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Why is it necessary to have rules and regulations, etc. in the preparation of valuations?
These are necessary because valuations form the basis of many financial decisions and consequently there have to be consistent standards. More recently there has been a move towards greater transparency, accountability, comparability and the availability of information the need for which was given added impetus following major corporate failures, particularly, but not exclusively, in the US. RICS wants to maintain public confidence in the work of its members by means of self-regulation.
The Red Book is divided into practice statements, appendices and guidance notes. Are they all mandatory?
A practice statement must be followed and is mandatory as is the commentary which accompanies it: 'The commentary to each practice statement should be considered to have mandatory status when it requires the member to take a specified action.' (PS 1.1, para. 4) On the other hand appendices are advisory unless indicated to be mandatory in the practice statement to which it relates. Guidance notes are not mandatory but are designed to help the valuer with the application of the practice statements and describe the standard of work that is expected of a reasonably competent surveyor.
Does the Red Book apply to a purchase report that does not contain a valuation but merely recommends a purchase at a certain figure that has been negotiated at, above or below market value?
If the advice to purchase at a specific figure is not presented as a valuation then the report is outside the Red Book but it is still subject to the Rules of Conduct for RICS members, so it would be good practice to follow all the appropriate advice in the Red Book.
I carry out estate agency work which involves advising clients on asking figures and recommending acceptance of offers usually in writing. Is this subject to the Red Book?
Advice given in connection with estate agency is one of the principal exceptions in the Red Book. PS 1.2, para 10, states: 'Advice tendered in the expectation of, or in the course of an instruction to dispose of, or acquire, an interest in property on the anticipated price achievable or payable, including advice on whether a particular offer should be accepted or made. This exemption does not apply if the client requires a purchase report that includes a valuation.'
I am director of property at a large publicly quoted company. I am frequently asked to advise the directors on the value of the
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I understand there is some flexibility in the Red Book and departures are allowed. Can you explain the procedures?
It has long been recognised that there may be circumstances when it is not entirely practical to give a client all the advice he or she needs by strict adherence to the Red Book. This is dealt with in PS 1.3. The procedure is that a departure is allowed if you feel that it is justified and the situation cannot be covered by making a 'special assumption', but the Red Book issues a warning that you may be called upon by the RICS or the Institute of Revenues Rating and Valuation (IRRV) to explain your reasons. Clearly the circumstances have to be agreed with your client in the terms of engagement and the details and reasons and the client's agreement must be set out in the report.
My client wants a valuation which is to be incorporated into his company's accounts but says he doesn't want a long Red Book valuation report. What should I tell him?
Firstly, if the valuation is for his accounts, as a chartered surveyor you have no option but to produce a valuation and report which is Red Book compliant. Secondly, his auditors will probably insist that it is a professional valuation if they are to sign off the accounts. Thirdly, a Red Book report for accounts does not have to be long providing it contains the minimum contents as outlined in PS 6.1. It can be concise and there is no requirement to provide photographs, location plans or detailed descriptions of the property and its environs. One reason for your client's request could be that he feels you will charge less for a shorter report.
How can I provide written confirmation of my opinion given in a verbal report without agreement of terms of engagement and a full report in accordance with PS 6?
Example context: I am often approached by a bank seeking a verbal desktop valuation of a property upon which they are contemplating making a loan. The bank, following my verbal report, may ask me to confirm my opinion in writing but do not at this stage require a Red Book compliant report as the terms of the loan are still being negotiated. How can I provide written confirmation without agreement of terms of engagement and a full report in accordance with PS 6? Any valuation in writing is subject to the Red Book. The best way forward is to develop a simple engagement letter which incorporates the minimum Red Book requirements together
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with confirmation that the property has not been inspected, total reliance is made on information supplie and, it is preliminary advice to consider whether a loan should be made, which may lead to a full Red Book report in due course. In addition, in the absence of the usual due diligence, the preliminary figure may be subject to change and should not be relied upon for any contractual purpose.
The Red Book is divided into global and UK standards - I work in the UK, so is it in order for me to ignore the global standards?
The global standards apply throughout the world and are the core of the Red Book - they apply equally in the UK as anywhere else. You are required to apply global valuation standards unless there is a more specific national practice statement. The UK standards (UKPS 1 to UKPS 5) cover valuation situations, rules and regulations in the UK such as UK listing rules, takeover code, property unit trusts and UK accounting conventions, etc. It is expected that RICS national associations outside the UK will devise their own standards within the Red Book framework.
My client, a company within an EU country outside of the UK, requires a valuation for the accounts of a UK subsidiary carried out in accordance with international valuation standards. May I do this?
On the assumption you hold the necessary qualifications, knowledge and skills (PS 1.5) the matter is dealt with in PS 4.1 which states that: 'Valuations for financial statements prepared under International Financial Reporting Standards (IFRS) shall be in accordance with the IVSC International Valuation Application 1 (IVA 1).' This is published by the International Valuation Standards Committee as part of the International Valuation Standards and contains information on International Accounting Standards (IAS) including the important IAS 16 (Property Plant and Equipment), IAS 17 (Leases) and IAS 40 (Investment Property). You will report the Market Value under IVA 1 but your client is required under International Financial Reporting Standards (IFRS) to account for the asset at its 'fair value'. To enable your client to do this and to make disclosures required under IAS 16 and IAS 40 your report must contain the following information: the effective date of the revaluation; whether the valuer is an external or internal valuer; the methods and significant assumptions applied in estimating market value; under IAS 16 the extent to which the values were determined by reference to observable prices in an active market or recent market transactions on arm's length terms, or were estimated using other valuation techniques; and under IAS 40 the method and significant assumptions applied in determining the value of investment property, including a statement whether the determination of fair value was supported by market evidence or was more heavily based on other factors because of the nature of the property and lack of comparable market data.
You must indicate if you are an internal or external valuer as defined in the glossary to the Red Book. The report must include a statement that the valuation has been prepared in accordance with IVA 1. You should consider Appendix 6.3 (Reporting valuations under IFRS) which explains the current lack of clarity in the International Standards and the recommendation that when valuing
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owner occupied property you should provide valuations on the alternative assumptions that either it is sold: as part of the continuing enterprise in occupation; or on the assumption that the property is sold following a cessation of the existing operation.
My client has sent me various plans showing different designs for a proposed development and asked me to provide valuations of each when completed and let. Is this advice subject to the Red Book?
Formerly one of the exceptions was market and other advice in connection with the design of development improvement and conversion schemes and as an element of grant applications. This exception no longer applies and the valuation advice proposed would be within the remit of the Red Book.
Can anyone who is not a chartered surveyor undertake a valuation in accordance with the Red Book?
The rule in PS 1.4 is that: 'Each valuation to which these standards apply must be prepared by, or under the supervision of, an appropriately qualified member ...' It would appear from a literal translation of this that only chartered surveyors can undertake Red Book valuations, but a non-member can carry out a valuation if supervised by a member. However the report has to be signed by the member who accepts responsibility for it ( Appendix 6.1(s)). A valuation could be undertaken and signed by a non-member but the client would not have the protection of disciplinary procedures against the valuer if the valuation was found subsequently to be faulty.
May I delegate the inspection and due diligence work for a valuation in accordance with the Red Book to an unqualified assistant?
Yes you may. Provided you consider this to be appropriate in the circumstances of the instruction; the assistant is under your supervision; and you take responsibility for the valuation, but remember as in the previous question that this will require you to sign the report.
My practice is in Wales and it specialises in retail property. I have been asked to value an office property in Edinburgh. May I do this or should I sub-instruct a local valuer?
PS 1.5 states that the member 'must have sufficient current local, national and international (as appropriate) knowledge of the particular market'. If you practise in Wales specialising in a different class of property it seems unlikely you would meet the criteria set out. The safest procedure would be to sub-instruct (with your client's authority) a local valuer.
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May I instruct another valuer with the required level of expertise without first getting my client's approval?
No. Paragraph 3 of the commentary to PS 1.5 states: 'The client's approval must be obtained if the valuer proposes to employ another firm to provide some of the valuations that are the subject of the instruction.' Rather than sub-instruct, some valuers prefer their client to instruct the other valuer and then combine his or her report with their own.
I have been asked to value a property for my client's annual accounts that I acquired for him nine months ago. Is it in order for me to do so?
This situation is covered by UKPS 5.3. A valuation for accounts is such a valuation and the Red Book stipulates that if you or your firm negotiated the purchase of a property on behalf of a client within 12 months preceding the date of valuation you may not undertake a valuation unless another firm unconnected with your firm has provided a valuation of the property at the time of acquisition or subsequently. 'Where a regulated purpose valuation includes: (a) one or more properties acquired by the client within the twelve months preceding the date of valuation; and (b) the member, or the member's firm, has in relation to those properties: received an introductory fee; or negotiated that purchase on behalf of the client
the member shall not undertake a regulated purpose valuation of the property, or properties identified under (a) above, unless another firm unconnected with the member's firm has provided a valuation of that property for the client at the time of, or since, the transaction was agreed.' (UKPS 5.3) So unless another firm has provided an interim valuation you must wait 12 months before valuing. This rule stems from a recommendation in the Carsberg Report and you cannot get round this by disclosure.
I have been asked by a bank to value a property for mortgage purposes that I acquired for the bank's customer two months ago. Is it in order for me to accept this instruction?
You must disclose any previous, current or anticipated involvement with the prospective borrower or the property to be valued to the bank (Appendix 4.4, para. 3.4). You must consider whether your previous involvement with the property compromises your duty to be independent and objective. If by accepting the instruction this would create a conflict that cannot be avoided the instruction should be declined. Providing all this is disclosed to the bank and the bank is comfortable you may accept the instruction. Banks are often happy to accept such conflicts in the interest of speed and a possible saving on fees.
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The Red Book rules are set out in Appendix 1.1, para. 5.4. They can be defined as a procedure to manage conflicts of interest whereby different parts of a firm are kept separate so that information does not circulate freely. Chinese walls are unlikely to work without considerable planning as their management needs to be an established part of a firm's culture. It will be more difficult or may be impossible for smaller firms or offices to operate them. 'RICS has strict guidelines on the minimum standards which must be adopted by organisations when separating the advisers acting for "conflicting" clients. Any "Chinese wall" set up must be robust enough to offer no chance of information passing through it. This is a strict test. Taking "reasonable steps" to operate an effective wall is not sufficient. Accordingly, any "Chinese wall" set up, and agreed to by affected clients, must ensure that: the individual(s) acting for conflicting clients must be different. Note that this extends to secretarial and other support staff; such individuals or teams must be physically separated, at least to the extent of being in different parts of a building, if not in different buildings; any information, however held, must not be accessible to "the other side" at any time and, if in a written form, must be kept secure in separate, locked accommodation to the satisfaction of the compliance officer, or another senior independent person within the firm; the compliance officer, or other senior independent person, should oversee the setting up and maintenance of the "Chinese wall" while it is in operation, adopting appropriate measures and checks to ensure it is effective. The compliance officer must have no involvement in either of the instructions, and should be of sufficient status within the organisation to be able to operate without hindrance; there should be appropriate education and training within the firm on the principles and practice relating to the management of conflicts of interest.'
A client for whom I have carried out a valuation has asked for details of comparables. Some of these are not in the public domain and are only known to me by working for another client. May I pass on this information?
Where this information is contemporary and not reduced in relevance by age, the answer has to be no. You might consider giving non-specific information, or asking the first client if you may release the information. Most clients will be impressed by your confidentiality.
My client wishes to discuss the valuation with me before I sign off. May I do this?
PS 6.11 lays down the conditions upon which preliminary valuation advice is submitted. Yes, you may have a meeting but you must keep very careful notes of any additional information provided by your client and whether or not that information has affected the final valuation. It is important that any discussions do not, and can be shown not to lead to any perception that the valuer's opinion has been influenced by those discussions other than to correct inaccuracies or the provision of further information.
I have been asked to value a property for mortgage purposes that belonged to my wife's family three years ago. Do I need to disclose this to the bank?
After three years this is probably irrelevant but it would be safer to make a disclosure.
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which he owns for his annual accounts. I find that my firm is acting for the major tenant in an ongoing rent review negotiation. May I accept the instruction and if so what action must I take?
There is clearly a conflict and whilst you may accept the instruction (by disclosing the position to both parties and obtaining their confirmation in writing) it would probably be unwise to do so.
I have been asked by a client to value a property for accounts purposes on which my firm gave planning advice to the previous owner some three years ago. May I accept the instruction?
Providing you have disclosed this previous involvement to your client it seems unlikely that this would compromise your independence, integrity and objectivity and there should be no reason why you cannot take on the instruction.
My client wants me to increase my valuation due he says to commercial pressures from shareholders in the company of which he is the managing director. How should I react to this request?
You should explain to your client that professionally you can only provide your honest opinion which reflects the market at the date of valuation. Unless he can produce relevant information of which you are unaware you are not able to adjust your valuation. You should record your discussions with your client on the file.
I have undertaken valuation assignments outside my area of work but of a class of property with which I am familiar. I carefully reserach the market and speak to local valuers. Is this sufficient to comply with PS 1.5 Knowledge and skills?
If you refer to the commentary to PS 1.5 this states that if the valuer does not have the required level of expertise then he or she should decide what assistance is needed assembling and interpreting relevant information from other professionals such as specialist valuers, accountants and lawyers.
I do frequent valuations for the same client. Do I have to send him written terms of engagement for each instruction?
The best way forward is to have standard terms of engagement to which you can refer when
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you acknowledge the instruction and confirm the fee and timetable. If any special assumptions were required you could confirm these at the same time.
May I extend the terms of engagement beyond those set out in the Red Book?
The 20 matters referred to in PS 2.1 are the minimum matters that must be agreed. There are other matters that, from a business perspective, you may wish to include such as the date for delivery of figures, the number and type of report required, etc.
I have been asked by a client to provide a valuation in the capacity of an independent valuer. There is no such definition in the Red Book, so what should I do?
Previous editions of the Red Book contained several different definitions some of which were included in statute and regulations. In your instance you need to discuss the precise criteria required with your client and confirm this in the terms of engagement and check that there is not a definition already in existence for the required purpose. Remember that the RICS Rules of Conduct already require you to act with independence, integrity and objectivity.
My client wants me to assume a hypothetical planning consent when valuing his property. Is this a special assumption?
This is almost certainly a special assumption particularly if a potential purchaser of the property would not make that assumption in the marketplace at the date of valuation. Remember, valuing with special assumptions may only be made if they can reasonably be regarded as realistic, relevant and valid. If valuing for a bank you would be well advised to include a second valuation without the special assumption so that its effect can be demonstrated.
I have been asked by a client for a 'forced sale value', how should I advise him?
Forced sale value as a basis of valuation was abolished some time ago and is a term which generally arises in difficult economic conditions when there are few willing sellers and it is thought that most transactions are by vendors who, for various reasons, are being compelled to sell. Such sale prices are then considered to be unrepresentative of the market, as invariably the seller is under pressure to achieve a sale as quickly as possible. This is a false assumption. An obligation to sell by a certain date is not necessarily incompatible with achieving market value because of the assumption in the definition which requires the seller to be motivated to sell at the terms available in the market at the valuation date. The degree of pressure on the seller will depend on the consequences for him of not selling on that date and therefore the discount he would accept. There is nothing to prevent a valuer from giving advice in such circumstances and this can generally be achieved by making a special assumption - for instance, that the marketing period is constrained. This is a commercial judgment and is more likely to be advice to the vendor reflecting his particular circumstances. Do not use the term 'forced sale value' (PS 2.3).
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A client has asked me to consider the veracity of a valuation prepared by another valuer, may I do this?
The rule is that a valuer must not review another valuer's work that is intended for publication or disclosure unless the valuer is in possession of all the facts and information available to the first valuer. The reasons for this are obvious. If on the other hand the full facts and information are not available but a review of files or an audit process is required for internal purposes, this is acceptable (PS 2.6).
I am rather concerned about the accuracy of a valuation due to a weak market and lack of relevant comparables. May I report a range of figures?
For some valuations, particularly those prepared for financial statements, a single figure must be reported. However, there is nothing to stop the valuer from commenting on the robustness of his or her figure and the reasons for the potential uncertainty. If reporting to a bank there is more scope for reporting a higher and lower figure and this could be further illustrated by using special assumptions for different circumstances. Do not use qualifying words such as 'in the region of' without further comment. GN 5 gives very helpful advice on both identifying uncertainty and reporting it.
I have just valued a portfolio of properties where I believe the value of the entirety is greater than the sum of the individual properties, should I report the higher figure?
You should report both values: firstly, the individual values for each property and then the value of the portfolio as a whole. Portfolios of pubs and hotels dependent on market conditions can have an aggregate value higher than the sum of the individual parts. Where a portfolio has been valued on the assumption that it would be sold as a single entity the reported market value will be in respect of the whole group and any breakdown of the market value between the individual properties should be expressed as such with a statement that this notional apportionment does not necessarily equate to the market value of the interest in any individual property (GN 3).
A client has asked me to value a property on the basis of open market value; why is this no longer defined?
In line with the RICS policy of supporting International Valuation Standards, open market value has been replaced in the Red Book by the international definition of market value (PS 3.2). Open market value as a definition has consequently been withdrawn.
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value?
Whilst the wording is very different and the market value definition considerably shorter there should be no difference in a valuation of a property using either definition. A client can be assured that a property valued by reference to open market value would produce the same figure if valued using the market value definition (UKPS 1.1, para. 8).
It is not unknown in the economic cycle for the market to collapse and for there to be a complete absence of purchasers. Does the existence of a 'willing purchaser' allow me to ignore this?
PS 3.2.4 explains that the buyer '... purchases in accordance with the realities of the current market and with current market expectations ...'. For there to be a sale there has to be a purchaser and in reality whatever the state of the market there is always a figure at which somebody will deal - remember the present property owner is included among those who constitute the market. Also remember that a reverse payment or premium will generally produce a purchaser.
In the open market value definition the additional bid of a special purchaser was specifically excluded. Using the market value definition may I now take special purchasers into account?
It is very important to read the market value definition together with the conceptual framework of the IVSC definition that goes with it. PS 3.2 explains that the words 'in an arm's-length transaction' mean that there is no particular or special relationship between the parties that could lead to an inflated value because of an element of special value. The commentary goes on to say that 'hope' or 'marriage value' may only be included to the extent that it would be reflected by prospective purchasers in the general market. This is a similar approach to the definition of open market value.
Can you please explain the difference between special value and synergistic value?
Special value is an amount in excess of market value that would be paid by a purchaser for whom the property had a particular value not shared by others. Examples include an adjoining owner to the property or a purchaser rolling over Capital Gains Tax. On the other hand synergistic value is the additional value created by the combination of two or more interests where the value of the combined interest is worth more than the sum of the original interests. This is frequently known as marriage value.
What is the essential difference between existing use value and market value?
The major difference is that market value is a pure valuation basis designed to reflect the price at which a property should sell in the marketplace assuming certain conditions. On the other hand, existing use value is a basis of valuation designed to reflect the price at which a property should be held in an owner's accounts.
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The definition of existing use value therefore makes additional assumptions to reflect the concept of the ongoing business - including ignoring development potential, personal planning consents and contamination that do not affect the continuation of the existing use and for which there is no obligation to remedy. The result is that existing use value could be the same, higher or lower than market value. For example, a leasehold property held at a low rent but with a complete bar on assignment would have only a limited market value, if any, but if assessing the existing use value the bar on assignment would be ignored and the value would be higher. Conversely, a nursing home with extensive grounds with planning consent for development which could only be implemented by demolishing the buildings on site would have a higher market value than the existing use value. For more detailed advice on the concepts see VIP No. 1 Valuation of Owner-Occupied Property for Financial Statements.
Explain when I should use market value and when I should use existing use value.
Existing use value is the only basis for valuation under UK Generally Accepted Accounting Principles for non-specialised properties that are owner occupied for the purpose of the entity's business (UKPS 1.1). Most other valuations are assessed by reference to market value.
Depreciated replacement cost is now reported as market value. Surely depreciated replacement cost is used only when there is no market, so how can this be?
Many have argued that it was incorrect for RICS to describe depreciated replacement cost as a separate basis of value in previous editions of the Red Book, as it described a method, not a distinct basis. The background to this debate lies in accounting standards. For many years UK accounting standards have required specialised property, valued using depreciated replacement cost, to be separately reported in accounts. The rationale was that users of the accounts needed to be aware that the valuations of such specialised assets were not based on transactional evidence and therefore were potentially less reliable. An unintended consequence of this was that many people came to think of depreciated replacement cost as an alternative to valuation, not merely a different valuation approach. Under International Accounting Standards, no such distinction is made. Under IAS 16 the fair value of an asset is normally based on 'market-based evidence' or, in the case of a specialised asset, it may be assessed using either the income or depreciated replacement cost approach. In other words three different approaches, or methods, may be used to arrive at the required basis. The problem of conveying the reliability of the valuations to users is dealt with by the requirement to make disclosures as to the valuation approach adopted. Market Value is a concept that simply describes the relationship, motivation and behaviour of the hypothetical parties to a transaction. It does not specify or imply a particular method of valuation, and like fair value, can be estimated using any of the three different approaches described in IAS 16. Whenever the depreciated replacement cost approach is being used, the valuer should be ensuring that, as far as possible, all inputs should be based on the market, and not on criteria specific to the actual owner.
A property valued using depreciated replacement cost methodology may have a value for an alternative use that is higher or lower if the current use were to cease. Do I have to report this?
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Both potential situations should be reported. If the alternative use valuation for the property can be readily identified; is commercially and legally feasible; and is materially higher, it should be reported. If the value cannot readily be assessed then a statement that the property may have potentially higher value would be sufficient. However, if the value would be materially lower if the business ceased this should be drawn to the attention of the client (PS 6.7). It is important also to state that the alternative use valuation ignores the costs of business closure or any other costs.
What qualifications do I have to report with a valuation based on depreciated replacement cost?
In the private sector the valuation should be accompanied by a statement that the valuation is subject to the adequate profitability of the business paying due regard to the value of the total assets employed (PS 6.5). In the public sector the valuation should be accompanied by a statement that it is subject to the prospect and viability of the continued occupation and use (PS 6.6). In both instances it is up to the client to consider the effect of these qualifications.
Who has the ultimate responsibility for deciding whether a property should be valued by depreciated replacement cost?
Firstly, the valuer must be satisfied that it is not practicable to prepare a valuation by any other method and, secondly, he or she should agree this with the client.
I value two identical properties in similar locations using the depreciated replacement cost method of valuation. Should a difference in output be reflected in my valuations?
In the circumstances you describe, where the first property is working to 100% capacity and the second is only working to 60% capacity, the replacement cost of the properties would be similar but the valuations are made 'subject to the adequate profitability of the business paying due regard to the value of the total assets employed' (PS 6.5). It is the directors who have the responsibility to apply this test and therefore they may reduce the value of the second property to reflect this on the grounds of profitability. VIP No. 10 The Depreciated Replacement Cost Method of Valuation for Financial Reporting, describes the technical approach to such valuations.
When undertaking a valuation for accounts under FRS 15 (Tangible Fixed Assets) should I make an adjustment in my valuation for costs of purchase or sale?
FRS 15 requires the reporting of notional directly attributable acquisition costs, where material to the existing use value. Likewise, where property is surplus to the entity's requirements and valued on the basis of market value it requires, the amount of expected directly attributable selling costs, where material, should be reported. The Red Book states in UKPS 1.7 that: 'The member must not include directly attributable acquisition or disposal costs in the valuation. Where asked by the client to reflect costs these must be stated separately.'
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I have been asked by a client to provide a fair value for his annual accounts; what is this?
The term fair value is derived from International Accounting Standards and is the valuation approach to the measurement of assets and liabilities. It is expressed in most of the International Accounting Standards as: '... the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm's-length transaction.' Whilst the wording incorporates some of the language of market value, fair value is not supported by a detailed conceptual framework and is more of a generic term without any guidance for its application. The International Accounting Standards stipulate that: '... the fair value of land and buildings is usually determined from market based evidence by appraisal that is normally undertaken by professionally qualified valuers. The fair value of items of plant and equipment is usually their market value determined by appraisal.' This is why the International Valuation Standards and Red Book tell the valuer to report market value.
Can you explain why some valuations are governed by International Financial Reporting Standards (IFRS) and some by UK Generally Accepted Accounting Principles (UK GAAP)?
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This depends under which rules your client is preparing his accounts. Companies listed on a stock exchange within the European Union have to prepare consolidated accounts in accordance with EU adopted IFRS for accounting periods commencing on or after 1 January 2005. In the UK any company not listed on its stock exchange reporting under the Companies Act 1985 may also prepare its accounts under IFRS.
May I assume a property is free from contamination even if I believe it is not? Is this a special assumption?
Unless you know the property is contaminated you can agree with your client in the terms of engagement to disregard any potential contamination. However if you suspect that the property is contaminated disregarding this would be a special assumption and would have to be agreed with your client in the terms of engagement and highlighted in your report and any published reference to it.
I value many industrial buildings with corrugated asbestos roofs; how should I qualify my valuation report?
The best advice would be to draw your client's attention to the roof and suggest that he or she may wish to take specialist advice but that similar properties change hands and there is an acceptance by the market of such properties. Since 2003 owners and occupiers of business property are required to have management plans in place and it would be sensible to ask for the survey and see what this reveals (Control of Asbestos at Work Regulations 2002). You should comment that maintenance, repairs and alterations may be significantly increased due to the need to take appropriate precautions under the regulations.
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To what extent may I rely on information supplied by my client's other advisers, i.e. lawyers, managing agents, etc.?
Again if in your terms of engagement it is agreed that you should do so you can rely on it. You would be well advised to schedule in your report your sources of information.
My client has asked me to rely on the floor areas that he has supplied; may I do this?
Yes, but you should agree this with your client in the terms of engagement and refer to it in your report. It is good practice to check areas against gross error when conducting your property inspections.
My client having received my report has asked for further information on the detail behind some of the figures; may I give him this information?
This is not an uncommon request and clients frequently ask for details of rents and yields, etc. You are perfectly at liberty to provide this information and the format in which you provide it is entirely up to you as it is not covered by the Red Book.
My client says he does not want a long valuation report; may I write him a simple letter and call it an 'informal valuation'?
If your client requires a valuation that comes under the jurisdiction of the Red Book (most valuations do - for exceptions see PS 1.2) he will have to receive a report in accordance with PS 6 of the Red Book. A report that complies with the minimum reporting requirements in PS 6.1 can be very brief and need not include building descriptions, photographs, location plans, etc. 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. It should be noted that a valuer is just as liable for an opinion expressed informally as formally. The Financial Services Authority Listing Rules allow a condensed report in certain circumstances (UK appendix 2.1, para 2.2).
If my valuation were made using a 'special assumption' how should I deal with this in my report?
PS 6.4 states that the special assumption must be set out in full together with a statement that it has been agreed with the client. Remember that special assumptions may only be made if
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they are realistic, relevant and valid for the particular circumstances of the valuation (PS 2.2). Again, depending on circumstances, it is worth considering providing a valuation without the special assumption to show the effect of it, particularly if reporting to a bank. Remember also that any published reference to the report must include reference to the special assumption. Valuations prepared for financial statements are unlikely to incorporate special assumptions.
If, as is likely, discussions with the client take place after submission of the preliminary report, it is vitally important to keep clear file notes including noting any additional information provided or suggestions made and how these affected the final valuation (PS 6.11).
My client says he may wish to refer to my valuation report in his published accounts; what action and consent do I have to give him?
The procedure for this is discussed under publication statements with suggested suitable wording (PS 6.12 and Appendix 6.2). You must submit with your report a suitable draft statement for your client to include in the notes to his accounts. The precise wording will depend on the purpose of the valuation and may be governed by rules issued by local regulatory bodies. You should ensure that you see a final proof to ensure the wording is correct and you should return this to your client if correct with a letter consenting to the reference to your name and report appearing in the document. If the report contains any special assumptions or any departures from the Red Book then it is essential that these should be included in the reference.
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This is a basis of value defined in the Red Book as: 'The value of property to a particular owner investor, or class of investors, for identified investment or operational objectives.' Worth is more a tool for analysis than a valuation. Its origins go back to the Mallinson Working Party on commercial property valuation that recommended 'the development of a definition of worth as a valuation basis inviting the Investment Property Forum to lead research into techniques of assessing and expressing worth'. Worth may be the same as the amount that could be realised from the sale of an asset, this value is specific to a particular party and reflects the benefits received by holding the asset. See also RICS Information Paper Calculation of Worth.
I valued a property for a client for accounts purposes 12 months ago. He has asked me for an update for his year-end accounts. May I do a simple letter referring to the previous valuation and confirm my latest opinion of value?
You should agree your terms of engagement for the new instruction in the usual way confirming that you will be making the assumption that there have been no material changes to the property and the area. Your report should contain this assumption and it would be in order to refer to your previous report without repeating the minimum contents in PS 6.1.
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valuation?
'Where a valuation is a regulated purpose valuation the member shall state all of the following in the report and any draft published reference to it: (a) the length of time the member continuously has been the signatory to valuations provided to the client for the same purpose as the report, together with the length of time the member's firm has continuously been carrying out that valuation instruction for the client; (b) the extent and duration of the relationship of the member's firm with the client; (c) in relation to the firm's preceding financial year the proportion of the total fees, if any, payable by the client to the total fee income of the member's firm expressed as one of the following: less than 5%; or if more than 5%, an indication of the proportion within a range of 5 percentage points; and
(d) where, since the end of the last financial year, it is anticipated that there will be a material increase in the proportion of the fees payable, or likely to be payable by the client, the member shall include a further statement to that effect in addition to (c) above.' (UKPS 5.4)
Are there other matters that should be included in a secured lending report other than the 19 matters in PS 6.1?
If you refer to Appendix 4.4, para. 5 you will find a list of six other matters that would normally be included in a report. These include: disclosure of any involvement identified in the terms of engagement, valuation methodology, transaction history and suitability of the property for secured lending. Para. 5.2 contains a list of other matters which, subject to the particular circumstances, may be appropriate, including advice on alternative uses, occupational demand, repairs, environmental hazards, marketability of the property, comparables, etc. There is a further list of matters which may be addressed for different types of property, i.e. owner-occupied, investment property, property which is to be developed or refurbished, etc., together with some typical special assumptions.
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The borrower has asked for a copy of the report I sent to the lender; may I make this available to him?
The lending institution is your client having instructed you to undertake the valuation albeit that the borrower is probably paying for it. The correct procedure is for the lending institution to either pass a copy of the report to the borrower if they wish to or to ask you to send it to the borrower on their behalf.
The lender has asked his solicitors to send me title documents to review and to confirm that nothing therein affects my valuation. Am I allowed to comment not being a qualified lawyer?
The title documents contain the definitive information on the property such as plot plans, lease extracts, details of rights of way, etc. It is a normal procedure to be asked to check that the information you have used for your valuation coincides with the title. You do not need to be a qualified lawyer for this and can always ask for an explanation from the solicitors on any matter that is unclear.
I still get requests from banks for valuations using estimated realisation price and estimated restricted realisation price as a basis. What action should I take?
All the major banks supported the abolition of these bases but it takes them some time to change their internal rules. The action you should take is to inform the instructing bank that their letter is out of date and ask them to check with their head office.
What is the appropriate valuation basis when valuing commercial property for secured lending?
PS 4.2, para. 2 stipulates that valuations for secured lending shall normally be on the basis of market value except when otherwise governed by law or statute.
The expression 'forced sale value' is still used yet the Red Book says (PS 2.3) it must not be used, but what am I to do if clients ask for it?
The banks were anxious to abolish this expression because a forced sale assumed an unreasonable period in which to make a sale. This was considered to be in conflict with the banks' duty of care to the borrower and other creditors. A client asking for advice on the basis of a forced sale is really asking what will be the diminution in market value if the sale period is unreasonable which would be a special assumption. If this advice is required it would be sensible to understand the circumstances in which it is required and explain that if the vendor is willing to accept a price below the market value a quick sale is more likely.
Is the RICS HomeBuyer Survey and Valuation covered by the Red Book?
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UKPS 4.1 provides that the HSV service procedures take precedence over the Red Book. 'Members who provide the HSV Service must comply with the practice notes published by RICS Books. In particular the standard documentation and report form must be used without alteration as set out in the second edition practice notes.' (UKPS 4.1, para. 3)
I am a sole principal and am in some difficulty in complying with the (UKPS 5.2) requirement for rotation of personnel. What should I do?
The Red Book deals with this problem and makes a suggestion that to comply with the principles of the statement it would be permissible for you to arrange for a periodic review of the valuation at intervals of not more than seven years. This would demonstrate that you were taking steps to ensure that objectivity was maintained and thus retain the confidence of third parties. Remember that if you adopt this policy it must be included in your terms of engagement.
I understand I may not undertake the valuation of a property for 12 months if my firm has received an introductory fee or negotiated the purchase on behalf of a client. Can you please explain this?
Firstly, this restriction only applies to regulated purpose valuations. You could (if they were happy after you had made full disclosure of your firm's involvement) undertake a valuation for a bank. If you were undertaking a regulated purpose valuation it is highly likely this would be relied upon by somebody other than the entity commissioning it, i.e. a third party. The idea behind this restriction is to remove any threat to objectivity and the perception that a valuer is unlikely to contradict or disagree with previous advice which his firm had given. This restriction would not apply if your firm had acted for the vendor of the property and received a fee although you would need to disclose this.
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Remember that it is not only the report in which these disclosures have to be made but also in any published reference to it.
Are valuations for SIPPS (Self Invested Pension Plans) regulated purpose valuations?
No. A SIPP is a tax approved scheme that is not otherwise regulated and is therefore not a regulated purpose valuation.
My client is a big international firm with many subsidiaries for whom my firm acts throughout the world and researching all the fees paid or about to be paid is almost impossible. How detailed do my enquiries need to be to conform to Disclosure (c)?
This was always envisaged to be a potential problem and is dealt with in some detail in UKPS 5.4. It acknowledges that it is impossible to establish and evaluate every relationship but it is nonetheless the valuer's responsibility to make reasonable enquiries and to ensure that the principles of the statement are adhered to. It also points out that it is frequently the valuer's commercial relationship with a party other than the instructing client that could create a perceived threat to independence. Where there is a material connection or relationship with the client the disclosures relate to the relationship of the valuer's firm with all the parties involved and the aggregate fees earned from those parties. UKPS 5.4, para. 8 gives examples of parties other than the instructing party which should be taken into account in making the disclosure, including: subsidiaries of an instructing holding company; where instructions are from a subsidiary company, those other companies connected by the same holding company; or a third party issuing valuation instructions as agent for different legal entities, for example, the manager of a property fund.
The onus is on the valuer to make adequate enquiries bearing in mind the size and nature of
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How detailed does the extent and duration relationship disclosure ((b)) need to be?
This is dealt with in UKPS 5.4, para. 5 which says members are not required to provide a comprehensive account of all work ever undertaken by their firm for the client. A simple, concise statement that discloses the nature of other work done and the duration of the relationship, is all that is required. If there is no relationship, other than the valuation instruction in question, a statement to that effect should be made. There is also a requirement to keep a note of the enquiries made and the source of the information which should be kept on file.
Do the regulated purpose valuation disclosures have to be included in any published reference to the valuation, for example in my client?s accounts?
Yes. UKPS 5.4 states 'where a valuation is a regulated purpose valuation the member shall state all of the following in the report and any draft published reference to it'. It then goes on to list the disclosures. Remember you will have to incorporate in the same reference those matters referred to in Appendix 6.2.
Valuations of property held in pension fund schemes is not included in the list of regulated purpose valuations in UK PS 5.1. Are these valuations excluded?
If the pension scheme is within the regulations produced by the Financial Services Authority then it is clearly a regulated purpose valuation. Alternatively if the pension scheme is run by an entity incorporated as a company, subject to the Company's Act, and the valuation is for financial statements, it would be a regulated purpose valuation.
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These valuations all might be relied upon by third parties other than those to whom the valuation report is addressed. However RICS is to extend monitoring to all valuations.
What guarantees does the valuer have that the file will remain confidential?
The monitor will give a signed undertaking that the information obtained during the monitoring exercise will be used by RICS solely for the purpose of the administration of the institution's conduct and disciplinary regulations. It will not be disclosed to any other party, including RICS staff members, not concerned with the administration of the regulations. In the event of any disciplinary action taken by RICS against the member, the identity of the client and the properties will be removed from documentation submitted to any disciplinary panel.
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What are the penalties if the valuer does not pass the inspection?
If the failure is due to minor breaches these will be discussed with the valuer who will have the opportunity to comment and no further action will be taken. On the other hand, serious breaches will be discussed with the valuer and referred to the Head of Regulation for consideration.
My client has asked me to prepare a valuation for probate purposes. What should I give him?
He undoubtedly requires a valuation for inheritance tax. You should, when confirming instructions, make it clear that since you understand the valuation is required as part of the procedure for obtaining a Grant of Probate the basis of valuation will be in accordance with the statutory definition.
I am frequently asked by clients seeking valuations for capital gains tax or inheritance tax to provide high or low valuations to suit their particular taxation circumstances. How should I deal with such requests?
If you are approached to produce what is sometimes known as 'a made to measure valuation' you should explain that you are bound by the RICS Code of Conduct to act with 'independence, integrity and objectivity' and you can only provide your honest view in accordance with the statutory definition and case law. You should also explain to your client that property valuations are subject to scrutiny by district valuers on behalf of HM Revenue and Customs and if this leads to negotiation which results in a materially different tax assessment there could be a claim for interest or other penalties.
Surely every valuation is subject to a range and in practice I could provide a bottom of the range figure for inheritance tax and a top of the range figure for capital gains tax if that was appropriate?
This is a matter of professional judgment but you must act in accordance with the RICS Rules of Conduct. The fact of the matter is that the same property valued at the same date for either inheritance tax or capital gains tax should be at the same figure. In some cases statute law provides that the same figure shall be adopted.
What is the correct basis of valuation to use when advising a charity on the purchase of a property?
There is no basis of valuation laid down in the various statutes or in the Charity Commission advice but as a chartered surveyor is required to carry out the report it clearly envisages market value as defined in PS 3.2.
I am advising a charity on the purchase of a freehold property on which they hold a lease and the price they are paying is above market value. How should I advise them?
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You should provide the trustees with the market value but separately advise them on the worth to the charity and the reasons for proposing to pay in excess of Market Value.
Are valuations prepared for local authority accounts regulated purpose valuations?
No, they are covered by their own SORP (Statement of Recommended Practice) which is dealt with in UKPS 1.12.
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