Valuations Level 2

Question 1

What is the definition of Market Value

Answer 1

Market value is the estimated amount for which an asset or liability should exchange on a valuation date between a willing buyer and a willing seller in an arm’s length transaction after property marketing where the parties had each acted knowledgably, prudently and without compulsion.

Question 2

What is the definition of Market Rent

Answer 2

Market rent is the estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arms length transaction after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion.

Question 3

How did you ensure you had the skills, knowledge and understanding and what would you have done if you didn’t?

Answer 3

I assessed the scope of works to determine whether it was within my expertise. As I am not a registered valuer, I ensured that I completed the valuation under appropriate supervision, ensuring that everything was checked before going in the report.
If I did not, I would have either recommended a competent valuer or referred to the RICS Find a Surveyor service on the RICS website.

Question 4

How did you ensure there were no conflicts?

Answer 4

My company carries out conflict of interest checks via data searches of the parties involved so I checked with my supervisor that this was done. I also ensured that I did not have a personal interest with any of the parties involved before accepting the instruction.

Question 5

Provide example of what were included in the TOE?

Answer 5

1. Identification and status of responsible valuer – My Supervisor as the Registered Valuer (Report must be signed by Valuer and PII cover only covers Registered Valuer).
2. Identification of client - Client name and confirmed there were no other intended users
3. The asset to be valued – Property Address
4. The currency - GBP
5. Purpose of the valuation - Disposal
6. Basis of value - Market Value
7. Valuation date - 2023
8. Nature and extent of the valuers work including investigations and any limitations
9. Nature and sources of information to be relied upon
10. All assumptions and special assumptions
11. Format of report
12. Restrictions for use, distribution and publication
13. Confirmation the valuation was done in accordance with the Red Book
14. Basis of fee calculation
15. Complaints handling procedure (as RICS registered firm)
16. Statement that the valuation may be subject to monitoring and compliance by RICS.
17. Limitation of liability agreed
18. Understand that it is now required to have consideration to any significant ESG factors under the new Red Book.

Question 6

Talk me through your DDs.

Answer 6

As part of the statutory due diligence, I checked:
* Asbestos register
* Business rates/council tax
* Contamination
* Equality Act 2010 compliance
* EPC
* Environmental matters
* Flooding (check environmental agency website)
* Fire safety compliance
* Health and Safety compliance
* Highways
* Legal title and tenure
* Public rights of way
* Planning history and compliance (listed area/ subject to S.106 / CIL)

Question 7

Why did you carry out DDs?

Answer 7

Statutory due diligence is required to check that there are no material matters that could impact upon the valuation.

Question 8

What factors did you consider on the inspection which could impact the value of the property?

Answer 8

• Location
• Tenure
• Aspect
• Form of construction
• Defects
• Current condition
• Occupation details

Question 9

Talk through your inspection

Answer 9

Step 1: Desktop review
*
Step 2: Consideration of the wider location
*
Step 3: External Inspection
*
Step 4: Internal Inspection
*

Question 10

Why did you measure to NIA?

Answer 10

It was a retail property, which in line with the guidance at the time should have been measured to NIA. The relevant guidance was the Code of Measuring Practice 2015.

Question 11

What do you mean by Zone A?

Answer 11

Zone A is established via the Zoning technique, which is a valuation technique used for comparing retail properties. It creates a unit of comparison for different sized buildings.
Zone A is considered the most valuable part of the property, usually at the front of the store, and is valued based on its whole measurement.

Question 12

Talk me through ITZA.

Answer 12

A halving back principle is applied with 6.1m (20ft) or 9.14m (30ft) for some prime locations.
Basements/first floor areas are usually treated as A/10 depending on comparable evidence and subject to specification.
Return frontages usually add 10% uplift (depending on comparable evidence and footfall).

Question 13

Where did you source your comparables from?

Answer 13

I sourced my comparables by speaking to my company’s leasing team operating in that area and also through CoStar and my company’s internal database of transactions.
I’m aware of other methods such as:
* Inspection of area looking out for agent’s boards, however I did not see any on my inspection.
* I didn’t consider auction results as there was enough comparable evidence through my other sources and I recognise that auction sales are at gross prices, and may be for a special purchaser or insolvency sale so less likely to be reflective of the market.

Question 14

What attributes did you consider when analysing your comps?

Answer 14

I considered:
* Quality of location and covenants
* Specification
* Age of transaction
* Use of the property
* Lease terms, e.g FRI, inside/outside the Act (security and regularity of income)

Question 15

What cap rate did you apply and what was this based on?

Answer 15

6%, this took into account comparable market data of recently sold properties in the last 18 months and with consideration to the extra risk of the building being vacant.

Question 16

What is ERV?

Answer 16

Rent achievable on the market today

Question 17

What is the income approach and what method did you employ?

Answer 17

The income approach entails converting current and future cash flows into a capital value (investment, residual and profits method).
I employed the investment method here, specifically the conventional method, which was most appropriate here as the unit was vacant. There was no rent being received so the market rent and yield was obtained via comparable evidence. The market rent was then multiplied by the years purchase to calculate market value.
The investment method is required when there is an income stream to value, the rental income is capitalised to produce a capital value.
The conventional method assumes a growth implicit valuation approach. An implied growth rate is derived from the market capitalisation rate.

Question 18

Why did you capitalise into perpetuity?

Answer 18

The method capitalises into perpetuity because it values the property on the assumption that the Market Rent continues forever, with no end date or changes, using a yield multiplier derived from the chosen yield. This is a standard method for valuing assets with ongoing income, such as freehold commercial properties.

Question 19

What transaction fees and taxes did you apply?

Answer 19

Agents and legal fees at 1.8% and SDLT.
Non-residential SDLT:
- £0 - £150,000 Nil
- £150,001 to £250,000 2%
- Over £250,000 5%
Charged on incremental basis based on how much of the price falls into each bracket.

Question 20

How did this qualify as an exemption to the Red Book?

Answer 20

This was for my client’s internal purposes only, I advised that it had to be on express contractual terms that excluded the valuers liability and that it could not be communicated to or relied upon by a third party.
My client wanted to understand if they could achieve a higher rent for an upcoming rent review, but this valuation was not used as part of the final rent decided at rent review and the rent review was not included in the scope of the instruction.

Question 21

What are the other exemptions to the Red Book?

Answer 21

5 exceptions to VPS 1-6:
6. Providing an agency or brokerage service in respect of the acquisition or disposal of one or more assets (but does not cover a purchase report which includes a valuation)
7. Providing valuation advise expressly in preparation for, or during, negotitaions or litigation
8. Acting or preparing to act as an expert witness
9. Performing statutory functions
10. Providing valuations to a client purely for internal purposes, on express contractual terms that exclude the valuers liability and without communication to a third party.

Question 22

Talk me through your hierarchy of evidence.

Answer 22

I focused on category A evidence, which is direct comparables of contemporary evidence, as there was enough comparable evidence that I did not need to source category B or C data.
Category A – direct comparables of contemporary:
- Completed transactions of near identical properties for which full and accurate information is available, this may include data from the subject property itself.
- Completed transactions of other, similar real estate assets for which full and accurate information is available.
- Completed transactions of similar real estate for which data may not be available, but for which enough reliable data can be obtained to be used as evidence.
- Similar real estate being marketed where other offers may have been made but a binding contract has not been completed, and
- Asking prices (only with careful analysis)
Category B – General market data that can provide guidance, e.g.
- Information from published sources or commercial databases; its relative importance will depend on relevance, authority and verifiability.
- Other indirect evidence (e.g. indices)
- Historic evidence, and
- Demand/supply data for rent, owner occupation or investment
Category C – other sources, e.g:
- Transactional evidence for other real estate types and locations, and
- Other background data (e.g. interest rates, stock market movements and returns which can give an indication for real estate yields)

Question 23

Why is a hierarchy of evidence used?

Answer 23

A hierarchy of evidence is used for comparable property valuations to ensure that the valuation is based on the most reliable, relevant, and objective information available in relation to the subject property.

Question 24

Explain the term and reversion method?

Answer 24

The term and reversion method is used to reversionary investments where market rent is more that the current passing rent.
The term is capitalised until the next review date or lease expiry at an initial yield.
The reversion is then capitalised at market rent valued in perpetuity at a reversionary yield.

Question 25

Did you refer to any RICS guidance when sourcing comparables?

Answer 25

I referred to the hierarchy of evidence in the RICS Professional Standard: Comparable evidence in real estate valuation, 2019. This document outlines principles in the use of comparable evidence. It provides advice in dealing with situations where there is limited availability of evidence and sets at a non-prescriptive hierarchy of evidence, noting that “the valuer should use professional judgement to assess the relative importance of the evidence on a case-by-case basis.”

Question 26

What other RICS guidance did you refer to in this example?

Answer 26

- RICS Professional Standard: Comparable evidence in real estate valuation, 2019. - RICS Professional Standard: Rules of Conduct, 2021 - RICS Global Professional Standard: Conflicts of Interest, 2017 - RICS Valuation – Global Standards 2024 (the red book) - RICS Professional Standard: Valuation - Global Standards (UK National Supplement, 2023) - RICS Ethics Decision Tree (when determining whether to act for a client)

Question 27

Talk through your inspection, what did you look out for (Haymarket, Comparable)?

Answer 27

First I conducted a desktop review, for which I ensured access was arranged with the tenants in accordance with their leases, I requested a copy of the tenancy schedule and any legal documents from my client that were relevant to the valuation such a leases, ancillary documents such as LTA’s, and planning documentation tied to the property, EPC certificates etc, that could impact the value. Then I considered the wider location of the property and an impact this would have of the valuation, as this was in Central London I considered how factors such as how close the property was to the tube station… When I arrived, I inspected the property externally first, noting the condition of the building and it’s construction. This building was stone and built around…, last refurbished in 2018 and in relatively good condition. I then inspected internally, ensuring I signed in at reception upon arrival and signed out when I left. I looked out for things such as the quality of fitout, how well the property was being maintained, any disrepair etc.

Question 28

Talk through how you decided your cap rates?

Answer 28

Initial Yield: I derived my initial yield through the comparable method, making adjustments to the yield with consideration to the hierarchy of evidence and based on the characteristics or the properties in comparison to my subject property. For the reversionary yield, I increased the percentage by 1% and I based this on the fact that the property was under rented and there was a higher risk associated with the tenant paying a higher rent.

Question 29

How does tenant’s covenant strength impact value?

Answer 29

A tenant with a stronger covenant strength is considered a lower risk as they are less likely to default on their rent or repair and maintenance obligations within their lease. This lower risk translates into a lower yield, which translates into a higher property value as Net Rent / Yield = Capital Value

Question 30

What yields did you adopt and why?

Answer 30

5% for initial yield – in line with the market evidence 6% for reversion – reference to high risk of higher rent with reference to the tenant’s covenant strength.

Question 31

What were the assumptions in your Brompton example?

Answer 31

Liaised with leading team who advised 6 months void period Higher yield was adjusted to account for this and void costs payable by landlord

Question 32

You mentioned compliance with VPS 2 - what was included in this?

Answer 32

VPS 2 at the time was inspections, investigations and records, which is now VPS 4. Included the extend of investigations, the inspection and nature or sources relied. 1. Inspections and Investigations Inspections and investigations must be carried out to the extent necessary to produce a valuation that is professionally adequate for its purpose. The valuer must take reasonable steps to verify the information used in preparing the valuation. If relevant information is unavailable due to the instruction's limitations, any resulting restrictions and assumptions (or special assumptions) must be recorded in the terms of engagement and the valuation report. When agreeing the terms of engagement, the valuer must specify the extent of inspection and any investigations to be made. Professional judgement is required to determine the adequacy and reliability of information and not to exceed the valuer's expertise. Dispensing with an inspection increases risk; only accept such instructions after assessing the risks carefully[Source: Red-Book-Global-Standards-incorporating-IVS.pdf]. 2. Revaluation Without Reinspection Revaluations without reinspecting real property previously valued by the valuer are only permitted if the valuer is satisfied that there have been no material changes to the property's physical attributes or its location. The client must confirm in writing that no changes have occurred. Changes in non-physical attributes (e.g., rental income, planning consents) must be disclosed by the client; the valuer must consider these in the valuation. If material changes have occurred, reinspection is required. If a revaluation without reinspection is requested solely for internal use and the client accepts the risk, this exception must be clearly stated in both engagement terms and the report[Source: Red-Book-Global-Standards-incorporating-IVS.pdf]. 3. Valuation Records Proper, auditable records must be maintained for inspections, investigations, and key inputs, regardless of employment status (internal/external). Records should include: scope of the valuation, work performed, data considered, key inputs used, judgements made, different methods considered, results, and quality control procedures. Adequate documentation must enable understanding and review of the basis for all conclusions. All documentation must be retained for the period required by relevant legal, regulatory, or contractual mandates. ESG and sustainability data must be requested and considered as appropriate. All ESG data used or any limitations due to unavailable data must also be recorded and reported. Inspection and investigation notes should be clear and unambiguous to avoid misleading interpretations