What is valuation?
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Transcript of What is valuation?
Reasons for valuations
Development appraisal
Transfer of ownership
Monitoring of property investment performance
Reporting the value of property assets held by companiesLoan security
For taxation purposes
Insurance risk assessment
Compensation claims
Types of property to be valuedStandard Property Types
Offices Shops Factories & WarehousesStandard office Kiosk Factory
Business park Standard unitWorks (e.g. quarry, pit, mine, tip)
Post Office, bank Workshop
ShowroomLight industrial business unit
Supermarket / Superstore WarehouseRetail Warehouse Builders yardRetail Park (collection of retail warehouses)
Store
Shopping centre (collection of standard units)
Storage land
Department / Variety store Storage depotMarket stall
Types of property to be valuedNon-Standard Property Types
Accommodation Licensed Education Leisure TransportCamping park Pubs and clubs Day nursery Golf course Petrol station
Hotel Market SchoolSports hall / ground
Car park
Self-catering unit Restaurant College Leisure centre Dock / wharfGuest house Café University Cinema Marina / mooring
Student Food court Garden centre Bus station
Betting shop Medical Health club RailwayMiscellaneous Casino Surgery Theatre AirportAdvertising right Bingo hall Health centre Amusement park Vehicle dealership
Utility works Amusement arcade Hospital Place of worship
Nursing home
Public service
Library Club-house Sports centre Swimming pool Hostel
Museum / gallery Hall StadiumCemetery / crematorium
Home
Community centre
Playing field Sports groundPolice / fire station
Toilets
Prison Allotments Sporting right Law court Park
Legal estates in property
Landowner
Developer
Sub-tenant 1
Sub-tenant 3
Sub-tenant 2
3. Leases backdevelopment
(long lease) to...
2. Sells development freehold to...
Sub-lets to...
Sub-lets to...
Sub-lets to...
Investor
1. Sells sitefreehold to...
Concepts of price, value and worthMarket Price Price paid, exchange price
Market Value Estimate of exchange price in a defined market
Market Worth Estimate of worth to a section of the market who could make up the
whole market
Individual Worth Estimate of worth to an individual
What is valuation?
• Process of estimating an exchange price, known as ‘market value’
• Analysis and reporting of price information under certain assumptions
• Price quote supported by experience and knowledge
• Static view of dynamic market
Reasons for valuations
Investment appraisal
Sale, purchase, letting of a property
Rent review, lease renewal
Development site appraisal
Asset valuation
Lending decisions
Tax liability
Insurance
Compulsory purchase and compensation
Defined ‘bases’ of valueMarket Value is the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
Market Rent is the estimated amount for which a property, or space within a property, should lease (let) on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion.
Investment Value is the value of the property to a particular owner, investor, or class of investors, for identified investment or operational objectives.
Fair Value is the amount for which an asset could be exchanged, between knowledgeable, willing parties, in an arm’s-length transaction.
Existing Use Value a UK basis for accounting purposes...
Depreciated Replacement Cost is now defined as a method rather than a basis...
Determinants of value
1. Location2. Legal rights3. Physical characteristics
including specification, deterioration and obsolescence
4. Environmental attributes
» Quality of tenant» Lease terms» Use» Development potential
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Attributes of value to an occupier are also of value to an investor (and developer)
The value of a property reflects its capacity to fulfil a function. The value of shop, for example, will be influenced by trading position, length of frontage, accessibility, planning restrictions and tenure.
2. Legal rights• Type of lease
– Head-lease, sub-lease• Incentives
– Rent-free periods, financial contributions, works• Length of lease term• Break rights
– Fixed, rolling, benefit, notice, conditions
• Security of tenure• Rent reviews
– Upward-only, index-linked, turnover
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Two main methods of leasing offices; whole building to single tenant (best) or suites to several tenants (service charges)Industrial voids due to economic conditions, changes in manufacturing practice
Warehouse voids as demand varies with economic activity, changing technological factors and ‘just-in-time’ production
2. Legal rights• Alienation
– Assignment, sub-letting, sharing
• Service charge obligations• Repairing obligations• Alterations• Use restrictions• Insurance
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3. Physical attributes
city centre prime
city centre prime mall
Retail
Many types of shopInvestors seek ‘prime’ propertySecure due to ‘goodwill’ and capital investment by tenantNew areas more risky - turnover rent
Desirable attributes of offices
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Quality of space
Fitness for purpose
Comfortable and predictable temperature & ventilationLift(s) where appropriateDaylight (less than 15m from window to wall)
DesignLongevity, durability and life-cycle costAesthetic, corporate identity
Flexibility
SpaceOpen planRaised floors & suspended ceilings
Future contractual (lease) liability
Lease length that fits with business planOption(s) to break leaseWide user clauseStandard assignment provision
Location
Access:- by staff and suppliers- to clients and complementary businesses
Private transport: parking, motorway network, congestion, cycle routes
Public transport: air, rail, buses
Quality of surroundings
Low incidence of crime, attractive appearanceAccess to: open space, retail, leisure, amenities (post office, doctors, schools, opticians, dentists, pharmacists, etc.)
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Heavyindustrialmanufacturing
Lightindustrialtrading estate
historically not popular due tointense physical useinflexibility of premisesclose relationship to economic conditions
change in attitude due to new type of premisesgood accommodation
modern, simple construction with production and storage areas on ground flooruninterrupted floor areaadaptable structureminimal artificial lightadequate and convenient office accommodationample yard space and loading facilitiescar-parking and good layout
high-tech unitsgood communicationscampus stylehigh specificationnear skilled labouradaptable to changes in technology
Classifications...
• Quality– Prime– Secondary– Tertiary
• Type– Retail– Office– Industrial– Other
• Location– City centre– Out of town– London– South east– Rest of UK
• Quality– Prime– Secondary– Tertiary
• Type– Retail– Office– Industrial– Other
• Location– City centre– Out of town– London– South east– Rest of UK
IPD SegmentsStandard Shops Central London Rest of London South East &
Eastern Rest of UKShopping Centres In Town Out of TownRetail Warehouses Retail Parks Fashion Parks Other Retail
WarehousesDept / Variety
StoresSupermarketsOther Retail
Standard Offices Central & Inner London Rest of London Inner South Eastern Outer South Eastern Rest of UKOffice Parks London & South East Rest of UKStandard Industrials London Inner South Eastern Outer South Eastern Rest of UKDistribution WarehousesOther Property Leisure
requires market knowledge
Asset market:Bad property investment attributes
illiquid
few transactions
decentralised market
stepped income growth
external influences
high transaction costs
depreciatesheterogeneous
lumpy
high management costs
useful portfolio diversifier
Asset market:Good property investment attributes
potential for real return on income & capital
tax advantagesrelatively secure
can provide corporate identity
growth potential
Introduction1. Confirm the valuation instruction2. Agree the terms of engagement3. Inspect the property4. Gather and analyse comparable evidence5. Perform the valuation6. Produce the report
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1. Confirm Instruction and2. Agree Terms of Engagement
• Assuming a professional practice is requested to do a valuation then first step is to check with the client the purpose of the valuation and the date at which value is to be assessed.
• Send client ‘Terms of Engagement’ (TOE) as per ‘Red Book’ - see PS2.1 - read by next week
• When received from client they become the first element in the documentation and must be on file
3. Property Inspection• Inspections and investigations must always be
carried out to the extent necessary to produce a valuation which is professionally adequate for its purpose
• An essential part of the valuation process• Must be carried out in a logical and methodical manner• Must meet PS4.1 - read commentary (provides some
general guidance on the extent of the inspection)• Must be properly documented
4. Collection and Analysis of Comparables
• Central part of the valuation process• Must be evidenced on file
The documentation must include evidence of the comparables used and how they were analysed. Handwritten notes, notes of telephone calls, copies of particulars etc. NB these don’t get sent to the client.
5. Valuation CalculationsThis is what it is all about.These calculations are likely to be handwritten and these
‘working notes’ must be retained on file.Or could be done on a spreadsheet in which case a printout
should be kept on file.If valuation software is used then a printout should be put on
file.Do not send to the client.
6. Report to the Client• Could take many forms depending on the client.• Form reports - mortgages• Memos - internal• Narrative - private clients• NB must have regard to the Red Book which sets standards
for reports
A building society mortgage valuation would be on a form that they supply - may be submitted electronically.A private client would probably be sent a full narrative report that conforms to the standards set out in the Red Book.
Summary
• Valuers carry out valuations for a client• The outcome will usually be a written report• Before the report can be written a series of tasks will be
undertaken - valuation process• The tasks will be carried out to a high standard in accordance
with agreed standards and guidelines• All stages will be fully documented and held on file• Failure to meet the standards could lead to a negligence claim
and professional indemnity insurance is essential.
Measurement
• RICS Code of Measuring Practice sets out definitions for measurement of land and property
• Defines:– Gross external area (GEA)– Gross internal area (GIA)– Net internal area (NIA)– Zoning (see next slide)– Others: clear internal height, cubic content, eaves
height, plot ratio
… and advises when and how each should be used
Regulation in the UK
• Self regulation by professional body (RICS) – responsible for monitoring and ethics
• Standards published by IVS and RICS• Mandatory on all surveyors and asked for by main users of valuations• Deal with process rather than methods of valuation• Departure from Red Book procedures without good reason could be
evidence of negligence• Registered Valuer Scheme
Regulation of the valuation process
• Valuation procedures in the UK are regulated to a large extent by the Royal Institution of Chartered Surveyors (RICS)
• The RICS:– Ensures accountability– Establishes education and training requirements– Sets standards– Imposes disciplinary procedures– Publishes the Appraisal and Valuation Manual (The
Red Book)
The Red Book• Regulates valuation
procedures• Most valuation work is
covered• Includes standards for
specific-purpose valuations:– Asset valuations– Valuations for stock market
listing particulars– Valuations for mergers,
acquisitions, etc.
Why Standards?• Good technique only gets you so far.• Valuations must be:
– Credible– Cogent
• Credibility depends on trust:– Trust requires ethics
• Cogency depends on sound communication:– numerical AND– Verbal
• Standards fall into three broad groups:– Ethical– Procedural– Definitional
Ethical Standards• Relate to behaviour of individual valuer or firm• Key requirements:
– Independence– Integrity– Objectivity
• Ethical requirements distinguish a profession from a trade• Not unique to valuation• Key is not just to behave ethically but to be seen to be behaving ethically• Key components an ethical regime
– Transparency– Enforceability
• UK model is self regulation• Elsewhere professional behaviour often regulated by statute, eg licensing
Procedural Standards•Set fundamental rules for processing
•Why?– Protecting the user; they need to understand what they are
getting.
– Protecting the valuer; reputation would suffer if users did were dissatisfied with product
Rules thus needed to require valuer to clearly explain:– What is to be done
– What has been done
Definitional Standards•Needed to avoid “Tower of Babel” syndrome
•Value is an ephemeral concept; – Based on hypotheses not fact
– Mixture of science and art
– Jargon can confuse or mislead users and undermine credibility
•Need for principles and objectives to be codified and common terminology developed to clearly communicate valuation concepts
True or False?• The Red Book tells me all I need to know about
valuation• The Red Book sets out the RICS approved methods
of valuation• If I comply with the Red Book my valuation will not
be negligent• If I comply with the Red Book my valuation is more
likely to be understood by the client and anyone else relying on it
Regulates process not function• What to do, not how to do it• Minimum procedures that have to be adopted by all Chartered
Valuation Surveyors• Promote use of consistent bases and other definitions to aid
public understanding• Extends Rules of Conduct with specific requirements for valuation• Provides regulatory framework for valuation advice• Provides client and public confidence in valuation by requiring
ethical and transparent approach• Promotes consistent definitions and terminology• Assists clients in understanding what is being valued, the
assumptions made and the limitations that apply• Promulgates procedural protocols agreed with client bodies, e.g.
CML, BBA
Monitoring• Until 2005 only reactive monitoring of compliance carried
out by RICS, i.e. investigating complaints received• Now proactive monitoring regime in place• Only Regulated Purpose Valuations covered at present• Likely to be extended to all valuation work in due course
The Red Book on one slide…• Establish purpose and subject of valuation• Ensure you have appropriate knowledge and experience
and are free of conflict• Agree appropriate terms and assumptions with client (at
least 17 items must be covered)• Confirm these in writing• Do valuation using basis appropriate for purpose• Report (include mandatory items plus any specific
statements required by applicable valuations)
Valuations where RB not mandatory
• Advice during litigation• Arbitrations and similar disputes• During negotiations• Internal valuations• Certain agency or brokerage work• Development schemes• Antiques, etc. separately valued
However, advice is to follow RB as closely as possible even if compliance no mandatory
Structure of RBa) Valuation standards
i. Compliance and ethical requirementsii. Terms of engagementiii. Basis of valueiv. Applicationsv. Investigationsvi. Reports
b) Guidance notes
c) UK valuation standardsi. Valuations for financial statementsii. Valuation of residential propertyiii. Regulated purpose valuations
d) UK appendices
e) UK guidance notes
a) Valuation standardsCompliance and ethical requirements
• Qualifications of the valuer– Valuations under the standards must have appropriately qualified member
taking responsibility for them– Must have experience, knowledge and ability to act with independence
and objectivity– Commentary on application of Rules of Conduct to valuation instructions– Qualifying includes freedom from conflict– Additional guidance on identiying and managing conflicts of interest when
undertaking valuations
Terms of engagement• RoC require terms to be confirmed in writing for all work
undertaken for a client• RB extends general requirement in relation to valuation work• Important that valuer and client are clear about purpose of
valuation and assumptions valuer will make• Checklist of 17 minimum things to include• Assumptions:
– All valuations are subject to assumptions– No such thing as a standard assumption which can be implied without
being stated– Made where reasonable for valuer to accept something as fact
without specific investigation– Special assumptions arise mainly where it is necessary to assume
something is different from status quo or where it is an assumption that would not normally be made by a purchaser in the market
Bases of valuation• MV
– International definition agreed in 1993– Supported by conceptual framework– Basis for all valuations– Will normally need qualification or assumption to apply in correct context
(e.g. with VP, subject to lease, as an operational entity, as an individual item for removal, etc.)
• MR– Adaptation of MV to a recurring rather than a single payment– Must be quoted in context of assumed lease terms– Must be accompanied by assumed basic lease terms (e.g.
inclusive/exclusive, FRI/IRI, etc., duration, review pattern, incentives, etc.)• Fair Value• Special Value• Synergistic Value
Assumptions and Special Assumptions
• Knowing basis of valuation is not enough• For valuation to be credible and useful the whole scenario
of hypothetical transaction must be set out• Assumptions and special assumptions need to be thought
about and explained to client before proceeding
Investigations• No such thing as a minimum standard of inspection• Extent of inspection (if any) depends on the terms of
engagement• Investigations• Verification of information
Reports• Signatory must be an individual• List of mandatory contents – echo those in terms of
engagement• Do not use Formal / Informal to describe reports• Provisional valuations – any changes made should have an
audit trail
b) Guidance Notes• Valuation certainty• Valuation of individual trade related properties• Valuation of portfolios and groups of properties• Personal property• Plant and equipment• Depreciated replacement cost method of valuation for
financial reporting
c) UK valuation standardsi. Valuations for financial statements
• Relevant to valuations under UK GAAP, e.g.– Non-listed companies– Public sector – local authorities– Registered Social Landlords
• Eventually will disappear as either IFRS adopted or UK GAAP merges with IFRS• EUV – the additional assumptions
– …the buyer is granted VP…– …of all parts of the property required by the business…– …disregarding potential alternative uses…– …disregarding …any other characteristics of the property that would cause the MV
to differ from that needed to replace the remaining service potential at least cost• DRC
– Required reporting basis under UK GAAP for specialised property– For all other purposes, including valuations under international accounting
standards, it is regarded as a method used to derive MV (or any appropriate basis)– Used only where there is no sales evidence– Use of DRC approach must be disclosed
ii. Financial Statements – Specific Applications (UKPS2)• UK Listing Rules• Takeover Code• Authorised Unit Trusts• Unregulated Unit Trusts• Pension Funds• Insurance Company Assets
All have subtle variations on rules or specific reporting requirements
iii. Valuation of residential property
• Residential mortgage valuations– Specification agreed with CML – sets out generally accepted duties
and limitation for undertaking residential mortgage work– Recognises that these valuations mostly undertaken on pro forma
style reports with no scope for commentary
iv. Regulated Purpose Valuations
• What is a RPV?– Financial statements under IAS or UK GAAP– Listing particulars and circulars– Takeovers and mergers– Unit trusts (authorised and unregulated)– Pension funds (not SIPPS)– Insurance company assets
• Matters addressed– Rotation of personnel– Extent and duration of relationship between a valuer’s firm and
client– Fee earning relationship between valuer’s firm and client –
expressed in 5% bands of total turnover– All must be disclosed in report
e) UK Guidance Notes• Land and buildings apportionments for lease classification
under IFRS• EU directives and regulations relevant to valuation• Valuations for CGT, IHT and SDLT• Local authority disposal of land for less than best
consideration• Analysis of commercial lease transactions• Valuations for charities