property let at MR reflecting all risks attached

Question 30

What is the initial yield?

Answer 30

* Factual yield * Current income / current price

Question 31

What is the reversionary yield?

Answer 31

* Market Rent / current price

Question 32

What is the equated yield?

Answer 32

* The weighted average of the initial and reversionary yield

Question 33

What is years purchase?

Answer 33

* t’s the number of years it will take the income to repay the purchase price * Calculated by dividing 100 by the yield

Question 34

What are the risks to consider when determining a yield?

Answer 34

* Rental growth * Location and covenant strength * Void periods * Use * Lease terms

Question 35

Which sections of the global Red Book are mandatory?

Answer 35

* PS 1 – 2 * VPS 1 - 5

Question 36

What does PS1 & PS2 relate to?

Answer 36

* PS1 - Compliance with standards where a written valuation is provide\ * PS2 - Ethics, competency, objectivity and disclosures

Question 37

What is a particular buyer / special value?

Answer 37

* When a particular buyer for whom a particular asset has special value because of the advantages arising from owning it are not available to other buyers in the market * Special value is the amount of particular attributes of the asset which only have value to the special purchaser

Question 38

What is Synergistic Value?

Answer 38

TWO OR MORE ASSETS WHERE THE COMBINED VALUE IS MORE THAN THE SEPARATE VALUES.

Question 39

What is Marriage Value?

Answer 39

* An additional element of value created by the combination of two or more assets or interests where the combined value is more than the sum if the separate values.

Question 40

Tell us about ransom strips?

Answer 40

* When one piece of land controls access to another piece of land * The upper tribunal (land chamber) evidence conveys that the value of a ransom strip is up to 15% to 50% of the development value unlocked by including the ransom strip in the proposed development scheme. * Sometimes fixed sums are awarded. * The upper tribunal (land chamber) considers the facts of each case separately

Question 41

What is the key case study surrounding ransom strips?

Answer 41

* Stokes vs Cambridge (1961) where 1/3 of the uplift in development value was awarded to the owner of the ransom strip

Question 42

What characteristics of a lease would have to be considered that affect value?

Answer 42

* Rent reviews * Lease expires * Incentive periods

Question 43

What is the statutory due diligence should be reviewed?

Answer 43

* Asbestos register * Business rates * Contamination (Contamination, the Environment and Sustainability, 2010) * Environmental assessment (electricity pylons) * Equality act compliance * EPC available * Flooding risk * Fire safety compliance * Highways – check adopted roads through local highway authority * Health and safety compliant * Legal title and tenure * Public rights of way * Planning history and compliance

Question 44

What effect did COVID have on valuations?

Answer 44

* Lack of evidence and material uncertainty * Guidance note on comparable evidence provides advice for when info is less reliable or unverifiable * Material uncertainty should be explicitly stated in the Terms of Engagement * RICS issued a COVID-19 global valuation practice alert in March 2020 and updated it in November * Valuers must be aware of VPGA 10 and VPS 3 regarding material uncertainty and reporting, as it should be explicitly reported

Question 45

What is a right to light?

Answer 45

* Arises when there is 20 years of uninterrupted enjoyment of light, via no 3rd party consent, by way of an easement with a restrictive right. * If infringed an injunction can be served * Guidance note on right to light 2016

Question 46

Do you know of any case law relating to right to light?

Answer 46

Highcross vs Heaney (2011) – served with an injunction on their Toronto Square development in leeds where they proposed to add 2 additional floors onto the office

Question 47

How would you respond to a request to value a property from a Drive-by only?

Answer 47

* Ask - Why do you want to inspect by drive by? What is the purpose of the valuation? If for sale then I would reject this request and state you must inspect internal of the premises. * I would only do a drive-by if you have previously inspected the premises such as for Re-valuation purposes * You have to have enough information to carry out a valuation. A desk-top valuation or drive-by is departing from the red book mandatory requirements however you can do it.