What is valuation?

1. What is valuation?

2. The need for valuations

3. Reasons for valuations

4. Types of property to be valued

5. Types of property to be valued

6. Legal estates in property

7. Concepts of price, value and worth Market Price Price 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

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 Quality of tenant Lease terms Use Development potential • Location • Legal rights • Physical characteristics including specification, deterioration and obsolescence • Environmental attributes 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. Attributes of value to an occupier are also of value to an investor (and developer)

11. 1. Location Average house prices in London in the third quarter of 2000

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 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

14. 3. Physical attributes Retail city centre prime mall Many types of shop Investors seek ‘prime’ property Secure due to ‘goodwill’ and capital investment by tenant New areas more risky - turnover rent city centre prime

15. city tertiary city centre secondary out of town prime mall

16. Offices wide range of types …and conversions-prime/secondary city centre prime…

17. Desirable attributes of offices

18. Offices – out of town purpose built prime and out of town speculative prime / secondary

19. Heavyindustrialmanufacturing • 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 Lightindustrialtrading estate

20. Warehousingtrading 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

24. Asset market:Bad property investment attributes decentralised market lumpy few transactions high transaction costs stepped income growth heterogeneous depreciates high management costs external influences illiquid requires market knowledge

25. Asset market:Good property investment attributes potential for real return on income & capital relatively secure tax advantages can provide corporate identity growth potential useful portfolio diversifier

26. Valuation procedures

27. Introduction • Confirm the valuation instruction • Agree the terms of engagement • Inspect the property • Gather and analyse comparable evidence • Perform the valuation • Produce the report

28. 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

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 • Valuation standards • Compliance and ethical requirements • Terms of engagement • Basis of value • Applications • Investigations • Reports • Guidance notes • UK valuation standards • Valuations for financial statements • Valuation of residential property • Regulated purpose valuations • UK appendices • UK guidance notes

50. 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