What is the Red Book?
The RICS Valuation - Global Standards (2021) effective 31 Jan 22
Global Standards - UK Supplement (2018) - effective 14 Jan 2019
How is the Red Book structured?
Intro Glossary 2x Professional Standards (PS1, PS2) 5x Valuation technical and performance standards (VPS1 - 5) 10x Valuation applications (VPGA 1 - 10)
What refinements were made in the latest Red Book updates?
- More documented terms of engagement for when exceptions are applied to Valuation standards
- Enhanced focus on ESG
- Reflect feedback and evolving needs
What are the focuses for the three main types of standard in the Red Book?
Professional standards - ethics, conduct, competence, etc.
Technical standards - conventions, common definitions and approaches
Performance standards - analysis, objectivity and rigour
The standards of what other body does the Red Book incorporate?
The International Valuation Standards Council
In what instances does the Red Book apply and not apply?
Under PS1 of the Global Standards:
PS1 and PS2 apply to all members regardless of valuation type - no exemptions.
Exemptions for VPS 1-5 include:
- Agency or brokerage services
- Acting as an expert witness
- Statutory valuations, e.g. lease extensions
- Internal valuations (without liability)
- Negotiations
What does PS1 of the Red Book cover?
PS1 - Compliance with standards including within firms, with international standards, jurisdictions and departures / exemptions
What does PS2 of the Red Book cover?
- Professional and ethical standards
- Qualification and competence
- Conflicts and objectivity
- Disclosures
- Reviewing other valuers’ work
- Terms of engagement
- Responsibility for the valuation
What are the five VPS in the red book?
VPS1. Terms of engagement VPS2. Inspections, investigations and records VPS3. Reports VPS4. Bases of value and assumptions VPS5. Approaches and methods
What are the 10 VPGA (Valuation practice guidance - applications)?
VPGA 1 - Inclusion in financial statements VPGA 2 - Interest for secured lending VPGA 3 - Businesses and interests VPGA 4 - Trade related properties VPGA 5 - Plant and Equipment VPGA 6 - Intangible Assets VPGA 7 - Personal property VPGA 8 - Real property investments VPGA 9 - Portfolios VPGA 10 - Matters creating uncertainty
What RICS guidance exists regarding comparable evidence?
Guidance note: Comparable Evidence in Real Estate Valuation, 1st Edition (2019)
What is the purpose of the guidance note Comparable Evidence in Real Estate Valuation?
- Outline the principles of using comps
- Encourage consistency in the use of comps
- Address issues of availability and use of comparable evidence
- Consider potential sources of comparable evidence
What are the principles behind using comparable evidence as a basis for valuation?
The economic principle of substitution is well-established. A buyer would not pay more than the cost of acquiring a satisfactory subsitute.
What are the factors that make up ideal comparable evidence?
- Multiple transactions
- Similarity to the item being valued
- Recent
- Verifiable
- Arm’s length
- Result of underlying demand - i.e. enough potential buyers
What are the three main valuation approaches outlined in VPS 5?
- Market approach - using comparables
- Income approach - capitalising income
- Cost approach - cost of purchase / creation / construction
What are Scarett’s five methods?
- Comparative method - most commonly used
- Investment method - income-generating assets
- Residual method - development sites
- Profits method - used for pubs, hotels etc
- Contractor/cost method - last resort, unreliable
Which valuation standard deals with future projected valuations?
Valuation Performance Standard 4 -Bases of value, assumptions and special assumptions
If a real estate asset is let as an investment, what factors would impact the value and should be considered in comparables?
- Lease terms
- Unexpired term
- Break options
- Covenant strength
- Rent reviews
What types of market evidence are there?
- Direct transactional evidence
- Publicly-available information
- Databases
- Asking prices - use with caution
- Historic evidence
What is the hierarchy of comparable evidence?
Cat A - direct comparables
Cat B - general market data
Cat C - other sources (e.g. from other locations and types of asset)
What details should be collected regarding comparables?
Address Property type Leasehold/freehold details Location Lease terms Description and specification Area / size Data of transaction Sale / rent price Price per unit of measurement Source of information Commentary Date collected/confirmed
How might you consider making adjustments on the basis of condition?
An adjustment could be made based on the cost to bring the worse property up to the standard of the better property.
Care is needed in this approach as in practice, a purchaser may also factor in uncertainty, inconvenience, time to renovate, etc. Valuer should consider how a purchaser would act.
How should you treat shortages of comparable evidence?
Lack of evidence should not preclude a valuation from being done but more reliant on the skills of the valuer.
Do not shy away from reporting material uncertainty and it should be disclosed.
What standards exist around valuing BTR assets?
RICS Guidance Note - Valuing residential property purpose built for renting (1st Edition), 2018
