Double-award-winning property company Ringley Chartered Surveyors have exposed that banks may be over-exposed in investment lending due to poor valuations. The company suggests that aggregate values of component units within a property cannot be the market or investment value of the property. Valuers who in practice report the aggregate value of the units would not be complying with the definition of market value under the RICS Valuation & Appraisal Manual, the Red Book. It also means that banks are becoming over-exposed by lending a percentage of what is not the true market value.
To illustrate this point, Ringley have used a model of why an investor would not pay the aggregate value of units as market value.
Properties held as an investment. An investor would not pay the price of Flat 1 + Flat 2 + Flat 3, because the investor would want a discount for buying 3 units, thus expects to pay less than the typical homeowner.
The full value of Flat 1 + Flat 2 could only be seen if tenants move out, and the properties were vacant for a period of time, or, by creating new titles. This is because today, property is held on a Freehold title (to realise the aggregate value of each unit that the investor would pay a Solicitor to create separate leases for Flat 1 + Flat 2).
Building costs would bring each unit up to the maximum unit value, such as separating services, re-tiling bathroo
ms, kitchens, paintings, etc.
Finance is based on purchase and refurbishment, so the investor would have to bank fund the project, or least suffer the opportunity cost of investing in gilts, etc, instead.Estate Agency fees would be incurred in order to realise the maximum aggregate value of the units (gross development value).
An investor would do this in order to profit. This would have to reflect the risks of buying the property as a freehold lot. This means delays in getting vacant possession, having experience in preparing units for sale and looking into the risk of the market falling during the period, where the property is being held prior to the sale.
If you aggregate values and call this market value, when you divide the capital value to derive the yield, you will probably find that the Valuer is suggesting that an average investment is worth more than a blue chip covenant!
There are planning risks which reflect Council Tax banding. One band for three flats would mean that the property was converted without the usual consents. If more than four years has elapsed under the rules of intensification of use, an established user certificate would be obtained, for change of use for ten years. For HMO type units, there is a real risk of enforcement notice if fire alarms, means of escape or unit sizes are too small.
(Weekly, fortnightly or monthly)