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Valuation Standards and the Red Book 14th April 2008 Moscow Andrew Renshaw FRICS

Valuation Standards and the Red Book 14th April 2008 Moscow Andrew Renshaw FRICS Head of Valuation Jones Lang LaSalle, London. Why have Global Valuation Standards?. Valuers supply global clients: Banks, Investment Funds, Corporate Entities

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Valuation Standards and the Red Book 14th April 2008 Moscow Andrew Renshaw FRICS

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  1. Valuation Standards and the Red Book 14th April 2008 Moscow Andrew Renshaw FRICS Head of Valuation Jones Lang LaSalle, London

  2. Why have Global Valuation Standards?

  3. Valuers supply global clients: Banks, Investment Funds, Corporate Entities • Clients need consistency of service wherever they operate worldwide • Real Estate is a global industry • National boundaries result in different legal requirements- but basic “rules of engagement” the same worldwide.

  4. Effective performance measurement is a MUST Investors and shareholders demand up-to-date information on their assets Valuation underpins: Collective Real Estate investment vehicle – Increased frequency of revaluation- in some cases quarterly revaluation now in place Financial reporting- Global financial reporting practices changing driven by fair value revolution (esp. US) Banking-debt securitisation has led drive to revalue portfolios Many other transactions such as company flotations (IPO) Valuation of Increasing Importance

  5. Public confidence in valuation is essential Transaction volumes in European Real Estate markets (2007) totalled Euro244bn Most of this underpinned by valuations Huge amounts of public and private equity Robust standards must form the basis of public confidence Trust and Public Confidence

  6. RICS and Valuation • RICS represents 35,000 valuation professionals in 50 National • Associations worldwide • RICS is the world’s leading mark of quality in valuation: Education, • Standards, Regulation • Education: Rigorous entry requirements - 7 core areas of technical • expertise and 10 defined business competencies, demanding lifelong • learning • Regulation: Work of all members strictly regulated by these RICS • standards • Standards: “The Red Book”- fully compliant with International Valuation • Standards and constantly updated to reflect emerging practice, • Guidance on latest valuation methods, Global rules of conduct for • members and Firms

  7. IVSC first established in 1981 by 2 states. Now contribution from 50 member states IVS sets the common governing definitions and principles of valuation practice, that are increasing demanded by the market. IVSC 8th Edition 2007 published August 2007 RICS Red Book reflects the requirements of the IVS IVSC currently restructuring to provide standards for all assets – tangible and intangible International Valuation Standards 8

  8. Introduction • Originally introduced in 1974 the fifth edition came into effect on 1 May 2003 and the sixth edition on 1 January 2008 (including non-English language versions) • Contains global and local standards • Deals with practice standards and not methodology • Free to all RICS members online www.rics.org/redbook, www.rics.org/redbook, www.rics.org/redbook www.rics.org

  9. Global Standards • The RICS Rules of Conduct were revised in 2007 • Three new standards have been introduced to deal with the status and application of the Valuation Standards • Fair Value is introduced as a basis of valuation • The links with IVS, and international definitions have been strengthened by revising the standards to incorporate IVS definitions and applications • The format of the book has changed to make it smaller and easier to navigate Reasons for the sixth edition (global)

  10. TRANSLATIONS: Red Book is currently available online in Russian, Chinese, German and French. Soon to follow, translations in: Dutch, Spanish and Italian. LOCALISATION: National Material will be added over time. This will be done in co-ordination with local standards setters wherever appropriate. Developing the RICS Red Book Worldwide

  11. Introduction Glossary Practice Statements (Global) Guidance Notes (Global) Practice Statements (National) Guidance Notes (National) RICS Red Book- The Structure

  12. Purpose of the standards • International Valuation Standards (IVS) • Enforcement of the standards • Arrangement of the standards • Amendments and exposure drafts Introduction

  13. Contains only words and terms that are used in RICS standards IVS definitions adopted Glossary

  14. PS 1. Compliance and ethical requirements PS 2. Agreement of Terms of Engagement PS 3. Bases of Value PS 4. Applications PS 5. Investigations PS 6. Valuation reports The Global Practice Statements

  15. Global Practice Statements PS 1 Compliance and ethical requirements 16

  16. PS 1.1 Compliance with these standards PS 1.2 Exceptions PS 1.3 Departures PS 1.4 Qualifications of the valuer PS 1.5 Knowledge and skills PS 1.6 Independence and objectivity PS 1.7 Additional criteria for independence Compliance with these standards – PS 1

  17. The status of the standards • RICS’ national practice statements • Compliance with other valuation standards • Guidance Notes • Monitoring compliance with the standards Compliance– PS 1.1

  18. Exceptions – PS 1.2 Advice during litigation Arbitration and similar disputes During negotiations Internal valuations Certain agency or brokerage work Antiques, etc. separately valued Departures – PS 1.3 Exceptions and departures

  19. Valuations under Standards must have an appropriately qualified • member taking responsibility for them • Must have experience, knowledge, skills AND the ability to act • with independence and objectivity Qualifying as a Valuer – PS 1.4 & 1.5

  20. Achieved by valuer, (and the valuer’s firm) : Complying with the Rules of Conduct Acting with independence, integrity and objectivity Maintaining confidentiality Avoiding conflicts Independence and objectivity – PS 1.6 & 1.7

  21. Agreement of Terms of Engagement –PS 2 PS 2.1 Provides a list of matters that must be referred to in the Terms of Engagement www.rics.org

  22. Assumptions All valuations are subject to assumptions No such thing as a “standard” assumption which can be implied without being stated Made where reasonable for a valuer to accept something as fact without specific investigation Terms of Engagement

  23. All now recognised globally: Market Value Market Rent Worth and Investment Value Fair Value Bases of Valuation – PS 3

  24. Bases of Valuation - 1 • International definition in Red Book since 1995 • Market Value (PS 3.2) • DRC is a method of valuation NOT a basis

  25. Market Rent Definition: Modified Market Value with additional assumption Bases of Valuation - 2

  26. Worth and investment value • Definition: • Value specific to a particular party. It may differ from Market Value Bases of valuation - 3

  27. Fair Value • Definition: • May use assumptions that differ from MV Bases of Valuation - 4

  28. Extent of inspection and investigation (if any) depends on the terms of reference • Verification of information Investigations – PS 5

  29. Some important points: • Signatory must be an individual (Appendix 6.1.(s)) • Simplified list of mandatory contents • Formal/Informal • Reports not certificates • Draft reports Reports – PS 6

  30. All opinions of value have a degree of uncertainty GN 5 “Valuation Uncertainty” Reports – Valuation Uncertainty - 1

  31. Reports – Valuation Uncertainty - 2 • Identifying Uncertainty • Nature of property or location • Restrictions on enquiries or information given • Method of valuation • Hope value • Legal changes • Market instability

  32. Reports – Valuation Uncertainty - 3 • Reporting Uncertainty • Research indicates that clients do not want a scientific • statement of uncertainty • Limited to drawing attention to the uncertainty, its cause, • and the degree to which it is reflected • Most valuations have to be a single figure • Consider sensitivity analysis

  33. Reports – Valuation Uncertainty - 4 • Uncertainty – WARNINGS • Make explicit comment on material uncertainty • The existence of material uncertainty is not a licence • to determine a valuation figure different from that • which represents the Valuer’s honest opinion

  34. Guidance Notes • GN 1 Trade Related Property Valuations • GN 2 Plant & Equipment • GN 3 Valuations of Portfolios and Groups of • Properties • GN 4 Mineral Bearing Land and Waste Management • Sites • GN 5 Valuation Uncertainty

  35. Things to remember about the Red Book…… It applies wherever you are practising Compliant with International Valuation Standards Reinforces the RICS’ Rules of Conduct Ethical issues focus on independence and avoidance of conflict Practice statements are specific numbered rule Summary

  36. To the RICS Russian Red Book Committee: Igor Artemenkov FRICS (Chairman RICS Rossia) Andrey Kuzmin (DTZ) Alexander Yakovlev (DTZ) Anna Sorokina (C&W) Dmitry Romanov MRICS (JLL) Robert Mayhew MRICS (JLL) For Russian translation of RICS Valuation Standards (The Red Book): www.rics.org/redbook Thank you ...

  37. Introducing the RICS Red Book Questions and Discussions

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