Presentation on theme: "What is valuation? 1. THE NEED FOR VALUATIONS Reasons for valuations Development appraisal Transfer of ownership Monitoring of property investment performance."— Presentation transcript:
1 What is valuation? 1
2 THE NEED FOR VALUATIONS
3 Reasons for valuations Development appraisal Transfer of ownership Monitoring of property investment performance Reporting the value of property assets held by companies Loan security For taxation purposes Insurance risk assessment Compensation claims
4 Types of property to be valued Standard Property Types OfficesShopsFactories & Warehouses Standard officeKioskFactory Business parkStandard unit Works (e.g. quarry, pit, mine, tip) Post Office, bankWorkshop ShowroomLight industrial business unit Supermarket / SuperstoreWarehouse Retail WarehouseBuilders yard Retail Park (collection of retail warehouses) Store Shopping centre (collection of standard units) Storage land Department / Variety storeStorage depot Market stall
5 Types of property to be valued Non-Standard Property Types AccommodationLicensedEducationLeisureTransport Camping parkPubs and clubsDay nurseryGolf coursePetrol station HotelMarketSchoolSports hall / groundCar park Self-catering unitRestaurantCollegeLeisure centreDock / wharf Guest houseCaféUniversityCinemaMarina / mooring StudentFood courtGarden centreBus station Betting shopMedicalHealth clubRailway MiscellaneousCasinoSurgeryTheatreAirport Advertising rightBingo hallHealth centreAmusem*nt parkVehicle dealership Utility worksAmusem*nt arcadeHospitalPlace of worship Nursing home Public service LibraryClub-houseSports centreSwimming poolHostel Museum / galleryHallStadium Cemetery / crematorium Home Community centrePlaying fieldSports groundPolice / fire stationToilets PrisonAllotmentsSporting rightLaw courtPark
6 Legal estates in property
7 Concepts of price, value and worth Market PricePrice paid, exchange price Market Value Estimate of exchange price in a defined market Market WorthEstimate 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
8 Defined ‘bases’ of value Market 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...
9 DETERMINANTS OF VALUE
10 Determinants of value 1.Location 2.Legal rights 3.Physical characteristics including specification, deterioration and obsolescence 4.Environmental attributes »Quality of tenant »Lease terms »Use »Development potential 10 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.
11 Average house prices in London in the third quarter of 2000 1. Location
12 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 12 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
13 2. Legal rights Alienation –Assignment, sub-letting, sharing Service charge obligations Repairing obligations Alterations Use restrictions Insurance 13
14 3. Physical attributes city centre prime city centre prime mall Retail Many types of shop Investors seek ‘prime’ property Secure due to ‘goodwill’ and capital investment by tenant New areas more risky - turnover rent
15 city tertiary city centre secondary out of town prime mall
16 city centre prime… …and conversions- prime/secondary wide range of types Offices
17 Desirable attributes of offices 17 Quality of space Fitness for purpose Comfortable and predictable temperature & ventilation Lift(s) where appropriate Daylight (less than 15m from window to wall) Design Longevity, durability and life-cycle cost Aesthetic, corporate identity Flexibility Space Open plan Raised floors & suspended ceilings Future contractual (lease) liability Lease length that fits with business plan Option(s) to break lease Wide user clause Standard 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 appearance Access to: open space, retail, leisure, amenities (post office, doctors, schools, opticians, dentists, pharmacists, etc.)
18 Offices – out of town purpose built prime and out of town speculative prime / secondary
19 Heavy industrial manufacturing Light industrial trading estate historically not popular due to intense physical use inflexibility of premises close relationship to economic conditions change in attitude due to new type of premises good accommodation modern, simple construction with production and storage areas on ground floor uninterrupted floor area adaptable structure minimal artificial light adequate and convenient office accommodation ample yard space and loading facilities car-parking and good layout high-tech units good communications campus style high specification near skilled labour adaptable to changes in technology
20 Warehousing trading estate Office / warehouse out of town purpose-built or conversions
21 Leisure: city centre and out of town complex
22 4. Environmental considerations Energy efficient Good environmental rating
23 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 Segments Standard Shops Central London Rest of London South East & Eastern Rest of UK Shopping Centres In Town Out of Town Retail Warehouses Retail Parks Fashion Parks Other Retail Warehouses Dept / Variety Stores Supermarkets Other Retail Standard Offices Central & Inner London Rest of London Inner South Eastern Outer South Eastern Rest of UK Office Parks London & South East Rest of UK Standard Industrials London Inner South Eastern Outer South Eastern Rest of UK Distribution Warehouses Other Property Leisure
24 requires market knowledge Asset market: Bad property investment attributes illiquid few transactions decentralised market stepped income growth external influences high transaction costs depreciates heterogeneous lumpy high management costs
25 useful portfolio diversifier Asset market: Good property investment attributes potential for real return on income & capital tax advantages relatively secure can provide corporate identity growth potential
26 VALUATION PROCEDURES
27 Introduction 1.Confirm the valuation instruction 2.Agree the terms of engagement 3.Inspect the property 4.Gather and analyse comparable evidence 5.Perform the valuation 6.Produce the report 27
28 1. Confirm Instruction and 2. 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
29 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
30 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.
31 5. Valuation Calculations This 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.
32 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.
33 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.
34 MEASUREMENT
35 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
36 REGULATION OF VALUATIONS
37 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
38 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)
39 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.
40 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
41 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
42 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
43 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
44 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
45 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
46 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
47 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)
48 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
49 Structure of RB a)Valuation standards i.Compliance and ethical requirements ii.Terms of engagement iii.Basis of value iv.Applications v.Investigations vi.Reports b)Guidance notes c)UK valuation standards i.Valuations for financial statements ii.Valuation of residential property iii.Regulated purpose valuations d)UK appendices e)UK guidance notes
50 a) Valuation standards Compliance 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
51 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
52 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
53 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
54 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
55 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
56 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
57 c) UK valuation standards i. 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
58 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
59 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
60 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
61 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
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