Valuation Theory and Practice
England and Wales
Monday 7th December 2015
1.55pm-5.10pm(incl. 15 mins. for reading but candidates may start writing after 5 minutes)
Time allowed: 3 hours
Valuation Theory and Practice, England and Wales, IRRV Certificate in Business Rates, December 2015
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1. Adjust and analyse recent comparable rental evidence given at (a) to (e) below using a yield of 9% where appropriate.
(a)A factory with an area of 221.95m² in terms of main space (ITMS) is let on fully repairing and insuring terms (FRI) at a stepped rent agreed as follows: Year 1 £8,000; Year 2 £9,750; Year 3 £10,000; Year 4 £10,500; Year 5 £10;750; Year 6 £11,000; Year 7 £11,000.
(b)A warehouse with an area of 246.87m² ITMS is let at a rent £16,250 pa. A capital payment of £20,000 was made by the landlord to the tenant as an incentive to take a five-year lease without a break clause.
(c)An industrial building with an area of 199.45m² ITMS with a rent of £10,250 pa. The landlord is responsible for all repairs and insurance and the average paid over last 3 years is as follows: External repairs £500 pa; internal repairs £425 pa and insurance £350 pa.
(d)A workshop with an area of 228.13m² ITMS and rent of £12,500 pa FRI. A rent free period of nine months was granted to the tenant as an incentive to take the lease. Assume a 10-year lease with a rent review after 5 years.
(e)The freehold of a factory with a rack rent of £15,750 and an area ITMS of 350.00m² sold for £175,000.
(f)Using your analysis from (a) to (e) above, assess the market rental value of ‘Stores R Us’ – a secure warehouse with a floor area of 250.00m². The rent passing is £38.00/m² FRI and 2 years of the term remain before the rent is reviewed to market value. Value the freehold of the property as at today’s date.
2(a).You have been asked to measure a supermarket to assist with a valuation for local taxation. On external inspection you find a steel framed building with glass cladding under a shallow pitched roof of sheet steel. A canopy to the front covers the porch and shelters shopping trolleys. A customer car park is provided for the exclusive use of supermarket customers.
At the rear there is a single docking bay for unloading and four open bays for delivery vehicles. Nearby is a water storage tank and housed in three separate steel clad buildings, are a compactor, a standby generator and a workshop with roller shutter doors.
Internally, at regular intervals throughout the mains sales area and ancillary accommodation, columns support the roof at regular intervals and there is a staircase to the mezzanine floor café. At the back of the supermarket is a bakery area leading through to the fire corridor.
The accommodation also includes customer and staff toilets and a baby changing room and associated plant rooms, meter cupboards and a cleaner’s room (part of which has headroom of less than 1.50 metres).
With reference to the RICS Code of Measuring Practice 6th edition identify from the list of accommodation areas mentioned which should be included and which should be excluded from measurement. (30 marks)
Valuation Theory and Practice, England and Wales, IRRV Certificate in Business Rates, December 2015
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2(b).From the plan below calculate the floor area In Terms of Zone A.
(30 marks)
Valuation Theory and Practice, England and Wales, IRRV Certificate in Business Rates, December 2015
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3(a)Calculate the value of the right to receive £12,525 pa at 8% for 5 years. Round sensibly.
(4 marks)
3(b)Calculate the value of the right to receive £12,525 pa at 8% in perpetuity commencing
in 5 years’ time. Round sensibly. (3 marks)
3(c)Calculate the value of the right to receive £12,525 pa at 8% for 5 years commencing
in 5 years’ time. Round sensibly. (6 marks)
3(d)Hannah and her four brothers inherit property with a return of £714,285 per annumin perpetuity at 7%. Calculate the capital value of Hannah’s share to the nearest penny.
(5 marks)
3(e)A tenant pays a rent of £15,000 pa FRI. The current market rent is £17,500 pa FRI.
There is a review in 4 years’ time. Using a remunerative yield of 8%; an accumulative
yield of 2% (for the sinking fund) and tax at 40% calculate the value of the tenant’s
interest as of today. (10 marks)
3(f)Property Managers responsible for the running of a shopping centre predict expenditure of £12M in 5 years’ time. What sum of money needs to be invested each year at the accumulative rate of 2% to meet this anticipated expenditure? (8 marks)
3(g)A dress worn by Vivien Leigh in her role as Scarlett O’Hara in the 1939 classic Gone with the Wind has sold for £92,000. The grey and black gown was originally bought for £10 by a collector who spotted it on the floor during a visit to the movie props store. Calculate the compound rate of growth.(12 marks)
3(h)An article in The Times (2015) reported that an MP who purchased a Georgian town house in London in November 2005 for £7.25M is selling it for £16.75M. Calculate the compound rate of growth. (12 marks)
Valuation Theory and Practice, England and Wales, IRRV Certificate in Business Rates, December 2015
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4(a).A car hire company finds that there is much demand from its customers for a two-seater transit van. The van will cost the company £24,830 to buy (including VAT). Running expenses and depreciation and income will amount to:
Running expenses and depreciation / IncomeYear 1 / £1,050 / £7,250
Year 2 / £1,125 / £7,750
Year 3 / £1,250 / £7,950
The van will be sold at the end of the third year for £11,000. The company’s target rate of return is 9.00%. What is the Net Present Value? Is the investment worthwhile? (20 marks)
4(b).Calculate the approximate Internal Rate of Return (IRR). Note: 9.25% will give a negative Net Present Value (NPV) in your first trial rate attempt. The NPV calculated at 9.25% will guide you as to the rate to use in your second trial rate attempt and from this you should be able to estimate the IRR (which lies somewhere between 9.00% and 9.25%).
The Present Value of £1 formula (annually in arrears) is as follows:
The Present Value of £1 = / 1(1 + i)n
Where i is the rate per cent and n is the number of years. (40 marks)
Valuation Theory and Practice, England and Wales, IRRV Certificate in Business Rates, December 2015
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5(a)The freeholder of contractor’s café is proposing to let the premises on a 21-year lease with reviews to market value every 7 years. The current market value is £25,000 pa FRI but a prospective tenant – Mr Alan Dente has offered to pay £17,500 pa FRI plus a premium (or capitalised profit rent) to make up the shortfall in rent between now and the first review. Calculate the value of the premium that should be paid from the tenant’s point of view (use dual rate adjusted for tax) [10 marks] and from the landlord’s point of view (use a single rate). (10 marks)
(b)As an alternative, the freeholder of the café is considering an offer from another possible tenant –Mrs Roux, who has pointed out that the property will need new roof cladding in 7 years’ time which will cost £8,000 and says that kitchen will need to be improved at the same time which will cost a further £5,000. If the work was carried out by the freeholder now she would be prepared to pay the market rent of £30,000 pa FRI but the freeholder would rather do the repairs and improvements in 7 years’ time. Value the freehold interest.
(20 marks)
(c)Mrs Roux has also looked at Top Slice Tearooms nearby. This is also available to rent on a 21-year lease with reviews to market value every 7 years. The headline rent is £28,500 but the landlord has agreed to grant a six-month rent free period, pay Mrs Roux a cash sum of £5,000 as an incentive to take the lease and to carry out all the external repairs at his own expense. Mrs Roux will opt for the cheapest deal. Advise her whether to take Contractor’s Café or Top Slice Tearooms. (20 marks)
6.Determine the rental value of the town hall using the Contractor’s Basis of valuation. Demonstrate all of the stages. Use the data below and make sensible assumptions.
Bldg No. / Built / Description / Accommodation / Floor area GIA m²1 / 1889 / 3-storey Victorian Civic building constructed of brick under a tiled roof. Limestone façade with ornate features. Fully refurbished 1975. / Offices, conference rooms and Council Chamber. Clock Tower. Basement boiler room and stores. / 2,645
2 / 1935 / 2-storey ‘modernist’ building of brick under a flat roof. / Public library and entertainment hall to seat 800 people. Licensed bars and toilet facilities. / 2,250
3 / 2010 / Single storey extension of steel frame and glass wall cladding. / Full height atrium, offices, kitchen, servery and canteen. Gymnasium, WCs and showers. / 4,576
4 / 2010 / Hard and soft landscaping. / Gardens and Paved Plaza with public seating areas. / 2,000
Valuation Theory and Practice, England and Wales, IRRV Certificate in Business Rates, December 2015
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7(a)Calculate a rental value for ‘The Advocate’ public house based on the table of trade information provided. The publican, who has 25 years of experience managing a number of public houses in the past, bought the pub a few years ago and converted outbuildings into 12 bedrooms. The restaurant is popular with families as the food is good and competitively priced. There is a separate bar with gaming machines (Amusement with Profits). (30 marks)
7(b)Associated Superstores occupy a food store on the London Road, Mytown. It has a good catchment area and trades well with minimal competition from other mainstream food retailers. Value the freehold interest. Annotate your answer with notes.(30 marks)
Valuation Theory and Practice, England and Wales, IRRV Certificate in Business Rates, December 2015
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8. The Rachman Restaurant (an independent restaurant with rooms) opened in 2010 and is trading well but the owner plans to return to America for 5 years and a friend has agreed to lease the restaurant from him at a market rent until he returns. Extracts from the accounts for the last three years are given below. Using a full Receipts and Expenditure method of valuation assess the market rental value of the property.
Valuation Theory and Practice, England and Wales, IRRV Certificate in Business Rates, December 2015
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Cert L3 Valuation Theory and Practice,England and Wales
Examiners Comments
December 2015
This report refers to the following classifications
Unclassified / 0% / to / 16.33%Fail / 16.67% / to / 44.67%
Marginal fail / 45% / to / 49.67%
Pass / 50% / to / 74.67%
Distinction / 75% / to / 100%
Overall results
40% Unclassified
20% Fail
0% Marginal fail
0% Pass
40% Distinction
QUESTION 1
Most candidates attempted this question but with various degrees of success with a range of marks from 12% to 87%. The question was designed so that the analysis produced about £45/m² in all cases except one which was slightly more.
Part (a) was either handled very well or not attempted at all.
Part (c) of the question gave the rent as £10,250 on an internal repairing basis and it was stated that the tenant had paid £425 each year on average. To adjust the rent to FRI the candidate simply needed to deduct the average cost of the external repairs and insurance. £10,250 less (£500 + £350). Candidate’s seemed to struggle with this and I was surprised at the number of different answers returned.
Part (d) is a straightforward rent free period analysis. Even the better candidate’s struggled with this although it is fundamental to rent analysis and this type of calculation is used a lot in practice.
The only comment I would make in respect of part (f) concerns candidates’ choice of yields. I appreciate that in practice the approach might not always be consistent but in an examination when candidates need to demonstrate that they understand investment risk, it is advised that the reversionary yield is increased by one percent (if only to demonstrate understanding – and to pick up the allocated mark).
QUESTION 2
(a) This was an easy question in that all the candidate needed to do was to work through the accommodation list given in the question and identify from the definition of Gross Internal Area (Code of Measuring Practice) what is included and what needs to be excluded from measurement. Only 50% of candidates attempted it and yet good marks could be picked up in a very short time.
(b) The shop in this second part of the question should be measured to Net Internal Area and the stairs (excluded) in Zone B with a depth of more than a metre will produce quite a differential in height. Technically, this should be allowed for in the valuation rather than at the measurement stage but candidates were keen to show that they recognised that an adjustment should be made and although this was a measurement only exercise, reflected an allowance in the ITZA. I am not unhappy with this approach but any allowance should be made in the light of the fact that an allowance has already been made in starting the Zone C earlier. It is a point that should not escape the attention of the valuers and will inevitably be brought up by the ratepayer's valuer in negotiation. Candidates had different ways of approaching this. I would caution against deducting a percentage at the end as a height differential between zones B and C would not (arguably) affect Zones A or B or the upper floors.
QUESTION 3
This whole question tests the ability of candidates to use valuation and investment tables. The principles are fundamental to valuation of property held for investment. Such tables are a tool of the trade. This was a popular question although parts (c) and (g) were avoided by some. Marks ranged widely with the lowest mark being 28% and the highest mark being 95%.
QUESTION 4
This question required a discounted cash flow to calculate the Internal Rate of Return and Net Present Value. Only one candidate attempted it but scored an impressive 100%.
QUESTION 5
This was not a popular question because it was probably seen as the most difficult and relied on a good knowledge and understanding of the relevant chapters in Modern Methods of Valuation and a knowledge and understanding of the relationship between freehold term and reversion yields and leasehold yields.
QUESTION 6
This was not a popular question but should have been. The one candidate that attempted it did very well and their mark contributed to an overall distinction for this paper. Some marks were lost as the costs adopted were totally unrealistic but the methods and principles demonstrated were sound with all six stages considered.
QUESTION 7
This question was not attempted by any candidate.
QUESTION 8
In answer to this question I wanted to see some judgement on the part of the candidate as to the level of receipts and expenditure looking forward based on past performance as shown in the extract from the accounts. Candidates tended to average or adopt the last year’s figures and variations on those approaches. Obviously the mortgage interest and hire purchase payments needed to be excluded and most candidates acknowledged that fact.