1
Q
What is an Internal / External Valuer?
A
Internal Valuer: employed by company to value for internal use only (no 3rd party reliance).
External Valuer- has no material links with the asset being valued or the client.
2
Q
3 steps to take before undertaking a valuation
A
- Competence (SUK- skills, understanding, knowledge)?
- Independence (conflicts/personal interests)?
- Terms of Engagement (signed in writing, confirm competence and extent/limitations of inspection)
3
Q
Statutory DD:
Why undertake?
Examples?
A
Why undertake? to ensure no material matters that would impact valuation
Examples:
- Business Rates
- Environmental matters (high voltage power lines, electricity sub-stations)
- Flooding (Environmental Agency website)
- EPC ratings
- Legal title / tenure (boundaries, ownership, restrictive covenants, rights of way)
- Planning history / compliance (onerous planning conditions, conservation area, listed)
- Fire Safety compliance
- Asbestos register
4
Q
Valuation Timeline
A
- Receive instruction from client
- Check competence: SUK
- Check Independence (No CoI, personal interest)
- Issue ToE to client – then receive ToE signed by client
- Gather info (TS, Title docs, Service charge budget, PPM)
- Undertake DD (check no matters could adversely impact value)
- Inspection and measurement
- Research market, assemble, verify and analyse comps
- Undertake valuation
- Draft report and check with supervisor
- Finalise and sign report.
- Report to client
- Issue invoice
- Ensure valuation file is in good order for archiving.
5
Q
What are the 5 methods of Valuation?
A
- Comparable Method
- Investment Method
- Residual Method
- Profits Method
- Depreciated Replacement Cost
6
Q
What is the comparable method?
Key legislation?
Use?
A
What: Collate, verify and analyse comps
Use: Assessing MV of vacant land. used with Inv. Method – Establishing MR and Cap Rate
RICS Professional Standard: Comparable evidence in real estate valuation (2019)
- Cat A: Direct, Recent Comparables
- Completed or U/O, Close proximity, Full info - Cat B: General market Data
- Info from published sources / commercial databases
- Historic evidence
- Demand / Supply data for rent, investment - Cat C: Other Sources
- Transactional evidence from other property types / locations
- Other background data e.g. stock market movements and returns which can indicate yields.
7
Q
Investment method
- Definition
- Use
A
Def: Rental income capitalised to produce a capital value:
- Conventional
- Term & Reversion
- Layer / Hardcore
- Discounted Cash Flow
Use: Used if there is rental income stream to value
8
Q
Profits Method
- Definition
- Use
- Technique
A
- EBITDA (earnings before interest, tax, depreciation & amortisation) capitalised by a multiplier (YP) / cap rate.
- Use: Self Storage, Hotels, Pubs, Petrol Stations
- Technique: DCF
9
Q
Residual Method
- Definition
- Use
A
Def: Calculate GDV by investment method then deduct costs.
- Residual: to calculate land value
Development: to calculate profitability
Use: Market Value of a development site.
10
Q
Depreciated Replacement Cost (DRC)
A
Def: - Used when direct market evidence is unavailable.
- Value the land in its existing use, add the costs of replacing the building (plus fees), discount for obsolescence (physical/functional/economic).
- NOT for Red Book-compliant valuations for secured lending, CAN provide Market Value for financial reporting.
Use: Lighthouse, Sewage works, submarine base.
11
Q
What are the 3 approaches of valuations?
A
ICM:
- Income approach (converting current/future cashflows into a capital value- investment, residual, profits)
- Cost approach (referencing cost of asset by purchase or construction- DRC)
- Market approach (using comparable evidence- comparable method)
12
Q
What valuation method do you use when a property is rack-rented?
A
Conventional:
- MV = Rent multiplied by YP (cap rate). Growth implicit in yield
- For rack rented
13
Q
What approach do you use for a reversionary property?
A
- Term & Reversion:
- Reversionary properties
- Income split vertically
- Primary chunk: Passing Rent (lower yield)
- Second chunk: Market Rent (high yield)
14
Q
What approach do you use when a property is over rented?
A
- Layer / Hardcore
- Overrented properties
- Income flow divided horizontally
- Bottom Slide: Market Rent (lower yield)
- Top Slice: Passing Rent - market rent (High yield)
15
Q
What method do you use when you a property is modelled over a finite period?
A
DCF:
- Explicitly modelling cashflow over a hold period, plus exit value (calculated with on conventional ARY basis) at end. Cashflow discounted back to present day at a discount rate (IRR) that reflects perceived level of risk. Growth explicitly modelled.
- Assumptions explicitly modelled over finite period. E.g. complex assets or where little market evidence.
16
Q
what is a yield
A
Yield: The return a property investment provides to the investor (income / value)
17
Q
What is an Initial Yield
A
Current income / current value of investment.
18
Q
What is an Net Initial Yield
A
Current income / current value of investment
deduct purchaser costs
19
Q
What is an Reversionary Yield
A
Market Rent / current value of investment
20
Q
What is an All Risk Yield
A
Growth-implicit Yield used in an investment valuation that reflects all potential risk and rewards of the investment
21
Q
What is an Equivalent Yield
A
Weighted average of the Net Initial Yield and the Reversionary Yield. Represents the return a property will produce based upon the timing of the income received.
22
Q
What is an Running Yield
A
The yield at one moment in time
23
Q
What is an Gross Yield
Example?
A
Yield not adjusted to purchaser’s costs
(such as an auction result yield)
24
Q
What is an nominal Yield
A
Does not include inflation (i.e. it has not had anything deducted for inflation, more common)
25
What is a real yield?
Takes into account inflation (to get from nominal yield to real yield, deduct inflation. Real Yield can be negative if inflation is especially high.
26
What is a discounted cashflow?
Identify future net income and discount to arrive at market value
27
How do you find the MV when using a DCF (valuation purposes)
1. Estimate the cashflow (income and expenditure) over hold period
2. Estimate the exit value at end of the hold
28
What is Net Present Value?
Investment will be profitable by comparing the present value of all expected future cash flows to the initial investment cost.
You would use a market determined discount rate to identify that
29
What is a discount rate?
the rate used when calculating the present value of future cashflows.
30
Difference between a discount rate and all risk yield?
DCFs explicitly model future capex/void costs/void costs, whereas traditional valuation wraps the risk of them up in the ARY.
31
How to chose a discount rate?
Comparable evidence
Market sentiment
Investor requirement: Hurdle rate
32
Can you walk me through the profits method of valuation?
* Annual turnover (income received)
* Less Costs/Purchases
= Gross Profit
* Less reasonable working expenses
= Unadjusted net profit
* Less operator’s remuneration
* = Adjusted net profit known as the Fair Maintainable Operating Profit (FMOP)
* In other words EBITDA (earnings before interest, tax, depreciation, amortisation)
33
What is the latest edition of the Redbook?
RICS Valuation - Global Standards 2024. Effective 31st January 2024
34
What is the purpose of the red book?
Provides mandatory standards and guidance for property valuation. It Ensures consistency, transparency and professional quality to build market confidence.
35
What are the latest changes in the Red Book?
* Updated ESG Requirements: It is mandatory for valuers to report ESG factors and outline how this can impact a valuation report. (e.g. adjustment of comparable evidence / ESG appendix)
* Use of AI: Incorporates updates on the use of AI and technology. (ensuring transparency and compliance).
* Aligning with IVS structure changes: aligns with the latest International Valuation Standards (IVS). Including a revised structure and increased focus on data and valuation modelling.
* Revised ordering of VPS: VPS 2 swaps with VPS4 and VPS3 to VPS6)
* New VPS 5 section: Valuation models
36
What is the Structure of the Red Book?
Part 1: Introduction
Part 2: Glossary
Part 3: Professional Standards (PS1 and PS2)
Part 4: Valuation technical and performance standards (VPS 1-6)
Part 5: Valuation practice guidance application (VPGA 1-11).
Part 6: International Valuation Standards (IVS). Adopted / applied through the Red Book.
37
what parts of the Red Book are mandatory?
Parts 3 & 4are mandatory and Part 5 is advisory/best practice!
38
Can you tell me about Part 3 of the Red Book?
Professional Standards:
PS1: Compliance with standards and practice statements where a written valuation is provided.
PS2: Ethics, competency, objectivity and disclosure.
e.g. rules of conduct, objectivity and independently, CoI and ToE
39
5 exceptions for VPS 1-6?
ALIENS:
Agency (unless purchase report)
Litigation
Internal Purposes
Expert Witness
Negotiation
Statutory Function (unless statutory return to tax authority)
40
Can you summarise the VPS's for me?
VPS1: Terms of Engagement
VPS 2: Basis of Valuation
VPS 3: Methods and approaches
VPS 4: Inspection investigation and records
VPS 5: Valuation Models
VPS 6: Valuation reports
41
What is VPS1?
Valuation technical and performance standards 1: Terms of Engagement
Confirm PRIOR to commencing Red Book valuation.
42
What is included within ToE
1. Identification / status of 2. valuer
3. Client
4. Asset being valued
5. purpose of valuaiton
6. Basis of Value
7. Basis of Valuation
8. Valuation date
15. Fee basis
16. Compaints handeling procedure
17. Statement: Compliance with RICS
18: PII
43
What is VPS2?
Bases of Value, assumptions and special assumptions.
Value must determine basis of value appropriate for every val, and identify indented special assumptions.
44
What is the difference between an assumption and special assumption?
- Assumptions: Made where it is reasonable for the valuer to accept that something is true, without the need for specific investigation.
- Special Assumptions: A supposition that is taken to be true and accepted as a fact, even though it isn’t true (Agreed with client in writing before commencing instruction)
45
Definition of Market Value?
The estimated amount for which an asset or liability should exchange:
- On the val date
- Between willing b&s
- In arms length transaction
- After proper marketing
- When the parties had each acted knowledgably, prudently and without compulsion
46
Definition of Market Rent?
The estimated amount for which an interest in real property should be leased:
- On the val date
- Between willing lessor and willing lessee
- On appropriate terms
- In arms length transaction
- After proper marketing
- When the parties had each acted knowledgeably prudently and without compulsion.
47
Definition of Fair Value?
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.
48
When is Fair Value used?
Required if the client is undertaking financial reporting purposes.
49
what is Investment value?
The value of an asset to a particular owner (or prospective owner) for individual investment or operational objectives.
50
What is VPS 3?
Valuation approaches and methods
Valuers responsible for choosing and justifying their valuation approach
51
what is VPS 4?
Inspection, investigation and records.
Verify info before valuing
52
When can you revalue a property if you don't reinspect?
Not advisory, unless satisfied no material changes since last inspection (& confirm in ToE and valuation report)
53
what is VPS 5 and what does it set out?
New: Valuation Models
For complex models, valuers must ensure the model is suitable for the valuation purpose, using professional judgement
Greater vigilance is needed to ensure no internal inconsistency
54
What is a valuation model?
quantitative implementation of a method in whole or part that converts inputs into outputs used in the development of a value
55
What is VPS 6?
Valuation Reports (IVS 103 Reporting)
Minimum report inclusions:
- Same as terms of engagement, plus
- Valuation approach and reasoning
- Valuation figure(s)
- Date of valuation report
- Preliminary advice: must be labelled as draft.
56
What is VPGA?
Valuation Practice Guidance Application
57
What is VPGA 1:
Valuation for includsion in Financial accoutns
- Fair Value adopted for all IFRS accounts
- a number of Performance standards to be adhered too ( similar to VPSs)
58
What is VPGA 2?
what does it set out?
Valuation for secured lending
Independence, objectivity and CoI.
Disclose previous /current/anticipated involvement with prospective borrow.
Valuer's responsibility to decide whether to accept instruction.
59
What is part 6?
Incorporation of International Valuation Standards 2024 (Mandatory).
* General Standards (100-106) e.g. Valuations framework (100), Scope of Work (101), Bases of Value (102) etc.
* Asset Standards (200-500) e.g. ‘Asset Standards’ provide requirements relating to specific types of asset.
60
What is the International Valuation Standards?
IVS sets the international benchmark for valuation principles, while the RICS Red Book takes these principles and translates them into a comprehensive, mandatory framework for its members, adding specific professional and operational requirements to ensure consistency, transparency, and high-quality valuations globally.
61
What is the UK national supplement?
It provides members with specific requirements on the application of the red book, within the UK. However it is NOT a Substitute
62
Latest edition of the UK supplement?
October 2023, effect May 2024
63
What were changes made in the latest edition of the UK national supplement ?
Mandatory changes on valuation rotations:
how long an individual or firm can be on an instruction.
o Individual: max 5 years
o Firm: Max 10 years
o There must be a 3-year break between them.
64
Structure of the UK National Supplement
1. Introduction
2. UK Professional Standards (UK PS) (mandatory)
3. UK Valuation Technical and Performance Standards (UK VPSs) (mandatory)
4. UK Valuation Practice Guidance Applications (UK VPGA) (advisory)
65
Important UK VPGAs
- UK VPGA 1 - Valuation for financial reporting: general matters
- UK VPGA 10 - Valuation for commercial secured lending purposes
66
what is Margin of Error?
- The permissible range allowed by courts in respect of a valuation.
+/- 10% for one-off commercial.
67
what is Hope Value
value arising from expectation that future circumstances affecting the property may change.
- E.g. future prospect of securing planning permission for development.
68
What is Marriage value?
created by the merger of interests (physical or tenurial).
- Undertake a before and after valuation and calculate the level of marriage value created.
- Typical negotiated outcome is to split the marriage value created 50:50 or divide it pro-rate to the value of the individual interest.
69
Special Purchaser
a particular buyer for whom a particular asset has special value because of advantages arising from its ownership that would not be available to other buyers in a market
70
Special Value
- Red Book: ‘an amount that reflects particular attributes of an asset that are only of value to a special purchaser’.
e.g. tenant buys freehold interest
71
What is Building Cost Reinstatement Valuations?
Building Cost Reinstatement Valuations / Estimations
- *For building insurance purposes only*
- The cost of reinstatement of the building without a profit.
- Not a ‘written opinion of value’ so Red Book compliance not required.
72
Long Leasehold Interest Valuation
- Value the income from the tenancy schedule as usual but just deduct off the annual ground rent from the gross income to get the net income.
- Capitalise this net income for the length of the lease (rather than into perp) to get the Market Value.
- The capitalisation rate needs to reflect the risk of the long leasehold being a ‘wasting asset’.
- DCF can also be used.
73
what are rental Premiums?
- capital payments made by one party to another. e.g. premium on existing fittings, high end fitout costs
74
What is an assumption in valuation
Assume a tenant will exercise their break.
Assume the property has a good and marketable title.
75
What is the purchasers cost in the UK?
- Stamp Duty Land Tax (SDLT)- at the prevailing rate.
- Agent’s fees- assume 1% of purchase price plus VAT.
- Solicitor’s fees- assume 0.5% of purchase price plus VAT.
76
what is Net effective rent?
- Devaluation (on a straight-line basis until the next lease event or expiry) of a headline rent, accounting for rent-free periods / capital contributions = net effective rent.
77
What is a Ransom Strip Valuation?
- A piece of land which controls access to another piece of land.
- Evidence suggests value could be 15-50% of the development value unlocked by inclusion of the ransom strip within the proposed development scheme (but case-by-case basis).
78
what are party walls?
a wall on the boundary of land belonging to 2+ different owners.
- Specialist ‘party wall’ dispute surveyors.
79
what are rights to light?
right to receive light through defined windows/doors in buildings.
- RICS guidance note on Rights of Light.
80
What is the RICS Valuer Registration Scheme?
- RICS regulatory monitoring scheme for all valuers conducting Red Book Global valuations from Oct-11.
- Mandatory for Red Book Valuation valuers (must have completed APC valuation to Level 3).
- Head of Regulation has the power to remove a valuer from the Scheme.
81
What are the 3 aims of the RICS Valuer Registration Scheme
1. To improve the quality of valuation and ensure highest possible professional standards (openness & transparency).
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.
82
How to resister for the RICS Valuer Registration Scheme
- Type, purpose and number of valuations.
- Firm’s total fee income from Red Book Global valuations in the last year.
- What data sources are used.
- Quality assurance audit procedures in place.
- History of negligence claims and negotiations.
83
Why is Independence, objectivity and accuracy fundamental components of valuations?
* Independence is important to avoid conflict of interest…
* Objectivity and accuracy:
o don’t be influenced by any situation that would threaten professional objectivity
o Ensure public confidence and trust within a valuation.
o The public depend on valuers to provide sound judgment and opinion of value, in accordance with globally recognised standards.
84
What is a rateable value?
the amount the Valuation Office Agency (VOA) in England and Wales estimates it would cost to rent the property for one year on the open market on a specific valuation date
85
What are the Valuation technical and performance standards?
Turn by an inch more Rachel
VPS 1: Terms of Engagement
VPS 2: Basis of Value, Assumptions and Special Assumptions
VPS 3: Approaches and Methods
VPS 4: Inspections, Investigations and Records
VPS 5: Models
VPS 6: Report
86
what is the purpose of a credit safe check?
To assess how well the business is performing financially
87
Limitations of Credit Safe?
88
What does 100 A mean as a credit safe rating?
numerical term: Risk score predicting a companies insolvency risk
Letter term: International score, using a standardised global comparison of credit risk across different countries
89
What is M&S' credit score rating?
86 A
90
What is an IRR?
Discount rate at which the NPV = 0.
It's not a valuation technique but a method of assessing return.
91
How do you calculate Net Effective Rent
1. determine the total gross rent for the lease term
2. Deduct Landlord Contributions: RF or TI
3. Divide net amount by term certain.
92
Why did you use the EY for you're case study?
1. Market Norm
2. Reflect fixed rental uplifts
93
What if you're property was in a conversation area?
Restricted planning condition and the property won't be able to develop.
Lose investor pool of developers
94
What if IFRS 13
Definition of Fair Value
95
What if IFRS 16
Lease have to be accounted for on a balance sheet, if over 12 months. This is recognised as a liability.
96
Talk me through you're Retail Warehouse example in Oxford
- New instruction.
- financial Reporting
- Fair value
- Prior val: Competence, independence and ToE
- Inspection and measurement
97
Retail Warehouse, Oxford:
- WAULT
- Passing Rent / Market Rent
- Value
- Yield
- 13 years unexpired
- Rack rented (£25psf)
- £12m
- 5.5% EY
98
Talk me through your valuation of the Leisure Unit in Suffolk?
- Ongoing Mandate
- Inspection
- Lack of evidence in immediate proximity
- Expanded Search Radius
- Rack Rented
- Value remained the same
99
Leisure Unit Suffolk
- WAULT
- Passing Rent / Market Rent
- Value
- Yield
- 29.5 years
- £18 / £18
- £18m
- 6.75% EY
100
High Street, West London:
What was the advice you gave
- Upcoming lease expiry couldn't be reflected
101
High Street, West London:
- WAULT
- Passing Rent / Market Rent
- Value
- Yield
- Void / Rent Free?
- Prime?
- 0.75 years
- £32 / £27
- £2.5m
- 7%
- 8 months
- Prime: 6.5%
102
Retail Park, Sussex:
Advice?
- Property was overrented - renewal will result in lower rent
- Overrented nature will pose a higher risk potential investors
- Given Short WAULT, property is even more at risk.
103
Retail Park, Sussex:
- WAULT
- Passing Rent / Market Rent
- Value
- Yield
- Void / Rent Free?
- Prime?
- WAULT: 2.5 years
- Passing Rent / Market Rent: £20 / £18
- Value: 14 m
- Yield: 6.5%
- Void / Rent Free: 6 months
- Prime: 5.5%
104
What is the case law for Margin of Error?
Singer & Friedlander Ltd & J.D. Wood (1977) - Margin of Error can vary and it will be narrow
105
What would you count as a Non-recoverable cost?
- Service Charge
- Business Rates
- Letting Fees
APC - BK
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