copy of faqs from the guide to the red book

8/6/2019 Copy of FAQs From the Guide to the Red Book

1/25

http://www.isurv.com

Why is it necessary to have rules and regulations, etc. in thepreparation of valuations?

These are necessary because valuations form the basis of many financial decisions andconsequently there have to be consistent standards. More recently there has been a movetowards greater transparency, accountability, comparability and the availability of information -the need for which was given added impetus following major corporate failures, particularly,but not exclusively, in the US. RICS wants to maintain public confidence in the work of itsmembers by means of self-regulation.

The Red Book is divided into practice statements, appendicesand guidance notes. Are they all mandatory?

A practice statement must be followed and is mandatory as is the commentary whichaccompanies it:

'The commentary to each practice statementshould be considered to have mandatorystatus when it requires the memberto take a specified action.' (PS 1.1, para. 4)

On the other hand appendices are advisory unless indicated to be mandatory in the practicestatement to which it relates.Guidance notes are not mandatory but are designed to help the valuer with the application ofthe practice statements and describe the standard of work that is expected of a reasonablycompetent surveyor.

Does the Red Book apply to a purchase report that does not

contain a valuation but merely recommends a purchase at acertain figure that has been negotiated at, above or below market

value?

If the advice to purchase at a specific figure is not presented as a valuation then the report isoutside the Red Book but it is still subject to the Rules of Conduct for RICS members, so itwould be good practice to follow all the appropriate advice in the Red Book.

I carry out estate agency work which involves advising clients on

asking figures and recommending acceptance of offers usually inwriting. Is this subject to the Red Book?

Advice given in connection with estate agency is one of the principal exceptions in the RedBook. PS 1.2, para 10, states:

'Advice tendered in the expectation of, or in the course of an instruction to dispose of, oracquire, an interest in propertyon the anticipated price achievable or payable, includingadvice on whether a particular offer should be accepted or made. This exemption does notapply if the client requires a purchase reportthat includes a valuation.'

I am director of property at a large publicly quoted company. Iam frequently asked to advise the directors on the value of the

Page 1
http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=1http://www.rics.org/newregulationhttp://site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=2http://site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=2http://www.rics.org/newregulationhttp://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=1


2/25


company's properties. Is this advice subject to the Red Book?

You are an internal valuer and as such, provided none of the advice you give including thevaluation figure is to be seen or communicated to a third party or appear in any publication,this falls outside the Red Book. Remember, however, this does not exempt you from the RICSRules of Conduct and you would be advised to follow the spirit of the Red Book whereappropriate. However, the company may still be entitled to rely on the advice given andtherefore it is advisable to clearly set out the limitations on advice provided and any

assumptions made in estimating the price obtainable.

I understand there is some flexibility in the Red Book anddepartures are allowed. Can you explain the procedures?

It has long been recognised that there may be circumstances when it is not entirely practical togive a client all the advice he or she needs by strict adherence to the Red Book. This is dealtwith in PS 1.3.The procedure is that a departure is allowed if you feel that it is justified and the situation

cannot be covered by making a 'special assumption', but the Red Book issues a warning thatyou may be called upon by the RICS or the Institute of Revenues Rating and Valuation (IRRV)to explain your reasons. Clearly the circumstances have to be agreed with your client in theterms of engagement and the details and reasons and the client's agreement must be set outin the report.

My client wants a valuation which is to be incorporated into hiscompany's accounts but says he doesn't want a long Red Book

valuation report. What should I tell him?

Firstly, if the valuation is for his accounts, as a chartered surveyor you have no option but toproduce a valuation and report which is Red Book compliant.Secondly, his auditors will probably insist that it is a professional valuation if they are to sign offthe accounts.Thirdly, a Red Book report for accounts does not have to be long providing it contains theminimum contents as outlined in PS 6.1. It can be concise and there is no requirement toprovide photographs, location plans or detailed descriptions of the property and its environs.One reason for your client's request could be that he feels you will charge less for a shorterreport.

How can I provide written confirmation of my opinion given in averbal report without agreement of terms of engagement and a

full report in accordance with PS 6?

Example context: I am often approached by a bank seeking a verbal desktop valuation of aproperty upon which they are contemplating making a loan. The bank, following my verbalreport, may ask me to confirm my opinion in writing but do not at this stage require a Red Bookcompliant report as the terms of the loan are still being negotiated. How can I provide writtenconfirmation without agreement of terms of engagement and a full report in accordance withPS 6?Any valuation in writing is subject to the Red Book. The best way forward is to develop asimple engagement letter which incorporates the minimum Red Book requirements together

Page 2
http://www.rics.org/newregulationhttp://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=3http://www.rics.org/http://www.irrv.net/http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=1http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=1http://www.irrv.net/http://www.rics.org/http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=3http://www.rics.org/newregulation


3/25


with confirmation that the property has not been inspected, total reliance is made oninformation supplie and, it is preliminary advice to consider whether a loan should be made,which may lead to a full Red Book report in due course. In addition, in the absence of theusual due diligence, the preliminary figure may be subject to change and should not be reliedupon for any contractual purpose.

The Red Book is divided into global and UK standards - I workin the UK, so is it in order for me to ignore the global standards?

The global standards apply throughout the world and are the core of the Red Book - they applyequally in the UK as anywhere else. You are required to apply global valuation standardsunless there is a more specific national practice statement.The UK standards (UKPS 1 to UKPS 5) cover valuation situations, rules and regulations in theUK such as UK listing rules, takeover code, property unit trusts and UK accountingconventions, etc. It is expected that RICS national associations outside the UK will devise theirown standards within the Red Book framework.

My client, a company within an EU country outside of the UK,requires a valuation for the accounts of a UK subsidiary carriedout in accordance with international valuation standards. May I

do this?

On the assumption you hold the necessary qualifications, knowledge and skills (PS 1.5) thematter is dealt with in PS 4.1 which states that:

'Valuations for financial statementsprepared under International Financial ReportingStandards(IFRS) shall be in accordance with the IVSC International Valuation Application1(IVA 1).'

This is published by the International Valuation Standards Committee as part of theInternational Valuation Standards and contains information on International AccountingStandards (IAS) including the important IAS 16 (Property Plant and Equipment), IAS 17(Leases) and IAS 40 (Investment Property).You will report the Market Value under IVA 1 but your client is required under InternationalFinancial Reporting Standards (IFRS) to account for the asset at its 'fair value'. To enable yourclient to do this and to make disclosures required under IAS 16 and IAS 40 your report mustcontain the following information:

- the effective date of the revaluation;- whether the valuer is an external or internal valuer;

- the methods and significant assumptions applied in estimating market value;- 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 lengthterms, or were estimated using other valuation techniques; and

- under IAS 40 the method and significant assumptions applied in determining thevalue of investment property, including a statement whether the determination of fairvalue was supported by market evidence or was more heavily based on otherfactors because of the nature of the property and lack of comparable market data.

You must indicate if you are an internal or external valuer as defined in the glossary to the RedBook.The report must include a statement that the valuation has been prepared in accordance with

IVA 1.You should consider Appendix 6.3 (Reporting valuations under IFRS) which explains thecurrent lack of clarity in the International Standards and the recommendation that when valuing

Page 3
http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=26http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=5http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=18&pageNumber=1http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=171&documentID=13http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=16http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=16http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=171&documentID=13http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=18&pageNumber=1http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=5http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=26


4/25


owner occupied property you should provide valuations on the alternative assumptions thateither it is sold:

- as part of the continuing enterprise in occupation; or- on the assumption that the property is sold following a cessation of the existing

operation.

My client has sent me various plans showing different designs

for a proposed development and asked me to provide valuationsof each when completed and let. Is this advice subject to the Red

Book?

Formerlyone of the exceptions was market and other advice in connection with the design ofdevelopment improvement and conversion schemes and as an element of grant applications.This exception no longer applies and the valuation advice proposed would be within the remitof the Red Book.

Can anyone who is not a chartered surveyor undertake avaluation in accordance with the Red Book?

The rule in PS 1.4 is that:

'Each valuationto which these standards apply must be prepared by, or under thesupervision of, an appropriately qualified member ...'

It would appear from a literal translation of this that only chartered surveyors can undertakeRed Book valuations, but a non-member can carry out a valuation if supervised by a member.However the report has to be signed by the member who accepts responsibility for it (Appendix 6.1(s)). A valuation could be undertaken and signed by a non-member but the client

would not have the protection of disciplinary procedures against the valuer if the valuation wasfound subsequently to be faulty.

May I delegate the inspection and due diligence work for avaluation in accordance with the Red Book to an unqualified

assistant?

Yes you may. Provided you consider this to be appropriate in the circumstances of theinstruction; the assistant is under your supervision; and you take responsibility for the

valuation, but remember as in the previous question that this will require you to sign the report.

My practice is in Wales and it specialises in retail property. Ihave been asked to value an office property in Edinburgh. May I

do this or should I sub-instruct a local valuer?

PS 1.5 states that the member 'must have sufficient current local, national and international (asappropriate) knowledge of the particular market'.If you practise in Wales specialising in a different class of propertyit seems unlikely you would

meet the criteria set out. The safest procedure would be to sub-instruct (with your client'sauthority) a local valuer.

Page 4
http://site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=4http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=14http://site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=5http://site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=5http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=14http://site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=4


5/25


May I instruct another valuer with the required level of expertisewithout first getting my client's approval?

No. Paragraph 3 of the commentary to PS 1.5 states:

'The client's approval must be obtained if the valuer proposes to employ another firmtoprovide some of the valuationsthat are the subject of the instruction.'

Rather than sub-instruct, some valuers prefer their client to instruct the other valuer and thencombine his or her report with their own.

I have been asked to value a property for my client's annualaccounts that I acquired for him nine months ago. Is it in order

for me to do so?

This situation is covered by UKPS 5.3. A valuation for accounts is such a valuation and theRed Book stipulates that if you or your firm negotiated the purchase of a property on behalf of

a client within 12 months preceding the date of valuation you may not undertake a valuationunless another firm unconnected with your firm has provided a valuation of the property at thetime of acquisition or subsequently.

'Where a regulated purpose valuationincludes:(a) one or more propertiesacquired by the client within the twelve months preceding thedate 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 membershall not undertake a regulated purpose valuationof the property, or properties

identified under (a) above, unless another firmunconnected with the member's firmhasprovided a valuationof that propertyfor the client at the time of, or since, the transaction wasagreed.' (UKPS 5.3)

So unless another firm has provided an interim valuation you must wait 12 months beforevaluing. This rule stems from a recommendation in the Carsberg Reportand you cannot getround this by disclosure.

I have been asked by a bank to value a property for mortgagepurposes that I acquired for the bank's customer two months ago.

Is it in order for me to accept this instruction?

You must disclose any previous, current or anticipated involvement with the prospectiveborrower or the property to be valued to the bank (Appendix 4.4, para. 3.4). You mustconsider whether your previous involvement with the property compromises your duty to beindependent and objective. If by accepting the instruction this would create a conflict thatcannot be avoided the instruction should be declined.Providing all this is disclosed to the bank and the bank is comfortable you may accept theinstruction. Banks are often happy to accept such conflicts in the interest of speed and apossible saving on fees.

Can you explain the meaning of 'Chinese walls'?

Page 5
http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=5http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=3http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=3http://site/scripts/documents_info.aspx?categoryID=130&documentID=18&pageNumber=8http://site/scripts/documents_info.aspx?categoryID=130&documentID=18&pageNumber=8http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=3http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=3http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=5


6/25


The Red Book rules are set out in Appendix 1.1, para. 5.4. They can be defined as aprocedure to manage conflicts of interest whereby different parts of a firm are kept separate sothat information does not circulate freely. Chinese walls are unlikely to work withoutconsiderable planning as their management needs to be an established part of a firm's culture.It will be more difficult or may be impossible for smaller firms or offices to operate them.

'RICS has strict guidelines on the minimum standards which must be adopted byorganisations when separating the advisers acting for "conflicting" clients. Any "Chinesewall" 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 extendsto secretarial and other support staff;

- such individuals or teams must be physically separated, at least to the extent ofbeing 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 timeand, if in a writtenform, must be kept secure in separate, locked accommodation tothe satisfaction of the compliance officer, or another senior independent personwithin the firm;

- the compliance officer, or other senior independent person, should oversee thesetting up and maintenance of the "Chinese wall" while it is in operation, adoptingappropriate measures and checks to ensure it is effective. The compliance officer

must have no involvement in either of the instructions, and should be of sufficientstatus within the organisation to be able to operate without hindrance;

- there should be appropriate education and training within the firmon the principlesand practice relating to the management of conflicts of interest.'

A client for whom I have carried out a valuation has asked fordetails of comparables. Some of these are not in the public

domain and are only known to me by working for another client.May I pass on this information?

Where this information is contemporary and not reduced in relevance by age, the answer hasto be no. You might consider giving non-specific information, or asking the first client if youmay release the information. Most clients will be impressed by your confidentiality.

My client wishes to discuss the valuation with me before I signoff. May I do this?

PS 6.11 lays down the conditions upon which preliminary valuation advice is submitted. Yes,you may have a meeting but you must keep very careful notes of any additional information

provided by your client and whether or not that information has affected the final valuation. It isimportant that any discussions do not, and can be shown not to lead to any perception that thevaluer's opinion has been influenced by those discussions other than to correct inaccuracies orthe provision of further information.

I have been asked to value a property for mortgage purposes thatbelonged to my wife's family three years ago. Do I need to

disclose this to the bank?

After three years this is probably irrelevant but it would be safer to make a disclosure.

I have been asked by a client to value an investment property

Page 6
http://site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=8http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=11http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=11http://site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=8


7/25


which he owns for his annual accounts. I find that my firm isacting for the major tenant in an ongoing rent review negotiation.

May I accept the instruction and if so what action must I take?

There is clearly a conflict and whilst you may accept the instruction (by disclosing the positionto both parties and obtaining their confirmation in writing) it would probably be unwise to do so.

I have been asked by a client to value a property for accountspurposes on which my firm gave planning advice to the previous

owner some three years ago. May I accept the instruction?

Providing you have disclosed this previous involvement to your client it seems unlikely that thiswould compromise your independence, integrity and objectivity and there should be no reasonwhy you cannot take on the instruction.

My client wants me to increase my valuation due he says tocommercial pressures from shareholders in the company ofwhich he is the managing director. How should I react to this

request?

You should explain to your client that professionally you can only provide your honest opinionwhich reflects the market at the date of valuation. Unless he can produce relevant informationof which you are unaware you are not able to adjust your valuation. You should record yourdiscussions with your client on the file.

I have undertaken valuation assignments outside my area ofwork but of a class of property with which I am familiar. I

carefully reserach the market and speak to local valuers. Is thissufficient to comply with PS 1.5 Knowledge and skills?

If you refer to the commentary to PS 1.5 this states that if the valuer does not have therequired level of expertise then he or she should decide what assistance is neededassembling and interpreting relevant information from other professionals such as specialistvaluers, accountants and lawyers.

Do I have to obtain my client's written agreement to the terms ofengagement?

Under PS 2.1 the terms of engagement must be confirmed to the client prior to issuing thereport. Clearly it's not practical to insist that the client agrees in writing, but sending two copies,one to sign and return can be helpful. A telephone or e-mail response should be noted on thefile.

I do frequent valuations for the same client. Do I have to send

him written terms of engagement for each instruction?

The best way forward is to have standard terms of engagement to which you can refer when

Page 7
http://site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=5http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=16&pageNumber=1http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=16&pageNumber=1http://site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=5


8/25


you acknowledge the instruction and confirm the fee and timetable. If any special assumptionswere required you could confirm these at the same time.

May I extend the terms of engagement beyond those set out inthe Red Book?

The20 matters referred to in PS 2.1 are the minimum matters that must be agreed. There areother matters that, from a business perspective, you may wish to include such as the date fordelivery of figures, the number and type of report required, etc.

I have been asked by a client to provide a valuation in thecapacity of an independent valuer. There is no such definition in

the Red Book, so what should I do?

Previous editions of the Red Book contained several different definitions some of which wereincluded in statute and regulations. In your instance you need to discuss the precise criteria

required with your client and confirm this in the terms of engagement and check that there isnot a definition already in existence for the required purpose. Remember that the RICS Rulesof Conduct already require you to act with independence, integrity and objectivity.

My client wants me to assume a hypothetical planning consentwhen valuing his property. Is this a special assumption?

This is almost certainly a special assumption particularly if a potential purchaser of theproperty would not make that assumption in the marketplace at the date of valuation.Remember, valuing with special assumptions may only be made if they can reasonably be

regarded as realistic, relevant and valid. If valuing for a bank you would be well advised toinclude a second valuation without the special assumption so that its effect can bedemonstrated.

I have been asked by a client for a 'forced sale value', how shouldI advise him?

Forced sale value as a basis of valuation was abolished some time ago and is a term whichgenerally arises in difficult economic conditions when there are few willing sellers and it isthought that most transactions are by vendors who, for various reasons, are being compelled

to sell.Such sale prices are then considered to be unrepresentative of the market, as invariably theseller is under pressure to achieve a sale as quickly as possible. This is a false assumption.An obligation to sell by a certain date is not necessarily incompatible with achieving marketvalue because of the assumption in the definition which requires the seller to be motivated tosell at the terms available in the market at the valuation date.The degree of pressure on the seller will depend on the consequences for him of not selling onthat date and therefore the discount he would accept. There is nothing to prevent a valuer fromgiving advice in such circumstances and this can generally be achieved by making a specialassumption - for instance, that the marketing period is constrained. This is a commercialjudgment and is more likely to be advice to the vendor reflecting his particular circumstances.Do not use the term 'forced sale value' (PS 2.3).

I value the same property for a client every year. Do I need to

Page 8
http://site/scripts/documents_info.aspx?categoryID=130&documentID=16&pageNumber=1http://www.rics.org/newregulationhttp://www.rics.org/newregulationhttp://site/scripts/documents_info.aspx?categoryID=130&documentID=16&pageNumber=3http://site/scripts/documents_info.aspx?categoryID=130&documentID=16&pageNumber=3http://www.rics.org/newregulationhttp://www.rics.org/newregulationhttp://site/scripts/documents_info.aspx?categoryID=130&documentID=16&pageNumber=1


9/25


inspect it on each occasion?

This is a matter of professional judgment but providing your client confirms that there havebeen no material changes to the property or its locality an annual inspection is unnecessary.However, the terms of engagement must state that this procedure has been agreed and youare relying on the confirmation from your client.

A client has asked me to consider the veracity of a valuationprepared by another valuer, may I do this?

The rule is that a valuer must not review another valuer's work that is intended for publicationor disclosure unless the valuer is in possession of all the facts and information available to thefirst valuer. The reasons for this are obvious. If on the other hand the full facts and informationare not available but a review of files or an audit process is required for internal purposes, thisis acceptable (PS 2.6).

I am rather concerned about the accuracy of a valuation due to aweak market and lack of relevant comparables. May I report a

range of figures?

For some valuations, particularly those prepared for financial statements, a single figure mustbe reported. However, there is nothing to stop the valuer from commenting on the robustnessof his or her figure and the reasons for the potential uncertainty. If reporting to a bank there ismore scope for reporting a higher and lower figure and this could be further illustrated by usingspecial assumptions for different circumstances. Do not use qualifying words such as 'in theregion of' without further comment. GN 5 gives very helpful advice on both identifyinguncertainty and reporting it.

I have just valued a portfolio of properties where I believe thevalue of the entirety is greater than the sum of the individual

properties, should I report the higher figure?

You should report both values: firstly, the individual values for each property and then thevalue of the portfolio as a whole. Portfolios of pubs and hotels dependent on market conditionscan have an aggregate value higher than the sum of the individual parts. Where a portfolio hasbeen valued on the assumption that it would be sold as a single entity the reported marketvalue will be in respect of the whole group and any breakdown of the market value between

the individual properties should be expressed as such with a statement that this notionalapportionment does not necessarily equate to the market value of the interest in any individualproperty (GN 3).

A client has asked me to value a property on the basis of openmarket value; why is this no longer defined?

In line with the RICS policy of supporting International Valuation Standards, open market valuehas been replaced in the Red Book by the international definition of market value (PS 3.2).Open market value as a definition has consequently been withdrawn.

What is the difference between open market value and market

Page 9
http://site/scripts/documents_info.aspx?categoryID=130&documentID=16&pageNumber=6http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=131&documentID=25http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=131&documentID=23http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=17&pageNumber=2http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=17&pageNumber=2http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=131&documentID=23http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=131&documentID=25http://site/scripts/documents_info.aspx?categoryID=130&documentID=16&pageNumber=6


10/25


value?

Whilst the wording is very different and the market value definition considerably shorter thereshould be no difference in a valuation of a property using either definition. A client can beassured that a property valued by reference to open market value would produce the samefigure if valued using the market value definition (UKPS 1.1, para. 8).

It is not unknown in the economic cycle for the market tocollapse and for there to be a complete absence of purchasers.Does the existence of a 'willing purchaser' allow me to ignore

this?

PS 3.2.4 explains that the buyer '... purchases in accordance with the realities of the currentmarket and with current market expectations ...'. For there to be a sale there has to be apurchaser and in reality whatever the state of the market there is always a figure at whichsomebody will deal - remember the present property owner is included among those whoconstitute the market. Also remember that a reverse payment or premium will generally

produce a purchaser.

In the open market value definition the additional bid of a specialpurchaser was specifically excluded. Using the market valuedefinition may I now take special purchasers into account?

It is very important to read the market value definition together with the conceptual frameworkof the IVSC definition that goes with it. PS 3.2 explains that the words 'in an arm's-lengthtransaction' mean that there is no particular or special relationship between the parties thatcould lead to an inflated value because of an element of special value.

The commentary goes on to say that 'hope' or 'marriage value' may only be included to theextent that it would be reflected by prospective purchasers in the general market. This is asimilar approach to the definition of open market value.

Can you please explain the difference between special value andsynergistic value?

Special value is an amount in excess of market value that would be paid by a purchaser forwhom the property had a particular value not shared by others. Examples include an adjoining

owner to the property or a purchaser rolling over Capital Gains Tax.On the other hand synergistic value is the additional value created by the combination of twoor more interests where the value of the combined interest is worth more than the sum of theoriginal interests. This is frequently known as marriage value.

What is the essential difference between existing use value andmarket value?

The major difference is that market value is a pure valuation basis designed to reflect the price

at which a property should sell in the marketplace assuming certain conditions. On the otherhand, existing use value is a basis of valuation designed to reflect the price at which a propertyshould be held in an owner's accounts.

Page 10
http://site/scripts/documents_info.aspx?categoryID=132&documentID=26&pageNumber=1http://site/scripts/documents_info.aspx?categoryID=130&documentID=17&pageNumber=2http://site/scripts/documents_info.aspx?categoryID=130&documentID=17&pageNumber=2http://site/scripts/documents_info.aspx?categoryID=130&documentID=17&pageNumber=2http://site/scripts/documents_info.aspx?categoryID=130&documentID=17&pageNumber=2http://site/scripts/documents_info.aspx?categoryID=132&documentID=26&pageNumber=1


11/25


The definition of existing use value therefore makes additional assumptions to reflect theconcept of the ongoing business - including ignoring development potential, personal planningconsents and contamination that do not affect the continuation of the existing use and forwhich there is no obligation to remedy.The result is that existing use value could be the same, higher or lower than market value. Forexample, a leasehold property held at a low rent but with a complete bar on assignment wouldhave only a limited market value, if any, but if assessing the existing use value the bar onassignment would be ignored and the value would be higher. Conversely, a nursing home withextensive grounds with planning consent for development which could only be implemented bydemolishing the buildings on site would have a higher market value than the existing usevalue. For more detailed advice on the concepts see VIP No. 1 Valuation of Owner-OccupiedProperty for Financial Statements.

Explain when I should use market value and when I should useexisting use value.

Existing use value is the onlybasis for valuation under UK Generally Accepted AccountingPrinciples for non-specialised properties that are owner occupied for the purpose of the entity'sbusiness (UKPS 1.1). Most other valuations are assessed by reference to market value.

Depreciated replacement cost is now reported as market value.Surely depreciated replacement cost is used only when there is

no market, so how can this be?

Many have argued that it was incorrect for RICS to describe depreciated replacement cost asa separate basis of value in previous editions of the Red Book, as it described a method, not adistinct basis. The background to this debate lies in accounting standards.

For many years UK accounting standards have required specialised property, valued usingdepreciated replacement cost, to be separately reported in accounts. The rationale was thatusers of the accounts needed to be aware that the valuations of such specialised assets werenot based on transactional evidence and therefore were potentially less reliable. Anunintended consequence of this was that many people came to think of depreciatedreplacement cost as an alternative to valuation, not merely a different valuation approach.Under International Accounting Standards, no such distinction is made. Under IAS 16 the fairvalue of an asset is normally based on 'market-based evidence' or, in the case of a specialisedasset, it may be assessed using either the income or depreciated replacement cost approach.In other words three different approaches, or methods, may be used to arrive at the requiredbasis. The problem of conveying the reliability of the valuations to users is dealt with by therequirement to make disclosures as to the valuation approach adopted.

Market Value is a concept that simply describes the relationship, motivation and behaviour ofthe hypothetical parties to a transaction. It does not specify or imply a particular method ofvaluation, and like fair value, can be estimated using any of the three different approachesdescribed in IAS 16. Whenever the depreciated replacement cost approach is being used, thevaluer should be ensuring that, as far as possible, all inputs should be based on the market,and not on criteria specific to the actual owner.

A property valued using depreciated replacement costmethodology may have a value for an alternative use that ishigher or lower if the current use were to cease. Do I have to

report this?

Page 11
http://www.isurv.com/site/scripts/download_info.aspx?downloadID=206&fileID=237http://www.isurv.com/site/scripts/download_info.aspx?downloadID=206&fileID=237http://site/scripts/documents_info.aspx?categoryID=132&documentID=26&pageNumber=1http://site/scripts/documents_info.aspx?categoryID=132&documentID=26&pageNumber=1http://www.isurv.com/site/scripts/download_info.aspx?downloadID=206&fileID=237http://www.isurv.com/site/scripts/download_info.aspx?downloadID=206&fileID=237


12/25


Both potential situations should be reported. If the alternative use valuation for the propertycan be readily identified; is commercially and legally feasible; and is materially higher, it shouldbe reported. If the value cannot readily be assessed then a statement that the property mayhave potentially higher value would be sufficient. However, if the value would be materiallylower if the business ceased this should be drawn to the attention of the client (PS 6.7). It isimportant also to state that the alternative use valuation ignores the costs of business closureor any other costs.

What qualifications do I have to report with a valuation based ondepreciated replacement cost?

In the private sector the valuation should be accompanied by a statement that the valuation issubject to the adequate profitability of the business paying due regard to the value of the totalassets employed (PS 6.5).In the public sector the valuation should be accompanied by a statement that it is subject tothe prospect and viability of the continued occupation and use (PS 6.6).In both instances it is up to the client to consider the effect of these qualifications.

Who has the ultimate responsibility for deciding whether aproperty should be valued by depreciated replacement cost?

Firstly, the valuer must be satisfied that it is not practicable to prepare a valuation by any othermethod and, secondly, he or she should agree this with the client.

I value two identical properties in similar locations using thedepreciated replacement cost method of valuation. Should a

difference in output be reflected in my valuations?

In the circumstances you describe, wherethe first property is working to 100% capacityandthe second is only working to 60% capacity, the replacement cost of the properties wouldbe similar but the valuations are made 'subject to the adequate profitability of the businesspaying due regard to the value of the total assetsemployed' (PS 6.5). It is the directors whohave the responsibility to apply this test and therefore they may reduce the value of the secondproperty to reflect this on the grounds of profitability. VIP No. 10 The DepreciatedReplacement Cost Method of Valuation for Financial Reporting, describes the technicalapproach to such valuations.

When undertaking a valuation for accounts under FRS 15(Tangible Fixed Assets) should I make an adjustment in my

valuation for costs of purchase or sale?

FRS 15 requires the reporting of notional directly attributable acquisition costs, where materialto the existing use value. Likewise, where property is surplus to the entity's requirements andvalued on the basis of market value it requires, the amount of expected directly attributableselling costs, where material, should be reported. The Red Book states in UKPS 1.7 that:

'The membermust not include directly attributable acquisition or disposal costs in the

valuation. Where asked by the client to reflect costs these must be stated separately.'

Page 12
http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=7http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=5http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=6http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=5http://www.isurv.com/site/scripts/download_info.aspx?downloadID=207&fileID=238http://www.isurv.com/site/scripts/download_info.aspx?downloadID=207&fileID=238http://site/scripts/documents_info.aspx?categoryID=132&documentID=26&pageNumber=7http://site/scripts/documents_info.aspx?categoryID=132&documentID=26&pageNumber=7http://www.isurv.com/site/scripts/download_info.aspx?downloadID=207&fileID=238http://www.isurv.com/site/scripts/download_info.aspx?downloadID=207&fileID=238http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=5http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=6http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=5http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=7


13/25


I have been asked by a client to provide a fair value for hisannual accounts; what is this?

The term fair value is derived from International Accounting Standards and is the valuationapproach to the measurement of assets and liabilities. It is expressed in most of theInternational Accounting Standards as:

'... the amount for which an asset could be exchanged, or a liability settled, betweenknowledgeable willing parties in an arm's-length transaction.'

Whilst the wording incorporates some of the language of market value, fair value is notsupported by a detailed conceptual framework and is more of a generic term without anyguidance for its application. The International Accounting Standards stipulate that:

'... the fair value of land and buildings is usually determined from market based evidence byappraisal that is normally undertaken by professionally qualified valuers. The fair value ofitems of plant and equipment is usually their market value determined by appraisal.'

This is why the International Valuation Standards and Red Book tell the valuer to report marketvalue.

What is the difference between market value and fair value?

It is difficult to give an explicit answer as although the definition of market value is wellunderstood and explained in detail in the Red Book, fair value has no internationallyrecognised definition or conceptual framework - in spite of being widely used in financialreporting and transfers of business assets.The main distinction from market value is the concept of fairness, i.e. the price must be onethat, taking into account all the circumstances, is fair to the particular parties in a transaction -it can, for example include special value. In contrast market value has no regard to whether

either of the parties regard the price as 'fair', it is simply the price obtainable in the generalmarket.In many cases a 'fair' price will be market price, but this is not always the case. In the contextof accounting standards, some limited additional direction is given. In IAS 16 fair value shouldnormally be based 'on market evidence' and in IAS 40 fair value should reflect 'current marketconditions'.

Is fair value covered by the Red Book?

Appendix 6.3 dealing with valuations under International Reporting Standards deals with the

difficulty of interpreting fair value with reference to IAS 16 and advises that, pendingclarification of fair value, where there is a significant difference in the value of owner-occupiedproperty either on the assumption that it is sold:

- as part of the continuing enterprise in occupation; or- it is sold in isolation after removal of the business in occupation,

market value should be reported on both assumptions (see also PS 3.5).

Can you explain why some valuations are governed byInternational Financial Reporting Standards (IFRS) and some by

UK Generally Accepted Accounting Principles (UK GAAP)?

Page 13
http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=16http://site/scripts/documents_info.aspx?categoryID=130&documentID=17&pageNumber=5http://site/scripts/documents_info.aspx?categoryID=130&documentID=17&pageNumber=5http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=16


14/25


This depends under which rules your client is preparing his accounts. Companies listed on astock exchange within the European Union have to prepare consolidated accounts inaccordance with EU adopted IFRS for accounting periods commencing on or after 1 January2005. In the UK any company not listed on its stock exchange reporting under the CompaniesAct1985 may also prepare its accounts under IFRS.

May I assume a property is free from contamination even if Ibelieve it is not? Is this a special assumption?

Unless you know the property is contaminated you can agree with your client in the terms ofengagement to disregard any potential contamination. However if you suspect that theproperty is contaminated disregarding this would be a special assumption and would have tobe agreed with your client in the terms of engagement and highlighted in your report and anypublished reference to it.

May I agree with my client to disregard any possibility ofcontamination in a property?

Yes, in fact most valuations are undertaken on this basis but usually after the valuer has madesome preliminary enquiries with the owner and/or local authority. You would need to agree thisin your terms of engagement with your client. Possible wording might be as follows:

'In preparing our valuation, unless otherwise advised or our inspection reveals matters tothe contrary, we will make an assumption that no contaminative or potentially contaminativeuse is or has been carried out at the property.

Unless specifically instructed we do not undertake any investigation into the past or presentuses of either the property or any adjoining or nearby land to establish whether there is anypotential for contamination from these uses and will make an assumption that none exist.

Should it subsequently be established that any contamination exists at the property or onadjoining land or that any premises have been or are being put to contaminative use, thismay have a detrimental effect on the value reported.'

If the property was clearly affected by contamination an assumption of absence would involvemaking a special assumption that would need to be agreed with the client.

I value many industrial buildings with corrugated asbestos roofs;how should I qualify my valuation report?

The best advice would be to draw your client's attention to the roof and suggest that he or shemay wish to take specialist advice but that similar properties change hands and there is anacceptance by the market of such properties. Since 2003 owners and occupiers of businessproperty are required to have management plans in place and it would be sensible to ask forthe survey and see what this reveals (Control of Asbestos at Work Regulations 2002). Youshould comment that maintenance, repairs and alterations may be significantly increased dueto the need to take appropriate precautions under the regulations.

To what extent do I need to verify information provided by myclient?

If in your terms of engagement you have agreed to rely on this there should be no need forfurther verification but clearly you should not rely on information that is blatantly incorrect. Youshould record in your report the information supplied, relied on, and the source.

Page 14
http://www.opsi.gov.uk/si/si2002/20022675.htmhttp://www.opsi.gov.uk/si/si2002/20022675.htm


15/25


To what extent may I rely on information supplied by my client'sother advisers, i.e. lawyers, managing agents, etc.?

Again if in your terms of engagement it is agreed that you should do so you can rely on it. Youwould be well advised to schedule in your report your sources of information.

Do I need to read leases?

This depends on your instructions and what you have agreed in your terms of engagement. Ifyou were valuing a property with a considerable number of tenants such as a shopping centreit would be sensible to see a sample lease and likewise if valuing a leasehold interest a reviewof the lease would be good practice. If valuing a large portfolio, particularly for accounts,reading every lease would be impractical and reliance on the client's tenancy schedule wouldbe more normal.

My client has asked me to rely on the floor areas that he has

supplied; may I do this?

Yes, but you should agree this with your client in the terms of engagement and refer to it inyour report. It is good practice to check areas against gross error when conducting yourproperty inspections.

My client having received my report has asked for furtherinformation on the detail behind some of the figures; may I give

him this information?

This is not an uncommon request and clients frequently ask for details of rents and yields, etc.You are perfectly at liberty to provide this information and the format in which you provide it isentirely up to you as it is not covered by the Red Book.

My client says he does not want a long valuation report; may Iwrite him a simple letter and call it an 'informal valuation'?

If your client requires a valuation that comes under the jurisdiction of the Red Book (mostvaluations do - for exceptions see PS 1.2) he will have to receive a report in accordance with

PS 6 of the Red Book. A report that complies with the minimum reporting requirements in PS6.1 can be very brief and need not include building descriptions, photographs, location plans,etc. Valuers are discouraged from describing valuations as 'formal' or 'informal' as these termsmay give rise to the misunderstanding of unstated assumptions applicable in either case. Itshould be noted that a valuer is just as liable for an opinion expressed informally as formally.The Financial Services Authority Listing Rules allow a condensed report in certaincircumstances (UK appendix 2.1, para 2.2).

If my valuation were made using a 'special assumption' howshould I deal with this in my report?

PS 6.4 states that the special assumption must be set out in full together with a statement thatit has been agreed with the client. Remember that special assumptions may only be made if

Page 15
http://site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=2http://site/scripts/documents_info.aspx?categoryID=130&documentID=20http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=1http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=1http://site/scripts/documents_info.aspx?categoryID=132&documentID=27&pageNumber=7http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=4http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=4http://site/scripts/documents_info.aspx?categoryID=132&documentID=27&pageNumber=7http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=1http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=1http://site/scripts/documents_info.aspx?categoryID=130&documentID=20http://site/scripts/documents_info.aspx?categoryID=130&documentID=15&pageNumber=2


16/25


they are realistic, relevant and valid for the particular circumstances of the valuation (PS 2.2).Again, depending on circumstances, it is worth considering providing a valuation without thespecial assumption to show the effect of it, particularly if reporting to a bank.Remember also that any published reference to the report must include reference to thespecial assumption. Valuations prepared for financial statements are unlikely to incorporatespecial assumptions.

How do I report a property with a 'negative value'?

Negative values do occur from time to time particularly in the case of leasehold interests orcontaminated property. It is important to remember that they must be shown separately in thereport and not aggregated with properties showing a positive value. (PS 6.8)

How should I incorporate the valuation of a sub-valuer?

The appointment of another valuer with specialist skills needs to be agreed in the terms ofengagement with the client. You may prefer that your client instructs him or her directly but

either way a valuation from another valuer incorporated in a report needs to be accompaniedby a statement that it has been prepared in accordance with the Red Book or such otherstandards as may be appropriate (PS 6.10).

May I submit a preliminary report to my client?

This procedure needs to be dealt with very carefully. It is quite in order to do so providing thereport includes the information that:

- it is a draft subject to the completion of the final report;

- the advice is provided for the client's internal purposes only; and- the draft is on no account to be published or disclosed.

If, as is likely, discussions with the client take place after submission of the preliminary report,it is vitally important to keep clear file notes including noting any additional informationprovided or suggestions made and how these affected the final valuation (PS 6.11).

My client says he may wish to refer to my valuation report in hispublished accounts; what action and consent do I have to give

him?

The procedure for thisis discussedunder publication statementswith suggested suitablewording (PS 6.12 and Appendix 6.2).You must submit with your report a suitable draft statement for your client to include in thenotes to his accounts. The precise wording will depend on the purpose of the valuation andmay be governed by rules issued by local regulatory bodies.You should ensure that you see a final proof to ensure the wording is correct and you shouldreturn this to your client if correct with a letter consenting to the reference to your name andreport appearing in the document. If the report contains any special assumptions or anydepartures from the Red Book then it is essential that these should be included in thereference.

What is an assessment of worth?

Page 16
http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=16&pageNumber=2http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=8http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=10http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=11http://site/scripts/documents_info.aspx?categoryID=194&documentID=1630&pageNumber=6http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=12http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=15http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=15http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=12http://site/scripts/documents_info.aspx?categoryID=194&documentID=1630&pageNumber=6http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=11http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=10http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=8http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=16&pageNumber=2


17/25


This is a basis of value defined in the Red Book as:

'The value of propertyto a particular owner investor, or class of investors, for identifiedinvestment or operational objectives.'

Worth is more a tool for analysis than a valuation. Its origins go back to the Mallinson WorkingParty on commercial property valuation that recommended 'the development of a definition ofworth as a valuation basis inviting the Investment Property Forum to lead research intotechniques of assessing and expressing worth'. Worth may be the same as the amount thatcould be realised from the sale of an asset, this value is specific to a particular party andreflects the benefits received by holding the asset. See also RICS Information PaperCalculation of Worth.

How do I report an assessment of worth?

If you provide an assessment the important matter is that under no circumstances should it bedescribed as a valuation and a statement must be made that the figure is not a market value (PS 3.4).

Who may sign a valuation report?

The rule is that the person taking responsibility for the report must sign it. It is not acceptableto sign with the name of a firm but the person taking responsibility may sign on behalf of thefirm (Appendix 6.1(s)).

Should my report be dated the same date as the valuation date?

The definition of market value is time specific as of a given date. Markets rarely stand still and

a valuation of a property as of today in theory could be different from one made yesterday or tobe made tomorrow. A possible exception to this would be if a specialist property lenderrequested exit values on expiry of a loan or in the case of lease financing transactions - insuch cases the requirement for clear agreed assumptions is paramount.If the valuation date is the date of the report the date must be specifically referred to in thereport to avoid any confusion. Alternatively a statement that the date of valuation is the date ofreport is acceptable.

'If there has been a material change in market conditions, or the circumstances of a propertyor portfoliobetween an earlier date of valuationand the date of the report, the membermustdraw attention to this.' (Appendix 6.1(g))

I valued a property for a client for accounts purposes 12 monthsago. He has asked me for an update for his year-end accounts.May I do a simple letter referring to the previous valuation and

confirm my latest opinion of value?

You should agree your terms of engagement for the new instruction in the usual wayconfirming that you will be making the assumption that there have been no material changes tothe property and the area. Your report should contain this assumption and it would be in orderto refer to your previous report without repeating the minimum contents in PS 6.1.

What disclosures are required in a report for a regulated purpose

Page 17
http://www.isurv.com/site/scripts/download_info.aspx?downloadID=138&fileID=164http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=17&pageNumber=4http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=14http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=14http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=1http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=1http://site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=14http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=14http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=17&pageNumber=4http://www.isurv.com/site/scripts/download_info.aspx?downloadID=138&fileID=164


18/25


valuation?

'Where a valuationis a regulated purpose valuationthe membershall state all of thefollowing in the reportand any draft published reference to it:

(a) the length of time the membercontinuously has been the signatory to valuationsprovided to the client for the same purpose as the report, together with the length of time

the member's firmhas continuously been carrying out that valuationinstruction for theclient;(b) the extent and duration of the relationship of the member's firmwith the client;(c) 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 firmexpressed as one of thefollowing:

- less than 5%; or- if more than 5%, an indication of the proportion within a range of 5 percentage

points; and(d) where, since the end of the last financial year, it is anticipated that there will be amaterial increase in the proportion of the fees payable, or likely to be payable by the

client, the membershall include a further statement to that effect in addition to (c) above.'(UKPS5.4)

Why are there so many disclosures?

The idea is to enable a third party reading the report or any reference to it to be alerted to thelength of time that the valuer has been dealing with the instruction and consider whether thevaluer's firm is unduly dependent on the client for its income. Although the RICS Rules ofConduct require a member to act with integrity and avoid conflicts of interest, there is norequirement to disclose the working relationship with the client. It is all part of the movementtowards greater transparency and the maintenance of public confidence in the valuation

process as advocated by the Carsberg working party.

Does the Red Book apply to commercial property mortgagevaluations?

Yes, these were brought within the ambit of the Red Book in the 4th edition. Previously bankshad always wanted to retain the right to instruct valuers on any basis then thought appropriate.Secured lending valuations are dealt with in PS 4.2.

Are there other matters that should be included in a securedlending report other than the 19 matters in PS 6.1?

If you refer to Appendix 4.4, para.5 you will find a list ofsix other matters that would normallybe included in a report. These include: disclosure of any involvement identified in the terms ofengagement, valuation methodology, transaction history and suitability of the property forsecured lending.Para. 5.2 contains a list of other matters which, subject to the particular circumstances, may beappropriate, including advice on alternative uses, occupational demand, repairs, environmentalhazards, marketability of the property, comparables, etc.

There is a further list of matters which may be addressed for different types of property, i.e.owner-occupied, investment property, property which is to be developed or refurbished, etc.,together with some typical special assumptions.

Page 18
http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=4http://site/scripts/documents_info.aspx?categoryID=130&documentID=18&pageNumber=2http://site/scripts/documents_info.aspx?categoryID=130&documentID=18&pageNumber=8http://site/scripts/documents_info.aspx?categoryID=130&documentID=18&pageNumber=8http://site/scripts/documents_info.aspx?categoryID=130&documentID=18&pageNumber=2http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=4


19/25


The borrower has asked for a copy of the report I sent to thelender; may I make this available to him?

The lending institution is your client having instructed you to undertake the valuation albeit thatthe borrower is probably paying for it. The correct procedure is for the lending institution toeither pass a copy of the report to the borrower if they wish to or to ask you to send it to theborrower on their behalf.

The lender has asked his solicitors to send me title documents toreview and to confirm that nothing therein affects my valuation.

Am I allowed to comment not being a qualified lawyer?

The title documents contain the definitive information on the property such as plot plans, leaseextracts, details of rights of way, etc. It is a normal procedure to be asked to check that theinformation you have used for your valuation coincides with the title. You do not need to be aqualified lawyer for this and can always ask for an explanation from the solicitors on any matterthat is unclear.

I still get requests from banks for valuations using estimatedrealisation price and estimated restricted realisation price as a

basis. What action should I take?

All the major banks supported the abolition of these bases but it takes them some time tochange their internal rules. The action you should take is to inform the instructing bank thattheir letter is out of date and ask them to check with their head office.

What is the appropriate valuation basis when valuing commercialproperty for secured lending?

PS 4.2, para. 2 stipulates that valuations for secured lending shall normally be on the basis ofmarket value except when otherwise governed by law or statute.

The expression 'forced sale value' is still used yet the Red Booksays (PS 2.3) it must not be used, but what am I to do if clients

ask for it?

The banks were anxious to abolish this expression because a forced sale assumed anunreasonable period in which to make a sale. This was considered to be in conflict with thebanks' duty of care to the borrower and other creditors.A client asking for advice on the basis of a forced sale is really asking what will be thediminution in market value if the sale period is unreasonable which would be a specialassumption. If this advice is required it would be sensible to understand the circumstances inwhich it is required and explain that if the vendor is willing to accept a price below the marketvalue a quick sale is more likely.

Is the RICS HomeBuyer Survey and Valuation covered by theRed Book?

Page 19
http://site/scripts/documents_info.aspx?categoryID=130&documentID=18&pageNumber=2http://site/scripts/documents_info.aspx?categoryID=130&documentID=18&pageNumber=2


20/25


UKPS 4.1 provides that the HSV service procedures take precedence over the Red Book.

'Members who provide the HSV Service must comply with the practice notes published byRICS Books. In particular the standard documentation and reportform must be used withoutalteration as set out in the second edition practice notes.' (UKPS 4.1, para. 3)

What is a regulated purpose valuation?

There are valuations that although provided for a client may be relied upon by third parties.The majority of valuations will come under this heading with the important exception ofvaluations for secured lending. The full list of the five valuations is contained in UKPS 5.1 andincludes valuations for financial statements, for inclusion in prospectuses and circulars to beissued by UK companies, valuations in connection with takeovers and mergers, valuations forcollective investment schemes and for unregulated property unit trusts.

What is a Financial Statement?

This is defined in the glossary to the Red Book as:

'Writtenstatements of the financial position of a person or a corporate entity, and formalfinancial records of prescribed content and form. These are published to provide informationto a wide variety of unspecified third partyusers. Financial statementscarry a measure ofpublic accountability that is developed within a regulatory framework of accountingstandards and the law.'

I am a sole principal and am in some difficulty in complyingwith the (UKPS 5.2) requirement for rotation of personnel. What

should I do?

The Red Book deals with this problem and makes a suggestion that to comply with theprinciples of the statement it would be permissible for you to arrange for a periodic review ofthe valuation at intervals of not more than seven years. This would demonstrate that you weretaking steps to ensure that objectivity was maintained and thus retain the confidence of thirdparties. Remember that if you adopt this policy it must be included in your terms ofengagement.

I understand I may not undertake the valuation of a property for12 months if my firm has received an introductory fee or

negotiated the purchase on behalf of a client. Can you pleaseexplain this?

Firstly, this restriction only applies to regulated purpose valuations. You could (if they werehappy after you had made full disclosure of your firm's involvement) undertake a valuation fora bank. If you were undertaking a regulated purpose valuation it is highly likely this would berelied upon by somebody other than the entity commissioning it, i.e. a third party.The idea behind this restriction is to remove any threat to objectivity and the perception that avaluer is unlikely to contradict or disagree with previous advice which his firm had given. Thisrestriction would not apply if your firm had acted for the vendor of the property and received afee although you would need to disclose this.

I understand I have to make certain disclosures in any report

Page 20
http://site/scripts/documents_info.aspx?categoryID=132&documentID=29&pageNumber=1http://site/scripts/documents_info.aspx?categoryID=132&documentID=29&pageNumber=1http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=1http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=171&documentID=13http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=171&documentID=13http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=1http://site/scripts/documents_info.aspx?categoryID=132&documentID=29&pageNumber=1http://site/scripts/documents_info.aspx?categoryID=132&documentID=29&pageNumber=1


21/25


when undertaking a regulated purpose valuation. What are these?

These are set out in UKPS 5.4 and in summary are as follows:

1. the length of time the valuer has been continuously responsible for the valuationinstruction;

2. the length of time the valuer's firm has been undertaking the valuation instruction;

3. the extent and duration of the relationship between the valuer's firm and theclient; and

4. the fee earning relationship between the valuer's firm and the client expressed in5% bands to total turnover.

Remember that it is not only the report in which these disclosures have to be made but also inany published reference to it.

Do I need to refer to the disclosures in my terms of engagement?

In UKPS 5.2 the only regulated purpose valuation matter that has to be included in the terms

of engagement is a statement of the firm's policy on the rotation of the valuer who acceptsresponsibility for those valuations and a statement of the quality control procedures that are inplace. However, it would be sensible to state in your terms of engagement that whenundertaking a regulated purpose valuation you are required by RICS to state certaindisclosures in your report.

Are valuations for SIPPS (Self Invested Pension Plans) regulatedpurpose valuations?

No. A SIPP is a tax approved scheme that is not otherwise regulated and is therefore not a

regulated purpose valuation.

My client is a big international firm with many subsidiaries forwhom my firm acts throughout the world and researching all thefees paid or about to be paid is almost impossible. How detailed

do my enquiries need to be to conform to Disclosure (c)?

This was always envisaged to be a potential problem and is dealt with in some detail in UKPS5.4. It acknowledges that it is impossible to establish and evaluate every relationship but it is

nonetheless the valuer's responsibility to make reasonable enquiries and to ensure that theprinciples of the statement are adhered to. It also points out that it is frequently the valuer'scommercial relationship with a party other than the instructing client that could create aperceived threat to independence.Where there is a material connection or relationship with the client the disclosures relate to therelationship of the valuer's firm with all the parties involved and the aggregate fees earnedfrom those parties. UKPS 5.4, para. 8 gives examples of parties other than the instructingparty which should be taken into account in making the disclosure, including:

- subsidiaries of an instructing holding company;- where instructions are from a subsidiary company, those other companies

connected by the same holding company; or

- a third party issuing valuation instructions as agent for different legal entities, forexample, the manager of a property fund.

The onus is on the valuer to make adequate enquiries bearing in mind the size and nature of

Page 21
http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=4http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=2http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=4http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=4http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=4http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=4http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=4http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=4http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=2http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=4


22/25


the valuation instruction.

How detailed does the extent and duration relationship disclosure((b)) need to be?

This is dealt with in UKPS 5.4, para. 5 which says members are not required to provide acomprehensive 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 therelationship, is all that is required. If there is no relationship, other than the valuation instructionin question, a statement to that effect should be made. There is also a requirement to keep anote of the enquiries made and the source of the information which should be kept on file.

Do the regulated purpose valuation disclosures have to beincluded in any published reference to the valuation, for example

in my client?s accounts?

Yes. UKPS 5.4 states 'where a valuation is a regulated purpose valuationthe member shallstate all of the following in the report and any draft published reference to it'. It then goes on tolist the disclosures. Remember you will have to incorporate in the same reference thosematters referred to in Appendix 6.2.

Valuations of property held in pension fund schemes is notincluded in the list of regulated purpose valuations in UK PS 5.1.

Are these valuations excluded?

If the pension scheme is within the regulations produced by the Financial Services Authority

then it is clearly a regulated purpose valuation. Alternatively if the pension scheme is run byan entity incorporated as a company, subject to the Company's Act, and the valuation is forfinancial statements, it would be a regulated purpose valuation.

Why do valuations need to be monitored?

RICS through itsRules of Conduct and the Red Book imposes on its members the obligationto act with integrity, objectivity and independence. However, fears were raised, particularly in astudy published by the Universities of Reading and Nottingham Trent, that clients might be in aposition to influence their valuers. This fear was exacerbated by various scandals in theauditing world mainly concerning American companies where auditors were accused of having

cosy relationships with the management of public companies and not carrying out rigorousaudits. This was put down to the lucrative fees charged for non-audit work from the sameclients.RICS in anticipation of potential problems, and what was known as the 'moral hazard' facingvaluers asked Sir Bryan Carsberg, a chartered accountant and former head of the Office ofFair Trading, to chair a working party to consider the valuation process in a number of areasparticularly the maintenance of confidence in valuations and the reliability of the system byclients and others using or affected by them.Recommendation 17 of the Carsberg Reportread:

'RICS should create a Valuation Monitoring Committee to create and manage a Review andMonitoring System in accordance with the principles set out, and make amendments to theRed Book to enforce the system.'

From this recommendation RICS developed the concept of regulated purpose valuations and

Page 22
http://site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=4http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=4http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=15http://www.rics.org/newregulationhttp://www.rics.org/newregulationhttp://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=20&pageNumber=15http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=4http://site/scripts/documents_info.aspx?categoryID=132&documentID=30&pageNumber=4


23/25


the associated disclosures and procedures for monitoring.

Which valuations are subject to the monitoring process?

The original list comprised the five valuations set out in UKPS 5 as follows:

1. Valuations for Financial Statements;

2. Valuations for incorporation into Listing Particulars and Circulars;3. Valuations in connection with Takeovers and Mergers;4. Valuations for Authorised Unit Trusts;5. Valuations for Unregulated Property Unit Trusts.

These valuations all might be relied upon by third parties other than those to whom thevaluation report is addressed. However RICS is to extend monitoring to all valuations.

How are valuers selected to be monitored?

Members are asked whether they have undertaken any regulated purpose valuations in the

previous 12 months. Those that reply positively will be picked at random for the monitoringprocess.

Will the monitoring process involve consideration of thevaluation produced?

The purpose of the exercise is to monitor whether the member has complied with therequirements of the Red Book with special emphasis on compliance with the requirements ofUKPS 5. It is not within the remit of the monitoring exercise to consider or comment upon theaccuracy of the valuations produced.

Where does the monitoring take place?

This will be in the valuer's office.

Is the valuer interviewed or is it just an inspection of the file?

The valuer will be asked to present his or her file for inspection which will invariably result in

some dialogue.

What guarantees does the valuer have that the file will remainconfidential?

The monitor will give a signed undertaking that the information obtained during the monitoringexercise will be used by RICS solely for the purpose of the administration of the institution'sconduct and disciplinary regulations. It will not be disclosed to any other party, including RICSstaff members, not concerned with the administration of the regulations. In the event of anydisciplinary action taken by RICS against the member, the identity of the client and the

properties will be removed from documentation submitted to any disciplinary panel.

Page 23
http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=30


24/25


What are the penalties if the valuer does not pass the inspection?

If the failure is due to minor breaches these will be discussed with the valuer who will have theopportunity to comment and no further action will be taken. On the other hand, seriousbreaches will be discussed with the valuer and referred to the Head of Regulation forconsideration.

My client has asked me to prepare a valuation for probatepurposes. What should I give him?

He undoubtedly requires a valuation for inheritance tax. You should, when confirminginstructions, make it clear that since you understand the valuation is required as part of theprocedure for obtaining a Grant of Probate the basis of valuation will be in accordance with thestatutory definition.

I am frequently asked by clients seeking valuations for capital

gains tax or inheritance tax to provide high or low valuations tosuit their particular taxation circumstances. How should I dealwith such requests?

If you are approached to produce what is sometimes known as 'a made to measure valuation'you should explain that you are bound by the RICS Code of Conduct to act with'independence, integrity and objectivity' and you can only provide your honest view inaccordance with the statutory definition and case law. You should also explain to your clientthat property valuations are subject to scrutiny by district valuers on behalf of HM Revenueand Customs and if this leads to negotiation which results in a materially different taxassessment there could be a claim for interest or other penalties.

Surely every valuation is subject to a range and in practice Icould provide a bottom of the range figure for inheritance taxand a top of the range figure for capital gains tax if that was

appropriate?

This is a matter of professional judgment but you must act in accordance with the RICSRulesof Conduct. The fact of the matter is that the same property valued at the same date for eitherinheritance tax or capital gains tax should be at the same figure. In some cases statute law

provides that the same figure shall be adopted.

What is the correct basis of valuation to use when advising acharity on the purchase of a property?

There is no basis of valuation laid down in the various statutes or in the Charity Commissionadvice but as a chartered surveyor is required to carry out the report it clearly envisagesmarket value as defined in PS 3.2.

I am advising a charity on the purchase of a freehold property onwhich they hold a lease and the price they are paying is above

market value. How should I advise them?

Page 24
http://www.rics.org/newregulationhttp://www.rics.org/newregulationhttp://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=17&pageNumber=2http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=130&documentID=17&pageNumber=2http://www.rics.org/newregulationhttp://www.rics.org/newregulation


25/25


You should provide the trustees with the market value but separately advise them on the worthto the charity and the reasons for proposing to pay in excess of Market Value.

Are valuations prepared for local authority accounts regulatedpurpose valuations?

No, they are covered by their own SORP (Statement of Recommended Practice) which is dealtwith in UKPS 1.12.
http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=26&pageNumber=12http://www.isurv.com/site/scripts/documents_info.aspx?categoryID=132&documentID=26&pageNumber=12

copy of faqs from the guide to the red book

Documents