Red Book

Question 1

Tell me about the RICS Red Book Valuation Global Standards?

• Effective 31st January 2022

Answer 1

• The Red Book sets out valuation professional, technical and performance standards and ensures that valuations undertaken by RICS members are consistent and objective.

Question 2

What are the changes in the most recent Red Book from the previous version?

Answer 2

• Terms of reference must be clear and unambiguous in that valuations are either RBG compliant or not
• Valuation for financial reporting purposes (VPGA1) – reference to IFRS 13 and IFRS16 and the need to provide reasonably possible fair value measurements
• Sustainability and ESG factors – valuers should have regard to the relevance and significance which should form part of their approach and reasoning. For loan sec, sustainability & ESG can also require commentary on the maintainability of income and future cost liabilities to meet changing regulations and investor expectations.

Question 3

What are the 5 Valuation Technical Performance Standards?

Answer 3

• VPS1: Terms of Engagement (scope of work)
• VPS2: Inspections, Investigations and Records
• VPS3: Valuation Reports
• VPS4: Basis of Value, Assumptions and Special Assumptions
• VPS5: Valuation Approaches and Methods

Question 4

What does the Red Book state on draft, desktop and revaluations?

Answer 4

• These all are considered to be RBG valuations unless undertaken for the five exceptions
• Valuer must consider:
  o Nature of restrictions – must be agreed in writing and included in ToEs
  o Valuation implications of restrictions – confirmed in writing in ToEs
  o If the restriction is reasonable
  o Refer to the restriction explicitly within the valuation report
• Revaluations must only be undertaken without inspection if the valuer can satisfy themselves that there have been no material changes to the property or the nature of the location since the last inspection – this must be confirmed in writing within the ToEs

Question 5

When is the RICS Valuation Global Standards 2021 (Red Book) used?

Answer 5

• The Red Book is mandatory for all valuations undertaken except for the following purposes:
  o Advice is provided for or during the course of negotiations or litigations
  o The valuer is performing a statutory function except for the inclusion within statutory return to a tax authority
  o The valuation is provided purely for internal purposes, without liability and not communicated to a third party
  o Valuation is provided as part of agency and brokerage work in anticipation of receiving instructions to dispose of or acquire an asset except when a purchase report is required which includes valuation
  o Valuation provided in anticipation of giving evidence as an expert witness

Question 6

When does a valuation have to be RBG complaint?

Answer 6

• The RBG is mandatory for all valuations except the FIVE following circumstances:
  o When a valuation is prepared for or during the course of negotiations or litigation
  o If the valuer is performing a statutory function EXCEPT provision of a valuation for inclusion in statutory to return to tax authority
  o If the valuation is provided for client internal use only, without liability and not for circulation to third parties
  o If the valuation is provided for agency/brokerage purposes in anticipation of instruction for disposal or acquisition of an asset except where a purchase report is required which includes a valuation
  o Where valuation advice is provided in anticipation of giving evidence as a expert witness

Question 7

PS2 Ethics, Competence, Objectivity and Disclosures

Answer 7

Professional and ethical standards:

• Act in accordance with RICS Rules of Conduct

Independence, objectivity and the identification and management of conflicts of interest:

• Act objectively and independently
• Do not be influenced by any situation which could threaten professional objectivity
• Rely on ‘professional scepticism’ when reviewing information and data before relying on it
• Detailed advice on conflicts of interest

Terms of Engagement:

• Understand client’s requirements
• Comply with terms of engagement
• Demonstrate professional competence

Question 8

VPS 1 Terms of Engagement

Answer 8

• Mandatory
• The following must be confirmed prior to commencing a RBG valuation:

o Identification and status of the valuer
o Client
o Identification of any other intended users
o Asset to be valued
o Currency
o Purpose of valuation
o Basis of value
o Extent of investigation
o Nature and source of information relied upon
o Assumptions and special assumptions
o Format of report
o Restrictions for use, disruption, and publication
o Confirmation of RBG / IVS compliance
o Fee basis
o CHP
o Limitation on liability agreed

Question 9

Assumption

Answer 9

• Assumptions are made when it is reasonable for the valuer to accept something is true without requiring specific investigation

Question 10

• A special assumption

Answer 10

• A special assumption is a supposition that is taken to be true and accepted as fact, even though it is not true
• It must be agreed with the client in writing at the commencement of the instruction. E.g. relating to such matters as assuming planning consent has been granted or the property is vacant

Question 11

VPS 2 Inspections, Investigations and Records

Answer 11

Inspections:

• Verify necessary information being relied upon to ensure the information is professionally adequate

Restricted information (desktop) valuations (no inspection undertaken):

• RBG valuation unless for one of the specific purposes
• When a valuation is undertaken with restricted information or without a physical inspection, the following must be considered:

1) Nature of the restriction – agreed in writing in the terms of engagement

2) Possible valuation implications of the restriction – agreed in writing before the value is reported

3) Is the restriction reasonable?

4) The restriction must be referred to in the report

Question 12

VPS 2 Inspections, Investigations and Records
Revaluation (without re-inspection):

Answer 12

Revaluation (without re-inspection):

• The revaluation without re-inspection should not be carried out unless satisfied there have been no material changes to the property or nature of its location since the last inspection
• Confirmed in the terms of engagement and in the valuation report

Records:

• Proper records of the inspection and investigations must be kept
• Importance of ESG and sustainability

Question 13

VPS 3 Valuation Reports

Answer 13

Minimum requirements to be stated within the report are:

• Identification and status of the valuer
• Client and any other intended users
• Purpose of valuation
• Identification of the asset to be valued
• Basis of value
• Valuation date
• Extent of investigation
• Nature and source of information relied upon
• Assumptions and special assumptions
• Restrictions on use, distribution and publication
• Instruction undertaken in accordance with IVS standards
• Valuation approach and reasoning
• Valuation figures
• Date of valuation report
• Comment on market uncertainty
• Statement setting out any limitations on liability that have been agreed

Question 14

Can you give draft advice

Answer 14

yes

VPS 3 Valuation Reports

Preliminary (draft) valuation advice:

• Preliminary valuation advice can be given, but must be marked as draft, for internal purposes only, cannot be relied upon and on no account can it be published or disclosed
• Draft report can be issued to the client but must be stated it is in draft format and is subject to completion of the final report
• Draft valuation can be discussed with the client, but the valuer is not to be influenced by the client in respect of the final valuation figure
• Any changes made to a preliminary report must be noted on file and reasons provided
• Any additional information supplied by the client as a result of the discussion regarding the draft report must be stated in the report

Importance and relevance of ESG and sustainability factors which form an integral part of the valuation approach and reasoning

Question 15

VPS 4 Bases of Valuation, Assumptions and Special Assumptions

Market Value

Answer 15

1) Market Value

The estimated amount for which an asset or liability should exchange

o On the valuation date
o Between a willing buyer and a willing seller
o In an arm’s length transaction
o After proper marketing
o When the parties had each acted knowledgably, prudently and without compulsion

Question 16

VPS 4 Bases of Valuation, Assumptions and Special Assumptions

Market Rent

Answer 16

Market Rent

The estimated amount for which an interest in real property should be leased

o On the valuation date
o Between a willing lessor and a willing lessee
o On appropriate lease terms
o In an arm’s length transaction
o After property marketing
o When the parties had each acted knowledgably, prudently and without compulsion

Question 17

3) Fair Value

Answer 17

The price that would be received to sell an asset or paid to transfer a liability on an orderly transaction between market participants at the measurement date

o This basis of valuation is now required if the International Financing Reporting Standards (IFRS) have been adopted by the client
o It is adopted by the IFRS board
o The RICS view is that this definition is generally consistent with the definition of MV

Question 18

4) Investment Value

Answer 18

The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives

o May differ from MV
o Sometimes used as a measure of worth to reflect the value against the client’s own investment criteria

Question 19

VPS 5 Valuation Approaches and Methods

Answer 19

• Valuers are responsible for choosing and justifying their valuation approach and use of model
• In some cases, more than one approach may be appropriate

Question 20

What ESG and Sustainability factors would affect valuations and how?

Answer 20

• RICS Guidance Note ‘Sustainability and ESG in commercial property valuation and strategic advice’ 3rd Edn 2021
• EPC rating if poor could limit marketability of property etc. less attractive to the market
• Valuers must consider ESG and Sustainability within their assumptions and advice

Question 21

I see you have undertaken a loan security valuation, where would you find the guidance on this within the Red Book?

Answer 21

• It is included within VPGA 2

Question 22

What would you do prior to commencing a valuation instruction?

Answer 22

• CIT
  o Check my Competence, if I have the required experience to undertake the work
  o Conflict of interest and personal conflict check
  o Issue and receive back signed Terms of Engagement from the client

Question 23

What due diligence is required on a valuation instruction?

Answer 23

• Asbestos register (pre-2000)
• Business rates/council tax
• Contamination
• Equality act 2010 compliance
• Environmental matters (power lines, sub stations)
• Health and safety compliance
• Fire safety
• Highways (check adopted roads)
• Legal title and tenure (deeds, wayleaves, restrictive covenants)
• Planning history & compliance – listed building, conservation area, section 75 agreements

Question 24

What additional information do you require for a Loan Sec Valuation?

Answer 24

• Must disclose any previous, anticipated or current involvement with the prospective borrower or the property to the lender
• ‘Previous involvement’ is typically 2 years but can be longer (client request etc.)
• Reporting procedures;
  o Disclosure of any previous involvement
  o Any arrangements to manage a conflict, if applicable
  o Valuation methodology adopted, supported where appropriate with the calculation
  o Where a recent transaction has occurred or a provisionally agreed price has been disclosed, the extent to which this information has been accepted as market value
  o Where the enquiry does not reveal any information, the valuer must include a statement to that effect
  o Comment on any environmental consideration
  o Comment on the suitability of the property for mortgage purposes
  o Any circumstances the valuer is aware could affect price
  o Any other factor that potentially conflicts with the definition of market value or its underlying assumptions
• Any other relevant, normal valuation enquiries undertaken
• If arrived to using a special assumption, then a comment mut be made of any material difference between the reported value with and without that special assumption

Question 25

Which parts of the Red Book are mandatory?

Answer 25

PS 1 and 2, VPS 1-5 are all mandatory, VPGA’s are advisory.

Question 25

Part 5 Valuation Applications (Valuation Practice Guidance Applications – VPGAs)

Answer 25

• 10 VPGA’s

Question 26

What does VPS 5 cover?

Answer 26

Approaches and methods.
- Market approach, based on comparing the subject asset with identical or similar assets for which price information is available
- Income approach, based on capitalisation or conversion of present and predicated incomes to produce a single current capital value
- Cost approach, based on the economic principle that a purchase will pay no more for an asset than the cost to obtain one of equal utility whether by purchase or construction.

Question 26

What guidance does VPGA 8 provide with regard to inspections and assumptions?

Answer 26

• Confirm the title of the property being valued
• Note the condition of the building
• What services are present
• Planning and the necessary consents
• Environmental factors such as flooding
• Sustainability

Question 27

VPGA 1 – Valuation for inclusion in financial accounts

Answer 27

• Fair value will be adopted for all IFRS adopted accounts
• Performance standards must be adhered to

Question 28

VPGA 2 Valuations for secured lending

Answer 28

Dealing with conflicts of interest

• Any previous, current or anticipated involvement with the prospective borrower or the property must be disclosed to the lender
• Previous involvement is usually within the last 2 years
• If any previous involvement creates a conflict that cannot be avoided, then the instruction must be declined
• E.g. longstanding professional relationship with the borrower / owner, financial interest in the property, valuer is retained to act as the agent in regard to disposing / letting
• Prior to accepting / declining the instruction, have regard to the RICS Rules of Conduct
• If the potential conflict can be avoided, arrangements to manage the instruction must be recorded in writing and included within the terms of engagement and valuation report

Question 29

VPGA 2 Valuations for secured lending

Reporting Procedures

• Minimum requirements of a valuation report

Answer 29

• Also need to include:

o Conflict of interest
o Valuation methodology, supported where appropriate, with the calculation
o Where a recent transaction on the property has occurred or a provisionally agreed price has been disclosed, the extend to which the information has been accepted as market value
o Comment on any environmental consideration
o Comment on the suitability of the property for mortgage purposes
o Any circumstances of which the valuer is aware that could affect the price
o Any special assumptions – report value with special assumption separately
o Sustainability factors

Question 30

VPGA 8 – Valuation of real property interests

Answer 30

• Covers inspections and investigations, with emphasis on ESG and specific environmental constraints and sustainability issues
• Identified ESG and sustainability issues including the need to consider direct valuation factors, indirect valuation factors, physical risks, and transition risks

Question 31

VPGA 10 – Matters that may give rise to material valuation uncertainty

Answer 31

• Valuation report must not be misleading
• Valuer should comment on any issues resulting in material uncertainty e.g. Covid 19
• A standard caveat should not be used

Question 32

Part 6 International Valuation Standards 2017 (Mandatory)

Answer 32

• General Standards – e.g. terms of engagement and method of valuation
• Asset Standards – e.g. requirements relating to specific types of asset e.g. real property and development property

Question 33

RICS Valuation – Global Standards (UK National Supplement, 2018)

Answer 33

The relationship between the RBG and the UK National Supplement

• Published November 2018

Key Changes:

• Easy to read and more user friendly with clear advice on what is / isn’t mandatory
• Makes it clear that the UK National Supplement augments the RBG which are not subject to jurisdiction
• Not a substitute for the RBG but provides mandatory statements and advice for UK valuations
• New UK VPGAs have been included for the valuation of central government assets, local authority assets and registered social housing providers’ assets
• For financial reporting valuations, there is a greater differentiation between UK GAAP and IFRS requirements
• New section on valuation for commercial lending

Question 34

UK VPGAs include:

Answer 34

• Valuation for financial reporting
• Valuation of registered social housing providers’ assets for financial statements
• Valuation of charity assets
• Valuation for commercial secured lending purposes
• Valuation for residential mortgage purposes
• Valuation for registered social housing for loan security purposes
• Valuation for CGT, Inheritance Tax, SDLT and ATED

Question 35

UK VPS 3 Regulated Purpose Valuations (RICS Valuation Monitoring)

Answer 35

• Valuations relied on by third parties who have not commissioned the valuation and they are subject to valuation monitoring
• Valuations for 5 purposes:

1) Financial reporting (company accounts)

2) Stock exchange listings / inclusion in prospectuses and circulars

3) Takeovers and mergers

4) Collective investment schemes

5) Unregulated property unit trusts

Secured lending valuations are NOT regulated purpose valuations as they are not relied upon by third party or in the public interest

Question 36

UK VPS 3 Regulated Purpose Valuations (RICS Valuation Monitoring)

Valuation Monitoring Requirements

Answer 36

Valuation Monitoring Requirements

• An annual declaration for all members now in place to declare length of time valuer has acted for the client for regulated valuation purposes and the extent and duration of the firm’s relationship with the client
• In last financial year, whether percentage fee income from the client is less than or more than 5% of the total fee income (if more than 5% the percentage is to be disclosed to the nearest 5%)
• There should be a policy in place on the rotation of valuers when the asset is regularly valued. RICS recommends a 7-year maximum rotation policy.

Properties introduced or purchased by the valuer’s firm

• When a property is purchased or an introductory purchase fee accepted by the firm, it cannot be valued for a regulated purpose valuation for 12 months by the same firm

Question 37

Valuation Techniques and issues ESG and Sustainability

Answer 37

ESG and Sustainability

• Global Guidance Note: Sustainability and ESG in commercial property valuation and strategic advice, December 2021
• Provides a useful glossary of relevant terms and factors which valuers should incorporate into their valuation approaches, including:

o Terms of Engagement
o Valuation purpose
o Inspection
o Reporting

• The Guidance Note also provides advice relating to:

o Relevant sustainability characteristics, considerations and risks which should be borne in mind when analysing comparable and other market information

o How these should be reflected in the choice of valuation methodology

Question 38

Margin of error

Answer 38

• The permissible range allowed by courts e.g. respect of a valuation
• This principal of a 10% margin of error was reinforced in the case of K/S Lincoln and Others V CB Richard Ellis (2010) in respect of a valuation of 4 hotels in 2005. The Judge stated that an appropriate margin may be +/-5% for a standard residential property, but for a one-off commercial property +/-10% and if there are exceptional features of the property, the margin could be +/-15%.

Question 39

Hope Value

Answer 39

• The value arising from any exception that future circumstances affecting the property may change
• Two typical examples of hope value being created are as follows:

1) The future prospect of securing planning permission for the development of land, where no planning permission exists at the present time

2) The realisation of marriage value arising from the merger of two interests in land

Question 40

Valuations for Charities

Answer 40

• The Charity Commission requires the trustees of a charity to obtain a Section 119 of the Charities Act 2011 valuation when the charity is seeking to buy or sell a property
• The valuer must follow the Acts requirements
• The surveyor must comment as to whether the purchase or sale is in the charity’s best interest
• The report must state whether the terms agreed are the best that can be reasonably obtained for the charity
• UK VPGA 8 sets out advice in respect of the provision of valuation advice to charities
• Basis of valuation to be MV or MR

Question 41

Marriage Value

Answer 41

• Created by a merger of interests – can be physical or tenurial
• Undertake a before and after valuation and calculate the level of marriage value created
• Typical negotiated outcome is to split the marriage value created 50:50 or divide it pro-rata to the value of the individual interest