Five counties conference

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1 Five counties conference The Red Book: Keeping an Auditable File High Wycombe: 4 th March 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 JFPC Ltd

2 1. The RICS Red Book Overview The RICS Valuation Professional Standards, Global and UK Edition, January 2014: effective from 6 th 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 30 th March 2012 Previous Editions were: RICS Valuation Standards, 7 th Edition effective from 2 nd May 2011 RICS Valuation Standards, 6 th Edition effective from 1 st January 2008 amended 4 times reprinted March 2009 and April 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 VPGAs embody best practice John Faulkner FRICS P a g e 1

3 Note (page 121): UK Valuation Standards (UKVS) have mandatory status: supplement, expand or amend the global valuation standards to 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 UKGN 6 Analysis of commercial lease transactions John Faulkner FRICS P a g e 2

4 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 nonregulated 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). RICS members must also comply with the requirements of RICS valuer registration (VR). John Faulkner FRICS P a g e 3

5 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. John Faulkner FRICS P a g e 4

6 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. John Faulkner FRICS P a g e 5

7 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 Value is defined in the Glossary as: A statement of the fundamental measurement assumptions of a valuation. Basis must not be confused with Method of Valuation which is now not defined but in the 6 th 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 The bases of value recognised in these standards Market Value Market Rent Investment Value Fair Value IFRS definition Fair Value IVS definition John Faulkner FRICS P a g e 6

8 1.2 Market Value 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 The highest and best use of an asset possible, legally permissible and financially feasible Ignores price distortions caused by special value or synergistic value Regards must be had to the Conceptual Framework set out in paragraphs of the IVS Framework 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 If a basis other that Market Value is appropriate comment is recommended where the other basis differs significantly 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 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 It is modified definition of Market Value John Faulkner FRICS P a g e 7

9 1.3.3 MR will vary significantly according to the assumed lease terms lease terms should reflect current practice 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 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 Defined in IVS Framework paragraph 36: The value of an asset to the owner or a prospective owner for individual investment or operational objectives May also be known as worth. 1.5 Fair Value 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: 41. Fair Value can take into account Special Value John Faulkner FRICS P a g e 8

10 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 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 must be discussed with the client before the report is delivered John Faulkner FRICS P a g e 9

11 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 John Faulkner FRICS P a g e 10

12 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 John Faulkner FRICS P a g e 11

13 (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 (1 st Edition, 2012) Page 11, Comparable Analysis Matrix 2 Market Street 84 Bridge Street 14 Market Street Agreed Rent 48,000 38,500 57, Bridge Street To be assessed Net Internal Area (m 2 ) Rent per m 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 Lower than No Lower than market) subject adjustment 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: AC: air-conditioned; CH: central heating; L: lift; RF: raised access floors. John Faulkner FRICS P a g e 12

14 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 will require all eligible properties to be improved to a specified minimum standard. John Faulkner FRICS P a g e 13

15 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. John Faulkner FRICS P a g e 14