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THE RED THE RED BOOKBOOKRICS Valuation StandardsRICS Valuation Standards66thth Edition- 09 /10 updated Edition- 09 /10 updated

Michael FoodySwift Property ServicesWaterdyke, Shanballymore, Mallow County Cork,022 25969mfoody@swiftps.com

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• RICS – The Royal Institution of Chartered Surveyors – is the pre-eminent organisation of its kind in the world. As such, it represents everything that is good in the property profession.

• Operating out of 146 countries, RICS is the leading organisation of its kind in the world for professionals in property, land, construction and environmental assets.

• RICS membership is only awarded to individuals who are prepared to maintain exemplary standards - for the public advantage.

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Practice statements, Guidance notes, Codes of practice, Practice notes & Information papers

• Practice statements• Under RICS Bye-law 19(5) and Conduct Regulation 5 it is the duty of every member to comply

with the contents of RICS practice statements in the interest of maintaining the highest professional standards. Mandatory practice standards are the highest category of technical information produced by RICS. They are obligatory for all RICS members to follow when providing a service covered by such a standard. These are often referred to collectively as Practice Statements though there are some other instances of mandatory status standards which you will need to be aware of

• Guidance notes• Guidance notes provide advice to Members of the RICS on aspects of the profession. Where

procedures are recommended for specific professional tasks, these are intended to embody 'best practice', ie procedures which in the opinion of the RICS meet a high standard of professional competence.

• Codes of practice• Codes of practice have the status of guidance notes. It provides advice to practitioners. Where

procedures are recommended for specific professional tasks, these are intended to embody ‘best practice’.

• Practice notes• Under the terms of certain practice statements Members must comply with the conditions set out

in the specified practice notes.• Information papers• Information papers are intended to provide information and explanations to Members of the RICS

on specific topics of relevance to the profession. The function of information papers is not to recommend or advise on professional procedures to be followed by surveyors.

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Practice statements and notes

• Examples of Practice statements and notes include;

• Residential estate agency standards (the RICS Blue Book)

• Valuation standards (the RICS Red Book) • Surveyors acting as expert witnesses  • Surveyors acting as expert witnesses - client copy • Surveyors acting as advocates  • Surveyors acting as advocates - client copy • RICS HomeBuyer Service 2009

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Guidance notes

• Asbestos    • Auctioneers proposing to sell plant and machinery at public auction in England, Wales and Scotland • Auctioneers selling real estate in England and Wales • Boundaries: procedures for boundary identification, demarcation and dispute resolution in England and Wales • Building maintenance: planning, strategy and procurement • Building surveys and inspections of commercial and industrial property • Building surveys of residential property • The calculation of fees relating to the exercise of statutory powers in connection with land and property • Carbon management of real estate • Carrying out reinstatement cost assessment • Commercial property management • Construction insurance • Contamination and environmental matters • Development management • Dilapidations • EDM calibration   • Electronic document management • Electronic document storage • Energy strategies for rural businesses  • e-tendering • Flat roof covering problems • Form and structure of mineral option and lease • Guidelines for the use of GPS in surveying and mapping • Handling Home Information Packs (HIPs) • Historic building conservation • Independent compliance auditing for registered social landlords • Innovative building maintenance

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• Letting of residential property in the private sector • New rules of measurement: order of cost estimating and elemental cost planning • Party wall legislation and procedure • Practice management guidelines • Project monitoring • Rating appeals • Receipts and expenditure method of valuation for non-domestic rating • Selling personal property at auction • Stock condition surveys • Surveyors acting as adjudicators in the construction industry • Surveyors acting as adjudicators in the construction industry in Scotland • Surveyors acting as advocates • Surveyors acting as advocates - client copy • Surveyors acting as arbiter or independent expert in commercial property rent reviews in Scotland • Surveyors acting as arbiter or independent expert in construction related disputes in Scotland • Surveyors acting as arbitrators and as independent experts in commercial property rent reviews • Surveyors acting as arbitrators and as independent experts in construction related disputes • Surveyors acting as expert witnesses • Surveyors acting as expert witnesses - client copy • Surveyors and lawyers involved in lease renewals under PACT • Sustainability and the RICS property lifecycle • Technical due diligence of commercial & industrial property (Australia) • The mundic problem • The strategic role of facilities management in business performance (RICS White Book)  • Valuation of individual new-build homes

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Codes of practice

• Code of measuring practice • Rating consultancy • Rent only residential management code • Right to buy • Service charges in commercial property • Service charges in commercial property - Scottish edition • Service charges in commercial property - Northern Irish

edition • Service charge residential management code

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RED BOOK

• Possible Valuation requests

• Responsibility & Understanding

• THE RED BOOK– History, – Purpose, – Framework, – 6 Criteria

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VALUATIONS

• The Red Book– Is a framework for best practice in the

execution and delivery of valuations

How would you value and produce a report for the following?

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House in an Estate

•Comparable method?Freehold sale / Rent / Investor / Insurance / Bank?

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Shop with Offices above

•Comparable method?•Freehold owner / investor / rental / Insurance?

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Pharmacy

•Freehold owner/ investor or rental ? Comparable method or Business ?

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Hotel

•Freehold owner / investor / Third Party ?•Comparable method / redevelopment or Business ?

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Cork County Council Buildings

•Comparable method / Redevelopment?

Freehold sale or financial book value.

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Mallow Garda Station

•Comparable method / Redevelopment or Depreciated Replacement Cost ?

Freehold sale or financial book value.

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RTE Mast Private Mast

Freehold sale or financial book value.

•Comparable method or Depreciated Replacement cost ?

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Wind Farm

•Comparable method or Depreciated Replacement cost ?

Freehold sale, Leasehold sale or Financial book value

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Airport

Comparable method or Depreciated Replacement Cost ?

Freehold sale, Leasehold sale or Financial book value

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– Comparable, – Residual Valuation for Redevelopment, – Depreciation Replacement Cost, – Existing Use Value, – And more….

• Distinct approaches that constitute separate methods of valuation.

• Some Properties require 2 or more very different methods which can give similar or very different values

Answer?There isn’t one method, until we know the facts.

BUT

The Valuation Reports follow a similar pattern

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Definition of Valuation;-

• A member’s opinion of the value of a specified interest or interests in a property at the date of valuation given in writing.

• Subject to– agreed terms of engagement – provided after an inspection – having regard to the nature of the property

and the purpose of the valuation.

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Factors Affecting Valuation

• MANY– Title– Condition of buildings, services, planning

(zoning/listing), contamination and hazardous substances, environmental matters, location

– Pedestrian flow, changes in transportation, changes in population/habits e.g. apartments, smaller families, divorce

– Changes in energy, – Changes in legal system– Hope value– Premium value– Marriage value / Synergistic value

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RESPONSIBILITY

• A number of parties may rely on the valuation.

• The valuer will be liable

• Expressed formally or informally.

– Liability for the Valuation. • This year as a result of the recession, the UK in particular has seen

a massive increase in claims related to property valuation. Ireland less so. But, the recession and its consequences isn’t over yet…

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UNDERSTANDING

• It is therefore very important to understand the purposes of a valuation, to ensure that you are independent of any pressures by your client, that you are the right person for the job and the terms of your appointment are specified.

• This is the raison d’etre of The Red Book

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• The RICS has published valuation standards since 1974.• The Red Book was first published in 1980.• Initially only applied to valuations incorporated in published

accounts, but since the mid 1990’s have applied to virtually all valuations.

• Regularly updated.• Mandatory since 1991.• The 5th edition of The Red Book, was known as

RICS Appraisal & Valuation Standards.• the ‘Carsberg Report’. commissioned by the RICS in 2002.• These recommendations have had a large input into the Red Book,

most recent being RICS Valuation Standards, 6th Edition, Published in 2007 and updated each year. is now available in a number of languagesAmended during 09 and will be updated for March 2010.

HISTORY

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PURPOSE• The purpose of these standards is to ensure that valuations

produced by members achieve high standards of integrity, clarity, and objectivity and are reported in accordance with recognised basis appropriate for the purpose.

• The standards define 1. Criteria used to establish whether members are appropriately

qualified.2. The steps necessary to deal with any actual or perceived threat

to their independence and objectivity.3. Matters to be addressed when agreeing conditions of

engagement4. The basis of valuation, assumptions and material considerations

that must be taken into account when preparing a valuation.5. Minimum reporting standards.6. Matters that should be disclosed when valuations may be relied

upon by third parties.

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Framework for Best Practice

• The standards set a frame work for best practice in the execution and delivery of valuations for different purposes

• Does not instruct members how to value, nor do they discuss valuation methodology or techniques.

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Rare- Exceptions

– Advice during the course of litigation– Arbitrations and similar disputes– Advice in preparation for or during

negotiations– Internal valuations– Certain agency or brokerage work

• Unless clearly agreed with reasons, departure from the Red Book is not permitted under any circumstances.

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The standards in the Red Book are divided into the following sections:-

• Practice Statements known as PS – PS1 Compliance and ethical requirements– PS2 Agreement of terms of engagement– PS3 Basis of value– PS4 Applications– PS5 Investigations– PS6 Valuation reports

• Guidance Notes known as GN– GN1 Trade related property valuations– GN2 Plant and Equipment– GN3 Valuations of portfolios and groups of properties.– GN4 Mineral Bearing land and Waste Management– GN5 Valuation uncertainty– GN6 European Union directives and regulations relevant to valuation.– GN7- Personal Property effective Jan 2010

All members and firms worldwide are required to comply with these valuation standards when undertaking any instruction which requires a written valuation.

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Red Book Sections• The final sections of the Red Book are divided into;

– UK Practice Statements and also UK Guidance Notes 1-5.– (Some aspects applicable to Ireland).– Valuation information papers

– Amendments to the 2010 include;• Removal of exception for antiques and fine art, PS1.2.11 (this paragraph has been deleted and a new

GN7, Personal Property has been introduced).• Alteration to minimum terms of engagement, including PS 2.1(q), PS 2.1(s) & PS 2.1(t).• Amendment to Take Over Code UK appendix 2.1• PS 4.3 Additional disclosures for valuations in which the public has an interest or upon which third

parties may rely (This PS will be published as PS 1.8).• UKPS 1.12 Local authority asset valuations• UKPS 4.1 RICS HomeBuyer Service• UK Homebuyer Service• UK PS 4.4 The Scotish Home Report Last year amendments included;• Update of ‘Treatment of Incentives’ for residential sales.• UKGN1 has included Energy Performance Certificates

– It is important to be aware of changes, even those not applicable to Ireland because they often make their way into the Global arena.

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LAY OUT

• Each section is broken down into sub sections, – e.g. PS1 then has PS1: 1 to PS1.8 and its

own Appendix 1.1 which then has its own sections and sub sections.

• we do not have the time to look at every aspect of the Red Book therefore we will have a brief synopsis followed by concentration on the areas that meet the

SIX Criteria / standards listed above in RED.

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Mandatory rules (Practice Statements) contained within the Red Book.

• PS1 Compliance and ethical requirementsThese standards relate to competence and qualifications of valuers, and the relationship between RICS standards and national law or other standards. They also deal with maintaining independence and objectivity, which is perhaps the single most important aspect of maintaining high standards in valuation.Appendix 1.1 Confidentiality, threats to independence and conflicts of interestThis appendix provides additional guidance on the application of the Rules of Conduct specifically related to valuations, on confidentiality, threats to independence and objectivity and managing conflicts of interest that could threaten or compromise a valuer’s integrity and objectivity.

• PS2 Agreement of terms of engagementThese standards provide specific rules and guidance for how terms of engagement should be agreed with clients. It also gives detailed guidance on the use of assumptions and special assumptions in a valuation.

• PS3 Basis of valueThis standard contains all the internationally recognised bases of value agreed by the International Valuation Standards Committee, with additional interpretative commentary where required.

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• PS4 Valuation applicationsRules and detailed commentary (derived from IVS/International Valuation Standards) on the application of international bases of valuation to particular valuation situations. This section provides all the relevant extracts from International Valuation Standards in one user-friendly place for the valuer.Appendix 4.4 Valuations for commercial secured lendingThis appendix is applicable when the member is to provide services for a client who is considering whether to lend or extend commercial loan facilities on the security of land or buildings.

• PS5 Investigations for valuation purposesRules and related guidance on determining the appropriate level of investigation for a valuation. These standards also provide detailed analysis of the key issues which must be considered when inspecting a property for valuation purposes.

• PS6 Valuation reportsThese standards provides detailed guidance on what a valuation report should contain. It provides a detailed treatment of Reporting Valuations under IFRS (International Financial Reporting Standards) and how to report alternative use valuations for the asset, preliminary valuation advice, published references to valuation reports.

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Best Practice guidance (known as Guidance Notes) contained in the Red Book.

• GN1 Trade related property valuationsThis guidance note concerns trade related property valuations where the Market Value of a property is related to their trading potential.

• Examples of this type of property include hotels, restaurants, theatres, cinemas and fuel stations. • The note considers the additional criteria that need to be considered by the property valuer in

these cases but does not concern itself with methods of valuation, which will vary depending upon the property to be valued.

• GN2 Valuation of plant and equipmentThis guidance note examines the application of the RICS Valuation Standards to plant & equipment, which are defined as tangible items other than realty, that are:

– held by an entity for use in the production or supply of goods or services; – for rental by others, or for administrative purposes; – and are expected to be used over a period of time.

• GN3 Valuations of portfolios and groups of propertiesThis guidance note provides guidance on the matters that property valuers should consider when undertaking a valuation, or valuations, of several properties simultaneously for the same client.

• It examines how to avoid giving misleading or inappropriate advice and to the use of any assumptions or special assumptions relating to the circumstances under which the properties may be brought to the market.

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• GN4 Mineral-bearing land and waste management sitesThis guidance note discusses additional matters that a property valuer needs to take into account when valuing wasting assets, such as mineral deposits and waste disposal sites.

• A feature common to mineral working sites and waste management sites, but less usual elsewhere, is that both may have a nil or negative value at the end of their operational lives.

• It is possible, however, that the land may have a value for some other use, following mineral working or waste management.  

• GN5 Valuation uncertaintyAll property valuations are opinions of the price that would be achieved in a transaction at the valuation date, based on the stated assumptions or special assumptions.

• Like all opinions, the degree of subjectivity involved will vary significantly, as will the degree of ‘certainty’ (that is, the probability that the valuer’s opinion would be the same as the price achieved by an actual sale at the valuation date).

• This guidance note examines how valuation uncertainty should be dealt with, particularly where use of one of the bases recognised in the International Valuation Standards is inappropriate.

• GN6 European Union directives and regulations relevant to valuation (2009) This guidance note provides brief information on the various EU directives and regulations that have an impact on valuations.

• GN7 Personal Property (2010) The term personal property refers to assets that are not permanently attached to land or buildings. It includes antiques and fine art, furnishings, collectables, appliances and trade inventories. It excludes plant and machinery which is the subject of specific guidance in GN2.

• All these sections are all now available in 8 languages; Chinese, Dutch, English, French, German, Italian, Russian, Spanish

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1, Criteria used to establish whether members are appropriately qualified.

• This is covered under PS1.4 and 1.5.– When offered a valuation instruction each

valuer must ask himself –

• “Am I suitably qualified, skilled and knowledgeable to take on the work?”

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The test being;-

• Academic/professional qualification

• Membership of a professional body demonstrating ethical standards

• Practical experience as a valuer

• Compliance with any State legal regulations governing the right to practise valuations.

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2. The steps necessary to deal with any actual or perceived threat to their independence and

objectivity.• Section PS1.6 deals with independence and objectivity and states

– “Members undertaking valuations must act with independence, integrity and objectivity.

• Typical situations where conflicts arise include:-

– Acting for a buyer and a seller of a property in the same transaction.– Acting for two or more parties competing for an opportunity.– Valuing for a lender where advice is being provided to the borrower.– Valuing a property previously valued for another client.– Undertaking a valuation for third party consumption where the member

firms have other fee earning relationships with the client.– Valuing both parties interest in a leasehold transaction.– You own similar property nearby

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‘a matter of judgement’

• Chinese Walls.• There are rules associated with Chinese Walls!

• If you consider you have a conflict of interest you must either decline the instruction or advise all parties involved explaining the conflict and agree with them terms to proceed.

• Each situation will vary. It is important that you comply with the Red Book and ensure that you are independent of any pressures by your client, that you are the right person for the job and the terms of your appointment are specified.

• “Members undertaking valuations must act with independence, integrity and objectivity.

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EXAMPLE

• “Auctioneer told to pay €850,000 in dispute over lands he sold”. – This is a case from 2008 where the agent was

found acting for the purchaser and the Vendor. The Vendor having instructed him to obtain the best price available for the lands on the open market.

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Confidentiality(Appendix 1:1(2)

• This is a difficult area, especially in a profession that relies so heavily on the exchange of information and market knowledge.

• A general duty to treat information related to a client as confidential

• Matters of confidentially can be agreed upon instruction or later correspondence with the client.

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3. Matters to be addressed when agreeing conditions of engagement

• PS 2 covers agreement of terms of engagement.

• PS2.1. The members must always confirm to the client in writing before any report is issued, the terms on which the valuation will be undertaken.

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As a minimum the terms must include the following:-

a) Identification of the client. b) The purpose of the valuation. c) The subject of the valuation. d) The interest to be valued. e) The type of property and how it is used or classified by the client–f) The basis or bases of value. g) The date of valuation. h) Disclosure of any material involvement, or a statement that there has not been any previous material

involvement. i) If required, a statement of the status of the valuer. j) Where appropriate, the currency to be adopted. k) Any assumptions, special assumptions, reservations, and special instructions or departures. l) The extent of the member’s investigations. m) The nature and source of information to be relied on by the member. n) Any consent to, or restriction on publication. o) Any limits of exclusion of liability to parties other than the client. p) Confirmation that the valuation will be undertaken in accordance with the Red Book standards. q) Confirmation that the valuer has the knowledge, skills and understanding to undertake the valuation

competently*r) The basis on which the fee will be calculated.s) Reference to the members’ or firms’ complaints handling procedure with a copy available on request. t) A statement that compliance with these standards may be subject to monitoring under the institution’s

conduct and disciplinary regulations. (Applicable to firms registered for regulation, i.e. UK only at present*)*brought in in 2009 and further amended for 2010

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As a minimum the terms must include the following:-

(Author Andrew Cherry: A valuer’s Guide to the ..)

a) Identification of the client. Instructions for a valuation may emanate from an entity other than to whom it is to be addressed. If the addressee and the entity responsible for payment of your fee are different you should ensure that you have the appropriate confirmation from both.

b) The purpose of the valuation. You should always confirm the purpose of the valuation. It is very important to establish this at the outset of the instruction, firstly to establish if it is a valuation which is subject to the Red Book and secondly to confirm the appropriate basis of valuation.

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c) The subject of the valuation. Clearly the property or properties to be valued must be agreed with the client and the interest which the client owns. Trade fixtures and fittings etc are normally excluded unless valuing an interest in property as part of an operational entity. The effect on value of any tenants’ improvements should be established.

d) The interest to be valued. Must always bear in mind that it is a particular ownership or interest in the property that is being valued.

e) The type of property and how it is used or classified by the client– Appendix 2.1 gives examples of the different categories and classes, i.e. freehold or leasehold, owner occupied, held for investment, specialised etc. The report will classify each property, so agreement with the client is important.

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f) The basis or bases of value. It is very important to set out the bases to be used and to set out their definitions

in full.g) The date of valuation. It is very important to agree the

precise date of valuation which cannot be after the date of the report. A possible exception to this would be if specialist property lenders request exit values on

expiry of a loan or in the case of a lease financing transaction – in such cases the requirement for clear agreed assumption is paramount. You will also need to agree a date of submission of your report. Certain rules are laid down by regulatory bodies for instance

Para. 6 of the Financial Services Authority Listing Rules state that the effective date of valuation, unless

otherwise agreed, must not be more than 42 days prior to the date of publication of the listing particulars or

circular.

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h) Disclosure of any material involvement, or a statement that there has not been any previous material involvement. When considering the extent of any material involvement, whether past, current or potential, the valuer must have regard to the requirements of PS 1. If there has not been any previous material involvement, a statement to that effect must be made.

i) If required, a statement of the status of the valuer. For some valuations the valuer is required to state the capacity in which they are acting, i.e. internal or external.

j) Where appropriate, the currency to be adopted. If the currency in which the valuation has been prepared is likely to be converted to another, the exchange rate must be agreed. Frequently, if valuing for accounts the rate will be fixed at the client’s year end.

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k) Any assumptions, special assumptions, reservations, and special instructions or departures. This is a critical area and needs to be carefully considered- Appendix 2.2 and 2.3 deals with this. Every valuation contains a number of basic assumptions relating to such matters as title, repair, services and planning, which may have been agreed with the client and although must be stated do not have to be verified during the valuation process. On the other hand a ‘special assumption’ is an assumption that either requires the valuation to be based on facts that differ materially from those that exist at the date of valuation or an assumption that a prospective purchaser could not reasonably be expected to make at the date of valuation (see the Red Book glossary ). Appendix 2.3 gives several examples – the most obvious being to assume that planning consent has or will be granted for a development. It is essential that any special assumption must be agreed with the client in advance and highlighted in the report. It may be that the valuer will wish to produce a second valuation without the special assumption to demonstrate the difference, particularly if reporting to a bank. All special assumptions must only be made if they can reasonably be regarded as realistic, relevant and valid in connection with the particular circumstances of the valuation. Any request to make unrealistic, special assumptions should be resisted with the instruction declined. If the valuation is being prepared for inclusion in a financial statement (such as a set of accounts), the normal basis of valuation will exclude any additional value due to a special assumption. If a special assumption is made it is essential this is referred to in any published reference.

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l) The extent of the member’s investigations. To avoid misunderstandings it is good practice to agree or advise the client on the scope of the task envisaged – in particular the valuers duty to obtain and or verify material information (see PS 5 Investigation).

m) The nature and source of information to be relied on by the member. It is very important to agree with the client the information which he, she or third parties will supply and that it is sufficiently robust and can be relied upon as being complete and correct. It is good practice to list it in the terms of engagement. If the client requests a valuation based only on restricted information it is essential to discuss with him or her the implications of this. It may be that the timescale is such that facts normally verified by inspection or enquiry cannot be made or completed. Clearly the effect of this on the purpose of the valuation may limit its use and it is therefore important to consider the restriction is reasonable having regard to its purpose.

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n) Any consent to, or restriction on publication. It is essential to insist, on prior consent being obtained before any reproduction or public reference to the valuation is made. Such wording in the terms of engagement might be along the following lines:

‘Should you wish to make reference to the valuation in annual accounts or any other document, circular or statement or disclose it orally to a third party, we require to approve the form and context of such publication or disclosure’.

o) Any limits of exclusion of liability to parties other than the client. It is usual to include a clause limiting liability to any party other than to whom the report is addressed but this must be agreed in advance hence the need for it to be in the terms of engagement. There are instances where it is forbidden by law to exclude third-party liability particularly in valuation made in accordance with Financial Services Authority Listing Rules. It may be preferable to exclude any limitations on liability rather than include a clause extending it to a specified group or category of third parties. This has to be a matter of commercial judgement. If a valuation has been prepared for a bank there is a possibility the loan may be syndicated. If this is a possibility it is sensible to agree that the client must notify the valuer of the identity of the syndicate members with a view to opening up liability to them. Some firms require additional fees if their liability is extended and this should be included in the terms of engagement.

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p) Confirmation that the valuation will be undertaken in accordance with the Red Book standards. This is straightforward and confirms that the statement must be unequivocal but may include a cross reference to any agreed departures. The standards must be referred to by their full title The RICS Valuation Standards Sixth Edition.

q) Confirmation that the Valuer has the knowledge, skills and understanding to undertake the valuation competently (09 /10) This statement may be limited to a confirmation that the valuer has sufficient current local, national and international (as appropriate) knowledge of the particular market; and the skills and understanding to undertake the valuation competently. It is not necessary to provide any details. Where the provisos in PS 1.5.1 and PS 1.5.2 apply an appropriate disclosure is to be made

r) The basis on which the fee will be calculated. This may be fixed fee or a percentage of value and should confirm whether disbursements are included or are charged separately, as well as that VAT at the appropriate rate will be added. It is also good practice to record the basis of fee if the instruction is aborted prior to completion or extended. It would also be sensible to agree the timetable for delivering the report and the number of copies required.

s) Reference to the members’ or firms’ complaints handling procedure with a copy available on request. This emphasises the need to comply with the RICS Rules of Conduct and does not apply just to valuation work.

t) A statement that compliance with these standards may be subject to monitoring under the institution’s conduct and disciplinary regulations. This is to alert the client to the possibility that the valuation report may be investigated for compliance of procedures. It is not to monitor the opinion of value.

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4. The basis of valuation, assumptions, and material considerations that must be taken into account when

preparing a valuation

• The basis of value describes the fundamental measurement principles of a valuation.

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• Following basis of valuation are recognised standards with international valuation standards.– Market Value– Market Rent– Worth (Investment value)– Fair Value

• Examples outside the IVS* but often necessary and permitted in UK / Ireland for financial statements and / or specialised properties could include– Depreciation Replacement Cost– Existing Use value

Basis of Valuation

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PS 4; Applications

• PS 4 deals with applications. Essentially concerned with valuations for financial statements prepared under International Financial Reporting Standards (IFRS) will be in accordance with the IVSC International Valuation Application 1 (IVA1).

• 09 amendment has brought in a new Appendix 4:4 which has been extended from UKPS 3.1 to a global level and provides more information when providing valuations for secured lending.

• For 2010 amendments to 4:3 additional disclosures for valuations in which the public has an interest or upon which third parties may rely (This PS will be published as PS 1.8)

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PS 5, Investigations.

• PS 5.1 Inspections and investigations must always be carried out to the extent necessary to produce a valuation which is professionally adequate for its purpose.

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• The degree to which investigation and inspection will be necessary is down to the professional judgement of the Valuer, the terms of reference agreed with the client and the purpose of the valuation.

• 5.1 (3) A client may request, or consent to, an assumption that no problems exist with the property.

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PS 5.2 Verification of Information

• The member must take reasonable steps to verify the information relied upon

• clarify any necessary assumptions that will be relied upon and, where appropriate its source.

• A valuer will not normally be able to advise on a number of aspects, in particular contamination and hazardous materials.

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Assumptions.

• Title. – ‘the title is Freehold / leasehold and there are no

encumbrances on title that affect the Valuation.”

• Condition of buildings. – the inspection is not a building survey and the assumption is

made that the building is in good repair and does not suffer any structural or other defects affecting value.

• Services. – assume that services are provided in good and working order.

• Planning (zoning)– The use to which the property is active is permitted.

• Contamination and hazardous substances. – An assumption the land is not contaminated in any way that

would affect the valuation.

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Special Assumption• A ‘special assumption’ is an assumption that either requires the valuation to be based on facts

that differ materially from those that exist at the date of valuation or an assumption that a prospective purchaser could not reasonably be expected to make at the date of valuation.

• Appendix 2.3 gives several examples – the most obvious being to assume that planning consent has or will be granted for a development not generally known in the market.

• It is essential that any special assumption must be agreed with the client in advance and highlighted in the report.

• Special value can arise where an asset has attributes that make it more attractive to a particular buyer or a limited category of buyers than to the general body of buyers in a market. These attributes can include the physical, geographic, economic or legal characteristics of an asset. Market Value requires the disregard of any element of Special Value because at any given date it is only assumed there is a willing buyer, not a particular willing buyer.

• When Special Value is reported it should be clearly distinguished from Market Value

• If necessary a range of values can be given depending upon the circumstances of the special value.

• It may be that the valuer will wish to produce a second valuation without the special assumption to demonstrate the difference, particularly if reporting to a bank.

• All special assumptions must only be made if they can reasonably be regarded as realistic, relevant and valid in connection with the particular circumstances of the valuation. Any request to make unrealistic, special assumptions should be resisted with the instruction declined.

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Marketing constraints and Forced Sales.

• Sometimes a valuation is required where a marketing constraint arises. For example – the sale of a property without exposing it to the

market. E.g. sale of a supermarket or other business premises

– There may also be situations where marketing period is for an artificially reduced period of time.

• Is it an inherent feature of the property or the particular circumstances of the client.

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Forced Sale Value

• Forced Sale can be a type of marketing constraint.• A forced sale of property is only likely when the particular vendor will suffer

some financial penalty if the property is not disposed of within a period that is too short to ensure proper marketing.

• The term forced sale value, implies that the seller is not a willing seller and therefore the prices achieved are not the market value. However, liquidators and receivers are often categorised as forced sellers and none the less they normally have a duty to obtain the best price which will reflect market value at that time.

• PS2.3 states wherever the member or client identifies that the valuation may need to reflect an actual or anticipated marketing constraint details of that constraint must be agreed or set out in the terms of engagement. The term forced sale value must not be used.

• Therefore to produce a valuation of a property subject to a constraint on proper marketing the easiest way to do it is by making a special assumption. However must include the reasons why.

• However, an assessment of worth may be more appropriate than a valuation when the assessment is based on the vendor’s particular circumstances.

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Recession and Repossessions

• This year UK repossessions is expected to increase.

• In Ireland this figure is substantially less but is partly due The Financial Regulator's statutory Consumer Protection Code. – When talking to banks they express concern about

the current state of arrears and therefore is a delay in repossession going to cause a flood onto the market?

• In some American states repossession sales are conducted on the Court steps.

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5. Minimum Reporting Standards

• PS6 cover valuation reports• PS6.1 states minimum content of valuation reports. A report must clearly

and accurately set out the conclusions of the valuation in a manner that is not ambiguous, misleading or creating a false impression. It must also deal with all the matters agreed between the client and the member in the terms of engagement and must include the following minimum information, except where the report is to be provided on a form supplied by the client;a) Identification of the clientb) The purpose of the valuationc) The subject of the valuationd) The interest to be valuede) The type of property and how it is used, or classified, by the clientf) The basis, or bases, of the valuationg) The date of valuationh) Disclosure of any material involvement or a statement that there has not

been any previous material involvement

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i) If required, a statement of the status of the valuerj) Where appropriate, the currency that has been adoptedk) Any assumption , special assumption, reservations ,any special instructions or

departuresl) The extent of the member’s investigationsm) The nature and source of information relied on by the membern) Any consent to, or restriction on, publicationo) Any limits or exclusion of liability to parties other than the clientsp) Confirmation that the valuation accords with these Standardsq) A statement of the valuation approachr) A statement (confirmation) that the Member has the appropriate knowledge,

skills and understanding to undertake the valuation competently* 09 amendment

s) The opinion of value in figures and wordst) Signature and date of the report

• Those matters in points a) to p) are identical to the list PS2.1 confirmation of terms of engagement and r) is identical to 2:1q).

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• With regard to q) the Red Book states reports must include a statement about the extent to which the values are supported by market evidence, or estimated using other valuation techniques (which will be disclosed) because of the nature of the property or limited transactions or any combination of these factors.

• s) and t) are self explanatory.

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• PS 6.2 A report prepared in accordance with these standards must not be described as a certificate or statement. This is because misunderstandings can occur in different states.

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PS 6.8 Negative Value

• Where a property has a negative value, that value must be reported separately and must not be set off against a positive value or other properties.

• Negative values can occur with leasehold properties and / or contaminated property.

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PS 6.11 Preliminary Valuation Advice and discussions with the client

• Some Clients may ask for a simple letter and call it an ‘informal valuation’. If the valuation falls under the remit of the Red Book, and most do, then a report in accordance with PS 6, Valuation Report is required.

• A report can be brief and need not include detailed building description, photographs, plans etc. However, Valuers are discouraged from describing valuations as formal or informal as these terms may give rise to the misunderstanding of unstated assumptions applicable in either case.

• As stated earlier, the Valuer is liable for an opinion expressed either way.

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• PS6.11 Preliminary Valuation Advice was introduced into the Red Book following one of the recommendations from the Carsberg Report.

• PS6.11 Where a report that complies with these standards is in the course of preparation the member may provide the client with preliminary advice, or a draft report or valuation in advance of its completion. This may include the amount of the valuation, provided the document includes the information that:– It is a draft, subject to the completion of the final report– That the advice is provided for the client’s internal purposes only– That the draft report is on no account to be published or disclosed– If matters of fundamental importance are not included, their omission

must also be referred to.• The purposes of this section is to avoid opportunities for client to

influence, to their advantage, the final outcome of the valuation. Any discussions with the client must be recorded on file particularly those that lead to a change in the valuation. The aim is to provide a transparent and clear audit trail that will demonstrate that the valuer was not influenced by the client. It should also be noted that the client’s auditors have the right to inspect the file.

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PS 6.12 Publications Statement• Most valuations will usually contain a disclaimer clause as a final paragraph

– Valuation caveat • The extreme volatility in the financial sector at present, the lack of confidence in the market place, the

extreme difficulty in raising finance for any project such as the acquisition and development of sites and the overall uncertainty as to how long this will continue, has an impact on any appraisal of this site in the current market. Consequently should the property be offered for sale in the current climate, any deviation from the valuation given below will be determined by the availability of finance to any prospective purchasers, the overall level of confidence in the marketplace, market competition and the prospects of sale and/or rentability of the site/property.

• Neither the whole nor any part of this report and valuation or any reference thereto may be included in any published documents, circular or statement, or published in any way without the Valuer’s prior approval of the form and context in which it may appear. In accordance with our standard practice it must be stated that this report and Valuation is for the benefit only of the party to whom it is addressed and no responsibility or liability is extended or shall be deemed to be extended to any third party for the whole or any part of its contents.

• The valuation assumes an open free market situation where there is a willing vendor, where bank finance is available at competitive terms for the purchase of this property, where there is competitive demand and not a forced sale*.

• Due to the lack of current market transactions this valuation is based on historic values with appropriate adjustments for current market conditions.

The above is the suggestion of JC Collins and not legal advice as such but thought they might be helpful.

N.B The word forced sale is used here which we should avoid.

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Retrospective Valuations*• The RICS has noticed a number of enquiries with regard to Retrospective Valuations. • Such Valuations may be the first step by a lender or receiver in considering the

circumstances surrounding aloan and the decision to take formal action.• Consideration is being given to developing guidance covering all forms of

retrospective valuation but in the meantime the following comments may be of assistance;’

– The valaution is to be provided on the same terms and conditions, if known, that applied to the origiginal valuation otherwise assumptions should be stated;

– The valuer must have sufficient knowledge of the area and market at the specified date of valuation;

– Market conditions and evidence of values must reflect those available at the original date of valuation. The use of hindsight is not appropriate;

– Unless instructed otherwise the property may be assumed to be in average condition for its type;

– The Red Book is to be adopted as it existed on the date of the original valuation;– The valuation is not a commentary or critical review on previous valuations;– The valuer is not providing a valuation as an expert witness. However, if there is an

indication that the valuer may be subsequently instructed to act as an expert witness the report should state that the opinion of value could change as a result of the application of the Surveyors acting as expert witnesses practice statement.

– *valuation alert

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A view upon value in the near future*

• At times such as the current economic climate markets can experience rapidly changing pricing of assets with the consequences the valuation can become out of date very quickly. It is during such periods that a client, particularly a lender conducting a loan security review, may seek additional advice from a valuer.

• This is likely to include market value in the future. Evidence suggests that clients are asking valuers to report using poorly defined valuation bases. Lenders have been advised not to request valuations on any basis which is not recogniosed in the Red Book, without giving clear definition.

• Market Value is the starting point for the provision of good valuation advice • It is the valuer’s role to observe the market and to look at trends and evidence. It is

recognised that, in rapidly changing markets, the definition of Market Value would not deliver the same result if the marketing period started on the date of the valuation.

• In addition to providing an opinion of Market Value, a valuer can provide a view upon the potential market sale price with a marketing period commencing on the date of the valuation. The marketing period should be specified by the valuer.

• Any expression as to the potential price in the future must be provided in such a way so as to caution the client that it may include opinions which may be rapidly overtaken by events and should not be relied upon in isolation.

• Any such view must always be provided in addition to an opinion of Market Value (Red Book definition).

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• may highlight where appropriate:

– • Comments on the pace of change observed in the market;

– • Consensus forecasts compared to actual returns such as IPD returns or in other indices;

– • RICS Commercial Property Confidence Survey;

– • Derivatives market (with caution);

– • Commercial knowledge, professional skill and discussion with market based colleagues and contacts.

• The valuer should take a balanced view of all of the information sources outlined above in order to provide advice on the anticipated trend for values for the asset class, location and property itself.

• Valuation Information Alerts are issued periodically by the RICS Valuation Group Board. They are designed to address important areas of valuation practice and respond to issues where clarification or expansion of best practice is required. They do not form part of the RICS Valuation Standards. After publication of a Valuation Information Alert, any changes to guidance which are necessary will be published in the subsequent annual Red Book edition.

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• Regulated purpose valuation has been termed third party valuations.• Normally commissioned by a director, manager or trustees but are provided

for the benefit of third parties who may be investors, policy holders or share holders.

• Regulated purpose valuations are valuations for: – Financial statements under PS4 or UK PS1.1. – Note ammendment for 2010 and new PS 1.8.– Valuation reports for inclusion in prospectus and circulars to be issued

by UK companies under UK PS2.1– Valuations in connection with takeovers and mergers under UK PS2.2 – Valuations for collective investor schemes under UK PS2.3– Valuations for unregulated property unit trusts under UK PS2.4.

– Very strict rules apply and include terms of engagement, previous valuations, valuer, properties acquired / sold by the client, fees and fee levels from client and must be adhered to.

6. Matters that should be disclosed when valuations may be relied upon by third parties.

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Monitoring Valuations

• Rules and regulations associated with regulated purpose valuations are a direct result of the Carsberg report. Another direct result from this report is the monitoring of valuations.

• Any breaches in discipline could be referred to the professional conduct committee depending upon such breach.

• UK Registered

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Guidance Notes

• GN1-4 are associated with specific types of property for valuation purposes.

• However GN5 Valuation Uncertainty can assist the valuer with the unusual.

• 09 New Guidance Note GN6 on EU Directives - This Guidance note gives brief information on the various directives and regulations that have an impact on valuation.

• 2010 New Guidance Note GN 7- personal Property refers to assets that are not permanently attached to land or buildings. It includes antiques and fine art, furnishings, collectables, appliances and trade inventories. It excludes plant and machinery which is the subject of specific guidance in GN2.

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GN5 - Identifying Uncertainty.• The following are examples where uncertainty is likely to arise, and have a material effect on the

degree of confidence that can be applied to any valuation opinion. – Nature of the property on location

– unusual due to its location or physical characteristics, or is not widely marketed,

– Restrictions on enquiries or information provided – Where the information available to the valuer is limited or restricted either by the client or the circumstances of the valuation,

– Method of valuationDevelopment land or buildings are often valued using the residual method, which is highly sensitive to the

assumptions adopted. The range of uncertainty in such a valuation will usually be greater than that associated with other methods. Likewise, valuations based on forecast future cash flows could also be very sensitive to the assumptions made when making those forecasts.

– Hope ValueA property may have significant hope value, perhaps for planning permission for a more valuable use, or for

a potential transaction with a special purchaser. Any estimate of the amount that the market would pay for this added potential will be highly dependent on the assumptions made.

– Legal changes– Sometimes a market, sector or an individual property will be affected by anticipated legislation or by disputes pending a court

decision.

– Market instabilityUnforeseen macroeconomic or political crises can have a sudden and dramatic effect on markets. This could manifest itself by either panic buying or

selling, or simply disinclination to trade until it is clear how prices in the market will be affected in the longer term. If the valuation date coincides with the immediate aftermath of such an event, the data on which any valuation is based may be confused, incomplete or inconsistent, with an inevitable effect on the certainty that can be attached to it.

While the above are examples of where material uncertainty may arise the list is not exhaustive. In practice, it would be rare for a valuer to have the same degree of confidence in every valuation.

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Reporting Uncertainty

– The valuer’s confidence in the valuation figure will depend upon the purpose of the valuation and the format of the report agreed.

• To comply with PS 6.1 that valuation reports should not be misleading or create a false impression,

– Valuer's should provide their best estimate, but also comment upon the robustness of their opinion, such as noting the availability and relevance of comparable market evidence, so that the client can judge the degree of confidence that the valuer has in the reported figure.

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– For valuations of some properties there may be an upper and lower limit that can be identified by the valuer.

– alternative valuations on the basis of special assumptions reflecting those different circumstances.

– it may be prudent to provide a sensitivity analysis to illustrate the effect that changes have to variables. This will be particularly appropriate where a residual method has been used.

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Valuation Regulatory Framework

• RICS Governing Council has approved the introduction of a regulatory monitoring scheme for members carrying out valuations under the RICS Valuation standards (the Red Book).

• The scheme which will be underpinned by a register of individual valuers and regulated firms, has three core purposes’– To improve quality of valuation– To meet RICS’ requirement to self regulate effectively– To protect and raise the status of the valuation profession

• The mandatorry accredation scheme is due to be introduced in mid-2010.

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SUMMARY• The purposes of the RED BOOK is to ensure that valuations

produced by members achieve high standards of integrity, clarity, and objectivity and are reported in accordance with recognised basis that are appropriate for the purpose.

• The standards define 1. Criteria used to establish whether members are appropriately

qualified.2. The steps necessary to deal with any actual or perceived threat

to their independence and objectivity.3. Matters to be addressed when agreeing conditions of

engagement4. The basis of valuation, assumptions and material considerations

that must be taken into account when preparing a valuation.5. Minimum reporting standards.6. Matters that should be disclosed when valuations may be relied

upon by third parties.

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THINK INSIDE THINK INSIDE

THETHERED BOOKRED BOOK

BOXBOX

FOR VALUATION CRITERIA