valuation update 2017 - professional conferences · valuation update 2017 valuing sustainability...

Valuation Update 2017Valuing Sustainability & Valuing In Uncertain Times

Nick FrenchProfessor in Real Estate School of the Built EnvironmentOxford Brookes UniversityEmail: [email protected]

Since the BREXIT “yes” vote, the Trump USA presidency and problems in the Eurozone, property

markets are more volatile.

� The RICS and 2017 IVSC Standards

�Acknowledging uncertainty in valuations - RICS guidance

�What is market value in a volatile world? Impact of Sustainability

�What will the EPC letting restriction mean to the valuation of property?

�Case Study

Agenda

�Measurement and Comparables

� IPMS 3 – Office, which would equate closely to the former NIA (net internal area), also referred to as net lettable area – BUT NOT THE SAME

� Not being implemented outside London (and even there, it isn’t being embraced)

� Measurement underpins all comparables

� The RICS should have implemented a transition period where NIA was side by side with IPS.

Stop Press 1 - IPMS3

IVSC Valuation StandardsIVSs - January 2017� The launch is the latest step in IVSC’s

mission to raise standards of international valuation practice as a core part of the financial system, for the benefit of capital markets and the public interest.

� The Standard apply to the undertaking and reporting of valuations for all asset types.

� IVS 2017 comprises five General Standards and six Asset Standards.

The International Valuation Standards Council (IVSC) is a non-profit making group of professional valuers who are dedicated to developing and sustaining

a single set of globally accepted valuation standards

� RICS Valuation - Professional Standards The RICS is a member organization of IVS and as such we have played an active role in developing the revised IVS. We are actively updating the RICS’ Red Book to incorporate the new standards. We hope this will be completed by July 1st 2017 which is the proposed implementation date for IVS 2017. We believe that continued wide adoption of IVS will boost the transparency of, and confidence in, valuations for the benefit of business and the public.

Ben Elder, RICS Director of Valuation, Jan 2017

NB. Until the new edition is issued, the Red Book 2014 isstill in effect.

RICS Red Book

� RICS - VPS 3 Valuation Reports

If appropriate, the valuer should draw attention to, and

comment on, any issues affecting the degree of certainty, or uncertainty, of the valuation

� RICS – VPGA 9 Valuation in markets

susceptible to change: certainty and uncertainty1.1 The purpose of this VPGA is to encourage best practice in the reporting of valuations, with specific reference to conveying a clear picture to users concerning the degree of certainty and risk attached to them.1.2 For some purposes it is often helpful, if not essential, to the understanding of the valuation to include supporting evidence, an explanation of the approach and the market

VPS = Valuation Practice StatementVPGA = Valuation Practice Guidance Application

Acknowledging uncertainty in valuations -RICS guidance

All valuations are professional opinions on a stated basis, coupled with any appropriate assumptions or special assumptions (see VPS 4 paragraph 2, Assumptions, and VPS 4 paragraph 3, Special assumptions). A valuation is not a fact, it is an opinion. The degree of subjectivity involved will inevitably vary from case to case, as will the degree of certainty – that is, the probability that the valuer’s opinion of market value would exactly coincide with the price achieved were there an actual sale at the valuation date.

Valuation (Un)CertaintyRICS – VPGA 9 1.2

Reflecting Uncertainty

� Reflecting Uncertainty in Valuations for Investment Purposes for clients Supports VPGA 9

� Valuers’ attention is drawn to the fact that the most recent guidance on their responsibilities when providing valuation advice (of any type) in such circumstances is to be found in VPGA 9 within the global section of the 'Red Book' (RICS Valuation – Professional Standards Global January 2014).

� Market Value is an estimate of price

� All Valuation Approaches (Market, Cost and Income) determine Market Value

� Market Value needs to be provided in context –VPGA 9 - Uncertainty

� Market ValueThe estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion

What is Market Value (MV) in a volatile world?

Impact of Sustainability on ValueIf, at the date of valuation, the market does not

differentiate “sustainable” and “non-sustainable” , there will be no impact on Value. www.rics.org/sustainability

Please note - All talks on Sustainability MUST have a picture of a stranded polar bear – It is the LAW !

In a free market, sustainability will only have an impact if the occupiers of properties consider that the “sustainable elements” make a contribution (perceived or real) to the

bottom line. Occupiers will only pay for specifications that impact positively upon their businesses. That said,

legislation will have an impact if it restricts occupation.

� The Energy Act 2011 will make it unlawful from April 2018 to let residential or commercial properties with an EPC Rating of F or G (i.e. the lowest 2 grades of energy efficiency).

� Minimum Energy Efficient Standards (MESS) Legislation

� To achieve the UK’s legislative targets –all buildings must be Carbon Neutral by 2050

� How do you deal with these changes when valuing property?

EPC letting restriction

� The Minimum Energy Efficient Standards Legislation will make it unlawful to agree a new lease (as well as lease renewals) for a commercial property which achieves an Energy Performance Certificate (EPC) rating below an E.

� The deadline of April 2018 will only apply to lease renewals and new lettings, however from 1st April 2023 MEES will apply to all current leases.

Minimum Energy Efficient Standards

Summary provided, with permission, by Pure Real Estate Services Limited, Chartered

Surveyors

1st April 2018New commercial leases

and renewals

1st April 2020All new and current residential leases

1st April 2023All existing commercial

leases

The aims of the MEES regulations:

� Improve the energy efficiency of properties with an EPC rating of ‘F’ or ‘G’

� Help to tackle the traditional barrier to the implementation of energy efficiency works in buildings (aka the ‘split incentive’) where the landlord foots the bill for improvements that benefit the tenant.

� To encourage the retrofitting or redevelopment of energy inefficient buildings

� It is expected that the government will review the standards and likely raise them to cover all properties with a rating below a ‘D’ in 2025.

Why MEES?

Summary provided, with permission, by

Pure Real Estate Services Limited,

Chartered Surveyors

� Landlords will be exempt after all cost-effective improvements have been carried out - A cost effective measure is deemed to have a payback period of seven years or less.

� Landlords can apply for exemption from MEES, for five years, where they have implemented all cost effective improvement measures and the minimum ‘E’ rating has not been met.

� Landlords will be exempt, again for five years, if consent to undertake improvements is refused from a third party (e.g. Local Authority),

superior landlord or a tenant.

� If the improvement works would result in a devaluation of the property by 5% or more the landlord can apply for an exemption.

� The government will create a central register for landlords to apply for exemptions from MEES, evidence for these must be submitted.

MEES – Exemptions

Summary provided, with permission, by Pure Real Estate Services Limited, Chartered Surveyors

� MEES will apply to the grant or renewal of a lease from 1 April 2018. The landlord will be required ensure a property complies with MEES before the lease is granted. However, where the landlord has no choice whether to grant the lease, the landlord will have six months after the lease is granted to comply.

� From 1 April 2023 MEES will be extended to cover all existing leases.

� MEES does not apply to very short lettings, or to lettings of 99 years or more.

MEES – The details

Summary provided, with permission, by Pure Real Estate Services Limited, Chartered Surveyors

�Energy Act 2011: Illustrative Wording for Valuation Reports

� This legislation could impact on up to 20% of UK properties, the RICS Valuation Sustainability Task Force consider it is prudent to incorporate explanatory text about the upcoming changes within valuation advice.

� The RICS has produced illustrative wording to assist in providing clarification to the clients of valuations – NEW INSIGHT PAPER TO FOLLOW

� http://www.rics.org/uk/news/news-insight/news/energy-act-2011-illustrative-wording-for-valuation-reports/

Stop Press 2 – RICS/MEES

�A – no EPC

� We have not been provided with an up to date EPC rating for this property and, as such, our valuation is based on the assumption that the subject property(ies) will meet the minimum requirements laid down by the legislation and that there will be no adverse impact on value and marketability. It is advisable to obtain an expert’s opinion to advise whether (an) EPC(s) should be commissioned and if the building(s) is(are) likely to meet with the legislative requirements.

Stop Press 2 – Words No 1

�B – EPC is OK

� The existing EPC certificate(s) that has(have) been provided indicates that the subject property(ies) will fall within the acceptable energy performance range for the purposes of the Act. Although the legislation is not expected to be reviewed again until 2020, the method of assessment may have changed since the EPC certificate was issued. It is therefore advisable to obtain an expert’s opinion on whether the building would still comply with the minimum standard if the building(s) were re-certified under the current methodology.


�C – EPC below E� The existing EPC certificate(s) that has(have) been provided

indicates that this property may not meet the minimum acceptable energy performance standard for the purposes of this Act. Unless the property qualifies as exempt , capital expenditure may be required in order to upgrade the property(ies) to an acceptable EPC rating standard. Failure to do this may result in renting this property being unlawful, with an associated impact on marketability and value. It is therefore advisable to obtain an expert’s opinion on the status of the property(ies). Our valuation assumes the property(ies) is(are) not exempt and reflects the fact that a strategy of improvement will be required in order to bring the property(ies) up to the minimum required energy performance standards.


When discussing valuations with colleagues in practice, there seems to be little consensus on how to reflect the EPC legislation in Capital Valuations.

� Value as if the property can be relet at reversion and deduct the (estimated) cost of retrofitting to conform with an “E” (or above) rating

� Use a reversionary valuation model (layer or term and reversion) and increase the equivalent yield.

� Use a reversionary valuation model (term and reversion) and increase the yield used on reversion.

MEES and Capital Value

When discussing valuations with colleagues in practice, there seems to be little consensus on how to reflect the EPC legislation in Capital Valuations.

� Value as if the property can be relet at reversion and deduct the (estimated) cost of retrofitting to conform with an “E” (or above) rating

� Use a reversionary valuation model (layer or term and reversion) and increase the equivalent yield.

� Use a reversionary valuation model (term and reversion) and increase the yield used on reversion.

� No one is using DCF models

Valuation Case Study

Example – F rated

Example. Valuation 2017 – ARY 10% A small office 2 storey property let to one tenant on the M3 corridorBuilt in 1968 and let on a 10 year lease in 2010. 5 year reviewsRent passing – £30,000, Market Rent £32,000

The property is in a good secondary location but the specification is a typical 60s’ build. Metal single glazed windows, brick built, flat roof (which shows signs of leaking previously). The tenant has fulfilled all obligations and maintained the property well albeit, obviously, in keeping with the condition at the commencement of the lease.

Example – Valuation 1 Value as if the property can be relet at reversion and deduct the

(estimated) cost of retrofitting to conform with an “E” (or above) rating

Term & Reversion

Rent Passing £30,000

YP 3 years @ 10.00% 2.49 £74,606

M arket Rent £32,000

YP Perp @ 10.00% 10.00

PV 3 years @ 10.00% 0.75 £240,421

Capital Value £315,026

Estim ated cost of retrofitting £100,000Net Capital Value £215,026

Less costs @ 6.8%M arket Value £201,335

Traditional - Im plicit

Example – Valuation 2

Use a reversionary valuation model (layer or term and reversion) and increase the equivalent yield.

In this case, a 4% increase has been applied

Term & Reversion


YP 3 years @ 14.00% 2.32 £69,649


YP Perp @ 14.00% 7.14

PV 3 years @ 14.00% 0.67 £154,279




Example – Valuation 3

Use a reversionary valuation model (term and reversion) and increase the yield used on reversion.

In this case, a 5% increase has been applied

Term & Reversion


YP 3 years @ 10.00% 2.49 £74,606


YP Perp @ 15.00% 6.67

PV 3 years @ 15.00% 0.66 £140,270




� Regulation is changing rapidly and will impact on value

� The link between value and good property management will become more important

� Valuations need to be placed in the context of uncertainty

� Both uncertainty issue and EPC legislation means that assumptions of perpetuity will be challenged

� The RICS Red Book 2017 will include the new 2017 IVSs

Conclusions

Valuation Update 2017Valuing Sustainability & Valuing In Uncertain Times

Nick FrenchProfessor in Real Estate School of the Built EnvironmentOxford Brookes UniversityEmail: [email protected]

valuation update 2017 - professional conferences · valuation update 2017 valuing sustainability...

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