Red Book Global Flashcards
RICS Valuation: Global Standards 2021 effective January 2022
Red Book Global
Structure?
- Introduction
- Glossary
- PS - Professional Standards
- VPS - Valuation and Performance Standards
- VPGA - Valuation Applications
- IVS - International Valuation Standards
PS1
Compliance with standards and practice statements where a written valuation is provided
PS1 5 Exceptions to the Red Book?
E - Expert Witness
A - Agency and Brokerage apart from purchase report
S - Statutory Purposes
I - Internal Accounts
N - Negotiation or litigation
PS2
Ethics
C - Compliance with the rules of conduct
I - Independence
T - Terms of Engagement
VPS 1 - Minimum Terms of Engagement
- Name and status of valuer
- Identification of the Client/other intended users
- Asset to be valued (if portfolio then lotting of assets considered)
- Valuation currency (2017)
- Purpose of valuation
- Basis of value
- Valuation date
- Extent of investigation
- Nature and source of information to be relied upon
- Assumptions and special assumptions to be made
- Format of report
- Restrictions for use, distribution and publication
- Confirm RBG/IVS compliance
- Fee basis
- Complaints handling procedure to be made available
- Statement that the valuation may be audited by RICS
- Limit on PII liability agreed
VPS2 – Inspections, Investigations and Reports
Valuers must take steps to verify the necessary information being relied upon for a valuation to ensure professionally adequate.
Desktop Valuation
Without an Inspection - RBG valuation unless for one of the 5 exceptions outlined in PS1.
Valuers should consider the following:
1. The nature of the restriction must be agreed in writing in ToE
2. Possible valuation implications of restriction confirmed in writing before the value is reported.
3. Valuer should consider whether the restriction is reasonable about the purpose of the valuation.
4. The restriction must be referred to in the report.
VPS3 – Valuation Reports (IVS 1103 Reporting)
- Identification of the status of the valuer
- Client
- Purpose of valuation
- Asset
- Basis of value
- Valuation date
- Extent of investigation
- Nature and source of information to be relied upon
- Assumptions and special assumptions
- Restrictions for use, distribution and publication
- Instruction undertaken in accordance with IVS standards
- Valuation approach and reasoning
- Valuation Figure
- Date of valuation report
- Commentary on any market uncertainty
- Any limitations on liability that have been agreed
VPS4 – Bases of Value
Market Value – The estimated amount for which an asset or liability should exchange between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where each party had acted knowledgeably, prudently and without compulsion.
Market Rent – The estimated amount for which an interest in real property should be leased on the valuation date, between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction where each party had acted knowledgeably, prudently and without compulsion.
Fair Value IFRS13 – The price that would be received to sell an asset or transfer a liability in an orderly transaction between two market participants at the measurement date.
Investment Value – The value of an asset to a particular owner, or prospective owner for individual investment or operational objectives.
Equitable Value IVS104 – The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties. Not used in the UK.
Liquidation Value – A group of assets sold in a piecemeal basis considering the costs of getting assets into saleable condition. Not used in the UK.
VPS 5 – Valuation Approaches and Methods (IVS 105)
- Valuers are responsible for selecting and justifying their use of model and valuation approach.
- In some cases, more than one approach may be appropriate.
VPGA 1 – Valuation for inclusion in Financial Accounts
- Fair Value will be adopted for all IFRS adopted accounts.
- Prescribed ‘performance standards’ must be adhered to.
VPGA 2 – Valuation for secured lending
- Previous involvement with property/borrower disclosed to the lender, usually within past 2 years.
- If instruction accepted, the conflict management details must be recorded in ToE and report.
VPGA 8 – Valuation of real property assets
- Covers inspections and investigations, with particular emphasis on ESG and sustainability issues.
- Need to consider direct/indirect valuation factors, physical risks and transition risks.
VPGA 10 – Matters that may give rise to material valuation uncertainty
- Overriding requirement is that a valuation report must not be misleading.
- Valuer should clearly draw attention to issues relating to material uncertainty in the valuation on the specified date relating to risk, surrounding the valuation of the asset.
Statutory due diligence
- Asbestos register
- Business Rates/Council tax
- Contamination/Flooding/Environmental matters
- Equality Act compliance
- EPC
- Fire safety/Health & Safety
- Highways/Public Rights of Way
- Legal title
- Planning history (subject to S106 agreement or CIL)
Timeline of an instruction
- Receive instruction from the client.
- Check competence and independence.
- Issue ToE, receive signed ToE.
- Gather info/due diligence/market research/comparables.
- Inspect and measure.
- Undertake valuation.
- Draft report and peer review with another surveyor.
- Finalise and sign report.
- Report to client.
- Issue invoice.
- Ensure file is in good order to archive.
Methods of Valuation
- Comparable method
- Investment method
- Profits method
- Residual method
- Contractors Method (Depreciated Replacement Cost)
Comparable Method
- Gather comparables and confirm details.
- Adjust headline rent to ‘net effective rent’ if appropriate.
- Assemble in a schedule adjust using ‘Hierarchy of Evidence’.
- Analyse to form an opinion of value and report the value.
Comparable Professional Standard
RICS Professional Standard: ‘Comparable Evidence in Real Estate Valuation’ 2019 (Reissued as Professional Standard April 2023)
RICS Professional Standard: ‘Comparable Evidence in Real Estate Valuation’ 2019 (Reissued as Professional Standard April 2023)
Hierarchy of Evidence
Cat A – direct comparables, accurate, recent, asking prices (analysis)
Cat B – general market data to give guidance, historic and reports
Cat C – other asset classes, locations, background data interest rates
Investment Method
- Used when there is an income stream, rental income is capitalised to produce a capital value.
- Conventional method assumes growth implicit where implied growth rate is derived from the market capitalisation rate (yield).
Term and Reversion – Used for reversionary investments, term capitalised until rent review then into perp at new yield.
Layer/hardcore – Used for overrented investments, horizontally split, different yields used due to risk of higher income.
Discounted Cashflow Technique (DCF)
- Estimate the cashflow (income less expenditure)
- Estimate the exit value at the end of the holding period
- Select discount rate and discount the cash flow at the rate
- Value is the sum of the completed DCF to provide the NPV
DCF Terminology
Net Present Value (NPV)
Sum of the DCFs for the project – NPV can determine if the investment will give a positive/negative return against a target rate of return.
Internal Rate of Return (IRR)
The rate at which all future cashflows must be discounted to produce NPV of zero. IRR = total return from an investment opportunity if no software to calculate can use linear interpolation.
- MV as -, Rent as +, Exit as +, discount rate chosen, if NPV is more than zero, target rate of return is met.
Profits Method
- trade related – monopoly position (3 years of audited accounts)
- Income – costs = gross profit – less expenses & operator’s remuneration = Fair Maintainable Operating Profit (FMOP).
- Expressed as EBITDA (earnings before interest, taxation, depreciation and amortisation. Capitalised at yield.
Residual Method
- MUST be MARKET led, ONLY used to calculate LAND VALUE
- GDV of scheme at today’s date assuming current market.
- Comparable method used to establish rent and yield (ARY). Rent free and void periods can be assumed and purchaser’s costs are usually deducted.
