Modern Methods ofValuation

I Ith edition

Eric Shapiro, David Mackmin andGary Sams

RoutledgeTaylor&FrancisCroup H i B o o k sLONDON AND NEW YORK

Contents

Foreword xxiPreface to the eleventh edition xxiiAcknowledgements xxivTable of cases xxvTable of statutes xxixTable of statutory instruments xxxiiAcronyms xxxiii

1 Principles of valuation 1

1. The valuer's role 12. The property market 23. A definition of value 24. Value and valuation 45. Demand, supply and price 56. Demand for and supply of landed property 67. Landed property as an investment 10 ^ , ,

2 Methods of valuation (valuation approaches) 11

1. Introduction 11 *2. Comparison 113. 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

vi Contents

3 Property in land 16

1. Land law 16

2. Property rights in general 16

3. Freeholds 17

(a) Registered and unregistered land 19(b) Adverse possession 20

4. Leaseholds 20(a) Building leases 22(b) Occupation leases 23(c) Leases for life 24

5. Licences 24 t

6. Common law, equity and trusts 25

7. Equitable interests including options 26

8. Co-ownership 27

9. Easements and related rights 28

10. Restrictive covenants 29

11. Commonhold 31

12. Successive interests in property 32

13. Transfers of interests in land and security in land 33

4 The market approach or comparative method 36

1. Introduction 36' "(a) Location 36

(b) Physical state 36(c) Tenure 37(d) Purpose 37(e) Time 37

2. Residential property 38 "«»

3. Development land 39

5 Market rent 41

1. Introduction 41

2. Rent and net income 41

3. Economic factors affecting rent 42(a) Supply and demand 42(b) Demand factors 43(c) Supply factors 46

4. Estimation of market rent 49(a) Generally 49(b) Basis of the rent actually paid 50

Contents vii

(c) Comparison of rents 52(d) Rent and lease terms 53

5. Effect of capital improvements on market rent 55

6. Hierarchy of market evidence 56

6 Outgoings 57

1. Introduction 57

2. Repairs 58(a) Generally 58(b) Immediate repairs 58(c) Annual repairs 58(d) Conditions of tenancy 60(e) Future repairs 60

3. Sinking funds 61

4. Business rates, water services and council taxes 61

5. Income tax 62

6. Insurances 62(a) Fire insurance 62(b) Other insurances 63

7. Voids 63

8. Service charges 63

9. Management 65

10. Value added tax 65

11. Outgoings and rent 66

12. Current issues 66

7 Yield 67

1. Introduction 67 «.*»(a) Nominal and actual or effective rates of interest 67(b) Timing of payments and yields 68

2. Principles governing yields from investments 69

3. Yields from landed property investments 72(a) Shops 73(b) Offices 74(c) Factories and warehouses 74(d) Residential properties 75(e) Ground rents 76

4. Changes in interest rates 77

viii Contents

8 Investment mathematics as it applies to propertyvaluation 79

1. Introduction 792. Amount of£l (A£l) 803. Present value of£l (PV£1) 814. Amount of£l per annum (A£lpa) 865. Annual sinking fund (ASF) 876. PV of£l per annum (PV£lpa) or

Years'Purchase (YP) 89 •• _ _ .

9 Income approach or investment method 95

1. 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 107

2. 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 119

3. Synergistic value, sometimes known as marriagevalue 121

4. Freehold interest where a building has a terminable life 1225. Premiums 1256. Surrenders and renewals of leases 128 ••*»7. Traditional valuation techniques and DCF 133

10 Discounted cash flow 135

1. Generally 1352. Net present value 136

(a) The discount rate 136(b) Rate of growth 137(c) Cash flow period (see guidance note) 138

3. Internal rate of return (IRR) 1404. Comparison ofNPV with IRR approaches 1425. Application of DCF and investment value (worth) 143

Contents ix

11 Residual approach or development method of valuation 146

1. Introduction 1462. Proceeds of sale 1463. Costs of sale 1474. Costs of development 148

(a) Cost of building 148(b) Miscellaneous items 148(c) Costs of finance 148

5. Development profits 150 [6. Surplus for land 150

12 Developments in valuation approaches 155

1. Introduction 1552. Relationship of rent in arrears and in advance 1563. Taxation of incomes 1584. 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 166

5. 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 - valuationcertainty 180 .

7. Valuing sustainability 1838. Conclusion 1849. Further reading 185

13 Some practical points 186

1. The valuation process 1862. The analysis of rents and prices 1893. Special purchasers or buyers 1914. RICS valuation -professional standards, global and UK 192

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 195

6. Claims for damages 195(a) Dilapidations 195(b) Other claims 196

7. Management of investments 197(a) Maintenance of capital values 198(b) Rents 199(c) Outgoings 200(d) Reserves 200

14 Principles of the law of Town and Country Planning 202

1. The Town and Country Planning Acts 202(a) The 1947 Act 202

2. The planning system 203(a) Planning authorities 203(b) The development plan system 203(c) Effect of the development plan 204

3. Development control 205(a) The use classes order 1987 206(b) Part 3, general permitted development order (GPDO) -

changes of use 208

4. 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 210

5. 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 214

6. Effect of planning permission 215

7. Duration of planning permission 215

8. Planning conditions and planning obligations 216

Contents xi

9. The Community Infrastructure Levy (CIL) 21710. Appeals-section 78 217

(a) Appeals and overlapping and repeated applications 218

11. Judicial control of planning decisions 219

12. 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 224

13. 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

15 Development properties 229

1. Introduction 229

2. Valuation approach 229

3. Types of development 232

4. Viability statements (studies) 232

5. Factors affecting value 234

6. Residential development schemes 235(a) Generally 235(b) User of land 239(c) Infrastructure 242(d) Environmental and other factors 243

7. Commercial development schemes 243 »*„

8. Period of development 244

9. Incidental costs 245

10. Site assembly 245 \

11. Hope value 246

12. Urban sites 247(a) New development 247(b) Refurbishment 248

13. Ground rents 255(a) Residential ground leases 258(b) Commercial ground leases 259(c) Ground rent 260(d) Market value of ground rents 261

xii Contents

16 Residential properties 263

1. Generally 263

2. The Rent Acts 265(a) Rents under regulated tenancies (1977 Act, Part III) 266(b) Security of tenure (1977 Act, Part VII) 266

3. The Housing Act 1988 - assured and assured shorthold

tenancies 267

4. 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 2002 279

5. 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 284

6. Larger residential properties 286(a) Generally 286(b) Factors affecting value 286(c) Methods of valuation 287(d) Sales records 289

7. Blocks of flats held as investments 290(a) Generally 290(b) Gross income 290(c) Outgoings 290(d) Net income and yield 292

8. Places of worship 294

Contents xiii

17 Commercial properties (1): Landlord and Tenant Acts andrent reviews 296

1. Introduction 296

2. Landlord and Tenant Act 1927 296(a) Landlord and Tenant Act 1927 (Part I) 296(b) Landlord and Tenant Act, 1927 (Part II) 297

3. Landlord and Tenant Act 1954 (Part II) (as amended by theRegulatory Reform Order 2003) 297 \

4. Health and safety at work, etc. Act 1974 305

5. Rent reviews 306(a) Machinery for review 308(b) Rent payable 309

6. 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 317

7. Market value 317

8. Court procedure for the grant of a new tenancy or the

termination of a current tenancy 317

18 Commercial properties (2): types of property 319

1. Introduction 319

2. 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 329

4. "High-tech" industrials 332

5. Business and science parks 332

6. Warehouses 332

7. Office properties 335

(a) Introduction 335(b) Market rent 336

xiv Contents

(c) Terms of tenancy 336(d) Outgoings 337(e) Net income and market value 337

19 UK valuation standards: valuation for financial statements;replacement cost (contractor's) method; loan security

valuations and fire insurance replacement cost 341

1. Introduction to the RICS valuation standards 341

2. 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 6.9.23) 346(f) Reducing balance (GN 6.9.25) 347(g) S-curve approach (GN 6.9.26) 347(h) Conclusion 348

4. 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 354

5. 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 356

6. Further reading 357

20 Valuations for rating 358

Introduction 358

Contents xv

Section A: Non-domestic properties 358

1. General 358

2. Procedure 359

3. Exemptions and reliefs 361

4. Elements of rateable occupation 361(a) Actual occupation 362(b) Exclusive occupation 362(c) Beneficial occupation 362(d) Transience of occupation 363

5. Principles of assessment 363

6. Statutory basis of assessment 365

7. Rating of unoccupied properties 367

8. 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 373

9. 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 383

1. General 383 ' - . ,

2. Procedures 383

3. Basis of assessment 384

4. Compilation and maintenance of new lists 385

21 Taxation: capital gains tax 386

1. Taxation of capital gains — capital assets and stock

in trade 386

2. Taxation of chargeable gains act (TCGA) 1992 387(a) Occasions of charge 387(b) Computation of gains 387(c) Disposals after 5 April 1988 389(d) Disposals before 6 April 1998 389

xvi Contents

(e) Disposals after 6 April 1998 389(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 401

1. General 4012. Taxable transfers 4013. Basis of assessment 4024. Rates of tax 4025. Exemptions and reliefs 403

(a) General 403(b) Potentially exempt transfers 403(c) Business assets 403(d) Agricultural property 404(e) Woodlands 404

6. Valuation 404

Income tax on property 405

1. Schedule A 405

2. Capital allowances 405

Value added tax 406

1. VAT and property 4062. VAT - the general scheme 406

(a) Added value 406 \(b) Taxable supplies 408(c) Non-taxable supplies 409

3. VAT and the property market 409(a) Residential property 410(b) Non-residential property 410

4. Option to tax 4115. Transfer of a going concern 4136. Value and VAT 4147. Valuation and VAT 414

Contents xvii

8. Special cases 415(a) Incentives 415(b) Statutory and other compensation 415(c) Mixed supplies 416

Stamp duty land tax 416

1. Purchases 4162. Leases 417Reference 417

22 Principles of the law of compulsory purchase andcompensation 418

1. Legal basis of compulsory purchase 4182. Compulsory purchase procedure 4193. Compulsory purchase compensation 421

23 Compulsory purchase compensation I: compensation for landtaken 424

1. Introduction 4242. General principles of compensation 4253. Market value 428

(a) Six basic rules of valuation 428

4. Additional rules of assessment 435

5. Development value 440

(a) Assumptions as to planning permission 4406. Certificates of appropriate alternative development 4437. Special compensation rules in particular cases 445

(a) Reinvestment by investors 445 ***(b) Special provisions in Private Acts 445

8. Summary of general basis of compensation 4459. Arbitration of compensation disputes 446

10. Valuation 44711. Home loss, basic loss and occupiers'loss payments 44812. Basic loss and occupier's loss payments 44913. Interest on compensation 450

24 Compulsory purchase compensation II: compensation forseverance and injurious affection 451

1. General principles 451

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) 454

3. 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 458 •

4. Compensation where no part of the land is taken 459(a) Injurious affection under section 10 459(b) Compensation for harm from "physical factors" 460

5. "Before and after" method of valuation 462

25 Compulsory purchase compensation III: compensation fordisturbance 467

1. Disturbance compensation and disturbance payments 467

2. Judicial approach to quantification of disturbance

compensation 471

3. Disturbance compensation: items which are typically

claimed 472

(a) Residential premises 472(b). Business and professional premises 474

4. Disturbance in relation to development value 488

26 Blight notices 491

1. Compulsory purchase instigated by land owners: blight

notices 491 *•*»(a) Blighted land 491(b) Qualifying interests 492

2. Blight notice procedure 493

27 Purchase notices 496

1. Compulsory purchase instigated by landowners 496

2. Purchase notices 496(a) Compensation as in compulsory purchase cases 499(b) Revocation, modification and discontinuance orders and other

special cases 500

Contents xix

28 Compensation under the Town and Country Planning Acts:revocation, modification and discontinuance orders, etc. 501

1. Revocation, modification and discontinuance cases 5012. Revocation and modification orders 5023. Discontinuance orders 5074. Other cases of planning compensation 5075. Listed buildings and ancient monuments 508

Index '" 510