Valuation CP

  1. How is COVID impacting valuation?
    RICS Practice Alert - Coronavirus 

    • Any restrictions of information and/or the ability to inspect must be made clear, agreed with the client and clearly stated in the report
    • All affected terms of engagement must be amended to confirm this
    • These requirements also apply to any valuation assumptions that are made as a consequence of restricted access and/or valuation information
    • If the Regulated Member considers that it is not possible to provide a valuation on a restricted basis, the instruction should be declined.’
  2. What is an internal valuer and a external valuer?
    Internal Valuer = Valuer who is employed by the company to value the assets of the company 

    External Valuer = Has no material links to the asset
  3. What should you consider before carrying out a valuation?
    CIT 

    • Determine competence 
    • Independence (COI)
    • TOE's
  4. Why is it important to undertake statutory due diligence when undertaking a valuation?
    These matters can affect value
  5. What statutory due diligence should you consider before undertaking a valuation?
    CAPEF + Extras

    • Contamination
    • Asbestos 
    • Planning history 
    • EPC rating 
    • Flood risk 

    • Business rates 
    • Public rights of way
  6. How did you assess flood risk?
    Looked at the Environmental Agency flood map which showed no significant risk of flooding for the area
  7. What is the use classes for A1, A3, A5, B1, D2
    • A1: Shops 
    • A3: Restaurants
    • A5: Drinking establishments 
    • B1: Business
    • D2: Assembly & Leisure
  8. What is a typical timeline of a valuation instruction?
    • 1. Receive instructions
    • 2. CIT 
    • 3. Receive material factors relating to property including lease, plans, OS map, planning history etc. 
    • 4. Carry out statutory due diligence 
    • 5. Inspect and measure 
    • 6. Search and select comparable evidence 
    • 7. Form opinion of value 
    • 8. Draft report 
    • 9. Get report checked by another member of staff, preferably someone with more experience
    • 10. Finalise report, sign and date it 
    • 11. Issue to client
    • 12. Invoice client 
    • 13. Keep good record of report
  9. What are the 5 methods of valuation?
    PRICC

    • Profits 
    • Residual 
    • Investment 
    • Contractors 
    • Comparable
  10. What are the approaches to valuation?
    • Market approach
    • Income approach 
    • Cost approach
  11. When would you use the Profits method and what's the methodology?
    It is used for properties who have a monopoly, such as hotels, pubs and petrol stations 

    • Methodology: 
    • Annual Turnover
    • Less costs / purchases 
    • = Gross Profit
    • Less working expenses 
    • = Unadjusted Net Profit 
    • Less operator remuneration 
    • = EBITDA (earnings before interest, taxation, depreciation and amortisation) 
  12. What is the Residual Method of valuation?
    The residual method of valuation is used to assess the residual land value of a development 

    It is a form of development appraisal
  13. What's the methodology of the residual method of valuation?
    Establish GDV (Annual rent / yield) 

    Residual land value = GDV - Costs 

    • GDV less...
    • - Site preparation (varies)
    • - Planning costs (varies) 
    • - Build costs (£100psf for retail) 
    • - Contingency (5% - 10% of construction cost) 
    • - Professional fees (10% of construction cost)
    • - Marketing fees (1 - 2% of GDV) 
    • - Finance costs (5% of GDV)
    • - Developers profit (20% of GDV)
  14. How did you obtain your GDV?
    • Through comparable evidence 
    • Look at typical rents, voids and incentives for retail schemes 
    • Decided on a ARY of 6% 
    • Capitalised the ERV (£400k) at 6% 
    • = GDV
  15. What are the limitations of a residual valuation?
    Accurate inputting 

    Very sensitive to slight changes 

    Should always cross check with other similar developments
  16. Did you include a SWOT analysis? If so, what were the common parts?
    • Strengths: Good location, adjacent to resi 
    • Weaknesses: Retail in general isn't in a good way 
    • Opportunities: Variable planning uses potentially 
    • Threats: Not being able to obtain the relevant planning use
  17. What is the methodology of a development appraisal?
    Establish GDV (Annual rent / yield)

    GDV - Costs 

    • GDV less...
    • - Site costs
    • - Site preparation (varies)
    • - Planning costs (varies)
    • - Build costs (£100 psf for retail)
    • - Contingency (5% - 10% of build cost)
    • - Professional fees (10 - 15% of GDV)
    • - Marketing fees (1 - 2% of GDV)
    • - Finance costs (5% of GDV)

    = PROFIT ON COST (% varies)
  18. What is BCIS?
    Buildings Cost Information Service
  19. What are typical yields for all property sectors?
    • High Street retail: 4.75% 
    • Retail warehousing: 6% 
    • Office: 4.75 - 5.0% 
    • West End office: 3.50% 
    • Industrial/distribution: 4.25%
  20. How are yields determined?
    • Quality of location 
    • Quality of covenant 
    • Property use 
    • Lease terms 
    • Obsolescence 
    • Voids
  21. What is years purchase and how do you calculate it?
    • Amount of time it takes to pay off an investment 
    • 1 / yield... 1 / 0.06 = 16.6 years
  22. When is the Contractors method of valuation used and what's the methodology?
    It is used for specialist properties where there are limited comparable pieces of evidence such as a light house 

    Methodology: 

    • Calculate value of the land with existing use
    • Add cost of replacing the building 
    • Less obsolescence / deterioration of property
  23. What is the comparable method of valuation and how's it used?
    • This is the most common method of valuation. 
    • Used it almost all methods of valuation 

    • Methodology: 6 step process 
    • 1. Search and select comparable 
    • 2. Verify comparable with agent 
    • 3. Input into schedule 
    • 4. Weight using the hierarchy of evidence 
    • 5. Form opinion of value 
    • 6. Submit report to client
  24. What is the guidance note on this?
    RICS Guidance note on comparable evidence in RE 2019
  25. How do you find comparable evidence?
    Inspect local area to check for new lettings and letting boards 

    Speak to local agents 

    Search via CoStar and get evidence verified by the agent
  26. What is the hierarchy of evidence and what are the weightings?
    The hierarchy of evidence is a weighting system used to rank evidence in accordance to relevance. 

    • Weightings: 
    • 1. OML 
    • 2. LR
    • 3. RR 
    • 4. Third party determination 
    • 5. Sale and leaseback 
    • 6. Intercompany transactions
  27. What are the 3 hierarchy's of evidence?
    • Cat A - Direct comparable of property (complete transactions of near identical properties, full data may not be available, properties being marketed and asking prices 
    • Cat B - General market data that provide guidance such as EG costar, historical evidence 
    • Cat C - Transactional evidence from other RE types and locations
  28. When is the Investment method of valuation?
    It is used to value an income stream 

    Rental income is capitalised at a rate to produce capital value

    Two main methods are Term and Reversion for reversionary properties and Layer and Hardcore for overrented properties
  29. What is Term & Reversion?
    Term & Reversion (used to value a property where the market rent is greater than the passing rent)

    • Passing Rent: £10,000
    • Initial Yield: 5%
    • Market Rent: £15,000 
    • Reversionary Yield: 6% 
    • Next lease event: 2 years time 

    • TERM 
    • YP 2 years @ 5% = Figure x Passing Rent = TERM 

    • REVERSION
    • YP Perp @ 7% deferred 2 years = Figure x Market Rent = REVERSION

    Term + Reversion = Market Value / 1.068 (purchasers costs)

    • = MARKET VALUE 
  30. What is Layer & Hardcore?
    Layer & Hardcore (used to value a property where the market rent is lower than the passing rent) 

    • Passing Rent: £20,000
    • Initial Yield: 5% 
    • Market Rent: £15,000 
    • Reversionary Yield: £6% 
    • Next lease event: 3 years 

    • Hardcore (Reversionary) 
    • YP Perp @ 6% = Figure x Market Rent = Layer 

    • Layer (Froth) 
    • YP 3 years @ 5% = Figure x £5,000 = Layer
  31. What is a yield and how is it calculated?
    Measurement of investment return

    Investment / Rent = Yield
  32. What is an All Risks Yield?
    Rate used in the valuation of a fully let property at market rent reflecting all risks attached
  33. What is TRUE YIELD?
    Assumes rent is paid in advance
  34. What is Nominal Yield
    When rent is paid in arrears
  35. What is Gross Yield?
    Yield not adjusted for purchasers cost
  36. What is Net Yield?
    Yield adjusted for purchasers cost
  37. What is an equivalent Yield?
    Average weighted yield when a reversionary property is valued using an initial and reversionary yield
  38. What's the difference between a equivalent yield and a equated yield?
    Equivalent yield – the weighted average yield of a reversionary property between the initial and reversionary yield. Growth Implicit

    Equated yield – the average annual return that an investor requires from the investment. Growth Explicit
  39. What is an initial yield?
    Simple income yield for current income and price
  40. What is a Reversionary Yield?
    Yield that should be achieved if the passing rent adjusts to market rent
  41. Running Yield?
    The yield at one moment in time
  42. How do you find the initial, reversionary and equivalent yields?
    • Initial: Comparable evidence 
    • Reversionary: Comparable evidence also but you do MR/Current Price on a investment let a below MR = Reversionary Yield
  43. What is NPV?
    It is the sum of the discounted cash flows of a project 

    If it is positive, it means it has exceeded the clients expectations

    If it is negative, it means it hasn't exceeded expectations
  44. What is an IRR?
    The rate of return at which all future cashflows must be discounted to produce an NPV of zero.
  45. When is IRR used?
    To assess the total return from an investment opportunity making some assumptions regarding rental growth, re-letting and exit assumptions
  46. What is DCF?
    It is a discounted cash flow 

    It is a valuation method used to value an investment today based on future projections including assuming the holding period and exit value
  47. What's the methodology?
    • Estimate the cash flow (income less expenditure) 
    • Estimate the exit value at the end of the holding period 
    • Select the discount rate 
    • Discount cash flow at discount rate 
    • Vale is the sum of the completed DCF to provide the NPV
  48. Why would a surveyor be asked to value as an external valuer?
    May be required for financial reporting from companies accountants
  49. What type of sensitivity analysis can you do?
    Simple sensitivity: changing variables such as yields, GDV and build costs

    Scenario analysis: change the scope of a development from say retail to resi

    Monte Carlo simulation: using software such as crystal ball
  50. Where would you typically get your finance rate from?
    Firstly check with your client as they may have a specific loan facility and be able to borrow money at a certain rate, I would then use that.

    •  
    • I would also look at comparable scheme to see what finance rate had been used. However the best way of working out the best level of finance achievable for the scheme would be to talk to the developer, and find out what finance arrangements he has been able to find on recent projects, and compare the market conditions then with the current market.

    •  
    • Alternatively my understanding is that you would look at the current Swap Rates (10 year SWAPS are currently at 0.75% for Feb 2020) and add on a typical percentage for risk in the development. A typical market finance rate TODAY would be 4-6%.

    Interest should also be calculated to cover the time period from the purchase of the land, the construction of the building and any projected letting / sale void upon completion of construction.
  51. How do you calculate finance for the whole project?
    Straight line basis for purchasing the site 

    S Curve for when building the project out 

    Holding period is from project completion to disposal
  52. What is a SWAP rate?
    It is the market interest rate for a fixed rate, fixed term loans
  53. What is the BOE base rate?
    0.1%
  54. What is the current LIBOR rate?
    0.7%
  55. What is replacing LIBOR?
    SONIA rate at the end of 2021 (Sterling Over Night Index Average)
  56. What two main methods of funding are there?
    Debt Finance - lending money from a bank

    Equity Finance - selling shares in a company or use own money
  57. What is the typical loan to value ratio?
    60%
  58. What software do you use to calculate finance and what does it assume?
    Argus 

    Assumes 100% debt
  59. What are the benefits and limitations to Argus?
    • Benefits 
    • - Quick
    • - Simplified 

    • Limitations 
    • - Human error 
    • - Sensitivity to inputs 
    • - Includes hidden assumptions
  60. What is a Section 106 agreement?
    Private agreement between local authority and developer that is usually attached to the planning application to make the development viable

    May include that the developer has to build a school, local centre, housing etc. as part of the project
  61. What is a Section 278 agreement?
    Private agreement between local authority and developer that is usually attached to the planning application to make the development viable from a infrastructure point of view

    May include that the developer has to make improvements to the local highways, new highways, bus stops etc.
  62. What is a conservation area?
    An area that is worthy of preservation  due to its architectural or historic interest
  63. How might a building in a conservation area affect a valuation?
    Can affect it greatly as it may not be able to be redeveloped
  64. What is the current UBR?
    • 2020
    • Standard 50.4p
    • Small 49.1p
  65. What's an S Curve in development finance?
    A display of cumulative costs plotted against time
  66. What is a contingency?
    A rate used to reflect unforeseen circumstances and events

    Can include an increase in building costs due to a specific reason, bad weather etc.
  67. How do you work out your contingency?
    Depending on the complexity of the development 

    5-10% is market norm
  68. How would you reflect planning requirements in your appraisal?
    Contact the local authority to determine the costs for S106 and S278 agreements
  69. What is hope value?
    Is the term used to describe the market value of land based on the expectation of getting planning permission for development on it
  70. What is included in purchasers cost?
    • SDLT = Prevailing rate 
    • Agents fees = 1% of purchase price plus VAT
    • Sols fees = 0.5% of the purchase price plus VAT
  71. What are the SDLT rates?
    • 0 - £150,000 = Nil 
    • £150,001 - £250,000 = 2% 
    • £250,001 - above = 5%
  72. What are the SDLT rates for new leases?
    • NPV up to £150k = Nil 
    • NPV over £150k = 1% 
    • NPV over £5m = 2%
  73. What is an NPV?
    Net Present Value 

    Total rent payable over the term of the lease, reduced by discounted rate
  74. What is marriage value?
    Created by a merger of interests which can be both physical or tenurial 

    This can include a tenant buying the freehold
  75. How do you value marriage value?
    Carry out a before and after valuation and calculate the difference between the two 

    Outcome is negotiable however typically it's a 50:50 split of both
  76. What is ZONING?
    It is a valuation technique used to compare retail property in relation to its size and shape 

    Value of the property reduces away from the street 

    6.1m zones
  77. What is a CIL payment?
    Community Infrastructure Levy 

    It's a charge set on new developments in order to raise funds in order to fund infrastructure, facilities and services
  78. Could you tell me about your development appraisal you did in Buckinghamshire?
    I used the RESIDUAL METHOD of valuation to establish the residual site value 

    I assisted in the preparation of a development appraisal of a site in Buckinghamshire on behalf of my client. We carried out the development appraisal to establish the profitability of a proposed scheme if a new retail complex was built on the site. When inspecting with my manager, we took an OS plan which we obtained from land reg and walked the site. I used Promap to confirm the size of the site.

    We used comparable evidence to establish typical market rents, voids and incentive packages. We looked at typical yields in the area for a 10 year term certain which was 6%

    ARY which I capitalised which would give me my GDV.

    I then carried out a residual method of valuation to establish residual site value 

    Reported it through to my client 

     

    My client provided me with his costs which I consulted with a building surveyor to ensure they were accurate.
  79. Could you tell me about the valuation you undertook in Ashford?
    I used the comparable method of valuation to establish the MARKET RENT of the property 

    • Received instruction 
    • CIT check
    • Received material matters relating to property 
    • Inspected and measured the property
    • Search and selected comparable evidence
    • Formed opinion of value using the zoning technique 
    • Drafted report and submitted to client
    • Received instructions a week later to market the property
  80. What are the consequences if the valuer doesn't comply with the Red Book Global?
    Action by the head of regulation
  81. What info are you required from an interested party who has called up requesting a valuation?
    • Property address
    • Supporting documentation such as lease, plans 
    • Competence check 
    • Confirmation there are no COI
    • Agree and sign TOE's
  82. How would you respond to a request to value a property from  pavement only?
    • I would need to carry out a desktop valuation 
    • Would need to specify in the TOE and Report of the limitations
  83. What is the difference between basis of value and method of valuation?
    Basis is the definitions and methods are the approaches
  84. Name some typical assumptions in a valuation report
    • Assume free of contamination 
    • Assume obtaining a specific use 
    • Assume all the services are in good working order
  85. What is WAULT?
    Weighted Average Unexpired Lease Term
  86. How do you calculate a WAULT?
    Add up all of the contractual lease terms and divide it by the number of tenants
  87. What are the advantages and disadvantages of Automated Valuation Models?
    • Advantages
    • Speed
    • Efficiency 
    • Accuracy

    • Disadvantages  
    • Subject to human error
    • Use hidden assumption
    • Do not illustrate calculations
  88. Can you tell me about the valuation you did in Ashford?
    • Yes, I used the comparable method of valuation to establish the ERV 
    • CIT check 
    • Received material matters relating to the property 
    • Inspected and measured the property on a NIA basis and using the zoning technique
    • Search and selected comparable evidence 
    • Ranked the evidence using the hierarchy of evidence 
    • Multiplied market ZA tone by ITZA which provided me with the ERV
    • Reported to my client
  89. What's a ransom strip?
    Piece of land that restricts access to another piece of land 

    Stokes v Cambridge = court held the piece of land to be valued 1/3 of the uplift of the development site value
Author
Palmiero
ID
351604
Card Set
Valuation CP
Description
Valuation
Updated