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Sessi on t opi c
Valuation Uncertainty and Guidance

Sessi on obj ec t i ves
To briefly outline the clarification of advice on valuation uncertainty issued by RICS. To
examine why the clarification is needed and what action valuers must take if valuation
uncertainty exists.

I nt ended audi enc e
Chartered valuation surveyors.

Summar y
Programme
The global financial crisis is hitting us all -and hard. These are indeed uncertain times.
With such volatility creating extraordinary transactional voids valuation surveyors have a
new concern -how on earth can they be certain of a propertys true worth?
The uncertainty of valuations has now become such an issue that RICS felt compelled to
issue clarification to its members
In this programme we discuss the key issues and look at what the future might hold. We
also take a brief look at the RICS proposals for introducing a new, enhanced international
system for regulating and monitoring compliance with RICS valuation standards.

Programme Notes
The study notes are reproduced with the kind permission of the RICS. The notes consist
of Information Bulletins which were issued to RICS members.


Study notes
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About t he c ont r i but or s
David Rusholme has been the Director of Valuation at the RICS since 2007. Prior to
2007 he gained over 20 years experience as a commercial valuer as a Director with GVA
Grimley and more latterly Atisreal based in Central London.
David is a Fellow of the RICS and an Independent Expert for lease disputes. He has
practised both in the UK and New Zealand and has undertaken loan, asset, company and
other specialist valuations.
Valuations undertaken in the past have ranged from some of the biggest office buildings
in the City of London to a box in the Albert Hall!
Luay Al-Khatib has worked at RICS since 2000, where he has been instrumental in the
development of the Red Book. As part of his work with the Valuation Professional Group
he has taken on primary responsibility for international development in the sector, and
development of the valuation and property finance and investment qualifications. Luay is
a graduate of Pembroke College Cambridge.
Di sc ussi on poi nt s
Discuss examples of market instability
Discuss the action a valuer should be taking where valuation uncertainty exists
Discuss the need for a forward-looking valuation mechanism and how such a
mechanism might work in practice.

Study notes
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Not es


Information Bulletin Valuation Uncertainty and Market Instability

The valuation of many assets including property in the current market is unusually difficult.

With a reduction in the number of comparable property transactions to rely on, in a time of
rapidly changing macroeconomics, the valuers ability to accurately capture value at a single
point in time is being severely tested. Consequently, there are concerns that some valuations
currently have a greater reliance on professional judgement than factual evidence.

Valuers attention is drawn to Guidance Note 5 (GN 5) which covers Valuation Uncertainty. It
is hoped that the following clarification and interpretation will be helpful.

GN5 states that the degree of certainty (that is, the probability that the valuers opinion would
be the same as the price achieved by an actual sale at the valuation date) that can be
attached to a particular valuation will vary significantly from time-to-time, because of the
inherent features of the property, the market place or the information available to the valuer.
The resultant subjectivity in the valuation opinion is not a reflection on the professional skill or
judgement of the valuer.

GN5 lists Market Instability as one of the specific causes of Valuation Uncertainty.

Market Instability can arise when an unforeseen macroeconomic event causes a sudden and
dramatic change on markets. This could manifest itself by either panic buying or selling, or
simply disinclination to trade until it is clear how prices in the market will be affected in the
longer term. If the valuation date coincides with the immediate aftermath of such an event, the
data on which any valuation is based may be confused, incomplete or inconsistent, with an
inevitable effect on the certainty that can be attached to it (GN5).

The above circumstances have existed for some time and have in recent months become
more marked in a broad sense to the property markets in many world regions. However, in
the narrower sense of the local market (and asset type), the valuer must decide whether there
is market instability and, if so, to what degree this impacts on the advice given.

It should be emphasised that the characteristics of market instability as described in GN5 will
not be the same in all circumstances. For example reference is made to an event which
causes a sudden and dramatic change on markets. This was evidenced by conditions
immediately post 11 September 2001 and which was a driver to the introduction of GN5. In
reality, there are a range of issues which can bring about market instability. There can be
circumstances, such as those which exist at the present time, which can lead to a more
prolonged period of uncertainty and possibly instability.

Notwithstanding the very significant fall in the volume of transactions together with similar falls
in the availability of bank financing, markets may still be functioning, albeit at far lower
volumes of transactions than hitherto. In such circumstances, it is likely that a valuer will still
be able to make a judgement regarding value albeit that this judgement would be expressed
as being provided in conditions of uncertainty.

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If the valuer decides there is Valuation Uncertainty then, in order to comply with the general
requirements of Practice Statement 6.1 that valuation report must not be misleading or create
a false impression, the valuer must:

1. Draw attention to the cause of the Valuation Uncertainty.
2. Comment within the valuation report on the nature and degree of Valuation
Uncertainty.
3. Give a full written commentary on the particular difficulty - for example, a lack of
comparable evidence on which to base a valuation in a rapidly changing market.

In addition, the valuer is encouraged to:

1. Enter into a dialogue with the client with a view to agreeing any special
assumptions, such as alternative valuation bases which may better express the
particular circumstances. It would be (and always has been) entirely appropriate for
the valuer to include forward looking advice as part of the advisory service to the
client. This would be included within the report commentary and outside the formal
valuation statement.
2. Consider whether for certain assets such as development properties (and for
example, large lot sizes), the valuation report should include a sensitivity and risk
analysis within the explanatory commentary.
3. At all times give a full and clear account within the report as to why these items are
being included.
4. Consider in the report the context of the valuation against the market and economic
trends over time.

It is highlighted that:

1. For financial reporting and many other valuation purposes, the valuer must
give a single valuation figure and not a range of values, although a comment on
the degree of subjectivity is encouraged.
2. It would not be acceptable for a valuation report to have a standard caveat to
deal with Valuation Uncertainty which devalues or questions the authority of the
advice given. The task is to produce authoritative and considered professional
advice within the report, and Valuation Uncertainty should be reported in this
context.
3. Valuation Uncertainty is not a reason for putting a formal qualification to a
report, nor is it a reason to be interpreted in the current market as a qualification
to an auditor, in the case of company asset valuations.
4. A general disclaimer to the report is unacceptable.

It is recognised that where Valuation Uncertainty exists, the demands and pressures put on
valuers are unusually testing. The emphasis of this advice is to encourage a constructive
dialogue between valuers and their clients, which results in the issues being properly reflected
by measured consideration within the body of a valuation report. Good, well thought out, and
reasoned advice which addresses clients needs is to be encouraged; standard caveats and
disclaimers or the lack of well reasoned valuations figures are to be avoided.

Additional Notes

When issuing financial statements, the Directors and auditors of a company must be
confident that the asset figures reported are, in the opinion of the valuer, correct as at the
balance sheet date. Therefore all valuation reports carried out for these purposes must
contain specific values that are stated as being the Market Value of the properties at the date
of valuation. Many Clients will require further information, such as a commentary on the
current liquidity in the market, the factors influencing property purchase decisions, and the
current direction of travel of the market having regard to recent transaction evidence.
However, these comments should not be linked back to infer that the Market Value reported is
Study notes
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somehow incorrect or unproven. This would then be considered a caveat to the valuation,
which might make it unsuitable for use as a basis for financial statements.

Clients requirements for additional commentary will vary, and valuers are advised to discuss
these matters with Clients, and perhaps the auditors, before the report is issued, and record
this as part of the terms of engagement. Property Unit Trusts, for example, may be faced with
pricing future fund withdrawals and require a detailed commentary. This may include
comments on direction of travel and likely quantitative movements in the near future.
Companies who report property asset values but for which these are not considered as
central to the financial standing of the company may be less concerned with anticipated future
movements and would prefer a shorter commentary that does not raise any additional
uncertainty in readers minds.

The RICS cannot give detailed guidance on the wording of such commentary as this will
depend on the market for each property as the date of valuation. However, phrases such as:

We are not able accurately to assess the effect of [macro-economic and market
events] as at the balance sheet date with the evidence available to us and therefore
there is an abnormal degree of uncertainty attached to our valuations

could amount to an unacceptable caveat of the valuation and should be avoided.

This advice has been issued by a working party of the RICS International Valuation
Faculty Board.
26 November 2008.

INFORMATION NOTE RICS IGC NOVEMBER 2008
Valuation Regulation and Accreditation Scheme
RICS is working to develop an enhanced, international system for regulating and
monitoring compliance with RICS valuation standards. This is seen as a logical
progression of our self regulating status, a means to differentiate ourselves and to
demonstrate the strength of our brand.
This move is to ensure RICS can clearly demonstrate to clients and the public its ability to be
a robust, self regulating profession. This occurs in an environment where government
regulators are looking closely at the role of valuers and the standards they operate under. It
has been instigated by the International Valuation Faculty Board which believes that Red
Book Valuations must be robustly self regulated because:
1. The authorities will ultimately seek to place tighter statutory regulation on valuers if
the profession is not able to demonstrate its ability to self regulate in a robust manner
2. It does much to reinforce the reputation of the RICS Red Book as the global
valuation standard.
3. The possibility of widespread criticism if no action is taken is a valid concern
4. Other valuation bodies worldwide have or are planning similar regulation.
5. Current regulation is received to be inadequate.

The enhanced regulatory environment will also incorporate the development of an
accreditation scheme for all practising RICS property valuers worldwide which will be
renewable on a regular basis. This will provide for tighter regulation around use of the
Chartered Valuation Surveyor designation. Reasons for accreditation include.
1. Providing a visible distinction between Valuation Surveyors and other Chartered
Surveyors without valuation skills (this is already stated as a current Red Book
requirement).
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2. Enhancing compliance. To the extent that research suggests accredited valuers may
see a 20-30% lower professional indemnity cost.
3. Regulatory pressure from Europe.
4. There may be a visible output in the shape of a formal certificate for use by the valuer
and capable of being attached to a valuation report.

The terms of this accreditation and compliance scheme are currently being developed by a
dedicated Valuation Faculty committee under the chairmanship of Rupert Dodson, Global
Valuation co-head at Cushman & Wakefield. It is too early to pre-empt the technical and
financial terms of the compliance monitoring programme or the valuer accreditation scheme,
though the RICS Valuation Faculty would like to stress the fact that no widespread re-testing
of qualified members is envisaged.
The new regime will by its very nature have to be self financing and this will involve a levy on
RICS Chartered Valuation Surveyors (irrespective of whether the scheme includes an
accreditation certificate scheme)
RICS will enter a period of stakeholder and public consultation on regulation of Chartered
Valuation Surveyors around April 2009. It will be presented to IGC early in the spring, once
the full shape of the proposed regime is known.


References
The Red Book Guidance Note 5