RICS Valuation Standards

The answer from the last post - the five main methods of valuation are Profit, Residual, Investment, Comparable and Contractors - PRICC

The information below are notes and quotes taken from the book Introducing Property Valuation by Michael Blackledge on the subject of RICS Valuation Standards.

The Red Book has the official title of the RICS Valuation Standards and Guidance Notes and was first published in 1980. The 6th edition is the latest of the Red Book and was published in 1st of January 2008. It has had an amendment in April 2010 and both the 6th edition and amendment can be found here. Please note you will have to have access to the RICS site through membership.

The first set of standards contains standards and rules that apply to the RICS members wherever they work in the world. The second set of standards apply to certain countries. These standards came into force especially after the Mallinson Report (1994) which was published to quell the public's thoughts after the widely varying valuations on property including the Queens Moat Houses in the early 90's; a continual criticism of valuation bases in and out of the profession and losses incurred by mortgages on failed developments resulting from the falling values during the 1990's recession.

The Red Book's principal purpose "is to ensure that valuations produced by members achieve high standards of COI (Clarity, Objectivity and Intergrity - remember this as a badly spelt Koi Carp) and are reported in accordance with recognised bases. These may include:

a)the criteria of member's qualifications

b)the steps necessary to deal with actual or perceived threat to independence and objectivity
matters to be addressed on when agreeing on conditions of engagement (PS2)

c)bases of Valuations, Assumptions and Material considerations that need to remembered when preparing a valuation (PS3)

d)the minimum reporting standards

e)matters that should be disclosed if the valuations are relied upon by a third party

The Red Book has a series of Practice Statements or National Practice Statements, these are:
PS1 - Compliance and ethical requirements
PS2 - Agreement of terms of engagements
PS3 - Bases of value
PS4 - Applications
PS5 - Investigations
PS6 - Valuation reports

The bases of value, as noted in PS 3 are Market Value (MV), Market Rent (MR, Worth (or Investment Value) and Fair Value. These are dissected below.

Market Value - "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" (RICS PS 3.2)

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" (RICS PS 3.3)

Worth (Investment Value) - "the value of property to a particular owner, investor, or class of investors for identified investment or operational objectives" (RICS PS 3.4)

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" (RICS PS 3.5) or "a price that is fair between two parties acting at arm's length for the exchange of an asset" Note that there is no marketing, the price must be fair to both parties, price should reflect any special advantages or disadvantages. Note that market value does not need to be fair to either parties

The Red Book has a collection of VIPs - Valuation Information Papers, available here:
VIP 1 - The Valuation of Owner-Occupied Property for Financial Statements
VIP 2 - The Capital and Rental Valuations of Restaurants, Bars, Public Houses and Nightclubs in England and Wales
VIP 3 - The Capital and Rent Valuation of Petrol Filling Stations in England, Wales and Scotland
VIP 4 - The Valuation of Surgery Premises Used for Medical or Health Services
VIP 5 - Rural Property Valuation (includes Property Used for Primary Agricultural Production, Leisure/Amenity, Commercial and Dwellings categories)
VIP 6 - The Capital and Rental Valuation of Hotels in the UK
VIP 7 - Leasehold Reform in England and Wales
VIP 8 - The Analysis of Commercial Lease Transactions
VIP 9 - Land and Buildings Apportionments for Lease Classification under International Financial Reporting Standards
VIP 10 - The Depreciated Replacement Cost Method of Valuation for Financial Reporting
VIP 11 - The Valuation and Appraisal of Private Care Homes Properties in England, Wales and Scotland
VIP 12 - The Valuation of Development Land
VIP 13 - Sustainability and Commercial Property Valuation

In the Practice Statement 6 and Appendix 6 of the Red Book, there is a list of minimum content of valuation reports:

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, how it is used or classified by the client
f) The basis, or bases, 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 the source of information relied on by the member
n) Any consent to, or restrictions on, publications
o) Any limits or exclusion of liability to parties other than the clients
p) Confirmation that the valuation accords with these Standards
q) A statement of the valuation approach
r) The opinions of value of figures and words
s) Signature and date of report

Other issues may need to be taken into account, these may include:

1) Confirmation of original instructions or terms of engagement
2) Site Plan
3) Description of the situation and location of the property
4) Description of the subject property
5) Details of construction
6) Services
7) Accommodation measurements/size, design, layout and description
8) Rating assessments
9) Planning consents and policies
10) Tenancy details
11) Details of any leases
12) Explanations of any defects and contamination
13) Overview of property market conditions
14) Market evidence and comparables
15) Valuation methodology, calculations and reasoning
16) Conclusion including valuer's recommendations

It must be noted that the valuer must have sufficient current local, national and international knowledge of the particular market, and the skills and understanding necessary to undertake the valuation competently...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 the specialist valuers, environmental surveyors, accountants and lawyers (RICS PS 1.5)

Next time - how do you measure an elephant?

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