"Analyse as you value, value as you analyse"
Retail Property come in all flavours including prime main street, high street, pedestrianised, shopping centre, secondary, tertiary or suburban street positions; out of town and mixed use retail parks; department; variety; retail warehouse; supermarkets; superstores and hypermarkets. All of these types of retail property have a basic approach to valuing retail - "zoning and halving back".
Zoning and Halving Back, which is based on splitting the shop into zones, the closest to the passing pedestrians has the most value (Zone A). So how do you do value it, follow the steps:
1) Divide the ground floor NIA (Net Internal Area) into 6m (the Valuation office still measures in 6.1 m intervals) zones A, B, C, etc. If the shop is more than 24 m deep then label all remaining zones with R.
2) 1 square metre of zone A then zone B would be worth 0.5 of zone A, etc and label in terms of Zone A (ITZA).
3) Upper and lower floors and non-sale areas are all valued on an overall basis and are not zoned, but allocated different values according to their use.
4) Add up the adjusted areas.
5) Result is the floor area ITZA and this forms the basis unit of comparison.
E.G.
Any type of property will have Property Value Parameters (PVP) such as the Physical Factors include Location, Accessibility, Topography, Aspect and Geology (LATAG) and the Property Specific Factors including Construction, Age, Condition, Layout & Specification (CACLS)
Once again, as with all comparable valuations, ensure that you have and use the same units of comparability.
Market evidence can be gained from Estate Agents; the specialist journals such as Estate Gazette and Property Week; auction houses; the Internet has many property databases including Rightmove.co.uk and organisations like the Investment Property Databank. (Farmland market evidence can be found in Farmland Market journal).
Office Comparisons use NIA measurements and the quality of office accommodation is of key concern to any valuer and the offices may be ranked in class. The following are just a few parameters that are used to value high class offices - car parking allocation, air conditioning, raised access flooring and low glare flush lighting. High street to urban fringe business centre will command different values.
Retail Comparisons use NIA valuations as most shops resemble warehouses, but not all, and this allows the trader space and environment to sell goods and secure the footfall. Therefore, this is why quick purchase stock is at the front and the more thought provoking and time consuming goods are at the back. This is reflected in the zoning valuations as shown above.
You may need to include a commentary on the adjustments you have made and the assumptions. But beware of the criticisms of zoning, these include:
1) An artificial process - analytical tool for a valuer, not a decision making tool for the occupier.
2) Irrelevant for retailers as they do not use zoning to arrive at rental bids, they use prospects for making a profit - the valuer rents arrangement of floor space not for the trader.
3) The zone depths are set arbitrarily by the valuer - it is a trusted approach and does not prevent the tenant from producing alternate analysis.
4) It would be better to take the relationship of the shop front to the zoning, but this depends on alternate data which may not always be present.
Industrial Valuation
Collecting evidence for industrial property valuation is similar to other methods of comparison, but beware of obtaining and interpreting evidence and explain your assumptions. With an industrial building, it is thought that there should be approx. 10% office space. If more, seek market evidence. Industrial property should be measured on GIA and to include office space unless office space is separate and can be developed separately and then that should be measured NIA. Considerations and assumptions should be commented on.
Other Property includes hotels, petrol filling stations, care homes, nursing homes and public houses will be probably valued with the profits method but investigate supporting market evidence.
Automated Valuations as in the ones where the process is streamlined for the purpose of granting loans, etc. These can be calculated by a drive by inspection and valuation; a postcode valuation or an automated process that relies on recorded comparables and is adjusted to limit risk. With more HIPs (Home Information Packs), this form of valuation may become more common.
Thursday, 13 May 2010
Valuation Method One - Part One - Comparing Rural Property
The Comparison method is based on comparisons derived from the current market evidence to find rental or capital values directly...goodnight everybody.
Well alright, there is a bit more about this subject. It is the simplest and most reliable method of valuation, but when comparing properties, use the acronym PLR (Property, Location & Recent). The three main requirements of property comparables are that they should be of a similar property type, a similar location and obtain recent evidence (this may be the last six weeks or the last six months but mainly dependent on the market - bullish where the values are increasingly rapidly or bearish where the values are increasing slowly). The market may not be as transparent as you hope, so you may not get all the information you want. Please ensure that the figures mentioned are completed transactions and not just offers.
Heterogeneous - diverse in character or content, so take into account that property is not the same, so use your experience in and around the market in deciding allowances or adjustments.
The comparison method can be used to calculate freehold capital values, market rent values and freehold all risks yields:
Market Value (MV) = Market Rent (MR) x 100 /All Risk Yield (ARY)
MV = MR x Years Purchase (YP) in perp @ ARY
ARY = MR x 100/MV
MR = ARY x MV/100
MR = MV/YP perp @ ARY
YP perp = 100/ARY
YP perp = MV/MR
Generally, according to Blackledge's Introducing Property Valuation, properties with relatively small total areas will produce higher values per unit of area measurement than will substantially larger properties. A bit like women's clothing, I am guessing. Suitable adjustments, with market evidence, in terms of deduction or additions should thus be made to the comparable evidence before applying the figure to the subject property.
Agricultural Property
The rural estate market is highly localised, land can be bought for prestige or for convenience and with this local rivalry and competition can help to raise sale prices. Rents obtained from tenanted farmland are secure as they are comparatively low (compared to other types of land use) and long tenancies where investment is also viewed in the long term. Farming requires heavy investment in capital and time.
It is suggested that capital and rental value are measured in £/hectare or acre. This usually includes buildings and smaller farms will have more buildings. Any notable buildings should be valued separately
Agricultural Property Valuation Parameters include location and its space within the human landscape; topography; climate and weather; size of the farm; the land (both class and soil); type of farm; water supply; roads and approaches; fences and gates; mains services; the farm house and cottages; the farm buildings (a farm of 50 acres and may have 10 acres whereas a farm of 500 acres may have 50 buildings) and the state of repair of the farm.
Special characteristics of farms include sporting rights and commercial woodlands (what do you call a fish with no eyes? FSH - Fishing, Shooting and Hunting). The yield on sporting rights are normally higher than on the farm due to the greater uncertainty of the income due to the specialised nature of the market and the possible disruption from PDP (Pollution, Development & Poaching). Commercial woodlands must be valued separately, it is a combination of the value of the land on which the trees grow as well as the value of the timber. This is highly specialised and the value depends on size, age and type of timber.
The RICS has carefully put together a Valuation Information Paper (No.5) on valuing agricultural property, this includes the suggested minimum headings for a comparable schedule:
Address; date of transaction; source of information; land of area (ha or acres); type of farm; description of buildings; other information (sporting rights, commercial woodlands, etc.); rent per annum exclusive (agreed or asking); freehold capital value (paid or asking); freehold all risks yield; rent per annum exclusive per ha (or acre); capital value per ha (or acre).
Never use comparable evidence to calculate an average
Always try to explain your assumptions
Well alright, there is a bit more about this subject. It is the simplest and most reliable method of valuation, but when comparing properties, use the acronym PLR (Property, Location & Recent). The three main requirements of property comparables are that they should be of a similar property type, a similar location and obtain recent evidence (this may be the last six weeks or the last six months but mainly dependent on the market - bullish where the values are increasingly rapidly or bearish where the values are increasing slowly). The market may not be as transparent as you hope, so you may not get all the information you want. Please ensure that the figures mentioned are completed transactions and not just offers.
Heterogeneous - diverse in character or content, so take into account that property is not the same, so use your experience in and around the market in deciding allowances or adjustments.
The comparison method can be used to calculate freehold capital values, market rent values and freehold all risks yields:
Market Value (MV) = Market Rent (MR) x 100 /All Risk Yield (ARY)
MV = MR x Years Purchase (YP) in perp @ ARY
ARY = MR x 100/MV
MR = ARY x MV/100
MR = MV/YP perp @ ARY
YP perp = 100/ARY
YP perp = MV/MR
Generally, according to Blackledge's Introducing Property Valuation, properties with relatively small total areas will produce higher values per unit of area measurement than will substantially larger properties. A bit like women's clothing, I am guessing. Suitable adjustments, with market evidence, in terms of deduction or additions should thus be made to the comparable evidence before applying the figure to the subject property.
Agricultural Property
The rural estate market is highly localised, land can be bought for prestige or for convenience and with this local rivalry and competition can help to raise sale prices. Rents obtained from tenanted farmland are secure as they are comparatively low (compared to other types of land use) and long tenancies where investment is also viewed in the long term. Farming requires heavy investment in capital and time.
It is suggested that capital and rental value are measured in £/hectare or acre. This usually includes buildings and smaller farms will have more buildings. Any notable buildings should be valued separately
Agricultural Property Valuation Parameters include location and its space within the human landscape; topography; climate and weather; size of the farm; the land (both class and soil); type of farm; water supply; roads and approaches; fences and gates; mains services; the farm house and cottages; the farm buildings (a farm of 50 acres and may have 10 acres whereas a farm of 500 acres may have 50 buildings) and the state of repair of the farm.
Special characteristics of farms include sporting rights and commercial woodlands (what do you call a fish with no eyes? FSH - Fishing, Shooting and Hunting). The yield on sporting rights are normally higher than on the farm due to the greater uncertainty of the income due to the specialised nature of the market and the possible disruption from PDP (Pollution, Development & Poaching). Commercial woodlands must be valued separately, it is a combination of the value of the land on which the trees grow as well as the value of the timber. This is highly specialised and the value depends on size, age and type of timber.
The RICS has carefully put together a Valuation Information Paper (No.5) on valuing agricultural property, this includes the suggested minimum headings for a comparable schedule:
Address; date of transaction; source of information; land of area (ha or acres); type of farm; description of buildings; other information (sporting rights, commercial woodlands, etc.); rent per annum exclusive (agreed or asking); freehold capital value (paid or asking); freehold all risks yield; rent per annum exclusive per ha (or acre); capital value per ha (or acre).
Never use comparable evidence to calculate an average
Always try to explain your assumptions
Valuation and Paying the Rent - Quarter Days in England & Scotland
Just for a bit of light refreshment, the timings of quarterly rental payments in the UK are based on quarter days. In England, these are as follows:
Lady Day 25th of March
Midsummer 24th of June
Michaelmas 29th of September
Christmas 25th of December
And in Scotland, the quarter days are:
Candlemas 2nd of February
Whitsunday 15th of May
Lammas 1st of August
Martinmas 11th of November
Lady Day 25th of March
Midsummer 24th of June
Michaelmas 29th of September
Christmas 25th of December
And in Scotland, the quarter days are:
Candlemas 2nd of February
Whitsunday 15th of May
Lammas 1st of August
Martinmas 11th of November
Valuation Mathematics - Part Two - Capitalisation and other dastardly computations
Still no jokes but here is the skinny on Capitalisation (
Know the difference between income flows and capital sums. Law, in his book Oxford Dictionary of Business and Management defines the former as "any sum that a person or organisation receives either as a reward for effort (Earned income as the tax office defines it) or as a return on investments including land and property (unearned in the eyes of the tax office).
Whereas capital expenditure (costs, investments) is the expenditure by an organisation of a significant amount for the purchase or improvement of a fixed asset. Parsons, The Glossary of Property Terms defines capital value as the value of an asset as distinct from its annual or periodic (rental) value. Capital sums are payments of a one-off basis as to purchase or acquire an investment, good or chattel.
E.G.
An investor buys a property for £1 million and then lets the property out at £80,000 per annum. The tenant has the right to occupy and use the premises in return for the rental payments and these provide the owner with an income of £80,000 per annum in return for the capital sum expended of £1 million
Capitalisation of income is achieved by multiplying the annual income flow by a multiplier, known as the years purchase (YP).
Years purchase (YP) in perpetuity (perp)
This is the present value of £1 per annum forever, thus at 5 per cent the YP perp is 20, which is the sum total of all the PVs from year 1 to infinity and the equation is commonly shown as:
YP perp = 1/i
Where i = interest rate, or yield, expressed as a decimal rate
or
the calculation may be easier to undertake as 100 / Yield
The YP perp at 8% can be found from 100/8 = 12.5
The multiplier is used to capitalise the income flow from a freehold property investment, where the current income is already the full market rent (MR) and thus in present values can't be any higher.
E.G. Where the freehold interest in a business property on the open market was sold for £10 million, a blue-chip company leases it for a long-term period at £550,000 annum. On analysis, the ARY is 5.5% (550,000 x 100 / 10 000 000). But if the purchasers had decided to gain a return of 5.5% on their investment, the price they would be prepared to pay to acquire it would be YP perp at 5.5% x market rent income.
YP perp @ 5.5% = 1/0.055 or 100/5.5 = 18.1818
18.1818 x £550,000 p.a. = £9,999,999.99
that is to SAY £10,000,000.
Get out your Parry's and remember where these five valuation tables are in the book:
Amount of £1 to calculate the future amount of a fixed sum benefitting from compound interest:
(1 + i) n
Present Value of £1 to calculate the present value of a sum expected in the future, given that compound interest could have been earned on it during the period before it is received.
1 / (1 + i) n
Amount of £1 per annum to calculate the future amount of a regular annual investment benefitting from compound interest.
{(1 + i) n - 1} / 1
Annual Sinking Fund to calculate the annual amount required to be invested, at a given rate of compound interest, to grow to a desired future sum.
i / {(1 + i) n - 1}
Years Purchase (or Present Value of £1 per annum) to calculate the present value of an annual amount receivable for a period into the future.
{1 - (1 + i) -n} / 1
Know the difference between income flows and capital sums. Law, in his book Oxford Dictionary of Business and Management defines the former as "any sum that a person or organisation receives either as a reward for effort (Earned income as the tax office defines it) or as a return on investments including land and property (unearned in the eyes of the tax office).
Whereas capital expenditure (costs, investments) is the expenditure by an organisation of a significant amount for the purchase or improvement of a fixed asset. Parsons, The Glossary of Property Terms defines capital value as the value of an asset as distinct from its annual or periodic (rental) value. Capital sums are payments of a one-off basis as to purchase or acquire an investment, good or chattel.
E.G.
An investor buys a property for £1 million and then lets the property out at £80,000 per annum. The tenant has the right to occupy and use the premises in return for the rental payments and these provide the owner with an income of £80,000 per annum in return for the capital sum expended of £1 million
Capitalisation of income is achieved by multiplying the annual income flow by a multiplier, known as the years purchase (YP).
Years purchase (YP) in perpetuity (perp)
This is the present value of £1 per annum forever, thus at 5 per cent the YP perp is 20, which is the sum total of all the PVs from year 1 to infinity and the equation is commonly shown as:
YP perp = 1/i
Where i = interest rate, or yield, expressed as a decimal rate
or
the calculation may be easier to undertake as 100 / Yield
The YP perp at 8% can be found from 100/8 = 12.5
The multiplier is used to capitalise the income flow from a freehold property investment, where the current income is already the full market rent (MR) and thus in present values can't be any higher.
E.G. Where the freehold interest in a business property on the open market was sold for £10 million, a blue-chip company leases it for a long-term period at £550,000 annum. On analysis, the ARY is 5.5% (550,000 x 100 / 10 000 000). But if the purchasers had decided to gain a return of 5.5% on their investment, the price they would be prepared to pay to acquire it would be YP perp at 5.5% x market rent income.
YP perp @ 5.5% = 1/0.055 or 100/5.5 = 18.1818
18.1818 x £550,000 p.a. = £9,999,999.99
that is to SAY £10,000,000.
Get out your Parry's and remember where these five valuation tables are in the book:
Amount of £1 to calculate the future amount of a fixed sum benefitting from compound interest:
(1 + i) n
Present Value of £1 to calculate the present value of a sum expected in the future, given that compound interest could have been earned on it during the period before it is received.
1 / (1 + i) n
Amount of £1 per annum to calculate the future amount of a regular annual investment benefitting from compound interest.
{(1 + i) n - 1} / 1
Annual Sinking Fund to calculate the annual amount required to be invested, at a given rate of compound interest, to grow to a desired future sum.
i / {(1 + i) n - 1}
Years Purchase (or Present Value of £1 per annum) to calculate the present value of an annual amount receivable for a period into the future.
{1 - (1 + i) -n} / 1
Wednesday, 12 May 2010
Valuation Mathematics - Part One - Compound, Discounting, All Risk Yield and other dastardly computations
No joke, so lets get straight through the hard stuff.
Simple interest
The amount charged for a loan, shown as a percentage of the sum borrowed. Or the amount paid by a bank or building society to a depositor on funds deposited and shown as a percentage.
Simple interest occurs when all interest calculations are based upon an initial sum invested.
P(1+in)
Where P = Principal sum invested
Where i = Interest rate per time period expressed as a decimal number
Where n = Number of time periods over which interest accrues
E.G. £30,000 invested for the last 3 years at 5 per cent per annum
£30,000 x (1 + 0.05 x 3)
£30,000 x (1 + 0.15)
£30,000 x (1.15)
£34,500
Compound Interest
If interest rates are discussed in connection with property and investment, then these interest rates are calculated on compound and not simple basis. Compound interest is calculated at the end of each time period over which interest is based (usually yearly) on the accumulated sum of principal plus interest up to that date. I.E. - Interest earned on interest.
P(1+i)
Where P = Principal sum invested
Where i = Interest rate per time period
Where n = Number of time periods and shown as a small n at the top of the closed bracket
E.G. £30,000 is invested at 5 per cent per annum compound interest for the last three years
£30,000 x (1 + 0.05)3
£30,000 x (1.05 x 1.05 x 1.05)
£30,000 x (1.157625)
£34,728.75
As the calculation finds out how much a sum of money invested for a specific time period will amount to at a stated interest rate, this is known in Parry's Valuation and Conversion Tables as the "Amount of £1"
Concepts of Compounding and Discounting
Compounding is the adding of compound interest to an invested sum, the total amount of money invested increases over time.
Discounting is the inverse of compounding, the present value of an investment is found allowing for compound interest that would be earned on it over future time. The further into the future that a sum of money would be receivable and the higher the interest rate, the greater the discount factor will be and the lower the present value of the investment. A bit complicated but stick with it. In valuation terms, discounting allows for the purchase now of an interest, which will produce income or capital in the future.
Put in simple terms, somebody would pay less than £1 today for the right to receive £1 in three year's time. To work this effect out, we use the Present Value of £1 (PV)
PV = 1 / (1 + i) n
Where PV = Present Value of £1
Where i = Interest rate per time period (usually per annum) expressed as a decimal
Where n = Number of time periods (usually years) which will elapse before the sum of £1 is received.
E.G. An investment will return the sum of £50,000 in six year's time. What would be the present value of this be allowing for discounting at the interest rate of 6 per cent per annum?
PV of £1 in 6 years @ 6% = 1 / (1 + 0.06) 6
= 1 1/1.418519
= 0.70496 x £50,000
= Present Value of £35,248
All Risk Yield (ARYs) and implied risk/growth allowances
In property valuation the All Risk Yield (ARY), or Market Yield, is the standard comparison measure of the rate of return from investment. Lower yields are associated with relatively risk free investments, more uncertain and risky investments will have higher yields. As the capital value increases, the ARY decreases.
Freehold market yields are customarily based on the market rent (MR). Where MR is not receivable or it is a leasehold valuation, the yield will require adjustment. Property yields are influenced by, though not directly determined by, the level of interest rates in the economy. If interest rates are falling, investors are able to bid higher prices for property as borrowing the purchase funds are becoming relatively cheaper. This will result in a decrease in property yields.
The Amount of £1 calculations
This formula calculates for every £1 how much money will accumulate, principal plus compound interest, over a specific period.
A = (1 + i) n
Where A = Amount of £1
Where i = Interest Rate (such as ARY) per time period (per annum) expressed as a decimal.
Where n = number of time periods over which compound interest is to be added to the principal sum
E.G. Where the monthly interest rate of 1% is charged on £1
= (1 + i) n
= (1 + 0.01) 12
= 1.1268
The Amount of £1 per annum calculations
This calculates the amount that will accumulate at a specific rate of interest if £1 is invested at the end of each year for a given number of years. The formula is shown below:
[(1 + i) n - 1] / i
Where i = annual interest divided by 100 and expressed as a decimal number
Where n = number of years over which the annual sums are invested
E.G. £1 per annum is invested at the end of each year for five years at 5% per annum.
= [(1 + 0.05) 5 - 1] / 0.05
= 0.2762816 / 0.05
= £5.525632
= SAY £5.526
If the sum where £2,000 per annum, then it would be...
= £2,000 x 5.525632
= £11,051.26
Simple interest
The amount charged for a loan, shown as a percentage of the sum borrowed. Or the amount paid by a bank or building society to a depositor on funds deposited and shown as a percentage.
Simple interest occurs when all interest calculations are based upon an initial sum invested.
P(1+in)
Where P = Principal sum invested
Where i = Interest rate per time period expressed as a decimal number
Where n = Number of time periods over which interest accrues
E.G. £30,000 invested for the last 3 years at 5 per cent per annum
£30,000 x (1 + 0.05 x 3)
£30,000 x (1 + 0.15)
£30,000 x (1.15)
£34,500
Compound Interest
If interest rates are discussed in connection with property and investment, then these interest rates are calculated on compound and not simple basis. Compound interest is calculated at the end of each time period over which interest is based (usually yearly) on the accumulated sum of principal plus interest up to that date. I.E. - Interest earned on interest.
P(1+i)
Where P = Principal sum invested
Where i = Interest rate per time period
Where n = Number of time periods and shown as a small n at the top of the closed bracket
E.G. £30,000 is invested at 5 per cent per annum compound interest for the last three years
£30,000 x (1 + 0.05)3
£30,000 x (1.05 x 1.05 x 1.05)
£30,000 x (1.157625)
£34,728.75
As the calculation finds out how much a sum of money invested for a specific time period will amount to at a stated interest rate, this is known in Parry's Valuation and Conversion Tables as the "Amount of £1"
Concepts of Compounding and Discounting
Compounding is the adding of compound interest to an invested sum, the total amount of money invested increases over time.
Discounting is the inverse of compounding, the present value of an investment is found allowing for compound interest that would be earned on it over future time. The further into the future that a sum of money would be receivable and the higher the interest rate, the greater the discount factor will be and the lower the present value of the investment. A bit complicated but stick with it. In valuation terms, discounting allows for the purchase now of an interest, which will produce income or capital in the future.
Put in simple terms, somebody would pay less than £1 today for the right to receive £1 in three year's time. To work this effect out, we use the Present Value of £1 (PV)
PV = 1 / (1 + i) n
Where PV = Present Value of £1
Where i = Interest rate per time period (usually per annum) expressed as a decimal
Where n = Number of time periods (usually years) which will elapse before the sum of £1 is received.
E.G. An investment will return the sum of £50,000 in six year's time. What would be the present value of this be allowing for discounting at the interest rate of 6 per cent per annum?
PV of £1 in 6 years @ 6% = 1 / (1 + 0.06) 6
= 1 1/1.418519
= 0.70496 x £50,000
= Present Value of £35,248
All Risk Yield (ARYs) and implied risk/growth allowances
In property valuation the All Risk Yield (ARY), or Market Yield, is the standard comparison measure of the rate of return from investment. Lower yields are associated with relatively risk free investments, more uncertain and risky investments will have higher yields. As the capital value increases, the ARY decreases.
Freehold market yields are customarily based on the market rent (MR). Where MR is not receivable or it is a leasehold valuation, the yield will require adjustment. Property yields are influenced by, though not directly determined by, the level of interest rates in the economy. If interest rates are falling, investors are able to bid higher prices for property as borrowing the purchase funds are becoming relatively cheaper. This will result in a decrease in property yields.
The Amount of £1 calculations
This formula calculates for every £1 how much money will accumulate, principal plus compound interest, over a specific period.
A = (1 + i) n
Where A = Amount of £1
Where i = Interest Rate (such as ARY) per time period (per annum) expressed as a decimal.
Where n = number of time periods over which compound interest is to be added to the principal sum
E.G. Where the monthly interest rate of 1% is charged on £1
= (1 + i) n
= (1 + 0.01) 12
= 1.1268
The Amount of £1 per annum calculations
This calculates the amount that will accumulate at a specific rate of interest if £1 is invested at the end of each year for a given number of years. The formula is shown below:
[(1 + i) n - 1] / i
Where i = annual interest divided by 100 and expressed as a decimal number
Where n = number of years over which the annual sums are invested
E.G. £1 per annum is invested at the end of each year for five years at 5% per annum.
= [(1 + 0.05) 5 - 1] / 0.05
= 0.2762816 / 0.05
= £5.525632
= SAY £5.526
If the sum where £2,000 per annum, then it would be...
= £2,000 x 5.525632
= £11,051.26
RICS Code of Measuring Practice
How do measure an elephant? Carefully and preferably under sedation
So Royal Institution of Chartered Surveyors or RICS created a set of guidelines called the Codes of Measuring Practice or CMP (Please note that RICS has a membership access to its content) to ensure consistency and the application of best practice.
The CMP, which is for UK use only, is "to provide succint, precise definitions to permit the accurate measurement of buildings and land, the calculation of the sizes (areas and volumes) and the description or specification of land and buildings on a common and and consistent basis" (RICS, CMP, A Guide for Property Professionals)
It should be noted that the CMP is different from the Standard Method of Measurement of Building Works (SMM) which is used in the construction industry.
The principal methods of CMP used in property valuation are the following:
Gross External Area (GEA)
Gross Internal Area (GIA)
Net Internal Area (NIA)
It should be noted that it is useful to remember the following conversion rates:
1 metre = 3.28 feet
1 square metre = 10.76 square feet
1 hectare = 2.47 acres
1 foot = 0.3 metres
1 mile = 1.6 kilometres
1 square foot = 0.09 square metres
1 acre = 0.4 hectares
The CMP has a use as proved in the case of Kilmartin SCI (Hulton House) vs Safeway Store plc (2006). The code helps to reduce inconsistencies and disputes, the above court case was dependent on the parties interpretation of the NIA.
It is important to state when quoting values per square foot or square metre what the space measurement basis had been calculated.
Valuers should always double check their measurements and vital information before leaving a property. It can be a time consuming exercise, but best to do it the first time. It is thought to be a unreliable practise to rely on calculating measurements using a scaled drawing with a scaled ruler.
Gross External Areas (GEAs)
The area of a building measured externally at each floor level, mainly used for a computational plot ratio, planning matters or for building costs for residential building. It includes all external wall thicknesses and takes each floor into account.
Gross Internal Area (GIAs)
The area of a building measured to the internal face of the perimeter walls at each floor level. GIA is used for non-residential building costs and the valuation of industrial, warehousing, department, variety, food, retail and new homes for development.
Net Internal Area (NIAs)
The usable area within a building measured to the internal face of the perimeter walls at each level floor level. It excludes the non-usable areas that would be part of a GIA measurement, these may include toilet, toilet lobbies, cleaner's cupboards, lift rooms, stairwells, columns and piers, etc. This measurement is used for the valuation of offices and shops
NB It is essential to refer and apply to the RICS CMP when starting a valuation.
Next time - what is meant by the mathematics of valuation
So Royal Institution of Chartered Surveyors or RICS created a set of guidelines called the Codes of Measuring Practice or CMP (Please note that RICS has a membership access to its content) to ensure consistency and the application of best practice.
The CMP, which is for UK use only, is "to provide succint, precise definitions to permit the accurate measurement of buildings and land, the calculation of the sizes (areas and volumes) and the description or specification of land and buildings on a common and and consistent basis" (RICS, CMP, A Guide for Property Professionals)
It should be noted that the CMP is different from the Standard Method of Measurement of Building Works (SMM) which is used in the construction industry.
The principal methods of CMP used in property valuation are the following:
Gross External Area (GEA)
Gross Internal Area (GIA)
Net Internal Area (NIA)
It should be noted that it is useful to remember the following conversion rates:
1 metre = 3.28 feet
1 square metre = 10.76 square feet
1 hectare = 2.47 acres
1 foot = 0.3 metres
1 mile = 1.6 kilometres
1 square foot = 0.09 square metres
1 acre = 0.4 hectares
The CMP has a use as proved in the case of Kilmartin SCI (Hulton House) vs Safeway Store plc (2006). The code helps to reduce inconsistencies and disputes, the above court case was dependent on the parties interpretation of the NIA.
It is important to state when quoting values per square foot or square metre what the space measurement basis had been calculated.
Valuers should always double check their measurements and vital information before leaving a property. It can be a time consuming exercise, but best to do it the first time. It is thought to be a unreliable practise to rely on calculating measurements using a scaled drawing with a scaled ruler.
Gross External Areas (GEAs)
The area of a building measured externally at each floor level, mainly used for a computational plot ratio, planning matters or for building costs for residential building. It includes all external wall thicknesses and takes each floor into account.
Gross Internal Area (GIAs)
The area of a building measured to the internal face of the perimeter walls at each floor level. GIA is used for non-residential building costs and the valuation of industrial, warehousing, department, variety, food, retail and new homes for development.
Net Internal Area (NIAs)
The usable area within a building measured to the internal face of the perimeter walls at each level floor level. It excludes the non-usable areas that would be part of a GIA measurement, these may include toilet, toilet lobbies, cleaner's cupboards, lift rooms, stairwells, columns and piers, etc. This measurement is used for the valuation of offices and shops
NB It is essential to refer and apply to the RICS CMP when starting a valuation.
Next time - what is meant by the mathematics of valuation
Friday, 7 May 2010
RICS Valuation Standards
The answer from the last post - the five main methods of valuation are Profit, Residual, Investment, Comparable and Contractors - PRICC
The information below are notes and quotes taken from the book Introducing Property Valuation by Michael Blackledge on the subject of RICS Valuation Standards.
The Red Book has the official title of the RICS Valuation Standards and Guidance Notes and was first published in 1980. The 6th edition is the latest of the Red Book and was published in 1st of January 2008. It has had an amendment in April 2010 and both the 6th edition and amendment can be found here. Please note you will have to have access to the RICS site through membership.
The first set of standards contains standards and rules that apply to the RICS members wherever they work in the world. The second set of standards apply to certain countries. These standards came into force especially after the Mallinson Report (1994) which was published to quell the public's thoughts after the widely varying valuations on property including the Queens Moat Houses in the early 90's; a continual criticism of valuation bases in and out of the profession and losses incurred by mortgages on failed developments resulting from the falling values during the 1990's recession.
The Red Book's principal purpose "is to ensure that valuations produced by members achieve high standards of COI (Clarity, Objectivity and Intergrity - remember this as a badly spelt Koi Carp) and are reported in accordance with recognised bases. These may include:
a)the criteria of member's qualifications
b)the steps necessary to deal with actual or perceived threat to independence and objectivity
matters to be addressed on when agreeing on conditions of engagement (PS2)
c)bases of Valuations, Assumptions and Material considerations that need to remembered when preparing a valuation (PS3)
d)the minimum reporting standards
e)matters that should be disclosed if the valuations are relied upon by a third party
The Red Book has a series of Practice Statements or National Practice Statements, these are:
PS1 - Compliance and ethical requirements
PS2 - Agreement of terms of engagements
PS3 - Bases of value
PS4 - Applications
PS5 - Investigations
PS6 - Valuation reports
The bases of value, as noted in PS 3 are Market Value (MV), Market Rent (MR, Worth (or Investment Value) and Fair Value. These are dissected below.
Market Value - "the estimated amount for which a property 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" (RICS PS 3.2)
Market Rent - "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. Whenever market rent is provided the appropriate lease terms which it reflects should also be stated" (RICS PS 3.3)
Worth (Investment Value) - "the value of property to a particular owner, investor, or class of investors for identified investment or operational objectives" (RICS PS 3.4)
Fair Value - "the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties, in an arm's length transaction" (RICS PS 3.5) or "a price that is fair between two parties acting at arm's length for the exchange of an asset" Note that there is no marketing, the price must be fair to both parties, price should reflect any special advantages or disadvantages. Note that market value does not need to be fair to either parties
The Red Book has a collection of VIPs - Valuation Information Papers, available here:
VIP 1 - The Valuation of Owner-Occupied Property for Financial Statements
VIP 2 - The Capital and Rental Valuations of Restaurants, Bars, Public Houses and Nightclubs in England and Wales
VIP 3 - The Capital and Rent Valuation of Petrol Filling Stations in England, Wales and Scotland
VIP 4 - The Valuation of Surgery Premises Used for Medical or Health Services
VIP 5 - Rural Property Valuation (includes Property Used for Primary Agricultural Production, Leisure/Amenity, Commercial and Dwellings categories)
VIP 6 - The Capital and Rental Valuation of Hotels in the UK
VIP 7 - Leasehold Reform in England and Wales
VIP 8 - The Analysis of Commercial Lease Transactions
VIP 9 - Land and Buildings Apportionments for Lease Classification under International Financial Reporting Standards
VIP 10 - The Depreciated Replacement Cost Method of Valuation for Financial Reporting
VIP 11 - The Valuation and Appraisal of Private Care Homes Properties in England, Wales and Scotland
VIP 12 - The Valuation of Development Land
VIP 13 - Sustainability and Commercial Property Valuation
In the Practice Statement 6 and Appendix 6 of the Red Book, there is a list of minimum content of valuation reports:
a) Identification of the client
b) The purpose of the valuation
c) The subject of the valuation
d) The interest to be valued
e) The type of property, how it is used or classified by the client
f) The basis, or bases, of the valuation
g) The date of valuation
h) Disclosure of any material involvement or a statement that there has not been any previous material involvement
i) If required, a statement of the status of the valuer
j) Where appropriate, the currency that has been adopted
k) Any assumptions, special assumptions, reservations, any special instructions or departures
l) The extent of the member's investigations
m) The nature and the source of information relied on by the member
n) Any consent to, or restrictions on, publications
o) Any limits or exclusion of liability to parties other than the clients
p) Confirmation that the valuation accords with these Standards
q) A statement of the valuation approach
r) The opinions of value of figures and words
s) Signature and date of report
Other issues may need to be taken into account, these may include:
1) Confirmation of original instructions or terms of engagement
2) Site Plan
3) Description of the situation and location of the property
4) Description of the subject property
5) Details of construction
6) Services
7) Accommodation measurements/size, design, layout and description
8) Rating assessments
9) Planning consents and policies
10) Tenancy details
11) Details of any leases
12) Explanations of any defects and contamination
13) Overview of property market conditions
14) Market evidence and comparables
15) Valuation methodology, calculations and reasoning
16) Conclusion including valuer's recommendations
It must be noted that the valuer must have sufficient current local, national and international knowledge of the particular market, and the skills and understanding necessary to undertake the valuation competently...if the valuer does not have the required level of expertise to deal with some aspect of the commission properly then he or she should decide what assistance is needed, assembling and interpreting relevant information from other professionals, such as the specialist valuers, environmental surveyors, accountants and lawyers (RICS PS 1.5)
Next time - how do you measure an elephant?
Any comments or complaints, left a comment and I shall try to assist
The information below are notes and quotes taken from the book Introducing Property Valuation by Michael Blackledge on the subject of RICS Valuation Standards.
The Red Book has the official title of the RICS Valuation Standards and Guidance Notes and was first published in 1980. The 6th edition is the latest of the Red Book and was published in 1st of January 2008. It has had an amendment in April 2010 and both the 6th edition and amendment can be found here. Please note you will have to have access to the RICS site through membership.
The first set of standards contains standards and rules that apply to the RICS members wherever they work in the world. The second set of standards apply to certain countries. These standards came into force especially after the Mallinson Report (1994) which was published to quell the public's thoughts after the widely varying valuations on property including the Queens Moat Houses in the early 90's; a continual criticism of valuation bases in and out of the profession and losses incurred by mortgages on failed developments resulting from the falling values during the 1990's recession.
The Red Book's principal purpose "is to ensure that valuations produced by members achieve high standards of COI (Clarity, Objectivity and Intergrity - remember this as a badly spelt Koi Carp) and are reported in accordance with recognised bases. These may include:
a)the criteria of member's qualifications
b)the steps necessary to deal with actual or perceived threat to independence and objectivity
matters to be addressed on when agreeing on conditions of engagement (PS2)
c)bases of Valuations, Assumptions and Material considerations that need to remembered when preparing a valuation (PS3)
d)the minimum reporting standards
e)matters that should be disclosed if the valuations are relied upon by a third party
The Red Book has a series of Practice Statements or National Practice Statements, these are:
PS1 - Compliance and ethical requirements
PS2 - Agreement of terms of engagements
PS3 - Bases of value
PS4 - Applications
PS5 - Investigations
PS6 - Valuation reports
The bases of value, as noted in PS 3 are Market Value (MV), Market Rent (MR, Worth (or Investment Value) and Fair Value. These are dissected below.
Market Value - "the estimated amount for which a property 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" (RICS PS 3.2)
Market Rent - "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. Whenever market rent is provided the appropriate lease terms which it reflects should also be stated" (RICS PS 3.3)
Worth (Investment Value) - "the value of property to a particular owner, investor, or class of investors for identified investment or operational objectives" (RICS PS 3.4)
Fair Value - "the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties, in an arm's length transaction" (RICS PS 3.5) or "a price that is fair between two parties acting at arm's length for the exchange of an asset" Note that there is no marketing, the price must be fair to both parties, price should reflect any special advantages or disadvantages. Note that market value does not need to be fair to either parties
The Red Book has a collection of VIPs - Valuation Information Papers, available here:
VIP 1 - The Valuation of Owner-Occupied Property for Financial Statements
VIP 2 - The Capital and Rental Valuations of Restaurants, Bars, Public Houses and Nightclubs in England and Wales
VIP 3 - The Capital and Rent Valuation of Petrol Filling Stations in England, Wales and Scotland
VIP 4 - The Valuation of Surgery Premises Used for Medical or Health Services
VIP 5 - Rural Property Valuation (includes Property Used for Primary Agricultural Production, Leisure/Amenity, Commercial and Dwellings categories)
VIP 6 - The Capital and Rental Valuation of Hotels in the UK
VIP 7 - Leasehold Reform in England and Wales
VIP 8 - The Analysis of Commercial Lease Transactions
VIP 9 - Land and Buildings Apportionments for Lease Classification under International Financial Reporting Standards
VIP 10 - The Depreciated Replacement Cost Method of Valuation for Financial Reporting
VIP 11 - The Valuation and Appraisal of Private Care Homes Properties in England, Wales and Scotland
VIP 12 - The Valuation of Development Land
VIP 13 - Sustainability and Commercial Property Valuation
In the Practice Statement 6 and Appendix 6 of the Red Book, there is a list of minimum content of valuation reports:
a) Identification of the client
b) The purpose of the valuation
c) The subject of the valuation
d) The interest to be valued
e) The type of property, how it is used or classified by the client
f) The basis, or bases, of the valuation
g) The date of valuation
h) Disclosure of any material involvement or a statement that there has not been any previous material involvement
i) If required, a statement of the status of the valuer
j) Where appropriate, the currency that has been adopted
k) Any assumptions, special assumptions, reservations, any special instructions or departures
l) The extent of the member's investigations
m) The nature and the source of information relied on by the member
n) Any consent to, or restrictions on, publications
o) Any limits or exclusion of liability to parties other than the clients
p) Confirmation that the valuation accords with these Standards
q) A statement of the valuation approach
r) The opinions of value of figures and words
s) Signature and date of report
Other issues may need to be taken into account, these may include:
1) Confirmation of original instructions or terms of engagement
2) Site Plan
3) Description of the situation and location of the property
4) Description of the subject property
5) Details of construction
6) Services
7) Accommodation measurements/size, design, layout and description
8) Rating assessments
9) Planning consents and policies
10) Tenancy details
11) Details of any leases
12) Explanations of any defects and contamination
13) Overview of property market conditions
14) Market evidence and comparables
15) Valuation methodology, calculations and reasoning
16) Conclusion including valuer's recommendations
It must be noted that the valuer must have sufficient current local, national and international knowledge of the particular market, and the skills and understanding necessary to undertake the valuation competently...if the valuer does not have the required level of expertise to deal with some aspect of the commission properly then he or she should decide what assistance is needed, assembling and interpreting relevant information from other professionals, such as the specialist valuers, environmental surveyors, accountants and lawyers (RICS PS 1.5)
Next time - how do you measure an elephant?
Any comments or complaints, left a comment and I shall try to assist
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