Five counties conference
The Red Book:
Keeping an Auditable File
High Wycombe: 4
thMarch 2015
These notes contain extracts from the RICS Valuation – Professional Standards and other RICS publications. You should not act without first reading and understanding the relevant part(s) of the Standards and other publications.
John Faulkner FRICS Director: JFPC Ltd
www.jfpc.co.uk
1.
The RICS Red Book Overview
The RICS Valuation – Professional Standards, Global and UK Edition, January 2014: effective from 6th January 2014
applies to all valuations where the valuation date is on or after that day This supersedes:
RICS Valuation – Professional Standards,Global and UK Edition, March 2012
effective from 30th March 2012 Previous Editions were:
RICS Valuation Standards, 7th Edition
effective from 2nd May 2011 RICS Valuation Standards, 6th Edition
effective from 1st January 2008
amended 4 times
reprinted March 2009 and April 2010
2.
2014 Red Book Contents
The main contents are:
Introduction
Glossary
Professional Standards (PS)
Global Valuation Practice Statements (VPS)
Global Valuation Practice Guidance – applications (VPGA)
UK Valuation Standards (UKVS)
UK Appendices
UK Guidance Notes (UKGN)
Note Preface page iii:
Professional Standards (PS) and Valuation Practice Statements (VPS): compliance is
mandatory unless stated otherwise
Valuation Practice Guidance –Applications (VPGA): are advisory
Note Introduction page 3
VPSs have implementation guidance
Note (page 121):
UK Valuation Standards (UKVS) have mandatory status: supplement, expand or amend the global valuation standardsto meet UK statutory or regulatory requirements
The same arrangement and format has been used for the UK material as in the 2012 edition, but with updated cross-references to the global section
Professional Standards (PS)
PS 1 Compliance with standards and practice statements where a written valuation is provided
PS 2 Ethics, competency, objectivity and disclosures
Global Valuation Practice Statements (VPS)
VPS 1 Minimum terms of engagement VPS 2 Inspections and investigations VPS 3 Valuation reports
VPS 4 Bases of value, assumptions and special assumptions
Global Valuation Practice Guidance – applications (VPGA)
VPGA 2 Valuation for secured lending
VPGA 8 Valuation of portfolios, collections and groups of properties
VPGA 9 Valuation in markets susceptible to change: certainty and uncertainty
UK Valuation Standards
UKVS 3 Valuations of Residential Property UKVS 4 Regulated purpose valuations
UK Appendices
UK Appendix 10 RICS residential mortgage valuation specification
UK Appendix 11 Application of the RICS mortgage valuation specification to related purposes
UK Guidance Notes
UKGN 3 Valuations for capital gains tax, inheritance tax and stamp duty land tax UKGN 4 Inspections and material considerations
3.
Purpose of the Red Book
Introduction
1. Consistency, objectivity and transparency
6. To assure users that a valuation provided anywhere in the world is in accordance with the highest professional standards
7. The standards set out procedural rules and guidance which: (a) expressly comply with the RICS Rules of Conduct
(b) impose mandatory obligations regarding competence, objectivity and transparency (c) establish a framework for uniformity and best practice
8. The standards do not: (a) instruct on how to value
(b) prescribe a particular report format (c) override specific national standards
Note
:
A Valuation File contents are: Conflicts of Interest (COI) check
Terms of Engagement
Inspection notes etc.
Planning, rating and environmental searches
Comparables and analysis
Valuation calculations with rationale
Report
4.
RICS Professional Standards
PS 1 Compliance with standards and practice statements where a written valuation is provided
All RICS and IRRV members, whether practising individually or within an RICS-regulated or non-regulated firm, who provide a written valuation are required to comply with the professional standards and valuation practice statements set out in Parts 3 and 4 of this edition of the Red Book. This includes compliance with the International Valuation Standards (IVS) issued by the International Valuation Standards Council (IVSC).
Implementation
6. Exceptions
6.1 The mandatory application of VPS 1 to 4 would not be appropriate for some purposes
but the application of the relevant standards is encouraged 6.2 The areas of exception are where valuation advice is provided for:
a statutory function
preparation for or during negotiations or litigation
purely for internal purposes
agency or brokerage work in anticipation of disposal or acquisition instructions
giving evidence as an expert witness
6.3 A replacement cost figure for insurance purposes is an exception
PS 2 Ethics, competency, objectivity and disclosures
As it is fundamental to the integrity of the valuation process, all members practising as valuers must have the appropriate experience, skill and judgment for the task in question and must always act in a professional manner free from any undue influence, bias or conflict of interest
1.4 Referring to a report as formal or informal is discouraged.
3. Member Qualification
3.1 Must have market knowledge and, the skills and understanding
to undertake the valuation competently
4. Independence, objectivity and conflict of interest
4.4 ………To provide an audit trail, a note of all conflict of interest checks and their resolution must be retained with the working papers.
7. Terms of Engagement
7.1 All material matters must be brought to the client’s attention prior to the issue of the report and documented. This is to ensure that the report does not contain any revision of the initial terms of engagement of which the client is unaware.
5.
Terms of Engagement
VPS 1 Minimum terms of engagement
2 The IVS 101 Scope of Work terms are:
(a) Identification and status of the valuer
(b) Identification of the client and any other intended users (c) Purpose of the valuation
(d) Identification of the asset or liability to be valued (e) Basis of value
(f) Valuation date
(g) Extent of investigation
(h) Nature and source of the information to be relied upon (i) Assumptions and special assumptions
(j) Restrictions on use, distribution or publication
(k) Confirmation that the valuation will be undertaken in accordance with the IVS (l) Description of report
confirmation of the report format
reference made to any report content in IVS 103 that are to be excluded
3 The additional RICS requirements are inclusion of: (m) the basis on which the fee will be calculated
(n) where the firm is registered for regulation by RICS, reference to the firm’s complaints handling procedure, with confirmation that a copy is available on request and
(o) a statement that compliance with these standards may be subject to monitoring under RICS’ conduct and disciplinary regulations.
(g) Extent of Investigation
1. A short time timescale for reporting may result in not all of the facts being established or valuation based on an automated valuation model (AVM) may be required.
2. A client may require a drive-by, desk-top or pavement valuation.
3. Instructions may be accepted if the restriction is considered reasonable.
4. The instruction should be declined if the valuer considers that it is not possible to provide a valuation on the basis of restricted information.
5. It must be made clear when confirming instructions that the restriction, any resulting assumptions and the impact on the accuracy of the valuation will be referred to in the Report.
6.
Inspections and Investigations
VPS 2 Inspections and Investigations
1. Inspections and investigations must always be carried out to the extent necessary to produce a valuation that is professionally adequate for its purpose. The valuer must take reasonable steps to verify the information relied on in the preparation of the valuation and, if not already agreed, clarify with the client any necessary assumptions that will be relied on.
9. While the valuer should take reasonable care to verify any information provided or obtained, any limitations on this requirement must be clearly stated. (See VPS 1, Minimum terms of engagement)……….
10. Legible notes (which may include photographs) must be retained
particularly the limits and circumstances
should also include all calculations, investigations and analyses
UKGN 4 Inspections and material considerations
7.
Bases of Value
Basis of Valueis defined in the Glossary as:
A statement of the fundamental measurement assumptions of a valuation.
Basis must not be confused with Method of Valuationwhich is now not defined but in the 6th Edition was defined as:
A procedure or technique used to arrive at the value described by a basis of value.
VPS 4 Bases of Value, Assumptions and Special Assumptions
1.1.3 The bases of value recognised in these standards
Market Value
Market Rent
Investment Value
Fair Value – IFRS definition
1.2 Market Value
1.2.1 Defined in IVS Framework paragraph 29:
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
1.2.2 The highest and best use of an asset
possible, legally permissible and financially feasible
1.2.3 Ignores price distortions caused by special value or synergistic value
1.2.4 Regards must be had to the Conceptual Framework
set out in paragraphs 30–34 of the IVS Framework
1.2.5 The basis must be in the instructions and in the report
no mandatory requirement to refer to the Conceptual Framework but may be useful to do so
1.2.6 If a basis other that Market Value is appropriate
comment is recommended where the other basis differs significantly
1.2.7 Additional value from an expectation by prospective buyers generally in the market of a change in circumstances is reflected in Market Value for
the prospect of development
the prospect of synergistic value
1.3 Market Rent
1.3.1 Defined in IVS 230 Real Property Interests paragraph C9:
The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
1.3.3 MR will vary significantly according to the assumed lease terms
lease terms should reflect current practice
1.3.4 Market Rent is used to indicate the amount for which a vacant property may be let or a let property may re-let when the lease terminates
(but please note S34 of Landlord and Tenant Act 1954) Market Rent is not suitable for rent reviews
where the actual definitions and assumptions have to be used
1.3.5 When providing Market Rent
the assumed principal lease terms should be set out
any payments or concessions should also be stated
1.4 Investment Value
1.4.1 Defined in IVS Framework paragraph 36:
The value of an asset to the owner or a prospective owner for individual investment or operational objectives.
1.4.2. May also be known as worth.
1.5 Fair Value
1.5.2 There are two recognised definitions of Fair Value
(a) the definition adopted by the International Accounting Standards Board (IASB) in IFRS 13: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
and
(b) the definition adopted by the IVSC in IVS Framework paragraph 38:
The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties.
IVS Framework:
Glossary: Special Value
An amount that reflects particular attributes of an asset that are only of value to a special purchaser.
Special Purchaser
A particular buyer for whom a certain asset has special value because of advantages arising from its ownership that would not be available to general buyers in the market.
IVS Framework:
42(b) An example of Fair Value is the price that is fair between lessor and lessee
for a transfer of the asset or the cancellation of the lease liability
There are four further Valuation Bases in the UK Practice Statements
Existing Use Value (EUV) UKVS 1.3
Existing Use Value for Social Housing (EUV-SH) UKVS 1.13
Projected Market Value (PMV) of residential property UKVS 3.3
Value of Plant and Equipment to the business (VPEB) UKVS 1.11
8.
Valuation Assumptions and Special Assumptions
VPS 4 Bases of Value, Assumptions and Special Assumptions
2. Assumptions
2.1 An assumption is made when it is reasonable for the valuer
to accept that something is true without the need to investigate or verify
2.2 Almost always necessary to couple a basis of value with
assumptions and / or special assumptions
2.3 Assumptions must be agreed in the Terms of Engagement
2.4 If after inspection or investigation the valuer considers that an agreed assumption is inappropriate or should become a special assumption
2.5 Information and guidance is given on the following Assumptions (a) Title
(b) Condition of buildings (c) Services
(d) Planning (Zoning)
(e) Contamination and hazardous substances (f) Environmental matters, and
(g) Sustainability
3. Special Assumptions
3.1 A special assumption is made where an assumption assumes facts that differ from those existing at the valuation date
includes assumptions about a future state or event
3.2 Special Assumptions must be agreed in writing before the report is issued
3.7 Illustrations of Special Assumptions are:
planning consent has or will be granted
proposed development has been completed in accordance with a defined plan and specification
the property has been changed in defined way
the property is vacant (when occupied at the valuation date)
the property is let on defined terms (when vacant at the valuation date)
that synergistic value is created where one or more parties has as special interest Where a property has been damaged special assumptions may include:
the property has been reinstated
valuing as a cleared site with development permission for the existing use
refurbishment or redevelopment for a different use
4. Valuations reflecting an actual or anticipated marketing constraint, and forced sales
4.1 Details of the constraint must be agreed in the Terms of Engagement 4.7 The term forced sale value must not be used
Could be expressed as Market Value on the Special Assumption of a sale after X days
90 days / 3 months is usual for residential property
180 days / 6 months is usual for commercial property
9.
Valuation Reports
VPS 3 Valuation Reports
2. The report must clearly and accurately set out the conclusions of the valuation in a manner that is not ambiguous or misleading, and does not create a false impression. If appropriate, the valuer should draw attention to, and comment on, any issues affecting the degree of certainty, or uncertainty, of the valuation. See Valuation Practice Guidance – Application 9, Valuation in markets susceptible to change: certainty and uncertainty (VPGA 9), which provides more detail.
3. The report must also deal with all the matters agreed between the client and the valuer in the terms of engagement …… The report should convey a clear understanding of the opinions being expressed by the valuer and should be couched in terms that can be read and understood by someone with no prior knowledge of the subject asset.
6. Terms that should not be used:
certificate of value
valuation certificate
statement of value
Report Content
7. The requirements are:
(a) Identification and status of the valuer
(b) Identification of the client and any other intended users (c) Purpose of the valuation
(d) Identification of the asset or liability to be valued (e) Basis of value
(f) Valuation date
(g) Extent of investigation
(h) Nature and source of the information relied upon (i) Assumptions and special assumptions
(j) Restrictions on use, distribution or publication
(k) Confirmation that the assignment has been undertaken in accordance with the IVS (l) Valuation approach and reasoning
(m) Amount of the valuation or valuations (n) Date of the valuation report
(l) Valuation Approach and Reasoning
To understand the valuation figure in context, the report shall make reference to the approach or approaches adopted, the key inputs used and the principal reasons for the conclusions reached. ………..
This requirement does not apply if it has been specifically agreed and recorded in the scope of work that a report shall be provided without reasons or other supporting information.
Key Inputs / Comparables
See: RICS Information Paper:
Comparable Evidence in Property Valuation (1st Edition, 2012) Page 11, Comparable Analysis Matrix
2 Market Street 84 Bridge Street 14 Market Street 64 Bridge Street
Agreed Rent £48,000 £38,500 £57,200 To be
assessed
Net Internal Area (m2) 190 155 254 205
Rent per m2 £253 £248 £225
Date 3 months ago 1 month ago 7 months ago Now Transaction Type Letting Letting Rent Review Rent Review Specification* AC, L, RF AC, L, RF CH, L CH, L, RF Specification
Comparison Better Better Slightly Inferior Date Adjustment (rising
market) Lower than subject No adjustment Lower than subject
Condition Better Better Worse
Location Better Better Better
Layout Similar Worse Better
Net qualitative
adjustment (compared
with subject) Better Similar Slightly Worse
* Specification abbreviations:
10.
Valuation Certainty and Uncertainty
VPGA 9 Valuation in markets susceptible to change: certainty and uncertainty 1. Introduction
1.1 The degree of certainty and risk attached to valuations should be reported 1.2 All valuations are professional opinions
on a stated basis with assumptions or special assumptions
A valuation is not a fact, it is an estimate.
2. Matters that may affect valuation certainty
Status of the valuer
accuracy depends on skill and experience
confidence in valuation is dependent on the independence of the valuer
Inherent uncertainty
unusual or unique property or location
quantification of potential planning permission
existence of a special purchaser
Restrictions on enquiries or information provided
information available to the valuer is limited or restricted
Liquidity and market activity
inactive markets with low liquidity
in liquid and functioning markets the valuer should state that there is abundant data
Market volatility
valuation on date immediately after macroeconomic or political crises
11.
The Energy Act 2011
Places a duty on the Secretary of State
to bring into force regulations to improve the energy efficiency of buildings in the domestic and non-domestic private rented sector in England and Wales
Domestic and non-domestic private rented sector Minimum Energy Efficiency Standard Regulations
must be in force by 1 April 2018
The government confirmed in February 2012
that it would not be possible to let commercial or residential properties with an EPC lower than an E (i.e. with an F or G rating)
Domestic private rented sector Tenant’s Energy Efficiency Improvement Regulations
must be in force by 1 April 2016
applies to properties occupied on either an assured tenancy under the Housing Act 1988 or regulated tenancy under the Rent Act 1977
will empower tenants in the sector to request consent for energy efficiency measures that may not unreasonably be refused by the landlord
Non-domestic buildings newly let from 1 April 2018 onwards
will be required to comply with the regulations.
From 1 April 2023 a regulatory “backstop” will apply
all non-domestic properties would be required to meet the standard, including existing lets, or demonstrate an exemption.
Where the backstop applies to existing leases an exemption would be provided
a sitting tenant’s refusal to consent to improvements or Green Deal finance
Where a property has a rating of F or G
advisable to report and comment under certainty and uncertainty?
These notes contain extracts from the RICS Valuation – Professional Standards and other RICS publications. You should not act without first reading and understanding the relevant part(s) of the Standards and other publications.
