Modern Methods of Valuation

Transcription

1 Modern Methods of Valuation I Ith edition Eric Shapiro, David Mackmin and Gary Sams Routledge Taylor&FrancisCroup LONDON AND NEW YORK H i Books

2 Contents Foreword Preface to the eleventh edition Acknowledgements Table of cases Table of statutes Table of statutory instruments Acronyms xxi xxii xxiv xxv xxix xxxii xxxiii 1 Principles of valuation 1 1. The valuer's role 1 2. The property market 2 3. A definition of value 2 4. Value and valuation 4 5. Demand, supply and price 5 6. Demand for and supply of landed property 6 7. Landed property as an investment 10 ^,, 2 Methods of valuation (valuation approaches) Introduction 11 * 2. Comparison Principal methods of valuation 12 (a) The market approach or comparative method 12 (b) The income approach or investment method 12 (c) The residual approach or development method 13 (d) The profits approach 14 (e) The cost approach or contractor's method 14 (f) Conclusion 15

3 vi Contents 3 Property in land Land law Property rights in general Freeholds 17 (a) Registered and unregistered land 19 (b) Adverse possession Leaseholds 20 (a) Building leases 22 (b) Occupation leases 23 (c) Leases for life Licences 24 t 6. Common law, equity and trusts Equitable interests including options Co-ownership Easements and related rights Restrictive covenants Commonhold Successive interests in property Transfers of interests in land and security in land 33 4 The market approach or comparative method Introduction 36 ' "(a) Location 36 (b) Physical state 36 (c) Tenure 37 (d) Purpose 37 (e) Time Residential property 38 " 3. Development land 39 5 Market rent Introduction Rent and net income Economic factors affecting rent 42 (a) Supply and demand 42 (b) Demand factors 43 (c) Supply factors Estimation of market rent 49 (a) Generally 49 (b) Basis of the rent actually paid 50

4 Contents vii (c) Comparison of rents 52 (d) Rent and lease terms Effect of capital improvements on market rent Hierarchy of market evidence 56 6 Outgoings Introduction Repairs 58 (a) Generally 58 (b) Immediate repairs 58 (c) Annual repairs 58 (d) Conditions of tenancy 60 (e) Future repairs Sinking funds Business rates, water services and council taxes Income tax Insurances 62 (a) Fire insurance 62 (b) Other insurances Voids Service charges Management Value added tax Outgoings and rent Current issues 66 7 Yield Introduction 67 «.*» (a) Nominal and actual or effective rates of interest 67 (b) Timing of payments and yields Principles governing yields from investments Yields from landed property investments 72 (a) Shops 73 (b) Offices 74 (c) Factories and warehouses 74 (d) Residential properties 75 (e) Ground rents Changes in interest rates 77

5 viii Contents 8 Investment mathematics as it applies to property valuation Introduction Amount of l (A l) Present value of l (PV 1) Amount of l per annum (A lpa) Annual sinking fund (ASF) PV of l per annum (PV lpa) or Years'Purchase (YP) Income approach or investment method Valuation of freehold interests 95 (a) Freehold let at MR 96 v(b) Freehold let at below MR 101 (c) Freehold let at more than MR Valuation of leasehold interests 109 (a) Provision for loss of capital 111 (b) YP dual rate 112 (c) Capital replacement and inflation 114 (d) The position of the owner/occupier 114 (e) Annual sinking fund and tax 114 (f) Dual rate adjusted for income tax 116 (g) Leasehold interest where income is less than MR Synergistic value, sometimes known as marriage value Freehold interest where a building has a terminable life Premiums Surrenders and renewals of leases 128 *» 7. Traditional valuation techniques and DCF Discounted cash flow Generally Net present value 136 (a) The discount rate 136 (b) Rate of growth 137 (c) Cash flow period (see guidance note) Internal rate of return (IRR) Comparison ofnpv with IRR approaches Application of DCF and investment value (worth) 143

6 Contents ix 11 Residual approach or development method of valuation Introduction Proceeds of sale Costs of sale Costs of development 148 (a) Cost of building 148 (b) Miscellaneous items 148 (c) Costs of finance Development profits 150 [ 6. Surplus for land Developments in valuation approaches Introduction Relationship of rent in arrears and in advance Taxation of incomes Valuation of freehold interests 162 (a) Nature and function of yields 162 (b) Equated yields 163 (c) Effects of inflation 166 (d) Valuation of varying incomes Leasehold interests 168 (a) Replacement of capital 169 (b) Replacement of capital in real terms 172 (c) ASF at low rates of return 174 (d) Why use dual rate YP? 174 (e) Valuation of variable incomes 176 (f) The effect of tax 177 (g) The double sinking fund method 178 (h) Summary 179 "** 6. Valuing in periods of market instability - valuation certainty Valuing sustainability Conclusion Further reading Some practical points The valuation process The analysis of rents and prices Special purchasers or buyers RICS valuation -professional standards, global and UK 192

7 x Contents 5. The cost of building works 193 (a) Bills of quantities 194 (b) Unit comparisons 194 (c) Other methods of comparison 194 (d) Alterations and repairs Claims for damages 195 (a) Dilapidations 195 (b) Other claims Management of investments 197 (a) Maintenance of capital values 198 (b) Rents 199 (c) Outgoings 200 (d) Reserves Principles of the law of Town and Country Planning The Town and Country Planning Acts 202 (a) The 1947 Act The planning system 203 (a) Planning authorities 203 (b) The development plan system 203 (c) Effect of the development plan Development control 205 (a) The use classes order (b) Part 3, general permitted development order (GPDO) - changes of use Planning permissions 209 (a) Development orders and local development orders 209 (b) Local development orders 210 (c) Simplified planning zones and enterprise zones 210 (d) Public authority development Applications for planning permission 211 (a) Outline planning permission 211 (b) Applicants and applications 212 (c) Environmental Impact Assessment 212 (d) Nationally significant infrastructure projects 213 (e) Planning fees 213 (f) Determining planning applications 213 (g) "Calling in" procedure 214 (h) Revocation, modification and discontinuance orders Effect of planning permission Duration of planning permission Planning conditions and planning obligations 216

8 9. The Community Infrastructure Levy (CIL) Appeals-section (a) Appeals and overlapping and repeated applications Judicial control of planning decisions Enforcement of planning control 220 (a) Enforcement notices 220 (b) Planning contravention notices 221 (c) Stop notices 221 (d) Breach of condition notices 222 (e) Injunctions 222 (f) Appeals against enforcement notices 223 (g) Non-compliance with an enforcement notice Amenity and safety 224 (a) Protection of trees and special buildings 224 (b) Regulation of advertisement displays and caravan sites 226 (c) Unsightly land and hazardous substances 227 Contents xi 15 Development properties Introduction Valuation approach Types of development Viability statements (studies) Factors affecting value Residential development schemes 235 (a) Generally 235 (b) User of land 239 (c) Infrastructure 242 (d) Environmental and other factors Commercial development schemes 243»* 8. Period of development Incidental costs Site assembly 245 \ 11. Hope value Urban sites 247 (a) New development 247 (b) Refurbishment Ground rents 255 (a) Residential ground leases 258 (b) Commercial ground leases 259 (c) Ground rent 260 (d) Market value of ground rents 261

9 xii Contents 16 Residential properties Generally The Rent Acts 265 (a) Rents under regulated tenancies (1977 Act, Part III) 266 (b) Security of tenure (1977 Act, Part VII) The Housing Act assured and assured shorthold tenancies Schedule 10 to the Local Government Act 1989, the Leasehold Reform Act 1967 and the Leasehold Reform, Housing and Urban Development Act 1993 (Parti) 268 (a) Enfranchisement by way of purchase of the freehold 271 (b) Valuations to determine enfranchisement price - "original method" (i.e. lower value properties only) 271 (c) Market transactions 274 (d) Valuations under the Housing Act 1974 and the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUD) 276 (e) Valuations to determine enfranchisement price - "higher value method" 276 (f) Extension of the existing lease (lower value houses) 277 (g) Landlord's overriding rights 278 (h) Retention of management powers 279 (i) The LRHUD Act 1993 as amended by the Commonhold and Leasehold Reform Act Smaller residential properties, HMOs and tenements 280 (a) General method of valuation 280 (b) Outgoings 282 (c) State of repair 283 (d) Clearance areas 284 ^ ^ (e) Duration of income Larger residential properties 286 (a) Generally 286 (b) Factors affecting value 286 (c) Methods of valuation 287 (d) Sales records Blocks of flats held as investments 290 (a) Generally 290 (b) Gross income 290 (c) Outgoings 290 (d) Net income and yield Places of worship 294

10 Contents xiii 17 Commercial properties (1): Landlord and Tenant Acts and rent reviews Introduction Landlord and Tenant Act (a) Landlord and Tenant Act 1927 (Part I) 296 (b) Landlord and Tenant Act, 1927 (Part II) Landlord and Tenant Act 1954 (Part II) (as amended by the Regulatory Reform Order 2003) 297 \ 4. Health and safety at work, etc. Act Rent reviews 306 (a) Machinery for review 308 (b) Rent payable Valuation consequences 314 (a) Restricted user 314 (b) Period between reviews 314 (c) Analysis of incentives 315 (d) Comparable evidence 316 (e) Machinery for settling disputes Market value Court procedure for the grant of a new tenancy or the termination of a current tenancy Commercial properties (2): types of property Introduction Retail premises 321 (a) Location 321 (b) Type of premises 322 (c) Type of tenant 323 *. <v (d) Terms of the lease 324 (e) Market rent 324 ; (f) Market value 327, 3. Industrial premises 328 (a) Introduction 328 (b) Construction 328 (c) Market rent and market value "High-tech" industrials Business and science parks Warehouses Office properties 335 (a) Introduction 335 (b) Market rent 336

11 xiv Contents (c) Terms of tenancy 336 (d) Outgoings 337 (e) Net income and market value UK valuation standards: valuation for financial statements; replacement cost (contractor's) method; loan security valuations and fire insurance replacement cost Introduction to the RICS valuation standards Valuations for financial statements 342. _ - 3. Depreciated replacement cost (DRC) 344 (a) Cost-based valuation methods generally 344 (b) The DRC method of valuation for financial reporting 344 (c) Types of property involved 344 (d) The DRC method 345 (e) Straight line depreciation (SLD, GN ) 346 (f) Reducing balance (GN ) 347 (g) S-curve approach (GN ) 347 (h) Conclusion Mortgages and loans 348 (a) Borrowing against property assets 348 (b) Nature of a mortgage 349 (c) The mortgagee's security 350 " (d) The valuation 351 (e) Second or subsequent mortgages 354 (f) Secured lending for commercial property Fire and terrorism insurance: reinstatement cost 354 (a) Generally 354 (b) Cost of reinstatement 355 ««(c) Effect of under insurance 355 (d) Public authority requirements 356 (e) Cost and value 356 (f) Incidental costs 356 (g) Value added tax on building costs Further reading Valuations for rating 358 Introduction 358

12 Contents xv Section A: Non-domestic properties General Procedure Exemptions and reliefs Elements of rateable occupation 361 (a) Actual occupation 362 (b) Exclusive occupation 362 (c) Beneficial occupation 362 (d) Transience of occupation Principles of assessment Statutory basis of assessment Rating of unoccupied properties Methods of assessment 367 (a) Valuation by reference to rents paid 368 (b) The contractor's method or test 370 (c) The receipts and expenditure or profits basis Assessment of various types of property 374 (a) Agricultural properties 374 (b) Offices 375 (c) Shops 375 (d) Factories and warehouses 380 (e) Cinemas and theatres 381 (f) Licensed premises 382 (g) Caravan sites 382 (h) Garages and service stations 382 (i) Minerals 383 Section B: Domestic properties General 383 ' -., 2. Procedures Basis of assessment Compilation and maintenance of new lists Taxation: capital gains tax Taxation of capital gains capital assets and stock in trade Taxation of chargeable gains act (TCGA) (a) Occasions of charge 387 (b) Computation of gains 387 (c) Disposals after 5 April (d) Disposals before 6 April

13 xvi Contents (e) Disposals after 6 April (f) Rates of tax from 23 June 2010 for individuals 390 (g) Exemptions and reliefs 392 (h) Losses 396 (i) Part disposals 396 (j) The market value rule on certain disposals 398 (k) Sale of leasehold interests 398 (1) Premiums for leases granted out of freeholds or long leases 399 (m) Premiums for subleases granted out of short leases 400 Inheritance tax General Taxable transfers Basis of assessment Rates of tax Exemptions and reliefs 403 (a) General 403 (b) Potentially exempt transfers 403 (c) Business assets 403 (d) Agricultural property 404 (e) Woodlands Valuation 404 Income tax on property Schedule A Capital allowances 405 Value added tax VAT and property VAT - the general scheme 406 (a) Added value 406 \ (b) Taxable supplies 408 (c) Non-taxable supplies VAT and the property market 409 (a) Residential property 410 (b) Non-residential property Option to tax Transfer of a going concern Value and VAT Valuation and VAT 414

14 Contents xvii 8. Special cases 415 (a) Incentives 415 (b) Statutory and other compensation 415 (c) Mixed supplies 416 Stamp duty land tax Purchases Leases 417 Reference Principles of the law of compulsory purchase and compensation Legal basis of compulsory purchase Compulsory purchase procedure Compulsory purchase compensation Compulsory purchase compensation I: compensation for land taken Introduction General principles of compensation Market value 428 (a) Six basic rules of valuation Additional rules of assessment Development value 440 (a) Assumptions as to planning permission Certificates of appropriate alternative development Special compensation rules in particular cases 445 (a) Reinvestment by investors 445 *** (b) Special provisions in Private Acts Summary of general basis of compensation Arbitration of compensation disputes Valuation Home loss, basic loss and occupiers'loss payments Basic loss and occupier's loss payments Interest on compensation Compulsory purchase compensation II: compensation for severance and injurious affection General principles 451

15 xviii Contents 2. Compensation where part only of the land is taken 452 (a) Accommodation works 453 (b) Apportionment of rent (Compulsory Purchase Act 1965, section 19) Setting out a claim 454 (a) Land taken 454 (b) Severance and injurious affection 454 (c) Other incidental injury (disturbance) 457 (d) Assessment of compensation Compensation where no part of the land is taken 459 (a) Injurious affection under section (b) Compensation for harm from "physical factors" "Before and after" method of valuation Compulsory purchase compensation III: compensation for disturbance Disturbance compensation and disturbance payments Judicial approach to quantification of disturbance compensation Disturbance compensation: items which are typically claimed 472 (a) Residential premises 472 (b). Business and professional premises Disturbance in relation to development value Blight notices Compulsory purchase instigated by land owners: blight notices 491 * *» (a) Blighted land 491 (b) Qualifying interests Blight notice procedure Purchase notices Compulsory purchase instigated by landowners Purchase notices 496 (a) Compensation as in compulsory purchase cases 499 (b) Revocation, modification and discontinuance orders and other special cases 500

16 Contents xix 28 Compensation under the Town and Country Planning Acts: revocation, modification and discontinuance orders, etc Revocation, modification and discontinuance cases Revocation and modification orders Discontinuance orders Other cases of planning compensation Listed buildings and ancient monuments 508 Index '" 510