RICS Valuation Standards 6th edition

Transcription

1 RICS Valuation Standards 6th edition Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 1 / Date: 18/9

2 Please note: references to the masculine include, where appropriate, the feminine. Published by the Royal Institution of Chartered Surveyors (RICS) under the RICS Books imprint Surveyor Court Westwood Business Park Coventry CV4 8JE UK Effective 1 January 2008 No responsibility for loss occasioned to any person acting or refraining from action as a result of the material included in this publication can be accepted by the author or RICS. ISBN Royal Institution of Chartered Surveyors (RICS) November Copyright in all or part of this publication rests with RICS, and save by prior consent of RICS, no part or parts shall be reproduced by any means electronic, mechanical, photocopying or otherwise, now known or to be devised. Typeset in Great Britain by Columns Design Ltd, Reading, Berkshire Printed in Great Britain by Cromwell Press, Trowbridge, Wiltshire Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 2 / Date: 18/9

3 Acknowledgements The RICS Appraisal and Valuation Manual was originally published as two separate titles: + Guidance Notes on the Valuation of Assets. First (1976), second (1981) and third (1990) editions published under the title, Statement of Asset Valuation Practice and Guidance Notes; and + Manual of Valuation Guidance Notes. First (1980), second (March 1981) and third (April 1992) editions. The RICS Appraisal and Valuation Manual was reprinted in 1993, 1996 (twice), 1998, 2000 and The RICS Appraisal and Valuation Standards first published in Nine amendments were published between March 2003 and April Extracts and definitions from the International Valuation Standards 8th edition are reproduced in this publication with the permission of the International Valuations Standards Committee (IVSC) who hold the copyright. No responsibility is accepted by the IVSC for the accuracy of information contained in the text as republished by RICS. The English version of the IVSC Standards as published by the IVSC from time-to-time is the only official version of the IVSC Standards. The full text of the official version may be obtained from the IVSC International Headquarters, 12 Great George Street, London SW1P 3AD, UK, Extracts from Financial Reporting Standard 15 (FRS 15) Tangible Fixed Assets are reproduced in this publication by kind permission of the Accounting Standards Board who hold the copyright. The copyright of the Takeover Code, reproduced in UK appendix 2.2 belongs to the Takeover Panel. The text has been reproduced with kind permission of the Takeover Panel. The copyright of the text of UKPS 2.6 belongs to the Financial Services Authority and is reproduced with their permission. (Use of FSA material does not indicate any endorsement by the FSA of this publication, or the material or views contained within it.) The copyright of the text of Appendix 4.3 belongs to the European Mortgage Federation and is reproduced with their permission. RICS would like to thank the Chartered Institute of Public Finance and Accountancy (CIPFA) for their help in revising Annexe A to UK appendix 1.5 Definitions and categories of assets agreed with the CIPFA. RICS VALUATION STANDARDS iii Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 1 / Date: 18/9

4 RICS would like to thanks the British Bankers Association for their help in revising UKPS 3 Valuations for loan facilities. RICS would like to thank the ODPM (now Communities and Local Government) for their help in revising UKGN 5 Local authority disposals at an under value. Published in association with: Changes of address Please note that changes of address pertaining to existing subscribers to the Red Book should be notified to the address below: Red Book Subscription Service RICS Books Surveyor Court Westwood Way Coventry CV4 8JE UK Tel: (+44) (0) Fax: (+44) (0) Or for local dialling: iv RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 2 / Date: 18/9

5 Contents Introduction 1 1. Purpose of these standards 1 2. International Valuation Standards 1 3. Enforcement of these standards 2 4. How these standards are arranged 2 5. Amendments and exposure drafts 3 6. Effective date 4 Glossary 5 Practice statements 11 PS 1 Compliance and ethical requirements 11 PS 1.1 Compliance with these standards 11 PS 1.2 Exceptions 12 PS 1.3 Departures 14 PS 1.4 Qualifications of the valuer 15 PS 1.5 Knowledge and skills 15 PS 1.6 Independence and objectivity 16 PS 1.7 Additional criteria for independence 17 Appendix 1.1 Confidentiality, threats to independence and objectivity, and conflicts of interest 18 PS 2 Agreement of terms of engagement 23 PS 2.1 Confirmation of terms of engagement 23 PS 2.2 Special assumptions 24 PS 2.3 Marketing constraint and forced sales 25 PS 2.4 Restricted information 26 PS 2.5 Revaluation without inspection 26 PS 2.6 Critical reviews 27 Appendix 2.1 Settling the terms of engagement 29 Appendix 2.2 Assumptions 34 Appendix 2.3 Special assumptions 37 PS 3 Basis of value 41 PS 3.1 Basis of value 41 PS 3.2 Market Value 42 PS 3.3 Market rent 46 RICS VALUATION STANDARDS v Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 3 / Date: 18/9

6 PS 3.4 Worth and investment value 47 PS 3.5 Fair value 48 PS 4 Applications 50 PS 4.1 Valuations for financial statements prepared under IFRS 50 PS 4.2 Valuations for secured lending 51 PS 4.3 Valuations for public sector assets for financial 52 reporting Appendix 4.1 International Valuation Application 1 (IVA 1) 53 Appendix 4.2 International Valuation Application 2 (IVA 2) 70 Appendix 4.3 European Mortgage Federation paper on mortgage lending value 78 PS 5 Investigations 81 PS 5.1 Inspections and investigations 81 PS 5.2 Verification of information 83 PS 6 Valuation reports 84 PS 6.1 Minimum content or valuation reports 84 PS 6.2 Description of a report 85 PS 6.3 Reporting the basis of value 86 PS 6.4 Special assumption 86 PS 6.5 Depreciated replacement cost in the private sector 86 PS 6.6 Depreciated replacement cost in the public sector 87 PS 6.7 Comparison of depreciated replacement cost valuations 88 and alternative MVs PS 6.8 Negative values 89 PS 6.9 Property in more than one state 89 PS 6.10 Incorporation of other valuations 90 PS 6.11 Preliminary valuation advice 90 PS 6.12 Publication statement 91 PS 6.13 Published references to departures and special 92 assumptions Appendix 6.1 Minimum contents of valuation reports 94 Appendix 6.2 Examples of published references to valuation reports 98 Appendix 6.3 Reporting valuations under IFRS 100 Guidance notes 103 GN 1 Trade related property valuations 103 GN 2 Plant & equipment 110 GN 3 Valuations of portfolios and groups of properties 115 vi RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 4 / Date: 18/9

7 GN 4 Mineral-bearing land and waste management 118 GN 5 Valuation uncertainty 122 UK practice statements 125 UKPS 1 Valuations for financial statements 125 UKPS 1.1 The bases of valuation 125 UKPS 1.2 Date of valuation 127 UKPS 1.3 Existing use value (EUV) 128 UKPS 1.4 Differences between EUV and MV 130 UKPS 1.5 EUV of adapted property 121 UKPS 1.6 Events after the balance sheet date 132 UKPS 1.7 Costs to be excluded 132 UKPS 1.8 Apportionments for depreciation 133 UKPS 1.9 Treatment of leasehold interests 134 UKPS 1.10 Mineral bearing land or waste disposal sites 135 UKPS 1.11 Plant & equipment 135 UKPS 1.12 Local authority asset valuations 137 UKPS 1.13 Valuations for registered social landlords 137 UKPS 1.14 Trading stock 139 UK appendix 1.1 Accounting concepts and terms used in FRS 15 and 141 SSAP19 UK appendix 1.2 Property categorisation for company accounts 144 UK appendix 1.3 Relationship with the auditor 149 UK appendix 1.4 Accounting for depreciation and associated 152 apportionments UK appendix 1.5 Valuations of local authority assets 160 UK appendix 1.6 Examples of published references to valuation reports 172 UKPS 2 Valuations for financial statements specific applications 174 UKPS 2.1 Valuation reports in prospectuses and shareholders 174 circulars to be issued by UK companies UKPS 2.2 Takeovers and mergers 175 UKPS 2.3 Collective investment schemes 176 UKPS 2.4 Unregulated property unit trusts 176 UKPS 2.5 Adequacy of financial resources of insurance 177 companies UKPS 2.6 Adequacy of financial resources for financial 177 institutions UK appendix 2.1 FSA listing rules 179 UK appendix 2.2 The Takeover Code 185 UK appendix 2.3 Collective investment scheme 189 RICS VALUATION STANDARDS vii Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 5 / Date: 18/9

8 UKPS 3 Valuations for loan facilities 193 UKPS 3.1 Commercial secured lending 193 UKPS 3.2 Residential property mortgages 194 UKPS 3.3 Projected Market Value (PMV) of residential property 195 UKPS 3.4 Secured lending valuations for registered social 196 landlords UKPS 3.5 Trustee mortgage valuations 196 UK appendix 3.1 Protocol for valuations and appraisal of land and 198 buildings for commercial secured lending UK appendix 3.2 RICS mortgage valuation specification 203 UK appendix 3.3 Registered social landlords housing stock for secured 219 lending purposes UK appendix 3.4 RICS Scotland advice on issuing terms of engagement 223 UKPS 4 Residential property valuations (other than for mortgage purposes) 224 UKPS 4.1 RICS Homebuyer Survey and Valuation (HSV) 224 UKPS 4.2 Repossession proceedings 226 UKPS 4.3 Individual leaseholds in DIYSO 227 UKPS 5 Regulated purpose valuations 228 UKPS 5.1 Regulated purpose valuations 228 UKPS 5.2 Rotation of personnel 228 UKPS 5.3 Exclusion of certain properties 229 UKPS 5.4 Disclosures 230 UK guidance notes 233 UKGN 1 Inspections and material considerations 233 UKGN 2 Shared ownership of residential property 238 UKGN 3 Valuations for capital gains tax, inheritance tax and 242 stamp duty land tax UKGN 4 Valuations for charities 249 UKGN 5 Local authority disposal of land for less than best consideration 254 Valuation Information Papers 259 Index 261 viii RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 6 / Date: 18/9

9 Introduction 1. Purpose of these standards 1.1 RICS has published valuation standards since 1974, which have colloquially become known as the Red Book. Initially they only applied to valuations incorporated in published accounts, but since the mid 1990s have applied to virtually all valuations. Theyhavebeen mandatory since The purpose of these standards is to ensure that valuations produced by members achieve high standards of integrity, clarity and objectivity, and are reported in accordance with recognised bases that are appropriate for the purpose. The standards define: + criteria used to establish whether members are appropriately qualified; + the steps necessary to deal with any actual or perceived threat to their independence and objectivity; + matters to be addressed when agreeing conditions of engagement; + bases of valuation, assumptions and material considerations that must be taken into account when preparing a valuation; + minimum reporting standards; + matters that should be disclosed where valuations may be relied upon by third parties. 1.3 These standards set out procedural rules and guidance for members in the conduct of most types of valuation instructions. Their purpose is to ensure that clients receive objective advice, delivered in a professional manner that is consistent with internationally recognised standards. The standards set a framework for best practice in the execution and delivery of valuations for different purposes but do not instruct members how to value, nor do they discuss valuation methodology or techniques. 1.4 This, the sixth edition, was published in 2007 to incorporate the new RICS Rules of Conduct which came into effect on 1 June There will be regular updating amendments in response to market developments, and changes in regulations and/or statute. 2. International Valuation Standards 2.1 The International Valuation Standards Committee (IVSC), publishes the International Valuation Standards (IVS) that set out internationally accepted valuation principles, procedures and definitions. RICS has adopted these standards. RICS VALUATION STANDARDS 1 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 1 / Date: 18/9

10 Introduction 2.2 The role of RICS Valuation Standards is to provide an effective regulatory framework, within the Rules of Conduct, so that users of valuation services can have confidence that a valuation provided by an RICS member is not only in accordance with internationally recognised standards but that there is an obligation placed on the individual valuer or firm to follow these standards, and an effective sanction in the case of a material breach. Because of the regulatory role of the RICS standards they are presented in a different way to IVS, but the principles, objectives and defined terms, are identical. 2.3 RICS also has specific requirements that, either, do not appear in IVS or that are more detailed or rigorous than the equivalent provision in IVS. This means that there are some differences in the detailed requirements of IVS and these standards, particularly in relation to the terms of engagement and the valuer s investigations. However, since these differences exceed the requirements of IVS, RICS considers that a valuation that is compliant with these standards will be compliant with IVS. Non-RICS valuation standards and national legal requirements 2.4 Members may be required by law or requested by clients to provide a valuation in accordance with another body s standards or national legal requirements. These may include: + national legal requirements set by statutory authorities governing valuation practice; or + valuation standards set by another body that apply to valuations undertaken in a particular state (such as the Uniform Standards of Professional Appraisal Practice in the USA). Whilst PS 1.1 requires compliance with RICS standards members may accept such an instruction. In such cases the requirements that the valuer is instructed/required to follow take precedence and any conflicts with specific rules contained within these standards should be recognised as authorised departures (see PS 1.3). However, in doing so members shall still ensure that they do not fall below the requirements of these standards. 3. Enforcement of these standards 3.1 Compliance with these valuation standards is mandatory for members of RICS. 3.2 RICS standards are to be applied by members in whatever state they operate. RICS national associations may also produce or approve supplemental standards and guidance designed to support valuation practice in their specific state (see PS 1.1.6). 4. How these standards are arranged 4.1 The standards, preceded by an introduction and the glossary, are arranged in the following categories: 2 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 2 / Date: 18/9

11 Introduction Practice statements. These are grouped in the following categories: PS1 Compliance and ethical requirements; PS2 Agreementofterms of engagement; PS3 Bases of value; PS 4 Applications; PS5 Investigations; PS 6 Valuation reports. Guidance notes. National practice statements. National guidance notes. 4.2 Practice statements are denoted by the use of a PS reference number (for example PS 1.1). National practice statements are denoted by the use of a PS reference number prefixed by letters identifying the Association (for example UKPS 1.1, or IRLPS 1.1). 4.3 Each practice statement has the following structure + individual statements comprising a short statement or rule followed, as appropriate, by a commentary giving additional information to assist in their interpretation and application; + appendices containing supporting information referred to in the commentaries. Appendices contain either material amplifying the information contained in the practice statement or commentary, or background material that will help in understanding the context of the specific practice statement or standards that it supports. 4.4 The guidance notes explain how the valuation standards should be applied to certain types of property, or in particular situations, by highlighting issues that are peculiar to the subject of the guidance notes and discussing these in the context of the valuation standards. 4.5 Where a standard uses a defined term it will be shown in italic font. Where quotes from other publications are included they will appear as in this example: 4. Members shall carry out their professional work with due skill, care, and diligence and with proper regard for the technical standards expected of them. RICS Rules of Conduct Members 2007, para Amendments and exposure drafts 5.1 The content of these standards is under regular review, and amendments and additions will be issued from time to time as RICS VALUATION STANDARDS 3 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 3 / Date: 18/9

12 Introduction required. Amendments and additions will be introduced as either stand alone documents or incorporated into a reprint of the standards. 5.2 Where amendments may have a substantial effect, for instance, the rewriting of an appendix or a guidance note, they will be published as an exposure draft. An exposure draft will contain the text approved for publication by the RICS Valuation Standards Board. 5.3 The purpose of an exposure draft is to enable members to comment on the approved text, and possibly identify flaws, before it achieves mandatory status. The text of an exposure draft will, after consideration of any comments made, become mandatory on the effective date of the next update following its publication. 5.4 The RICS Valuation Standards Board would also be pleased to receive suggestions for inclusion of additional material or requests for clarification of the text. 6. Effective date 6.1 The standards in this edition came into effect on 1 January 2008 and apply to allvaluation reports issued on or after that date. Where future amendments are made the relevant effective date will be shown immediately following each practice statement, appendix or guidance note. 6.2 Where members have the paper version of the standards they are recommended to retain a copy of each reprint, together with any intermediate amendments, for future reference. 6.3 Copies of the text extant at any specific date may be obtained from the RICS Library. 4 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 4 / Date: 18/9

13 Glossary of terms used in the valuation standards This table defines various terms used in these standards. Where a term is used as defined it will be identified in the text with an italic font. National Association Valuation Standards may have additional terms and these will be defined in the context of the specific National Association practice statement. appraisal assets assumption basis of value date of report date of valuation departure depreciated replacement cost directors external valuer See valuation. Real and personal property. A supposition taken to be true. It involves facts, conditions or situations affecting the subject of, or approach to, a valuation that, by agreement, need not be verified by the member as part of the valuation process. Typically, assumptions are made where specific investigation by the valuer is not required in order to prove that something is true. A statement of the fundamental terms upon which a hypothetical exchange is assumed to take place. The date on which the valuer signs the report. The date agreed with the client as being the date on which the value is assessed. This date may be before, or the same as, the date of report but it cannot be after that date. Special circumstances where the member considers that it is inappropriate, or impractical, for the valuation to be made wholly in accord with a practice statement in these standards. The current cost of reproduction or replacement of an asset less deductions for physical deterioration and all relevant forms of obsolescence and optimisation. The individual(s) responsible for the management of a company, firm or entity. This also includes, where the context so admits, the corresponding officers, charged with similar duties (for example, trustees) of an undertaking, enterprise or other organisation, which does not have directors. A valuer who, together with any associates, has no material links with the client, an agent acting on behalf of the client, or the subject of the assignment. RICS VALUATION STANDARDS 5 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 1 / Date: 18/9

14 Glossary of terms used in the valuation standards fair value financial statements firm guidance notes inspection internal valuer International Financial Reporting Standards (IFRS) International Valuation Application (IVA) The amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm s length transaction. (Fair value is a measurement basis required or permitted under IFRS, where its application is subject to specific requirements that are discussed in PS 4.1.Fair value is also used in other situations, for example where the valuer is required to determine a price that is fair between two specified parties, not necessarily the price that could be obtained in a wider market.) Written statements of the financial position of a person or a corporate entity, and formal financial records of prescribed content and form. These are published to provide information to a wide variety of unspecified third-party users. Financial statements carry a measure of public accountability that is developed within a regulatory framework of accounting standards and the law. The firm or organisation for which the member works, or through which the member trades. Guidance notes provide further material and information on good valuation practice appropriate for particular types of circumstances. Where procedures are recommended for specific professional tasks they are intended to embody best practice, and are procedures which, in the opinion of RICS and IRRV, members should normally adopt in order to demonstrate the required level of professional competence. A visit to a property to examine it and obtain relevant information, in order to express a professional opinion of its value. Unless otherwise agreed with the client the term assumes that the member will inspect the property both internally and externally, wherever access is possible. (See also survey). A valuer who is in the employ of either the enterprise that owns the assets, or the accounting firm responsible for preparing the enterprise s financial records and/or reports. An internal valuer is generally capable of meeting all the requirements of independence and professional objectivity required under PS 1.4 to PS 1.6 but, for reasons of public presentation and regulation, may not always be able to satisfy the additional criteria for independence under PS 1.7 in certain types of assignments. Standards set by the International Accounting Standards Board with the objective of achieving uniformity in accounting principles. The standards are developed within a conceptual framework so that elements of financial statements are identified and treated in a manner that is universally applicable. These Standards were previously known as International Accounting Standards (IAS). The application of the International Valuation Standards defined by the IVSC to specific purposes. 6 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 2 / Date: 18/9

15 Glossary of terms used in the valuation standards investment value, or worth machinery & equipment market rent (MR) Market Value (MV) member method of valuation mortgage lending value national practice statement open market value (OMV) plant & equipment portfolio practice statement (PS) The value of a property to a particular investor, or a class of investors, for identified investment objectives. This subjective concept relates specific property to a specific investor, group of investors, or entity with identifiable investment or operational objectives and/or criteria. See plant & equipment. The estimated amount for which a property, or space within a property, should lease on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms, in an arm s length transaction, after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. A Fellow, Professional Member, Technical Member or Honorary Member of the Royal Institution of Chartered Surveyors (RICS) or a Member of the Institute of Revenues Rating and Valuation (IRRV). A procedure or technique used to arrive at the value described by a basis of value. Mortgage lending value shall mean the value of the property as determined by a valuer making a prudent assessment of the future marketability of the property by taking into account the long-term sustainable aspects of the property, the normal and local market conditions, as well as the current use and alternative possible uses of the property. Speculative elements should not be taken into account in the assessment of mortgage lending value. Mortgage lending value should be documented in a clear and transparent way. A statement which applies in a specified state and that may amend the application of a practice statement. A basis of value supported by the previous editions of the Red Book. Its application provides the same result as Market Value. Tangible assets, other than land and buildings, that: (a) are held by an entity for use in the production or supply of goods or services, for rental by others, or for administrative purposes; and (b) are expected to be used over a period of time. A collection or aggregation of properties held by a single entity. A statement of the highest professional standards that apply mandatorily to members when providing written valuations of property in all states, for all purposes to which these standards apply. RICS VALUATION STANDARDS 7 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 3 / Date: 18/9

16 Glossary of terms used in the valuation standards property purchase report report special assumption special purchaser special value specialised property state survey synergistic value terms of engagement third party trade related property All rights and interests in land (with and without buildings), plant & equipment and wasting assets unless the context clearly implies a more restrictive definition. The term applies also to other assets held as trading stock or work in progress, when the valuation is for the purposes of inclusion of a figure(s) in a financial statement. Property will include properties in the appropriate context. A report prepared to advise a client on the suitability of property for purchase that may or may not include a valuation. The written means of providing the client with the valuation, appraisal or assessment of worth. An assumption that either: + requires the valuation to be based on facts that differ materially from those that exist at the date of valuation; or + is one that a prospective purchaser (excluding a purchaser with a special interest) could not reasonably be expected to make at the date of valuation, having regard to prevailing market circumstances. A purchaser to whom a particular asset has special value because of advantages arising from its ownership that would not be available to general purchasers in the market. An amount above the Market Value that reflects particular attributes of an asset that are only of value to a special purchaser. Property that is rarely if ever sold in the market, except by way of a sale of the business or entity of which it is part, due to uniqueness arising from its specialised nature and design, its configuration, size, location, or otherwise. Examples include refineries, power stations, docks, specialised manufacturing facilities, public facilities, churches, museums. An organised political community under one government. For the purpose of these standards the term state includes country. An inspection of a property or land for the purpose of recording specific information. Surveys may be required for a variety of purposes, such as to assess structural condition, dimensions, soil condition, quality, and so on. An additional element of 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. (May also be known as marriage value.) Written confirmation of the conditions that the member either proposes, or that the member and client have agreed shall apply to the undertaking and reporting of the valuation, appraisal or opinion of worth. Any party, other than the client, who may have an interest in the valuation or its outcome. Property with trading potential, such as hotels, fuel stations, restaurants, or the like, the Market Value of which may include assets other than land and buildings alone. These properties are commonly sold in the market as operating assets and with regard to their trading potential. Also called property with trading potential. 8 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 4 / Date: 18/9

17 Glossary of terms used in the valuation standards trading stock valuation worth written/in writing Stock held for sale in the ordinary course of business. For example, in relation to property, land and buildings held for sale by builders and development companies. A member s opinion of the value of a specified interest or interests in a property, at the date of valuation, given in writing. Unless limitations are agreed in the terms of engagement this will be provided after an inspection, and any further investigations and enquiries that are appropriate, having regard to the nature of the property and the purpose of the valuation. See investment value. Written verification, including material transmitted by electronic means. RICS VALUATION STANDARDS 9 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 5 / Date: 18/9

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19 Practice statements PS 1 Compliance and ethical requirements Practice statements PS 1.1 Compliance with these standards All members and firms worldwide are required to comply with these valuation standards when undertaking any instruction that requires a written valuation, unless that instruction is one that is listed in PS 1.2 of these standards or where a specific departure is made under PS 1.3. Commentary Status of these standards 1. All RICS members undertaking valuations are expected to comply with these valuation standards, in addition to client requirements or any legal requirements, subject to the limited exceptions referred to in PS 1.2. These standards have been approved by the RICS practice board as technical standards which members and firms shall follow. 2. The Rules of Conduct (Members) states: 4 Members shall carry out their professional work with due skill, care, diligence and expedition and with proper regard for the technical and professional standards expected of them. RICS Rules of Conduct Members Although the Rules of Conduct apply to members and firms these standards have been written as they apply to the member. Where it is necessary to consider the application of a standard to a firm it is to be interpreted accordingly. 4. The commentary to each practice statement should be considered to have mandatory status when it requires the member to take a specified action. 5. The material in the appendices is mandatory where this is indicated in the practice statement to which it relates but otherwise it is advisory. RICS national practice statements 6. Practice statements published or adopted by an RICS national association have mandatory status in the states to which they apply. RICS national practice statements are intended to expand or amend these valuation standards to meet local statutory or regulatory RICS VALUATION STANDARDS 11 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 1 / Date: 18/9

20 PS 1 Compliance and ethical requirements Practice statements requirements. In the event of conflict between these standards, the national association practice statements take precedence but may not be interpreted as imposing a lesser standard than the global standards. 7. Where the valuation involves assets in two or more states with different valuation standards, the member must agree with the client the standards that shall apply to the instruction. Compliance with other valuation standards 8. RICS recognises that the member may be requested to provide a report that complies with valuation standards other than the RICS Valuation Standards. Before treating such a request as a departure (PS 1.3) the member should establish if the RICS Valuation Standards impose the same, or higher, standard and if so should include the following statement in the terms of engagement and the report: + that the valuation will comply with the RICS Valuation Standards (see PS 2.1 (p) and PS 6.1 (p)); and + that the RICS Valuation Standards impose the same or higher standard as the named standard and will therefore be compliant with those standards; and + that any additional requirement(s) within the named standard will be complied with. Guidance notes 9. The guidance notes do not carry the same mandatory status as practice statements. They describe the standard of work that is expected of a reasonable, competent valuer experienced in the subject to which the guidance notes relate. 10. It is recognised that there are situations and circumstances where valuers, exercising their proper professional skill and judgement, will not necessarily follow the guidance notes. However, if the guidance is not followed, and the members actions are called into question, they will be asked to justify the steps they took, and this may be taken into account in any disciplinary action. Monitoring compliance with these valuation standards 11. As a self-regulatory body, RICS has the right under its Bye-Laws to seek information from members, or firms. This right extends to monitoring compliance with these valuation standards. 12. The procedures under which such powers will be exercised in relation to valuations may be found on the RICS web site at PS 1.2 Exceptions These Standards do not have to be applied to valuations provided for: + advice during the course of litigation; + arbitrations and similar disputes; + advice in preparation for or during negotiations; 12 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 2 / Date: 18/9

21 PS 1 Compliance and ethical requirements Commentary + internal valuations; + certain agency or brokerage work; + antiques and fine art. 1. For certain types of valuation advice the mandatory application of these standards would be impractical. For example, the valuation may have to be provided in accordance with procedures set out in statutory regulations, or a contract or for use in litigation or negotiation. Specific exemptions from these standards are set out in the following paragraphs. However, the member will remain subject to the Rules of Conduct and, even though compliance with these standards is not mandatory for the work listed, RICS considers it good practice to adopt them to the extent that this does not conflict with terms of reference or the purpose of the instruction. Advice during the course of litigation 2. Valuations prepared in anticipation of giving evidence as an expert witness before a court, tribunal or committee in connection with litigation related to matters in which property value is in dispute. Practice statements 3. However, adopting the principles and definitions in any standards that are relevant and practical may give evidence credibility and help withstand cross-examination. Members are referred to the RICS practice statement Surveyors Acting as Expert Witnesses (available on 4. This exclusion does not apply where the value is not yet in dispute, for example, where the valuation is required as part of the process of settling a wider matter, such as a matrimonial separation. Awards and determinations 5. The decisions and reports of arbitrators, independent experts and mediators appointed with a view to the settlement of disputes. 6. These matters are excluded because the terms of appointment usually contain statutory and or contractual requirements which govern the terms of reference. However, where a member acts as an independent expert it is recommended that the principles of these standards are followed in so far as they do not conflict with the terms of appointment. 7. Members appointed in respect of rental disputes on commercial property are referred to the RICS guidance note Surveyors Acting as Arbitrators and Independent Experts in Commercial Property Rent Reviews (available on During negotiations 8. Valuation advice on the probable outcome of current or impending negotiations, or requests for figures to be quoted in connection with such negotiations. If the negotiations relate to a matter that may be RICS VALUATION STANDARDS 13 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 3 / Date: 18/9

22 PS 1 Compliance and ethical requirements Practice statements subject to determination by a third-party tribunal or court, members are alerted to the comments in the paragraph on advice during the course of litigation Internal valuations 9. Valuations by internal valuers, solely for internal use by their organisation, where no part of the report, including the valuation figure, is to be seen by, or communicated to, any third party.however the valuer is still bound by the Rules of Conduct and the principles of these valuation standards should be adopted wherever practicable. Certain agency or brokerage work 10. 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. Antiques and fine art 11. The separate valuation of antiques and fine art. This exclusion does not apply to the valuation of antiques and fine art in any of the following circumstances: + where they are part of the interest in land and buildings that is the subject of the valuation; + where they are part of an operational entity that is to be valued with regard to trading potential; + where they come within the definition of plant & equipment. PS 1.3 Departures A clear statement in writing of any departure from a specified practice statement, together with details of, and reasons for it, and confirmation of the client s agreement, must be given in the report. Departure is not permitted from PS 1.1 or 1.3 under any circumstances. Commentary 1. Where the valuer considers that there are special circumstances which make it inappropriate or impractical for the valuation to be made wholly in accordance with a specific practice statement those circumstances must be confirmed and agreed with the client as a specific departure before reporting. 2. The use of a basis of valuation not recognised in these standards will constitute a departure which must be clearly set out in the terms of engagement and the report.the report must also include an indication of the difference between the basis used and the nearest equivalent recognised basis. 3. A member who makes a departure may be required to justify the reasons for this to RICS, or IRRV. If RICS, or IRRV, is not satisfied 14 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 4 / Date: 18/9

23 PS 1 Compliance and ethical requirements PS 1.4 PS 1.5 with the reason(s) advanced and/or the manner in which the departure is declared or evidenced, they are entitled to take disciplinary measures. Qualifications of the valuer Each valuation to which these standards apply must be prepared by, or under the supervision of, an appropriately qualified member who accepts responsibility for it. Commentary 1. The test of whether an individual is appropriately qualified to undertake a valuation combines: + academic/professional qualifications, demonstrating technical competence; + membership of a professional body, demonstrating a commitment to ethical standards; + practical experience as a valuer; and + compliance with any state legal regulations governing the right to practise valuation. 2. Members of RICS have to achieve and maintain defined standards of training and competence. However, as members are active across a wide range of specialisms and markets, membership of RICS or IRRV alone does not imply that an individual has the necessary practical experience of valuation in a particular sector or market. 3. In some states valuers are required to be certified or licensed to undertake certain valuations. This gives a clear indication whether the member is appropriately qualified. National association practice statements may also stipulate minimum requirements. Knowledge and skills The member must have sufficient current local, national and international (as appropriate) knowledge of the particular market, and the skills and understanding necessary to undertake the valuation competently. Commentary 1. If the valuer does not have the required level of expertise to deal with some aspect of the commission properly then he or she should decide what assistance is needed, assembling and interpreting relevant information from other professionals, such as specialist valuers, environmental surveyors, accountants and lawyers. 2. The personal qualification requirements may be met in aggregate by more than one valuer within a firm provided that each meets all the other requirements of this practice statement. 3. 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. RICS VALUATION STANDARDS 15 Practice statements Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 5 / Date: 18/9

24 PS 1 Compliance and ethical requirements Practice statements PS 1.6 Independence and objectivity Members undertaking valuations must act with independence, integrity and objectivity. Commentary 1. The Rules of Conduct state that a member shall at all times act with integrity and avoid any actions or situations which are inconsistent with their professional obligation. 2. Members are required to exercise independence and objectivity in all instructions and consider the possible impact of any potential conflicts of interest. Compliance with this practice statement, and PS 1.7 if appropriate, will mean that the member is able to confirm that he or she can be said to be acting as an independent valuer. 3. Guidance on confidentiality, identifying threats to independence and objectivity, and identifying and managing conflicts of interest specifically related to valuations is in appendix 1.1. If a valuation instruction is confirmed after a member discloses a potential conflict, the disclosure must be referred to in the terms of engagement, seeps In making any disclosures of past or current involvement, members must also have regard to the requirement to maintain client confidentiality. Effective disclosure can usually be made without revealing confidential information, but if this is not possible then the instruction must be declined. 5. A valuer may be asked to value for both parties to a proposed transaction. Careful consideration must be given as to whether it is desirable to accept such an instruction. The possibility of a conflict of interest arising in the future because of divergence of the clients respective interests should be considered. If the valuer concludes that it is not inappropriate or unwise to act for both parties, the written consent of both parties should be obtained before accepting the commission and reference to that consent must be included in the report. 6. A threat to a valuer s objectivity can arise where the outcome of a valuation is discussed in advance of its completion with either the client or another party with an interest in the valuation. Whilst such discussions are not improper, and indeed may be of value to both the member and the client, valuers must be alert to the potential influence that such discussions may have on their fundamental duty to provide an objective opinion. Where such conversations take place, the valuer must make a written record of any meetings or discussions and whenever the valuer decides to alter a provisional valuation as a result, the grounds for doing so must be carefully noted. See also PS RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 6 / Date: 18/9

25 PS 1 Compliance and ethical requirements PS 1.7 Additional criteria for independence Where the valuation is for a purpose that sets specific criteria for independence, members must establish the criteria required and confirm that they meet them in the terms of engagement and the report. Commentary 1. For some purposes, statutes, regulations, the rules of regulatory bodies, or client s special requirements, may set out specific criteria that the valuer must meet in order to achieve a defined state of independence. Frequently the requirements define a valuer meeting the required criteria using terms such as independent expert, expert valuer, independent valuer, standing independent valuer or appropriate valuer. It is important that the valuer confirms compliance with these criteria both when confirming acceptance of the instruction and in the report so that the client, and any third party relying on the report, can be assured that the additional criteria have been satisfied. 2. Although the valuer may meet the stipulated criteria for the particular appointment, the general requirements in PS 1.6 still apply. It is still necessary for the valuer to identify any threats to their independence and objectivity and take the appropriate action before accepting the instruction. Practice statements RICS VALUATION STANDARDS 17 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 7 / Date: 18/9

26 Appendix 1.1 Confidentiality, threats to independence and objectivity and conflicts of interest Practice statements Appendix 1.1 Confidentiality, threats to independence and objectivity and conflicts of interest 1. Introduction 1.1 This appendix provides additional guidance on the application of the Rules of Conduct specifically related to valuations, on confidentiality, threats to independence and objectivity and managing conflicts of interest that could threaten or compromise a valuer s integrity and objectivity. 2. Duty of confidentiality 2.1 There is a general duty to treat information relating to a client as confidential where that information becomes known as a result of the professional relationship, and is not in the public domain. 2.2 The risk of disclosure of confidential information is a material factor that members should consider in assessing whether or not they can act where there is a potential conflict. It is also a factor that should be borne in mind should it be necessary to disclose some details of a member s involvement with the subject of the valuation. If an adequate disclosure of the involvement with the subject of the valuation cannot be made without breaching the duty of confidentiality, then the instruction should be declined. 2.3 The possession of confidential information may create an irresolvable conflict where passing on that information would be a breach of the original duty of confidentiality, but failing to pass on materially relevant information to a subsequent client, or failing to use it to that subsequent client s advantage, might lead to a claim of negligence or breach of contract. 2.4 The duty of confidentiality is not confined to clients where there is a current fee-earning relationship, but also to previous clients and even potential clients. The duty to a client is continuous and ongoing. Over time, the potential relevance of information, and the potential for a conflict arising, will decrease, but there is no fixed period which can be used to determine whether the duty of confidentiality still creates a conflict with the general duty in a subsequent instruction. The nature and extent of information held will be a key determinant of whether it is possible to act for another client, but the nature of the original job, the time which has elapsed since doing it and the existence of any retainers still held from the original client, will all be of relevance. 18 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 8 / Date: 18/9

27 Appendix 1.1 Confidentiality, threats to independence and objectivity and conflicts of interest 2.5 For instance, if a member,orfirm, is asked by Company A to advise on a possible takeover of Company B, a careful check should be made on whether work has been carried out previously for Company B. If it is decided that the nature or timing of any past work for Company B allows the acceptance of the new instruction, then a careful file note should be kept to record the reason for the decision. If, however, it is decided that past work for Company B means there is a conflict of interest then the new instruction (from Company A) may well have to be declined without disclosing the reasons for that decision. Practice statements 2.6 The duty of confidentiality also extends to any references to transactions in reports where confidentiality agreements may apply. 3. Threats to independence and objectivity 3.1 It is not possible to provide a definitive list of situations where a threat to a valuer s independence or objectivity may arise. However, the following are examples of where it will usually be necessary for the valuer to either make an appropriate disclosure, or where it is considered that any conflict that might arise could not be resolved or managed in a satisfactory way, to decline to act: + acting for the buyer and the seller of a property in the same transaction; + acting for two or more parties competing for an opportunity; + valuing for a lender where advice is also being provided to the borrower; + valuing a property previously valued for another client; + undertaking a valuation for third-party consumption where the member s firm has other fee-earning relationships with the client; + valuing both parties interests in a leasehold transaction. 3.2 The extent to which any of the above examples will compromise the member s overriding obligation to act with independence and objectivity will depend upon the circumstances of each case, for example the purpose of the valuation, the client s objectives, and the practicality of managing conflicts through either disclosure or the operation of chinese walls. The interest of any third parties in the valuation, and the reliance they may place on it, will also be a relevant consideration. If valuers doubt their ability to avoid or manage any threat to their independence, they should decline the instruction. 4. Managing a conflict of interest 4.1 Members, and their firms, have a duty to identify any actual or potential conflict of interest in the course of their business and need to be satisfied that they, or their firm, are truly in a position to manage the potential conflict in the future, and this can normally be done in one of two ways: RICS VALUATION STANDARDS 19 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 9 / Date: 18/9

28 Appendix 1.1 Confidentiality, threats to independence and objectivity and conflicts of interest Practice statements 1 if it arises because of the member s own interest in the property concerned, by proper disclosure of this to interested parties; or 2 if it arises because of loyalty to different clients, by creating a chinese wall between those acting for the respective clients. 4.2 Fundamentally, one of three courses can be followed: 1 it is established that an irresolvable conflict exists and instructions would be declined; 2 a potential conflict is disclosed in writing to the client or clients, agreement sought and obtained as to how it will be managed, and that agreement is confirmed in writing; or 3 where a conflict or potential conflict arises from former clients, consideration should be given to informing the former clients (in writing) of the current circumstances, and asking if they have any objection to the member, or firm, acting. 4.3 In all cases, however, it remains the responsibility of the member, or firm, to determine if there is an irresolvable conflict or not. 4.4 Where a conflict, or potential conflict, is identified, consideration has to be given as to whether or not to accept the instruction. There is no stipulation that the member cannot accept the instruction under any given set of circumstances as it is recognised that in many cases a conflict or potential conflict is either of no concern or relevance to a client, or can be effectively managed. 4.5 With regard to taking the action as noted in paragraph of this appendix it will be necessary to obtain the client s agreement to the proposals for managing the conflict by disclosing, subject to the advice in paragraph 2 of this appendix, the possibility and nature of the conflict, the circumstances surrounding it and any other relevant facts. 4.6 In choosing to explain and seek agreement to the proposals for managing the conflict, the member must consider the standing, or nature, of the client or prospective client. A large corporate client will find it easier to give an informed consent than a small business or an individual who rarely employs professionals. If the member has reason to believe that a prospective client probably does not have sufficient awareness of the issues to make an informed decision on the implications of any potential conflict, or the member s proposals for its management, the member should either decline the instruction or advise the prospective client to take advice from another professional, for example a lawyer or accountant, about the situation. 5. Third parties 5.1 Where a duty of care is owed to a third party, the member must disclose promptly and in writing any interest that they, or their firm, 20 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 10 / Date: 18/9

29 Appendix 1.1 Confidentiality, threats to independence and objectivity and conflicts of interest has from their appointment that goes beyond a normal fee or commission. Many valuations are undertaken that are relied upon by third parties, and if a member, or their firm, has other significant fee earning involvement with the client or the property this may need to be disclosed to the third party or parties. In cases where the third party or parties are identifiable at the outset then the requirement that the disclosure be made promptly means that this would need to be made before the valuation was undertaken, thus giving the third party the opportunity to object to the appointment if they felt that the member s independence and objectivity was compromised. Practice statements 5.2 However, in many cases the third parties will be a class of individuals, for example, the shareholders of a company. Disclosure at the outset to all interested third parties would clearly be impossible or impractical. In such cases the earliest practical opportunity for disclosure will be in the report or any published reference to it. A greater onus thus lies on the member to consider before accepting the instruction whether those third parties who will rely on the valuation will accept that any involvement that will need to be disclosed does not unduly compromise the member s objectivity and independence. 5.3 Valuations in the public domain, or which will be relied on by third parties, are frequently subject to statute or regulation, and there are often specific stipulations that a valuer must meet in order to be deemed suitable to provide a truly objective and independent view. For certain purposes these standards may also impose specific restrictions or conditions on valuers providing valuation advice where they have had an involvement with either the property, or a party with an interest in it. However, there are no specific criteria for most valuations, and the onus is on members to ensure that they are aware of potential conflicts and other threats to their independence and objectivity. Chinese walls 5.4 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 RICS VALUATION STANDARDS 21 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 11 / Date: 18/9

30 Appendix 1.1 Confidentiality, threats to independence and objectivity and conflicts of interest Practice statements 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. 5.5 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 therefore be more difficult, often impossible, for smaller firms or offices to operate them. 22 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 12 / Date: 18/9

31 PS 2 Agreement of terms of engagement PS 2 Agreement of terms of engagement PS 2.1 Confirmation of terms of engagement The member must always confirm to the client in writing, before any report is issued, the terms on which the valuation will be undertaken. As a minimum the terms must include the following: (a) identification of the client; (b) the purpose of the valuation; (c) the subject of the valuation; (d) the interest to be valued; (e) the type of property and how it is used, or classified, by the client; (f) the basis, or bases, of value; (g) the date of valuation; (h) disclosure of any material involvement, or a statement that there has not been any previous material involvement; (i) if required, a statement of the status of the valuer; (j) where appropriate, the currency to be adopted; (k) any assumptions, special assumptions, reservations, any special instructions or departures; (l) the extent of the member s investigations; (m) the nature and source of information to be relied on by the member; (n) any consent to, or restrictions on, publication; (o) any limits or exclusion of liability to parties other than the client; (p) confirmation that the valuation will be undertaken in accordance with these standards; (q) the basis on which the fee will be calculated; (r) the member s, or firm s, complaints handling procedure, with a copy available on request; (s) A statement that the valuation may be subject to monitoring under the institution s conduct and disciplinary regulations. Practice statements Commentary 1. Further guidance on the list of minimum terms is provided in appendix Normally the terms of engagement will be settled between the client and the valuer when instructions are first received and accepted (the RICS VALUATION STANDARDS 23 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 13 / Date: 18/9

32 PS 2 Agreement of terms of engagement Practice statements initial confirmation of instructions). However, it is recognised that a valuation commission may range from a single property to a substantial portfolio, thustheextenttowhichalltheminimum terms of engagement can be confirmed in the initial confirmation could also vary. 3. It is fundamental that by the time the valuation is concluded, but prior to the issue of the report, all the matters have been fully brought to the client s attention and appropriately 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. 4. Firms may have a standard form of terms of engagement, or standing terms of engagement in place, which include several of the minimum terms required by this statement. The valuer may need to amend such a form to refer to those matters which will be clarified at a later date. 5. The member will need to discuss and agree the extent of the investigations and assumptions that are appropriate to the circumstances and purpose of the valuation and ensure that any assumptions or special assumptions that will be included in the report are recorded in the terms of engagement. The member should make sufficient investigations to fully understand the subject of the assignment. 6. As disputes may arise many years after a valuation has been completed it is important to ensure that the agreement between the parties is contained in, or evidenced by, comprehensive documentation. 7. Guidance on the assumptions that are applicable to most valuations is contained in appendix 2.2. PS 2.2 Special assumptions Where special assumptions are necessary in order to adequately provide the client with the valuation(s) required, these must be agreed and confirmed in writing to the client before the report is issued. Special assumptions may only be made if they can reasonably be regarded as realistic, relevant and valid, in connection with the particular circumstances of the valuation. Commentary 1. In order that the member and the client both understand the exact nature of an agreed special assumption, the member must ensure that it is confirmed in writing to the client before the report is issued. 2. The member may include in the report some comment, or assessment, of the likelihood of the special assumption being fulfilled. For example, a special assumption that permission had been granted to develop land may have to reflect the impact on value of any conditions that might be imposed. 3. If a client requests a valuation on the basis of a special assumption that the member considers unrealistic, the instruction should be declined. 24 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 14 / Date: 18/9

33 PS 2 Agreement of terms of engagement PS Guidance on the use of special assumptions can be found in appendix 2.3. Marketing constraints and forced sales Wherever the member, or client, identifies that a valuation may need to reflect an actual or anticipated marketing constraint, details of that constraint must be agreed and set out in the terms of engagement. The term forced sale value must not be used. Commentary 1. If a property cannot be freely or adequately presented to the market, the price is likely to be adversely affected. Before accepting instructions to advise on the likely effect of a constraint, the member should ascertain whether this arises from an inherent feature of the property or interest being valued, or from the particular circumstances of the client. 2. If an inherent constraint is identified, and exists at the date of valuation, it is normally possible to assess its impact on value. The constraint should be identified in the terms of engagement and it should be made clear that the valuation will be provided on this basis. It may also be appropriate to provide an alternative valuation on the special assumption that the constraint did not exist at the valuation date, in order to demonstrate its impact. Practice statements 3. Greater care is needed if an inherent constraint does not exist at the date of valuation, but is a foreseeable consequence of a particular event or sequence of events. Alternatively, the client may request a valuation to be on the basis of a specified marketing restriction. In such cases the valuation would be provided on the special assumption that the constraint had arisen at the valuation date. The precise nature of the constraint, or restriction, must be included in the terms of engagement. It may also be appropriate to provide a valuation without the special assumption, in order to demonstrate the impact that the constraint would have if it arose. 4. Forced sales arise where there is pressure on a particular vendor to sell at a specific time, for example, because of the need to raise money or extinguish a liability by a given date. The fact that a sale is forced means that the vendor is subject to external legal or commercial factors, and therefore the time constraint is not merely a preference of the vendor. The nature of these external factors and the consequences of failing to conclude a sale are just as important in determining the price that can be achieved as the length of time available. While a valuer can assist a vendor in determining a price which should be accepted in forced sale circumstances this is a commercial judgement and is a reflection of the worth to that particular vendor. Any relationship between the price achievable on a forced sale and the Market Value is coincidental; it is not a valuation that can be RICS VALUATION STANDARDS 25 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 15 / Date: 18/9

34 PS 2 Agreement of terms of engagement Practice statements determined in advance. Consequently, although advice may be given on the likely realisation in forced sale circumstances, the term forced sale value should not be used. 5. A special assumption that simply refers to a time limit for disposal, without stating the reasons for that limit, would not be a reasonable assumption to make. Without a clear understanding of the reasons for the constraint, the valuer would be unable to determine the impact that it may have on marketability, sale negotiations and the price achievable, and would be unable to provide meaningful advice. Further guidance on special assumptions and forced sale circumstances is provided in appendix 2.3. PS 2.4 Restricted information Where a member is requested to undertake a valuation on the basis of restricted information the nature of the restriction must be agreed, and the possible valuation implications of the restriction confirmed in writing to the client, before the valuation is reported. Commentary 1. A client may require a restricted service, for example, a short timescale for reporting may make it impossible to establish facts that would normally be verified by inspection or by making normal enquiries or a valuation based on an automated valuation model (AVM). 2. It is accepted that a client may sometimes require this level of service, but it is the duty of the member to discuss the requirements and needs of the client prior to reporting. Such instructions are often referred to as drive-by, desk-top or pavement valuations. 3. The member should consider if the restriction is reasonable, with regard to the purpose for which the valuation is required. The member may consider accepting the instruction subject to certain conditions, for example that the valuation is not to be published or disclosed to third parties. 4. If the member considers that it is not possible to provide a valuation, even on a restricted basis, the instruction should be declined. 5. The member must make it clear when confirming acceptance of such instructions that the nature of the restrictions, any resulting assumptions and the impact on the accuracy of the valuation, will be referred to in the Report. (See also PS 6 Valuation reports.) PS 2.5 Revaluation without inspection A revaluation without a reinspection of property previously valued by the member, or firm, must not be undertaken unless the member is satisfied that there have been no material changes to the physical attributes of the property, or the nature of its location, since the last inspection. 26 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 16 / Date: 18/9

35 PS 2 Agreement of terms of engagement Commentary 1. It is recognised that clients may need the valuations of their property updated at regular intervals, and that reinspection on every occasion may be unnecessary. Provided that members have previously inspected the property, and the client has confirmed that no material changes to the physical attributes of the property and the area in which it is situated have occurred, a revaluation may be undertaken. The terms of engagement must state that this assumption will be made. 2. The valuer must obtain from the client information of changes in rental income from investment properties and any other material changes to the non-physical attributes of each property such as lease terms, planning consents, statutory notices and so on. Practice statements 3. Where the client advises that there have been material changes, or if the valuer is otherwise aware that such changes may have taken place, the member must inspect the property. Irrespective of any changes to the property the interval between inspections is a matter for the professional judgement of the valuer who will, amongst other considerations, have regard to its type and location. 4. The valuer may decide that it is inappropriate to undertake a revaluation without re-inspection because of material changes, the passage of time or other reasons. Even so the valuer may accept such an instruction providing the client confirms in writing, prior to the delivery of the report, that it is required solely for internal management purposes and no publication will be made to third parties. This position must be set out unequivocally in the report and state that the report must not be published. PS 2.6 Critical reviews A member must not undertake a critical review of a valuation prepared by another valuer that is intended for disclosure or publication unless the member is in possession of all the facts and information on which the first valuer relied. Commentary 1. This statement applies to circumstances where a valuer is provided with a valuation report prepared by another valuer and asked to provide a critical review which may be used by the client to publicly challenge the original valuation. For example, a party in a hostile takeover situation may wish to commission a report criticising a valuation commissioned by the opposing party, rather than produce a separate independent valuation. 2. Unless the second valuer has full knowledge of the first valuer s instructions, and is in possession of the same facts, a review in these circumstances could be grossly misleading to third parties, and might result in unjustified damage to the first valuer s reputation. RICS VALUATION STANDARDS 27 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 17 / Date: 18/9

36 PS 2 Agreement of terms of engagement Practice statements 3. It is important that a clear distinction is made between a critical review of a valuation and an audit of a valuation, or an independent valuation of property included in another valuer s report. 4. Members may quite properly be involved in a review of files, audit of methods, investigation of the support for valuations provided (including selective valuations of a sample of properties) or discussions with other valuers about their approach to a valuation. However, if this review is for anything other than the internal purposes of the client, members should exercise considerable caution before consenting to their work being referred to in any published document or circular. 28 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 18 / Date: 18/9

37 Appendix 2.1 Settling the terms of engagement Appendix 2.1 Settling the terms of engagement 1. Introduction 1.1 There is an extensive range of purposes for which clients will require valuation advice and the knowledge of clients will range between some who have a deep understanding of the property market; and others who are unfamiliar with the market, the terms used and the concepts embraced by valuers. Practice statements 1.2 Members should take care that they understand the client s needs and requirements fully, and appreciate that there will be occasions when they may need to guide the client to choose the most appropriate advice in the circumstances. Even in the most unusual situations a client can usually be provided with appropriate advice in accordance with these standards, for example, by making appropriate special assumptions. 1.3 Members may wish to establish checklists of questions to ask or matters to discuss with clients, the answers to which may influence their subsequent investigations and reporting. In all cases the member s papers must make clear what has been agreed, and record the reasons for any restrictions, special assumptions or departures. 1.4 Members must bear in mind any requirements of their professional indemnity insurance policies and, in case of doubt, refer to their insurer before accepting instructions. 2. Guidance on minimum terms of engagement The headings in the first column of this table are same as those in PS 2.1. Item (a) Identification of the client Comment Requests for valuations will frequently be received from representatives of the client and the member should ensure that the client is correctly identified. This is particularly relevant where: + the request is made by the directors of a company, but the client is the company the directors having a separate legal standing; + a valuation is required for loan purposes and, although commissioned by the borrower, the report may be for the lender, the true client. RICS VALUATION STANDARDS 29 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 19 / Date: 18/9

38 Appendix 2.1 Settling the terms of engagement Practice statements (b) The purpose of the valuation Valuations are required for many purposes and it is essential that the member has this information so that the appropriate basis of value is adopted. If the client declines to reveal the purpose of the valuation, and the member is willing to proceed with the valuation, the client must be advised in writing that this omission will be referred to in the report. In this case the report must not be published or disclosed to third parties. If an unusually qualified valuation is to be provided the terms must state that it is not to be used other than for the purpose originally agreed with the client. (c) The subject of the valuation Where the valuation is of a single property its identification will usually be straightforward. However, complications may arise, for example where there are not clearly defined boundaries. The valuer must make certain that such matters are resolved before reporting. Where the valuation is of a number of, or a portfolio of, properties GN 3 provides guidance on property identification. Unless valuing an interest in property as part of an operational entity it is usual to exclude trade fixtures, machinery, furnishings and other equipment from the valuation, although this should also be clarified with the client. GN 1 provides guidance on trade-related valuations and goodwill. In the case of a tenanted property it may be necessary to identify any improvements undertaken by tenants, and to clarify whether or not these improvements are to be disregarded on renewal, or review, of the lease, or even if they may give rise to a compensation claim by the tenant when vacating the property. It will be necessary to agree with the client any items of plant & equipment to be valued separately. GN 2 provides guidance on the identification of plant & machinery. Where a valuation of plant & equipment is carried out concurrently with a valuation of an interest in land, it is essential that the plant & equipment valuer liaises with the valuer of the interest in the land to ensure that items of this nature are neither omitted from, nor duplicated in, the valuation. (d) The interest to be valued It must always be borne in mind that it is a particular ownership or interest in the property that is being valued. The member must agree with the client the interest, or interests, to be valued. 30 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 20 / Date: 18/9

39 Appendix 2.1 Settling the terms of engagement (e)thetypeof property and how it is used, or classified, by the client (f) The basis, or bases, of value (g) The date of valuation (h) Disclosure of any material involvement or a statement that there has not been any previous material involvement; As different valuation approaches and assumptions are required for different types of property it is important that the member ascertains, not only the type of property involved, but also how this is used or classified by the client. Examples of different classes and categories include property that is: + freehold or leasehold; + owner-occupied; + held as an investment; + specialised property; and + property held for specified purposes (mineral-bearing land or waste management assets). The agreement should also state the format in which the valuation of portfolios should be presented. GN 3 provides guidance on this aspect. The member must stipulate the basis, or bases, of value that will be reported. For certain purposes or classes of property these statements stipulate that a specific basis is used. In other cases the correct basis, or bases, to use is a matter for the members professional judgement. The date of valuation. will need to be agreed with the client. A specific date must be agreed as an assumption that it is the date of the report is not acceptable In considering the extent of any material previous involvement, whether past, current or possible future, the valuer must have regard to the requirements of PS 1. Where there has not been any previous material involvement a statement to that effect must be made. Practice statements (i) if required, a statement of the status of the valuer (j) Where appropriate, the currency to be adopted For some purposes the valuer may be required to state if he or she is acting as an internal valuer or an external valuer. Where the valuer is required to comply with additional requirements of independence PS 1.7 will apply. In some states the national association s standards may require certain disclosures to be made in the terms of engagement.the valuer should also indicate that additional disclosures with regard to the status of the valuer, as outlined, may be included in the report. (See appendix 6.1(i).) If there is a possibility that a valuation has to be translated into a currency other than that of the country in which the property is located the basis of the exchange rate is to be agreed. RICS VALUATION STANDARDS 31 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 21 / Date: 18/9

40 Appendix 2.1 Settling the terms of engagement Practice statements (k) Any assumptions, special assumptions, reservations, any special instructions or departures (l) The extent of the member s investigations (m) The nature and source of information to be relied on by the member (n) The requirement of consent to publication (o) Any limits or exclusion of liability to parties other than the client It is very rare for a valuation to be reported without express or implied assumptions. Even when these assumptions are those that would usually be made in undertaking a valuation for that particular purpose the client must still be notified that the valuer will produce and report the valuation on this basis. Many of the assumptions are made to limit the valuer s liability where full investigation has been impossible, or impractical, within the context of the instruction. Even so, unless they are notified to, and accepted by, the client in advance they may have no legal standing. Further guidance on assumptions and special assumptions can be found in appendices 2.2 and 2.3. Reference must be made to any departures from the practice statements that the member considers both necessary and justifiable in the circumstances. (See PS 1.3 Departures.) The extent of the valuer s investigations is discussed in PS 5 Investigations. To avoid misunderstanding it is good practice to agree, or at least tell the client, the scope of the task envisaged, defining the extent of the member s duty to obtain or verify information that may be material. If the client wishes to restrict the scope of the member s investigations PS 2.4 will apply. If the client plans to supply information relating to the property, or directs the member to obtain it from a third party, then agreement that the valuer can safely rely upon this information should be recorded in the terms of engagement. Members must stipulate in their terms of engagement that their prior consent in writing will be required for any reproduction or public reference to the valuation or report. See PS 6.12 for additional information. Limitations are only effective if notified to the client in advance. The member should keep in mind that any insurance that protects against claims for negligence under professional indemnity policies may require the valuer to have particular qualifications, and to include certain limiting clauses in every report and valuation. If this is the case the relevant words should be repeated, unless the insurers agree either to a modification, or to a complete waiver. Some valuations will be for purposes where the exclusion of third-party liability is either forbidden by law or where it is unacceptable to the client or an external regulator. In many cases it may be preferable to exclude any limitation on liability, rather than include a clause specifically extending liability to a specified group or category of third parties. This is a matter for the commercial judgement of the member. 32 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 22 / Date: 18/9

41 Appendix 2.1 Settling the terms of engagement (p) Confirmation that the valuation will be undertaken in accordance with these standards (q) The basis on which the fee will be calculated (r) The member s, or firm s, complaints handling procedure, with a copy available on request (s) A statement that the valuation may be investigated by RICS for the purposes of the administration of the Institution s conduct and disciplinary regulations. Where the client is a lender, this lender may be part of a syndicate or, having lent on property, may sell on tranches of the loan to other lenders. Although the third-party limitation clause may provide some protection, valuers may thus become exposed to the risk of a duty of care to unknown third parties.itmay therefore be wise, particularly in the case of valuations for lending on commercial property, for members to add to the usual limitation clause a statement that, in the event of a proposal to place the loan on the subject property in a syndicate, the client must notify the valuer, with a view to agreeing responsibility to the further, named parties. The standards must be referred to by their full title: the RICS Valuation Standards, sixth edition. This confirmation will include any statement required under PS If there are agreed departures from the standards they should be referred to within this confirmation but the details will be set out in the information required under (j) above. The level of the fee is a matter to be settled with the client, unless there is a fee basis prescribed by an external body that binds both parties. RICS does not publish any scale of recommended fees. This requirement is included to emphasise the need to comply with the RICS Rules of Conduct. The purpose of this statement is to draw the attention of the client to the possibility that the valuation may be investigated for compliance with these standards. Guidance on the operation of the monitoring regime, including matters relating to confidentiality is available from Practice statements RICS VALUATION STANDARDS 33 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 23 / Date: 18/9

42 Appendix 2.2 Assumptions Practice statements Appendix 2.2 Assumptions 1. Introduction 1.1 An assumption is a supposition that is taken to be true. It involves facts, conditions or situations affecting the subject of, or approach to, a valuation that it has been agreed need not be verified by the valuer as part of the valuation process. Assumptions are made where it is reasonable for the valuer to accept that something is true without the need for specific investigation. 1.2 An assumption is often linked to a limitation on the extent of the investigations or enquiries that should be undertaken by the valuer. Therefore assumptions that are likely to be included in the report must be agreed with the client and included in the terms of engagement. 1.3 The definition of Market Value (see PS 3.2) also incorporates various assumptions, so this appendix deals with the other assumptions that members may wish to make. 1.4 If, after inspection or investigation, the valuer considers that an assumption agreed in advance with the client has proved to be either inappropriate, or should be a special assumption, the revised assumptions and approach must be discussed with the client prior to the conclusion of the valuation and the delivery of the report. 2. Information and guidance on assumptions 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; and (f) environmental matters. This list is not exclusive and care should be taken to identify any assumptions that may have to be made in order to fulfil a particular instruction. There are no standard assumptions that need not be stated. (a) Title The valuer must have information on the essential details of the interest being valued. This may take the form of a synopsis obtained from the client or a third 34 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 24 / Date: 18/9

43 Appendix 2.2 Assumptions party, or copies of the relevant documents. However, unless provided with a current detailed report on title by the client s lawyers, the valuer must state what information has been relied on, and what assumptions have been made, for example that, apart from anything revealed in the information provided, it is assumed that there are no encumbrances on title. In order to assist the client in the circumstances giving rise to the valuation or appraisal, the valuer may have to make assumptions about the interpretation of legal documents. However, it must be appreciated that the interpretation of legal documents is a matter for lawyers and the valuer must state that the assumptions made must be checked by the client s legal advisers and that no responsibility or liability will be accepted for the true interpretation of the client s legal title in the property. If this is not done the valuer will assume no less a burden than the law imposes upon a competent lawyer if legal advice is given expressly, or by implication. (b) Condition of buildings Even if competent to do so, a valuer will not normally undertake a building survey to establish the details of any building defects or disrepair. However, it would also be wrong for the valuer to ignore obvious defects that would impact on the value, unless a special assumption to that effect is agreed. The valuer must therefore state clearly that the inspection will not be a building survey, and define the limits that will apply to the valuer s responsibility to investigate and comment on the structure or any defects. It should also be stated that an assumption will be made that the building(s) is in good repair, except for any defects specifically noted. (c) Services The presence and efficiency of building services and any associated plant & equipment will often have a significant impact on value. Detailed investigation will normally be outside the scope of the valuation, and the valuer will need to establish what sources of information are available, and the extent upon which these can be relied, in undertaking the valuation. It is usual to agree an assumption that the services, and any associated controls or software, are in working order or free from defect. (d) Planning (zoning) The valuer needs to establish whether the property has the necessary statutory consents for the current buildings and use, and whether there are any policies or proposals by statutory authorities that could impact positively or adversely on the value. This information will often be readily available, but on other occasions delays or expense may be incurred in obtaining definitive information. The valuer should state what investigations are proposed, or what assumptions will be made, where verification of the information is impractical within the context of the valuation. (e) Contamination and hazardous substances A valuer will not normally be competent to advise on either the nature, or risks, of contamination or hazardous substances, or any costs involved with their removal. However, where valuers have prior knowledge of the locality and experience of the type of property being valued, they can reasonably be expected Practice statements RICS VALUATION STANDARDS 35 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 25 / Date: 18/9

44 Appendix 2.2 Assumptions Practice statements to comment on the potential that may exist for contamination, and the impact this could have on value and marketability. It will therefore be necessary for the valuer to state the limits on the investigations that will be undertaken and any sources of information or assumptions that will be relied upon. For further guidance on contamination see the RICS publication Contamination and Environmental Matters their implications for property professionals. (f) Environmental matters Some property will be affected by environmental factors that are either an inherent feature of the property itself, or the surrounding area, which could impact on the value of the property interest. Examples include historic mining activity or electricity transmission equipment. Although detailed commentary on their effects will normally be outside the realm of the valuer s expertise, their presence, or potential presence, is something that can often be established in the course of a valuation inspection, through normal enquiries or by local knowledge. The valuer should state the limits that will apply to the extent of the investigations, and the assumptions that will be made in relation to environmental matters. 36 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 26 / Date: 18/9

45 Appendix 2.3 Special assumptions Appendix 2.3 Special assumptions 1. Introduction 1.1 This appendix contains information on special assumptions. Practice statements 1.2 Examples of the circumstances under which it may be appropriate to make special assumptions include: + a situation where a bid from a special purchaser has been made or can be reasonably anticipated; + a situation where circumstances mean that the interest that is being valued cannot be offered freely and openly in the market; + a past change in the physical circumstances of the property where the valuer has to assume those changes have not taken place; + an impending change in the physical circumstances of the property, for example, a new building constructed or an existing building refurbished or demolished; or + an anticipated change in the mode of occupation or trade at the property. 1.3 Some examples of special assumptions are that: + planning consent has been, or will be, granted for development (including a change of use) at the property; + a building or other proposed development has been completed in accordance with a defined plan and specification; + the property has been changed in a defined way (for example, removal of process equipment); + the property is vacant when, in reality, at the valuation dateitis occupied; + it is let on defined terms when in reality at the valuation dateitis vacant; or + the exchange takes place between parties where one or more has a special interest and that additional value, or synergistic value, is created as a result of the merger of the interests. 2. Valuations reflecting an actual, or anticipated, market constraint 2.1 Examples of features inherent to a property that may prevent it being openly or adequately exposed to the market include: RICS VALUATION STANDARDS 37 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 27 / Date: 18/9

46 Appendix 2.3 Special assumptions Practice statements + the interest being valued is controlled by a third-party interest, and that party s co-operation in any sale could not be guaranteed; + the interest being valued may be subject to particular easements or restrictive covenants that prevent a sale in the open market, for example, a restriction on assignment or a right of pre-emption; + plant & equipment may have to be removed from a leasehold property at short notice as the lease is about to be determined or forfeit. 2.2 A marketing constraint should not be confused with a forced sale. A constraint may result in a forced sale, but a constraint can also exist without the circumstances ever arising under which the owner is compelled to sell. Care must therefore be taken in identifying and wording any special assumption. 2.3 Other than in exceptional circumstances, a forced sale of freehold property is only likely when the particular vendor will suffer some financial penalty if the property is not disposed of within a period that is too short to ensure proper marketing. The valuer must have a full understanding of the nature of the penalty or other commercial constraint on the vendor in order to give sensible advice on the impact this is likely to have on the price achievable. As this price will reflect the vendor s particular circumstances it is an assessment of worth rather than a valuation. 2.4 It is a common misconception that in a poor or falling market there are few willing sellers and that, as a consequence, most transactions in the market are the result of forced sales. Accordingly valuers may be asked to provide forced sale advice on this basis. This argument has little merit because it suggests that the valuer should ignore the evidence of what is happening in the market. The commentary to Market Value makes clear that a willing seller is motivated to sell at the best terms available in the market after proper marketing, whatever that price may be. Valuers should be careful not to accept instructions on this basis and should explain to clients that, in absence of a defined constraint affecting either the property or the vendor, the appropriate basis is Market Value. 2.5 In a depressed market a significant proportion of sales may be by vendors who are obliged to sell, such as liquidators and receivers, but such vendors are normally under a duty to obtain the best price in the circumstances, and cannot impose unreasonable marketing conditions or constraints of their own volition. These sales will normally comply with the definition of Market Value. 38 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 28 / Date: 18/9

47 Appendix 2.3 Special assumptions 3. Damaged property 3.1 Where a property has been damaged the special assumptions may include: + treating the property as having been reinstated (reflecting any insurance claims); + valuing as a cleared site with development permission assumed for the existing use; or + refurbishment or redevelopment for a different use reflecting the prospects of obtaining the necessary development permissions. Practice statements 4. Trade related property 4.1 In the case of a trade related property (see GN 1) the special assumptions may include that: + accounts or records of trade would not be available to, or relied upon, by a prospective purchaser; + the business is open for trade when it is not; + the business is closed when it is actually trading from the property; + the inventory has been removed, or is assumed to be in place when it is not; + that the licenses, consents, certificates, and/or permits required in order to trade from the property are lost or are in jeopardy; + that the business will continue to trade on its present terms, including any ties to the landlord for supply of liquor, gaming machines or other goods and services; or + that the valuation reflects the least cost to replace all elements of the service potential of the property to the owner of the interest being valued, which may include the margin gained from tied wholesale supplies of goods or from the supply of services. 5. General points 5.1 The treatment of alterations and improvements carried out under the terms of a lease may warrant the adoption of a special assumption. 5.2 The adoption of some of these special assumptions may qualify the application of the definition of Market Value. They are often particularly appropriate where the client is a lender, where special assumptions are used to illustrate the potential effect of changed circumstances on the value of a property as a security. RICS VALUATION STANDARDS 39 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 29 / Date: 18/9

48 Appendix 2.3 Special assumptions Practice statements 5.3 In cases of valuations prepared for financial statements the normal basis of value will exclude any additional value attributable to special assumptions. However,ifsuchaspecial assumption is made, this must be referred to in any published reference, see PS RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 30 / Date: 18/9

49 PS 3 Basis of value PS 3 Basis of value PS 3.1 Basis of value The member must determine the basis of value that is appropriate for every valuation to be reported. Commentary 1. For many common valuation purposes these standards stipulate the basis or bases of valuation that is appropriate. 2. A basis of value describes the fundamental measurement principles of a valuation.abasis of value is not a statement of the method used, nor does it describe the state or condition of the asset that is involved in the hypothetical transaction. A basis of value typically describes the nature of the assumed transaction, the relationship and motivation of the parties and the extent to which the asset is exposed to the market. 3. It will almost always be necessary to couple a basis of value with appropriate assumptions or special assumptions that describe the assumed status or condition of the asset at the date of valuation. A typical assumption might concern occupation, for example. the Market Value subject to a lease. A typical special assumption might be that a property has been altered in some defined way, for example. the Market Value on the special assumption that the works had been completed. The use of assumptions and special assumptions is described in detail in appendix For most valuation purposes it will be appropriate to use one of the bases recognised in the International Valuation Standards and identified in these standards coupled with any necessary assumptions or special assumptions. RICS does not encourage the use of a basis that is not recognised by these standards, but if no recognised basis is suitable for a particular assignment, members should clearly define the basis adopted and explain in the report why use of a basis recognised by these standards is considered inappropriate. Members are cautioned that the use of an unrecognised or bespoke basis of value without good reason could result in breach of the requirement that the valuation report should be not be ambiguous or misleading (see PS 6.1). Practice statements 5. The following bases of value are recognised in these standards: + Market Value (see PS 3.2); + market rent (see PS 3.3); + worth (investment value) (see PS 3.4); and + fair value (see PS 3.5) RICS VALUATION STANDARDS 41 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 31 / Date: 18/9

50 PS 3 Basis of value Practice statements 6. Market value is the basis that is most commonly required. Because it describes an exchange between parties that are unconnected and operating freely in the market place, and ignores any price distortions caused by special value or synergistic value, it represents the price that would be most likely to be achieved for a property across a wide range of circumstances. Market rent applies similar criteria for estimating a recurring payment rather than a capital sum. 7. However, members may be legitimately instructed to provide valuation advice based on other criteria, and other bases of value may be appropriate. A client may require advice on the value to them of a particular property, which may mean that the valuer will need to take into account criteria that are particular to that client, rather than those applicable in the market at large. This will involve the assessment of the worth of property to that client. Fair value (except in the context of IFRS) may be used where the valuer needs to estimate the price that would be fair in an exchange between two specific parties, without necessarily having to disregard criteria that would not be replicated in the wider market, for example where special value or synergistic value would impact on that price. 8. It is important to note that these bases of value are not necessarily mutually exclusive. The worth of a property to a specific party, or the fair value of a property in exchange between two specific parties may coincide with the market value even though different assessment criteria are used. 9. Because bases other than market value may produce a value that could not be obtained on either an actual sale, or on a sale in the general market IVS 2 requires the valuer to clearly distinguish the assumptions that are different from, or additional to, those that would be appropriate in an estimate of market value. Typical assumptions that might differ from those in an assessment of Market Value are discussed under the appropriate heading. PS 3.2 Market Value Valuations based on Market Value (MV) shall adopt the definition, and the conceptual framework, settled by the International Valuation Standards Committee. Market Value is defined as: The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. IVSC RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 32 / Date: 18/9

51 PS 3 Basis of value Conceptual Framework, as published in International Valuation Standard The term property is used because the focus of these Standards is the valuation of property. Because these Standards encompass financial reporting, the term Asset may be substituted for general application of the definition. Each element of the definition has its own conceptual framework The estimated amount... Refers to a price expressed in terms of money (normally in the local currency) payable for the property in an arm s-length market transaction. Market Value is measured as the most probable price reasonably obtainable in the market at the date of valuation in keeping with the Market Value definition. It is the best price reasonably obtainable by the seller and the most advantageous price reasonably obtainable by the buyer. This estimate specifically excludes an estimated price inflated or deflated by special terms or circumstances such as atypical financing, sale and leaseback arrangements, special considerations or concessions granted by anyone associated with the sale, or any element of Special Value apropertyshould exchange... Refers to the fact that the value of a property is an estimated amount, rather than a predetermined or actual sale price. It is the price at which the market expects a transaction that meets all other elements of the Market Value definition should be completed on the date of valuation onthedateofvaluation... Requires that the estimated Market Value is time-specific as of a given date. Because markets and market conditions may change, the estimated value may be incorrect or inappropriate at another time. The valuation amount will reflect the actual market state and circumstances as of the effective valuation date, not as of either a past or future date. The definition also assumes simultaneous exchange and completion of the contract for sale without any variation in price that might otherwise be made betweenawilling buyer... Refers to one who is motivated, but not compelled to buy. This buyer is neither over-eager nor determined to buy at any price. This buyer is also one who purchases in accordance with the realities of the current market and with current market expectations, rather than on an imaginary or hypothetical market which cannot be demonstrated or anticipated to exist. The assumed buyer would not pay a higher price than the market requires. The present property owner is included among those who constitute the market. A valuer must not make unrealistic Assumptions about market conditions or assume a level of Market Value above that which is reasonably obtainable. Practice statements RICS VALUATION STANDARDS 43 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 33 / Date: 18/9

52 PS 3 Basis of value Practice statements awilling seller... Is neither an over-eager nor a forced seller prepared to sell at any price, nor one prepared to hold out for a price not considered reasonable in the current market. The willing seller is motivated to sell the property at market terms for the best price attainable in the (open) market after proper marketing, whatever that price may be. The factual circumstances of the actual property owner are not a part of this consideration because the willing seller is a hypothetical owner inanarm s-length transaction... Is one between parties who do not have a particular or special relationship (for example, parent and subsidiary companies or landlord and tenant) which may make the price level uncharacteristic of the market or inflated because of an element of Special Value (see IVS 2, paragraph 3.8). The Market Value transaction is presumed to be between unrelated parties each acting independently afterpropermarketing... Means that the property would be exposed to the market in the most appropriate manner to effect its disposal at the best price reasonably obtainable in accordance with the Market Value definition. The length of exposure time may vary with market conditions, but must be sufficient to allow the property to be brought to the attention of an adequate number of potential purchasers. The exposure period occurs prior to the valuation date whereinthepartieshadeachactedknowledgeably, prudently... Presumes that both the willing buyer and the willing seller are reasonably informed about the nature and characteristics of the property, its actual and potential uses, and the state of the market as of the date of valuation. Each is further presumed to act for self-interest with that knowledge and prudently to seek the best price for their respective positions in the transaction. Prudence is assessed by referring to the state of the market at the date of valuation, not with benefit of hindsight at some later date. It is not necessarily imprudent for a seller to sell property in a market with falling prices at a price which is lower than previous market levels. In such cases, as is true for other purchase and sale situations in markets with changing prices, the prudent buyer or seller will act in accordance with the best market information available at the time andwithout compulsion. Establishes that each party is motivated to undertake the transaction, but neither is forced or unduly coerced to complete it. 3.3 Market Value is understood as the value of a property estimated without regard to costs of sale or purchase, and without offset for any associated taxes. IVSC 2007 IVS 1 paras 3.2 and RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 34 / Date: 18/9

53 PS 3 Basis of value Commentary 1. The basis of Market Value is an internationally recognised definition. It represents the figure that would appear in a hypothetical contract of sale at the valuation date. Valuers need to ensure that in all cases the basis is set out clearly in both the instructions and the report. 2. Market Value ignores any existing mortgage, debenture or other charge over the property. 3. In the conceptual framework in IVS quoted above (para 3.2.1) it is clear that any element of special value that would be paid by an actual special purchaser at the date of valuation must be disregarded in an estimate of Market Value. Special value includes synergistic value, also known as marriage value. Practice statements 4. IVS describes special value and synergistic value as follows: Special Value can arise where an asset has attributes that make it more attractive to a particular buyer, or to a limited category of buyers, than to the general body of buyers in a market. These attributes can include the physical, geographic, economic or legal characteristics of an asset. Market Value requires the disregard of any element of Special Value because at any given date it is only assumed that there is a willing buyer, not a particular willing buyer. Synergistic Value can be a type of Special Value that specifically arises from the combination of two or more assets to create a new asset that has a higher value than the sum of the individual assets. When Special Value is reported, it should always be clearly distinguished from Market Value. IVSC 2007 IVS 2 para 6.6,6.7, Notwithstanding this general exclusion of special value where the price offered by prospective buyers generally in the market would reflect an expectation of a change in the circumstances of the property in the future, this element of hope value is reflected in Market Value.Examples of where the hope of additional value being created or obtained in the future may impact on the Market Value include: + the prospect of development where there is no current permission for that development; and + the prospect of synergistic value arising from merger with another property or interests within the same property at a future date. 6. When Market Value is applied to plant & equipment, the word asset may be substituted for the word property. The valuer must also state, in conjunction with the definition, which of the following additional assumptions have been made: + that the plant & equipment has been valued as a whole in its working place; or RICS VALUATION STANDARDS 45 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 35 / Date: 18/9

54 PS 3 Basis of value + that the plant & equipment has been valued for removal from the premises at the expense of the purchaser. Practice statements Further information on plant & equipment valuation, including typical further assumptions that may be appropriate in certain circumstances, can be found in GN 2 and in IVS GN 3 Plant & equipment. 7. Where the property includes land which is mineral bearing, or is suitable for use for waste management purposes, it may be necessary to make assumptions to reflect either the potential for such uses or, where the land is already in such use, to reflect any potential future uses that may be relevant. Further information on the valuation approach in these cases can be found in GN Where the property is personal property it may be necessary to interpret Market Value as it applies to different sectors of the market. Further information on this type of valuation can be found in IVSC GN 4 and 5. PS 3.3 Market rent Valuations based on Market rent (MR) shall adopt the definition settled by the International Valuation Standards Committee. Market Rent: The estimated amount for which a property, or space within a property, should lease (let) on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arm s-length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion. Whenever Market Rent is provided the appropriate lease terms which it reflects should also be stated IVSC, GN 2, para Commentary 1. The definition of market rent is the Market Value (MV) definition modified by the substitution of a willing lessor and willing lessee for a willing buyer and willing seller, and an additional assumption that the letting will be on appropriate lease terms. This definition must be applied in accordance with the conceptual framework of MV at PS 3.2, together with the following supplementary commentary: 1.1 willing lessor and willing lessee The change in the description of the parties simply reflects the nature of the transaction. The willing lessor is possessed with the same characteristics as the willing seller, and the willing lessee with the same characteristics as the willing buyer, save that the word price in the interpretive commentary to MV should be changed to rent, the word sell changed to let and the word buy changed to lease. 1.2 appropriate lease terms 46 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 36 / Date: 18/9

55 PS 3 Basis of value MR will vary significantly according to the terms of the assumed lease contract. The appropriate lease terms will normally reflect current practice in the market in which the property is situated, although for certain purposes unusual terms may need to be stipulated. Matters such as the duration of the lease, the frequency of rent reviews, and the responsibilities of the parties for maintenance and outgoings, will all impact on MR. In certain States, statutory factors may either restrict the terms that may be agreed, or influence the impact of terms in the contract. These need to be taken into account where appropriate. Valuers must therefore take care to set out clearly the principal lease terms that are assumed when providing MR. Practice statements If it is the market norm for lettings to include a payment or concession by one party to the other as an incentive to enter into a lease, and this is reflected in the general level of rents agreed, the MR should also be expressed on this basis. The nature of the incentive assumed must be stated by the valuer, along with the assumed lease terms. Market rent will normally be used to indicate the amount for which a vacant property maybelet,orforwhichaletproperty may re-let when the existing lease terminates. MR is not a suitable basis for settling the amount of rent payable under a rent review provision in a lease, where the actual definitions and assumptions have to be used. PS 3.4 Worth and investment value Valuations based on worth, or investment value shall adopt the definition settled by the International Valuation Standards Committee: Worth, or Investment Value, is: The value of property to a particular owner, investor, or class of investors for identified investment or operational objectives. IVSC 2007 Commentary 1. Although, under some circumstances, worth may be the same as the amount that could be realised from sale of the asset, this value is specific to a particular party and essentially reflects the benefits received by holding theasset and therefore does not necessarily involve a hypothetical exchange. It may differ from Market Value. 2. An example of worth is the value of an investment property to a particular party who may wish to analyse the potential performance against its own investment criteria, for example a target rate of return, as opposed to those generally prevailing in the market. 3. An estimate of worth is likely to use assumptions or criteria that differ from those that would be made in an assessment of the market value of the same property. A typical example would be the use of a rate of return specified by the client rather than one determined from the RICS VALUATION STANDARDS 47 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 37 / Date: 18/9

56 PS 3 Basis of value Practice statements PS 3.5 Fair value market. Such entity specific criteria should be highlighted by the valuer in the report, along with the fact that the value reported is not Market Value (also see PS 6.13). Valuations based on fair value shall adopt the definition settled by the International Valuation Standards Committee. Fair Value is: The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties, in an arm s length transaction. IVSC, IVA 2, para 3.2 Commentary 1. Fair value represents the price that would be reasonably agreed between two specific parties for the exchange of an asset. Although the parties may be unconnected and negotiating at arm s length, the asset is not necessarily exposed in the wider market and the price agreed may be one that reflects the specific advantages (or disadvantages) of ownership to the parties involved rather than the market at large. 2. Examples of fair value would be the price agreed between a landlord and a tenant for the surrender or extension of a lease, or the price for a transfer of shares in a private company. 3. Fair value is also a measurement basis required or permitted under International Financial Reporting Standards, where its application is subject to specific additional conditions that mean that it is generally equated with Market Value (See PS 4.1 and appendix 6.3 Reporting valuations under IFRS). 4. IVS 2 notes: 6.2 The application of Fair Value under accounting standards is discussed in IVA 1. In accounting standards, Fair Value is normally equated to Market Value. 6.3 Fair Value is a broader concept than Market Value. Although in many cases the price that is fair between two parties will equate to that obtainable in the general market, there will be cases where the assessment of Fair Value will involve taking into account matters that have to be disregarded in the assessment of Market Value. 48 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 38 / Date: 18/9

57 PS 3 Basis of value 6.4 A common application of Fair Value is for assessing the price that is fair for the shareholding in a business, where particular synergies between two specific parties may mean that the price that is fair between them is different from the price that might be obtainable in the wider market. In contrast, Market Value requires any element of Special Value, of which Synergistic Value is an example, to be disregarded. 6.5 For other purposes, Fair Value can be distinguished from Market Value. Fair Value requires the assessment of the price that is fair between two specific parties taking into account the respective advantages or disadvantages that each will gain from the transaction. IVS 2007 IVS 2 paras 6.2 to 6.5 Practice statements 5. An estimate of fair value for any purpose other than inclusion in a financial statement is likely to use assumptions or criteria that differ from those that would be made in an assessment of the market value of the same property. A typical example would be that the fair value might reflect the synergistic value that would arise in an exchange between two specific parties which would not be available on a disposal to the market at large. Such assumptions or criteria should be highlighted by the valuer in the report, along with the fact that the valuereportedisnotmarket value (also see PS 6.13). RICS VALUATION STANDARDS 49 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 39 / Date: 18/9

58 PS 4 Applications Practice statements PS 4 Applications PS 4.1 Valuations for financial statements prepared under IFRS Valuations for financial statements prepared under International Financial Reporting Standards (IFRS) shall be in accordance with the IVSC International Valuation Application 1 (IVA 1). Commentary 1. IVA 1 is published by the IVSC as part of the International Valuation Standards. It contains information on the following International Financial Reporting Standards: + IAS 2 (Properties Held for Sale); + IAS 16 (Property, Plant & Equipment); + IAS 17 (Leases); + IAS 36 (Impairment of Assets); + IAS 40 (Investment Property); + IAS 41 (Agriculture); + IFRS 3 (Business Combinations) and + IFRS 5 (Non-Current Assets Held for Sale and Discontinued Operations). Appendix 4.1 contains the full text of IVA 1. Appendix 6.3 contains additional guidance on reporting valuations under IFRS. 2. Valuations should be reported at Market Value. Anyassumptions or qualifications made in applying Market Value should be discussed with the entity and disclosed in the report. 3. Although under IVA 1 the valuer will report the Market Value, the entity is required under IFRS to account for the asset at its fair value. To assist the entity in this respect and to enable it to make the disclosures required under IAS 16 and IAS 40, the report must contain the following information: + the effective date of the (re)valuation (see PS 2.1 (g)); + whether the valuer is an external or internal valuer (see PS 1.6 and 1.7); + the methods and significant assumptions applied in estimating the Market Value (see PS 6.1 (f) and (k), PS 2.4, and PS 6.4 to PS 6.7); 50 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 40 / Date: 18/9

59 PS 4 Applications + 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 (see appendix 6.1(p)); + 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 (which the entity shall disclose) because of the nature of the property and lack of comparable market data (see appendix 6.1(q)). Practice statements 4. Where the valuation has been prepared in accordance with IVA 1, a statement to that effect must be made in the report. PS 4.2 Valuations for secured lending Valuations for lending purposes shall be in accordance with IVSC International Valuation Application 2 (IVA 2). Commentary 1. IVA 2 is published by the IVSC as part of the International Valuation Standards. It stipulates valuation requirements and discusses the requirements of the application in relation to different property types. Appendix 4.2 contains the full text of IVA The application stipulates that valuations for secured lending shall normally be on the basis of Market Value, except when otherwise governed by law or statute. 3. Specialised properties may have no market apart from being part of the sale of the business with which they are associated and therefore may not be suitable for a specific charge as a security. In these circumstances the valuer may be requested to provide a valuation of the land for its existing use, but should avoid becoming further involved. 4. Major banks, and other lenders, are subject to regulations that limit the total amount they can lend as a proportion of their assets. This is known as the solvency ratio. In the international context, the Basel Committee on Banking Supervision has issued an Accord, Basel II, which sets out agreed minimum solvency ratios to be maintained by lending institutions and how those ratios are to be calculated. These are enforced through national laws, and in the case of the European Union, in accordance with EU Directives. The value of assets over which the lender holds security is used in calculating the solvency ratio. RICS VALUATION STANDARDS 51 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 41 / Date: 18/9

60 PS 4 Applications Practice statements 5. The Basel II Capital Accord provides that one of two valuation approaches, to which different risk criteria apply, may be adopted to assess the value of security represented by commercial real estate: + The Market Value of the secured assets; or + mortgage lending value (MLV). 6. Mortgage lending value is a long term risk assessment technique. As such it is not a basis of value that is, an estimate of the value in an assumed transaction on a specific date. Mortgage lending value is used by banks in a number of European countries. An explanatory paper prepared by the European Mortgage Federation is at appendix The detailed application of MLV may vary from state to state, and before accepting an instruction to calculate MLV, members should ensure that they are familiar with any relevant requirements in national legislation, including any restrictions on who may undertake this work. For example, MLV is particularly common in Germany, where banks require individuals calculating MLV to be certified in accordance with a national scheme and to apply methods set out under federal regulations. PS 4.3 Valuations for public sector assets for financial reporting Valuations for public sector assets for financial reporting shall be in accordance with the IVSC International Valuation Application 3 (IVA 3). Commentary 1. IVA 3 is published by the IVSC as part of the International Valuation Standards. It stipulates valuation requirements and discusses the requirements of the application where the public sector applies the International Federation of Accountants International Public Sector Accounting Standards Board (IPSAS) standards. 2. Public sector assets are those assets owned and/or controlled by governmental or quasi-governmental entities to provide goods or services to the general public. The principles that apply to the valuation of public sector assets are essentially the same as for any other assets. 3. Legislative, regulatory, accounting, or jurisprudence requirements may require the modification of this application in some countries or under certain conditions. Any departure due to such circumstances must be referred to and clearly explained in the report. 52 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 42 / Date: 18/9

61 Appendix 4.1 International Valuation Application 1 (IVA 1) Appendix 4.1 International Valuation Application 1 (IVA 1) Valuation for Financial Reporting International Valuation Application 1 Valuation for Financial Reporting + Introduction + Scope + Definitions + Relationship to Accounting Standards + Application + Discussion + Disclosure Requirements + Departure Provisions + Effective Date + Addendum A (Further Guidance on Lease Accounting Practice statements International Valuation Application 1 Valuation for Financial Reporting Material for this Application is drawn from International Financial Reporting Standards (IFRSs) published by the International Accounting Standards Board (IASB). IFRSs comprise individually numbered standards. Those originally published before 2004 are denoted IASs (International Accounting Standards) Those published subsequently are prefixed as IFRSs. Extracts from IFRSs are reproduced in this publication of the International Valuation Standards (IVSs) with the permission of IASB. The approved text of the IFRSs is that published by IASB in the English language, and copies may be obtained directly from IASB, 30 Cannon Street, London EC4M 6HX, United Kingdom, [email protected] IFRSs, Exposure Drafts and other publications of the IASB are protected by the copyright of the IASB. IFRS, IAS, IASC, IASB and International Accounting Standards are Trade Marks of the IASB and should not be used without the approval of the International Accounting Standards Board. 1.0 Introduction 1.1 The objective of this Application is to explain the principles that apply to valuations prepared for use in financial statements and related accounts of business entities. Valuers undertaking work of this nature should have an understanding of the accounting concepts and principles underlying the relevant International Accounting Standards. RICS VALUATION STANDARDS 53 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 43 / Date: 18/9

62 Appendix 4.1 International Valuation Application 1 (IVA 1) Practice statements 1.2 The Valuer s adherence to market-based definitions, objectivity, and full disclosure of relevant matters within a pertinent and user-friendly format are fundamental to the requirements of valuation for financial reporting. 2.0 Scope 2.1 This Application applies to all valuations of asset classes included in any financial statement, which fall within the skills and expertise of Valuers. 2.2 IVSs facilitate cross-border transactions and the viability of global markets through harmonisation and transparency in financial reporting. As such this Application is developed in the context of International Financial Reporting Standards (IFRSs) as at 31 March IFRSs adopt two models for the recognition of property assets in the balance sheet: a cost model, and a fair value model. Where the fair value model is applied, a current revaluation of the asset is required, and this Application focuses on these particular circumstances where Market Values are to be reported. 2.4 Legislative, regulatory, accounting, or jurisprudence requirements may oblige modification of this Application in some countries or under certain conditions. Any departure due to such circumstances must be referred to and clearly explained in the Valuation Report. 3.0 Definitions International Valuation Standards Definitions 3.1 Market Value. The estimated amount for which a property should exchange on the date of valuation between a willing buyer and willing seller in an arm s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion (IVS 1, para. 3.1). 3.2 Depreciated Replacement Cost. The current cost of replacing an asset with its modern equivalent asset less deductions for physical deterioration and all relevant forms of obsolescence and optimisation. 3.3 Improvements. Buildings, structures or modifications to land, of a permanent nature, involving expenditures of labour and capital, and intended to enhance the value or utility of the property. Improvements have differing patterns of use and economic lives. 3.4 Specialised Property. A property that is rarely if ever sold in the market, except by way of sale of the business or entity of which it is part, due to uniqueness arising from its specialised nature and design, its configuration, size, location, or otherwise. International Financial Reporting Standards Definitions 3.5 Fair Value. The amount for which an asset could be exchanged or a liability settled between knowledgeable willing parties in an arm s length transaction (IAS 16, para. 6). 54 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 44 / Date: 18/9

63 Appendix 4.1 International Valuation Application 1 (IVA 1) 3.6 Depreciable Amount. The cost of an asset, or other amount substituted for cost (in the financial statements), less its residual value (IAS 16, para. 6). 3.7 Residual Value. The estimated amount that an entity would currently obtain from disposal of an asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life (IAS 16, para. 6). 3.8 Owner-Occupied Property. Property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes (IAS 40, para. 5). 3.9 Investment Property. Property (land or building, or part of a building, or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation, or both, rather than for: (a) use in the production or supply of goods or services or for administrative purposes, or Practice statements (b) sale in the ordinary course of business (IAS 40, para. 5) Carrying Amount. The amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon (IAS 36, para. 6) Depreciation. The systematic allocation of the depreciable amount of an asset over its useful life (IAS 16, para. 6; IAS 36, para. 6) Fair Value Less Costs to Sell. The amount obtainable from the sale of an asset or cash-generating unit in an arm s length transaction between knowledgeable, willing parties, less the costs of disposal (IAS 36, para. 6) Net Realisable Value. The estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale (IAS 2, para. 6). Net realisable value refers to the net amount that an entity expects to realise from the sale of inventory in the ordinary course of business. Fair value reflects the amount for which the same inventory could be exchanged between knowledgeable and willing buyers and sellers in the market place. The former is an entity-specific value; the latter is not. Net realisable value for inventories may not equal fair value less costs to sell (IAS 2, para. 7) Recoverable Amount. The recoverable amount of an asset or cash-generating unit is the higher of its fair value less costs to sell and its value in use (IAS 36, para 6) Revalued amount. The fair value of an asset at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses (IAS 16, para. 31). RICS VALUATION STANDARDS 55 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 45 / Date: 18/9

64 Appendix 4.1 International Valuation Application 1 (IVA 1) Practice statements 3.16 Property, Plant and Equipment. Tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period (IAS 16, para 6) Value in Use. The present value of the future cash flows expected to be derived from an asset or cash-generating unit (IAS 36, para. 6) Useful Life. Either: (a) the period over which an asset is expected to be available for use by an entity; or (b) the number of production or similar units expected to be obtained from the asset by an entity (IAS 16, para. 6; IAS 36, para. 6; IAS 38, para. 8). In regard to leases, useful life is defined as: The estimated remaining period, from the commencement of the lease term, without limitation by the lease term, over which the economic benefits embodied in the asset are expected to be consumed by the entity (IAS 17, para. 4) Economic Life. Either: (a) the period over which an asset is expected to be economically usable by one or more users; or (b) the number of production or similar units expected to be obtained from the asset by one or more users (IAS 17, para. 4) Impairment Loss. The amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount (IAS 36, para. 6) Cash-Generating Unit. The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets (IAS 36, para. 6). 4.0 Relationship to Accounting Standards 4.1 This Application applies the principles developed in IVS 1, IVS 2, and IVS 3 to the requirements of IASs/IFRSs. 4.2 This Application focuses on valuation requirements under IAS 16, Property Plant and Equipment; IAS 17, Leases; and IAS 40, Investment Property. Reference is also made to valuation requirements under IAS 36, Impairment of Assets; IAS 2, Inventories; and IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. 4.3 IASB is currently undertaking fundamental reviews of both the measurement of assets and liabilities in financial statements and of lease accounting. Although this Application has been updated to reflect the revisions made to various standards in 2003 as part of the IASB Improvements Project, further changes may be necessary as a result of these continuing review projects. 56 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 46 / Date: 18/9

65 Appendix 4.1 International Valuation Application 1 (IVA 1) 5.0 Application To perform valuations that comply with this Application and Generally Accepted Valuation Principles (GAVP), it is essential that Valuers adhere to all sections of the IVS Code of Conduct pertaining to Ethics, Competence, Disclosure, and Reporting (sections 4, 5, 6, and 7). 5.1 Classification of Assets. Valuers shall obtain from the directors of the owning entity a list of assets to be valued, designating them as operational assets, i.e., assets requisite to the operations of the entity, or non-operational assets, being properties held for future development, investment, or assets surplus to the operations of the entity. 5.2 Applicable Standards. The classification of assets determines which IAS or IFRS applies. IAS 16 requires non-current property and plant assets held for the production or supply of goods or services to be recognised initially in the balance sheet at cost and thereafter carried in accordance with either the cost model or fair value model described in 5.3. Other accounting standards that require or permit the valuation of tangible assets include: + Investment Property IAS 40 + Leases IAS 17 + Impairment of Assets IAS 36 + Inventories IAS 2 + Business Combinations IFRS 3 + Non current Assets Held for Sale and Discontinued Operations IFRS IAS 16, Cost and Fair Value IAS 16 deals with the cost model in paragraph 30 as follows: After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses The fair value model, which requires regular revaluations, is explained in paragraph 31 as follows: After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date Fair value is not necessarily synonymous with Market Value. It is used throughout IFRSs in differing contexts. Practice statements RICS VALUATION STANDARDS 57 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 47 / Date: 18/9

66 Appendix 4.1 International Valuation Application 1 (IVA 1) Practice statements Financial statements are produced on the assumption that the entity is a going concern unless management either intends to liquidate the entity or cease trading, or has no realistic alternative but to do so. (IAS 1, para 23). This assumption therefore underlies the application of fair value to property plant and equipment, except in cases where it is clear that there is either an intention to dispose of a particular asset or that option of disposal has to be considered, e.g. when undertaking an impairment review. 5.4 Valuations under IAS 16. Where an entity adopts the fair value revaluation option under IAS 16, the assets are included in the balance sheet at their fair value as follows: (a) 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 (IAS 16, para. 32). (b) If there is no market-based evidence of fair value because of the specialised nature of the item of property, plant and equipment and the item is rarely sold, except as a part of a continuing business, an entity may need to estimate fair value using an income or a depreciated replacement cost approach (IAS 16, para. 33) IVSC considers that a professional Valuer undertaking an appraisal for this purpose should report the Market Value of the asset. Any assumptions or qualifications made in applying Market Value should be discussed with the entity and disclosed in the report The valuation conclusion shall be reported in accordance with IVS 3, Valuation Reporting. Valuers shall ensure that reports include sufficient information for the entity to meet the requirements of IAS 16, para. 77, when preparing financial statements: (a) the effective date of the revaluation; (b) (c) (d) whether an Independent Valuer was involved (Note, IVSC interprets this as an External Valuer); the methods and significant assumptions applied; the extent to which the values were determined directly 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. 58 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 48 / Date: 18/9

67 Appendix 4.1 International Valuation Application 1 (IVA 1) 5.5 Valuations under IAS 40 Investment Property. Where an entity opts to account for investment property using the fair value model, IVSC considers that the requirements of this model are met by the Valuer adopting Market Value. Further guidance on Investment Property is provided at para IAS 40, para. 75, requires amongst others the following disclosures, which the Valuer should include in the Report in addition to the requirements of IVS 3 (a) the methods and significant assumptions applied in determining the fair 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 (which the entity should disclose) because of the nature of the property and lack of comparable market data; and (b) the extent to which the fair value of investment property (as measured or disclosed in the financial statements) is based on a valuation by an Independent Valuer (IVSC interprets this as an External Valuer), who holds a recognised and relevant professional qualification and who has recent experience in the location and category of the investment property being valued. 5.6 Valuation Requirements for Leased Assets IAS Leased assets are classified under IAS 17 as either finance leases or operating leases (see para below and Addendum A). If a lease is classified as a finance lease, the fair value of the asset is required to establish the amount of the asset and liability recorded by the entity on its balance sheet, IAS 17, para For leases of land and buildings special rules apply, which are described in para For all property, other than investment property, land and buildings have to be considered separately for classification as either a finance lease or an operating lease IAS 40 allows Investment Property held by a lessee to be accounted for as a finance lease under IAS 17, subject to further special rules. Firstly, no allocation is made between the land and buildings. Secondly, the fair value is recognized as the value subject to the lessee s future liabilities under the lease. Practice statements RICS VALUATION STANDARDS 59 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 49 / Date: 18/9

68 Appendix 4.1 International Valuation Application 1 (IVA 1) Practice statements IVSC considers that in each case the requirement to establish the fair value of the leased asset under IAS 17, para 20, is met by the Valuer reporting the Market Value. For leases of real estate, this is the Market Value of the lease interest held by the lessee. For leases of other assets, it is normally the Market Value of the asset unencumbered by the lease, as the liability is recorded separately. 5.7 Valuation of Impaired Assets IAS Impairment arises where there is a permanent decrease in the value of an asset below its carrying amount. The entity is required to write down the carrying amount of an impaired assert to the higher of its value in use or fair value less costs to sell. The requirements are discussed further at para Valuations after Business Combinations IFRS Where a business acquires or is merged with another, the acquirer has to account for the assets and liabilities of the acquiree at their fair value as of the acquisition date. For identifiable assets and liabilities, IVSC considers that the Valuer should report the Market Value as they existed at the date of acquisition. 5.9 Surplus Assets IFRS Under IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations, surplus assets are to be separately identified. Such assets may be accounted for individually or as a disposal group, i.e., a group of assets to be disposed of together, by sale or otherwise, and the liabilities directly associated with those assets that will also be transferred in the transaction. Surplus assets are to be initially accounted for at the lower of the carrying amount and the fair value less costs to sell, and subsequently at fair value less cost to sell. Valuers should therefore ascertain whether surplus assets are to be valued as individual items, or as a group or portfolio of assets that will be disposed of in a single transaction, and report the Market Value with the appropriate assumptions Properties Held for Sale in the Ordinary Course of Business IAS Valuations of properties held for sale in the ordinary course of business should comply with the requirements of IAS 2, Inventories. These properties are measured at the lower of cost and net realisable value. Net realisable value is the Market Value less the costs of sale. 60 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 50 / Date: 18/9

69 Appendix 4.1 International Valuation Application 1 (IVA 1) 5.11 Selling Costs When instructed to value impaired or surplus assets, or assets that are held for sale in the course of business, the Valuer must report their Market Value without deducting selling costs. If the client requests the Valuer to advise on the costs to sell the assets, such costs are to be reported separately Biological Assets IAS These include Agricultural and Forestry assets. The Valuer should value these assets in accordance with the guidance in GN Co-operation with Auditors. Subject to first obtaining the consent of their client, Valuers shall discuss and explain their valuations openly with the entity s auditors. 6.0 Discussion 6.1 Identification of Asset Class Separate disclosures are required for each class of property, plant and equipment. IAS 16, para. 73, requires that financial statements shall disclose for each class the measurement basis used for determining the gross carrying amount, the depreciation method used, and the useful lives or the depreciation rates used. A class of property, plant or equipment is a grouping of assets of a similar nature and use. The following are examples of separate classes (IAS 16, para. 37): (a) land; (b) land and buildings; (c) machinery; (d) ships; (e) aircraft; (f) motor vehicles; (g) furniture and fixtures; (h) office equipment When an item is revalued, the entire class to which it belongs should be revalued in order to avoid both selective revaluations and the reporting of a mix of costs and fair values as at different dates. An asset class for this purpose is a grouping of assets of a similar nature and use in an entity s operation. 6.2 Depreciation IAS IAS 16, paras , sets out the requirements for an entity to account for the depreciation of property, plant and machinery assets. Valuers may be requested to allocate value between different elements of an asset, to advise on the residual value or to advise on the future life of an asset. Practice statements RICS VALUATION STANDARDS 61 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 51 / Date: 18/9

70 Appendix 4.1 International Valuation Application 1 (IVA 1) Practice statements Elements of cost. Any part of an item, which has a cost that is significant in relation to the total cost of the item, has to be depreciated separately. Where parts have a similar useful life and will depreciate at a similar rate, they may be grouped in determining the depreciation charge. Valuers may be consequently requested to allocate a valuation they have provided to the different component parts of an asset in order to enable the entity to depreciate them separately Residual Value. The residual value is deducted from the carrying amount of the asset to determine the amount the entity has to depreciate. If the management policy of the entity involves disposal after a specific time, the useful life of an asset may be less than its economic life. IAS 16, para. 58, recognises that land normally has an unlimited useful life and therefore should be accounted for separately. It also provides that an increase in the value of land should not affect the determination of the depreciable amount of the building Future life. A Valuer can advise on the remaining economic life of the asset. When reporting the economic life of buildings, improvements, plant and equipment, it should be stated that this is not necessarily the same as the useful life to the entity, which is subject to any policy of the entity on future disposal or renewal Reporting requirements: When providing allocations, or estimating the residual value of an element of an asset based on an apportionment of the value of the complete asset, the Valuer should state that the figures provided are hypothetical allocations of the value of the whole item prepared solely for calculating the appropriate rate of depreciation in the entity s financial statements, and that these figures should not be relied upon for any other purpose. 6.3 Alternative Use Value If an owner-occupied property has potential for an alternative use, which would result in its value in isolation from the business being higher than its value as part of the cash-generating unit to which it belongs, the Valuer shall report the Market Value for that alternative use. A statement should also be made that the value for the alternative use takes no account of issues such as business closure or disruption and the associated costs that would be incurred in achieving the alternative use, and that these should be considered by the entity when deciding the appropriate amount to adopt as fair value. 62 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 52 / Date: 18/9

71 Appendix 4.1 International Valuation Application 1 (IVA 1) 6.4 Specialised Property Both IVSs and IAS 16 recognize that there are categories of assets for which market-based evidence may be unavailable because of their specialised nature. It endorses the application of either an income or depreciated replacement cost approach to the valuation of these assets. The choice of approach is not dictated by the type of asset but by the presence or absence of market evidence. For further discussion and guidance on the use of these approaches see paras and 5.13 of GN 1 and section 5 of GN Frequency of Revaluation Practice statements Paragraph 31 pf IAS 16 states: Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date IAS 17 Leased Property, Plant and Equipment IAS 17 deals with the accounting for assets that are held under a lease. All leases require classification as either operating leases or finance leases (see para above and Addendum A). Different accounting treatments apply to each type of lease. A finance lease is recorded in a lessee s balance sheet as both an asset and a liability at amounts equal to the fair value of the asset or, if lower, the present value of the minimum lease payments, each determined as at the inception of the lease. Any initial direct costs incurred by the lessee are added to the amount recognized as an asset Valuers may be required to advise on the fair value of the asset at the inception of the lease to enable a lessee to account for the asset correctly in accordance with IAS Special provisions apply to leases of land and buildings. IAS 17, para. 14, states that because a characteristic of land is that it normally has an indefinite economic life a lease of land will be an operating lease. Where a lease is of land and buildings, these elements have to be considered separately for the purposes of lease classification (IAS 17, para. 15). Most leases of real property will grant the lessee rights to occupy both the land and buildings, following which the interest in both elements reverts to the lessor. If the lessee also has to maintain the building and hand it back to the lessor in good repair, it is probable that both elements will correctly be classified as operating leases (see Addendum A). RICS VALUATION STANDARDS 63 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 53 / Date: 18/9

72 Appendix 4.1 International Valuation Application 1 (IVA 1) Practice statements If both elements are not considered to share the same classification, the minimum lease payments (including any initial capital payment) are allocated between the land and buildings elements in proportion to the relative fair values of the leasehold interests in the two elements at the inception of the lease. If the lease payments cannot be reliably allocated the entire lease is treated as a finance lease, unless it is clear that both elements are operating leases (IAS 17, para. 16). This allocation is not required in the case of a lessee s interest accounted for as investment property (IAS 17, para. 18) For further guidance on Leasehold interests, see Addendum A. 6.7 IAS 40 Investment Property IAS 40 defines an investment property as a property (land or a building or part of a building or both) held by the owner, or by a lessee under a finance lease, to earn rentals, or for capital appreciation or both. It excludes owner-occupied property used for the production or supply of goods or services, or for administrative purposes, and also property held for sale in the ordinary course of business If part of a property is held as an investment property and part is owner-occupied, or if the parts could be sold or leased separately, the parts are accounted for separately. If the parts could not be sold separately, the property is an investment property only if an insignificant proportion is held for the production or supply of goods or services or for administrative purposes (IAS 40, para. 10) Property leased to a subsidiary or parent under an inter-company leasing arrangement does not qualify as investment property in the consolidated financial statements of the group, but may be treated as such in the individual financial statements of the lessor entity (IAS 40, para. 15) Investment property is measured initially at cost. After initial recognition an entity may choose to adopt either: (a) (b) The Fair Value Model. Investment property should be measured at fair value and changes recognised in the profit and loss statement; or The Cost Model. The historic cost model is in accordance with the model described in IAS 16. An entity that chooses the (historic) cost model should nonetheless disclose the fair value of its investment property. 64 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 54 / Date: 18/9

73 Appendix 4.1 International Valuation Application 1 (IVA 1) The fair value model is described in detail in IAS 40, paras The Market Value of the entity s interest in the investment property derived in accordance with IVS 1 accords with these detailed requirements. The Market Value will reflect any current leases, current cash flows and any reasonable assumptions about future rental income or outgoings Leasehold investment property. Apropertyheldundera lease, rather than owned outright, and that otherwise meets the definition of an investment property, may be accounted for using the fair value model. If this option is taken for one such property held under a lease, all property classified as investment property shall be accounted for using the fair value model (IAS 40, para. 6). Practice statements IAS 40, para. 50(d), recognizes that the fair value of an investment property held under a lease will reflect the net income after deduction of future lease liabilities. Although the entity is required to add to the reported fair value any recognised lease liability to arrive at the carrying amount for accounting purposes, this does not affect the requirement for the Valuer to report Market Value At initial recognition an investment property held under a lease shall be accounted for as though it were a finance lease under IAS 17, para. 20, i.e., at the fair value of the property, or if lower, at the present value of the minimum lease payments. Any capital sum paid to acquire the property interest is treated as part of the minimum lease payments and is therefore included in the cost of the asset (IAS 40, para. 25) Subsequent measurement of an investment property held under an operating lease requires the fair value model to be adopted (see para above) External Valuations. Entities are encouraged, but not required, to determine the fair value of investment property on the basis of a valuation by an Independent (External) Valuer who holds a recognised and relevant professional qualification and who has recent experience in the location and category of the investment property being valued (IAS 40, para. 26). RICS VALUATION STANDARDS 65 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 55 / Date: 18/9

74 Appendix 4.1 International Valuation Application 1 (IVA 1) Practice statements 6.8 Other Requirements under IASs Portfolios: A collection or aggregation of properties held by a single ownership and jointly managed is referred to as a portfolio. The Market Value of such assets viewed or treated as a portfolio or as an assembled group of properties could exceed or could be less than the sum of the Market Value of each asset individually. Where this is the case, it should be reported separately to the directors or trustees Impairment: An entity is required, under IAS 36, Impairment of Assets, to review, at each balance sheet date, whether there is any indication that a tangible asset may be impaired. Impairment might be indicated by, for example, a reduction in the value of the asset because of market or technological changes, obsolescence of the asset, asset underperformance in comparison to the expected return, or an intention to discontinue or restructure operations. If impairment is considered to have arisen, the carrying amount of the asset, derived from either its historic cost or an earlier valuation should be written down to the recoverable amount, which is the higher of the asset s value in use or its fair value less costs to sell. Value in use reflects the value that the entity will obtain from the asset throughout its remaining useful life to the business and its eventual disposal. Although entity-specific, the valuation inputs for the value in use of an asset should be market determined wherever possible. However, if the value an entity can obtain from the continued use of an asset is less than the net proceeds that could be obtained from its immediate retirement and disposal, the carrying amount should reflect this latter figure. The fair value less costs to sell of an asset is its Market Value less the reasonably anticipated selling costs Disrupted Markets: When markets are disrupted or suspended, Valuers must be vigilant in their analyses as explained in IVS 1, paragraph 6.5. Under IAS 29, Financial Reporting in Hyperinflationary Economies, Valuers may be required to assess balance sheet value. 7.0 Disclosure Requirements 7.1 The Valuer shall make all disclosures required under IVS 3, Valuation Reporting. 7.2 For disclosures required under IFRSs/IASs, see paragraphs 5.4.2, and 6.1 above. 7.3 The Valuer shall disclose the regulatory framework and any departure required from these Standards to comply with local legislation, regulation (including accounting rules), or custom. 66 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 56 / Date: 18/9

75 Appendix 4.1 International Valuation Application 1 (IVA 1) 8.0 Departure Provisions 8.1 In following this Application any departures must be in accordance with directions made in IVS 3, Valuation Reporting. 9.0 Effective Date 9.1 This International Valuation Application became effective 31 July Practice statements Addendum A Further Guidance on Lease Accounting Lease Classification Under IAS 17, leases have to be classified for inclusion in financial statements as either operating leases or finance leases: A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not be eventually transferred. An operating lease is a lease other than a finance lease. The following examples are listed in IAS 17, paras 10-11, as situations that could be indicative of a finance lease, either individually or in combination. These are not absolute tests but illustrations, i.e., one or more of these circumstances may arise, but the lease would still not be classified as a finance lease if it is clear from the overall context that substantially all the risks and rewards of ownership have not been transferred from the lessor to the lessee. (a) the lease transfers ownership of the asset to the lessee by the end of the lease term; (b) the lessee has the option to purchase the asset on advantageous terms; (c) the lease term is for the major part of the economic life of the asset even if title is not transferred; (d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; (e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications; (f) if the lessee can cancel the lease, the lessor s losses associated with the cancellation are borne by the lessee; (g) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee; (h) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent. If it is concluded that substantially all the risks and rewards of ownership are not transferred to the lessee, then the lease is an operating lease. RICS VALUATION STANDARDS 67 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 57 / Date: 18/9

76 Appendix 4.1 International Valuation Application 1 (IVA 1) Practice statements As classification does involve an assessment of the degree to which economic benefits are transferred by a lease, Valuers may be requested to provide advice to assist classification by lessor and lessees. IVSC considers that in the majority of cases, a qualitative assessment of the lease terms will quickly indicate the correct classification without the need for a detailed calculation of the value of the different lease interests. The relative values of the lessor s and lessee s interests are not a key factor in classification; the key test is whether the lessor has transferred substantially all the risks and rewards of ownership. Land and Building Allocation Where a lease is of land and buildings together, IAS 17, para. 15, requires that the two elements be considered separately for the purposes of classification. If it appears that the buildings element could be a finance lease, it will be necessary to make an allocation of the initial rent based on the relative fair values of the leasehold interests in each element at the inception of the lease (IAS 17, para. 16). In most leases of real property, the interest in the land and buildings is not distinguishable, and the interest in both normally reverts to the lessor at the end of the lease. There are often provisions for the rent to be reviewed periodically to reflect changes in the Market Value of the property and also an obligation on the lessee to hand the buildings back to the lessor in good repair. These are all clear indicators that the lessor has not transferred substantially all the risks and rewards of ownership of either the buildings or the land to the lessee. Consequently, finance leases of real property will generally arise only where the lease is clearly designed as a way of funding the eventual purchase of the land, buildings or both by the lessee, often by means of an option to acquire the lessor s interest for a nominal sum after the rental payments have been made. Occasionally leases that are not clearly structured as finance agreements may meet some of the criteria of a finance lease, for example, where the rental payments do not reflect the underlying value of the property. In those cases a more detailed analysis of the value of the risks and benefits transferred may be required in order to confirm or rebut their classification. Under IAS 17, para. 17, allocation between the land and buildings elements of an investment property held under a lease is not required. Under IAS 40, even though the investor may hold the investment property under an operating lease, the whole is accounted for as though it were a finance lease. Where a lease is of a self-contained plot of land and the building upon it, allocating the rent to each element is a task that could be undertaken reliably where there is an active market for land for similar development in the locality. In other situations, for example where the lease is of part of a multi-let building with no identifiable land attributable to any particular lease, reliable allocation may be impossible. IAS 17, para. 16, recognises that such cases can arise and makes the proviso that where a reliable allocation cannot be made, the whole lease should be treated as a finance lease, unless it is clear that both elements are operating leases. If it were clear that both elements were operating leases from the outset, the allocation exercise would not be necessary. 68 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 58 / Date: 18/9

77 Appendix 4.1 International Valuation Application 1 (IVA 1) In practice, leases of part of a multi-let building will normally be operating leases and the whole property will be classified as investment property by the lessor. In such cases allocation will be unnecessary. In cases where the buildings element is clearly a finance lease, the land element is likely to be identifiable. It will be comparatively rare for the buildings element to meet the criteria for classification as a finance lease and for the land element not to be clearly identifiable. In such cases, the Valuer should not attempt an allocation based on unreliable criteria, but should advise that the allocation cannot be reliably made. The entity will then have to treat the whole as a finance lease. IVSC 2007 IVA 1 Practice statements Further advice on land and building allocation may be found in VIP 9 Land and Buildings Apportionments for Lease Classification under International Financial Reporting Standards. RICS VALUATION STANDARDS 69 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 59 / Date: 18/9

78 Appendix 4.2 International Valuation Application 2 (IVA 2) Practice statements Appendix 4.2 International Valuation Application 2 (IVA 2) Valuation for Secured Lending Purposes International Valuation Application 2 Valuation for Secured Lending Purposes (Revised 2007) + Introduction + Scope + Definitions + Relationship to Accounting Standards + Application + Discussion + Disclosure Requirements + Departure Provisions + Effective Date International Valuation Application 2 Valuation for Secured Lending Purposes (Revised 2007) 1.0 Introduction 1.1 The objective of International Valuation Application 2 (IVA 2) is to provide a framework for valuations of assets that are to be offered or taken as loan security. 1.2 It is important that Valuers consistently apply accepted valuation principles within the scope of these standards, providing clear, independent and objective opinions that are relevant to the needs of valuation users. 2.0 Scope 2.1 This Application applies in all circumstances where valuations are required of assets that are, or are proposed to be, held as security for lending. The lending may be done by different means, including mortgage or other forms of fixed or floating charge. 3.0 Definitions International Valuation Standards Definitions 3.1 Market Value. The estimated amount for which a property should exchange on the date of valuation between a willing buyer and willing seller in an arm s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion (IVS 1, para. 3.1). 3.2 Mortgage. A pledge of an interest in property as security or collateral for repayment of a loan with provision for redemption on repayment. In the event the borrower (mortgagor) defaults, the lender (mortgagee) has the power to recover the property pledged. 70 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 60 / Date: 18/9

79 Appendix 4.2 International Valuation Application 2 (IVA 2) 3.3 Specialised Property. A property that is rarely if ever sold in the market, except by way of sale of the business or entity of which it is part, due to uniqueness arising from its specialised nature and design, its configuration, size, location, or otherwise. 3.4 Trade Related Property. Certain classes of real property, which are designed for a specific type of business and that are normally bought and sold in the market, having regard to their trading potential. European Union Legislation Definition 3.5 Mortgage Lending Value. The value of the property as determined by a prudent assessment of the future marketability of the property taking into account long term sustainable aspects of the property, the normal and local market conditions, and the current use and alternative appropriate uses of the property. Speculative elements shall not be taken into account in the assessment of the mortgage lending value. The mortgage lending value shall be documented in a clear and transparent manner. (This definition is from Directive 2006/48/EC of the European Parliament.) 4.0 Relationship to Accounting Standards 4.1 A valuation prepared for lending purposes will not necessarily be the same as one made for accounting purposes, particularly one made for financial reporting purposes. Although a similar base such as Market Value may be applicable, the assumptions on which the valuation is based may be different. 4.2 By way of example, the underlying principle of many valuations for financial reporting is the presumption that the entity will continue as a going concern. However, this would not usually be appropriate for valuations undertaken for lending purposes. Such a presumption has particular implications for specialised assets where the value and marketability of the secured property, separate from the business of which it forms part, may be limited. 5.0 Application To perform valuations that comply with this Application and Generally Accepted Valuation Principles (GAVP), Valuers shall adhere to all sections of the IVS Code of Conduct pertaining to Ethics, Competence, Disclosure, and Reporting (sections 4, 5, 6, and 7). 5.1 In performing valuations of property for lending purposes, Valuers will normally provide the Market Value of such property in accordance with these International Valuation Standards. 5.2 If the circumstances are such that a departure from the Market Value basis is justified, the departure shall be clearly set out and explained in the Valuation Report along with the identification and definition of the alternative basis used and an explanation of the reasons for the departure. If there is a material difference between the Market Value of the property and the alternative value, this should be reported. 5.3 The valuation opinion shall be reported in accordance with IVS 3, Valuation Reporting. Practice statements RICS VALUATION STANDARDS 71 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 61 / Date: 18/9

80 Appendix 4.2 International Valuation Application 2 (IVA 2) Practice statements 5.4 In addition to fulfilling the requirements of IVS 3, Valuation Reports for secured lending of real property will normally include comment, where relevant, on the following items: current activity and trends in the relevant market: historic, current and anticipated future demand for the category of property in the locality; the potential and likely demand for alternative uses; both the current marketability of the property and if requested, the likelihood of its sustainability; any impact of foreseeable events (at the date of valuation) on the value of the security; the valuation approach adopted, and the extent of market-based evidence in support of the valuation. 5.5 Valuations for lending purposes may be required on an assumption there has been a change in the state or condition of the property, for example, the assumed development of a new building, or upgrade of a building. Such a valuation will normally be provided on the assumption that the change has occurred at the valuation date. It is not a projection of the value at the date in the future when the change will have actually occurred. The report must make it clear that the valuation is based on the assumption that the change specified had already been made at the valuation date. Use of the term Market Value without a modifier in these circumstances can be misleading. The term Market Value as if complete is an example of a suitable modification of Market Value that may be used in these circumstances. 5.6 A valuation of a property may also be required on the assumption that an estimated occupancy level had been achieved. This should also reflect the realistic expectations and perceptions of market participants as at the date of the report. 5.7 Corporate and individual loans from banks and other financial institutions are often secured by specific property assets. Valuers need to have a general understanding of the requirements of such institutions, and possibly the structure of loan terms and agreements. Lenders will usually require that the terms of a loan be kept confidential, but this does not relieve the Valuer of the obligation to have a general understanding of the lending process. 6.0 Discussion 6.1 At the outset of an assignment, the Valuer needs to clearly identify the property that is to serve as the security. Particular care is required to distinguish between property types where real property and personal property are combined. 72 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 62 / Date: 18/9

81 Appendix 4.2 International Valuation Application 2 (IVA 2) 6.2 The manner in which property would ordinarily trade in the market will determine the applicability of the various approaches to assessing Market Value. Based upon market information, each approach is a comparative method, and the use of more than one method may be required. 6.3 Each relevant valuation method will, if appropriately and correctly applied, lead to a similar result. All valuation methods should be based on market observations. Construction costs and depreciation, where they apply, should be determined by reference to an analysis of market-based estimates of costs and accumulated depreciation. The use of an income method, particularly discounted cash flow techniques, will also be based on market-determined cash flows and market-derived rates of return. 6.4 Occasionally a lender may request a valuation on a basis other than Market Value. IVS 2 addresses the types, use and reporting of some common alternative bases of valuation. The Valuer should ensure that an alternative basis is not confused with Market Value. Although there may be circumstances where an alternative basis is appropriate for secured lending, users of such valuations should be made aware that such value may not be realisable if the alternative assumptions made are no longer applicable. 6.5 Investment Properties Income-producing properties are usually valued as individual properties. Lending institutions may also wish to have a property assessed as part of a portfolio of properties. In such instances, the distinction between the value of the individual property, assuming it is sold individually, and its value as part of the portfolio should be clearly expressed Although the Valuer should comment on the expected demand and marketability of the property over the life of the loan (see para. 5.4 above), it is normally outside the scope of the valuation exercise to advise on the ability of a tenant to meet future lease obligations beyond comment on the market s current perception of the tenant s quality. 6.6 Owner-Occupied Properties Owner-occupied properties valued for lending purposes will normally be valued on the assumption that the property is transferred unencumbered by the owner s occupancy, i.e., that the buyer is entitled to full legal control and possession. This does not preclude consideration of the existing owner as part of the market, but it does require that any special advantage attributable to the owner s occupancy, which may be reflected in a valuation of the business, be excluded from the valuation. Practice statements RICS VALUATION STANDARDS 73 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 63 / Date: 18/9

82 Appendix 4.2 International Valuation Application 2 (IVA 2) 6.7 Leases Between Related or Connected Parties Practice statements Caution is required where property offered as security is subject to a lease to a party connected to the borrower. If the valuer considers that the lease creates a more favourable income stream than would be obtainable on a letting to an unconnected third party in an arm s-length transaction, the lender should be alerted and it may be appropriate to disregard the existence of the lease in a valuation of the property as security. 6.8 Sales Incentives It is not uncommon for a seller of property, especially developers of real property, to offer incentives to buyers. Examples of such incentives include rental income guarantees, contributions to the buyer s removal or fitting out costs, or the supply of personal property such as furnishings or equipment. Market Value ignores any price inflated by special considerations or concessions (IVS 1, para 3.2.1). It may also be appropriate to alert the lender as to the effect that any incentives being offered have on the actual selling prices achieved. 6.9 Specialised Properties Specialised properties by definition may have limited marketability and significant value only as part of a business (see Concepts Fundamental to Generally Accepted Valuation Principles, para. 8.2). For loan security purposes, such properties will normally be valued on a vacant possession basis (see para above) and a valuation based on the highest and best alternative use is usually applicable. This will involve consideration of the costs and risks that would be involved in achieving that use. Lenders may not consider specialised property to be suitable as a security for lending purposes A valuation may be required of a specialised property where the property is part of a going-concern business. The lender should be alerted to the valuation being dependent on the continuing profitability (or otherwise) of the going concern. If the value on a vacant possession basis is potentially lower, this should be drawn to the attention of the lender Trade Related Properties Certain classes of property, including but not limited to hotels and other trading businesses, where the property is approved and purpose-designed for only that use, are usually valued based on profitability but excluding Personal Goodwill (see GN 12, para ). 74 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 64 / Date: 18/9

83 Appendix 4.2 International Valuation Application 2 (IVA 2) In such cases, the lender should be made aware of the significant difference in value that may exist between an operating concern and a non-operating concern where the business is closed, the inventory is removed, licences (and other intangible assets such as certificates, franchise agreements, or permits) are removed or are in jeopardy, and any other circumstances exist that may impair future profitability and value If the income from a property is critically dependent on a tenant or tenants from a single sector or industry or some other factor, which could cause future income instability, the Valuer should address these factors in the Valuation Report. In certain cases, an assessment of the value of the property based on an alternative use, assuming vacant possession, may be appropriate Development Properties Properties held for redevelopment or sites intended for development of buildings should be valued taking into account existing and potential development entitlements and controls. Any assumptions as to planning issues and other material factors must be reasonable, validated by market behaviour and explicitly stated in the Valuation Report The approach to the valuation of development properties will depend on the state of development of the property at the date of valuation and may take into account the degree to which the development is pre-sold or pre-leased. The valuation approach may need to be discussed with the lender prior to undertaking the valuation. Care should be taken by the Valuer to: make a reasoned estimate of the development period from the date of valuation. The effect of additional development requirements on costs and revenues, using present value discounting where appropriate, will be reflected in this analysis; evaluate as far as is possible at the date of valuation, market behaviour during the period of the development; consider and outline the risks associated with the development; and consider and disclose any known special relationships between the parties involved in the development. Practice statements RICS VALUATION STANDARDS 75 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 65 / Date: 18/9

84 Appendix 4.2 International Valuation Application 2 (IVA 2) Practice statements 6.12 Wasting Assets Specific lending issues arise in relation to the valuation of wasting assets such as mines or quarries. The lender s attention needs to be drawn to the risk associated with this type of a wasting asset and the planned program for its extraction or use Property rental that exceeds the current market or economic rent may constitute a wasting asset because any value attributable to this factor diminishes as the term of the lease decreases The Valuer The nature and scope of the Valuer s engagement should be clear to the Valuer and the user of the valuation. Valuers should be aware of the risk associated with valuations for lending purposes where miscommunication, misunderstanding or error may lead to a dispute or litigation between the lender and the Valuer In some jurisdictions financial services legislation requires licensing or registration of advisers when advice is related not only to the value of property, but also to securities issues such as equity, participatory interests, collective investment schemes, or syndicated loans. Valuers may be restricted in the advice they can provide in these jurisdictions In undertaking valuations for lending purposes, it is particularly important that the Valuer be independent of the borrower It is important that the Valuer possess appropriate experience in relation to the particular property type and locale for the property involved, or if not, seek expert assistance Forced Sales and Limited Marketing or Disposal Periods Lending institutions may request valuations on a forced, or liquidation, sale basis or impose a time limit for disposal of the security. Because the impact of a constraint on the price obtainable will depend upon the specific circumstances under which the sale takes place, it is not realistic for the Valuer to speculate on a price that could be obtained without either knowledge of the reasons for the constraint, or the circumstances under which the property might be offered for sale. An alternative valuation may be provided based on defined assumptions, but the Valuer should draw the lender s attention to the fact that this opinion is valid only at the valuation date, and may not be relied upon in the event of a future default, when both market conditions and the sale circumstances may be different. 76 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 66 / Date: 18/9

85 Appendix 4.2 International Valuation Application 2 (IVA 2) 6.15 Lenders Solvency Ratios Major banks and other lenders are normally subject to regulations that limit the total amount they can lend as a proportion of the lenders assets, known as the solvency ratio In the international context, the Basle II Accord sets out rules for the minimum solvency ratios to be maintained by lending institutions and how those ratios are to be calculated. The value of assets over which the lender holds security is used in calculating the solvency ratio In exceptional circumstances for well-developed and long-established markets, the Basle II Accord requires the estimation of the Market Value and Mortgage Lending Value of a security backed by commercial real estate. A preferential risk weight of 50% is assigned to the tranche of a secured loan that does not exceed the lower of 50% of the Market Value or 60% of the Mortgage Lending Value Mortgage Lending Value is a long-term, risk assessment technique. As such, it is not a basis of value. MLV is a technique that is primarily used by banks in a number of European countries. Further information on Mortgage Lending Value is available on the IVSC website. 7.0 Disclosure Requirements 7.1 In reporting Market Value for lending security purposes, the Valuer shall make all disclosures required under IVS 3, Valuation Reporting. 7.2 The basis of the Valuer s engagement is to be clearly set out in any reports to be used by third parties. All reports should be presented in a way that would not be considered by a reasonable person to be misleading. 7.3 The Valuer shall disclose the regulatory framework and any departure required from these Standards to comply with local legislation, regulation, or custom. 8.0 Departure Provisions 8.1 In following this Application any departures must be in accordance with directions provided in IVS 3, Valuation Reporting. 9.0 Effective Date 9.1 This International Valuation Application became effective 31 July IVSC 2007 IVA 2 Practice statements RICS VALUATION STANDARDS 77 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 67 / Date: 18/9

86 Appendix 4.3 European Mortgage Federation paper on mortgage lending value Practice statements Appendix 4.3 European Mortgage Federation paper on mortgage lending value Introduction This appendix, which is the text of an explanatory note prepared by the European Mortgage Federation, is provided for information only. RICS has no responsibility for the contents and the paper is neither mandatory nor approved guidance. Mortgage Lending Value 1. Mortgage Lending Value may be used by the financial services industry in the activity of lending secured by real estate. The Mortgage Lending Value provides a long-term sustainable value limit, which guides internal banking decisions in the credit decision process (e.g. loan-to-value, amortisation structure, loan duration) or in risk management. 2. Mortgage Lending Value facilitates the assessment of whether a mortgaged property provides sufficient collateral to secure a loan over a long period. Given that Mortgage Lending Value is intended to estimate property value for a long period of time, it cannot be grouped together with other valuation approaches used to estimate Market Value on a fixed date. 3. Additionally, Mortgage Lending Value can be used as a risk management instrument in a number of ways in the context of: capital requirements for credit institutions as detailed in Basle I and II; funding of mortgage loans through covered bonds secured by real estate as the cover assets; the development of capital market products converting real estate and real estate collateral into tradable assets (e.g. mortgage backed securities). 4. The concept of Mortgage Lending Value is defined in detail by legislation, Directives and additional country specific regulations. 5. Mortgage Lending Value shall mean the value of the property as determined by a valuer making a prudent assessment of the future marketability of the property by taking into account the long-term sustainable aspects of the property, the normal and local market conditions, as well as the current use and alternative possible uses of the property. Speculative elements should not be taken into account in the assessment of Mortgage Lending Value. Mortgage Lending Value should be documented in a clear and transparent way. 78 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 68 / Date: 18/9

87 Appendix 4.3 European Mortgage Federation paper on mortgage lending value 6. All internationally recognised valuation methods also apply to the Mortgage Lending Value, subject to the type of property and the market specificities (historic, legal etc.) where the property is located. These are: comparison method; income method; depreciated replacement cost method. 7. Regarding the technical transposition of the definition mentioned above, the long-term validity of Mortgage Lending Value requires compliance with a certain number of steps aimed at eliminating short-term market volatility or temporary market trends. The valuer must address the following key issues when determining the Mortgage Lending Value of a property: The future marketability and saleability of the property has to be assessed carefully and prudently. The underlying time perspective goes beyond the short-term market and covers a long-term period. As a principle, the long-term sustainable aspects of the property such as the quality of the location, construction and allocation of areas must be taken into account. As far as the sustainable yield to be applied is concerned, the rental income must be calculated based on past and current long-term market trends. Any uncertain elements of possible future yield increases should not be taken into account. The application of capitalisation rates is also based on long-term market trends and excludes all short-term expectations regarding the return on investment. The valuer must apply minimum depreciation rates for administration costs and capitalisation of rents. If the Mortgage Lending Value is derived using comparison values or depreciated replacement costs, the sustainability of the comparative values needs to be taken into account through the application of appropriate discounts where necessary. The Mortgage Lending Value is generally based on the current use of the property. The Mortgage Lending Value shall only be calculated on the basis of a better alternative use, under certain circumstances, i.e. if there is a proven intention to renovate or change the use of the property. Further requirements, for example with respect to compliance with national standards, transparency, content and comprehensibility of the valuation, complement the legal framework for the calculation of Mortgage Lending Value. Practice statements RICS VALUATION STANDARDS 79 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 69 / Date: 18/9

88 Appendix 4.3 European Mortgage Federation paper on mortgage lending value Practice statements 8. There are important differences between Market Value and Mortgage Lending Value: Market Value is internationally recognised for the assessment of the value of a property at a given moment in time. It estimates the price that could be obtained for a property at the date of valuation, notwithstanding that this value could alter very rapidly and no longer be up-to-date. In contrast, the purpose of Mortgage Lending Value is to provide a long-term sustainable value, which evaluates the suitability of a property as a security for a mortgage loan independently from future market fluctuations and on a more stable basis. It provides a figure, usually below Market Value and therefore, able to absorb short-term market fluctuations whilst at the same time accurately reflecting the underlying long-term trend in the market. European Mortgage Federation RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 70 / Date: 18/9

89 PS 5 Investigations PS 5 Investigations PS 5.1 Inspections and investigations Inspections and investigations must always be carried out to the extent necessary to produce a valuation which is professionally adequate for its purpose. Practice statements Commentary 1. In settling the terms of engagement the valuer must agree the extent to which the subject property(ies) are to be inspected and the extent of any investigations to be made. Where a property is inspected the degree of on-site investigation that is appropriate will vary, depending upon the nature of the property, the purpose of the valuation and the terms of engagement agreed with the client. 2. A valuer meeting the criteria in PS 1.5 will be familiar with, if not expert on, many of the matters affecting either the type of property or the locality. Where a problem, or potential problem, that could impact on value is evident, from an inspection of the property, the immediate locality or from routine enquiries, an unconsidered assumption by the valuer that no such problem existed could be grossly misleading. 3. A client may request, or consent to, an assumption that no problems exist. If, following an inspection, the valuer considers that this is an assumption which would not be made by a prospective purchaser it becomes a special assumption and should be treated as such (see PS 2.2). However, these matters can rarely be disregarded completely and the discovery of adverse on-site factors, which may affect the valuation, should be drawn to the attention of the client before the report is issued. 4. Where it is agreed that inspections and investigations may be limited it is likely that the valuation will be on the basis of restricted information and PS 2.4 will apply. 5. Many matters which become apparent during the inspection may have an impact on the market s perception of the value of the property. These can include: (a) the characteristics of the surrounding area, and the availability of communications and facilities which affect value; (b) the characteristics of the property: (c) the dimensions, and areas, of the land and buildings; (d) the construction of any buildings and their approximate age; (e) the uses of the land and buildings; RICS VALUATION STANDARDS 81 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 71 / Date: 18/9

90 PS 5 Investigations Practice statements (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) (q) (r) the description of the accommodation; the description of installations, amenities and services; the fixtures, fittings and improvements; any plant & equipment which would normally form an integral part of the building; the apparent state of repair and condition. environmental factors: abnormal ground conditions, historic mining or quarrying, coastal erosion, flood risks, proximity of high-voltage electrical equipment; contamination: potentially hazardous or harmful substances in the ground or structures on it, for example, heavy metals, oils, solvents, poisons or pollutants that have been absorbed or integrated into the property and cannot be readily removed without invasive or specialist treatment, such as excavation to remove subsoil contaminated by a leaking underground tank or the presence of radon gas; hazardous materials: potentially harmful material present in a building or on land but which has not contaminated either. Such hazardous materials can be readily removed if the appropriate precautions and regulations are observed, for example, the removal of fuel (gas) from an underground tank or the removal of asbestos; deleterious materials: building materials that degrade with age, causing structural problems, for example high alumina cement, calcium chloride or woodwool shuttering; (s) any physical restrictions on further development, if appropriate. 6. Other information may include: + improvements to leasehold properties. When valuing leases and reversions, where the property originally included in the letting may have been altered or improved, care needs to be taken to ascertain what is to be valued. The valuation of the particular interest may not be simply what is seen and measured on the ground. If the valuer is unable to inspect the lease or, due to the absence of documented licences, the extent of alterations or improvements cannot be confirmed, the valuer should proceed on the basis of stated assumptions; + planning (zoning) controls. Planning control will vary between states and the extent of the enquiries that need to be made will be governed by the valuer s knowledge of the area. The valuer must consider the nature of the property, the purposes of the valuation, the extent of the property and the size of the undertaking, in determining the extent to which the regulatory measures which can, or might, affect it should be investigated; 82 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 72 / Date: 18/9

91 PS 5 Investigations + the incidence of local, or state, property taxes; + information on any substantial outgoings and running costs and the level of recovery from the occupier; + information relating to any quotas imposed or other trading restrictions that may be made by the state in which the property is located; + information revealed during the normal legal enquiry processes before a sale takes place. 7. While the valuer is under a duty to take reasonable care to verify any information provided or obtained, the limitations on this duty must be clearly stated. Practice statements PS 5.2 Verification of information The member must take reasonable steps to verify the information relied upon in the preparation of the valuation and, if not already agreed, clarify with the client any necessary assumptions that will be relied upon. Commentary 1. The valuer has a responsibility to state clearly the information that is relied on and, where appropriate, its source. 2. In each individual case the valuer must judge the extent to which the information supplied is reliable. If there is no option but to accept information that may not be reliable, an appropriate assumption will need to be set out in the terms of engagement. 3. When preparing a valuation for financial statements the valuer should be prepared to discuss the appropriateness of any assumptions that were made with the client s auditor, other professional advisor, or regulator. 4. Clients will expect valuers to express opinions (and, in turn, valuers will wish to express their opinions) upon legal issues which affect their valuations. Valuers must therefore make clear in reports any information which must be verified by the client s, or other interested parties, legal advisers before the valuation can be relied upon or published. RICS VALUATION STANDARDS 83 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 73 / Date: 18/9

92 PS 6 Valuation reports Practice statements PS 6 Valuation reports PS 6.1 Minimum content of valuation reports The report must clearly and accurately set out the conclusions of the valuation in a manner that is not ambiguous, misleading, or create a false impression. It must also deal with all the matters agreed between the client and the member in the terms of engagement and include the following minimum information, except where the report is to be provided on a form supplied by the client: (a) identification of the client; (b) the purpose of the valuation; (c) the subject of the valuation; (d) the interest to be valued; (e) the type of property and how it is used, or classified, by the client; (f) the basis,orbases, of the valuation; (g) the date of valuation; (h) disclosure of any material involvement or a statement that there has not been any previous material involvement ; (i) if required, a statement of the status of the valuer; (j) where appropriate, the currency that has been adopted; (k) any assumptions, special assumptions, reservations, any special instructions or departures; (l) the extent of the member s investigations; (m) the nature and source of information relied on by the member; (n) any consent to, or restrictions on, publication; (o) any limits or exclusion of liability to parties other than the client; (p) confirmation that the valuation accords with these Standards; (q) a statement of the valuation approach; (r) the opinions of value in figures and words; (s) signature and date of the report. Commentary 1. The report should convey to the reader a clear understanding of the opinions being expressed by the valuer and should be couched in terms which can be read and understood by someone with no prior knowledge of the subject property. 84 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 74 / Date: 18/9

93 PS 6 Valuation reports 2. The format and detail of the report is a matter for the valuer s discretion, provided it contains the minimum required information. 3. The table in appendix 6.1 contains further information on the minimum matters to be included in a report. 4. Notwithstanding the provisions of these standards, the valuer is reminded that any valuation advice provided, in whatever format, creates a potential liability to the client or, under certain circumstances, to third parties. Practice statements 5. Valuers are discouraged from referring to any valuation or report, as either formal or informal as these terms may give rise to the misunderstanding of unstated assumptions applicable in either case. 6. Valuers must exercise great caution before permitting valuations to be used for purposes other than those originally agreed. It is possible that a recipient or reader will not fully appreciate the restricted character of the valuation and any qualifications in the report, and that it may be misquoted out of context. PS 6.2 Description of a report A report prepared in accordance with these standards must not be described as a certificate or statement. Commentary 1. The terms certificate of value, valuation certificate and statement of value have specific meanings in certain states in designating statutory documents. One common factor is that the documents require a simple confirmation of price or value, without any requirement to understand the context, fundamental assumptions or analytical processes behind the figure provided. A valuer who has previously provided a valuation or advised on a transaction involving the property in question may prepare such a document, for example where the client is required to provide it by statute, but otherwise should avoid becoming involved. 2. RICS considers that these terms should not be used in connection with the provision of valuation advice as they imply either a guarantee, or a level of certainty that is often inappropriate when providing a valuation opinion. One overriding objective of the Standards is that clients should understand the meaning of different bases of valuation and the effect of different assumptions on the valuation. 3. However, a member may use the term certified, or similar words, in the body of a report where it is known that the valuation is to be submitted for a purpose that requires formal certification of a valuation opinion. RICS VALUATION STANDARDS 85 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 75 / Date: 18/9

94 PS 6 Valuation reports Practice statements PS 6.3 PS 6.4 PS 6.5 Reporting the basis of value The basis of value, together with its definition, must be stated in full in the report. Where the basis of value is not a market-based figure, and the valuation is materially different from Market Value, a statement to that effect must be made. Commentary 1. It is recognised that although Market Value is the most appropriate basis of value for a wide range of applications it may be appropriate to adopt alternative bases of value in specific circumstances (see PS 3 Basis of value). 2. It is essential that both the valuer and the users of valuations clearly understand the distinction between Market Value and other bases of value and the effects, if any, that differences between bases may have on the applicability of the valuation. 3. Where the basis of value is not market-based the purpose of this PS is to alert the user of the valuation to the possibility that, although relevant for the specified purpose, the valuation may not bear any relation to the price that could be obtained if the property were placed on the market. Unless agreed otherwise in the terms of engagement the valuer is not required to provide a valuation on any alternative bases of value. Special assumptions Where a report includes a valuation made on the basis of a special assumption, the special assumption shall be set out in full, together with a statement that it has been agreed with the client. Commentary 1. The purpose of this statement is to ensure that the report expressly referstoanyspecial assumptions that have been agreed in accordance with PS 2.2. Depreciated replacement cost in the private sector A valuation of a property in the private sector using a depreciated replacement cost method should be accompanied by a statement that it is subject to the adequate profitability of the business, paying due regard to the value of the total assets employed. Commentary 1. Accounting standards require entities to periodically review their assets for impairment, which is a permanent loss in the value of the asset to the entity. The appropriate figure to be included in the balance sheet for an asset following an impairment review is the higher of either its value in use or its fair value (see glossary), less costs to sell. In simple terms this means that the amount in the balance sheet should 86 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 76 / Date: 18/9

95 PS 6 Valuation reports be written down to the higher of either the current value of the future benefits that will be derived by the entity from the continued use of the asset or the proceeds it would derive from the asset s immediate retirement and disposal. 2. The Market Value of an asset derived by reference to the sales of similar assets will usually approximate to the sum that the entity could obtain from the retirement and sale of the asset. If the value in use of the asset is lower than a Market Value based on sales comparisons, the latter figure can safely be relied upon as the base figure for inclusion in the accounts it is an amount recoverable by the entity regardless of whether it continues to use or retire the asset. 3. In contrast, DRC is used for assets which are rarely, if ever, sold except as part of a sale of the entire operation of which they form part. The assumption that there will be demand for the use for which the asset is currently employed is an inherent feature of the method. As a consequence, a Market Value derived using this method will often not equate to the figure that would be obtained if the asset were retired and sold. If the value in use is lower than a Market Value arrived at using a DRC method, the latter figure cannot be relied upon as the base figure, as it may not bear any relation to the amount that would be received following a cessation of operations. 4. Although the possibility that a valuation derived using a DRC method would be materially affected by a cessation of operations is covered by the disclosure requirement in PS 6.7, the requirement to indicate additionally that the valuation is subject to adequate profitability emphasises to the entity that even if the value in use of the asset is lower than the reported Market Value, it may still be higher than the net realisable value on cessation. It may therefore be necessary to write the reported Market Value down to the value in use in an impairment review. Practice statements PS 6.6 Depreciated replacement cost in the public sector A valuation of a property in the public sector using a depreciated replacement cost method should be accompanied by a statement that it is subject to the prospect and viability of the continued occupation and use. Commentary 1. The need to consider impairment (see commentary for PS 6.5) is also a requirement of public sector accounting. However, in the public sector assets are held for service delivery rather than profit, so the caveat in PS 6.5 is inappropriate. It is therefore necessary for the valuer to make it clear that the validity of a valuation derived using the DRC method depends upon a continuing requirement to use the asset for the provision of the service in question. Combined with any appropriate disclosure under PS 6.7, this emphasises to users that the valuation cannot be relied on as an indication of the amount that could be recovered if the service was discontinued and the asset retired. RICS VALUATION STANDARDS 87 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 77 / Date: 18/9

96 PS 6 Valuation reports Practice statements PS 6.7 Comparison of depreciated replacement cost valuations and alternative MVs When reporting a valuation which has been estimated by using depreciated replacement cost methodology, the member must state in the report: (a) (b) the MV for any readily identifiable alternative use, if higher; or if appropriate, a statement that the MV on cessation of the business would be materially lower. Commentary 1. As part of the process of valuing any property, the valuer needs to consider if there is potential for an alternative use that would be reflected in the Market Value. In the case of specialised property that can only be valued using the DRC method, any alternative use value is likely only to relate to the land because the buildings or other improvements may be incapable of alternative use. 2. Where it is clear that a purchaser in the market would acquire the property for an alternative use of the land because that alternative use can be readily identified, generates a higher value than the current use and is both commercially and legally feasible, the value for this alternative use would be the Market Value and should be reported as such. However, it should be stated in the report that this value reflects an alternative use, and that it takes neither account of the costs of business closure or disruption nor any other costs associated with realising this value. 3. Realising a Market Value based on an alternative use may be inconsistent with the going concern assumption upon which financial statements are normally prepared; also the costs that an entity might incur in closure or relocation could exceed any additional value that could be released by an alternative use. Accordingly, an entity may request advice on the value derived from the DRC method, which assumes the existing use will continue, to assist it in quantifying the extent of any redevelopment potential. 4. It will frequently be the case that the potential for an alternative use in the event of the specialised use being discontinued can be broadly identified, but that the value for that use cannot be reliably determined without significant research, for example into the prospects of obtaining statutory consents, the conditions that would attach to those consents, the costs of clearance, the cost of new infrastructure, etc. In such cases a simple statement that the value of the site for a potential alternative use may be significantly higher than the value derived from using the DRC method will be sufficient. 5. If valuations are required on alternative assumptions these should be clearly stated. Assumptions that may be appropriate in valuations for financial reporting are discussed in appendix RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 78 / Date: 18/9

97 PS 6 Valuation reports PS 6.8 PS If the valuer considers that the value of the asset would be materially lower if it ceases to be part of the going concern, this should be drawn to the attention of the client. However, there is no requirement to report that figure. Negative values Where a property has a negative value, that value must be reported separately and must not be set off against a positive value on other properties. Commentary 1. Properties that do not constitute an asset, but are a liability, are said to have a negative value. 2. Negative values may arise in the case of leasehold interests where the rent reserved under the lease exceeds the market rent and/or there are onerous covenants on the lessee s part. Negative values could also arise on freehold property where the expenses of meeting statutory or contractual obligations exceed the value of the property, clear of such obligations. 3. There will be occasions when it would be correct to indicate a nil value for a property, for example, where the expense of meeting a liability outweighs the positive value, but there is no legal liability on the owner to incur the expense of removing it. Property in more than one state Where the properties are located in more than one state the report must list the properties within each state separately, and the valuation must be reported in the currency, or currencies, which have been agreed with the client. Commentary 1. Where the properties are located in more than one state the report should be arranged so that all the properties in one state are grouped together. 2. An entity will usually require valuations to be expressed in the currency of the country in which it is based. For financial statement purposes, this is known as the reporting currency. Irrespective of the location of the client, valuations are to be made in the currency of the state in which the property is located. Where it is agreed that the client requires the valuation to be translated into a different currency, for example, into the reporting currency, the exchange rate to be adopted, unless agreed otherwise, is the closing rate (also known as the spot rate ) on the date of valuation. 3. The report must also state, in respect of each state within which the property is situated, whether allowance has been made to take account of existing or proposed local legislation relating to taxation on the realisation of the property asset. RICS VALUATION STANDARDS 89 Practice statements Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 79 / Date: 18/9

98 PS 6 Valuation reports Practice statements PS 6.10 Incorporation of other valuations Where the member incorporates into the report a valuation prepared by another valuer or firm it must be confirmed that such valuations have been prepared in accordance with these Standards, or other Standards that may apply in the particular circumstances. Commentary 1. Circumstances may arise where the valuer wishes to obtain a valuation from another valuer or firm (for example, a plant & equipment valuation, oravaluation of a property in another state where local expertise is required). When this situation occurs the client must agree to the employment of valuers or firms not connected with the valuer, and reference to this should be included in the terms of engagement. PS The member may be requested to incorporate a valuation commissioned directly by the client. In such cases the member must be satisfied that any such report has been prepared in accordance with these standards. Preliminary valuation advice Where a report that complies with these standards is in the course of preparation, the member may provide the client with preliminary advice, or a draft report or valuation in advance of its completion. This may include the amount of the valuation, provided the document includes the information that: + it is a draft, subject to the completion of the final report; + that the advice is provided for the client s internal purposes only; + that the draft is on no account to be published or disclosed. If matters of fundamental importance are not included, their omission must also be referred to. Commentary 1. It is recognised that while the valuation is being prepared, the valuer may need to discuss various matters, such as the verification of facts and other relevant information (for example, confirming the outcome of rent reviews or clarifying the boundaries of a property), before forming a preliminary opinion of value. At any stage in the valuation process, such discussions give the client an opportunity to understand the valuer s viewpoint and evidence. However, once a preliminary opinion of value has been reached, and it is that opinion that is conveyed to the client, it is essential that the action required by this practice statement is taken. 2. It is important that such 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 90 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 80 / Date: 18/9

99 PS 6 Valuation reports of further information. Valuers should keep file notes of discussions with clients on draft reports or valuations. This record should: + note the information provided, or the suggestions made, in relation to the valuations; + record how that information was used to justify a change in value; and + record the reasons why the valuation has not been changed. The aim is to provide a transparent audit trail that will demonstrate that the discussions have not compromised the valuer s independence. If requested, this record should be made available to auditors, or any other party with a legitimate and material interest in the valuation. Practice statements PS 6.12 Publication statement Where the purpose of the report is one that requires a published reference to it, the member must provide a draft statement for inclusion in the publication. Commentary 1. A report may be published in full, for instance, in the annual accounts of a company, but it is more common for a reference to be made to it. In this case it is essential that the valuer has a close involvement in the publication statement to ensure that all the references are accurate, and that the reader is not misled. 2. If the whole report is not to be published, the draft statement should be prepared as a separate document and provided to the client at the same time as the report. The content of the statement may be governed by rules issued by local regulatory bodies, but it should contain the following minimum information: + the name and qualification of the valuer, or the valuer s firm, and a description of its nature; + an indication of whether the valuer is an internal or external valuer, or where required, that specific criteria relating to the valuer s status has been met; + the date and basis or bases of value, together with any special assumptions; + comment on the extent to which the values were determined directly by reference to market evidence or were estimated using other valuation techniques; + confirmation that the valuation has been made in accordance with the RICS Valuation Standards, or the extent of, and reason(s) for, departure from them; and + a statement indicating any parts of the report prepared by another valuer, or a specialist. Examples of published references to valuation reports are provided in appendix 6.2. RICS VALUATION STANDARDS 91 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 81 / Date: 18/9

100 PS 6 Valuation reports 3. Publication does not include making the report available, or the valuation figure known, to a mortgage applicant or borrower. Practice statements 4. The valuer should check for accuracy any other relevant material referring to the properties or the valuation that is to be published. 5. The valuer is also advised to read the whole of the document in which the report or reference is to be published to ensure that there is no misstatement of any other matter or opinion of which the valuer may have knowledge. 6. The valuer should insist that a copy of the final proof or the reference is supplied before issue, and attach that proof to the letter of consent. Any pressure by other parties, or persuasion to delegate power to sign, should be resisted. 7. An opinion may be expressed which, if included in a public document, might have some effect on a matter which is in dispute, under negotiation, or subject to certain rights between the owner and a third party (for example, an opinion of the rental or capital value of a property with an imminent rent review). The report may also include information about a company s trading which would not usually be in the public domain. Such information is commercially sensitive and the client must decide, subject to the approval of the auditors and any regulatory body, whether it should be included in the publication. 8. Valuers are permitted to exclude information of a commercially sensitive nature from a report which is published in full, subject to any legal requirements which may apply in a particular state. 9. In the published reference the valuer must refer to the omission(s) and state that this has been done upon the express instructions of the client and with the approval of the regulatory body and/or auditors. Without this note the member may be inadvertently placed in a situation where there is unjustifiable criticism. PS 6.13 Published references to departures and special assumptions The member must ensure that any reference to the report in any published document includes a reference to any departures or special assumptions. Commentary 1. This statement applies where the valuer has: + made a valuation subject to a special assumption (in accordance with PS 2.2); + made a valuation other than in accordance with a relevant practice statement (a departure see PS 1.3). 2. Where the full report is not published the publication statement required under PS 6.11 must refer to any special assumption made, and any additional valuation provided. 92 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 82 / Date: 18/9

101 PS 6 Valuation reports 3. Where the full report will not be published, sufficient reference to the departure or departures should be made in any published document. In each case the onus is upon the valuer to determine what would constitute a sufficient reference. A reference would not be regarded as sufficient if it failed to alert the reader to matters of fundamental importance as to the basis or amount of the valuation, or if there were any risk that the reader might be misled. Practice statements RICS VALUATION STANDARDS 93 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 83 / Date: 18/9

102 Appendix 6.1 Minimum contents of valuation reports Practice statements Appendix 6.1 Minimum contents of valuation reports 1. This table provides further information on the minimum matters to be included in valuation reports as specified in PS 5.1. Additional contents may be specified by any valuation standard that applies to either a specific valuation purpose or type of property. The headings in the first column of this table are the same as those used in PS 6.1 Item (a) Identification of the client (b) The purpose of the valuation (c) The subject of the valuation (d) The interest to be valued (e)thetypeof property and how it is used, or classified by the client (f) The basis,or bases, of the valuation Comment The report must be addressed to the client, or the client s representatives. The source of the instructions and the identity of the client must be stated, if different from the addressee. The purpose of the valuation must be stated clearly and unambiguously. Where the purpose is not disclosed the report must include an appropriate statement. Where a number of properties are valued it may be convenient to list them in a schedule that identifies each unit of valuation (see also PS 6.9). Where the valuation includes a separate valuation for plant & equipment this may also be included in a schedule, which should identify the items as agreed with the client (see GN 2). The legal interest in each property should be stated. The extent to which vacant possession is, or may be, available, if required, should also be noted. For some purposes the uses, categories, or classes of property will have been agreed with the client. Where formal agreement is not required it is recommended that the report contain a brief description of these matters (see appendix 2.1(e) and GN3). The basis of value must be stated (see PS 6.1 and PS 6.3) and the definition must be provided in full. A depreciated replacement cost valuation for inclusion in a financial statement must be expressed as being either subject to the test of adequate profitability (private sector, PS 6.5) or continuing viability or occupation (public sector, PS 6.6). Where the report includes a valuation using depreciated replacement cost and the value for an alternative use on cessation of the business is materially different, a statement to this effect must be included in the report (see PS 6.7). 94 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 84 / Date: 18/9

103 Appendix 6.1 Minimum contents of valuation reports (g) The date of valuation (h) Disclosure of any material involvement or a statement that there has not been any previous material involvement The date of valuation must be stated. If there has been a material change in market conditions, or the circumstances of a property or portfolio, between an earlier date of valuation and the date of the report, the member must draw attention to this. It may also be prudent for the member to draw the client s attention to the fact that values change over time, and that a valuation given on a particular date may not be valid on an earlier or later date. Any disclosures, or statement, made in accordance with PS 2.1(h) must be repeated in the report. Practice statements (i) if required, a statement of the status of the valuer Where it is a requirement for the purpose, the valuer will state if he or she is acting as an internal valuer or an external valuer. Where other criteria have been adopted they must be confirmed, together with a statement that the valuer meets them. In some states the national associations standards may require additional disclosures to be made with regard to the status of the valuer. (j) Where appropriate, the currency that has been adopted If some valuations have been translated into a currency other than that of the country in which the property is located, the exchange rate adopted, and its source, is to be noted (see PS 6.9). (k) Any assumptions, special assumptions, reservations, any special instructions or departures All assumptions made must be stated, together with any reservations that may be required (see appendix 2.2). Where the assumptions vary in different states the report must make this clear. Special assumptions must be clearly stated (see PS 2.2). Where the valuation is undertaken on the basis of restricted information, or is a revaluation without an inspection, the report must include full particulars of the restriction (see PS 2.4 and PS 2.5). Any departures from the standards must be stated and explained (see PS 1.3). A statement must be made as to whether or not any allowance has been made for liability for taxation which may arise on disposal, whether actual or notional, and whether or not the valuation reflects costs of acquisition or realisation. In some countries VAT, or similar taxes, acquisition and sale costs can be substantial. Where statements rely upon the prospect of future growth in rental and/or capital values, a statement must be made to the effect that such growth may not occur, and that values can fall as well as rise. RICS VALUATION STANDARDS 95 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 85 / Date: 18/9

104 Appendix 6.1 Minimum contents of valuation reports Practice statements (l) The extent of the member s investigations The report must record the date and extent of any inspection, including reference to any part of the property to which access was not possible (see PS 6.1). The valuer must make it clear if the valuation has been made without an opportunity to carry out an adequate inspection (see PS 2.4). In the case of a revaluation, the report should also refer to any agreement that further inspections are unnecessary (see PS 2.5). Where a substantial number of properties are being valued, a generalised statement of these aspects is acceptable, provided that it is not misleading. (m) The nature and source of information to be relied on by the member The valuer must make it clear if the valuation has been carried out without the information normally available when carrying out a valuation. The valuer must indicate in the report if (where practicable) verification is needed of any information or assumptions on which the valuation is based, or if information considered material has not been provided. If any such information or assumption is material to the amount of the valuation, the valuer must make clear that the valuation should not be relied on, pending verification (see PS 6.3). In the case of a revaluation a statement of any material changes advised by the client or a stated assumption that there have been no material changes should be included. Valuers should also include any additional information that has been available to, or established by, them that they believe to be crucial to the client s ability to understand and benefit from the valuation, with regard to the purpose for which it has been prepared. (n)any consent to, or restrictions on, publication Where a statement for inclusion in a publication is required this should be provided as a separate document, which may be annexed to the report (see PS 6.12). Where the valuer has either provided a valuation on the basis of a special assumption,ormadeadeparture from any of the valuation standards, a statement must be included that no reference is to be made to the report in any published document without an adequate contemporaneous reference to the special assumption or departure (see PS 6.13). (o) Any limits or exclusion of liability to parties other than the client For some purposes valuers may be unable to exclude liability to third parties (see appendix 2.1.2(o)). Any limitation on disclosure of a valuation based on restricted information or instructions should be included (see PS 2.4). 96 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 86 / Date: 18/9

105 Appendix 6.1 Minimum contents of valuation reports (p) Confirmation that the valuation accords with these standards (q)a statement of the valuation approach (r) The opinions of value, in figures and words (s) Signature and date of the report This statement must be unequivocal, but may include a cross-reference to any agreed departures referred to under item (j). This confirmation will include any statement required under PS Where the valuation is for inclusion in a financial statement and is in accordance with IVA 1, this must be specifically stated (see PS 4.1 and appendix 6.3). Statements concerning valuations by other valuers, that have been included in the report, should also be referred to (see PS 6.10). Reports must include a statement about the extent to which the values are supported by market evidence, or are estimated using other valuation techniques (which shall be disclosed) because of the nature of the property, or limited transactions or any combination of these factors. In the main body of the report the opinion of value is required in words, as well as in figures. Where the valuation instruction includes a number of properties falling into different categories it would normally be inappropriate to produce an aggregate valuation of the whole, although this will depend upon the purpose for which the valuation is required. If the identification of individual properties and their values is consigned to a schedule(s) appended to the report, a summary of values must be included within the body of the report. Negative values must be stated separately, and not set off against the positive values of assets (see PS 6.8). The report must be signed by the person who accepts responsibility for it (see PS 1.4). Practice statements RICS VALUATION STANDARDS 97 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 87 / Date: 18/9

106 Appendix 6.2 Examples of published references to valuation reports Practice statements Appendix 6.2 Examples of published references to valuation reports The following examples are intended to be illustrative only of the typical degree of detail required and the valuer must have due regard to the requirements of appendix 6.1(n), PS 6.11 Publication statement, and produce a statement that reflects the scope and nature of the property valued. 1. Valuations by an external valuer Valuation under IFRS The company s freehold and leasehold properties were valued on 31 December 2004 by an external valuer, Joe Smith, FRICS of Alpha Chartered Surveyors. The valuations were in accordance with the requirements of the RICS Valuation Standards, sixth edition and the International Valuation Standards. The valuation of each property was on the basis of Market Value, subject to the following assumptions (include as appropriate): (i) (ii) (iii) For owner-occupied property: that the property would be sold as part of the continuing business. For investment property: that the property would be sold subject to any existing leases. For surplus property and property held for development: that the property would be sold with vacant possession in its existing condition. The valuer s opinion of Market Value was primarily derived using (include as appropriate): + comparable recent market transactions on arm s length terms; + the depreciated replacement cost approach because the specialised nature of the asset means that there are no market transactions of this type of asset except as part of the business or entity; + using an estimate of the future potential net income generated by use of the property, because its specialised nature means that there is no market based evidence available. Similar comments may be appropriate where the valuation is of plant & equipment or mineral bearing land. 2. Valuations by an internal valuer The statements will be the same as those for valuations by an external valuer with the following variations of the first sentence: 98 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 88 / Date: 18/9

107 Appendix 6.2 Examples of published references to valuation reports The company s freehold and leasehold properties were valued by an internal valuer, Joe Smith FRICS, the company s chief estates surveyor, as at 31 December The company s freehold and leasehold properties were valued as at 31 December 2007, by the directors, in conjunction with the company s own professionally qualified staff. And, where appropriate, at the end of the statement: A representative sample of properties was also valued on the same basis by external valuer, ABC Chartered Surveyors, who confirmed that values proposed by the company s professionally qualified staff are at level(s) consistent with their own figures. Practice statements RICS VALUATION STANDARDS 99 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 89 / Date: 18/9

108 Appendix 6.3 Reporting valuations under IFRS Practice statements Appendix 6.3 Reporting valuations under IFRS 1. This appendix gives additional guidance to members on the application of International Valuation Application 1(IVA 1)in the International Valuation Standards. Paragraph of IVA 1 provides that: IVSC considers that a professional Valuer undertaking an appraisal for this purpose should report the Market Value of the asset. Any assumptions or qualifications made in applying Market Value should be discussed with the entity and disclosed in the report. IVSC IVA 1, para There is currently a lack of clarity in the International Financial Reporting Standards (IFRS) as to the assumptions that have to be made when valuing assets for different purposes. 3. Accounts generally are produced on the assumption that the entity is a going concern, unless management either intends to liquidate the entity, or cease trading, or has no realistic alternative but to do so. Therefore in IAS 16, fair value might be expected to reflect the value of the particular asset as part of the continuing business. 4. However, IAS 16 provides that the revaluation option can be applied to the asset, not to the enterprise, and this raises uncertainty as whether the valuer should assume that the asset can be removed from its operational setting and sold in isolation, or whether it should be valued as part of the continuing enterprise. These alternative assumptions may add or detract from its value, and therefore it is necessary for the valuer to ascertain from the client the assumption or assumptions on which Market Value is to be reported. The International Accounting Standards Board (IASB) has acknowledged some of the difficulties surrounding the application of fair value concepts in IFRS and is currently undertaking a project to review the principles of measurement in financial statements. 5. The potential for the Market Value of an asset to differ depending upon whether it is valued on the assumption that it will remain part of the continuing enterprise or on the assumption that it separated from the business before sale, raises particular issues for owner-occupied property. For example, an owner-occupied property may have been utilised for the purpose of the enterprise for many years, but, since its original acquisition, the area may have changed in character with the result that the property has a higher value for an alternative use. If the property is valued at the figure it would actually achieve if it were placed on the market, the valuation would necessarily reflect the alternative use. However, that valuation would also assume that the 100 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 90 / Date: 18/9

109 Appendix 6.3 Reporting valuations under IFRS enterprise had either been extinguished or relocated, which may affect the value of other assets employed in the enterprise. 6. Paragraph 6.3 in IVA 1 requires the valuer to report the value based on the alternative use, but with a statement that the value for the alternative use takes no account of issues such as business closure or disruption and the associated costs that would be incurred in achieving the alternative use, and that these should be considered by the entity when deciding the appropriate amount to adopt as fair value. Practice statements 7. Although it is clearly correct that the entity is alerted to the potential higher value for an alternative use, it does not follow that the entity will necessarily adopt this as the carrying amount in the accounts, as the figure could be incompatible with the going concern concept on which the accounts are prepared. Also, a valuation reflecting an alternative use could not be used for calculating the depreciable amount of land and buildings under IAS 16, as this requires any increase in the value of the land to be disregarded. 8. Pending clarification of the assumptions underpinning the concepts of fair value for different purposes in IFRS, RICS recommends that explicit assumptions are made in situations where a valuer has identified a material difference between the value of an asset for an alternative use and its value as part of the continuing business. Typical qualifying assumptions could be: (a) (b)...themarket Value on the assumption that the property is sold as part of the continuing enterprise in occupation x... the Market Value on the assumption that the property is sold following a cessation of the existing operations, x. This valuation takes no account of the costs of business closure or relocation. 9. Coupled with an assumption that the property is valued as part of the continuing enterprise, other assumptions and disregards may be appropriate. For example, a site used for a heavy industrial process may have ground contamination that is of no consequence to the continuing business, but which would have a depressing effect on value if the enterprise was closed or removed and the property sold for redevelopment. In such cases it may be appropriate to provide a valuation on the special assumption that the contamination has no effect on the Market Value. 10. RICS believes that it is the role of the valuer to provide the client with all relevant information to enable the client to make informed decisions on the most appropriate accounting treatment, and who is in a position to account for the different assets employed in the enterprise in a compatible fashion. RICS VALUATION STANDARDS 101 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 91 / Date: 18/9

110 102 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 92 / Date: 18/9

111 Guidance notes GN 1 Trade related property valuations 1. Introduction 1.1 The commentary to PS 3.2 indicates that special consideration must be given to the application of Market Value to certain categories of property that are normally bought and sold on the basis of their trading potential. Examples of this type of property include hotels, bars, restaurants, theatres or cinemas, fuel stations, and care homes. The essential characteristics of properties that are normally sold on the basis of their trading potential is that they are designed, or adapted, for a specific use and that ownership of the property normally passes with the sale of the business as an operational entity. Guidance notes 1.2 This guidance note is restricted to trade related property valuations. It considers the additional criteria that need to be considered by the valuer in these cases but does not concern itself with methods of valuation, which will vary depending upon the property to be valued. 2. Terms used in this guidance note 2.1 It is essential that the valuer recognises, and understands, that the terms used in this guidance note may have different meanings when used by other professional advisers. In particular the term property in valuation terms is defined in the glossary whereas in other contexts it includes intangible assets as well as intellectual property. Unless stated otherwise the term property is used in this guidance note as defined in the glossary. In this guidance note the following terms will be used as defined in the following paragraphs. 2.2 Trade related property Property with trading potential, such as hotels, fuel stations, restaurants, or the like, the Market Value of which may include assets other than land and buildings alone. These properties are commonly sold in the market as operating assets and with regard to their trading potential. Also called property with trading potential. IVSC GN 12, para 3.5 RICS VALUATION STANDARDS 103 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 1 / Date: 18/9

112 GN 1 Trade related property valuations 2.3 Valuation of the operational entity The assessment of the value of the operational entity will usually include: + the legal interest in the land and buildings; + the plant & equipment, trade fixtures, fittings, furniture, furnishings and equipment; + the market s perception of the trading potential, excluding personal goodwill, together with an assumed ability to obtain/renew existing licences, consents, certificates and permits; and + the benefit of any transferable licences, consents, certificates and permits. Consumables and stock in trade are normally excluded. 2.4 Reasonably efficient operator Guidance notes A market-based concept whereby a potential purchaser, and thus the valuer, estimates the maintainable level of trade and future profitability that can be achieved by a competent operator of a business conducted on the premises, acting in an efficient manner. The concept involves the trading potential rather than the actual level of trade under the existing ownership so it excludes personal goodwill. IVS GN 12, para Goodwill Transferable Goodwill. That intangible asset that arises as a result of property-specific name and reputation, customer patronage, location and similar factors, which generate economic benefits. It is inherent to the specialized trading property and will transfer to a new owner on sale. IVSC GN 12, para In previous RICS guidance transferable goodwill has also been referred to as inherent goodwill. In the valuation context these terms are identical. Other professional advisers, may use other definitions of types of goodwill, such as free goodwill, which do not have any bearing on the valuation of property. In relation to a trade related property valuation, goodwill is either capable of transfer with the property interest or it is not. Personal goodwill. The value of profit generated over and above market expectations which would be extinguished upon sale of the specialized trading property, together with those financial factors related specifically to the current operator of the business, such as taxation, depreciation policy, borrowing costs and the capital invested in the business. IVSC GN 12, para RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 2 / Date: 18/9

113 GN 1 Trade related property valuations Personal goodwill, where it can be identified, remains with the operator and, in principle, may be transferred to another property. The comment that the personal goodwill would be extinguished refers to that element of personal goodwill to be excluded from the consideration of the maintainable level of trade of the subject property and not the personal goodwill itself which is an intangible asset. 3. Valuation assumptions 3.1 Trade related property will usually be valued subject to specific assumptions. 3.2 Where the property is trading and the trade is expected to continue a typical assumption would be: Market Value as a fully-equipped operational entity having regard to trading potential. 3.3 Where the property is empty either through cessation of trade or it is a new property with no existing trade to transfer different assumptions are made. For example, an empty property may even have been stripped of all or much of its trade equipment, (or a new property may not have the trade equipment installed) but it could still be valued having regard to its trading potential. Guidance notes 3.4 Also the closure of a business, and the removal of some, or all, of the trade equipment, may have a significant effect on the value of the property. It will, therefore, often be appropriate to express the value on the basis of one or more special assumptions, as well as on a basis reflecting the status quo. This is often a requirement when advising a lender as to the value of trade related property for loan security purposes. It does not follow that the difference between this special assumption and the value reflecting the status quo represents the value of transferable goodwill, and valuers should not indicate any such apportionment. For example, the differences could reflect the cost and time involved in removing the fixtures and purchasing new equipment. Other examples of special assumptions are given in appendix In these cases the typical assumption will be: Market Value of the empty property having regard to trading potential [subject to the following special assumptions ] 4. The valuation approach 4.1 The valuation of a trade related property necessarily assumes that the transaction will be of the property interest, together with all the equipment required to continue operating the business (if it is assumed to be fully-equipped ). In this context equipment includes plant & equipment, fixtures, fittings and furnishings. However, care must be taken because this assumption does not necessarily mean that all such equipment is to be included in the valuation. For example, in RICS VALUATION STANDARDS 105 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 3 / Date: 18/9

114 GN 1 Trade related property valuations the case of a valuation in connection with a proposed transaction or for security purposes some equipment may be owned by third parties and would therefore not form part of the interest being valued. In order to avoid misunderstanding the valuer should always establish what is to be included in the valuation when settling the terms of engagement, and make this clear in the report. 4.2 Where assets that are essential to the running of the entity are either owned separately from the land and buildings, or are subject to separate finance leases or charges, an assumption may need to be made that the owners or beneficiaries of any charge would consent to the transfer of the asset as part of a sale of the operational entity. If it is not certain that such an assumption could be made, the valuer must consider carefully, and comment in the report on, the potential impact on the valuation that would be caused by the lack of availability of those assets to anyone purchasing the operation. Guidance notes 4.3 The valuer needs to be aware of the distinction between the Market Value of an operational entity, and the value to the particular operator (its worth to that operator). The operator will derive worth from the current and potential net profits from the business operating in the chosen format. While the present operator will be one potential bidder in the market, the valuer will need to understand the requirements and the achievable profits of all other potential bidders, and the dynamics of the open market to come to an opinion of value. 4.4 A valuation on the basis of Market Value should only reflect the transferable goodwill that relates to the trading potential of the property. The valuation should exclude any personal goodwill to the present owner or operator which would not be passed to a purchaser of the property. For example an operator may attract significant custom (personal goodwill) to a specific property as a result of their celebrity status, or a corporate operator may attract significant custom as a result of their brand identity or that of a brand under licence. Such additional custom would move with that person, or company to a new location managed by them but would not transfer on the sale of the property to any purchaser. It may even be terminated by a licensor. Assessing the potential 4.5 Trade related properties are considered as individual trading concerns and typically are valued on the basis of their potential earnings before interest, taxes, depreciation and amortisation (EBITDA) on the assumption that there will be a continuation of trading. The EBITDA of the actual business will often be different from the valuer s EBITDA which is based on an assessment of the market s perception of the potential earnings. 4.6 The task of the valuer is to assess the fair maintainable level of trade and future profitability that could be achieved by a reasonably efficient operator of the business upon which a potential purchaser would be likely to base an offer. Where trading information is provided by the actual operator the valuer should not assume that it represents the fair 106 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 4 / Date: 18/9

115 GN 1 Trade related property valuations maintainable trade. Just as a valuer of investment property should test whether a passing rent is in-line with current open market rent,atrade related property valuer should test by reference to comparables whether the present trade represents a reasonably maintainable trade in current market conditions 4.7 When assessing future trading potential, the valuer should exclude any turnover and profit that is attributable solely to the personal skill, expertise, reputation and/or brand name of a licensor, the existing owner or management. However, in contrast, the valuer should include any additional trading potential which might be realised under the management of a reasonably efficient operator taking over the existing business at the date of valuation. 4.8 When valuing properties by reference to trading potential, the valuer will need to compare trading profitability with similar types and styles of operation. Therefore a proper understanding of the profit potential of those property types, and how they compare to one another, is essential. 4.9 The valuer should endeavour to establish the accuracy and reliability of trading information provided for the purpose of the valuation. If any doubt of its accuracy exists, or of the underlying assumptions supplied, the valuer should recommend verification. Guidance notes 4.10 For many trading entities the vehicle for a transfer of the going concern business will be the sale of a freehold or leasehold interest in property. Such transactional evidence can be used as comparable evidence in the valuation of trade related properties, solongasthe valuer is in a position to exclude the value of the component parts of the transaction that are not relevant to the valuation of a trade related property, for example stock, consumables, cash and intangible assets A secondary basis of comparison may be by reference to physical factors, for example, when comparing one hotel with another using a value per bedroom approach. However, when using such a method it is essential that the basis used for comparison is truly relevant, as regards style, location, trading circumstances, and so on New competition can have a dramatic effect on profitability, and hence value. The valuer should be aware of the impact of current, and expected future, levels of competition and, if a significant change from existing levels is anticipated, should clearly identify this in the report and comment on the general impact it might have on profitability and value Outside influences, such as the construction of a new road or changes in relevant legislation, can also result in a very substantial effect on the value of property valued with regard to its trading potential Particular care must be taken, where the valuation is for the purposes of financial statements, to ensure that other items in the financial statements are not already included in the valuation. RICS VALUATION STANDARDS 107 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 5 / Date: 18/9

116 GN 1 Trade related property valuations Regulatory licences, consents, certificates, permits and approvals 4.15 When properties are sold as fully-equipped operational entities, the purchaser will normally need to renew licences or other statutory consents and take over the benefit of existing approvals, certificates and permits. For trade related property valuations it is normally assumed that all licences and permits will be transferred or granted on the date of transfer of the property interest, so where the valuer is making any different assumption it should be clearly stated as a special assumption The valuer should, where possible, inspect the licences, approvals, consents, permits and certificates relating to theproperty. Where this is not possible the assumptions made should be identified in the report, together with a recommendation that their existence should be verified by the client s lawyers. Guidance notes 5. Allocation (or apportionment) of valuations or transaction prices to their components 5.1 Where a valuation of a trade related property has been provided as a fully-equipped operational entity the valuer may be asked to provide an apportionment of the valuation between the elements listed in paragraph Where a transaction includes trade related property, or there has been some other form of business transfer, the valuer may be requested to allocate a transaction price into any or all of the following components: + the elements listed in paragraph 2.3; + inventory, being the trading stock and consumables; + intangible assets and liabilities. It is possible that several types of intangible assets will have to be separately identified and these could include: marketing-related; customer-related; artistic-related; contract-based; and technology-based. In some cases these allocations may also be required for the purpose of secured lending or property taxation. 5.3 Before considering making such apportionments it is essential that the valuer has detailed knowledge of the market in the particular type of trade and is able to distinguish between the value of transferable goodwill and personal goodwill RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 6 / Date: 18/9

117 GN 1 Trade related property valuations 6. Going concern or business valuations 6.1 This guidance note does not apply to going concern or business valuations. 6.2 In such cases the guidance in IVS GN 6 Business valuation should be considered. 6.3 Members who carry out trade related valuations may also be active in the valuation and transfer of businesses. These members acquire specialist knowledge, skills and access to relevant data which enable them to undertake such instructions. 6.4 This guidance note does not deal with the valuation of intangible assets and the valuer will need to liaise with other consultants who have specialist knowledge of analysing the business s financial performance, and valuing intangible assets, such as brands and trademarks in appropriate cases. Guidance notes RICS VALUATION STANDARDS 109 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 7 / Date: 18/9

118 GN 2 Plant & equipment GN 2 Plant & equipment 1. Introduction 1.1 This guidance note provides additional commentary on the application of the RICS Valuation Standards to plant & equipment. 1.2 Plant & equipment is defined as: Guidance notes Tangible items other than realty, that: are held by an entity for use in the production or supply of goods or services, for rental by others, or for administrative purposes; and are expected to be used over a period of time. IVSC. GN 3, para Where the valuation is for inclusion in financial statements prepared under IFRS the definition is: Tangible assets that: are held for use in the production or supply of goods or services, for rental by others, or for administrative purposes; and are expected to be used during more than one (accounting) period IASB IAS 16, para Plant & equipment assets have particular characteristics that distinguish them from most types of real property and that influences both the approach to and reporting of their value. Plant & equipment are typically capable of being moved or relocated and often will depreciate at a significantly faster rate than real property. Frequently, the value will differ notably depending on whether an item of plant or equipment is valued in combination with other assets within an operational unit or whether it is valued as an individual item for exchange, and where it may be considered as either in-situ (in place) or for removal. 1.5 Plant & equipment may be broadly divided into: + Plant: Assets that are inextricably combined with others and that may include items that form part of the building services installations specialised buildings, machinery, and equipment. 110 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 8 / Date: 18/9

119 GN 2 Plant & equipment + Machinery: Individual machines or a collection of machines which may have been installed wholly in connection with the occupiers industrial or commercial processes. A machine is an apparatus used for a specific process in connection with the operation of the entity. + Equipment: Other assets such as furniture and furnishings, tenants fixtures and fittings, vehicles, and loose tools that are used to assist the operation of the enterprise or entity. 1.6 The boundaries between these categories are not always easy to define, and the criteria used may vary according to the purpose of the valuation and the users accounting conventions. 1.7 The general rule is that assets installed primarily to provide services to the buildings should be valued as part of the property interest if they would normally be included in a sale of the property. However,there may be exceptions to this general rule where the valuation is required for inclusion in a balance sheet, or for tax purposes. In these cases the client may require a separate valuation for certain items of building service plant. 1.8 In valuations for financial statements the accounts of the entity will normally identify the items of plant & equipment that are separately valued. In other cases the valuer will need to clarify with the client the items that should be included in a valuation of the plant & equipment. Guidance notes 1.9 When different valuers are employed to carry out property and plant valuations, careful liaison will be needed to avoid either omissions or double counting. 2. Plant & equipment usually included in valuations of the property interest 2.1 This will include: + items associated with the provision of services (gas, electricity, water, drainage, fire protection and security) to the property; + equipment for space heating, hot water and air conditioning not integral to any process; + structures and fixtures that are not an integral part of process equipment, for instance, chimneys, plant housings, and railway tracks. 2.2 Occasionally, items normally valued with the land and buildings will be subject to a third-party interest, for example, a finance arrangement or finance lease (see paragraph 4). Valuers should be particularly cautious in such cases. The client may require that the valuation ignores any such encumbrances, in which case a special assumption should be made to this effect. However this type of assumption may not always be appropriate, and the valuer may need to investigate the cost of paying off the third party to gain outright control or assess the impact on the value of the property interest if the item were removed. RICS VALUATION STANDARDS 111 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 9 / Date: 18/9

120 GN 2 Plant & equipment 3. Plant & equipment separately valued 3.1 Plant & equipment valued separately from the property interest can be divided into broad categories of assets. Fixed assets are often defined by the accounting standards applicable in the relevant state. The different categories may need to be identified and valued separately, depending on the purpose of the valuation. 3.2 Examples of fixed assets include: + process and production plant and machinery; + fixtures and fittings; + office equipment, including computers; + office furniture; and + vehicles and mobile plant. Guidance notes 3.3 Items that may fall within the definition of plant & equipment, but which may not be regarded as fixed assets include: + product-dedicated items, for example, moulds, jigs, dies and spare parts; and + stocks, materials-in-trade, new stores and work in progress. 3.4 Although intangible assets fall outside the definition of plant & equipment they may have an impact on its value. In such cases the valuer should establish appropriate assumptions, with regard to the availability of any relevant intangible assets, before reporting a valuation. Examples of intangible assets include: + commercial and administration records, drawings, designs and technical data; and + licences, operating systems, goodwill, patents, trademarks, brand names and other intellectual property. 4. Encumbered assets 4.1 It is common for plant & equipment to be subject to financing arrangements that mean they cannot be sold without the lender being paid any balance outstanding under the arrangement, which may or may not exceed the unencumbered value of the item. 4.2 Items subject to finance leases are normally included in a valuation of an organisation s assets, but should be identified separately. 4.3 Items that are subject to operating leases or are the property of third parties should also be excluded. These items may also require separate valuation. 5. Material considerations 5.1 When valuing plant & equipment on the basis of Market Value, PS 3.2 requires that the valuer indicates whether the valuation assumes that the assets remain in their working place, or are valued for removal. 112 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 10 / Date: 18/9

121 GN 2 Plant & equipment Further assumptions may also be required, depending upon the purpose of the valuation. Examples include: + how the property is to be offered for sale, for example, as a whole or as individual items; + the assumed method of sale; + whether the purchaser or vendor is to bear the costs of decommissioning or removal; + whether allowance is made for any cost of reinstatement following removal and, if so, who is to bear the cost. 5.2 If a valuation is being undertaken with a view to disposing of plant & equipment separately from the property in which it is situated, there may be time constraints on the time available for marketing and disposal, for example, if a lease on the property is due to expire. If the valuer considers that this time limit is inadequate for proper marketing, as defined in the conceptual framework for Market Value, it may be inappropriate to provide a Market Value, other than to illustrate the adverse impact of the time constraint. The valuer can advise on the price that is likely to be obtained as a result of the constraint, but should not describe this as a forced sale value (see PS 2.4). If no constraint exists at the date of valuation, but a client requires advice on the impact that such a constraint on the marketing period may have, a Market Value can be provided, subject to a special assumption in the report that clarifies the time limit assumed, and the reasons for it. Guidance notes 5.3 Many of the inspection requirements set out in PS 5 can be readily adapted to plant & equipment assets. In order to prepare a valuation the valuer first needs to establish matters such as the type, specification, capacity and purpose of the items, then consider matters such as age, efficiency, condition, economic and functional obsolescence, and total useful economic working life. 5.4 As when valuing land and buildings, it will normally be impractical, if not impossible, for the valuer to establish every material fact that could have an impact on the valuation. Therefore the extent of the valuer s investigations, and any assumptions reflected in the valuation, will have to be agreed with the client and included in the report. 5.5 Similarly there will be occasions when factors affecting the land and buildings will impact on the valuation of plant & equipment. Examples include where the property is held on a short lease, if there are proposals for redevelopment, or if there is contamination of the land that would require plant to be decontaminated prior to removal. 6. Regulatory measures 6.1 Industrial activities are frequently subject to specific legislation and regulations. Non-compliance with these legal requirements may result in the suspension of the right to use the plant & equipment in question. Many of these are specific to the plant and process being RICS VALUATION STANDARDS 113 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 11 / Date: 18/9

122 GN 2 Plant & equipment considered and the valuer must consider the nature of the plant and activity, and the purpose of the valuation and its extent, in determining how far the regulatory measure which can, or might, affect the valuation should be investigated. 6.2 Where there is doubt about compliance with any regulations the valuer should discuss the matter with the client and refer to the outcome in the report, either by agreeing to make assumptions or referring to any certificates of compliance that may be available. Guidance notes 114 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 12 / Date: 18/9

123 GN 3 Valuations of portfolios and groups of properties GN 3 Valuations of portfolios and groups of properties 1. Introduction 1.1 This guidance note provides guidance on the matters that valuers should consider when undertaking a valuation, or valuations, of several properties simultaneously for the same client. 1.2 To avoid giving misleading or inappropriate advice, particular regard must be had to matters such as lotting or grouping, the identification of different property categories, and to any assumptions or special assumptions relating to the circumstances under which the properties may be brought to the market. Guidance notes 2. Identification of separate property 2.1 Where there is doubt about what constitutes a single property, the valuer should generally lot, or group, the properties for valuation in the manner most likely to be adopted in the case of an actual sale of the interest or interests being valued. However, the valuer should discuss the options with the client and must take care to confirm the approach adopted in both the terms of engagement and in the report. 2.2 Examples of situations where specific clarification of the lotting assumption needstobemadeinclude: + physically-adjoining properties that have been acquired separately by the current owner, for example, where a developer has assembled a site with a view to future redevelopment, or where an investor is building a strategic stake in the locality; + physically separate properties that are occupied by the same entity and where there is a functional dependence between the properties, for example, a car park that is separate from, but exclusively used by, the occupier of a building; + where ownership of a number of separate properties would be of particular advantage to a single owner or occupier because of economies that could result from either increased market share or from savings in administration or distribution, as with a chain of retail outlets or hotels; and + where each individual property is an essential component of an operation covering a large geographical area, for example, as part of a national or regional utility network, such as telecommunication masts. RICS VALUATION STANDARDS 115 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 13 / Date: 18/9

124 GN 3 Valuations of portfolios and groups of properties 2.3 The purpose of the valuation may well dictate the approach taken. For example, there may be a requirement for the value of the assets to be reported individually. The extent of what comprises an individual property or other asset will need to be clarified with the client. 2.4 Requests to value properties on an assumption which lots them in an artificial manner should normally be declined. However in certain circumstances, unusual lotting may be dealt with by way of a special assumption (see PS 2.3). 3. Valuation assumptions Guidance notes 3.1 Once the valuer has identified the lots within a portfolio that are to be valued separately, consideration needs to be given to any particular assumptions or special assumptions that may be necessary. These need to be recorded in the terms of engagement (PS 2) and in the report (PS 6). Examples of situations where different assumptions can have a material effect on the valuation of a portfolio are discussed in the following paragraphs. 3.2 If a whole portfolio, or a substantial number of properties within it, were to be placed on the market at the same time, it could have the effect of flooding the market, leading to a reduction in values. Conversely the opportunity to purchase a particular group of properties might produce a premium. In other words the value of the whole could exceed the sum of the individual parts. 3.3 If valuing for a purpose that assumes that the portfolio will continue to remain in the existing ownership or occupation, for example, for inclusion in financial statements, it would be inappropriate to make any reduction or allowance in the valuation to reflect the possible effect of flooding the market. A statement to this effect should be made in the report. 3.4 However, if the same portfolio were to be valued for another purpose, for example, as security for secured lending, the possible adverse effect on individual properties, if the whole portfolio were placed on the market at the same time, should not be ignored. In such cases it would normally be appropriate to state that the assumption has been made that the properties would be marketed in an orderly way, and that they would not all be placed on the market at the same time. However, if circumstances existed that such an assumption would not be made by the market, for example, if it were known that the current owner was in financial difficulty, this would become a special assumption, and its effect on the valuation should be clearly stated (see PS 2.2). 3.5 Likewise, where the valuer ascribes a single value to a group of separate properties, any assumptions necessary to support that approach should be stated. If the valuer considers that treatment of the portfolio on this basis is not one that the market would necessarily make, such assumptions would become special assumptions (see PS 2.2). 116 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 14 / Date: 18/9

125 GN 3 Valuations of portfolios and groups of properties 4. Reporting requirements 4.1 In any case where the total value of the properties within a portfolio would differ significantly, depending on whether they were disposed of individually, in groups or as a single lot, this should be stated clearly in the report. The lotting assumptions made should also be included in any published reference. 4.2 Where a portfolio or group of properties has been valued on the assumption that it would be sold as a single entity, the reported Market Value will relate to the whole of the group. Any breakdown of the Market Value of the individual properties should be clearly expressed as such, with a statement made that this apportionment does not necessarily equate to the Market Value of the interest in any individual property. 4.3 Conversely, if an aggregated figure is provided of the total of the Market Values for each individual property in a portfolio, care should be taken not to present this as the Market Value of the entire portfolio. Guidance notes RICS VALUATION STANDARDS 117 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 15 / Date: 18/9

126 GN 4 Mineral-bearing land and waste management sites GN 4 Mineral-bearing land and waste management sites 1. Introduction Guidance notes 1.1 This guidance note discusses additional matters that a valuer needs to take into account when applying the principles of PS 3 Basis of value to the valuation of wasting assets, such as mineral deposits and waste disposal sites. 1.2 A feature common to mineral working sites and waste management sites, but less usual elsewhere, is that both may have a nil or negative value at the end of their operational lives. It is possible, however, that the land may have a value for some other use, following mineral working or waste management. 2. Wasting assets 2.1 Wasting assets can be defined as fixed assets which, when consumed, cannot be renewed in the existing location. Examples of such assets are mineral workings, and waste disposal void space (and burial grounds, which are not discussed in this guidance note). These assets share the characteristic that the annual rental value varies according to the level of output or input and this, in turn, affects the remaining useful economic life of the asset and, therefore, its capital value. 2.2 When valuing a wasting asset, the valuer should first seek to collect any available information that could assist in establishing the remaining economic life of the asset and then agree any assumptions or special assumptions that may be appropriate in order to complete the valuation. Examples of assumptions that may be required when valuing wasting assets include: + an assumption that accurate or reliable information has been provided by the client, or a third party, as to the extent or quality of an exploitable mineral deposit; + an assumption as to future annual rates of extraction of a mineral or deposit of waste; and + a special assumption that an anticipated future event, with an impact on either the supply or demand for a mineral, has occurred. 118 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 16 / Date: 18/9

127 GN 4 Mineral-bearing land and waste management sites 3. Mineral assets 3.1 Although minerals will be an actual physical part of the land area within which they are situated they may be owned or leased with the surface, or held under separate title, with varying rights of working. They may be worked by underground mining, open pit, boreholes (as with oil and gas and brine pumping) or by way of treatment in situ (as with underground gasification of coal). Minerals beneath oceans and lakes may also be worked by dredging. 3.2 Different states have different laws relating to the ownership of minerals, and this will not always run with ownership of the surface interest in the land. In some states minerals are owned by the state, and these will normally be excluded from a valuation of the surface interest. There may, however, be rights incidental to the working of these minerals which may have a value, for example, there may be licences or leases that allow the owner of the land to extract the mineral, subject to the payment of a royalty. 3.3 Workings associated with mineralassets, such as mine shafts, can often become liabilities, particularly once they are no longer in use. Such sites may be unmarketable, or may result in a negative value for the whole, or part, of the property being valued (see PS 6.8). 3.4 Material considerations by a valuer of mineral assets will therefore include establishing the legal basis of the interest in the mineral, the terms of any royalty payment due to the state or any other third party investigating the quality and specification of the mineral, the demand that exists for it in the market, and, finally, any liabilities associated with redundant workings. Guidance notes 4. Waste management sites 4.1 Waste management sites may be categorised under three broad headings which relate to the way in which waste is processed. These are: + final disposal sites (landfill into pre-existing excavations and landraising without prior excavation); + waste treatment (such as biological breakdown and energy from waste incineration); and + waste recycling (to include waste transfer and composting). Some sites accommodate a combination of these operations. 4.2 Usually only landfill and landraising sites come under the heading of wasting assets since waste treatment and recycling sites can, in most instances, be operated indefinitely in the same way as any other commercial site. However, both waste treatment and waste recycling sites generate residues which can only be disposed of to landfill, and it is therefore possible for the life of a waste treatment or recycling site to be linked to that of an associated landfill site. Where this occurs, the value of the site for waste management purposes will be a wasting RICS VALUATION STANDARDS 119 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 17 / Date: 18/9

128 GN 4 Mineral-bearing land and waste management sites asset. In many states waste management or disposal operations are subject to stringent statutory regulation, which controls not only the type of waste which may be handled, but also imposes strict conditions on the construction of the site and working practices. 4.3 Old waste management sites may not be marketable because of actual or perceived hazards arising from that use. Such liabilities or hazards may result in a negative value for the whole, or part, of the property being valued. 4.4 Material considerations for the valuer will include establishing the statutory framework, identification of the precise category of waste that may be processed, the conditions of operation, and the market place, for example, the supply of waste. Guidance notes 5. After uses 4.5 Electricity generation from landfill gas is a common practice and can be a valuable asset. This is a wasting asset, but its life will be longer than that of the landfill operation from which it is derived. 5.1 A wasting asset will often have an alternative use once the prime or current use has ceased, for example, a quarry may have potential for landfill, either for waste disposal, or for land restoration and subsequent redevelopment. The valuer should seek to establish whether such potential exists and, if so, agree with the client any assumptions or special assumptions that may be appropriate to advise on the potential value for after uses. 5.2 Like minerals, waste disposal void space forms part of the corpus of the land and may be owned or leased with the surface, or held under separate title with rights to backfill. 5.3 In the case of a landfill site the asset may be restricted to the void space, but could include other land, extending to the site as a whole when filling has been completed. There may also be potential for electricity generation from landfill gas that will continue long after waste disposal has been completed. 5.4 Unless the minerals to be valued or, at landfill sites, the void space, have been severed from the surface, the valuation may well include elements of value of the surface as well as the minerals or void space. These elements may include the value of land which will be required for extraction or filling in the future, but which can be let to produce income until such time as it is required. 6. Associated buildings and plant 6.1 Valuations of mineral and waste management assets often include ancillary buildings and site improvements, as well as plant & equipment. The buildings will normally fall into the category of 120 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 18 / Date: 18/9

129 GN 4 Mineral-bearing land and waste management sites specialised properties and, where the valuation is for inclusion in a financial statement, may therefore be valued using the depreciated replacement cost method. 6.2 It is important to remember that the buildings, plant and other works will generally have lives limited to that of the wasting assets which they serve, but it is not unusual for mineral and waste management land and buildings to be put to other uses once their primary use has been exhausted. Where this is likely it may be appropriate to place a value on the site of the buildings and plant, additional to the value of the mineral reserve or waste disposal space. Where this is done the value under this heading must be distinguished clearly from the mineral or waste management value of the land and buildings. 6.3 The valuation may reflect costs which are also separately identified in the entities financial statement. Valuers must discuss with the directors and the auditors the accounting treatment of such costs, and the costs of any restoration liabilities, to ensure that these have been identified properly and to avoid double counting. The benefits of exploration works will usually be taken into account when coming to a reserve or void estimate, and in the choice of a risk or discount rate. Guidance notes RICS VALUATION STANDARDS 121 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 19 / Date: 18/9

130 GN 5 Valuation uncertainty GN 5 Valuation uncertainty 1. Introduction Guidance notes 1.1 All valuations are opinions of the price that would be achieved in a transaction at the valuation date, based on the stated assumptions or special assumptions. Like all opinions, the degree of subjectivity involved will vary significantly, as will the degree of certainty (that is, the probability that the valuer s opinion would be the same as the price achieved by an actual sale at the valuation date). These variations can arise because of the inherent features of the property, the market place or the information available to the valuer. They are no reflection on the professional skill or judgement of the valuer. 1.2 RICS has considered whether there would be merit in trying to develop a quantitative measure that could be used to indicate the degree of certainty that the valuer could ascribe to any particular valuation. However, following consultation, and putting aside the question of whether it would be possible to devise a measure that could both be applied consistently and also be clear and understandable to valuers and clients alike, it became clear that the majority of clients and other users of valuations have no need for such a measure. 1.3 While the consultation revealed that most clients would not find a quantitative statement of certainty to be helpful, many clients confirmed that they do find it helpful, if not essential, to their understanding of the valuation if the report includes an indication of the valuer s confidence in the valuation opinion offered, particularly where the level of uncertainty is significant. Valuers should not view the provision of advice that they have less confidence than usual in the valuation as an admission of weakness. Indeed, if failure to draw attention to material uncertainty gave a client the impression that greater weight could be attached to a valuation opinion than was warranted, the report would be creating a false impression, in breach of the general requirement in PS Identifying uncertainty 2.1 The following are examples of where uncertainty is likely to arise, and to have a material effect on the degree of confidence that can be applied to any valuation opinion. 122 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 20 / Date: 18/9

131 GN 5 Valuation uncertainty + Nature of the property or location If the property is of a type that is unusual, due to its locational or physical characteristics, or is not widely marketed, it may be difficult for the valuer to form an opinion of the likely demand. In each case there will be less comparable data available to the valuer, which could adversely affect the certainty of the valuation. + Restrictions on enquiries or information provided Where the information available to the valuer is limited or restricted, either by the client or the circumstances of the valuation, less certainty can be attached to the valuation than would otherwise be the case. + Method of valuation Development land or buildings that require major expenditure are often valued using the residual method, which is highly sensitive to the assumptions adopted. The range of uncertainty in such a valuation will usually be greater than that associated with other methods. Likewise, valuations based on forecast future cash flows could also be very sensitive to the assumptions made when making those forecasts. + Hope value A property may have significant hope value, perhaps for planning permission for a more valuable use, or for a potential transaction with a special purchaser. Any estimate of the amount that the market would pay for this added potential will be highly dependent on the assumptions made. + Legal changes Sometimes a market, a sector or an individual property will be affected by anticipated legislation or by disputes pending a court decision. Before either the detail of the legislation or the court s decision is known, potential buyers and sellers may be unwilling to commit to transactions. If the outcome is radical or unexpected, the aftermath may also produce uncertainty until the consequences are fully understood and reflected in the market. + Market instability Unforeseen macroeconomic or political crises can have a sudden and dramatic effect on markets. This could manifest itself by either panic buying or selling, or simply disinclination to trade until it is clear how prices in the market will be affected in the longer term. If the valuation date coincides with the immediate aftermath of such an event, the data on which any valuation is based may be confused, incomplete or inconsistent, with an inevitable effect on the certainty that can be attached to it. Guidance notes 2.2 While the above are examples of where material uncertainty may arise, the list is not exhaustive. In practice, it would be rare for a valuer to have the same degree of confidence in every valuation. RICS VALUATION STANDARDS 123 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 21 / Date: 18/9

132 GN 5 Valuation uncertainty 3. Reporting uncertainty 3.1 The manner in which the valuer s confidence in the valuation figure should be reported will depend upon the purpose of the valuation and the format of the report agreed with the client. However, in order to comply with the general requirement in PS 6.1 that valuation reports should not be misleading or create a false impression, RICS considers that, where uncertainty could have a material effect on the valuation, the valuer should draw attention to this, indicating the cause of the uncertainty and the degree to which this is reflected in the reported valuation. Guidance notes 3.2 For many valuation purposes, the valuation has to be expressed as a single figure, regardless of the level of certainty. Where this is the case, valuers should provide their best estimate, but comment upon the robustness of their opinion, such as by noting the availability and relevance of comparable market evidence, so that the client can judge the degree of confidence that the valuer has in the reported figure. 3.3 For valuations of some properties there may be an upper and lower limit that can be identified by the valuer. In such cases it may be appropriate to express the valuation as a range. However, where a valuer can reasonably foresee that different values may arise under different circumstances, a preferable approach would be to provide alternative valuations on the basis of special assumptions reflecting those different circumstances. 3.4 On other occasions where uncertain market conditions or other variable factors could have a material impact on the valuation, itmay be prudent to provide a sensitivity analysis to illustrate the effect that changes to these variables could have on the reported valuation. This will be particularly appropriate where a residual method has been used. 3.5 The use of qualifying words preceding the valuation figure, such as in the region of, or similar expressions, would not normally be adequate to convey material uncertainty without further explicit comment. As all valuations represent the valuer s opinion of the most probable of a range of possible outcomes based on the evidence available, such expressions simply confirm the degree of uncertainty attached to any opinion, however soundly based. 3.6 The existence of material uncertainty is not a licence to determine a valuation figure different from that which represents the valuer s honest judgement. 124 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 22 / Date: 18/9

133 UK practice statements UKPS 1 Valuations for financial statements UKPS 1.1 The bases of valuation Valuations for inclusion in financial statements prepared in accordance with UK Generally Accepted Accounting Principles (UKGAAP) shall be on the basis of either: (a) Properties other than specialised properties: Existing Use Value (EUV), as defined in UKPS 1.3, for properties that are owner occupied for the purposes of the entity s business; or Market Value (MV), as defined in PS 3.2, for property that is either surplus to an entity s requirements or held as an investment; (b) For specialised properties: Depreciated replacement cost. Valuations for this purpose are regulated purpose valuations (see UKPS 5.1) and the various disclosure requirements within PS 5.2 to 5.4 will apply. Commentary 1. This statement will take precedence over PS 4.1 (financial statements) where the client requires a valuation which complies with UKGAAP. 2. Accounting standards are issued by the Accounting Standards Board (ASB). They are published as Financial Reporting Standards (FRS) and are gradually superseding an earlier form of standard known as Statements of Standard Accounting Practice (SSAP). SSAPs that have not been superseded by FRS are still in force. The standards are freely available on 3. The relevant accounting standards can be found in FRS 15 Tangible Fixed Assets, and SSAP 19 Accounting for Investment Properties. Information on the accounting concepts, and explanation of some of the terms used, is provided in UK Appendix With the aim of converging UK and International Financial Reporting Standards (IFRS), the ASB has indicated an intention to amend FRS 15. This commentary will be revised when a new FRS 15 is issued. RICS VALUATION STANDARDS 125 UK practice statements Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 1 / Date: 18/9

134 UKPS 1 Valuations for financial statements 5. The frequency of valuations, with provision for full valuations and interim valuations, is discussed in UK Appendix 1.1. Both internal valuers and external valuers may carry out full valuations, but a full valuation by an internal valuer issubjecttoreviewbyanexternal valuer. In this case the review must include the valuation of a sample of the entity s properties sufficient for the external valuer to express an opinion on the overall accuracy of the valuation. The external valuer must also be satisfied that the sample represents a genuine cross-section of the entity s portfolio. An interim valuation, which can be carried out on a restricted basis, may be undertaken by either an external valuer or an internal valuer. 6. The valuer should agree with the client the appropriate basis of valuation when confirming the terms of engagement. For different categories of property different bases may be required. It should be noted that under FRS 15, depreciated replacement cost is recognised as a separate basis of valuation for reporting purposes. When settling the terms the valuer should indicate that although the definition of depreciated replacement cost may differ from that in the Appendix to FRS 15, the resultant valuation is the same. Further guidance on the identification of categories and the appropriate basis is in UK appendix Clients may ask the valuer to liaise with their auditors either before the report is made or subsequently. UK appendix 1.3 provides information about the relationship between the valuer and the auditor. UK practice statements 8. FRS 15 refers to open market value (OMV) rather than MV, as it was published in 1999 when OMV was still a basis supported by RICS. As stated in the glossary, there is no material difference between these two bases, and the correct application of either will produce the same figure. The term open market value should not be used in reporting, although the valuer should include an explanatory note that its replacement, Market Value, produces the same figure. Publication statement 9. PS 6.12 requires the member to include a draft statement for inclusion in the publication containing a reference to the report. UK appendix 1.6 provides examples of published references where the valuation is in accordance with UKGAAP. Statements of recommended practice (SORPs) 10. SORPs supplement accounting standards and other legal and regulatory requirements to reflect factors prevailing or transactions undertaken in a specialised industry or sector. SORPs are issued by the sectoral body recognised for the purpose by the Accounting Standards Board. 11. The purpose for which the valuation is being prepared may also be the subject of a SORP. SORPs may specify the basis of value or the criteria for establishing the valuer s independence or the disclosures that have to be made. 126 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 2 / Date: 18/9

135 UKPS 1 Valuations for financial statements UKPS The following SORPs contain specific valuation requirements and further information is provided in the relevant UKPS: + Capital accounting for Local Authorities. Issued by the Chartered Institute of Public Finance (CIPFA) and dealt with in UKPS Accounting by residential social landlords. Issued by the National Housing Federation (NHF) and dealt with in UKPS Authorised Funds (Collective Investment Schemes) Issued by the Investment Managers Association and dealt with in UKPS The following SORPs generally provide that these valuation standards shall apply but the valuer will need to check that any specific requirements, which may provide extended related party definitions impacting on the specific requirements of independence, are reflected in the report: + Accounting for further and higher education. Issued by Universities UK + Financial reports of pension schemes. Issued by the Pensions Research Accountants Group (PRAG) + Charities accounts and reports. Issued by the Charity Commission This SORP relates only to financial statements. Wherevaluations are required for acquisitions or disposals UKGN 4 Valuations for charities, will apply. + Accounting for insurance business. Issued by the Association of British Insurers + Investment trusts. Issued by the Association of Investment Companies Date of valuation Valuations for inclusion in financial statements must be as at the date of the report, or an earlier date. Commentary 1. There is no general restriction on the date of valuation in practice statements. 2. Valuations for inclusion in financial statements that may be relied on by third parties should only be as at the date of the report, or an agreed earlier date, due to the increased uncertainty of any estimate of value at a future date. 3. If valuations are prepared in advance of the date of any statement into which they have been incorporated, and there has been a significant change between the date of valuation and the date of the statement, RICS VALUATION STANDARDS 127 UK practice statements Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 3 / Date: 18/9

136 UKPS 1 Valuations for financial statements either in market conditions or to the property valued, this must be referred to in any published reference. 4. Where preliminary valuations arereportedinadvanceofthevaluation they must be clearly marked as drafts and PS 6.11 Preliminary valuation advice will apply. UK practice statements UKPS 1.3 Existing use value (EUV) Valuations based on Existing use value (EUV) shall adopt the definition settled by RICS. Existing Use Value is to be used only for valuing property that is owner-occupied by a business, or other entity, for inclusion in financial statements. Definition The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm s-length transaction, after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion, assuming that the buyer is granted vacant possession of all parts of the property required by the business and disregarding potential alternative uses and any other characteristics of the property that would cause its Market Value to differ from that needed to replace the remaining service potential at least cost. Commentary 1. The definition of EUV is the MV definition with one additional assumption and a further requirement to disregard certain matters. The definition must be applied in accordance with the conceptual framework of MV at PS 3.2, together with the following supplementary commentary: 2....thebuyerisgrantedvacant possession The assumption that vacant possession would be provided on acquisition of all parts of the property occupied by the business does not imply that the property would be empty, but simply that physical and legal possession would pass on completion. Any parts of the property occupied by third parties should be valued subject to those occupations.properties occupied by employees, ex-employees, or their dependants, should be valued with regard to the circumstances of their occupation, including any statutory protection. 2.2 This assumption also means that it is not appropriate to reflect any possible increase in value due to special investment or financial transactions (such as sale and leaseback) which would leave the owner with a different interest from the one which is to be valued. In particular the covenant of the owner-occupier must be ignored. 3. of all parts of the property required by the business 3.1 If parts of the property are unused, and surplus to the operational requirements of the business, their treatment will depend on whether 128 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 4 / Date: 18/9

137 UKPS 1 Valuations for financial statements they could be sold or leased separately at the valuation date. If they could be occupied separately then they should be allocated to a separate category as surplus property, and valued on the basis of MV. If separate occupation is not possible any surplus parts would have no more than a nominal Existing Use Value, as they would contribute nothing to the service potential of the property, and would not feature in a replacement at least cost. 4. disregarding potential alternative uses 4.1 Existing use, in the context of EUV, means that the valuer should disregard uses that would drive the value above that needed to replace the service potential of the property. An entity seeking to replace the service potential of the asset at least cost will not buy a property if its value has been inflated by bids from other potential occupiers for whom the property has greater value because of alternative uses or development potential which are irrelevant to its own requirements. 4.2 The valuer must ignore any element of hope value for alternative uses which could prove more valuable, though it would be appropriate to take into account any value attributable to the possibility of extensions or further buildings on undeveloped land, or redevelopment or refurbishment of existing buildings, providing that these would be required and occupied by the entity, and that such construction could be undertaken without major interruption to the current operation. 5. disregarding any other characteristics of the property that would cause its Market Value to differ from that needed to replace the remaining service potential at least cost. 5.1 There are circumstances where it may be appropriate for the valuer to ignore factors that would adversely affect the Market Value, but would not be characteristic of a replacement. Examples include: + where an occupier is operating with a personal planning consent that could restrict the market in the event of the owner vacating; + where the occupier holds the property under a lease and there are lease covenants that impose constraints on assignment or alternative uses; + where a property is known to be contaminated, but the continued occupation for the existing use is not inhibited or adversely affected, provided there is no current duty to remedy such contamination during the continued occupation; + where an industrial complex is overdeveloped, and the extra buildings have either a limited Market Value, or detract from the Market Value, but would need to be replaced to fulfil the service potential to the business; + where the existing buildings are old, and so have a limited Market Value, but would have a higher replacement cost to the business; + where the property is in an unusual location, or oversized for its location, with the result that it would have a very low Market Value, but where the cost of replacing the service potential would be significantly greater; UK practice statements RICS VALUATION STANDARDS 129 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 5 / Date: 18/9

138 UKPS 1 Valuations for financial statements + where the market is composed solely of buy-to-let investors, but the valuer believes that the replacement cost (the price agreed between a willing vendor and willing owner-occupier purchaser) would be higher. 5.2 Any value attributable to goodwill should normally be ignored, with the exception of trade related property (see GN 1), where the element of goodwill that is reflected in the trading potential (that which is inseparable from the interest in the property) should be included in the EUV. 5.3 The fact that a large property may be in single occupation does not necessarily mean that it has to be valued on the assumption that only bids from other potential occupiers for the whole can be taken into account. If the property is one where a higher value would be generated by the potential to divide it into smaller units for the existing use, this should be reflected in the valuation. 6. The underlying accounting concepts behind EUV are discussed in UK appendix 1.1. UK practice statements 7. Whilst the definition of EUV has changed from that published in previous editions of the Red Book, the underlying principles have not. The previous definition was based on the OMV definition, which has now been removed from these standards, but the new definition uses the MV definition, and the additional provisions have been reworded to define more precisely the requirements of the accounting standard. An EUV provided under the old or the new definition should produce exactly the same result. 8. Many market valuations are based on the existing planning use of the property as this represents the use which generates the highest value. Such valuations have sometimes been described as existing use valuations. However, this is incorrect and these valuations should properly be expressed as Market Values. It is emphasised that existing use value as defined is for use only when valuing, for inclusion in financial statements, property that is occupied by the owners of the interest being valued for the purpose of their business. 9. Further guidance on the interpretation of EUV is contained in Valuation Information Paper 1 Valuation of Owner-Occupied Property for financial statements. UKPS 1.4 Differences between EUV and MV Where there is a significant difference between the EUV and MV of the same property if it were surplus the member must provide an opinion on both bases and explain the reasons for this in the report. Any published reference to the report must refer to the valuations on both bases, except where the difference has no material effect on the aggregate value of the entity s properties. 130 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 6 / Date: 18/9

139 UKPS 1 Valuations for financial statements UKPS 1.5 Commentary 1. Where the property is of a type that is commonly traded in the market, with no higher value for an alternative use and with no unusual features that could restrict marketability, there would normally be little material difference between MV and EUV. However, as will be clear from the commentary to UKPS 1.3, there will be cases where the difference between the two bases is material. Where a difference exists, this could be material to an overall assessment of the entity s financial position, and in such cases the valuer must report both bases. In the case of a company there is an obligation (under the Companies Act 1985, para. 1(2) Schedule 7) for the directors to disclose if the Market Value of its assets is materially different from the figure that appears in the balance sheet. 2. Where the valuation involves a portfolio of properties, and the difference between EUV and MV on an individual property does not make a material difference to the aggregate value of the properties, the valuer simply needs to indicate whether the MV of a particular property would be higher or lower than the reported EUV. There is no obligation to provide alternative valuations or reasons for the difference. EUV of adapted property Where a property that is occupied by an entity for the purpose of its business has been adapted to suit the particular requirements of the entity s operations, the member should either: (a) provide the EUV of the property at the valuation date, as in its state after adaptation; or (b) provide the EUV of the property at the valuation date, as in its state before adaptation and, as a separate amount, the depreciated replacement cost of the adaptation works. Commentary 1. In the case of property that has been adapted the choice of which of the two alternative bases to use will depend on the accounting policies being used. Although it is the client s responsibility to decide which policy to adopt, it is reasonable to expect that the client will be guided by the valuer s advice. Option (a) can only be used if the valuer believes that it is possible to identify an EUV for the property in its existing state. 2. The valuer must take care to agree with the client exactly what adaptations are to be valued and, in so doing, check that any associated fixtures and fittings are not also included in the client s plant register, to avoid double counting. 3. In many cases adaptation works will be specific to the requirements of the occupier, so there will be no comparable evidence of what might be paid for a similarly-adapted property in the market. It is possible that such adaptations may have a detrimental effect on value, as most RICS VALUATION STANDARDS 131 UK practice statements Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 7 / Date: 18/9

140 UKPS 1 Valuations for financial statements purchasers would regard them as an encumbrance. In these circumstances FRS 15 permits the carrying amount (the figure entered into the balance sheet) to be the aggregate of the EUV of the unadapted property, the depreciated cost of the adaptations, and all directly attributable costs of acquisition. 4. Where the report includes a valuation using depreciated replacement cost, and the separate amount calculated is significant in relation to the EUV of the property in its state before adaptation, the resultant total value must be expressed as subject to adequate potential profitability (see PS 6.5) or, in the case of property in the public sector, to the prospect and viability of continued occupation (see PS 6.6). UKPS 1.6 Events after the balance sheet date Where a valuation may be materially affected by events after the balance sheet date, the member must refer to those events in the report and distinguish between adjusting events and non-adjusting events. Commentary 1. Under FRS 21, Events after the balance sheet date an entity is required to adjust its statements to reflect adjusting events which occur between the balance sheet date and the date when the financial statements are authorised for issue. UK practice statements 2. An adjusting event is one which provides evidence of conditions, favourable and unfavourable, that existed at the balance sheet date. Examples include the determination of a sale price of a property on the market or settlement of rent reviews. 3. Events that arise after the balance sheet date that could not be anticipated at that time are classified as non-adjusting events and these are not to be reflected in any amendment. For example, if a property is destroyed by fire after the balance sheet date. 4. Where non-adjusting events could influence the economic decisions of users taken on the basis of the financial statements, the entity is required to disclose the nature of the event and an estimate of its financial effect, or make a statement that such an estimate cannot be made. UKPS 1.7 Costs to be excluded 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. Commentary 1. In determining the figure to enter into the balance sheet (the carrying amount ), FRS 15 requires the addition of notional directly attributable acquisition costs, where material, to the EUV. Likewise, where property is surplus to the entity s requirements and valued on 132 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 8 / Date: 18/9

141 UKPS 1 Valuations for financial statements UKPS 1.8 the basis of MV, there should be a deduction for expected directly attributable selling costs, where material. If requested to advise on these costs, the member should report them separately and not amalgamate them with either the EUV or MV. These reported valuations should reflect the valuer s opinion of the consideration that would appear in the hypothetical sale and purchase contract. 2. FRS 15 states that directly attributable costs can include stamp duty, import duties and non-refundable purchase taxes, as well as professional fees. Valuers are alerted to a potential problem with property which either would be, or would potentially be, subject to VAT in any transaction, and where the entity may not be able to reclaim that VAT. The valuer should state clearly in the report what assumptions have been made, and the likely impact of VAT in any transaction, even though the decision whether or not to treat this as a directly attributable acquisition cost should be determined by the entity, together with its auditors. 3. In the case of surplus properties, directly attributable selling costs which are material may need to be itemised separately, and will include not only the transaction costs, but also any marketing costs that can be reasonably anticipated. Apportionments for depreciation Where the member is required to advise on an apportionment of a valuation for depreciation purposes, or to advise on the remaining useful economic life of the asset, the apportionment should be undertaken in accordance with the principles set out at UK appendix 1.4. Commentary 1. Where land and buildings are occupied by an entity in the normal course of its business the value of those assets, as shown in the accounts, may be adjusted to reflect depreciation of those assets over time. 2. The accounting principles for depreciation can be found in FRS 15. These provide that depreciation is applied over the future useful economic life of the asset to the entity. 3. As depreciation is normally only applied to property occupied by the entity the apportionment will be of EUV, or depreciated replacement cost-based valuations. Depreciation should not be applied to property valued on the basis of MV, except as provided by SSAP19 in relation to certain investment properties. 4. As, in reality, land and buildings are usually inseparable, the apportionment should be reported as being hypothetical and for accounting purposes only. UK practice statements RICS VALUATION STANDARDS 133 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 9 / Date: 18/9

142 UKPS 1 Valuations for financial statements UKPS 1.9 Treatment of leasehold interests Where the interest to be valued is leasehold the member shall, where appropriate, clarify with the client and refer in the report to the treatment of: (a) leases at rack rent or with short terms unexpired; and/or (b) inter-company leases. Commentary 1. (a) Leases at rack rent or with short terms unexpired 1.1 Where a lease is held at a rack rent, or has a short term before expiry or a review date to full rental value, the value (or in certain cases the liability, or negative value) to the business may not be material. 1.2 The valuer must discuss with the directors whether or not these specific leasehold interests are to be valued. If they are omitted from a valuation of an entire portfolio the report will need to contain a reference to their omission, on the grounds that their values are not material. 2. (b) Inter-company leases 2.1 Where a property is the subject of a lease or tenancy agreement between two companies in the same group, on arm s-length terms and in accordance with normal commercial practice, it is acceptable to take account of the existence of that agreement. UK practice statements 2.2 However, on consolidation of the results and balance sheets of those companies into the group accounts, the existence of the lease must be disregarded, and the property valued with vacant possession of the areas occupied by the group company, but subject to other leases or licences to third parties. 2.3 If asked to produce a valuation that takes account of an inter-company agreement the valuer should: + disclose in the report the relationship between the parties to the agreement; and + draw attention to the fact that the valuation taking full account of the lease would not be suitable for adoption in group accounts. 3. Accounting standards 3.1 Under UKGAAP, property leases are treated as either operating leases or finance leases under SSAP 21. As a general rule, if 90% or more of the value of a leased asset is transferred to the lessee, the lease is classified as a finance lease. However, under IAS 17 (see note to PS 3.6) the test is whether substantially all the risks and rewards of ownership are transferred from the lessor to the lessee. Listed companies in the UK have to adopt IFRS, and under the policy of converging UKGAAP and IFRS, SSAP 21 is likely to be changed. (Also see: Valuation 134 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 10 / Date: 18/9

143 UKPS 1 Valuations for financial statements Information Paper No. 9 Land and buildings apportionments for lease classification under International Financial Reporting Standards.) UKPS 1.10 UKPS 1.11 Mineral bearing land or waste disposal sites Where land is mineral bearing or suitable for use for waste disposal purposes a modified EUV basis may be adopted. Commentary 1. Land that is mineral bearing, or is suitable for waste disposal, may have a different use at the date of valuation. In this case the normal principles of EUV require some modification because the service potential reflects not only the current use, but also the potential future use. 2. Mineral extraction and landfill consume land over a period of time, so the concept of existing use will include the interim surface use of the land, and its eventual consumption for mineral working or landfill. While landfill, as a means of waste disposal, is generally into worked-out mineral sites or other excavations, in some instances it is into landraising sites where there has been no previous excavation. Here future tipping land may be available for other uses temporarily, and can be let to produce income until such time as it is required. 3. Even though no assumption should be made that a planning permission or waste management licence would be granted (unless granted as part of the earlier consent to extract or fill) the valuation should still include any element of hope value, insofar as the market reflects this. 4. The normal concept of existing use is also modified to include the after-use value, even though this may involve a change of use. Where the value of the after-use is a significant proportion of the valuation, the valuer must identify it separately. However, in any assessment of after-use, proper consideration must be given to restoration liabilities, including site monitoring after waste disposal, which may be imposed on the operator as a condition of land tenure, under planning law or in site licensing. 5. Where the report includes mineral-bearing or waste-disposal land valued on the basis of this statement, this must be clearly stated, together with a reference to any assumptions that have been made. 6. Guidance on valuations of this category of land can be found in GN 4. Plant & equipment The valuation of plant & equipment for inclusion in financial statements shall be on the basis of the value of plant & equipment to the business. UK practice statements RICS VALUATION STANDARDS 135 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 11 / Date: 18/9

144 UKPS 1 Valuations for financial statements Definition An opinion of the price at which an interest in the plant & equipment utilised in a business would have been transferred at the date of valuation, assuming: (a) that the plant & equipment will continue in its present use in the business; (b) adequate potential profitability of the business, or continuing viability of the undertaking, both having due regard to the value of the total assets employed and the nature of the operation; (c) that the transfer is part of an arm s length sale of the business wherein both parties acted knowledgeably, prudently and without compulsion. Commentary 1. This basis is used to establish the plant & equipment s value as part of an undertaking that is expected to continue in operation for the foreseeable future. In order to calculate the VPMB it is necessary to consider the value of the assets as a total integrated package, rather than the sum of the individual values. Therefore, any incompatibility of particular plant assets, imbalances between the capacity of different production sections, poor plant layout, and similar factors which may affect the overall efficiency of the manufacturing facility, should be recognised and taken into account. UK practice statements 2. VPMB will normally be the net current replacement cost. This is established by depreciating the gross current replacement cost to reflect the value attributable to the remaining portion of the total useful economic working life of the assets. 3. Gross current replacement cost is the cost of replacing an existing asset with an identical, or substantially similar, new asset which has a similar production or service capacity, including costs of transport, installation, commissioning, consultants fees and non-recoverable taxes and duties. 4. The depreciation applied to the gross current replacement cost should take due account of age, condition, economic and functional obsolescence, and environmental and other relevant factors, including any residual value at the end of the asset s useful economic working life. 5. Where suitable market evidence is available to the valuer, the net current replacement cost should always be compared with the cost of acquiring a similar asset in the open market, taking due account of the costs of transport and installation. 6. Further guidance on the valuation of plant & equipment is available in GN2andIVSGN3 Plant & equipment. 136 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 12 / Date: 18/9

145 UKPS 1 Valuations for financial statements UKPS 1.12 Local authority asset valuations Valuations of local authority assets for financial statements (including balance sheets) shall be in accordance with the guidance note agreed between RICS and the Chartered Institute of Public Finance and Accountancy (CIPFA). Commentary 1. The general principles underlying the valuation of local authority assets are no different from those for other assets where there is a requirement to determine their value to the business, in terms of the contribution those assets make to the activities and functions of the business. 2. The general principles of UKGAAP (see UKPS 1.1) will apply, but there are some differences in the approach needed to provide the valuations required because local authorities may hold property assets for both operational (service delivery) and non-operational (development and investment) purposes. 3. CIPFA introduced a system of capital accounting for local authorities by means of a Statement of Recommended Practice (SORP) in The SORP is developed and updated annually. UK appendix 1.5, which was jointly developed by CIPFA and RICS, contains guidance relating to the particular circumstances that apply to the valuation of local authority assets. 4. Local authorities are: + in England a county council, a district council, a London borough council, the Common Council of the City of London in its capacity as a local authority, a parish or town council, the Council of the Isles of Scilly; + inwales acounty council or a county borough council; + in Scotland the council; + innorthernireland acounty council, a district council and the police authority for Northern Ireland; + Police and fire authorities. UK practice statements UKPS 1.13 Valuations for registered social landlords Valuations of social housing for the financial statements of registered social landlords shall be on the basis of either: (a) existing use value for social housing (EUV-SH) (for housing stock held for social housing); or (b) Market Value (for housing stock that is surplus). Definition Existing use value for social housing (EUV-SH) is the estimated amount for which a property should exchange, on the date of valuation,between a willing buyer and a willing seller, in an arm s-length transaction, after RICS VALUATION STANDARDS 137 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 13 / Date: 18/9

146 UKPS 1 Valuations for financial statements proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion, subject to the following further assumptions that: + the property will continue to be let by a body pursuant to delivery of a service for the existing use; + at the valuation date, any regulatory body, in applying its criteria for approval, would not unreasonably fetter the vendor s ability to dispose of the property to organisations intending to manage their housing stock in accordance with that regulatory body s requirements; + properties temporarily vacant pending re-letting should be valued, if there is a letting demand, on the basis that the prospective purchaser intends to re-let them, rather than with vacant possession; and + any subsequent sale would be subject to all of the above assumptions. UK practice statements Commentary 1. A registered social landlord (RSL) is registered by either the Housing Corporation, Tai Cymru or Communities Scotland under the Housing Associations Act 1985, the Housing Act 1988, or, in Northern Ireland, the Department of the Environment under the Housing (Northern Ireland) Order Financial statements for RSLs are prepared broadly in accordance with UKGAAP (see UKPS1.1), but are subject to the provisions of a Statement of Recommended Practice (SORP) published by the National Housing Federation and its equivalents in Scotland and Wales. The SORP interprets the requirements of the Accounting Standards Board having regard to the nature of social landlords obligations. 3. Properties owned by an RSL may be shown in the accounts at historic cost, net of housing association grant (HAG), or at valuation. Where the properties are shown at valuation, the figure should be the lower of replacement cost less HAG, or the recoverable amount less any HAG recovery. The terms replacement cost and recoverable amount are defined in the value to the business model discussed in UK appendix In this context the valuer should determine replacement cost by applying the basis of EUV-SH. This basis is similar to MV, but with additional assumptions reflecting the continued use of the property for social housing. Although it shares some of the characteristics of EUV, it should not be confused with this basis. The essential similarity is that it is a basis aimed at establishing the service potential of the properties for the delivery of the RSLs objectives, therefore any value that may attach to a sale of the properties with vacant possession for use other than social housing must be ignored. 5. If an RSL has embarked on a policy of disposing of properties with vacant possession, or has declared an intention to do so, then those 138 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 14 / Date: 18/9

147 UKPS 1 Valuations for financial statements UKPS 1.14 properties will be surplus to requirements and should be valued to MV. Any properties valued on this basis must be separately identified in the report. 6. The report must show the values of completed schemes separately from those for properties under construction. Where properties in the course of development are valued, the valuation should be in accordance with UK appendix 1.2, 3.8 Land and buildings in course of development, although references to MV should be changed to EUV-SH. 7. In addition, valuations must be split between properties held for letting, shared ownership properties and any properties for outright sale. In the case of shared ownership properties under construction would include properties where the initial tranche of equity remains unsold. Further information about shared ownership schemes can be found in UKGN Where a discounted cash flow method has been used to derive EUV-SH, the valuer must state the key assumptions made, together with the discount rate(s) used. 9. An RSL may request valuations on alternative bases, for example MV, or MV with vacant possession, and these alternative figures may be disclosed in the notes to the accounts. 10. The RSL portfolio may include property not used for housing purposes, for example lock-up shops. These properties should be valued to MV. 11. The SORP requires that, where the value of properties is included in the balance sheet, a full valuation should be undertaken at least once every five years, or through a rolling programme which produces valuations of each property within that period. In the interim, annual reviews should also be undertaken. Trading stock Land and/or buildings and other assets held as trading stock and work in progress shall be valued in accordance with Statement of Standard Accounting Practice 9 (SSAP 9). Commentary 1. Land and/or buildings and other assets held as trading stock and work in progress are not fixed assets and therefore require special rules where their value is to be included in the accounts. They are normally stated in the accounts at cost or, if lower, net realisable value. UK practice statements RICS VALUATION STANDARDS 139 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 15 / Date: 18/9

148 UKPS 1 Valuations for financial statements Definition Net realisable value is defined in SSAP 9 as: the actual or estimated selling price (net of trade but before settlement discounts) less: i. all further costs to completion; and ii. all costs to be incurred in marketing, selling and distributing. ASB SSAP 9 2. In addition to the cost of building work, costs to complete will include, where appropriate, items such as site works, the fees and expenses of the architects, engineers, quantity surveyors, project managers, solicitors, and other professional advisers employed on the project, and interest charges. If a finance agreement exists with another party, the prescribed rate should be adopted. 3. In assessing costs to complete, it can normally be assumed that existing financing and other contractual arrangements continue uninterrupted. If such agreements cannot be assigned to another party this should be stated in the Report. Where the net realisable value is to be incorporated in financial statements which are subject to audit, it will normally be appropriate to ignore such restrictions and assume a continuation of the existing business. UK practice statements 4. The valuer may sometimes be concerned with the actual cost to date, perhaps being asked to assist with apportioning costs. In such cases, the cost of development will be roughly the same as costs to complete, plus the actual cost of the land, although the inclusion of any interest charges, land acquisition costs and irrecoverable VAT will depend on the accounting policy of the undertaking. The valuer should discuss this point with the client and state in the report whether or not such items have been included in the total amount reported. 5. Except in the case of farming stock valuations, the member should obtain written statements from the client setting out, as at the valuation date, the details of the cost of the works to date, and/or the estimated cost to complete. Details of any contracted lettings must also be obtained. 6. In the case of farming stock valuations, the member is referred to Farming Stock Valuation for Income Tax Purposes (Business Economic Notes, BEN 19) issued by HM Revenue and Customs 7. Further information on the principles of the valuation of land and buildings in the course of development can be found in UK appendix 1.2, 3.8 Land and buildings in course of development. 140 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 16 / Date: 18/9

149 UK appendix 1.1 Accounting concepts and terms used in FRS 15 and SSAP19 UK appendix 1.1 Accounting concepts and terms used in FRS 15 and SSAP19 1. Introduction 1.1 This appendix provides information on the accounting concepts and some of the terms used in FRS 15 Tangible Fixed Assets and SSAP 19 Accounting for Investment Properties. 2. The required accounting concept 2.1 The Accounting Standards Board s FRS 15 requires entities that revalue their tangible fixed assets to carry those assets in financial statements at current value. Current value is determined using the value to the business model set out in the FRS at appendix IV, paragraph 19. This can be portrayed diagrammatically, as shown below: UK practice statements + Replacement cost is the cost of purchasing, at the least cost, the remaining service potential of the asset at the balance sheet date. It is an entry value; + Value in use is the present value of the future cash flows obtainable as a result of an asset s continued use, including those resulting from its ultimate disposal; + Net realisable value is the amount for which an asset could be disposed, less any direct selling costs. It is an exit value. RICS VALUATION STANDARDS 141 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 17 / Date: 18/9

150 UK appendix 1.1 Accounting concepts and terms used in FRS 15 and SSAP Valuers should apply the concept of replacement cost to land and buildings on the following bases: + Market Value (MV) for non-specialised properties, but existing use value (EUV) for properties which are owner-occupied for the purposes of the business; + Depreciated replacement cost for specialised properties, subject to adequate potential profitability. 2.3 The value to the business model prescribes that the value of tangible fixed assets in the accounts must be set at a level that is sufficient to reflect the cost in the market of replacing their service potential. This is also referred to as the deprival value of the asset where, if the organisation had been deprived of a particular asset, the price which it, or any other potential owner occupier for the same use, would pay in the market to replace it to enable the organisation s operations to continue. UK practice statements 2.4 In considering the concept of deprival value in relation to EUV, the actual circumstances of the owner-occupier should not be taken into account as this would be an assessment of worth. There is also a risk that the actual owner-occupier could be vested with the characteristics of a purchaser with a special interest, whose bid has to be ignored under the definition of EUV. To avoid reflecting any additional bid that may be made by the actual owner-occupiers because of their particular circumstances, valuers may find it helpful to consider the bid which would be made by a hypothetical purchaser to occupy the property for the same use and in a similar manner to the actual occupier. Alternative use values incompatible with the use of the asset in the business have no relevance in the accounts of the company. However, an alternative use that increases the value of a property owned and occupied by the entity to a level above that needed to fulfil the service potential may be relevant to an overall appraisal of the company s situation, and should be disclosed in the directors report (see paragraph 2, Schedule 7, Companies Act 1985). 2.5 While the value to business model assists valuers in understanding the context in which valuations for financial statements are required, it should be noted that the use of the word value in the expression value in use does not mean that a valuer is necessarily competent to determine this figure. The term should not be regarded as an alternative valuation basis for fixed assets and should not be used by valuers when preparing valuations. The valuer s role will normally be confined to providing advice on the replacement cost and/or the net realisable value. 2.6 Notwithstanding this caution, members with a particular knowledge of, or skill in, an asset class or industry may be competent to assist in 142 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 18 / Date: 18/9

151 UK appendix 1.1 Accounting concepts and terms used in FRS 15 and SSAP19 the calculation of value in use. Requirements and guidance on the measurement of value in use can be found in FRS 11 Impairment of fixed assets and goodwill. 3. Frequency of valuations 3.1 FRS 15 does not require annual revaluations, although the objective of a revaluation policy is to reflect current values as at the balance sheet date. Full guidance can be found in paragraphs and 52 of the FRS but in summary: + where properties are revalued, the requirements of the FRS will be met by a full valuation at intervals of no more than five years and an interim valuation in year three; + if there has been a material change in value, further interim valuations should be undertaken in years one, two and four; + for portfolios of properties, full valuations on a rolling basis may be carried out so that all properties are covered over a five-year cycle, subject to interim valuations on the remainder of the portfolio, where it is likely there has been a material change in value. For this approach to be acceptable, the properties must be broadly similar in character, and it must be possible to subdivide the portfolio into groups of a broadly similar spread. 3.2 An interim valuation may be carried out on a restricted basis, although the FRS makes clear that an inspection of the property or the locality should still be undertaken to the extent that this is regarded professionally necessary Statement of Standard Accounting Practice 19 (SSAP 19) states that property companies holding a substantial proportion of investment properties must have an external valuation at least every five years. 4. Small companies 4.1 The Financial Reporting Standard for Smaller Entities (FRSSE), effective from 1 January 2005, sets out simplified financial reporting standards which may be adopted by small companies or groups, as defined in UK company legislation, or by other entities which would also qualify if they were incorporated, with the exception of building societies. UK practice statements 4.2 Where a small entity adopts a revaluation policy, the FRSSE states that the carrying amount should be Market Value. The Accounting Standards Board has confirmed that the term Market Value in this context is not intended to have the same meaning as the definition given in PS 3.2. The basis to be used when valuing land and buildings for inclusion in a financial statement relating to a smaller entity must be determined in accordance with UKPS 1.1 Valuations for financial statements. RICS VALUATION STANDARDS 143 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 19 / Date: 18/9

152 UK appendix 1.2 Property categorisation for company accounts UK appendix 1.2 Property categorisation for company accounts 1. Introduction 1.1 This appendix provides guidance on the identification of categories, and bases of valuation,of property referred to in UKPS FRS 15 provides that where a tangible asset is revalued, all assets of the same class should also be revalued. The three classes of assets referred to in company legislation are: + land and buildings; + plant & equipment; + fixtures, fittings, tools and equipment. 1.3 However, the standard provides that entities may, within reason, adopt narrower classes for valuation purposes. UK practice statements 1.4 Even though FRS 15 requires only three classes of assets members should agree and identify the types of property that should be valued in compliance with PS 2.1(e) and either report values separately, or provide a breakdown where an aggregated figure is reported. 2. Categories of property 2.1 The following are examples of the different categories of property that may be identified in a valuation for incorporation in a financial statement: + owner-occupied; + held as an investment; + specialised property; + trading stock; + fully-equipped as an operational entity; + held for non-specialised development; + held for specialised development; + land and buildings in the course of development; + minerals; + surplus to requirements; + joint development contracts, joint ventures; 144 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 20 / Date: 18/9

153 UK appendix 1.2 Property categorisation for company accounts 3. Bases of valuation + options and other contractual rights which may be saleable, and of value. 3.1 Owner-occupied property will be valued on the basis of EUV (UKPS 1.3) This property would usually be valued on the basis of vacant possession. In order to comply with the Companies Act 1985, Schedule 4, Part III, paragraph 44, it may be necessary to divide the amounts of the valuation between freehold, long leasehold (over 50 years) and short leasehold properties. 3.2 Property that is held as an investment will be valued on the basis of MV This is property held to earn either a present or future rental income and/or for the preservation or gain of capital value In some cases investment properties may include properties held for possible future occupation by the undertaking (sometimes called reserve properties) or for future development, either for the purposes of the undertaking or to create an investment property. 3.3 Specialised property (as defined in the Glossary) will be valued using the depreciated replacement cost approach (see appendix 3.1, but referred to in FRS 15 as a basis ) In deciding whether or not a property is specialised the valuer must be satisfied that it is impossible to provide an EUV. Property that might otherwise be regarded as specialised because of its construction, arrangement, size or location, and that is normally only sold as part of a sale of the business in occupation, may properly be valued by reference to its trading potential, or by a logical extrapolation of any available market evidence. UK practice statements 3.4 Trading stock will be valued at cost or net realisable value These are not fixed assets, and are dealt with in different ways in financial statements according to whether or not they are classified as long-term contract work Where valuations for this purpose are required they are governed by SSAP 9 (see UKPS 1.14 Trading stock) and will not be included in the valuation prepared under FRS Property that is fully equipped as an operational entity will be valued to EUV if owner-occupied, or to MV if surplus, or held as an investment (also see GN 1 Trade-related valuations). RICS VALUATION STANDARDS 145 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 21 / Date: 18/9

154 UK appendix 1.2 Property categorisation for company accounts Certain operations can be carried on only under statutory consents, permits and licences, and any assumption that they will continue must be stated specifically in the report Where a business has been closed down and the property stripped of fixtures, fittings and furniture, it will normally be available for redevelopment, refurbishment or change of use and should be valued accordingly as surplus to requirements, if so declared by the directors. If it is intended that such a property will be re-opened for the purposes of the business, its value for balance sheet purposes must reflect the additional costs that would be incurred, compared with an existing fully operational property, and this must be explained in the report. 3.6 Property that is held for non-specialised development will be valued to MV These will beproperties held for development for investment purposes, or properties that the client has declared are being held for development, at a foreseeable date, for future occupation by the undertaking (sometimes called reserve properties). UK practice statements Where pre-development procedures have started, such as where an agreement for a building lease has been signed, steps have been taken to obtain vacant possession, or demolition of existing buildings has begun, the valuer will need to agree with the client whether the property should be correctly classified as land and buildings in course of development. In this case, para. 3.8 will apply. 3.7 Property that is held for specialised development will be valued to MV Land and buildings for specialised development should be valued either: + for the proposed use by the business, provided that planning consent has been granted; or + in its existing state The application of these bases is subject to the accounting policy of the undertaking and the valuer should discuss the matter with the client in the light of that policy The valuer may be concerned only with the value of the land and, at this stage, this may not be either a material part of the total cost of the property when development is completed, or a material element in the total value of the fixed assets, so that a current valuation may not be required. 146 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 22 / Date: 18/9

155 UK appendix 1.2 Property categorisation for company accounts 3.8 Where land and buildings in course of development are to be re-valued they are to be included in the financial statement at their current value One approach to the valuation is to adopt the site value on commencement of development plus subsequent costs, subject to an impairment provision if the total figure exceeds the estimated Market Value on completion less costs to complete Alternatively, land and buildings may be valued in their current part-developed state. In this case, the valuation shall be to Market Value, adopting any recognised method of valuation, provided that the report contains an explanation of the method adopted. 3.9 Minerals will be valued to MV or EUV, depending on the circumstances Unless the minerals to be valued have been severed from the surface, the valuation may well include elements of value of the surface as well as of the minerals. These elements may include the value of the land required for extraction in the future which can be let to produce income in the meantime Additional assumptions must be made to take account of the fact that surface land scheduled for mineral extraction may have other uses at the date of valuation, and may have a future use once the mineral workings have ceased Expanded guidance on the approach to valuation of these assets can be found in GN Property which is surplus to requirements will be valued to MV This is property which the directorsof the undertaking declare to be no longer required for occupation for the purposes of the undertaking within the foreseeable future. UK practice statements 3.11 Joint development contracts and joint ventures will be valued to MV Agreements for these purposes take many forms and the report must clearly differentiate between: + the acquisition of a legal estate which gives the right to realise a sum of money, either in capital or income terms, linked to the underlying characteristics of the legal estate to which it is attached; and + a joint development contract, the successful performance of which will bring an entitlement to a sum of money. RICS VALUATION STANDARDS 147 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 23 / Date: 18/9

156 UK appendix 1.2 Property categorisation for company accounts In the case of large-scale projects, or development schemes involving a relatively high degree of uncertainty, developers often enter into binding, non-transferable agreements with landowners to undertake an agreed form of development. The responsibilities and risks are shared in varying proportions, and the ownership of the legal estate can be transferred to a new enterprise or another party. The valuer may be called upon to undertake valuations of the interests of the parties involved. In such circumstances the valuer should discuss, with the client, which approach to adopt Joint development contracts do not require the developer to hold any legal estate, but may include an option or a licence to acquire a legal estate. Developers may therefore expect to incur financial benefit or detriment arising directly or indirectly from their involvement. Such contracts, which often include a management fee, also allow for a profit, in accordance with a pre-determined formula, in the event of a successful outcome Thevaluation of a joint development contract will therefore involve an assessment of the value of the right to receive a financial benefit at a future date or dates, contingent upon performance. The developer, the recipient of potential future benefit under the contract, must fulfil the obligation to perform all of the terms of the contract. The valuer should consider and interpret all relevant factors including political, financial, fiscal, legislative, social, economic, market trends and so on, in assessing the developer s probable reward. UK practice statements A joint venture may be carried out by a company which owns the land, with shares held by the former landowner and the developer in stated percentages. It can also be undertaken as a partnership between two or more parties, but a partner may have a general or limited liability. Another method is a trust for sale. Such joint ventures will usually provide a formula for the percentage holdings and trading rights of the parties Options and other contractual rights which may be saleable and of value will be valued to MV The valuer will need to discuss with the client the actual terms of the options to establish the precise nature of the valuation required. 148 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 24 / Date: 18/9

157 UK appendix 1.3 Relationship with the auditor UK appendix 1.3 Relationship with the auditor 1. Introduction 1.1 This appendix provides guidance to members on the valuer s relationship with auditors when valuations are to be included or disclosed in published financial statements. It also provides an indication of the information auditors are likely to require. 2. The auditor s role 2.1 Auditors have a statutory obligation to express an opinion on whether the accounts: + give a true and fair view and have been properly prepared in accordance with the Companies Act 1985 (in particular, in accordance with its disclosure requirements); and + have been prepared in accordance with applicable accounting standards. 2.2 The Auditing Practices Board s Statement of Auditing Standards 520 Using the Work of an Expert states that: when using the work performed by an expert, auditors should obtain sufficient appropriate audit evidence that such work is adequate for the purposes of the audit; when planning to use the work of an expert the auditors should assess the objectivity and professional qualifications, experience and resources of the expert; the auditors should obtain sufficient appropriate audit evidence that the expert s scope of work is adequate for the purposes of their audit; and the auditors should assess the appropriateness of the expert s work as audit evidence regarding the financial statement assertions being considered. Statement of Auditing Standards 520 UK practice statements This involves assessment of whether the substance of the expert s findings is properly reflected in thefinancial statements, or supports the financial statement assertions, and consideration of: + the source data used; + the assumptions and methods used; RICS VALUATION STANDARDS 149 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 25 / Date: 18/9

158 UK appendix 1.3 Relationship with the auditor + when the expert carried out the work; + the reasons for any changes in assumptions and methods compared with those used in the prior periods; and + the results of the expert s work in the light of the auditors overall knowledge of the business and the results of other audit procedures. 2.3 When considering whether the expert has used appropriate source data the auditors may consider the following procedures: + making enquiries regarding any procedures undertaken by the expert to establish whether the source data are sufficient, relevant and reliable; and + reviewing or testing the data used by the expert. 2.4 The appropriateness and reasonableness of the assumptions and methods used, and their application, are the responsibility of the expert. The auditors do not have the same expertise and, therefore, cannot necessarily challenge the expert s assumptions and methods. However, they will seek to obtain an understanding of the assumptions and methods used and consider whether they are reasonable, based on their knowledge of the business and the results of other audit procedures. They will also need to decide if they are compatible with the methods used for the preparation of the financial statements. UK practice statements 2.5 If the results of the expert s work are not consistent with other audit evidence, the auditors will attempt to resolve the inconsistency by discussions with the entity and the expert. Additional procedures, including the possibility of engaging another expert, may also assist in resolving the inconsistency. 3. Directors responsibility 3.1 The inclusion of information relating to the valuation of assets in the accounts of a company is the directors responsibility, under the Companies Act 1985 Schedule 4, paragraph 43, which states: Where any fixed assets of the company (other than listed investments) are included under any item shown in the company s balance sheet at an amount determined on any basis mentioned in paragraph 31, the following information shall be given: the years (so far as they are known to the directors) in which the assets were severally valued and the several values, and; 150 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 26 / Date: 18/9

159 UK appendix 1.3 Relationship with the auditor in the case of assets that have been valued during the financial year, the names of the persons who valued them or particulars of their qualifications for doing so and (whichever is stated) the bases of valuation used by them. Companies Act 1985 Schedule 4, paragraph Paragraph31ofSchedule4totheCompanies Act 1985 is headed Alternative Accounting Rules. This is the provision in the Act that allows the use of valuations in accounts instead of historical costs. These can be in respect of land and buildings, plant & equipment, or, in some cases, fixtures and fittings, furniture or stock in trade. 3.3 There are provisions that mirror the above in the Companies (Northern Ireland) Order Auditors requests and the valuer s response 4.1 The valuer should provide the auditor with a copy of the agreed terms of engagement with the client and any subsequently agreed variations of those terms. 4.2 The auditor may ask the valuer to produce information and explanations relating to the purposes of the audit. Legal advice obtained by RICS indicates that there is no legal relationship between the auditor and an external valuer. An external valuer can therefore refuse to produce the file and even refuse to answer an auditor s questions. This does not apply to an internal valuer, who is an officer of the company within the meaning of the Companies Acts. However, if an external valuer refused to co-operate this could constitute a limitation on the scope of the auditor s work, and may lead auditors to qualify their reports on the accounts and make some comment that they had been unable to obtain all the information and explanations necessary to the valuation. 4.3 Valuers should therefore be prepared, and have the directors permission, to co-operate reasonably and responsibly with any auditors and, indeed, bring to their attention and discuss as appropriate, prior to issue of the report, matters relating to the valuation which may impact upon the audit and the auditor s responsibilities. Conversely, there will be occasions when valuers will welcome the opportunity to verify information and assumptions relevant to valuations. In some cases a discussion between the auditor and the valuer before the valuer starts to fulfil the client s instructions can be helpful to both parties, and will promote smooth completion of the audit. UK practice statements 4.4 Valuers may be asked, in falling markets, whether the property value has suffered a diminution of value. They should be prepared to give an opinion on the basis of a definition of diminution provided by the auditor. RICS VALUATION STANDARDS 151 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 27 / Date: 18/9

160 UK appendix 1.4 Accounting for depreciation and associated apportionments UK appendix 1.4 Accounting for depreciation and associated apportionments 1. Introduction 1.1 This appendix provides information on the accounting concepts and standards governing the consideration of depreciation, and associated apportionments, for the purposes of financial statements. 1.2 The relevant accounting standards can be found in Financial Reporting Standard 15 (FRS 15) Tangible Fixed Assets.It applies to all tangible fixed assets, with the exception of investment properties, as defined in SSAP 19 Accounting for Investment Properties. 1.3 Both FRS 15 and SSAP 19 deal with depreciation of assets carried in an entity s accounts either at cost or at valuation. This appendix refers expressly to land and buildings, but the material on depreciation applies equally to plant & equipment. UK practice statements 1.4 Depreciation, in accordance with accounting conventions, should not be confused with the deductions made in the course of valuation, for instance in a depreciated replacement cost valuation. The valuer provides the amount at which the asset is included in the balance sheet. The accountant calculates the provision for depreciation from the asset valuation, or an apportionment if required, without regard to the way in which the value of the asset was determined. 2. Depreciation 2.1 Depreciation is defined in FRS 15 as: The measure of the cost, or revalued amount, of the economic benefits of a tangible fixed asset that have been consumed during the period. Consumption includes the wearing out, using up or other reduction in the useful economic life of the tangible fixed asset whether from use, effluxion of time or obsolescence through either changes in technology or demand for goods and services produced by the asset. ASB FRS FRS 15 requires that depreciation should be allocated on a systematic basis over the future useful economic life of a fixed asset. The depreciation method used should reflect, as fairly as possible, the pattern in which the asset s economic benefits are consumed by the 152 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 28 / Date: 18/9

161 UK appendix 1.4 Accounting for depreciation and associated apportionments entity. The future useful economic life of an asset is defined in the FRS as the period over which the entity (in whose accounts the asset is carried) expects to derive economic benefit from the asset. All buildings have a limited life due to physical, functional and environmental changes that affect their useful economic life to the business. 2.3 As indicated above, the future useful economic life of the tangible fixed asset is defined as the period over which the entity in whose accounts the asset is carried expects to derive economic benefit from that asset. This may be the total physical or economic life of the asset, however, if there is an expectation that the asset will be sold before the end of its physical or economic life, this period will be shorter. 2.4 In normal circumstances depreciation is not applicable to freehold or feuhold land. Exceptions to this include land which has a limited life due to depletion, for example, by the extraction of minerals, or which will be subject to a future reduction in value due to other circumstances. One example would arise where the present use is authorised by a planning permission for a limited period, after which it would be necessary to revert to a less valuable use. 2.5 Leasehold assets must, by their nature, have a limited life to the lessee, although the unexpired term of a lease may exceed the life of the buildings on the land. Any contractual or statutory rights to review the rent, or determine or extend a lease, must also be considered. 2.6 The assessment of depreciation and the remaining useful economic life of the asset are the responsibility of the directorsof the company, or their equivalent in other organisations. However valuers should expect to be consulted on matters relevant to their assessment, such as the degree of obsolescence, condition, market factors, town planning and so on. 3. The depreciable amount 3.1 As it will be desirable to maintain consistency of practice in future years, the valuer should choose the basis of calculating the depreciable amount in consultation with the directors and auditors. UK practice statements 3.2 FRS 15 defines the depreciable amount as the cost of a tangible fixed asset (or, where an asset is revalued, the revalued amount) less its residual value. 3.3 Residual value is defined as the net realisable value of an asset at the end of its useful economic life. Residual values are based on prices prevailing at the date of the acquisition or revaluation of the asset, and do not take account of future price changes. RICS VALUATION STANDARDS 153 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 29 / Date: 18/9

162 UK appendix 1.4 Accounting for depreciation and associated apportionments 3.4 Net realisable value is defined in FRS 11 as the amount at which an asset could be disposed of, less any direct selling costs. It should be determined using a basis consistent with the basis used to determine the carrying amount of the asset. For example, where an asset is valued on an existing use basis, the residual value should also be measured on an existing use basis. The carrying amount of a tangible fixed asset is its cost or revalued amount, less accumulated depreciation. 3.5 Tangible fixed assets may be carried in financial statements on one of the following bases, the selection of which will normally constitute the first stage in the calculation of the depreciable amount: (a) (b) cost, less subsequent depreciation as appropriate. Whether acquired or self-constructed, the tangible fixed asset should initially be measured at its cost. This could be either: the price paid for a completed property plus directly attributable costs as set out in paragraphs 7 16 and of FRS 15; or (c) the cost of the land and the cost of erecting the building, plus directly attributable costs as indicated above; (d) a professional valuation made in a previous year, less subsequent depreciation as appropriate; or (e) a current professional valuation. UK practice statements 3.6 Directors may ask the valuer to provide an estimate of residual value in order to calculate the depreciable amount. Paragraph 95 of FRS 15 states that where the residual amount is material it should be reviewed at the end of each accounting period. 3.7 In some cases the future useful economic life of the asset to the entity will be considered to be equal to the physical or economic life of the buildings of which it is comprised. In such cases the valuer will need to consider whether the residual value will comprise a bare site value, less relevant costs, or whether the existing buildings or other site improvements will have some continuing value, for example, for refurbishment. In other cases there may be an expectation that the asset will either become surplus, or be disposed of, before the end of its physical or economic life. Under these circumstances the residual value would reflect the continuing life of the asset beyond the date when the directors anticipated disposal. Such an expectation would also affect the life over which the asset is to be depreciated, which would become the anticipated period of ownership. 3.8 FRS 15 indicates in paragraphs 83 and 84 that land and buildings comprise separate components of a tangible fixed asset and, for depreciation purposes, should be accounted for separately. Therefore, where a property is carried in the balance sheet at cost, or has been the subject of a past or present valuation, it will be necessary for the valuer to ascertain the amount applicable to the buildings, and the amount applicable to the land, by an apportionment of the cost or valuation. 154 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 30 / Date: 18/9

163 UK appendix 1.4 Accounting for depreciation and associated apportionments 4. Apportionment 4.1 The purpose of the apportionment, the removal of the land element from the valuation so as to depreciate only the building element, should be kept firmly in mind. Site works, such as roads, fences, paved areas and the like, are normally included in the value of the buildings and do not, therefore, feature in the land valuation. 4.2 At the end of the useful economic life of the buildings, the full potential of the site for redevelopment within the existing use would be realisable. However, allowance would have to be made for any material costs associated with demolition, site clearance or contamination treatment. 4.3 When providing figures for the purposes of depreciation, the valuer will need to emphasise in the report that the resultant figures, the depreciable amount and the residual amount, are apportionments derived solely for accounting purposes, and that the figures do not represent formal valuations of the individual elements. 4.4 The apportionment is arrived at in one of two ways: (a) (b) by deducting from the cost or valuation of the asset the value of the land for its existing use at the relevant date. In effect this calculates the residual value, unless the member believes that there is an additional residual value element in the buildings or site improvements. It is not appropriate to consider alternative uses unless they are reflected in the value at which the property has been included in the balance sheet; where there is little or no evidence of land values greater reliance will have to be placed on making an assessment of the net current replacement cost of the buildings at the relevant date. This figure will be derived from the gross current replacement cost. The gross current replacement cost is then reduced to the written-down, or net current replacement cost, to reflect the value of the asset to the business. In effect this is a direct calculation of the depreciable amount. UK practice statements 4.5 Gross current replacement cost is defined as either: + the actual cost of constructing the asset if this was incurred close to the relevant date; or + the estimated cost of erecting the building, or a modern substitute building with the same gross internal area as that existing, at prices current at the relevant date. This figure may include fees, any irrecoverable Value Added Tax (VAT), finance charges appropriate to the construction period, if required by the accounting policy, and other associated expenses directly related to the construction of the building. A definition of the directly attributable costs that may be included can be found in paragraphs 7 16 and of FRS 15. RICS VALUATION STANDARDS 155 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 31 / Date: 18/9

164 UK appendix 1.4 Accounting for depreciation and associated apportionments 4.6 Net current replacement cost is the gross current replacement cost, reduced to reflect the physical and functional obsolescence and environmental factors, in order to arrive at the value of the building to the business at the relevant date. 4.7 The relevant date is the effective date of the valuation or apportionment. 4.8 In the case of leasehold land and buildings, the total value will be the depreciable amount, except where the lease is likely to continue beyond the remaining useful economic life of the asset. 4.9 The valuer should make it clear that, in assessing the depreciable amount, the availability of government grants should be ignored, leaving the entity to make any appropriate adjustments The inclusion and exclusion of plant & equipment in a valuation of land and buildings should normally follow GN 2. UK practice statements 5. Valued as an operational entity 5.1 Where the valuation relates to property valued fully-equipped as an operational entity the valuation figures may need to be apportioned between: + land; + buildings; + fixtures and fittings; + trading potential. 5.2 Paragraph 85 of FRS 15 suggests that it would not be appropriate to treat the trading potential associated with the property as a separate component of the value of the asset if its value and life were inherently inseparable from that of the property (see also GN 1 Trade-related valuations). 6. Future useful economic life 6.1 In order to form an opinion of the future useful economic life of buildings, the valuer will need to take into account the following matters: + physical obsolescence the age, condition and probable costs of future maintenance (assuming prudent and regular maintenance); + functional obsolescence suitability for the present use, and the prospect of its continuance or use for some other purpose by the business. In the case of buildings constructed or adapted to meet the requirements of particular uses, including particular 156 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 32 / Date: 18/9

165 UK appendix 1.4 Accounting for depreciation and associated apportionments industrial processes, the member will need to consult with the directors to ascertain their future plans; + environmental factors existing uses must be considered in relation to the present and future characteristics of the surrounding area, local and national planning policies and restrictions likely to be imposed by the planning authority on the continuation of these uses; + policy on future disposals the valuer will need to consult with the entity to ascertain whether there is any intention or policy to dispose of assets before the end of their natural life span. 6.2 It is frequently difficult, even impossible, to put a precise life on a building or group of buildings and valuers may, therefore, have to resort to banding. It should be possible to identify buildings that are unlikely to remain beyond 20 years and other buildings with a life of more than 50 years. In such cases buildings should be noted as having a life of not less than 50 years. Clearly the valuer s task will be made easier by the use of broad bands and in the majority of cases it is likely these will meet the company s requirements. 6.3 Where a property comprises a number of separate buildings, for example, large factory premises, it is suggested that the buildings should be grouped and, wherever possible, a single life allocated to all buildings within each group. Such an approach can be justified by the fact that the life of individual buildings can usually be extended, within reasonable limits, by a higher standard of maintenance or minor improvement. It is normally uneconomic to carry out piecemeal redevelopment. 6.4 It would not be appropriate to group buildings if they are used for different industrial processes with different accommodation requirements, or where the client requires that each building must be considered individually. 6.5 If consulted on the remaining useful economic life of leaseholds the valuer must also consider the duration of the lease, any options to determine or extend, the date of the next rent review and whether this is to full or a proportion of rental value. UK practice statements 7. Investment properties 7.1 It should be noted that under SSAP 19 periodic charges for depreciation are not required for investment properties except for those held on lease when the unexpired term is 20 years or less. 8. Depreciation of a wasting asset 8.1 Provision of depreciation for a wasting asset is not primarily the concern of the valuer. Generally, the depreciable amount, see above, RICS VALUATION STANDARDS 157 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 33 / Date: 18/9

166 UK appendix 1.4 Accounting for depreciation and associated apportionments will be the difference between the present Market Value and the after-use value, but associated costs, such as restoration costs, may also need to be taken into account. The future useful economic life will be assessed by the entity, once advised of the life that the valuer has assumed for the purposes of the valuation. 9. Apportionments of value in respect of property which comprises only part of a building (of particular relevance in Scotland) 9.1 Special care is recommended in dealing with the apportionment of value in respect of property which comprises only part of a building, the remaining parts of which are separately owned by one or more other proprietors. This care is particularly relevant in considering the residual amount representing the value of land. 9.2 It is commonplace in Scotland for premises to be owned in perpetuity, even though those premises do not exclusively occupy the land on which they are situated. A building can contain various proprietors and it is quite usual for this type of ownership to carry with it a common interest on the part of the various proprietors in certain sections of the building out with the actual premises occupied by them. UK practice statements 9.3 The presence or otherwise of other proprietors within the building, and the existence of common interest on the part of those proprietors, should be established as part of the examination of titles and other documentation prior to the completion of the valuation. 9.4 The valuer dealing with an apportionment of value in cases where common interest exists must judge to what extent, if any, the apportionment, and the residual amount in particular, should be adjusted to allow for the presence of any common interest on the part of other owners in the building. 9.5 It is recommended that when dealing with property where there are other proprietors in the building, and where rights of common interest might exist, the apportionment of the valuation of the asset for depreciation purposes should be carried out by calculating the net current replacement cost of the building. 9.6 There might well be cases where complications are encountered in defining or ascertaining the rights of the other proprietors in the building but it is essential that, if common interest exists, its effect be taken into account. If this is done, it should be possible for the valuer to arrive at an apportionment where the depreciable amount fairly reflects the part of the Market Value or cost of the whole property at the time it was acquired or valued, which can be expressed at that time as the value to the business of the buildings on the land. Similarly, the 158 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 34 / Date: 18/9

167 UK appendix 1.4 Accounting for depreciation and associated apportionments residual amount should properly represent the element of land value which could be realised at the end of the day. UK practice statements RICS VALUATION STANDARDS 159 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 35 / Date: 18/9

168 UK appendix 1.5 Valuations of local authority assets UK appendix 1.5 Valuations of local authority assets 1. Introduction 1.1 The text of this appendix was originally published in 2002 as GN 11. Only the cross-references to practice statements have been changed to keep the material in context. 1.2 This appendix provides further guidance relating to the special circumstances that apply to certain types of local authority assets which require a valuation approach different from that used for other assets, and suggests procedures which may promote desirable consistency in valuation for local authority financial statements (including balance sheets). 1.3 This appendix is not intended as a definitive statement of the nature and extent of valuation practice, and should be accepted as complementary to, rather than a substitute for, the initiative and judgement of the valuer. UK practice statements 2. Background 2.1 The general principles underlying the valuation of local authority assets are no different from those for other assets where there is a requirement to determine the value to the business in terms of the contribution those assets make to the activities and functions of the business. There are, however, some differences in the approach needed to provide the valuations. Local authorities may hold property assets for both operational (service delivery) and non-operational (development and investment) purposes. 2.2 The requirements for local authority accounting are defined by CIPFA in a series of SORPs commencing in 1993 but developed and updated annually. 2.3 The SORP stipulates that assets be revalued at intervals not exceeding five years, and also whenever a permanent material change in value arises from market forces (for example, a change in demand) or a change in categorisation or classification occurs (for example, a change of use, or when the property becomes surplus to the existing user s requirements). 2.4 Depreciation should be provided on all fixed assets. The valuer should assess the useful economic life of properties in their existing use, on the 160 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 36 / Date: 18/9

169 UK appendix 1.5 Valuations of local authority assets 3. Definitions assumption of an adequate level of expenditure on repairs and maintenance to enable the property to continue to provide the existing service. Where, in the opinion of the valuer, the level of expenditure on repairs and maintenance is not sufficient to ensure continued availability of the property for service delivery, this should be reflected in the estimate of remaining useful life. 3.1 RICS and CIPFA have agreed a series of definitions and terms commonly recognised in the valuation of local authority assets. Any terms that should be adopted, and that are not included in the Glossary, or elsewhere in the practice statements, are set out in annexe A to this guidance note. 4. The service 4.1 The valuer may be asked to carry out any or all of the following activities: + liaise with the chief finance officer over the categorisation of assets; + classify the assets to be valued as specialised or non-specialised; + carry out inspections and prepare valuations; + estimate the remaining useful economic life of the assets to be valued; + estimate the residual value of the assets (see UK appendix 1.4); + provide a valuation report and agree a published reference; + undertake revaluations periodically, as required by the client, in accordance with the Code of Practice on Local Authority Accounting. 5. The purposes of the valuations 5.1 Valuations of all the assets of the local authority are required for inclusion in the financial statement prepared in accordance with the SORP applicable to the specific financial year. UK practice statements 6. The requirement 6.1 Assets are recorded in accordance with the value to the business model as set out in UK appendix 1.1. For the valuation bases which give effect to these requirements, paragraph 9.1 of the SORP requires that infrastructure and community assets are recorded in the balance sheet at historical cost, net of depreciation. RICS VALUATION STANDARDS 161 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 37 / Date: 18/9

170 UK appendix 1.5 Valuations of local authority assets 7. Valuation instructions 7.1 The CIPFA has produced instructions and guidance for its members who are, in most local authorities, likely to be the client responsible for securing the appropriate valuations and recording them in the financial statements of the authority. The CIPFA guidance requires valuations to be specified in accordance with these standards and sets out the procedures for important matters such as the categorisation of assets, and provision of the data and information required for valuation, as well as the form of valuation report and draft published reference which valuers will be asked to provide. 7.2 Valuers should also be prepared, as part of the process of settling instructions, to give advice on the methodology required to provide appropriate valuations for the subject portfolio of assets. 7.3 Valuers who are concerned as to the assumptions, limitations, any apparent inaccuracies or other matters arising from the proposed instructions must be able to discuss and resolve any issues with the instructing officer before the final written instructions are agreed and accepted. If agreement is not reached it may be necessary to refuse to act upon the instructions. UK practice statements 7.4 The appointed valuer will be required to provide a valuation report in a form prescribed in the instructions to the valuer. It is important that the local authority undertakes that this report will not be used other than for its originally specified purpose. 7.5 For valuation reports that are to be published see PS 6.11 and PS Categorisation and classification 8.1 Categorisation is governed by the authority s occupation and use of the property, and assets may be categorised as operational or non-operational, infrastructure assets, community assets or vehicles and plant. The basis of valuation depends on the categorisation of the assets. Operational assets are classified as either specialised or non-specialised (assets are specialised if, due to their nature, they are rarely, if ever, sold on the open market see the glossary for a further definition of specialised property). 8.2 Categorisation must be carried out and agreed by the authority (who may seek the advice of a valuer) and should be included in the instructions to the appointed valuer. Examples of the categorisation of assets are given in annexe B to this guidance note. 8.3 The classification of an asset is the responsibility of the valuer, who has knowledge of the market place. 162 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 38 / Date: 18/9

171 UK appendix 1.5 Valuations of local authority assets 8.4 Valuations of plant in buildings are required only in respect of specialised plant (for example, water heating and filtration equipment in swimming pools). (See GN 2.) 8.5 Valuations of community assets are not required for the purposes of implementing the CIPFA Code. 8.6 Where a property fulfils more than one function, the valuer may decide that it would be appropriate to regard it as more than one asset. For example, a museum, housed in one wing of a listed property, might be treated as specialised operational property, and would be valued using the depreciated replacement cost method while the remainder of the listed property might comprise a community asset, which would not require valuation. Similarly, a public park, containing a pavilion let to a sports club, might comprise two assets. The park would be a community asset, and the pavilion and its curtilage the subject of a lease, hence a non-operational property valued on the basis of Market Value. 8.7 The instructing officer will consider these matters with the service manager and may, if necessary, seek the valuer s views before finalising the valuation instructions. 9. Valuation bases 9.1 For valuation purposes local authority property usually falls into the following groups: + non-operational property (investment, surplus and development property), valued on the basis of Market Value (PS 3.2); + operational, non-specialised property, valued on the basis of existing use value (EUV) (UKPS 1.3); + operational housing, valued on the basis of existing use value for social housing (EUV-SH)(UKPS 1.13); + operational, specialised properties, valued using the depreciated replacement cost method (referred to in the SORP as a basis). UK practice statements 10. Operational assets 10.1 Operational assets are fixed assets held and occupied, used or consumed by the local authority in the direct delivery of those services for which it has either a statutory or discretionary responsibility The general underlying principles for valuing local authority assets are no different from those of other assets valued in accordance with UKPS 1.1. Operational assets can be classified as specialised and non-specialised assets. Non-specialised assets are valued for existing use. Specialised assets are valued at depreciated replacement cost. Issues relating specifically to local authority property are set out below. RICS VALUATION STANDARDS 163 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 39 / Date: 18/9

172 UK appendix 1.5 Valuations of local authority assets 10.3 The use of much local authority property often brings it within the category of specialised property. Many buildings are designed for a specific purpose and are incapable of any other use without extensive conversion or alteration. Likewise, the arrangement, size and location may be such that there is no market for their sale for a continuation of the existing use. It is therefore the appointed valuer s responsibility to determine whether each property is specialised or non-specialised before valuing it, as required by UKPS Due to the different approach of the depreciated replacement cost method of valuation, the valuer must notify the instructing officer, as soon as practicable, of an intention to use the depreciated replacement cost approach, and agree the terms of the report that is to be provided Where the depreciated replacement cost method is used PS 6.5 and PS 6.6 should be followed. The authority may require a valuation for a realistic alternative use in connection with its asset management strategy and policy. UK practice statements 10.6 In considering the basis of valuation for properties listed as being of architectural or historic interest (for example, some town, city or county halls, certain museums and art galleries) valuers may be inclined to assume that a depreciated replacement cost approach to replace the building as it stands is the only appropriate one. As the net current replacement cost of the existing service is required, it is advisable to first apply a test as to whether the service could just as easily be provided from equivalent modern premises The test, which needs to be applied before deciding the final approach, is whether the building is the service (as may be the case with certain museums and art galleries listed as historic buildings) or, because of its design, layout and accommodation, considered to be an integral and inseparable part of the service. In both cases a depreciated replacement cost valuation is appropriate (see Valuation Information Paper 10 The depreciated replacement cost method of valuation for financial statements) When considering the valuation of some large properties, such as council headquarters, their size, location, or the arrangement of the accommodation available may well be such that they are the largest properties of this type in the locality and of little or no interest in the local market. The valuer, however, should consider the market beyond the confines of the immediate town and the possibility of a regional or national market for what may be prestigious buildings. Even after these considerations the valuer may come to the conclusion that there is no real market of any kind for the property in its existing use. A depreciated replacement cost approach to the valuation would be appropriate in such circumstances. 164 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 40 / Date: 18/9

173 UK appendix 1.5 Valuations of local authority assets 10.9 What is important is that the valuer, in conjunction with the instructing officer and service manager, exercises judgement before deciding whether to use depreciated replacement cost methodology When preparing valuations of listed and historic buildings consideration should be given to the future useful economic life of the asset. Listed and historic buildings may have enhanced levels of maintenance, but the physical elements of the building will wear out, although potentially over a longer period. This enhanced maintenance may lengthen an assessment of remaining life, but there should never be an assumption that the asset has an indefinite life In all valuations of buildings which house a service which could be just as easily provided from equivalent modern premises, the valuer will need to consider the relevance of size, in relation to the existing use of the premises, and whether a modern equivalent might be more appropriate. 11. Housing revenue account valuations 11.1 With the introduction of resource accounting in local authorities in England, the capital financing costs of assets held on the housing revenue account is no longer based on historic debt, but by a capital charge based on the current value of the assets. Valuations will form an integral part of the housing revenue accounting process and, to ensure a consistent approach, Communities and Local Government (CLG) (formerly the Office of the Deputy Prime Minister (ODPM)) has published, in England, a guidance note entitled A New financial Framework for Local Authority Housing Guidance on Stock Valuation, dated May This guidance should be adopted when preparing asset valuations for the housing revenue account. There are a number of departures in methodology and assumptions from these standards in the guidance and these must be detailed in all valuations. UK practice statements 11.3 In Scotland and Wales the basis of valuation, as in England, is EUV-SH, but there is no specific valuation guidance covering the housing revenue account for Scotland and Wales. The valuer should be prepared to give advice on a methodology to provide appropriate EUV-SH valuations. 12. Requirements in respect of non-operational assets 12.1 Non-operational assets are fixed assets held by a local authority but not occupied directly, used or consumed in the delivery of services. Examples of non-operational property are: + land acquired in advance for a specific development, but used for another purpose; RICS VALUATION STANDARDS 165 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 41 / Date: 18/9

174 UK appendix 1.5 Valuations of local authority assets 13. Playing fields + land and property held as an investment by the authority; + property surplus to requirements but held pending allocation or disposal It is important to check the status of playing fields before deciding on the basis of valuation as, in the past, there has been some confusion over the valuation of school playing fields. Until they have been declared surplus to the requirements of the authority and available for disposal they remain part of operational properties Where a school has playing fields in excess of the statutory requirement, the excess, if not regarded as operational, should be valued on the basis of Market Value. However, the valuer should take particular care to establish with the local planning authority what alternative planning permission would be available. It will often be found that planning permission for building on the land would not be forthcoming due to a local shortage of open space. UK practice statements 166 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 42 / Date: 18/9

175 Annexe A to UK appendix 1.5 Definitions and categories of assets agreed with CIPFA Annexe A to UK appendix 1.5 Definitions and categories of assets agreed with CIPFA Definitions Capital charge A charge to service revenue accounts to reflect the cost of fixed assets used in the provision of services. Capital expenditure Expenditure on the acquisition of a fixed asset, or expenditure that adds to, and not merely maintains, the value of an existing fixed asset. Community assets Assets that the local authority intends to hold in perpetuity, that have no determinable useful life and that may have restrictions on their disposal. (Note: These assets may have been procured for, dedicated to, or donated to public use and the local authority appointed as custodian to provide care and maintenance and access for the public. The test for a community asset is whether it is alienable, or can be sold and the proceeds of sale used for some other purpose without the consent of some outside body, trust, donor or beneficiary. Examples of community assets are urban and country parks (but not any depots or facilities within them which support other services or activities carried on outside the park), land used for cemeteries and crematoria (but not the operational land and buildings associated therewith), and buildings or properties which are of an architectural or historical interest (but which are not primarily held for a direct statutory operational purpose, such as castles and monuments). Depreciation The measure of the cost or revalued amount of the benefits of the fixed asset that have been consumed during the period. Consumption includes the wearing out, using up or other reduction in the useful economic life of a fixed asset arising from use, effluxion of time or obsolescence through either changes in technology or demand for the goods and services produced by the asset. Fixed assets Tangible assets that yield benefits to the local authority and the services it provides for a period of more than one year. Going concern The concept that the authority will remain in operational existence for the foreseeable future. In particular that the revenue accounts and balance sheet assume no intention to curtail significantly the scale of operations. UK practice statements RICS VALUATION STANDARDS 167 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 43 / Date: 18/9

176 Annexe A to UK appendix 1.5 Definitions and categories of assets agreed with CIPFA UK practice statements Infrastructure assets Fixed assets which are inalienable assets, expenditure on which is recoverable only by continued use of the asset created. Examples of infrastructure assets are highways and footpaths. Investment properties Interest in land and/or buildings: + in respect of which construction work and development have been completed; and + this is held for its investment potential, any rental income being negotiated at arm s length. Long-term contracts A contract entered into for the design, manufacture or construction of a single substantial asset, or the provision of a service (or a combination of assets and/or services which together constitute a single project) where the time taken to complete the contract is so long that the contract activity falls in different accounting periods. Some contracts with a shorter duration than one year should be accounted for as long-term contracts if they are sufficiently material to the activity of the period. Netbookvalue The amountatwhich fixed assets are included in the balance sheet, their historic cost or current value, less the cumulative amounts provided for depreciation and any grants or contributions. Non-operational assets Fixed assets held by a local authority but not directly occupied, used or consumed in the delivery of services. Examples of non-operational assets are investment properties and assets that are surplus to requirements, pending sale or redevelopment. Operational assets Fixed assets held and occupied, used or consumed by the local authority in the direct delivery of those services for which it has either a statutory or discretionary responsibility. Stocks Comprise the following categories: + goods or other assets purchased for resale; + consumable stores; + raw materials and components purchased for incorporation into products for sale; + products and services in intermediate stages of completion; + long-term contract balances; + finished goods. 168 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 44 / Date: 18/9

177 Annexe A to UK appendix 1.5 Definitions and categories of assets agreed with CIPFA Useful life The period over which the local authority will derive benefits from the use of a fixed asset. UK practice statements RICS VALUATION STANDARDS 169 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 45 / Date: 18/9

178 Annexe B to UK appendix 1.5 Examples of asset categories Annexe B to UK appendix 1.5 Examples of asset categories UK practice statements 1. Operational assets Land associated with operational property Council dwellings Other housing properties Buildings Office buildings Schools Libraries Sports centres and pools Golf courses/sports pitches (see note 1, below) Residential homes/day centres Museums and galleries Depots and workshops (see note 2, below) Cemeteries (buildings only) Crematoria (buildings only) Off-street car parks Tenanted farms/smallholdings (see note 1, below) Equipment Vehicles Mechanical plant Computers Fixtures and fittings Other equipment 2. Non-operational assets Land awaiting development Commercial property Investment property 170 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 46 / Date: 18/9

179 Annexe B to UK appendix 1.5 Examples of asset categories Surplus assets (see note 3, below) Golf courses/sports pitches Depots and workshops Tenanted farms/smallholdings Shops on housing estates (see note 1, below) Markets Mooring sites and rights/dockland/shipways (see note 1, below) 3. Infrastructure assets Roads Sea defences Bridges Permanent ways Water drainage Street furniture 4. Community assets Parks Historic buildings Works of art Museum exhibits Civic regalia Cemeteries (land only) Crematoria (land only) UK practice statements Note 1: If these properties are held for investment purposes, they are non-operational. However, if they are held with particular service objectives in mind, they are operational. Note 2: The identification of the category of these properties will depend on the individual circumstances in each case. If a third party uses them to provide the authority s services, then they are operational. Note 3: Includes property released by a service and awaiting alternative use, as well as land and buildings declared surplus. RICS VALUATION STANDARDS 171 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 47 / Date: 18/9

180 UK appendix 1.6 Examples of published references to valuation reports UK appendix 1.6 Examples of published references to valuation reports The following examples are intended to be illustrative only of the typical degree of detail required and the valuer must have due regard to the requirements of appendix 6.1 (n) and PS 6.11 Publication statement, and produce a statement that reflects the scope and nature of the property valued. Valuation by an external valuer The company s freehold and leasehold properties were valued on 31 December 2007 by an external valuer, Joe Smith, FRICS of Alpha Chartered Surveyors. The valuations were in accordance with the requirements of the RICS Valuation Standards and FRS 15 (and any other regulatory requirements). UK practice statements The valuation of each property was on following bases and assumptions: (a) (b) (c) For owner-occupied property: valued to existing use Value (EUV) assuming that the property would be sold as part of the continuing business. For investment property: valued to Market Value assuming that the property would be sold subject to any existing leases. For surplus property and property held for development: valued to Market Value assuming that the property would be sold with vacant possession in its existing condition. The valuer s opinion of Market Value and existing use value was primarily derived using (include as appropriate): + comparable recent market transactions on arm s length terms; + the depreciated replacement cost approach because the specialised nature of the asset means that there are no market transactions of this type of asset except as part of the business or entity; + using an estimate of the future potential net income generated by use of the property, because its specialised nature means that there is no market based evidence available. Similar comments may be appropriate where the valuation is of plant & equipment or mineral bearing land. Valuations by an internal valuer The statements will be the same as those for valuations by an external valuer with the following variations of the first sentence: 172 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 48 / Date: 18/9

181 UK appendix 1.6 Examples of published references to valuation reports The company s freehold and leasehold properties were valued by an internal valuer, Joe Smith FRICS, the company s chief estates surveyor, as at 31 December The company s freehold and leasehold properties were valued as at 31 December 2007, by the directors, in conjunction with the company s own professionally qualified staff. And, where appropriate, at the end of the statement: A representative sample of properties was also valued on the same basis by external valuer, ABC Chartered Surveyors, who confirmed that values proposed by the company s professionally qualified staff are at level(s) consistent with their own figures. UK practice statements RICS VALUATION STANDARDS 173 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 49 / Date: 18/9

182 UKPS 2 Valuations for financial statements specific applications UKPS 2 Valuations for financial statements specific applications UKPS 2.1 Valuation reports in prospectuses and shareholders circulars to be issued by UK companies Valuation reports for inclusion in prospectuses, and circulars to the shareholders of UK companies, shall be in accordance with the RICS specification in UK appendix 2.1. Valuations for this purpose are regulated purpose valuations (see UKPS 5.1) and the various disclosure requirements within UKPS 5.2 to 5.4 will apply. UK practice statements Commentary 1. In the UK, the Financial Services Authority (FSA) is the competent authority for listing pursuant to Part VI of the Financial Services and Markets Act 2000 and is responsible for: + The Prospectus Rules, which set out rules and guidance for companies seeking FSA approval to publish a prospectus pursuant to EU Directive 2003/71/EC ( the Prospectus Directive )(PD) and European Commission Regulation 809/2004 ( the PD Regulation ); and + The Listing Rules, which set out rules and guidance applicable to companies admitted to or seeking admission to the Official List of the FSA (UK-listed companies), and which include, among other things, rules governing the contents of circulars issued by UK listed companies to their shareholders. 2. Where a company is issuing a publication under either the Prospectus Rules or the Listing Rules, there are requirements for a valuation report to be included in that publication. However, it is recognised that reports may be substantial documents and therefore in certain circumstances, the reports may be published in a condensed form. 3. The RICS specification for reports for this purpose is in UK appendix Members requiring further information about the regulatory requirements may access the full text of the Rules through the FSA web site ( 5. Members may be requested to provide valuations for inclusion in an application for admission to the alternative investment market (AIM). 174 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 50 / Date: 18/9

183 UKPS 2 Valuations for financial statements specific applications UKPS 2.2 On initial application, the company is required only to reveal the value of property as shown in its latest accounts. The values do not have to be current unless they are shown as such in the accounts. Where the valuer is requested to provide current valuations, these must be given in accordance with the particular accounting standards that the company has adopted. For that purpose, either PS 3.6 or UKPS 1.1 will apply. However, where the company has been listed on the AIM for at least 18 months, the publications must comply with the FSA Rules and this PS. Takeovers and mergers Valuations in connection with takeovers and mergers shall be in accordance with the Takeover Code (the Code) issued by the Takeover Panel. Valuations for this purpose are regulated purpose valuations (see UKPS 5.1) and the various disclosure requirements within UKPS 5.2 to 5.4 will apply. Commentary 1. The Takeover Panel is the regulatory body which administers the City Code on Takeovers and Mergers. The Panel is concerned with takeovers of companies whose shares are held by the public. The Code is designed to ensure good business standards and fairness to shareholders and, in order to do this, fair and orderly markets must be maintained. 2. The panel was set up in 1968 in response to mounting concern over unfair practices. The composition and powers of the panel have evolved over the years as circumstances have changed, although it remains a non-statutory body. The Code has been endorsed by the Financial Services Authority, under the Financial Services and Markets Act Members must conform to the Code, and its general principles and rules, in spirit as well as in letter. 4. The Code requires valuations to be made in accordance with these standards, but imposes additional requirements for this purpose. Information on the effect of the relevant parts of the Code is in UK appendix A member who attends meetings with clients and other advisers, such as lawyers, stockbrokers, accountants and merchant bankers, should be wary of assuming any role which could be regarded as that of a financial adviser within the provisions of the Financial Services and Markets Act A financial adviser must be a registered member of a professional regulatory organisation. Although the role of a valuer would not normally fall within the definition, any extended involvement could, for example in providing profit forecasts or commenting upon them. If members have any doubt about their position, legal advice should be taken, preferably before attending any meeting. RICS VALUATION STANDARDS 175 UK practice statements Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 51 / Date: 18/9

184 UKPS 2 Valuations for financial statements specific applications UKPS 2.3 Collective investment schemes Valuations for collective investment schemes shall be in accordance with the requirements of the Financial Services Authority (FSA) New Collective Investment Schemes Sourcebook. Valuations for this purpose are regulated purpose valuations (see UKPS 5.1) and the various disclosure requirements within UKPS 5.2 to 5.4 will apply. Commentary 1. Under section 238 of the Financial Schemes and Markets Act 2002, only certain collective investment schemes may be promoted to the public. These are: + investment companies with variable capital (ICVC) constituted in the UK; + authorised unit trusts (AUT) constituted in the UK. An AUT is a collective investment scheme authorised by the FSA under section 243 of the Act; + collective investment schemes constituted outside the UK and recognised by the FSA. UK practice statements UKPS UK appendix 2.3 contains information on the requirements of the sourcebook on property valuation. Unregulated property unit trusts Valuations for unregulated property unit trusts shall be on the basis of Market Value. Valuations for this purpose are regulated purpose valuations (see UKPS 5.1) and the various disclosure requirements within UKPS 5.2 to 5.4 will apply. Commentary 1. Unregulated property unit trusts are a form of collective investment scheme permitted under section 75, Financial Services Act 1986, where assets are held in trust for the participants who do not have day-to-day control over the management of those assets. They may not be marketed to the general public and are thus distinguished from authorised unit trusts (dealt with in UKPS 2.3). 2. There is no regulatory requirement for an independent valuation, but most trust deeds do require an independent valuer. If the trustee and/or the manager request an independent valuer, then the valuer must check the criteria and confirm that they can be met (see PS 1.7). 3. Valuations of land and buildings are critical to the pricing of units and should be reviewed at frequent intervals. Every valuation must be as up to date as possible with regard to the valuer s judgement of the trends of the most recent transactions in the market, even if those trends may be short-term. 176 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 52 / Date: 18/9

185 UKPS 2 Valuations for financial statements specific applications 4. In normal circumstances, the valuer is employed by, and reports to, the fund manager, but copies of the report should be provided for the trustees. UKPS 2.5 Adequacy of financial resources of insurance companies Valuations for inclusion in the assessment of the adequacy of financial resources for insurance companies shall be in accordance with the FSA Prudential sourcebook for insurers (INSPRU). Commentary 1. European Directives require financial institutions to make assessments of the adequacy of their financial resources. In the UK the FSA INSPRU provides that the value of assets for checking financial adequacy shall be the same as that adopted by the entity for its accounting purposes. 2. The value of assets is to be measured in accordance with: (a) the insurance accounts rules, or the Friendly Societies (Accounts and Related Provisions) Regulations 1994; (b) Financial Reporting Standards and Statements of Standard Accounting Practice issued or adopted by the Accounting Standards Board; and (c) (d) Statements of recommended practice, issued by industry or sectoral bodies recognised for this purpose by the Accounting Standards Board; or International Accounting Standards, as applicable to the firm for the purpose of its external financial reporting (or as would be applicable if the firm were a company with its head office in the UK). 3. Valuations for this purpose will therefore be in accordance with PS 3.6 or UKPS 1.1 and must include a statement that they comply with the provisions of the sourcebook. UK practice statements 4. The INSPRU sourcebook is freely available from the FSA website: UKPS 2.6 Adequacy of financial resources for financial institutions Valuations for inclusion in the assessment of the adequacy of financial resources for banks, building societies and investment firms shall be in accordance with the FSA Prudential sourcebook for banks, building societies and investment firms (BIPRU). RICS VALUATION STANDARDS 177 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 53 / Date: 18/9

186 UKPS 2 Valuations for financial statements specific applications Commentary 1. European Directives require financial institutions to make assessments of the adequacy of their financial resources. In the UK the FSA sets out in BIPRU the detailed rules under which such assessments shall be made. 2. The minimum requirements for the monitoring of property values set out in BIPRU 3.4 are: UK practice statements a) the value of the property must be monitored on a frequent basis and at a minimum once every three years for residential real estate; b) more frequent monitoring must be carried out where the market is subject to significant changes in conditions; c) statistical methods may be used to monitor the value of the property and to identify property that needs revaluation; d) the property valuation must be reviewed by an independent valuer when information indicates that the value of the property may have declined materially relative to general market prices; and e) for loans exceeding 3 million or 5% of the capital resources of the firm, the property valuation must be reviewed by an independent valuer at least every three years. The property must be valued by an independent valuer at or less than the market value. In those EEA States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory or regulatory provisions the property may instead be valued by an independent valuer at or less than the mortgage lending value. Independent valuer means a person who possesses the necessary qualifications, ability and experience to execute a Valuation and who is independent from the credit decision process. FSA Handbook BIPRU 3.4 It should be noted that BIPRU states that necessary qualifications need not be professional qualifications, but the firm should be able to demonstrate that he or she has the necessary ability and experience to undertake the review. 3. The definition of Market Value is the same as adopted in these standards (PS 3.2). 4. With regard to mortgage lending value, not normally used in the UK, reference should be made to appendix The full BIPRU is freely available from the FSA website ( 178 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 54 / Date: 18/9

187 UK appendix 2.1 FSA Listing Rules UK appendix 2.1 FSA Listing Rules RICS Specification for reports for inclusion in prospectuses or shareholders circulars to be issued by UK companies 1. Introduction 1.1 This specification is supplementary to appendix 6.1; it does not replace it, but provides guidance on the content of reports prepared for this purpose. Where the valuation is of a portfolio of properties, the guidance in GN 3 is relevant. 1.2 The FSA Handbook allows valuations for inclusion in prospectuses or shareholders circulars to be in a condensed form in specified circumstances. However, a condensed report must still meet the requirements of PS 6 Valuation reports and published references to them. A condensed report must be distinguished from a publication statement under PS Reports for inclusion in prospectuses 2.1 All UK domiciled property companies seeking FSA approval under the Prospectus Rules for the publication of a prospectus must include a property valuation report by an expert valuer in the prospectus. However, the report may be in a condensed form. property companies are defined as those issuers whose principal activity is the purchase, holding and development of properties for letting and retention as an investment. UK practice statements 2.2 A condensed valuation report may also be included when the prospectus relates to a property collective investment undertaking. A property collective investment undertaking is a collective investment undertaking whose investment object is the participation in the holding of property long term. 3. Reports for inclusion in circulars 3.1 When a UK-listed company proposes an acquisition or disposal of property and the transaction is classified under the FSA Listing Rules as either a class 1 transaction (where the size of the transaction exceeds 25% of the value of the company) or a related party transaction, the company must seek shareholder approval for that transaction. In either instance it must include a property valuation report by an expert RICS VALUATION STANDARDS 179 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 55 / Date: 18/9

188 UK appendix 2.1 FSA Listing Rules valuer in the circular to shareholders. The company will decide the classification of the transaction, but full definitions may be found in the FSA Rules. 3.2 A UK-listed company must also include a property valuation report where it makes significant reference to the value of property in a class 1 circular to shareholders 4. The status of the valuer 4.1 The valuation report must be prepared by an independent expert. For this purpose an independent expert is an external valuer as defined in the glossary. 4.2 The independent expert must disclose any material interest, if any, in the issuer. A material interest includes the following circumstances: + ownership of securities issued by the issuer or by any company belonging to the same group or options to acquire or subscribe for securities of the issuer; + former employment of the issuer or any form of compensation from the issuer; + membership of any of the issuer s bodies; and + any connections to the financial intermediaries involved in the offering or listing of the securities of the issuer. UK practice statements 4.3 It is the responsibility of the issuer to consider if the information provided will result in a material interest taking into account the type of securities offered and to clarify that these have been taken into account in order to fully describe the material interest (if any) of the expert to the best of the issuer s knowledge. 4.4 Valuers and their staff must be aware of the Criminal Justice Act 1993, Part V Insider dealing and the valuer must ensure compliance with the law. In case of doubt, legal advice should be sought. 4.5 A valuer who attends meetings with clients and other advisers such as lawyers, stockbrokers, accountants and merchant bankers, should be aware of assuming any role which could be regarded as that of a financial adviser within the provisions of the Financial Services and Markets Act If this were the case, the member must be a registered member of a professional regulatory organisation. Although the role of a valuer would not normally fall within the definition, an extended involvement could, for example, in providing profit forecasts or comment upon them. Legal advice should be taken, preferably before attending any meeting, if members have any doubt about their position. 180 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 56 / Date: 18/9

189 UK appendix 2.1 FSA Listing Rules 5. Valuation requirements: the prospectus rules 5.1 Valuations for the prospectus rules are to be on the same basis as adopted by the issuer for accounting purposes (either PS 3.6 or UKPS 1.1). 5.2 Where the issuer is a property company resident in the UK, a valuation report must be included in the prospectus, but it needs only to be in a condensed form. 5.3 The effective date of valuation can be up to one year prior to the date of publication of the prospectus, provided that the issuer affirms in the prospectus that no material changes have occurred since the date of valuation. If the valuer previously has provided a valuation for accounting purposes and the date of that valuation is within the time limit, the condensed report will relate to that valuation and no additional valuation is required. 5.4 Where the issuer cannot affirm that no material changes have occurred, the effective date of the valuation must be at the latest practical date. Where the material change relates to only part of the issuer s portfolio, only that part need be valued at the latest practical date. 5.5 Where the report to be published includes information that the issuer considers is commercially sensitive, the issuer may decide to delay disclosure of that information, provided its omission will not mislead the public. In such cases the valuer may amend the report appropriately but must make a reference to the omission and state that this has been done upon the express instructions of the issuer. 6. Valuation requirements: the listing rules 6.1 The basis of valuation for the listing rules is Market Value. UK practice statements 6.2 Where the valuation report referstoaportfolio of 60 or more properties the valuation report to be included in the publication may be in a suitably condensed format. 6.3 The effective date of valuation must be within 42 days of the date of the circular. The report is to be dated that same day as the circular is issued or the same day as any other documents which will be incorporated. 7. Framework for condensed reports 7.1 A condensed report need not include descriptive details of the properties, but must include the minimum information required by PS 6.1 and UKPS 5.4. The following framework is similar to that in RICS VALUATION STANDARDS 181 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 57 / Date: 18/9

190 UK appendix 2.1 FSA Listing Rules appendix 6.1, but with comments specific to the preparation of reports under the prospectus rules and listing rules. UK practice statements Item (a) Identification of the client (b) The purpose of the valuation (c) The subject of the valuation (d) The interest to be valued (e)thetypeofproperty and how it is used, or classified, by the client (f) The basis, or bases, of valuation (g) The date of valuation (h) The status of the member and disclosure of any previous involvement (i) Where appropriate, the currency that has been adopted (j) Any assumptions, special assumptions, reservations, any special instructions, or departures (k) The extent of the member s investigations Comment This may include a comment that the report is a condensed report prepared for the relevant rules. A brief overview of the property(ies) valued is required, i.e. the number of interests involved, whether freehold or leasehold, type (e.g. retail, industrial, leisure), where located (e.g. throughout UK, in central London) and whether held as investment(s), for development or for owner occupation. For prospectuses the basis required is the same as required for inclusion in the company s accounts. For circulars the basis is Market Value. Must be within one year of the publication date for a prospectus and 42 days for a circular. This comment must confirm the valuer is acting as an external valuer and as an independent expert under the rules. As this is a regulated purpose valuation, the disclosures required by UKPS 5.4 must be included. Relevant where the portfolio includes property in different States. All assumptions must be stated together with any reservations that may be required (see appendix 2.2 and PS 5.12). Where property is located in more than one State, any variation of assumptions in each state must be made clear. Special assumptions (see appendix 2.3) must be clearly stated and be confirmed as agreed with the client (see PS 5.3). Where the valuation reflects marketing constraints, (PS 2.4), restricted information, (PS 2.5), or limited inspection, (PS 2.6), the report must include full particulars. Any departures from the Standards must be stated and explained (PS 1.3). The report must record the date, or dates, and extent of the inspection(s) undertaken. Where a substantial number of properties are being valued, a generalised statement of these aspects is acceptable, provided that it is not misleading. 182 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 58 / Date: 18/9

191 UK appendix 2.1 FSA Listing Rules (l) The nature and source of information to be relied on by the member (m) Any consent to, or restrictions on, publication (n) Any limits or exclusion of liability to parties other than the client (o) Confirmation that the valuation accords with these Standards (p) The opinions of value in figures and words and disclosures A summary of the information relied upon is acceptable, provided that it is not misleading. Valuers should also include any additional information that has been available to, or established by, them that they believe to be crucial to the reader s ability to understand and benefit from the valuation. As this condensed report will be published in its entirety it will be appropriate to include consent for publication in the specific prospectus or circular in it, but otherwise to reserve the valuer s rights to it being reproduced or referred to in any other document. For prospectuses, the report should not include any disclaimer to the effect that liabilities to the third parties are excluded. For circulars, the report may include a disclaimer to the effect that liabilities to third parties are excluded but may not disclaim responsibility to the company, its directors or its shareholders. A statement that the report may not be used for any other purpose other than for the purpose stated may be included, provided that the purpose of the valuation report is clearly stated in the report as being for inclusion in the issuer s prospectus. Where the report is for inclusion in a prospectus and the company has adopted IFRS (see PS 3.6), confirmation is also required that the valuation also accords with International Valuation Standards. The valuations are to be summarised in the same categories determined under (e) above, identifying separately freeholds and leaseholds. Any negative values (liabilities) must be reported separately. The aggregate values and numbers of properties in each category are to be stated. Where the value of any individual property amounts to more than 5% of the aggregate valuation, the property must be specifically identified and the individual value disclosed. It may be appropriate to state that further details of individual properties are available for inspection or on request if this has been agreed with the client. Subject to any agreement that certain property information be kept confidential, the report should not omit information that would assist the reader to interpret the valuations. The following disclosures therefore must also be made, where appropriate: UK practice statements RICS VALUATION STANDARDS 183 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 59 / Date: 18/9

192 UK appendix 2.1 FSA Listing Rules (q) Signature and date of the report + reports must include a statement about the extent to which the values are supported by market evidence or are estimated using other valuation techniques (which shall be disclosed) because of the nature of the property or limited transactions or any combination of these factors. + where special assumptions have been made, alternative figures may be required to illustrate their effect (see PS 6.12). + for property in the course of development, the MV will reflect the value of the completed property assuming that it had been completed at the date of valuation, less the anticipated costs to complete, including the costs of finance and other holding costs. Statements must be also be made: + as to whether or not any allowance has been made for liability for taxation which may arise on disposal, whether actual or notional; + as to whether or not the valuation reflects costs of acquisition, disposal or reorganisation. The report must be signed by the person who accepts responsibility for it (see PS 1.4).The date of the report is to be the same as the date of issue or such other date that is the same as any other documentation to be published. UK practice statements 184 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 60 / Date: 18/9

193 UK appendix 2.2 The Takeover Code UK appendix 2.2 The Takeover Code 1. Introduction 2. General 1.1 This appendix contains information about those parts of the Code issued by The Takeover Panel that affect the valuation procedures or the standing of the valuer. A copy of the Takeover Code may be obtained from the Takeover Panel website at A valuer who provides valuation advice to a party involved in a proposed takeover comes within the definition of an associate. The term associate is intended to cover all persons who directly or indirectly are interested or deal in relevant securities of an offeror or the offeree company in an offer and who have an interest or potential interest whether commercial, financial or personal in the outcome of the offer. Without prejudice to the generality of the foregoing, the term associate will normally include the following: (1) an offeror s or the offeree company s parent, subsidiaries and fellow subsidiaries, and their associated companies, and companies of which such companies are associated companies (for this purpose ownership or control of 20% or more of the equity share capital of a company is regarded as the test of associated company status); (2) connected advisers and persons controlling, controlled by or under the same control as such connected advisers; (3) the directors (together with their close relatives and related trusts) of an offeror, the offeree company or any company covered in (1); (4) the pension funds of an offeror, the offeree company or any company covered in (1); (5) any investment company, unit trust or other person whose investments an associate manages on a discretionary basis, in respect of the relevant investment accounts; (6) an employee benefit trust of an offeror, the offeree company or any company covered in (1); and (7) a company having a material trading arrangement with an offeror or the offeree company. The Takeover Code (2007) definitions. UK practice statements RICS VALUATION STANDARDS 185 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 61 / Date: 18/9

194 UK appendix 2.2 The Takeover Code 2.2 All the valuer s colleagues (professional, administrative and secretarial) who provide assistance may fall within the definition above. Other partners and employees not involved are normally excluded. 2.3 A register of the holdings of securities of the valuer and his colleagues in the company(ies) concerned must be maintained, including nil returns and the holdings of spouses and dependent children. The valuer should advise the client of the totals or of any nil return. 2.4 No dealings in shares, and other securities or rights over these, may be made before or during the offer. The restrictions of the Criminal Justice Act 1993 apply, as well as Rule 4 Restrictions on dealings of the Code. The valuer and any colleagues involved in a takeover or merger situation must observe the law, which also embraces their spouses and dependent children. The rules also cover acquisitions and realisations of share holdings and the valuer and his or her colleagues must comply with them. 2.5 The valuer may consult the executive of the panel directly to seek its advice. It is not necessary to do this through the company s other advisers. In fact, the valuer may prefer not to involve them, particularly if subject to pressure to do something that is not in accordance with professional and ethical standards and these standards. UK practice statements 2.6 Security of documents and confidentiality of their contents and all information pertaining to the proposals must be maintained by all persons involved. 2.7 Although the directors have sole responsibility for profit forecasts the valuer may become involved if they include future rental income or capital values of properties in course of development. In such cases Rule 28 Profit forecasts, will apply. 2.8 Although it would be extremely unusual for a valuer to be considered as a financial adviser (see UKPS 2.2 Commentary, para. 5) appendix 3 of the Code provides rules which apply in such circumstances. Similarly, if the valuer s firm is in possession of material confidential information relating to the other party it may be necessary to decline the instructions. This situation may also arise when the valuer is not regarded as a financial adviser. 2.9 It may not be possible to resolve a conflict of interest by isolating information or assigning different personnel to the transaction, even chinese walls may not be regarded as adequate (see appendix 1.1 Conflicts of interest). Where doubt exists, the compliance unit, or a similar disinterested unit of the valuer s firm, must consult the panel. Alternatively, legal advice should be sought. 186 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 62 / Date: 18/9

195 UK appendix 2.2 The Takeover Code 3. Valuations to be reported on if given in connection with an offer 3.1 The valuation rules are fully set out in the Code Rule 29 The particular requirements to which the valuer must have regard, in addition to PS 6, are: (a) (b) (c) (d) (e) The valuation should be by a named independent valuer, who the Code states must be an external valuer as defined in these standards, who also has no connection with other parties to the transaction. The valuer should be a member of RICS or the Institute of Revenues Rating and Valuation, or some other person approved by the panel, and should satisfy the requirements of PS 1.2 Knowledge and skills. Where the valuer has insufficient current knowledge assistance may be provided by a person who has such skills and knowledge Only in exceptional circumstances should the basis of valuation be qualified, and in that event the valuer must explain the meaning of the words used. Special assumptions should not normally be made but, if they are permitted by the panel, they should be fully explained. The bases of valuation are as follows: for non-specialised properties, the basis of valuation will normally be Market Value; property that is occupied for the purposes of the business will be valued at existing use value (see UKPS 1.3); where a property has been adapted or fitted out to meet the requirements of a particular business, the value should relate to the property after the works have been completed. Alternatively, the value may relate to the state of the property before the works had commenced and the works of adaptation may be valued separately on a depreciated replacement cost basis, subject to adequate potential profitability; properties held as investments or which are surplus to requirements and are held pending disposal should be valued at Market Value. Where land is already being developed, or has immediate development potential, the valuations reported should include: MV in the state existing at the date of valuation; the value after the development has been completed; the value after the development has been completed and let; the estimated total cost, including carrying charges, of completing the development and the anticipated dates of completion and of letting or occupation; UK practice statements RICS VALUATION STANDARDS 187 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 63 / Date: 18/9

196 UK appendix 2.2 The Takeover Code (f) a statement as to whether planning consent has been obtained and, if so, the date thereof and the nature of any conditions attaching to the consent which affect the value. In some exceptional cases it will not be possible for the valuer to complete a full valuation of every property. If this is the case: the valuer may carry out a valuation of a representative sample of properties and report those valuations; the valuer must have knowledge of the portfolio as a whole and certify the representative nature of the sample; the directors must take sole responsibility for an estimate, based on the sample, to cover the remaining properties. The document sent to the shareholders should distinguish between properties valued professionally and those where the directors have made estimates based on the sample. It should also compare such estimates with the book value. 3.2 If the valuation is not current the valuer must state that a current valuation would not be materially different. If this statement cannot be made the valuation must be updated. 3.3 With regard to PS 6.11 Publication statement, the document containing the asset valuation must state that the valuer has given and not withdrawn consent to the publication of the valuation report UK practice statements 188 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 64 / Date: 18/9

197 UK appendix 2.3 Collective investment schemes UK appendix 2.3 Collective investment schemes 1. Introduction 1.1 This appendix provides an outline of the land and property valuation requirements in paragraph 5 of the New Collective Investment Schemes Sourcebook. 1.2 To avoid confusion, the valuer should be aware that the sourcebook uses the term scheme property in a very wide sense, which is not restricted to real estate. 1.3 For more detailed information about collective investment schemes, the full text of the sourcebook is available on the FSA website ( There is also a Collective Investment Schemes Information Guide on the same website, which provides some general background material on the regulatory structure surrounding scheme regulation in the UK. 2. Definitions 2.1 Qualified investor schemes Qualified investor schemes are authorised funds, which may only be sold or marketed to sophisticated investors. Qualified investor schemes have a more relaxed set of rules governing their operation than for retail schemes, particularly their investment powers. A qualified investor scheme is essentially a mixed asset type of scheme where different types of permitted asset may be included as part of the scheme property, depending on the investment objectives and policy of that scheme and within any restrictions in the rules. UK practice statements 2.2 Investment in property Any investment in land or a building held within the scheme property of a qualified investor scheme must be in an immovable as defined. 2.3 Immovable An immovable must have a good marketable title and: (a) (b) be situated in a country or territory identified in the prospectus; and if situated in: RICS VALUATION STANDARDS 189 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 65 / Date: 18/9

198 UK appendix 2.3 Collective investment schemes (i) (ii) England and Wales or Northern Ireland, be a freehold or leasehold interest; or Scotland, be any interest or estate in or over land or heritable right including a long lease; or (c) if not situated in the jurisdictions referred to in (b)(i) or (ii), be equivalent to any of the interests in (b)(i) or (ii). 2.4 Appropriate valuer An appropriate valuer must be a person who: (a) has knowledge of and experience in the valuation of immovables of the relevant kind in the relevant area; (b) (c) (d) is qualified to be the standing independent valuer of an authorised fund or is considered by the scheme s standing independent valuer to hold an equivalent qualification; is independent of the investment company with variable capital (ICVC), the depositary and each of the directors of the ICVC or of the manager and the trustee of the authorised unit trust scheme (AUT); and has not engaged himself or any of his associates in relation to the finding of the immovable for the scheme or the finding of the scheme for the immovable. 2.5 Standing independent valuer UK practice statements The standing independent valuer is an appropriate valuer appointed by the authorised fund manager with the approval of the depositary. 3. Valuation requirements for investment in property 3.1 Any investment in land or a building held within the scheme property of a qualified investor scheme must be in an immovable within For an immovable: (a) (b) (c) it must be situated in a country or territory identified in the prospectus; the authorised fund manager must have taken reasonable care to determine that the title to the interest in the immovable is a good marketable title; and the manager or the investment company with variable capital (ICVC) must have received a report from the appropriate valuer that: (i) contains a valuation of the interest in the immovable (with and without any relevant existing mortgage); and (ii) states that in the appropriate valuer s opinion the interest in the immovable would, if acquired by the 190 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 66 / Date: 18/9

199 UK appendix 2.3 Collective investment schemes scheme, be capable of being disposed of reasonably expeditiously at that valuation; (d) (e) unless (c) is satisfied, the manager or the ICVC must have received a report from an appropriate valuer valuing the interest in the immovable and stating that: (iii) the immovable is adjacent to or in the vicinity of another immovable included in the scheme property; and (iv) in the opinion of the appropriate valuer, the total value of the interests in both immovables would at least equal the sum of the price payable for the interest in the immovable and the existing value of the interest in the other immovable; and it must not be bought: (v) if it becomes apparent to the authorised fund manager that the report in either (c) or (d) could no longer reasonably be relied upon; or (vi) at a price more than 105% of the valuation relevant to the interest for that immovable in the report in either (c) or (d). 3.3 Any contents of any building may be regarded as part of the relevant immovable. 4. Valuation requirements for immovables in a property scheme 4.1 The standing independent valuer will be required to value all the immovables held within the scheme property on the basis of a full valuation with physical inspection (including internal inspection of buildings) at least once a year. For these purposes, any inspection in relation to adjacent properties of a similar nature and value may be limited to that of only one such representative property. UK practice statements 4.2 The standing independent valuer will also value the immovables on the basis of a review of the last full valuation, at least once a month. 4.3 Where the authorised fund manager becomes aware of any matter that is likely to affect the outcome of a valuation of an immovable, or cause the valuer to decide to value on the basis of a full valuation rather than a review, the valuer will be requested to report accordingly. 4.4 For information, the following limits apply in respect of immovables held as part of the scheme property: (a) the amount secured by mortgages over any immovable must not exceed 100% of the latest valuation by an appropriate valuer; RICS VALUATION STANDARDS 191 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 67 / Date: 18/9

200 UK appendix 2.3 Collective investment schemes (b) (c) no option may be granted to a person to buy or obtain an interest in any immovable comprised in the scheme property if this might unduly prejudice the ability to provide redemption; and the total of all premiums paid for options to purchase immovables must not exceed 10% of the scheme value in any 12-month period, calculated at the date of the granting of the option. 5. Basis of valuation 5.1 Any valuation by the standing independent valuer must be on the basis of Market Value as defined in the RICS Valuation Standards and any special provisions within the instrument constituting the scheme. 5.2 The sourcebook refers to open market value. There is no material difference between open market value and Market Value and the correct application of either will produce the same figure. The term open market value should not be used in reporting, although the valuer should include an explanatory note that its replacement, Market Value, produces the same figure. UK practice statements 192 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 68 / Date: 18/9

201 UKPS 3 Valuations for loan facilities UKPS 3 Valuations for loan facilities UKPS 3.1 Commercial secured lending Valuations for commercial secured lending shall be undertaken in accordance with the protocol agreed between RICS and the British Bankers Association unless a specific departure is requested by the client and agreed in the terms of engagement. Commentary 1. This practice statement refers to all lending for commercial purposes, including investment in, and development of, all types of property. The principal exclusions are mortgage lending on residential property for owner occupation, buy to let valuations of individual residential properties, and lending secured on social housing (see UKPS 3.2 and UKPS 3.4 respectively). 2. The protocol represents a statement of recognised best practice agreed between RICS and the British Bankers Association. However, it is also acknowledged that it is impractical to devise a rigid standard applicable to all situations. The wide variety of property offered as security, and the range of lending products available, will all require a slightly different approach. It is therefore open to the valuer and lender to agree variations from the protocol, subject to PS 1.3 Departures. The overriding objective is that the valuer should understand the lender s needs and objectives, and the lender understands the advice that is given. 3. This practice statement overrides PS 4.2 but all other practice statements still apply. The protocol is confined to additional matters that are specific to valuations for secured lending. UK practice statements 4. The valuer s report must be addressed and submitted directly to the lender, even though the lender may then choose to supply copies of the report to its customer. If a prospective borrower or broker commissions a valuation for lending purposes, the valuer should ascertain the identity of the proposed lender, join them in the agreement of terms and address the report to the lender. If the borrower or broker does not know, or is unwilling to disclose the identity of the lender, then the valuer must advise in the terms of engagement that the report will be addressed to the borrower or broker and that it may not be acceptable to a lender. No report shall be addressed to whom it may concern, or any other words to that effect. 5. The protocol is provided in UK appendix 3.1. RICS VALUATION STANDARDS 193 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 69 / Date: 18/9

202 UKPS 3 Valuations for loan facilities UK practice statements UKPS 3.2 Residential property mortgages Valuations of residential property for mortgage purposes shall be in accordance with the RICS Specification for The Valuation and Inspection of Residential Property for Mortgage Purposes. Commentary 1. This practice statement deals with a number of matters specific to valuations of residential property for mortgage purposes. 2. When valuing residential properties on behalf of building societies, banks and other lenders for mortgage purposes the valuer should comply with the specification reproduced in UK appendix 3.2 unless otherwise agreed in writing, in advance, with the client. 3. The specification makes reference to: + the valuer s role; + the terms of engagement ; + the valuer s inspection; + the valuation; + the report; + re-inspections; + further advances; + buytolet. 4. Valuers must make and retain legible notes of the findings and, particularly, the limits of the inspection and the circumstances in which it was carried out. They should also keep a record of any comparable transactions and/or valuations considered when arriving at the valuation. 5. Building society loans are classified as either fully secured on residential property (FSRP) or not fully secured on residential property. 75% of the business assets of a building society must be loans fully secured on residential property. 6. In general, firms that provide advice on residential mortgages are regulated by the FSA rules Mortgages: Conduct of Business. The regulation applies to regulated mortgage contracts. In order for a loan to fall within the definition of a regulated mortgage contract at least 40% of the total of the land to be given as security must be used as or in conjunction with a dwelling. To be residential property at least 40% of the land must normally be used as, or in connection with, one or more dwellings, or has been, is being, or is to developed or adapted for such use. 7. In connection with the application of the requirements of paragraphs 5 and 6 above, a lender may ask the valuer for advice on the extent of the use of the property for residential purposes. The advice required relates to the use of the property and the valuer should not be influenced by the relative capital values or floor areas in isolation from the accompanying land. 194 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 70 / Date: 18/9

203 UKPS 3 Valuations for loan facilities 8. In Scotland the traditional and accepted procedures for buying residential property differ from those in England, Wales and Northern Ireland. Due to time restrictions it may be difficult to issue terms of engagement within the requirements of PS 2.1 Confirmation of terms of engagement. Therefore, RICS Scotland has issued advice (SRF/01/06) which aims to reflect best endeavours on behalf of the member or their firm. The advice is reproduced as UK appendix 3.4. UKPS 3.3 Projected Market Value (PMV) of residential property Valuations of residential property on the basis of PMV shall be in accordance with the definition settled by RICS and CML. Definition The estimated amount for which a property is expected to exchange at a date, after the date of valuation and specified by the valuer, between a willing buyer and a willing seller, in an arm s-length transaction, after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. Commentary 1. The date specified by the valuer must be stated clearly whenever a PMV is provided. It should reflect the period that the valuer considers will be necessary for adequate marketing and the completion of negotiations. 2. This basis should be used to provide clients with an estimated valuation in respect of a future exchange, assuming that marketing begins on the date that the valuation is prepared. 3. The definition of PMV is based on Market Value, save for the stipulation that the valuer s estimate should reflect what the amount is forecast to be at a future, specified, date. The conceptual framework at PS 3.2 should therefore be applied, save that paragraph is modified as follows:... at a date, after the date of valuation and specified by the valuer... The date of valuation is the date on which the estimate is given, but represents the valuer s opinion of anticipated market changes during the period up to the specified date. It will reflect facts, market sentiment and public forecasts existing at the date of valuation. The PMV is therefore time-specific, as of a given date and, because markets and market conditions may change, may be incorrect or inappropriate at another time. The definition also assumes simultaneous exchange and completion of the contract for sale without any variation in price that might otherwise occur. UK practice statements RICS VALUATION STANDARDS 195 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 71 / Date: 18/9

204 UKPS 3 Valuations for loan facilities 4. PMV is designed to provide residential mortgage lenders with a simple numeric indication of the valuer s opinion of short-term market trends. It recognises that most reports for this purpose are based on a simple pro-forma, and that the degree of market analysis and commentary required in commercial lending situations is inappropriate. It must be used only for this purpose. 5. The purpose of PMV is simply to illustrate the valuer s opinion of whether the market is likely to fall, rise or remain static in the period that it is anticipated will be necessary to complete the sale. Values can change rapidly, due to unpredictable events, and an earlier provision of a PMV is not a substitute for a current Market Value. UKPS 3.4 Secured lending valuations for registered social landlords UK practice statements UKPS 3.5 Valuations of a registered social landlords housing stock for secured lending purposes shall be on the basis of either: + Market Value;or + existing use value for social housing. Commentary 1. This statement applies to the provision of valuations to lenders contemplating the provision of finance to registered social landlords for the development, or acquisition and retention, of an equity stake in residential property which would be let as shared ownership. 2. Guidance on the approach to these valuations can be found in UK appendix Additional guidance on shared ownership schemes is given in UKGN 2 for situations where the interest to be valued is in the freehold of a shared ownership scheme. Trustee mortgage valuations Valuations undertaken for trustee mortgages must be by an independent valuer in accordance with Section 8 of the Trustee Act Commentary 1. Under the Act a trustee must obtain a report of the value made by a person whom he reasonably believes to be an able practical surveyor or member instructed and employed independently of any owner of the property, and the loan must be made under the advice of the surveyor or valuer expressed in the report. 2. As a result of case law it should be noted that: + the surveyor or valuer must be instructed and employed independently of both the mortgager and his solicitor in the transaction; 196 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 72 / Date: 18/9

205 UKPS 3 Valuations for loan facilities + the amount or payment of the fee must not in any way depend upon the proposed loan being effected; + where a security is introduced by the surveyor or the valuer they should not be employed to make the valuation. UK practice statements RICS VALUATION STANDARDS 197 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 73 / Date: 18/9

206 UK appendix 3.1 Protocol for valuation and appraisal of land and buildings for commercial secured lending UK appendix 3.1 Protocol for valuation and appraisal of land and buildings for commercial secured lending 1. Introduction 1.1 This protocol, which has been agreed between RICS and the British Bankers Association, is applicable where the member is to provide services for a client who is considering whether to lend or extend commercial loan facilities on the security of land or buildings. 2. Instructions 2.1 Before accepting instructions, the member must disclose to the lender any anticipated, current or recent fee-earning involvement with the property to be valued, with the borrower or prospective borrower, or with any other party connected with a transaction for which the lending is required. In this context recent involvement would normally be anything within the past two years, but under certain circumstances could be longer. For further guidance see appendix 1.1 Conflicts of interest. UK practice statements 2.2 The terms of engagement (PS 2.1) should reflect the particular requirements of the lender, if these are consistent with these standards. To avoid any doubt, any special assumptions (PS 2.3) that the valuer anticipates may be necessary must be agreed and recorded in the terms of engagement. Thespecial assumptions will vary depending on the type of proposition and the nature of the property. 2.3 The following are the most common examples of security where a valuer s advice is likely to be sought: + property which is, is to be, or has been, owner-occupied; + property which is, or is to be, held as an investment; + property which is equipped as an operational entity and which is generally valued according to trading potential; and + property which is, or is intended to be, the subject of development or refurbishment. 198 RICS VALUATION STANDARDS Specific matters which should be considered and included in valuation and appraisal reports for these different situations are included under Reporting, below. Where the valuation is of a single residential unit that is being acquired with a view to letting as an investment (commonly known as Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 74 / Date: 18/9

207 UK appendix 3.1 Protocol for valuation and appraisal of land and buildings for commercial secured lending buy to let ), the lender s instructions will usually be in accordance with UKPS 3.2 Residential property mortgages, and UK appendix 3.2 RICS mortgage valuation specification. 2.4 The valuer should enquire if there has been a recent transaction, or a provisionally agreed price, on any of the properties to be valued. If such information is revealed, enquiries that are practicable as to the circumstances of that transaction should be made. For example, the extent to which the property was marketed, the effect of any incentives, and whether the price realised was the best price obtainable. 3. Basis of value 3.1 Market Value is the appropriate basis of value that should be used for all valuations or appraisals undertaken for secured lending. Any special assumptions made in arriving at the Market Value must be agreed with the lender in advance and referred to in the report. If the valuer is aware of any other circumstances which could affect the price, these must also be drawn to the attention of the lender, and an indication of their effect provided. 3.2 Examples of circumstances that often arise in valuations for secured lending where special assumptions may be appropriate include: + the anticipation of planning consent for development at the property; + the anticipation of a physical change to the property, for example, new construction or refurbishment; + the anticipation of a new letting on given terms, or the settlement of a rent review at a specific rent; + the existence of a special purchaser, which may include the borrower; + a known constraint which could prevent the property being either brought to, or adequately exposed to, the market; + any other factor which potentially conflicts with the definition of Market Value or its underlying assumptions, assetoutinthe supporting commentary in PS 3.2; + the anticipation of a new economic or environmental designation. UK practice statements This list is not exhaustive and the appropriate special assumptions will depend on the circumstances under which the valuation is requested, and the nature of the property to be valued. 3.3 In all cases (except where the property to be valued is equipped as an operational entity) any additional value attributable to goodwill, or to fixtures and fittings which are only of value in situ to the present occupier, is to be excluded. RICS VALUATION STANDARDS 199 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 75 / Date: 18/9

208 UK appendix 3.1 Protocol for valuation and appraisal of land and buildings for commercial secured lending UK practice statements 4. Reporting 4.1 Reports for secured lending should include all the matters set out in PS 6. The following is a guide to other matters that would normally be included in a report for secured lending, subject to the exact circumstances of the proposed loan, and the detailed requirements of the lender: + comment on potential and demand for alternative uses, or any foreseeable changes in the current mode or category of occupation; + disrepair, or whether any deleterious or harmful materials have been noted; + contamination or environmental hazards noted; + comment on past, current and future trends in the property market in the locality and/or demand for the category of property; + comment on both the current marketability of the interest and whether this is likely to be sustainable over the life of the loan; + the valuation methodology adopted; + details of any significant comparable transactions relied upon, and their relevance to the valuation; + comment on the suitability of the property as security for mortgage purposes, bearing in mind the length and terms of the loan contemplated; + if appropriate, a statement drawing attention to any other matter revealed during normal valuation enquiries which might have a material affect on the value currently reported; + comment on any environmental or economic designation. 4.2 Where a recent transaction, or a provisionally agreed price has been disclosed, the valuer is to indicate in the report the extent to which that information has been accepted as evidence of Market Value. Where the enquiry made under paragraph 2.4 does not reveal any information, the valuer will make a statement to that effect in the report, accompanied by a request that if such information comes to light before the loan is finalised, the matter must be referred back to the valuer for further consideration. 4.3 The following paragraphs deal with the most common lending situations, and indicate matters which should normally be included in an appraisal for loan security, in addition to the minimum requirements set out in PS 6 and in the Reporting section, above, together with examples of special assumptions that may typically be appropriate. 200 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 76 / Date: 18/9

209 UK appendix 3.1 Protocol for valuation and appraisal of land and buildings for commercial secured lending 4.4 Property which is, or is to be, owner-occupied, (except for properties included in the category dealt with at para. 5.4 below) Additional report contents: + none, other than those in PS 6, and the Reporting section, above. Typical special assumptions: + that any leases that actually exist are disregarded, for example, where these are between connected parties; + see appendix 2.3 for other examples. 4.5 Property which is, or is to be held, as an investment Additional report contents: + summary of occupational leases, indicating whether the leases have been read or not, and the source of any information relied on; + current rental income, and comparison with current market rental value. Where the property comprises a number of different units, which can be let individually, separate information should be provided on each; + comment on the market s view of the quality, suitability and strength of the tenant s covenant; + comment on sustainability of income over the life of the loan, with particular reference to lease breaks or determinations, and anticipated market trends; + comment on any potential for redevelopment or refurbishment at the end of the occupational lease(s). UK practice statements Typical special assumptions: + an assumption as to future reversionary income, for example, afterarentreview; + an assumption as to covenant strength where there is no information readily available. 4.6 Property which is fully equipped as a trading entity and valued with regard to trading potential Additional report contents: + see PS 3.2 Commentary, paragraph 5, and also GN 1 Trade-related valuations. RICS VALUATION STANDARDS 201 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 77 / Date: 18/9

210 UK appendix 3.1 Protocol for valuation and appraisal of land and buildings for commercial secured lending Typical special assumptions: + assumptions made of the trading performance. Closure of the business could have a significant impact on the Market Value. The valuer should therefore report the effect that closure of the business would have on the Market Value, referring to any appropriate special assumptions listed below: + the business had been closed; + the inventory had been depleted or removed; + licences had been lost or had been breached; + accounts or records of trade would not be available to a prospective purchaser. 4.7 Property which is, or which is intended to be, the subject of development or refurbishment Additional report contents: + comment on costs and contract procurement; + comment on the viability of the proposed project; + if valuation is based on a residual method, an illustration of the sensitivity of the valuation to any assumptions made; + the implications on value of any cost overruns or contract delays. UK practice statements Typical special assumptions: + the current Market Value, on the special assumption that the building or refurbishment described had been completed; + the effect of a proposed sale, or letting on completion, either being concluded or failing to materialise. Where a valuation is required on the special assumption that the work had been completed the value reported should be the current value rather than a projection, or valuation forecast, of the likely value at the end of the development period. 4.8 It is good practice to refer to, and attach to the report, any instruction letter and the terms of engagement. 202 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 78 / Date: 18/9

211 UK appendix 3.2 RICS mortgage valuation specification UK appendix 3.2 RICS mortgage valuation specification 1. Introduction 1.1 The specification, which has been jointly prepared by RICS and the Council of Mortgage Lenders, will apply to the valuation of residential property for mortgage purposes on behalf of building societies, banks and other lenders, unless varied by the lender s standard terms of engagement and standard report form. 1.2 The specification is arranged under the following headings: + the valuer s role + the terms of engagement + the valuer s inspection + the valuation + the report + re-inspections + further advances + buytolet + external appraisals 2. The valuer s role 2.1 The Financial Services Authority s (FSA) guidance to building societies states that valuers should have sufficient experience and expertise and should be free from conflicts of interest. UK practice statements 2.2 The role of the valuer, who must have knowledge of and experience in the valuation of the residential property in the particular locality, is: + to advise the lender of the Market Value, usually excluding development value at the date of inspection; + to advise the lender as to the nature of the property and any factors likely to affect its value; and + if required by the lender, to provide an assessment of the property s estimated current reinstatement cost in its present form (unless otherwise stated) for insurance purposes. 2.3 As the valuer s job is limited to assessing the adequacy of the security, valuers must neither accept instructions to make, nor volunteer RICS VALUATION STANDARDS 203 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 79 / Date: 18/9

212 UK appendix 3.2 RICS mortgage valuation specification 3. Terms of engagement recommendations, as to the length of the term, or the amount to be advanced, nor give advice as to whether the property is suitable for second mortgage purposes. These decisions are solely the responsibility of the lender. 3.1 Building societies and banks will usually have standard terms of engagement which will incorporate this specification, and make reference to the practice statements in these standards. 3.2 Where there have been no written, or previously-established instructions the valuer should confirm that the intention is to provide a service in accordance with this specification. A copy of this specification may be supplied to the client. 3.3 Any variation to the specification should be agreed in writing before the inspection is made. 4. The valuer s inspection 4.1 In order to fulfil the instructions the valuer must inspect the property to be valued. UK practice statements 4.2 The valuer must undertake a visual inspection of as much of the exterior and interior of the property as is accessible without undue difficulty. Although the valuer must use personal judgement, this inspection should include all of the property that is visible when standing at ground level within the boundaries of the site, and adjacent public/communal areas, and when standing at the various floor levels. 4.3 The inspection should deal with any of the following matters that are relevant to the subject property Main building 204 RICS VALUATION STANDARDS External + Roof coverings, chimneys, parapets, gutters, walls, windows, doors, pipes, wood, metalwork, plastics and composites, paintwork, damp proof courses, air bricks and ground levels. Internal + Any parts that are not readily accessible or visible are not inspected and furniture and effects are not moved or floor coverings lifted. + Subject to reasonable accessibility, roof spaces are inspected only to the extent that they are visible from the access hatches, without entering them. Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 80 / Date: 18/9

213 UK appendix 3.2 RICS mortgage valuation specification + Ceilings, walls, load bearers and floor surfaces are inspected, except where covered or obscured. Moisture meter readings should be taken to identify potential damp problems. + Cellars are inspected if they are reasonably accessible, but under-floor voids are not inspected Services The valuer identifies whether or not there are gas, electricity, central heating, plumbing and drainage services. These services are not tested Outbuildings + Garages and other buildings of substantial permanent construction, and any structure(s) attached to the dwelling, are inspected. + The valuer is not expected to comment on the size, condition or efficiency of any leisure installation in the grounds of the property. However, comment may be expected where: + there is obvious evidence of serious disrepair; + the siting of the installation (for example, of a swimming pool) is a potential hazard to the dwelling, or poses a threat in other terms; + the installation covers an unacceptably large area in relation to the confines imposed by site boundaries Site The inspection includes the general state of boundaries, structures, drives, paths, retaining walls and the proximity of trees only if they are likely to materially affect the property s value Neighbouring properties UK practice statements The nature, use and apparent state of repair of neighbouring properties in the immediate vicinity are considered only to the extent that they may materially affect the value of the subject property Hazardous materials, contamination and environmental matters + No enquiries regarding contamination or other environmental hazards are made but, if a problem is suspected, the valuer should recommend further investigation. + The valuer may assume that no deleterious or hazardous materials have been used in the construction and is under no obligation to verify such an assumption. However, if the limited inspection indicates that there are such materials, this must be reported and further instructions requested. RICS VALUATION STANDARDS 205 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 81 / Date: 18/9

214 UK appendix 3.2 RICS mortgage valuation specification + The valuer will not carry out an asbestos inspection, and will not be acting as an asbestos inspector in completing a mortgage valuation inspection of properties that may fall within the Control of Asbestos Regulations 2006 (SI 2005 No. 2739). + Where the valuer becomes aware of: the close proximity of a high voltage electricity supply; the possibility of the presence of Radon gas; the use of Mundic in concrete building materials in Cornwall and parts of Devon; the presence of old mine workings, reference should be made to the guidance in UKGN 1. + Certain problems, such as mining settlement, subsidence, woodworm etc. are particularly prevalent in certain districts. If appropriate, the valuer should make some reference to these defects, even if the subject property does not appear to be affected at the time of the inspection. Where appropriate, the valuer should advise that a mining report should be obtained. 4.4 Flats, maisonettes or similar units forming part of a larger building or group of related buildings The above provisions apply, but here main building means the building containing the proposed security, but not including other main buildings physically attached to it. UK practice statements Main building External + The valuer inspects the exterior of the proposed security, and enough of the remainder of the main building to ascertain its general state of repair. Internal + The interior of the proposed security is inspected, as well as the communal entrance areas within the main building from which the proposed security takes access, and the communal area on the floor(s) of the proposed security. + The roof space is only inspected (as defined in para ) where access is directly available from within the proposed security Services 206 RICS VALUATION STANDARDS In the case of flats, where services such as lifts, boilers and other plant are shared, the valuer may assume that the right to use these, and have them maintained, passes with the property, subject to an appropriate and reasonable service charge. Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 82 / Date: 18/9

215 UK appendix 3.2 RICS mortgage valuation specification Outbuildings The valuer also inspects garaging, car parking, other buildings (excluding sports complexes) of permanent construction and any other structures attached to the main building, or which serve either the main building or the proposed security Management and maintenance + The valuer is expected to identify, in the course of the inspection, any apparent deficiencies in the management and maintenance arrangements that materially affect the value. + No enquiry of the dutyholder (as defined in the Control of Asbestos Regulations 2006 (SI 2005 No. 2739), of the existence of an Asbestos Register, or of any plan for the management of asbestos will be made. 5. The valuation 5.1 The basis of valuation The basis of valuation is Market Value. This is defined as: The estimated amount for which a property should exchange, on the date of valuation, between a willing buyer, and a willing seller, in an arm s-length transaction, after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion This definition should be applied in accordance with the conceptual framework set out in the RICS Valuation Standards, PS Unless otherwise instructed, any value for development that either has, or requires, planning permission should be excluded from Market Value. 5.2 Relevant factors UK practice statements Among the relevant factors that should be taken into account in the valuation are: + the tenure of the interest offered as security and, if known, the terms of any tenancies to which that interest is subject; + the age, type, accommodation, siting, amenities, fixtures and features of the property and other significant environmental factors within the locality; and + the apparent general state of and liability for repair, the construction and apparent major defects, liability to subsidence, flooding, and/or other risks. Particular care must be taken with non-traditional construction. RICS VALUATION STANDARDS 207 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 83 / Date: 18/9

216 UK appendix 3.2 RICS mortgage valuation specification 5.3 The nature of the interest Account should be taken of any known or apparent easements, servitudes and burdensome or restrictive covenants Any restrictions, covenants, and other obligations associated with tenure, can influence value and marketability, but valuers are expected only to advise on the effect of a particular covenant if it is specifically brought to their notice by the prospective lender or its professional advisers If the valuer s inspection reveals anything which gives reason to suspect an encumbrance, this should be reported whether or not the form makes provision for such items. Easements and other rights pertaining to way, light and drainage can have a material influence on the value. Furthermore, if the inspection reveals the possibility that third parties have the right of occupation, this also should be reported When valuing leases and reversions particular care should be exercised in ascertaining what needs to be valued. As valuers are rarely shown the lease they can only be expected to take account of onerous provisions when they are aware of these from personal previous experience, or when these are brought to light by the lender. In the absence of such information, valuers may assume that there are no unusually onerous covenants unless the inspection of the property causes them to suspect otherwise. UK practice statements 5.4 Assumptions to be made Unless it is made apparent by an express statement in the report, the valuer can make the following assumptions, but is under no duty to have verified these assumptions: (a) (b) (c) (d) (e) that vacant possession is provided; that all required, valid planning permissions and statutory approvals for the buildings and for their use, including any extensions or alterations, have been obtained and complied with; that no deleterious or hazardous materials or techniques have been used, that there is no contamination in or from the ground, and that it is not landfilled ground; that the property is not subject to any unusual or especially onerous restrictions, encumbrances or outgoings and that good title can be shown; that the property and its value are unaffected by any matters which would be revealed by a local search (or their equivalent in Scotland and Northern Ireland), replies to the usual pre-contract enquiries, or by any statutory notice which may 208 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 84 / Date: 18/9

217 UK appendix 3.2 RICS mortgage valuation specification (f) (g) (h) (i) (j) indicate that neither the property, nor its condition, its use, or its intended use, is or will be unlawful; that an inspection of those parts which have not been inspected, or a survey inspection, would not reveal material defects or cause the valuer to alter the valuation materially; that the property is connected to, and there is the right to use, the reported main services on normal terms; that sewers, main services and the roads giving access to the property have been adopted, and that any lease provides rights of access and egress over all communal estate roadways, pathways, corridors, stairways and use of communal grounds, parking areas and other facilities; that, in the case of a new property, the construction of which has not been completed, the construction will be satisfactorily completed; that, in the case of a newly constructed property, it has been built under the NHBC Buildmark Scheme, Zurich Municipal Newbuild and Rebuild Schemes, Housing Association Property Mutual Scheme, Premier Guarantee for Private and Completed Housing or equivalent, or by a professional consultant acceptable to the lender In addition, where the proposed security is part of a building comprising flats or maisonettes, the following assumptions will also be made, unless instructed to the contrary: (a) (b) (c) (d) (e) the costs of repairs and maintenance to the building and grounds are shared equitably between the flats and maisonettes; there are suitable, enforceable covenants between all leaseholds, or through the landlord or the freeholder/any feuholder; there are no onerous liabilities outstanding; there are no substantial defects, or other matters requiring expenditure (in excess of the current amount or assumed amount of service charge payable on an annual basis), expected to result in charges to the leaseholder, or feuholder, of the subject property, during the next five years, equivalent to 10% or more of the reported Market Value; that, where the dwelling is leasehold, and because the valuer has no further and better knowledge or information: the unexpired term of the lease is 70 years, and no action is being taken by any eligible party with a view to acquiring the freehold or to extending the lease term; there are no exceptionally onerous covenants upon the leaseholder; the lease cannot be determined, except on the grounds of a serious breach of covenant in the existing lease agreement; UK practice statements RICS VALUATION STANDARDS 209 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 85 / Date: 18/9

218 UK appendix 3.2 RICS mortgage valuation specification UK practice statements if there are separate freeholders, head and/or other sub-head leaseholders, the terms and conditions of all the leases are in the same form and contain the same terms and conditions; the lease terms are mutually enforceable against all parties concerned; there are no breaches of covenant or disputes between the various interests concerned; the leases of all the properties in the building/development are materially the same; the ground rent stated or assumed is not subject to review and is payable throughout the unexpired lease term; in the case of blocks of flats or maisonettes of over six dwellings, the freeholder manages the property directly or there is an appropriate management structure in place; that there is a dutyholder, as defined in the Control of Asbestos in the Workplace Regulations 2002, and that an Asbestos Register and effective management plan is in place, which does not require any immediate expenditure, or pose a significant risk to health, or breach the HSE Regulations. where the subject property forms part of a mixed residential or commercially used block or development, there will be no significant changes in the existing pattern of use; where the property forms part of a development containing separate blocks of dwellings, the lease terms of the subject property apply only to the subject block, and there will be no requirement to contribute towards costs relating to other parts of the development, other than in respect of common roads, paths, communal grounds and services; where the property forms part of a larger development, the ownership of which has since been divided, all necessary rights and reservations have been reserved; there are no unusual restrictions on assignment or subletting of the subject property for residential purposes; there are no outstanding claims or litigation concerning the lease of the subject property or any others within the same development; where the subject property benefits from additional facilities within the development, the lease makes adequate provision for the lessee to continue to enjoy them without exceptional restriction, for the facilities to be maintained adequately, and that there are no charges over and above the service charge for such use and maintenance; 210 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 86 / Date: 18/9

219 UK appendix 3.2 RICS mortgage valuation specification in respect of insurance, that: (i) the property can be insured under all risks cover, which includes subsidence, landslip and heave, for the current reinstatement cost; (ii) the cover assumed is available on normal terms; (iii) there are no outstanding claims or disputes; (iv) where individuals in a block make separate insurance arrangements, the leases make provision for mutual enforceability of insurance and repairing obligations; and (v) any landlord responsible for insurance is required to rebuild the property with such alterations as may be necessary to comply with current building regulations and planning requirements. 5.5 Treatment of incentives Thevaluation of new build property should be approached in the same way as any other valuation. The notified sale price (or estimated value in the case of a re-mortgage) must be treated with caution. The lender may advise, or the valuer may become aware during the normal on-site enquiries, that some form of incentive is available to the prospective purchaser. Regard must be given to the effect of any incentives in the context of the overall consideration for the property. Valuers should remember that valuations for secured lending on residential property are provided to lenders to assist in the assessment of loans secured on property and that incentives may not be repeated in a resale. Therefore, care must be given to the assessment of the weight that should be attached to a notified sale price as evidence of Market Value. The valuer should also have regard to any lender specific instructions that may vary from the approach outlined in the following paragraphs Developers may offer incentives on new properties, and occasionally on non-new-build property, in order to achieve quicker sales and give the appearance of high sale prices. Incentives may take many forms and may include: payment of legal and surveying fees; reimbursement of the deposit on signing contracts; guaranteed rents for a number of years; discounts/reductions if more than one property is acquired; purchase of the buyer s existing property; payment of the mortgage for a specified period; high level material gifts, for example, a new car, cash backs after completion, furnishings and electrical goods and so on. This list is not exhaustive. UK practice statements The valuer will need to distinguish between incentives that are property related, but have little impact on value, and incentives that have a greater impact, to the extent that the price would be significantly lower if they were not available. RICS VALUATION STANDARDS 211 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 87 / Date: 18/9

220 UK appendix 3.2 RICS mortgage valuation specification The valuer will have regard to incentives in arriving at the valuation on the defined basis but will not reflect them purely as an arithmetical exercise starting with the notified sale price or a selected comparable. The valuer must exercise professional judgement in the light of all the information and evidence that is available Comparables may be available from sales and re-sales on the development, but these may not be reliable if considered in isolation. They should be considered in the context of any incentives which were available and could have influenced the price paid, the market in the area, prices realised for similar new property on other developments, the second-hand market and other information considered relevant by the valuer. Adjustments will be necessary to reflect any improvements in the design or layout of the subject property, the ease of maintenance during the early years and any other factors that may influence the decisions of purchasers Valuers should have regard to the nature of transactions on the site that may include a small number of bulk purchases and/or a larger number of individual transactions, and they should weigh the comparable evidence accordingly. Valuers should also have regard to the nature of any discounting on a development and assure themselves that the discounted price has not in fact become the norm. UK practice statements Where reports may be seen and relied upon by prospective purchasers, it is recommended that the valuer considers including a statement to the following effect: It should be appreciated that the valuation provided is for the property as new. It may not be possible to obtain the valuation figure if the property is resold as second-hand, especially if comparable new property is on offer at the same time. 5.6 Town planning and other regulatory matters It is not necessary for the valuer to make enquiries into town planning and other matters. These should be left to the lender s or borrower s legal advisers. Any obvious breach of planning control, however, should be reported Likewise, the valuer is not obliged to search for statutory notices, although the lender s legal advisers should ask if any such matters that come to light during searches materially affect value With fully-developed property, consideration may have to be given to known, or suspected, planning restrictions or conditions. The valuer is under no duty to search, but may be called upon for advice as to any effect on value, if they are disclosed. 212 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 88 / Date: 18/9

221 UK appendix 3.2 RICS mortgage valuation specification The valuer should inform the lender of any obvious recent significant alterations and extensions so that the lender s legal adviser is alerted to the possible need to make enquiries Where the security comprises a building that has not yet been constructed, the valuer will, unless instructed otherwise, give a figure which assumes that the development had been completed, as at the date of the inspection, in accordance with planning permission and other statutory requirements. 5.7 Reinstatement cost assessment and exceptional risks The figure required for reinstatement cost (often incorrectly called fire insurance valuation ) is the current cost of reinstatement of the buildings in their present form (unless otherwise stated) including demolition, site clearance and fees, but excluding VAT (except on fees). Regard should be had to the ABI/BCIS House Rebuilding Cost Index Where the subject property is a flat or maisonette, the valuer should assess the reinstatement cost of that part of the total structure comprising the proposed security. It is the lender s responsibility to enquire whether a management committee or the landlord arranges insurance for the building as a whole, and whether that cover is adequate. 6. Reports The valuer should also report on any exceptional risks likely to affect the premiums for insurance purposes. There is, however, no obligation for the valuer to seek out such factors. The duty is limited to factors which come to notice during the ordinary course of inspection. 6.1 The form of the valuation report The lender will often provide a general form of valuation report or, if this is not the case, the valuer may wish to adopt the Valuation of Residential Property for Mortgage Purposes Model Report Form available from RICS Books. If these formats are not used the information provided in the report should be sufficient to enable the prospective lender to become aware of the nature of the security being offered, although unnecessary detail should be avoided. UK practice statements The valuer s duty is to prepare a report on the basis of the information, or questions, contained in the instructions received, unless there are obvious errors or inconsistencies In addition to the assumptions described in para. 5.4, the valuer should make any other reasonable assumptions and state these explicitly in the report. RICS VALUATION STANDARDS 213 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 89 / Date: 18/9

222 UK appendix 3.2 RICS mortgage valuation specification 6.2 Defects and disrepair If it is suspected that hidden defects exist which could have a material effect on the value of the property, the valuer should advise of this and recommend more extensive investigation by the intending borrower before entering into a legal commitment to purchase or, in the case of a re-mortgage, as a pre-condition of the mortgage advance. It may be appropriate, in exceptional circumstances, to defer making a valuation until the results of the further investigations are known If it is not reasonably possible to carry out any substantial part of the inspection this should be stated. UK practice statements The report should include reference to: + any obvious evidence of serious disrepair to the property or obvious potential hazard to it, and any other matters likely to materially affect the value. Minor items of disrepair, poor design or lack of decoration, which do not materially affect the value of the security, do not need to be reported; + items which are not serious at the date of inspection but could become so if left unattended. The lender may wish to impose a stipulation that they be repaired before a stated date; + other items of disrepair, poor design or lack of external decoration which will adversely affect the structure and lead to a significant diminution in the value of the security. Such items may be the subject of a retention and, in any event, should be drawn to the attention of the prospective purchaser with a recommendation that they should be investigated before the purchaser enters into a legally-binding commitment to purchase In more serious cases of disrepair the valuer should recommend that there be no advance until certain works are carried out, but that when such works have been completed the property will be a suitable security. These items should also be brought to the attention of the prospective purchaser, with a note that they should be investigated before the purchaser enters into a legally-binding commitment to purchase Where the valuer reports that works must be carried out to a property as a condition of any advance, and has also identified the property as being: + of architectural or historic interest, or listed as such; + in a conservation area; or + of unusual construction, 214 RICS VALUATION STANDARDS then the report must state that a person with appropriate specialist knowledge be asked to give advice on the appropriate works. In such Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 90 / Date: 18/9

223 UK appendix 3.2 RICS mortgage valuation specification cases valuers should only offer advice themselves if they are sure they are competent to give advice which, if adopted, would not be detrimental to the property s architectural or historic integrity, its future structural condition, or the conservation of the building fabric Where there is a basic structural defect, so that renovation ceases to be possible or economic, the property should not be recommended as security for a mortgage advance. 6.3 Information provided In England and Wales, the valuer is not required to read the documents within a Home Information Pack or the Energy Performance Certificate, or comment on the energy or environmental ratings, unless specifically instructed to do so by the lender. However, this reservation does not affect the duty of the valuer to comply with general requirements of paragraphs 4, 5 and 6 of this specification Where the valuer relies on information that has been provided, this should be indicated in the report, together with the source of that information. This may include: + informing the lender of the existence of any obvious recent significant alterations and extensions, thus alerting the lender s legal adviser to any enquiries that should be made; + where the proposed security is part of a building comprising flats or maisonettes, identifying any apparent deficiencies in the management and/or maintenance arrangements observed during the inspection which materially affect the value; + the current amount of the annual service charges payable, if available; + informing the lender of any situation where the apparent sharing of drives, paths, or other areas might affect the value of the subject property; + reporting the form of construction and, where non-traditional, the valuer should advise accordingly, stating the type of construction and the source of this information, if it is not apparent from the inspection. UK practice statements 7. Re-inspections 7.1 A re-inspection is a further visit to a property which has already been accepted in principle by the lender as suitable security for an advance of a specified amount. 7.2 The valuer may be asked to advise whether the previous valuation report (which must always be available to the valuer) is still sufficiently accurate for the lender to assess the adequacy of the security when RICS VALUATION STANDARDS 215 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 91 / Date: 18/9

224 UK appendix 3.2 RICS mortgage valuation specification deciding whether or not to release a retention or stage payment. In this case the valuer s duty is to inspect only those parts of the property with which the lender is concerned. It is not the task of the valuer to inspect the whole property. 7.3 The cases that may arise include: + consideration of the release of money by way of stage payments applicable to the stage of construction reached; + whether the (new, or newly-converted or improved) property has been completed to the state assumed in the initial mortgage valuation report (where a mortgage offer has been made on this basis but no advance actually made); + in circumstances where part of the advance has been retained until specified works have been undertaken, whether those works have apparently been completed as assumed in the initial valuation report, or as otherwise specified by the lender, to a standard satisfactory to justify lending on them and without significant adverse effects on the value of the property. UK practice statements 7.4 If, during the re-inspection, the valuer: + becomes aware of any material changes or factors, additional to those in the previous report, which would affect the valuation of the proposed, completed security; + is aware of any other factor which might materially affect the valuation; + is of the opinion that the valuation of the proposed completed security would be materially different from that previously reported, then the valuer must report accordingly. 7.5 If, however, in the course of the inspection: + it is considered that the property mayhavebeenaffectedadversely by the works carried out; + new defects and/or repair requirements and/or unsatisfactory workmanship are observed; + it is apparent that the problem which gave rise to the need to carry out the remedial works is now affecting another part of the structure, or that part of the structure which is the subject of the required inspection is suffering from a further defect, then the valuer must advise the lender. 7.6 Unless asked to do so, the valuer has no duty to provide a new figure for reinstatement insurance purposes. 216 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 92 / Date: 18/9

225 UK appendix 3.2 RICS mortgage valuation specification 8. Valuations for further advances 8.1 Where a property is already in mortgage to a lending institution that organisation may sometimes wish to consider whether a further advance, usually of a specified sum, can be made on the security of the property, or the repayment of a loan rescheduled. The valuation may be of the property as it stands and/or with works proposed to it. The lender must provide the valuer with the original report, or a copy, wherever possible. 8.2 The valuer s remit is to provide a report on all of the following: + the current Market Value of the property; + the current Market Value, where defined works are contemplated, on the assumption that they have been satisfactorily completed, and a revised estimate obtained for insurance purposes; + any factors likely to affect its value materially; + changes in the accommodation or its amenities since the previous inspection report. 9. Buytolet 9.1 Individual residential properties are sometimes purchased with a view to the owner letting them as investments. Many lenders have specific loans designed for this buy to let market. As the security offered is essentially a property that would be in the residential owner-occupier market, it is appropriate that the valuation is in accordance with this specification. 9.2 Where the lender advises the valuer that the borrower intends to let a vacant property for residential purposes, the lender should also advise whether the valuer is to value the property: (a) (b) (c) with vacant possession; or subject to an assured shorthold tenancy (AST) on market terms; or subject to such other terms as the lender advises. UK practice statements Valuers should be aware of the impact of incentives in respect of properties suitable for buy to let investment. Guaranteed rents that are above market rent and cash backs in lieu of rental income for a number of years may have an effect on price. Valuers should consider these impacts and report accordingly. In some cases the lender may specifically request the valuer to give an opinion of the market rent on an assured shorthold tenancy under item (b). 9.3 In the case of (a), the valuer must include in the report asentenceto the effect that the lender has advised that the property is to be let and that this may adversely affect the valuation reported (if the valuer RICS VALUATION STANDARDS 217 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 93 / Date: 18/9

226 UK appendix 3.2 RICS mortgage valuation specification believes this to be the case). In the case of (b) or (c), the valuer must state in the report that a special assumption has been made that the property has been let on an AST on market terms, or such other stated terms as were advised by the lender. 9.4 Many lenders use a standard pro-forma report for buy to let valuations. Where this is the case, the valuer need not comment on: + the letting assumptions made and/or; + the possible adverse effect on the capital value of letting; where either the pro-forma, lender s terms of engagement or lender s guidance manuals or equivalent already state the assumptions that the lender wishes the valuer to make in the preparation of the report. 9.5 In the event that the property is already let and is to be conveyed subject to the letting, this letting must be reflected in the valuation, unless an appropriate special assumption (for example, at the lender s request, that vacant possession is to be assumed) is made and stated in the report. UK practice statements 10. External appraisals 10.1 A valuer may be asked for a valuation without the benefit of an internal inspection, and with or without the benefit of an earlier report. This may be called an external appraisal.whenavaluerdoes provide an opinion on this basis, it must be confirmed in writing and the manner of valuation and the restrictions under which it is given clearly stated (see PS 2.4 Restricted information). The lender must be informed that the value stated in such a fashion must not be disclosed to the borrower or any other party unless required to do so by the FSA rules in Mortgages: Conduct of Business Many lenders use a standard pro-forma report for valuations without an internal inspection. Where this is the case, the valuer need not comment on: + the manner of valuation; + the restrictions under which it is given; + the non-disclosure to the borrower and/or other third parties; where either the pro-forma, lender s terms of engagement, lender s guidance manuals or equivalent already state the assumptions, restrictions and terms under which the valuer should prepare the report. 218 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 94 / Date: 18/9

227 UK appendix 3.3 Registered social landlords housing stock for secured lending purposes UK appendix 3.3 Registered social landlords housing stock for secured lending purposes 1. Introduction 1.1 This appendix provides guidance on the additional matters that should be taken into account by valuers undertaking valuations for this purpose, in addition to the provisions of Part 3 of these Standards. Its provisions also apply to valuations of Registered Social Landlords (RSL) interests in property in shared ownership. 1.2 In this appendix references to the client are to the lender, who will normally issue any valuation instructions. However the provisions apply equally if an RSL requests a valuation for secured lending. 2. Identifying the property 2.1 The valuer first needs to agree with the client whether the stock is to be valued as a single portfolio, or in lots, which could be individual dwellings. If the stock is not to be valued as a single portfolio, the valuer will need to ensure that the client is aware that the aggregate of the valuations provided may differ from the price that could be achieved if some, or all, of the properties were sold, either as a portfolio, or if a large number were placed on the market concurrently for sale individually (see also GN 3 Valuations of Portfolios and Groups of Properties). 2.2 Particular care is necessary to establish the nature of the landlord s interest(s) to be valued. Restrictions and encumbrances (for example, Section 106 Agreements, right to buy, and nomination rights) are common. Planning consents may include restrictions upon occupation or its tenure. Obviously the valuation must reflect the terms of any shared ownership leases. UK practice statements 3. Extent of inspection 3.1 Where the stock to be valued comprises a large number of similar properties, or a number of estates or blocks, each of which comprise similar properties, the valuer must agree with the client whether every property will be inspected or, as is more usual, whether sample inspections should be completed and the valuer assume that these are representative of those properties which have not been inspected. The extent of each sample inspection (for example, internal and external, external only, or front elevation only) must also be agreed. RICS VALUATION STANDARDS 219 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 95 / Date: 18/9

228 UK appendix 3.3 Registered social landlords housing stock for secured lending purposes 3.2 Where the inspection is to be of a sample only, the extent of the sampling and the method of its selection must be agreed with the client. In all cases PS 4.1 applies so, if the valuer subsequently considers that the extent of the inspection is not adequate for the purpose of the service, the client must be advised accordingly and further instructions agreed before reporting. 4. Basis of valuation 4.1 Market Value (MV) will be subject to existing tenancies. Unless the client specifies to the contrary, a special assumption should not be made that dwellings vacant at the valuation date had been re-let to tenants in the RSL s target group, (they should be valued with vacant possession). 4.2 A valuation on the basis of MV should reflect any intention which the valuer considers that a prospective purchaser would have to raise the rents. If the valuer expects to make this assumption, the potential impact of this on the value of the security should be drawn to the client s attention. 4.3 Existing use value for social housing (EUV SH) is defined in UKPS 1.13 Social housing valuations. Its use is appropriate in secured lending valuations, as it assumes that the properties will continue to be let as social housing, and that any vacant dwellings will be re-let to tenants in the RSL s target group. UK practice statements 5. Calculations of worth 5.1 Clients may also require the valuer to provide a calculation of worth on the assumption that the lender was in control of the security, following default by the borrower. In this case clients potential rights (for example, whether they will be entitled to sell vacant dwellings, or where tenants rights to buy remain) and their willingness and ability to raise rents and sell dwellings that become vacant, will be relevant. 5.2 The client may also be interested in receiving, and hence will specify, a return which is to be adopted through the discount rate used in the calculation of worth. assumptions such as these must be stated in the report. 5.3 Where a calculation of worth is provided, an opinion of value on MV or EUV-SH should be provided concurrently. 5.4 Further guidance on these matters may be found in the RICS information paper Calculations of Worth. 6. Developments 6.1 Where lending is contemplated on the security of a proposed development, or a development in the course of construction, it will 220 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 96 / Date: 18/9

229 UK appendix 3.3 Registered social landlords housing stock for secured lending purposes normally be appropriate to provide both a valuation of the property in its current condition, and a further valuation on the special assumption that the development had been completed in accordance with the plans and specification provided. In establishing the current value the valuer will need to establish what information is available on the anticipated development costs, and the extent to which these may be relied upon by the valuer. 7. Reporting 7.1 The report should contain, in addition to those matters listed in PS 6.1, as many of the following additional matters as seem appropriate in the circumstances: + a statement of the average rents being charged for each dwelling and tenancy type, and a comparison of these with the valuer s assessment of the level of rents which could be obtained if the properties were let, unfurnished, on the open market; + a statement as to the existence of nomination rights; + an explanation if there is an exceptionally high number of vacant dwellings; + an appreciation of the strength of demand for the dwellings, both let at the level of rents charged/to be charged by the RSL, and if offered for sale with vacant possession, and any known factors likely to significantly affect these strengths; + a statement where the valuation(s) reported has/have been affected by the existence of an unimplemented planning permission for change of use or other development, or by the prospect of such consent(s) being available, with advice as to the amount(s) of the increase reported in consequence; + an opinion as to whether, over the period contemplated for the loan, material changes, in real terms, in the necessary level of expenditure are likely to be required; + the valuer s opinion of the property as a lending security, including implications relating to the ability to realise the security in the event of default, bearing in mind the length (which will be stated) of the term of the loan contemplated by the client, and assuming that the borrower will maintain the property in a reasonable state of repair; + a statement as to the valuation method(s) adopted, and an indication of the extent to which the valuer has been able to have regard to comparable market transactions. The yield and, where a discounted cash flow method is used, the principal inputs, assumptions and the discount rate adopted, must be stated. UK practice statements RICS VALUATION STANDARDS 221 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 97 / Date: 18/9

230 UK appendix 3.3 Registered social landlords housing stock for secured lending purposes 8. Liaison with lenders 8.1 The British Bankers Association, the Council of Mortgage Lenders and RICS regard it as important that lenders and valuers develop close workingrelationshipsinrespectof valuations and appraisals, especially in more complex cases, to ensure that the service provided by the valuer reflects the lender s needs and that the latter fully understands the advice which is being given. UK practice statements 222 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 98 / Date: 18/9

231 UK appendix 3.4 RICS Scotland advice on issuing terms of engagement UK appendix 3.4 RICS Scotland advice on issuing terms of engagement 1. This appendix reproduces the advice issued by RICS Scotland in January Paragraph 1.1 of the advice refers to the Rules of Conduct and those Standards that were applicable in As the Rules of Conduct 2007 do not refer to terms of engagement and the references in these Standards have changed this paragraph should be read as follows: 1.1 This advice should be read in conjunction with the RICS Valuation Standards, Sixth edition. PS 2.1 Confirmation of terms of engagement requires the terms of engagement to be brought to the client s attention and appropriately documented prior to the issue of the report. RICS Scotland advice on issuing terms of engagement (SRF/01/06) 1. Introduction 1.1 This advice should be read in conjunction with the Royal Institution of Chartered Surveyors (RICS) Appraisal and Valuation Standards (Fifth edition) (Red Book) Chapter 2 (Agreement of terms of engagement), PS 2.1 Confirmation of terms of engagement. RICS Code of Conduct, Rule 8, provides that terms of engagement shall be sent promptly. 1.2 This advice reflects that due to time restrictions sometimes created by the traditional and accepted procedures for buying residential property in Scotland, it is often difficult to issue Terms of Engagement to clients, or those acting for clients, prior to the issuing of a valuation or survey report. The guidance contained in this advice aims to reflect best endeavours on behalf of the Chartered Surveyor, in their firm. 2. Best endeavours 2.1 Where it is possible, and reasonable time permits, these Terms of Engagement shall be issued to clients in accordance with the RedBookPS2.1 Confirmation of terms of engagement.where this is not possible then the Chartered Surveyor, or their firm shall adhere to at least one of the following guiding principles: A written copy of the standard Terms of Engagement shall be sent to the client, or their representative, within 24 hours of receipt of the instruction. UK practice statements RICS VALUATION STANDARDS 223 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 99 / Date: 18/9

232 UK appendix 3.4 RICS Scotland advice on issuing terms of engagement Where a Chartered Surveyor, or their firm, has a website openly accessible to the public, then their standard Terms of Engagement shall be posted therein and the client, or their representative, shall be directed to view the terms on the website Where practicable, the Terms of Engagement shall be ed to the client, or their representative, within 24 hours of receipt of the instruction Where practicable, the Terms of Engagement shall be sent by fax to the client, or their representative, within 24 hours of receipt of the instruction It shall be deemed to be good practice for the Chartered Surveyor, or their firm, to furnish their standard Terms of Engagement with referring parties (e.g. local solicitors, lenders, etc., with their valuation commissions once received). A note of receipt of these terms should ideally be sought. 3. This advice is approved by the RICS Appraisal and Valuation Standards Board and RICS Scottish Residential Faculty Board. RICS Scotland SRF/01/06 January 2006 UK practice statements 224 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 100 / Date: 18/9

233 UKPS 4 Residential property valuations (other than for mortgage purposes) UKPS 4 Residential property valuations (other than for mortgage purposes) UKPS 4.1 RICS Homebuyer Survey and Valuation (HSV) Members accepting instructions to provide the RICS Homebuyer Survey and Valuation (HSV) Service must comply with the second edition HSV practice notes (2005). Commentary 1. The HSV is a product developed and owned by RICS, designed specifically as an economical service which may be provided only by RICS members. 2. The Homebuyer Service comprises: + an inspection of the property; + a concise report based on the inspection; and + a valuation. It covers the general condition of the property and particular features that affect its present value and may affect its resale. The report focuses on matters that the surveyor judges to be urgent and/or significant. 3. Members who provide the HSV Service must comply with the practice notes as 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. 4. The second edition practice notes are set out as follows: + Part A The practice notes Professional obligations Requirements and scope of the HSV Service The contract Compiling the report Commentary and guidance + Part B The documentation Choosing between surveys Description of the Homebuyer Service and terms of engagement Commentary on particular elements of the DHS Annex: Leasehold properties RICS VALUATION STANDARDS 225 UK practice statements Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 101 / Date: 18/9

234 UKPS 4 Residential property valuations (other than for mortgage purposes) + PartC Thereport form and checklists Cover A Introduction B The property & location C The building (C1 Movement; C2 Timber defects; C3 Dampness; C4 Condensation & insulation) C The Building (C5 The exterior) C The Building (C6 The interior) D The Services & Site E Legal and other matters F Summary G Valuation + Part D Appendices Appendix A: Definitions of HSV key terms Appendix B: The HSV Service: Checklist of professional obligations Appendix C: The Contract: Checklist for each commission Appendix D: Notes on HOMEBUYER terminology Appendix E: The HOMEBUYER Licensing Scheme UK practice statements UKPS 4.2 The documentation and report form are published separately for use by the surveyor. 5. The documentation and report form are available for use in an electronic format by obtaining a licence from RICS Books. Paper versions of all the documents are also available. Repossession proceedings Valuations of residential property for the purpose of possible possession proceedings, or the proposed sale of a repossessed property, shall be on the basis of Projected Market Value (PMV) subject to the following additional assumptions: + that during the marketing period the property has been unoccupied and that all furnishings and fittings have been removed; + that the vendor (the mortgagee) has to sell the property within a reasonable period to recover the secured debt. Commentary 1. Projected Market Value (see UKPS 3.3) is used in relation to possession proceedings or the marketing of repossessed property. 226 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 102 / Date: 18/9

235 UKPS 4 Residential property valuations (other than for mortgage purposes) UKPS The requirement to assume that the property has been empty means that the valuer has to take into account the adverse effect this may have had on its marketability. 3. A valuation on the basis of PMV, in connection with possession proceedings, will exclude the value of furnishings and fittings, although it is likely that their removal will have an adverse impact on marketability and the value of the property.the assumption of removal requires the valuer to consider the impact of removal, even though they may still be present at the date of inspection. 4. The conceptual framework for Market Value at PS 3.2 applies, but the second additional assumption above does slightly modify and without compulsion. While a mortgagee is not compelled to sell there is a requirement to capitalise a non-performing asset and therefore there is less flexibility than a typical owner-occupier would have. In certain market conditions this could affect the price that could be achieved. 5. The mortgagee as vendor has a duty to secure the best price available in the prevailing market conditions and has to act reasonably. If the mortgagee imposes restrictions on the available marketing period then these should be identified by the member in any special assumptions to the valuation. Individual leaseholds in DIYSO The value of an individual s leasehold interest in a shared ownership, or do-it-yourself shared ownership property, shall be in the same proportion of the Market Value of the freehold interest with vacant possession as that share bears to the whole. Commentary 1. The development of shared ownership schemes by registered social landlords is regulated by the Housing Corporation. UKGN 2 gives information on these schemes. 2. The valuation may be reached by considering the sales of comparable property, where the freehold interests were either sold, or were those of occupying tenants. On occasion there may be evidence that a share has sold at a higher price than the same arithmetical share of the value of the whole property. If the evidence supports this, then the valuation should too. 3. When a second-hand DIYSO property is purchased, the Housing Corporation will require a Homebuyer Survey and Valuation. If the valuer is not commissioned to provide this concurrently, the RSL should be asked to provide a copy, as it may offer more information on the current or recent condition of the property, and highlight any essential repair work that is required. UK practice statements RICS VALUATION STANDARDS 227 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 103 / Date: 18/9

236 UKPS 5 Regulated purpose valuations UKPS 5 Regulated purpose valuations UK practice statements UKPS 5.1 UKPS 5.2 Regulated purpose valuations Regulated purpose valuations are: + Valuations for financial statements under PS 3.6 or UKPS 1.1; + Valuation reports for inclusion in prospectuses and circulars to be issued by UK companies under UKPS 2.1; + Valuations in connection with takeovers and mergers under UKPS 2.2; + Valuations for collective investment schemes under UKPS 2.3; + Valuations for unregulated property unit trusts under UKPS 2.4. Commentary 1. There are circumstances where although valuations are provided for a client they may also be of use to third parties, for instance, the shareholders in a company. Such valuations are defined as regulated purpose valuations and the valuer is required by these statements to make specified disclosures in relation to the purposes listed. Rotation of personnel Where a series of valuations for a regulated purpose is to be provided the member shall include in the terms of engagement a statement of the firm s policy on the rotation of the valuer who accepts responsibility for those valuations and a statement of the quality control procedures that are in place. Commentary 1. The obligation to disclose the firm s rotation policy will arise only where the valuer has provided a series of valuations overaperiodof time. Where an instruction is a first, or one-off instruction, it is clear that it would be inappropriate to comment on a rotation policy. Therefore, this part of the practice statement need not be complied with in such circumstances. However, a statement of the quality controlproceduresisstillrequired. 2. It should be recognised that where the valuer responsible for the valuation in accordance with PS 1.4 holds that responsibility for many years there may be a possibility that a threat of familiarity, with either the client or the property valued, may arise leading to the perception that the valuer s independence and objectivity could be compromised. 228 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 104 / Date: 18/9

237 UKPS 5 Regulated purpose valuations UKPS 5.3 Such a threat may be minimised by arranging for the rotation of the valuer who accepts responsibility for the valuation. 3. The method by which a firm will arrange for any rotation of the person responsible for valuations is for them to decide, after discussion with the client if appropriate. However, RICS recommends that the individual responsible for signing the report, of whatever standing in the firm, has that responsibility for a limited number of years, with the exact period reflecting the frequency of valuation, the existence of a valuation panel and any internal valuation quality control procedures in place and good business practice. RICS considers it good practice to rotate the valuer responsible for regulated purpose valuations at intervals of not more than seven years. 4. When this statement comes into effect there will be instances of valuers having been signatories for many years. In such cases the statement should also indicate the firm s policy on the rotation of those valuers. 5. With regard to internal valuation procedures, it is recognised that, as a consequence of the size and/or numbers of properties that may be involved in a valuation, it is likely that a valuer s firm will have control procedures in place such as valuation panels, which assist both the accuracy and objectivity of the valuation process. Such policies should be taken into account when considering the timing of the rotation of the valuer who accepts responsibility for the valuation. 6. If a firm is of insufficient size to rotate the signatory, or have in place valuation panels, as suggested above, other arrangements could be made to comply with the principles of this statement. For example, where the same valuation instruction is undertaken on a regular basis, an arrangement for a periodic review of the valuation, at intervals not greater than as recommended in paragraph 2 above, would assist in demonstrating that the member was taking steps to ensure that objectivity was maintained and thus retain the confidence of those relying upon the valuation. Exclusion of certain properties Where a regulated purpose valuation includes: (a) oneormoreproperties 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. RICS VALUATION STANDARDS 229 UK practice statements Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 105 / Date: 18/9

238 UKPS 5 Regulated purpose valuations Commentary 1. There are many circumstances where conflicts of interest may arise (see PS 1.6) but this statement deals specifically with the conflict that may arise where the valuer, or the valuer s firm, could be involved in the introduction and acquisition of property by the client and also have to provide a regulated purpose valuation of the same property. 2. This statement requires that where the specified circumstances apply there should be avaluation provided by another firm. This will remove any perception that there could be a possibility of pressure on the valuer to justify earlier advice provided by that valuer or the valuer s firm. UK practice statements UKPS 5.4 Disclosures 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) (b) (c) (d) 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; the extent and duration of the relationship of the member s firm with the client; 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 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. Commentary 1. Theremaybeaperceptionbyathird party relying on the valuation that over-familiarity with the client, or the subject of the valuation, may compromise the valuer s objectivity. Likewise, if the client provides a significant proportion of the income of the valuer s firm there could also be a perception that this could consciously, or unconsciously, influence the valuer. The objective of this statement is to ensure that a third party reading the report, or a published reference to it, should be alerted to the length of time that the valuer has been dealing with the instruction and whether the valuer s firm is unduly dependent on the client for its income. 230 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 106 / Date: 18/9

239 UKPS 5 Regulated purpose valuations 2. Although the wider requirement for the member to act with independence, integrity and objectivity in PS 1.6 is clear, it does not require disclosure of the working relationships between the valuer and the client. 3. This statement, which applies only to regulated purpose valuations, provides for a degree of disclosure that both gives any third party some relevant information and, by requiring that information to be given in proportionate terms, maintains the confidentiality necessary between the valuer and the client. 4. With regard to item 1 of this statement, the disclosure should relate to the continuous period of responsibility for the valuation up to the date of the report. It is possible that the valuer has been the signatory to previous reports for the same purpose, but due to the firm s rotation policy (see UKPS 5.2) there has been a period of time when the valuer did not have that responsibility. There is no requirement to include that earlier period in the disclosure statement. 5. In complying with item 2 of this statement, 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. 6. In considering the disclosures required by this statement it is necessary to consider who constitutes the client. Closely connected companies within a group should be properly regarded as a single client. However, due to the complex nature of modern business it is frequently the case that there are other entities that have only a remote legal or commercial connection with the client but for whom the valuer s firm also act. There may also be practical difficulties in identifying and quantifying such relationships, for example, between overseas associates of the valuer s firm and client. Frequently it is the valuer s commercial relationship with a party other than the legal client that could create a perceived threat to independence. 7. Whilst it is recognised that it may be both impractical and immaterial to establish and evaluate every relationship between the valuer s firm and every party connected with the instructing party, it is the valuer s responsibility to make reasonable enquiries to identify the extent of the fee earning relationship with all parties having a material connection or relationship with the client, and to ensure that the principles of this statement are adhered to. Where there is a material connection or relationship, the disclosures required by this statement relate to the relationship of the valuer s firm with all the parties involved and the aggregate fees earned from those parties. UK practice statements RICS VALUATION STANDARDS 231 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 107 / Date: 18/9

240 UKPS 5 Regulated purpose valuations 8. The following are examples of where the disclosure requirements will relate to and include parties other than the legal entity giving the valuation instruction: + subsidiaries of an instructing holding company; + where instructions are from a subsidiary company, those other companies connected by the same holding company; + a third party issuing valuation instructions as agent for different legal entities, for example, the manager of a property fund. 9. Similar considerations apply in identifying the extent of the valuer s firm for disclosure purposes, where there may be separate legal entities in different locations or undertaking different types of work. Whilst it may not be relevant to include all organisations connected with the firm undertaking the valuation where their activities are remote or immaterial, for example, they do not involve the provision of property advice, where there is a series of closely connected entities trading under a common style it is the extent of the client s relationship with all those entities that should be disclosed. 10. The information required under items 3 and 4 of this statement should be expressed, when required, in the form of between x% and y% with the difference between x and y being no more than 5 percentage points. UK practice statements 11. The purpose of item 4 of this statement is to recognise that there may be circumstances where it is anticipated that there will be a significant increase in the proportions of fees between the end of the previous financial year and the date of the report. Because detailed information on the proportion will probably not be readily available the valuer will need to make enquiries and form a judgement as to the likely proportions to be disclosed. 12. Where a reference to a report is to be published, the statement for inclusion in the publication (see PS 6.12) should contain a reference to all the information given in complying with this statement. 13. A note of the enquiries made and the source of the information used in preparing the responses to this statement must be retained in the file. 232 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 108 / Date: 18/9

241 UK guidance notes UKGN 1 Inspections and material considerations 1. Introduction 1.1 The commentary to PS 5.1 notes that The degree of on-site investigation that is appropriate will vary, depending upon the nature of the property, the purpose of the valuation and the terms of reference agreed with the client. 1.2 Unless expressly stated to the contrary in the terms of engagement, for instance the assumptions in UK appendix 3.2, paragraph 4.3.6, Valuers have an obligation to investigate, consider and report on any material feature that affects a property or its surroundings that could impact on value even if it is not included in this guidance note. 1.3 Although this guidance note highlights matters that commonly can have an impact on the value of a property interest, the degree to which these matters may be addressed by the valuer will often depend upon the purpose of the valuation and the extent of enquiries that would normally be associated with such a valuation. It is acceptable for the valuer to agree with the client that either no investigation of these matters will be undertaken, or that specific assumptions can be made, providing that this takes account of 1.1 above. 1.4 The topics referred to and the information sources are provided for guidance only, and neither should they be regarded as a comprehensive list of all matters that may need to be investigated or reflected in every situation. 1.5 While many information sources are property specific, many are not and only give generalised information relating to a wider area. The valuer will need to take care in considering the potential impact on the specific property and, where appropriate, make clear the limitations of the information relied upon in the report. 1.6 Increasingly under UK legislation, the appropriate action to be taken to counter a potential property hazard is identified by a risk assessment undertaken by a designated competent person. Valuers are not expected to be competent to assess these risks but are recommended to take steps to familiarise themselves with those matters that commonly affect value in the sector or locality in which they practise. Where these UK guidance notes RICS VALUATION STANDARDS 233 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 1 / Date: 18/9

242 UKGN 1 Inspections and material considerations are likely to be a factor, the valuer will need to discuss with the client whether the matters identified should be subject to an investigation by appropriate specialists or whether the value is to be reported on the basis of a specific assumption about the level of risk. 1.7 In most cases the risk arising from a particular hazard reflects a combination of the physical features of the property and the manner in which the property is utilised by the occupier. Care is to be taken to distinguish any work that may be required because of the way in which a particular occupier utilises a property from work that would have to be undertaken by any potential buyer in the market. 1.8 Where expert reports have been obtained the valuer is to consider the effect of those reports on the valuation. It is important that the valuer does not offer any explanation or interpretation of such reports in the absence of any personal expertise in the subject. 2. Contamination and environmental matters 2.1 Contamination, or pollution, of land or buildings, can be caused by a wide variety of activities, both current and historic, and is not confined to areas that have been used for heavy industrial processes. Few valuers will have the knowledge or expertise to advise on the extent and nature of any contamination present, or any appropriate remedial works. If contamination is suspected, valuers are to alert the client if they believe that it could have a significant impact on the valuation, and agree the assumptions that should be made in completing the valuation and included in the report. 2.2 Mineral workings: Historic mineral workings exist in many parts of the country and can affect property, particularly from shallow workings and the contaminative activities found in close proximity to the surface. The greatest concentration of mine entries occurs in recognised coalfields and former metal-mining areas, but may also have taken place outside those areas. Valuers are expected to make themselves aware of any parts of their area of operation where there may have been past mining activity. UK guidance notes 2.3 Waste disposal: Many former mines and other sites of mineral extraction have been, or are being, used for landfill activities. These sites can cause ground instability and produce landfill gases. In addition other waste operations can cause pollution. Businesses are increasingly affected by waste management legislation. Care is to be taken to distinguish between the occupiers obligations and those of a prospective purchaser. 2.4 Flooding: The risks of flooding are increasing due to development on floodplains, flood and coastal defences nearing the end of their useful lives and climate changes, and valuers are expected to be aware of flooding issues which may affect the property. The Environment Agency and the Scottish Environmental Protection Agency publish floodplain maps which illustrate properties at risk. 234 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 2 / Date: 18/9

243 UKGN 1 Inspections and material considerations However, these do not show all the areas of risk or all the potential sources of flooding. For flooding information see or In Scotland, information on coastal defences is obtained from the local authority. There are also private companies able to supply flooding data. 2.5 Further information: The RICS guidance note Contamination and Environmental Matters their implications for property professionals (available for members on contains guidance on common types of contamination and information on the statutory and common law liabilities on property owners. The use of the relevant Property Observation Checklist provided in this guidance note is recommended. 3. Hazardous or deleterious materials 3.1 Asbestos: It is estimated that asbestos, in some form, is present in one and a half million buildings in the UK, as its use was commonplace until the mid-1980s. 3.2 The Control of Asbestos Regulations 2006 require non-domestic property to have management plans in place. In any building where asbestos is present, the cost of maintenance, alteration and repair can be significantly increased because of the need to take appropriate precautions under the Regulations, and this can impact on value. It is therefore recommended that valuers develop an awareness of the types of buildings and construction likely to contain asbestos. 3.3 Depending on the purpose of the valuation, the valuer may need to alert the client of the need to identify or discover: + the dutyholder; + the Asbestos Register; and + if any management plan is in place, following any specialist asbestos survey. Valuers are not qualified to interpret or validate the content of any Asbestos Register, or Asbestos Management Plan, unless they have been specially trained (for example, NIACS accredited). 3.4 The RICS guidance note, Asbestos and its implications for members and their clients (Available for members on has been especially prepared for non-specialist surveyors to assist them in identifying potential problems and knowing when to recommend the appointment of an expert. 3.5 Other materials: There may be various materials used in the construction of buildings which may be deleterious, for instance, high alumina concrete and calcium chloride cement and, in Devon and Cornwall, Mundic. UK guidance notes RICS VALUATION STANDARDS 235 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 3 / Date: 18/9

244 UKGN 1 Inspections and material considerations 4. Radiation The identification of these requires specialist knowledge but for more information the valuer is referred to the following RICS guidance notes (all available through + Building surveys and inspections of commercial and industrial property + Building surveys of residential property + The Mundic problem a guidance note. Recommended sampling, examination and classification procedure for suspect concrete building materials in Cornwall and parts of Devon. 4.1 High-voltage electrical supply apparatus: The possible effects of electric and magnetic fields have been the subject of occasional media coverage, with the result that, where there is high-voltage electrical supply equipment close to the property, there is a risk that public perception may affect marketability. 4.2 Radon gas: Radon gas is a naturally-occurring substance, particularly, but not exclusively, prevalent in areas with granite sub-strata. Any risks to health require long-term exposure and therefore the possible presence of radon is mainly of relevance to valuers of residential property, but it could also be a concern in certain commercial buildings. Valuers are recommended to familiarise themselves with any areas identified as being at risk. When valuing property in these areas, it would be prudent to enquire if any test has been carried out. If not, or if the results are not available, the valuer should recommend that one be commissioned. 4.3 Further information: The Health Protection Agency provides advice on various aspects of radiation and will also supply kits for testing for the presence of radon gas. Their website is 5. Disability discrimination UK guidance notes 5.1 The Disability Discrimination Act 1995, as amended by the Disability Discrimination Act 2005, imposes a duty on employers and businesses offering a service to the public to make reasonable changes to practices and procedures to enable disabled people to do their jobs, or remove or alter any feature that makes it impossible, or unreasonably difficult, for a disabled person to make use of the services provided. 5.2 Disability has a wide definition and valuers should be aware of the potential liability on building owners or occupiers to comply with the Act and its possible impact on the value of the property interest. However, it is important to note that the duty of compliance rests with the occupier. Although physical changes to a property may enable a particular occupier to comply with the Act, so may changes in the way they conduct their business. 236 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 4 / Date: 18/9

245 UKGN 1 Inspections and material considerations 5.3 Further information: The Department for Work and Pensions provides extensive advice on the application of the legislation at 6. Fire safety law 6.1 From 1 October 2006, The Regulatory Reform (Fire Safety) Order 2005 (SI 2005 No. 1541) introduced a requirement for the responsible person to make a suitable and sufficient assessment of the risks and to identify the fire precautions required to comply with the Order. The Order applies to all non-domestic property. 6.2 Such fire precautions may include adaptation of the building and installation of fire safety equipment, but must in all cases include: signage, fire safety action plans, staff training, identifying duty holders and routine maintenance/monitoring via signed and dated checklists. 6.3 Further information: The RICS Books publication The New Fire Safety Legislation 2006: A Practical Guide has been prepared for construction and property management professionals who need to be aware of their duties under fire safety legislation. Detailed information on the Regulations and fire safety in general is available from UK guidance notes RICS VALUATION STANDARDS 237 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 5 / Date: 18/9

246 UKGN 2 Shared ownership of residential property UKGN 2 Shared ownership of residential property 1. Introduction 1.1 This guidance note gives further information about the nature of shared ownership of residential property and the valuation procedures that may be followed when valuing the reversionary interest in such property. 2. Background Shared ownership is usually created in respect of new developments, and a lease is normally granted for a premium of 25% or 50% of the initial value of the freehold interest, with vacant possession. However, the tenant will often have an option to purchase additional shares in the property, usually in 20% or 25% tranches (this is known as staircasing ) up to 100% and then, simultaneously, sell the leasehold or the freehold (freehold will only apply to houses) The tenant can therefore staircase to outright ownership when there is a wish to sell the property on the open market An alternative approach is a sale of the share through an assignment (or resale), usually to a purchaser nominated by the Registered Social Landlord (RSL). Sometimes these shares are also sold on the open market. UK guidance notes Do-it-yourself shared ownership (DIYSO) is similar to new-build shared ownership, the principal difference being that the potential tenant teams up with an RSL and finds the property of his or her choice from the market within an agreed geographical area. The property is then purchased by the RSL, using a lender s mortgage moneys, a Housing Association Grant (HAG) or Social Housing Grant (SHG) and, in the short term, the RSL s own funds The RSL will subsequently recover its own funds from the loan obtained from its lender following valuation of its own reversionary interest, (see UK appendix 3.3). 2.3 The financing of shared ownership/diyso is made up of a maximum of four parts. (a) Sales receipts come from the shared ownership purchaser or leaseholder (in Scotland a tenant). The amount depends upon 238 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 6 / Date: 18/9

247 UKGN 2 Shared ownership of residential property (b) (c) (d) the share purchased and the value or price of the property. The purchaser may buy a share with a mortgage from a lender, cash, or a combination of cash and mortgage. It is usual, subject to status, for shared ownership purchasers to obtain % mortgages. Housing Association Grant (HAG) or Social Housing Grant (SHG) is a grant paid to the RSL either from the Housing Corporation or local authority. It has to be repaid only if the property, or part of the property, is sold (if the owner staircases ). It is, therefore, effectively an interest-only loan. Long-term loan is often known as the residual loan and is the private finance required by the RSL. This is borrowed from a building society, or bank, with the RSL s share of the shared ownership property being the security for the loan. Short-term development finance is required so that the RSL can finance the cost of development and because the HAG or SHG that the RSL obtains to develop the properties is not sufficient to cover the cost of acquiring the land and the subsequent cost of building. The balance of scheme costs come from sales receipts that cannot be realised until the scheme is completed and sold. 3. The occupational leases 3.1 The model lease contains six fundamental clauses which cannot be altered without the consent of the Housing Corporation, and which must be checked by a potential funder. (a) (b) (c) (d) The rent clause must contain a mechanism for reviewing the rent to ensure it is always sufficient to cover the loan debt. The staircasing clause must state that shared owners can only reach 100% ownership in a maximum of four stages, including the initial purchase, and that the initial share cannot be less than 25%. It should also state that advice on Market Value will be obtained from an external valuer who is totally independent of the registered social landlord. The alienation clause must provide that, when the lease is assigned, the sale price cannot exceed the relevant proportion of the then current Market Value. Some early leases, particularly from development corporations, did not incorporate an alienation clause. Thus, some shared ownership properties are being sold with the benefit of premium, where the market supports this. The mortgagee protection clause must allow the mortgagee in possession to claim any loss up to 12 months interest, any rent paid, legal and selling costs, repairs, and so on, from the association if the proceeds of sale are insufficient to meet the debt. A lease which does not contain the mortgagee protection clause (or mortgagee guarantee clause, as it is sometimes known) will be unacceptable to a potential lender. UK guidance notes RICS VALUATION STANDARDS 239 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 7 / Date: 18/9

248 UKGN 2 Shared ownership of residential property (e) (f) The stamp duty clause exists in order to avoid the lease being subject to stamp duty on the premium, within the prescribed limit. There must be a reference to the Finance Act 2003 (previously the Finance Act 1980 in the case of flats, and the Finance Act 1981 for houses). Finally, there must be an undertaking to advise the lender if the RSL is to take action under Schedule 1 of the Treasury Act 1988 for possession of the property. 4. Lease terms 4.1 In all cases, the shared ownership lease is of paramount importance and is fundamental to the valuation. In general, the standard Housing Corporation model lease is acceptable to funders and amended or alternative leases can seriously affect the value of the share, often because of restrictions on the sale of the share, or limitations or conditions attached to the annual rent payable. 4.2 The valuer will need to study the shared ownership lease carefully to ensure that it is in the approved Housing Corporation form. Particular attention needs to be paid to the mechanism for increasing the rent annually, the recovery of management and service costs (including insurance) and the mortgagee protection clause. 4.3 Condition is important. If the property is poorly maintained, resulting in unusually high future expenditure, the value of the rental income stream could be adversely affected. 5. Mortgage foreclosures and staircasing 5.1 Specific enquiry should be made as to the extent of any mortgage re-possessions and details of any properties bought back by the client. The valuer should request full details of the staircasing provisions for properties within the portfolio. 6. Inspections 6.1 Sample internal inspections of shared ownership schemes should be carried out to the extent which the valuer considers to be appropriate for the stated purpose of the report, unless otherwise agreed within the specific instruction. UK guidance notes 7. Valuation 6.2 DIYSOs are rather different as the properties are individual and are often located over a wide area. Each property should be identified externally. 7.1 The interest to be valued is the freehold, or long leasehold, reversion, the value of the rental income stream and, where the client lender is prepared to take account of them, the value of potential staircasing 240 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 8 / Date: 18/9

249 UKGN 2 Shared ownership of residential property receipts. Lenders typically ignore the latter as being unpredictable. However, there is sometimes a case for including them, particularly when a local authority sells a shared ownership stock where there is a track record of staircasing at a certain level, going back over past years, and where the purchaser has the benefit of the staircasing receipts since no Housing Association Grant (HAG) or Social Housing Grant (SHG) would be repayable; this is not the case with traditional shared ownership/diyso. 7.2 The freehold (or owners long leasehold) interest may be arrived at by consideration of sales of comparable similar property, whether the freehold interests were sold or those of occupying tenants shares. On occasion there may be evidence that the latter have sold at higher prices than the same arithmetical share of the value of the whole property. 8. Discounted cash flow valuations 8.1 Discounted cash flow is the most common method of valuation of the income stream and inputs include the RSL retained share, the passing rent, RPI projection, real rental assumptions, management costs, if applicable, and an appropriate discount rate. 8.2 The valuer will obtain factual information from the RSL on property type, tenancy, passing rent, bad debts, voids, management charges, maintenance plan and costs, and so on. These will be input into the valuation model. 8.3 Standard leases often allow for rents to be increased annually and will normally specify RPI + 2% or 5%, whichever is the greater. 8.4 It is considered reasonable to apply real rental growth with regard to current real earnings growth. RPI + 1% is the government s current annual target for registered social landlords and applies to shared ownership as much as to the rented sector. 9. The lender s financial analysis 9.1 The lender, who will usually be contemplating lending on a large portfolio of properties, will analyse the proposition in two respects, financial and non-financial. The lender s financial analysis is primarily concerned with reviewing audited accounts, establishing trends and looking at the historic performance of the RSL. Cash flow forecasts will be examined to establish the ability of the RSL to meet its commitments, and business plan projections are of critical importance when dealing with long term 25/35-year mortgage commitments. Non-financial analysis is very subjective, as it is in respect of the ability of the RSL s management team, the senior staff and the management committee. UK guidance notes The valuer has no responsibility for these analyses. RICS VALUATION STANDARDS 241 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 9 / Date: 18/9

250 UKGN 3 Valuations for capital gains tax, inheritance tax and stamp duty land tax UKGN 3 Valuations for capital gains tax, inheritance tax and stamp duty land tax 1. Introduction 1.1 Valuations for capital gains tax (CGT), inheritance tax (IHT) and stamp duty land tax (SDLT)purposes are based on a statutory definition of Market Value similar to the definition used in these standards. However, the statutory definition has been the subject of interpretation by the Lands Tribunal and higher courts. Valuers should be aware of the differences between the definitions so that HM Revenue and Customs (HMRC) will not be able to challenge their valuations as being made on an incorrect basis. 1.2 This guidance note deals solely with the statutory basis of Market Value for CGT (including corporation tax on capital gains), IHT and SDLT. It does not deal with valuations which may be required for income tax or corporation tax (such as capital allowances). The valuation approach in this guidance note is the one that would be likely to be adopted by HMRC for VAT purposes. 1.3 CGT, IHT and SDLT are complex taxes and members should take care to understand the background to the event triggering a potential tax liability before proceeding. 1.4 Further information is available on the internet. The HMRC website ( gives access to the HMRC s internal guidance manuals, and the Valuation Office Agency site ( gives access to the instructions to District Valuers. UK guidance notes 1.5 Valuations, which will include apportionments in appropriate cases, for tax purposes are based upon the concept of a hypothetical sale for which a statutory definition is required. The statutory definition, and interpretation, of Market Value for tax purposes is not exactly the same as the definition of Market Value used in these standards. While the differences are not always significant, difficulties arise frequently enough to warrant some basic introduction to assist general practitioners who may encounter such issues only on rare occasions. 1.6 This guidance is based upon interpretations arising from cases that have been determined by the Lands Tribunal, or higher courts, on appeals made by taxpayers against tax assessments based on the value of property. It is recognised that there may be circumstances in which 242 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 10 / Date: 18/9

251 UKGN 3 Valuations for capital gains tax, inheritance tax and stamp duty land tax 2. Background the client will wish to challenge an aspect of the tax calculation, including the interpretation of the statutory basis or the method of valuation. If the valuer is instructed to give valuations on specified assumptions which differ from those in this guidance the procedures in PS 2.1 and PS 2.2 must be followed. 2.1 CGT, IHT and SDLT are included in self-assessment procedures where the taxpayer is responsible for calculating the appropriate amount of tax based on the valuations provided by the member. 2.2 In the case of individual taxpayers, partnerships and trusts, any CGT calculation will be included in the tax return which relates to the tax year in which the transaction giving rise to the application of the tax takes place. 2.3 Large companies, on the other hand, pay their corporation tax on any capital gains in advance, by quarterly instalments, based on a prediction of their results for that tax year. A large company is defined as a company that is not a small or medium sized company (SME). A SME is an enterprise that employs fewer than 250 persons and either a turnover less than 50m or a balance sheet total less than 43m. Special provisions apply for groups of companies. Any large company taxpayer with a significant property portfolio is faced with the problem that property transactions may generate large gains or losses which can distort a tax charge. The exact amount of those gains or losses may be dependent upon the valuation provided. 2.4 In IHT cases the personal representatives are required to submit an IHT account which identifies all appropriate property and its value. 2.5 The valuations used by taxpayers in their tax computations are subject to checking by district valuers (DV) on behalf of the HMRC. It is therefore imperative that taxpayers ensure that any valuation used in their tax calculations has been calculated on the statutory basis, using best practice. 2.6 If, following discussion with the DV, a different valuation or apportionment is agreed or determined and this results in a materially different tax bill, a taxpayer could be faced with a claim for interest and, in some cases, additional penalties. Where the taxpayer has paid too much tax, the HMRC may pay interest. In either case the taxpayer is worse off because the interest rates are less favourable than commercial rates. 2.7 It is therefore of great importance, when preparing a valuation for taxation purposes, to apply the statutory rules appropriately, and have a proper understanding of the basis of Market Value for taxation purposes. UK guidance notes RICS VALUATION STANDARDS 243 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 11 / Date: 18/9

252 UKGN 3 Valuations for capital gains tax, inheritance tax and stamp duty land tax 3. Basis of valuation 3.1 Definitions for the basis of valuation for CGT can be found in section 272, Taxation of Chargeable Gains Act 1992, for IHT in section 160, Inheritance Act 1984 and for SDLT in section 118, Finance Act These definitions are written in similar terms and broadly define Market Value as: The price which the property might reasonably be expected to fetch if sold in the open market at that time, but that price must not be assumed to be reduced on the grounds that the whole property is to be placed on the market at one and the same time. 3.3 The current statutory definitions for CGT IHT and SDLT are similar to those used in earlier Tax Acts and, over the years, case law has established that, in arriving at Market Value, the following assumptions must be made: + the sale is a hypothetical sale; + the vendor is a hypothetical, prudent and willing party to the transaction; + the purchaser is a hypothetical, prudent and willing party to the transaction (unless considered a special purchaser ); + for the purposes of the hypothetical sale, the vendor would divide the property to be valued into whatever natural lots would achieve the best overall price; + all preliminary arrangements necessary for the sale to take place have been carried out prior to the valuation date; + the property is offered for sale on the open market by whichever method of sale will achieve the best price; + there is adequate publicity or advertisement before the sale takes place so that it is brought to the attention of all likely purchasers; + the valuation should reflect the bid of any special purchaser in the market (provided they are willing and able to purchase). UK guidance notes 3.4 Clients will often request a valuation for probate purposes, when they actually need a valuation which will be used for IHT purposes. When confirming instructions, and in the report, the valuer must make it clear that, although the valuation is required as part of the procedure for obtaining a Grant of Probate, the basis of the valuation will be in accordance with the statutory definition. Valuers should therefore avoid using the term probate value. 4. Analysis of the definition 4.1 The definition of open market value for the basis of valuation for CGT or for tax purposes may be broken up into various elements which have been defined in case law. 244 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 12 / Date: 18/9

253 UKGN 3 Valuations for capital gains tax, inheritance tax and stamp duty land tax 4.2 The price In Duke of Buccleuch v IRC (1967 1AC 506) the price which the property might reasonably be expected to fetch was defined as the gross sale price for the property without deducting any selling costs Furthermore, in Ellesmere v IRC (1918 2KB 735) the price was held to mean the best possible price that would be obtainable in the open market if the property was sold in such a manner (and subject to such conditions) as might reasonably be calculated to obtain for the vendor the best price for the property However, it should not be assumed that the best price is automatically the highest possible price that could be achieved. What is required, in valuation terms, is an estimate of the price that could be realised under the reasonably competitive conditions of an open market on a particular date. 4.3 the property In Duke of Buccleuch v IRC it was held that the reference to the property was not a reference to the whole estate being valued, but meant any part of the estate which it was proper to treat as a unit for valuation purposes. Similarly, in Ellesmere v IRC, it was held that the market price was a price based on the separate values of the various parts. It was also indicated that the price must be estimated on the basis that the properties were sold in whatever lot (or lots) would realise the best price In IRC v Gray (Executor of Lady Fox decd.) (1994) it was held that the property must be valued as it actually existed even if, in real life, a vendor would have been likely to have made some changes or improvements before putting it on the market. Although this case referred to variations in the way in which the property was held by the parties (rather than physical works), it identified the general principle of valuing the property as it stands at the valuation date As a consequence, in preparing any taxation valuation, it is important to have proper regard to the most viable lotting of the property (or properties) to be valued in order to maximise the overall price. This is effectively a notional marketing exercise, commonly referred to as prudent lotting. 4.4 if sold The statutory definitions of Market Value are concerned with a hypothetical sale, not an actual one. As originally held in IRC v Crossman [1937 AC 26] and confirmed unanimously in Duke of Buccleuch v IRC and also in Lynall v IRC (1972 AC 680) it is irrelevant, in arriving at the value, to consider what would have been the circumstances attending an actual sale. UK guidance notes RICS VALUATION STANDARDS 245 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 13 / Date: 18/9

254 UKGN 3 Valuations for capital gains tax, inheritance tax and stamp duty land tax The price that the property would have actually realised in the open market, or the potential impossibility of putting the property on the market at the valuation date, is also irrelevant. In other words, one does not have to assume that the property had actually to be sold, as a hypothetical market must be assumed as at the valuation date In IRC v Gray (Executor of Lady Fox decd.) it was said that the property must be assumed to have been capable of sale in the open market, even if in fact it was inherently unassignable or held subject to restrictions on sale. The relevant question is what a purchaser would have paid to enjoy whatever rights were attached to the property at the relevant date, assuming a hypothetical sale. 4.5 in the open market In the Lynall case it was held that the property must be valued on the basis of a hypothetical sale between a hypothetical willing vendor (not the actual owner of the property in question) and a hypothetical willing purchaser. The hypothesis used was that potentially no one was excluded from buying (the hypothetical purchaser thus potentially including even the actual owner) The statutory definitions refer to the open market and not an open market. This has been interpreted to mean a real market made up of real people. In Lynall the open market was regarded as a blend of reality and hypothesis. It was held that the conditions under which the hypothetical sale is deemed to take place should be built upon a foundation of reality as far as is possible. However, it was deemed even more important not to defeat the intentions of statute by an undue concern for reality in what is essentially a hypothetical situation Case law has added additional refinements to the components of the open market and, in particular, to those parties assumed to be active in it. Again, in the Lynall case, it was held that the statute implied that there had been adequate publicity or advertisement before the sale, and that steps had been taken (before the sale) to enable a variety of persons, institutions or financial groups to consider what offers they would be prepared to make. UK guidance notes However, in IRC v Gray (Executor of Lady Fox decd.) it was said that it could not be emphasised too strongly that although the sale is hypothetical, there is nothing hypothetical about the open market in which it is supposed to have taken place. The hypothetical sale envisaged (in order to ascertain the Market Value for taxation purposes) pre-supposes a willing vendor and a willing purchaser. 4.6 at that time This is defined by statute for the purposes of the valuation exercise in question (for example, in a CGT case it might be 31 March 1982). The assumption regarding the definition of the date is that one must envisage a hypothetical sale in which all the preliminary arrangements have been made prior to the valuation date so that the sale can take place at the statutory point in time. The objective is to ascertain the 246 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 14 / Date: 18/9

255 UKGN 3 Valuations for capital gains tax, inheritance tax and stamp duty land tax value of the asset at the prescribed time (and not at any other time) and this can only be achieved by assuming that all preliminary arrangements have been made beforehand. 5. Further interpretation 5.1 As part of the consideration of the definition of Market Value for tax purposes the courts have also given guidance on other terms which, although not appearing in the statutory definition, are used in the interpretation. 5.2 A willing vendor or willing seller is one who is prepared to sell, provided that a fair price is obtained. It does not mean a vendor who is prepared to sell at any price and on any terms. In short, the hypothetical vendor is assumed to be a reasonable and prudent person. 5.3 A willing purchaser presupposes that the open market includes everyone who has the will and the money to buy. It has been said that the buyer, like the vendor above, must be a person of reasonable prudence. 5.4 A special purchaser is one who has a particular interest in acquiring a property. The case of IRC v Clay (3KB 466) effectively established that where there is a known purchaser in the market who is willing to buy at a considerably higher price than anyone else then the value of the asset for tax purposes is represented by the higher price the special purchaser is willing to pay, or by a close approximation to this. 5.5 In Walton v IRC (1995 STC 68) it was held that it was a question of fact to be decided by evidence whether or not there were any special purchasers in the market and what price they would be prepared to pay. 6. Methods of valuation 6.1 Methods of valuation are not predetermined by statute or by case law. Transaction evidence may reflect the application of a variety of valuation methods, but that does not affect the comparability of the price realised in each case. In practical terms, property assets are valued or appraised by whichever method is most appropriate. Special classes and categories of asset will be valued in different ways because of the way in which the market values them. A presumption of the Lynall case is that the vendor when advertising the property makes such information available to purchasers of that type of asset as they would expect to receive, or to be available, in a normal market transaction. 7. Special cases UK guidance notes 7.1 Special situations, such as the valuation for taxation purposes of interests in land that are rarely (undivided shares) or never RICS VALUATION STANDARDS 247 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 15 / Date: 18/9

256 UKGN 3 Valuations for capital gains tax, inheritance tax and stamp duty land tax 8. Case references (unassignable agricultural tenancies) sold in the real world, or apportionments for part-disposal calculations, are beyond the scope of this guidance. Those involved in such matters should study the relevant HMRC and VOA manuals and other guidance. Further help may be obtained from the RICS Valuation Faculty. IRC v Clay (3KB 466) Duke of Buccleuch v IRC [1967 1AC 506] Ellesmere v IRC [1918 2KB 735] IRC v Crossman [1937 AC 26] Lynall v IRC [1972 AC 680] (This case was heard in a range of courts between 1969 and 1972). See also AG (1) v Jameson [1905 IRR 218] IRC v Gray (Executor of Lady Fox decd.) (1994) Walton v IRC (1995 STC 68) UK guidance notes 248 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 16 / Date: 18/9

257 UKGN 4 Valuations for charities UKGN 4 Valuations for charities 1. Introduction 1.1 There are various statutory provisions that apply to charities. These include: + the Companies Act 1985; + the Charities Act 1993; + the Trusts of Land and Appointment of Trustees Act 1996; and + the Trustee Act In addition, the Charity Commission, on its website ( publishes various booklets giving advice on specific topics. Booklets CC33 Acquiring Land and CC 28 Disposing of Charity Land, together with their operational guidance, are particularly useful. Where charities are producing financial statements, they will follow the Charity Commission s Statement of Recommended Practice (SORP), which broadly follows Financial Reporting Standard (FRS) 15 (see UKPS 1.1). 1.3 This guidance note, which is based on CC28 and CC33, provides further information for members who are requested to provide valuations for acquisitions and disposals by charities. Members, who require more information about the powers of trustees or any other matter related to charities, should seek advice from the charity s own professional advisers. 2. Acquisitions 2.1 Where trustees propose to acquire land, there is no requirement for them to obtain professional advice, unless there is such a requirement in the trust deed. However, the Charity Commission strongly recommends that they obtain a report from a qualified surveyor who is acting solely for the trustees. Where the proposed transaction is one where the trustees are required to obtain an order of the Charity Commission before acquiring land (for example, acquiring land other than freehold land, or buying land from one of the trustees, or where there is no power to acquire land), it is anticipated that the Commission will expect such an application to be accompanied by a surveyor s report. 2.2 A qualified surveyor is defined in CC33 as a fellow or professional associate of the Royal Institution of Chartered Surveyors (RICS). Pending any review of this publication, the reference with regard to UK guidance notes RICS VALUATION STANDARDS 249 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 17 / Date: 18/9

258 UKGN 4 Valuations for charities RICS may be read as referring to any member of RICS as defined in the Rules of Conduct (2007 edition). 2.3 When considering the purchase of land, the trustees must take all reasonable steps to ensure that, amongst other matters: + the property is suitable for its intended use and, in particular, is not subject to any legal or planning restrictions or conditions that might conflict with that use, or with which it may be difficult for the trustees to comply; + any necessary planning permission is obtained; + the price or rent is a fair one compared with similar properties on the market; + when acquiring a lease, they understand the obligations to which they will be subject under the lease, and ensure that the terms of the lease are fair and reasonable. 2.4 Basis of valuation Although there is no basis of valuation specified in the guidance, the presumption is that it will be Market Value, as defined in PS 3.2, or market rent, as defined in PS There may be circumstances where a charity is in a special position, for instance, where it has the benefit of certain tax exemptions or is a special purchaser, and as a consequence may be able to justify paying more than Market Value. Such circumstances, which are assessments of worth, are not to be reflected in thevaluation, but should be referred to in the general advice as to what the trustees should offer to pay or bid at auction. 2.5 Matters to be included in the report UK guidance notes The member will comply with the general requirements of PS 6.1 Minimum content of valuation reports, having regard to the commission s recommendation to include the following: + a description of the land; + details of any planning permission needed; + a valuation of the land; + advice on the price the trustees ought to offer to pay, or the maximum bid they ought to make at auction; + a description of any repairs or alterations the trustees would need to make, and the estimated cost; + a positive recommendation (with reasons) that it is in the interests of the charity to purchase the land; + anything else the surveyor thinks relevant, including a description of any restrictive or other covenants to which the land is subject. 250 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 18 / Date: 18/9

259 UKGN 4 Valuations for charities 3. Disposals 3.1 Where a charity wishes to dispose of an interest in land exceeding a term of seven years, a report must be obtained from a qualified surveyor (section 36 (3-5) of the Charities Act 1993). 3.2 For these purposes, a qualified surveyor is a member of RICS, or a person who satisfies such other requirements as may be prescribed by regulations made by the secretary of state (none have been made), who is reasonably believed by the trustees of the charity to have ability in, and experience of, the valuation of land of the particular kind, and in the particular area, in question. 3.3 Matters to be included in the report The report must include a range of information, laid down in the Charities (Qualified Surveyors Report) Regulations 1992 (SI 1992/2980), as summarised in the following paragraphs A description of the relevant land and its location, by reference to a plan if convenient, to include: + the measurements of the relevant land; + its current use; + the number of buildings (if any) included in the relevant land; + the measurements of any such buildings; + the number of rooms in any such buildings, and their measurements Details of whether the relevant land, or any part of it, is leased by or from the charity trustees and, if it is, details of: + the length of the lease, and the period of this which is outstanding; + the rent payable under the lease; + any service charge which is so payable; + the provisions in the lease for any review of the rent payable under it, or any service charge so payable; + the liability under the lease for repairs and dilapidations; + any other provision in the lease which, in the opinion of the surveyor, affects the value of the relevant land Information on whether the relevant land is subject to the burden of, or enjoys the benefit of, any easement or restrictive covenant, or is subject to any annual or other periodic sum charged on, or issuing out of the land, except rent reserved by a lease or tenancy Information on any buildings included in the relevant land, whether they are in good repair and, if not, the surveyor s advice: + as to whether or not it would be in the best interests of the charity for repairs to be carried out prior to the proposed disposition; + as to what those repairs, if any, should be; and + the estimated cost of those repairs. UK guidance notes RICS VALUATION STANDARDS 251 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 19 / Date: 18/9

260 UKGN 4 Valuations for charities Advice on whether it would be in the best interests of the charity to alter any buildings included in the relevant land prior to disposition (because, for example, adaptations to the buildings for their current use will not command the best market price on the proposed disposition) and an estimate of the outlay required for any alterations suggested Advice as to the manner of disposing of the relevant land so that the terms on which it is disposed of are the best that can reasonably be obtained for the charity, including: + where appropriate, a recommendation that the land should be divided for the purposes of the disposition; + the period for which, and the manner in which, the proposed disposition should be advertised (unless the surveyor s advice is that it would not be in the interests of the charity to advertise the proposed disposition); + where the surveyor s advice is that it would not be in the best interests of the charity to advertise the proposed disposition, the reasons for that advice (for example, that the proposed disposition is the renewal of a lease to someone who enjoys statutory protection or belief that someone with a special interest in acquiring the relevant land will pay considerably more than the market price for it); and + any view the surveyor may have on the desirability or otherwise of delaying the proposed disposition and, if it is reasonable to believe that such delay is desirable, what the period of that delay should be. UK guidance notes The surveyor s opinion of: + the current value of the relevant land, taking account of its current state of repair and current circumstances (such as the presence of a tenant who enjoys statutory protection) or, where the proposed disposition is a lease, the rent which could be obtained in its current state; + the value of the relevant land, or what the rent under the proposed disposition would be: + if advice under paragraph has been given, and followed; or + where an opinion expressed under paragraph has been acted upon; or + if both such advice and opinions had been acted upon; + the increase in the value of the relevant land or rent if a recommendation made under paragraph had been followed; + the amount by which the price that could be obtained by not advertising exceeds the price that could be obtained if the proposed disposition were advertised (where the advice is that it would not be in the best interests of the charity to advertise the proposed disposition because it is believed a higher price can be obtained by not doing so); 252 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 20 / Date: 18/9

261 UKGN 4 Valuations for charities + where a delay is advised in the proposed disposition under paragraph 3.3.7, the amount by which the surveyor believes the price which could be obtained consequent on such a delay exceeds the price that could be obtained without it In cases where it is relevant, and the surveyor feels competent to do so, advice as to the chargeability or otherwise of VAT on the proposed disposition, and the effect of such advice on the valuations given in paragraph In cases where either the surveyor does not feel able to give such advice, or believes that such advice is not relevant, a statement should be made to that effect If the surveyor is of the opinion that the proposed disposition is not in the best interests of the charity because it does not make the best use of the relevant land, the reasons for this opinion, together with advice on the type of disposition which would constitute the best use of the land (including any relevant advice on the prospect of buying out a sitting tenant, or of succeeding in an application for a change in the use of the land under the laws relating to town and country planning or similar) are to be given. UK guidance notes RICS VALUATION STANDARDS 253 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 21 / Date: 18/9

262 UKGN 5 Local authority disposal of land for less than best consideration UKGN 5 Local authority disposal of land for less than best consideration 1. Introduction 1.1 This guidance note applies only to local authorities in England and Wales. 1.2 Local authorities have wide land disposal powers under sections 123 and 127 of the Local Government Act 1972 and section 233 of the Town and Country Planning Act However, they are required to seek specific consent from the secretary of state where the consideration is less than the best that can reasonably be obtained. 1.3 England: The Local Government Act General Disposal Consent In England, the Local Government Act 1972: General Disposal Consent (England) 2003 removes the requirement for authorities to seek specific consent from the secretary of state for any disposal of land where the difference between the unrestricted value of the interest to be disposed of and the consideration accepted ( the undervalue ) is 2,000,000 or less The detailed valuation requirements are set out in the Technical Appendix to the Consent, which specifically incorporates this guidance note and the definition of Market Value in PS Wales: The Local Government Act General Disposal Consent In Wales, the Local Government Act 1972: General Disposal Consent (Wales) 2003 removes the requirement for authorities to seek specific consent from the National Assembly for Wales for any disposal of land where the difference between the unrestricted value of the interest to be disposed of and the consideration accepted ( the undervalue ) is 2,000,000 or less. UK guidance notes The circular accompanying the Consent provides that the valuer shall be directed to have regard to the guidance on local authority disposals of land at an undervalue in these standards. 1.5 It will be for the local authority to decide whether any proposed disposal requires specific consent, as the secretary of state and the national assembly for Wales have no statutory powers to advise in any particular case. Where the valuer is asked to provide a valuation so that the local authority may consider whether or not an application for consent is necessary, or to support a submission for a specific consent, 254 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 22 / Date: 18/9

263 UKGN 5 Local authority disposal of land for less than best consideration that valuation must be provided in England following the advice in the Technical Appendix and in Wales following the advice in paragraph 4 of the circular. 1.6 Scotland, the consent regime is provided by section 74 of the Local Government (Scotland) Act Section 11 of the Local Government in Scotland Act 2003 amends section 74, so that the current ministerial consent regime can be replaced by regulations issued by Scottish ministers. No regulations have yet been made. 2. Valuation bases 2.1 The consent requires the valuer to provide the following figures: (a) unrestricted value; (b) restricted value; (c) the value of voluntary conditions. 2.2 (a) Unrestricted value This is the best price that is reasonably obtainable for the property.it is the Market Value of the land, as defined in PS 3.2, except that it should take into account any additional amount that is, or might reasonably be expected to be, available from a purchaser with a special interest. It should also ignore the reduction in value caused by any voluntary condition imposed by the local authority In general terms, unrestricted value is intended to be the amount which would be received for a disposal of the property where the principal aim was to maximise the value of the receipt. Apart from the inclusion of bids from a purchaser with a special interest it is defined in the same way as Market Value. For example, the valuer must take account of any uses that might be permitted by the local planning authority, if these would be reflected by the market, and not only consider a use or uses intended by the parties to the proposed disposal The valuer should assume that the freehold disposal is made, or the lease is granted, on terms which are intended to maximise the consideration. For example, where unrestricted value is based on the hypothetical grant of a lease, at a rack rent or ground rent, with or without a premium, the valuer should assume that the lease would contain those covenants which would normally be included in such a lease by a prudent landlord, but that would not include unusual or onerous covenants which would reduce the consideration unless these had to be included as a matter of law. 2.3 (b) Restricted value This is the Market Value of the property having regard to the terms of the proposed transaction. It is defined in the same way as unrestricted value, except that it should take into account the effect on value of any voluntary condition. UK guidance notes RICS VALUATION STANDARDS 255 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 23 / Date: 18/9

264 UKGN 5 Local authority disposal of land for less than best consideration UK guidance notes Where the local authority has invited tenders and is comparing bids, the restricted value is normally the amount offered by the local authority s preferred transferee. In other cases it is normally the proposed purchase price. 2.4 (c) The value of any voluntary conditions Sales may be subject to voluntary conditions. These are any term or condition of the proposed transaction which the local authority chooses to impose. Voluntary conditions do not include any term or condition which the local authority is obliged to impose, for example, as a matter of statute or a condition which runs with the land. Nor do they include any term or condition relating to a matter which is a discretionary, rather than a statutory, duty of the local authority The value of voluntary conditions is the total of the capital values of voluntary conditions imposed by the local authority as terms of the disposal, or under agreements linked to the disposal, that produce a direct or indirect benefit to the local authority which can be assessed in monetary terms. It is not the reduction in value (if any) caused by the imposition of voluntary conditions and any adverse effect these may have on value must not be included in this figure The proposed disposal, or an agreement linked with it, may give rise to non-property benefits to the local authority. For example, these might include operational savings, or income generated as a result of the transaction where the local authority has an associated statutory duty. The monetary value of these benefits to the local authority should be included in the value of voluntary conditions in the valuer s report The valuer will often be able to assess the value of a voluntary condition of disposal to the local authority, but there may be cases where a question arises about the status, in law, of such value (whether or not it is capable of forming part of the consideration). In such cases the local authority may need to seek legal advice as to whether the value of the voluntary condition is such that this value may form part, or all, of the consideration the local authority proposes to accept. Conversely, there may also be cases where a term or condition of disposal is, in law, capable of forming part or all of the proposed consideration, but has no quantifiable value to the local authority, or its value is nil Where the valuer is not qualified to assess the value of any benefits (for example, of share options) the report should make clear the extent to which the member accepts liability for the figures. Where the valuer does not accept full responsibility, the report should make clear who was responsible for assessment of the remainder and copies of any valuations or advice received from accountants or other professional advisers should be annexed. 3. Leasehold disposals 3.1 The valuer is required to assess the unrestricted value in capital terms. The unrestricted value should be assessed by valuing the authority s 256 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 24 / Date: 18/9

265 UKGN 5 Local authority disposal of land for less than best consideration 4. Options 5. Discount interest after the lease had been granted, plus any premium payable for its grant. In other words, it will be the value of the right to receive the rent and any other payments under the lease, plus the value of the reversion when the lease expires. 4.1 Where a disposal involves the grant of an option the valuer must consider both the payment for the option and the consideration which might be received were it to be exercised as either, neither or both may involve a discount. Paragraphs 19 to 21 of the Consent provide more detailed guidance on the treatment of options. 5.1 This is the amount by which the value of the actual consideration is less than that of the best consideration reasonably obtainable. It is given by the formula: unrestricted value (restricted value + value of conditions). Or, where the value of the consideration for the disposal differs from the restricted value: unrestricted value (value of consideration + value of conditions). 5.2 The secretary of state needs to be aware of cases where the proposed consideration is more or less than the value of the interest to be disposed of, subject to the proposed voluntary conditions, so that this can be taken into account when reaching the decision. Accordingly, where the value of the consideration differs from the restricted value, both figures must be given. 6. Purpose of the valuation 6.1 As well as stating the purpose of the valuation the valuer must provide a summary of the proposed transaction, noting the key terms and any restrictions to be imposed by the local authority. Where the local authority proposes to grant a lease, a copy of the draft lease should be attached to the report. Where this is impracticable, a copy of any heads of terms agreed or a summary of the key terms of the proposed lease should be provided. 7. Assumptions as to planning 7.1 Where there is no detailed scheme, the valuer should make reasonable assumptions about the form of the development. This should include a note of the existing use(s), current planning consents and use(s) likely to be permitted with regard to the development plan. Where the unrestricted value has been based on an assumed planning use other UK guidance notes RICS VALUATION STANDARDS 257 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 25 / Date: 18/9

266 UKGN 5 Local authority disposal of land for less than best consideration 8. Tenure than that for which the property has been sold, a detailed explanation of the planning assumptions made is required. 8.1 This must include a note identifying the local authority s tenure and giving details of the purpose(s) for which the land is held (normally, land is held for the purposes of the power under which it was acquired, or taken on lease, unless it has since been formally appropriated). It must also include a summary of the details of any leases, or encumbrances, such as easements, to which the land is subject. 9. Valuations 9.1 The unrestricted and restricted values, together with the value of conditions, should be given. Where any of these is nil this should be expressly stated. 9.2 Where the value of a scheme is less than the development cost (that is, there is negative development value ), the advice in paragraph 23 of the Consent should be followed. 9.3 Where the value of land may be affected by the availability of grants, the advice in paragraph 24 of the Consent should be followed. 9.4 The date of the valuation should not be more than six months before the submission of the application to the secretary of state. 10. Description 10.1 The report must include a written description of the site and buildings, the location and surroundings. A plan, to which the secretary of state will refer if giving consent, sufficiently accurate to identify the land is also to be provided. 11. Existence of a special purchaser 11.1 The effect on value of the existence of a purchaser with a special interest should be described. UK guidance notes 12. The report 12.1 The report must be signed by a qualified valuer (a member of the RICS). 258 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 26 / Date: 18/9

267 Valuation Information Papers Valuation Information Papers are intended to provide information and outline current practice for RICS members. Their function is to give an indication of the approach to issues that may arise in the subjects to which they relate. Members have free access to the web-based copy of these Valuation Information Papers through the members area of or to purchase copies visit The available Valuation Information Papers are: No. 1. No. 2. No. 3. No. 4. No. 5. No. 6. No. 7. No. 8. No. 9. No. 10. No. 11. Valuation of Owner-occupied Property for Financial Statements The Capital and Rental Valuation of Restaurants, Bars, Public Houses and Nightclubs in England and Wales The Capital and Rental Valuation of Petrol Filling Stations in England, Wales and Scotland The Valuation of Surgery Premises used ofr Medical or Health Services Rural Property Valuation The Capital and Rental Valuation of Hotels in the UK Leasehold reform in England and Wales The Analysis of Commercial Lease Transactions Land and Buildings Apportionments for Lease Classification Under International Financial Reporting Standards The Depreciated Replacement Cost Method of Valuation for Financial Reporting The Valuation and Appraisal of Private Care Home Properties in England, Wales and Scotland (Due for publication 2008.) RICS VALUATION STANDARDS 259 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 1 / Date: 18/9

268 260 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 2 / Date: 18/9

269 Index a accounting concepts accounting requirements see financial statements accounting standards 125, see also International Accounting Standards (IAS) Accounting Standards Board (ASB) 125, see also Financial Reporting Standards (FRS); Statements of Standard Accounting Practices (SSAP) acquisition costs acquisitions, business 60 actual cost to date 140 adapted property additional reports, commercial secured lending adjusting events 132 advice see also discussions for litigation 13 during negotiations preliminary 90 1 after-use value 135 agency work 14 agricultural assets 61, 140 alterations and extensions 215, 216, see also improvements Alternative Accounting Rules 151 alternative use value 62, 88 9, financial statements 129, 142 wasting assets 120 amendment of standards 3 4 antiques 14 apportionments for depreciation 54, 133, part of a building trade-related property 108 approvals, trade-related valuations 108 arbitrations and similar disputes 13 architectural interest 164, 214 arm s length transactions 48 ASB see Accounting Standards Board asbestos 206, 210, 235 assets categorisation 144 8, 162, classification 57, 61, community 161, 163, 167, 171 definition 5 encumbered 112, 208, 219 fixed 112, 154, 167 impaired 35, 39 40, 60 infrastructure 161, 168, 171 insurance companies 177 intangible 112 leasehold see leasehold local authority mineral 46, 119 operational see operational assets plant & equipment see plant & equipment public sector 52, 87 surplus 60, 128 9, 147 wasting 75 6, 118, assistance, valuer s 15 associates (Takeover Code) 185 assumptions 34 6, see also special assumptions becoming special assumptions 34, 81 CGT/IHT/SDLT 244 company prospectuses and circulars 182 definition 5, 34 EUV financial statements 49, 128 lotting 115 MR 46 7 MV 42 planning conditions 35 plant & equipment 35, portfolios 116 reports 95, repossession proceedings 226 residential mortgage valuations restricted information 95 terms of engagement 32 trade related property 100 1, 105, 106 wasting assets 118 Auditing Practices Board 149 auditors, relationship with authorised unit trusts (AUT) 176 awards and determinations 13 b banding 157 banks basis of value 41 9, see also assumptions; depreciated replacement cost; Existing Use Value; Market Rent; Market Value CGT/IHT/SDLT charity acquisitions 250 collective investment schemes 192 RICS VALUATION STANDARDS 261 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 1 / Date: 18/9

270 Index commercial secured lending 199 company takeovers and mergers 187 definition 5, 41 financial statements 48, 50 1, 125, 126 local authority valuations 163, pension schemes 127 reports 86 residential mortgage valuations 207 RSL housing stock 220 specialised properties 125 terms of engagement 31 types of property Basel Committee on Banking Supervision (BCBS) 52 biological assets 61 BIPRU (FSA Prudential sourcebook for banks, building societies and investment firms) British Bankers Association 193 brokerage work 14 building condition 35, 214 building services 36, 111 residential mortgage valuations 205, 206 building societies 177 8, 194 business closure 202 business competition 107 business takeovers and mergers 60, 175 business valuations 109, see also trade-related property buy to let 198 9, c capital charges 167 capital expenditure 167 capital gains tax (CGT) carrying amount 55 cash-generating unit 56 categorisation local authority assets 162, properties certificate of value 85 certificates, trade-related valuations 108 certification, valuer s 85 CGT see Capital Gains Tax Charities (Qualified Surveyors Report) Regulations charity acquisitions charity disposals Chartered Institute of Public Finance and Accountancy (CIPFA) 160, 162, 167 chinese walls 21 2 CIPFA see Chartered Institute of Public Finance and Accountancy circulars and prospectuses 174 5, City Code on Takeovers and Mergers 175, classification of assets 57, 61, collective investment schemes 176, commercial secured lending 193, basis of value 199 reports commercially sensitive situations 92, 181 common interest 158 Communities and Local Government (CLG) 165 community assets 161, 163, 167, 171 Companies Act , 149, company accounts see also financial statements property categorisation company prospectuses and circulars 174 5, company takeovers and mergers 175, competition, trade-related 107 complaints procedures 33 compliance see also departures from standards with standards 2, condensed reports condition of buildings 35, 214 confidentiality conflicts of interest 19 20, see also disclosure regulated purpose valuations Takeover Code 186 consents planning 35, 212 publication 32 trade related 108 contamination 35 8, 82, 205 6, contractual rights 148 cost to completion Council of Mortgage Lenders 203 covenants 208 Criminal Justice Act critical reviews 27 8 currency (financial) 31, 89 current value 141 d damaged property 35, dateofreport5 date of valuation 5, 31, 43, 95 company prospectuses and circulars 181 financial statements Projected Market Value (PMV) 194 defects/disrepair 35, 214 definition of value see basis of value 262 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 2 / Date: 18/9

271 Index deleterious materials 235 6, see also hazardous materials departures from standards 2, 5, 12, terms of engagement 32 depreciable amount 54, depreciated replacement cost 5, 54, 86 7 compared with alternative use value 88 9 financial statements 126 local authority valuations 164 depreciation 55, 61 2 apportionments 133, definition 152, 167 depreciable amount 54, financial statements local authority assets wasting assets deprival value 142 desk-top valuations 26 development properties 75, 146, commercial secured lending 202 development restrictions 35, 82, 212 development schemes 147 8, 211 RSL housing stock developments, building 72 diminution of value 151 directly attributable costs 133 directors responsibility Disability Discrimination Act disclosure see also conflicts of interest under IFRS 61, 67 regulated purpose valuations reports 95 secured lending 77, 198 terms of engagement 31 discounted cash flow valuations 241 discounts, local authority disposals 257 discussions see also advice in advance of completion 16 preliminary planning advice 90 1 disposals 60 by charities costs future useful economic life 157 leasehold by local authorities plant & equipment 113 disrepair/defects 35, 214 disrupted markets 67, 123 district valuers 243 Do It Yourself Shared Ownership (DIYSO) 227, 238 drive-by valuations 26, see also external appraisals duties, valuer s care 20 1 confidentiality managing conflicts of interest e EBITDA 106 economic life see useful life effective date, Red Book standards 4 electromagnetic radiation 236 elements of cost 62 encumbered assets 112, 208, 219 Energy Performance Certificate 215 environmental factors 36, 157, 205 6, 234 5, see also material considerations estimated amount 43 EU see European Union European Group of Valuers Assocations (TEGoVA) 2 European Mortgage Federation European Union (EU) valuation applications 71 EUV see Existing Use Value events after the balance sheet date 132 exceptional risks 213 excluded costs, financial statements exemptions from Standards Existing Use Value (EUV) accounting requirements 125 adapted property definition 128 differences from Market Value (MV) financial statements 125, FRS 15 adjustments 142 mineral assets 147 owner-occupied property 142, 172 Existing Use Value for Social Housing (EUV-SH) 138, 220 exposure drafts, standards 4 extensions and alterations 215, 216, see also improvements extent of investigations 24, 32, 81, 96, 182 external appraisals 218, see also drive-by valuations external valuers 5, 66, 98 f factory premises 157 fair value 42, 48 9 definition 6, 54 operational assets 100 plant & equipment 57 8 fair value less costs to sell 55 farming stock valuations 140 fee basis 33 RICS VALUATION STANDARDS 263 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 3 / Date: 18/9

272 Index feuhold land 153 financial advisers 175, 180, 186 financial analysis, lender s 241 financial institutions financial leases 67 8, 134 Financial Reporting Standard for Smaller Entities (FRSSE) 143 Financial Reporting Standards (FRS) : Impairment of Fixed Assets and Goodwill : Tangible Fixed Assets 141, 143, 144 depreciation 152 3, 154, 156 Financial Schemes and Markets Act Financial Services Act Financial Services and Markets Act Financial Services Authority (FSA) Collective Investment Schemes Sourcebook 176, FSA Prudential sourcebook for insurers (INSPRU) 177 Listing Rules 174, Mortgages: Conduct of Business 194 Prospectus Rules 174, 181 financial statements , accounting standards 125 adapted property apportionments for depreciation 133, basis of value 48, 50 1, 125, 126 date of valuation definition 6 depreciation events after the balance sheet date 132 excluded costs existing use value (EUV) 125, information verification 83 leasehold interests 134 local authority assets 137, Market Value (MV) 125 mineral bearing land 135 plant & equipment 111, property categorisation publication statements 126 social housing special assumptions 40 specialised property 121 Statements of Recommended Practice (SORP) trading stock , 145 waste management sites 135 wasting assets 121 fine art 14 fire insurance valuation 213 fire safety law 237 firms 6 fixed assets 112, 154 definition 167 flats, mortgage valuations 206, , 213, 215 flood risk forced sales 25 6, 39, 76 forestry assets 61 frequency of valuations 63, 143, 160 FRS see Financial Reporting Standards FRSSE see Financial Reporting Standard for Smaller Entities FSA see Financial Service Authority FSA Prudential sourcebook for banks, building societies and investment firms (BIPRU) fully equipped operational entities 105, 108, 145, 156, 201 fully secured on residential property (FSRP) loans 194 functional obsolescence further advances, residential mortgage valuations 217 future useful economic life see useful life g garages 205, 207 Generally Accepted Valuation Principles (GAVP) 56 glossary 5 9 going concerns 108 9, 167 goodwill 75, 104 5, 106 government grants 156 gross current replacement cost 155 groups of properties , 157, see also portfolios guidance notes 6, 12 h HAG see Housing Association Grants hazardous materials 35 6, 82, 205 6, high-voltage electric supply equipment 206, 236 historic cost model 65 historical interest 164, 165, 214 Home Information Packs (HIPs) 215 Homebuyer Survey and Valuation (HSV) hope value 123, 129 Housing Association Grants (HAG) 138, 239 Housing Corporation occupational leases 239 shared ownership schemes 227 housing revenue account valuations RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 4 / Date: 18/9

273 Index i IAS see International Accounting Standards (IAS) IFRS see International Financial Reporting Standards IHT see Inheritance Tax immovables , impaired assets 35, 39 40, 60 impairment loss 56, 66 improvements see also extensions and alterations definition 54 leasehold properties 40, 82 in writing 9 independence see also disclosure regulated purpose valuations requirements 16, 17, 180 threats to 19 industrial buildings 157 information reliedon32 restricted 26, 95 verification 83 infrastructure assets 161, 168, 171 inheritance tax (IHT) insider dealing 180 inspections 6, 81 3, see also investigations material considerations plant & equipment 113 residential mortgage valuations RSL housing stock sample shared ownership property 240 INSPRU (FSA Prudential sourcebook for insurers) 177 Institute of Revenues Rating and Valuation (IRRV) 7 insurance, professional indemnity 29, 33 insurance companies 127, 177 insurance issues 211, 213 intangible assets 112 integrity requirements 16 inter-company leases 134 interest to be valued 30 interim valuations 126, 143 internal valuations 14 published references 98 9, reviews 126 rotation of personnel 229 internal valuers 6 International Accounting Standards (IAS) 50, 53, 56 16: Property, Plant & Equipment 51, 57, : Leased Assets 59 60, : Impaired Assets 60 40: Investment Property 51, 59, : Biological Assets 61 International Financial Reporting Standards (IFRS) 6, 50 1, 53 4 definition of terms : Properties Held for Sale in the Ordinary Course of Business 60 3: Valuations after Business Combinations 60 5: Surplus Assets 60 International Valuation Applications (IVA) 6 1: Financial Reporting 53 69, : Secured Lending 70 7 International Valuation Standards Committee (IVSC) 1 International Valuation Standards (IVS) 1 2 definitions 54 fair value 48, 48 9 market rent (MR) 46 market value (MV) 42 4 special value 45 worth, or investment value 47 investigations 32, 81 3, see also inspections for compliance with standards 33 extent of 24, 32, 81, 96, 182 investment firms investment properties definition 55, 168 depreciation 157 financial statements 59, 64 6, 145 reports 201 secured lending 73 investment schemes 176, investment values 7, 47 RSL housing stock 220 trade-related property 106 IRRV see Institute of Revenues Rating and Valuation IVA see International Valuation Applications IVSC see International Valuation Standards Committee j joint development contracts/ventures k knowledge requirements 15 RICS VALUATION STANDARDS 265 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 5 / Date: 18/9

274 Index knowledgeably, prudently and without compulsion 42, 46 l land and buildings in course of development 147 leasehold 64, 68 9 landfill , 135, 234 Lands Tribunal 242 lease concessions/terms 30, 46 leasehold 59 60, 63 4 classification 67 depreciation 153, 156, 157 disposals financial statements 67 9, improvements 40, 82 investment property 65 6 negative values 89 plant & equipment 111 residential mortgage valuations 208, shared ownership property 227, leases apportionments, land and building 67, 69 financial 67 8, 134 inter-company 134 occupational land and building allocation 69 between related or connected parties 73 4 legal changes 123 lending, secured see secured lending liabilities, limitations 32, 183 licences, trade-related valuations 108 licensing, valuers 76 limitations see also restricted information available dutyofcare83 duty of confidentiality 96 of liability 32, 183 terms of engagement 9 listed buildings 165 Listing Rules 174, litigation, advice for 13 loan security see secured lending local authority assets 137, categorisation and classification 162 3, definitions 161 disposals housing revenue account valuations 165 non-operational operational published references Local Government Act long-term contracts 168 lotting m machinery & equipment see plant & equipment maintenance and repairs see also building condition local authority assets 161 residential mortgage valuations 207, , 215 maisonettes, mortgage valuations 206, , 213, 215 market instability 67, 123 market rent (MR) 7, 46 7 Market Value as if complete 72 Market Value (MV) 42, see also basis of value; open market value (OMV); projected market value (PMV) commercial secured lending 199 definition 7, 42, 54 differences from existing use value (EUV) excluded costs financial statements 125 FRSSE 143 investment property 65, 145 joint development contracts/ventures 147 land and buildings in course of development 147 marketing constraints 39 mineral assets 147 non-specialised development property 146 options/saleable rights 148 plant & equipment 113 RSL housing stock 138, 196, 220 secured lending 51, 70 special assumptions 40 specialised development property 146 surplusproperty147 trade-related valuations 105 unregulated property unit trusts 176 marketing constraints 25 6, 37 8, 76 material changes see also extensions and alterations; improvements revaluation 27, 96, 216 material considerations 233 7, see also environmental factors mineral assets 46, 119 plant & machinery waste management sites 46, , 120, 135, 234 members (RICS/IRRV) 7, mergers, business 60, RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 6 / Date: 18/9

275 Index methods of valuation 247 mine workings 36, 119, 206, 234 mineral assets 46, 119, 147 mineral bearing land , 135 mortgage lending value 7, 52, 77, mortgages 194 5, 196 7, see also residential property mortgages definition 70 foreclosure 240 MR see market rent multi-let building 69 multiple functions, local authority assets 163 multiple properties , 157, see also portfolios multi-state properties 89, 182 mundic building materials 206, 236 MV see Market Value n national practice statements 3, 7, negative values 89 negligence 33 negotiations, advice during net book value 168 net current replacement cost 156 net realisable value 55, 139 definition 141, 154 new build property 138 9, 209, 211 RSL housing stock New Collective Investment Schemes Sourcebook 176, nil values 89 non-adjusting events 132 non-operational assets definition 168 local authority 165 6, non-specialised development property 146 non-specialised operational assets 162, 163 NRPB see National Radiological Protection Board o objectivity, requirements 16 obsolescence occupational leases open market value (OMV) 7, 44, 126, 244 6, see also Market Value operating leases 67, 69, 134 operational assets see also plant & equipment apportionments 108 financial reporting inclusion in valuation 57 8, 104, local authority 163 4, 170 trade-related property operational entities see also trade related property basis of value 105, 145 commercial secured lending 201 depreciation 156 regulatory issues 108 opinions of valuer 97, 184 options, contractual 148 outbuildings 205, 207 owner-occupied property alternative use value basis of value 145 definition 55 valuation for secured lending 73, p panels, valuation 229 part of a building see also flats apportionments residential mortgage valuations 206 part of a development 210, pavement valuations 26 pension schemes 127 Pensions Research Accountants Group (PRAG) 127 permits, trade related valuations 108 personal goodwill 75, 104 5, 106 personal property 46 physical obsolescence 156 planning controls 35, 82, 212 plant & equipment assumptions 35, 45 6, definition 7, 55, 110 encumbered assets 112 financial statements inclusion in valuation 105 6, 111 leased 63 4, 113 local authority assets 163 material considerations regulatory issues separately valued 112 terms of engagement 30 VPMB 136 playing fields 166 PMV see projected market value pollution see contamination portfolios definition 7 financial statements 66, 131 frequency of valuations 143 Listing Rules 181 registered social landlords (RSL) 219 post balance sheet events 132 RICS VALUATION STANDARDS 267 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 7 / Date: 18/9

276 Index practice statements (PS) 3, 7, PRAG see Pensions Research Accountants Group preliminary valuation advice 90 1 private sector depreciated replacement cost 86 7 probate 244 projected market value (PMV) 195 6, proper marketing 7 property see also assets definition 8 property categories 31, property companies prospectuses and circulars 179 Prospectus Rules 174, 181 prospectuses and circulars 174 5, PS see practice statements public sector assets 52, see also local authority assets public sector depreciated replacement cost 87 publication consent 32 publication statements 91 2, 126 published references 92 3, 98 9, purchase reports 8 purpose of valuation 30 q qualification requirements 15 qualified investor schemes 189 qualified surveyors 249, 251 quotas 83 r rack rents 134 radiation 236 radon gas 206, 236 recoverable amounts 55, 141 Red Book arrangement 3 development 3 4 effective date 4 redevelopment see development properties; development schemes refurbishment 202 registered social landlords (RSL) secured lending 196, shared ownership property 227, 238 regulated purpose valuations 174, 176, 176 7, regulatory issues disability discrimination 236 fire safety 237 planning controls 35, 82, 212 plant & equipment trade related property 108, re-inspections , see also frequency of valuations reinstatement cost 213 re-mortgages 211, 214 repairs and maintenance see also condition of buildings local authority assets 161 residential mortgage valuations 207, , 215 replacement costs see also depreciated replacement cost apportionments definition 141 gross current 155 net current 156 valuation basis 142 valuations for RSLs 138 VPMB 136 reporting currency 89 reports additional assumptions 95, basis of value 86, 94 for charities 250, collective investment schemes 176 commercial secured lending 193, commercially sensitive situations 92, 181 company prospectuses and circulars 174 5, currency 95 date of valuation 95 definition 8 departures 92 3, 95 depreciated replacement cost and alternative MVs comparison 88 9 description 85 disclosure 95 draft 90 1 extent of investigations 96 FSA Listing Rules under IFRS incorporation of other valuations 90 information relied on 96 interests 94 liabilities 96 for local authorities 162, minimum contents 84 5, 94 7 multiple properties 97 multi-state properties 89 MV/EUV differences negative values 89, 97 opinions of value 97 pension fund valuations RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 8 / Date: 18/9

277 Index portfolios 117 post balance sheet events 132 private sector depreciated replacement cost 86 7 public sector depreciated replacement cost 87 publication consent 32 publication statements 91 2, 126 published references 92 3, 98 9, purchase 8 purpose of valuation 94 residential mortgage valuations residual value 62 restrictions 96 RSL housing stock social housing 138 special assumptions 86, 92, 95 status of valuer 95 subject 94 takeovers and mergers 175 trade related valuations 100 1, type of property 94 uncertainty use of standards 97 valuation approach 97 repossession proceedings reserve property 145 residential property 194 residential property mortgages 194 6, basis of valuation buy to let external appraisals 218 further advances 217 inspections projected market value (PMV) reports terms of engagement 204 valuer s role residual value 55, 62, 154 definition 153 restricted information available 123 assumptions 95 terms of engagement 26 restricted value restrictions confidential information 18 residential mortgage valuations 208 RSL housing stock 219 revaluation frequency 63, 143, 160 revaluation without inspection 26 7 revalued amount 55 reviews critical 27 8 internal valuations 126 RICS Appraisal and Valuation Standards Board 224 Homebuyer Survey and Valuation (HSV) mortgage valuation specification see residential property mortgages Rules of Conduct 1, 3 Scottish Residential Faculty Board 224 risk assessment rotation of personnel RSL see Registered Social Landlords running costs 83 s sales incentives 74, sample inspections Scotland apportionments local authority disposals 255 residential property mortgages 194 terms of engagement Scottish Residential Faculty Board 224 secured lending 51 2, 70 7, see also commercial secured lending; residential property mortgages Registered Social Landlords (RSL) 196, selling costs 60 1, services building see building services local authority 164 shared ownership property 219, 227, skills, valuer s 15 small companies 143 social housing 138 9, 196, see also Registered Social Landlords (RSL) Social Housing Grants (SHG) 239 solvency ratios 51, 76 7 SORP see Statements of Recommended Practice special assumptions commercial secured lending 199 confirmation 24 5 damaged property definition 8, 37 forced sales 38 lotting 116 marketing constraints 37 8 MV 39 originally assumptions 35, 81 published references 92 reports 86 terms of engagement 24 5 trade related property 105 RICS VALUATION STANDARDS 269 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 9 / Date: 18/9

278 Index trade related valuations 40 wasting assets 118 special purchasers 8, 37, 247 special value 8, 42, 45 specialised property 62 3 definition 8, 54 local authority assets public sector 52 secured lending 74 valuation for financial reporting 51, 125, 145 wasting assets 121 SSAP see Statements of Standard Accounting Practices staircasing 238, 239 stamp duty land tax (SDLT) 240 standards applicable 2, 11 12, 57 compliance 2, departures from 2, 5, 12, European 2, 71, exempt work international 1 2, 6 principal aims 1 standing independent valuer 190 Statement of Auditing Standards 149 statement of value 85 Statements of Recommended Practice (SORP) CIPFA 137, 160 National Housing Federation 138, 139 PRAG 127 Statements of Standard Accounting Practices (SSAP) : Accounting for Investment Properties 143, 152, 157 9: Stocks and Long-Term Contracts 139 states definition 8 multi-state properties 89 stock, farming 140 stock(s) local authority 168 trading 9, 108, , 145 surplus assets 60, 128 9, 147 survey 8, see also inspections synergistic value 8, 42, 45, 49 t Takeover Code 175, Takeover Panel 175 taxation CGT/IHT/SDLT material consideration 95 multi-state properties 89 shared ownership property 240 Value Added Tax (VAT) 133 TEGoVA (European Group of Valuers Assocations) 2 tenanted property 30 tenure see also freehold; leasehold local authority disposals 258 terminology 5 9, 54 6 accounting concepts terms of engagement assumptions 32 auditors copy 151 bases of valuation 31 commercial secured lending 198 complaints procedure 33 confirmation 23 4 critical reviews 27 8 currency 31 date of valuation 31 definition 8 departures 32 disclosure 31 extent of investigations 32, 81 fees 33 forced sales 25 6 identification of client 29 information relied on 32 interest 30 limitations to liabilities 33 marketing constraints 25 6 minimum publication consent 32 purpose of valuation 30 residential mortgage valuations 204 restricted information 26 revaluation without inspection 26 7 Scotland special assumptions 24 5 standards undertaking 33 subject of valuation 30 type of property 31 terms of lease 30 third parties 8, 20 2 liabilities 33 time constraints, plant & equipment disposals 113 title 34 5 Town & Country Planning Act trade related property 8, 30, 39, apportionments 108 assumptions 105 definition 71, 103 operational assets regulatory issues RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 10 / Date: 18/9

279 Index reports 100 1, secured lending 74 5, trading potential 106 7, 156 secured lending trading stock 9, 108, , 145 transferable goodwill 104, 105, 106 Trustee Act Trustee Act trustee mortgages u UK Generally Accepted Accounting Principles (UKGAAP) 125 uncertainty, valuation unit trusts unregulated property unit trusts unrestricted value 255 useful life 62, 153, 154, definition 56, 169 v vacant possession 128, 138 valuation basis see basis of value valuation certificate 85 valuation panels 229 valuation reports see reports Valuation Standards Board 4 valuation uncertainty value added tax (VAT) 133 value in use 56, 141, 143 value of plant & machinery to the business (VPMB) 136 value of voluntary conditions 256 value to the business 142 valuers 76 appropriate 190 associates (Takeover Code) 185 district 243 external 5, 31, 66, 98 independence and objectivity 16 internal 31 knowledge and skills 15 local authority valuations 161 opinions 97, 184 qualifications 15 qualified 249, 251 relationship with auditors roles rotation policy standing independent 190 status 95, 180 VAT (value added tax) 133 verification of information 83 voluntary conditions 256 VPMB see value of plant & machinery to the business (VPMB) w waste management sites 46, , 134 5, 234 wasting assets 75 6, 118 depreciation willing lessees/lessors 46 willing purchasers 43, 247 willing sellers 43 4, 247 work exempt from Standards work in progress 139 worth see investment values written/in writing 9 z zoning see planning controls RICS VALUATION STANDARDS 271 Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 11 / Date: 18/9

280 272 RICS VALUATION STANDARDS Columns Design Ltd / Job: Red_Book_proofing / Division: RedBook6th /Pg. Position: 12 / Date: 18/9