What is the definition of Fair Value
adopted from IFRS 13 - the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date
What is the definition of Market Value
the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller, in an arm’s-length transaction, after proper marketing, and where both parties have acted knowledgeably, prudently, and without compulsion
What is the definition of FMOP
This is the level of profit, stated prior to depreciation and finance
costs relating to the asset itself (and rent, if leasehold), that the
reasonably efficient operator (REO) would expect to derive from
the fair maintainable turnover (FMT) based on an assessment of
the market’s perception of the potential earnings of the property.
What is the definition of FMT
This is the level of trade that an REO would expect to achieve on the assumption that the property is properly equipped, repaired, maintained and decorated.
What is an REO
This is a concept where the valuer assumes that the market participants are competent operators, acting in an efficient manner, of a business conducted on the premises.
The REO is a hypothetical operator and may, in some
circumstances, be assumed to operate differently from the actual
operator. The actual operator may not be the best proxy for the
REO as they might have practices and tastes that are personal
to them and their business but not reflective of the market
What is trading potential
This is the stabilised profit estimate, in the context of a valuation of the property that an REO would expect to be able to realise from occupation of the property. This could be above or below the recent trading history of the property.
If the property would have a higher value as a residential flat, why didn’t you value on this basis?
In IVS 102 and VPS 2, I am told to consider the highest and best use.
This means that the use must be legally permissible and if there is risk/uncertainty around the property receiving appropriate planning permission then it may not qualify as higher and best use.
Additionally, the price to redevelop might have an impact. The pub is worth £4.8m and the residential GDV is £6m but redevelopment costs are £2m, then the residual value is £4m, which is less than the pubs current value.
What are the steps in a profits valuation
- Assess the FMT generated at the property by an REO
- Assess the potential gross profit resulting from the FMT
- Assess the FMOP based on costs and allowances reflecting the REO
- Calculate the MV by capitalising the FMOP at an appropriate rate of return
How did you refer to your Market Rent valuation when reporting to the client
As it was not Red Book compliant, I did not use the word valuation to avoid confusion and instead referred to it as an assessment of rent
What is the full name of the Red Book
RICS Valuation – Global Standards
What do the different VPS in the red book refer to?
VPS 1 – Terms of engagement (scope of work)
VPS 2 – Bases of value, assumptions and special assumptions
VPS 3 – Valuation approaches and methods
VPS 4 – Inspections, investigations and records
VPS 5 – Valuation models
VPS 6 – Valuation reports
What is the RICS Review of Real Estate Investment Valuations
It was commissioned by RICS Standards and Regulation Board and the review was led by Peter Pereira Gray to futureproof the valuation of assets for investment purposes, as a result of market changes, impact of Covid-19 and structural shifts in occupier and investor demand
What did the RICS Review of Real Estate Investment Valuations recommend
Made 13 recommendations:
‘Recommendation 1 – Commissioning and Receiving Valuation Reports
RICS should work with appropriate stakeholders in standardising governance arrangements for commissioning and receiving valuation reports for high-risk and ‘regulated’ valuations.
Recommendation 2 – Valuation and Advisory Activities
Valuers, with the support of RICS, should ensure that the separation of valuation from advisory activities within firms is consistently applied in respect of the use of valuation data and instructions.
Recommendation 3 – Rotation
RICS should develop a time-specific, mandatory procurement and rotation process for valuers.
Recommendation 4 – Compliance Role
RICS should build on its existing ‘RICS responsible principal’ obligation by developing a Valuation Compliance Officer role to specifically cover valuation process and conduct.
Recommendation 5 – Raising Concerns
RICS should ensure it has clearly signposted processes for its regulated members and other stakeholders to raise concerns about ethical conduct and address, amongst other issues, improper pressure placed on valuers.
Recommendation 6 – Quality Assurance Panel
RICS should create a dedicated, independently-led valuation regulatory quality assurance panel, under the jurisdiction of the RICS Standards and Regulation Board.
Recommendation 7 – Valuation Audit Trail
The Red Book should include further standards around the conduct and recording of valuation instructions and meetings between client and valuer.
Recommendation 8 – Analytical Approaches (i) Discounted Cash Flow
The valuation profession should incorporate the use of discounted cash flow as the principal model applied in preparing property investment valuations.
Recommendation 8 – Analytical Approaches (ii) Advanced Analytics
RICS should improve the knowledge and application of valuers in respect of advanced analytical techniques.
Recommendation 9 – Global Standards
RICS should maintain a record of valuation standards adoption and application in countries outside the UK where significant numbers of its Registered Valuers operate, in order to inform the extension of regulatory requirements and support to valuers.
Recommendation 10 – Standardised Property Risk Advice
RICS should develop a framework to standardise property risk advice.
Recommendation 11 – Post-Qualification Requirements and Revalidation
RICS should review its post-qualification requirements for valuers, and consider introducing mechanisms for regular revalidation of valuers.
Recommendation 12 – Diversity
RICS should continue to build on its important work to ensure a diverse and inclusive valuation profession.
Recommendation 13 – Culture and Behaviour
There is a need for further specific RICS guidance to clarify RICS’ expectations around the culture and behaviours expected of RICS professionals in the pursuance of valuation activities’.
What does VPGA 1 relate to?
Financial statements
Why do financial statement valuations require particular care?
They must comply strictly with the financial reporting statements adopted by the entity and may be relied upon by third parties
What are the two commonly used financial reporting standards used in the UK
IFRS and UK GAAP
What additional criteria apply to secured lending valuation
That the valuer has had no previous, current or anticipated involvement with the borrower, or prospective borrower, the asset to be valued or any other party connected with a transaction for which the lending is required (for 24 months, or longer if requested)
What does VPGA 9 relate to?
Identification of portfolios, collections and groups of properties
What is the general principle when dealing with a portfolio valuation?
The valuation purpose and your client’s instructions will dictate the approach you take to lotting
What additional disclosures must you make in a regulated purpose valuation?
The total fees paid by the client proportionate to the turnover of the valuation firm (in the preceding 12 months), effectively stated within a 5% range
A statement disclosing the nature and duration of the client relationship and previous work undertaken (and if there is no prior relationship, then this should be clearly stated)
What is the statutory basis of market value (defined in the relevant tax legislation)?
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
When was the global Red Book last updated?
31 January 2025
What are the three VPS 3 valuation approaches?
Income
Market
Cost
What does IVS stand for?
International Valuation Standards
