RICS draft guidance note - Valuation of development land, 1st edition

Valuation of development land, 1st edition

1 Introduction

1.1 The principles set out in this guidance note apply to all valuations of development property and should be read in conjunction with RICS Valuation - Global Standards 2017 (the Red Book) - incorporating the International Valuation Standards (IVS) 2017, in particular IVS 410 Development Property - and RICS Valuation - Global Standards 2017 - UK national supplement.

1.2 This guidance note supplements IVS 410 with the aim of addressing in more detail its most pressing issues in order to facilitate the practical implementation of IVS 410.

1.3 The basis of valuation adopted for the valuation of development property must agree with IVS 104 and the Red Book Valuation technical and performance standards (VPS) 4. In addition, note that the purpose of the valuation will influence the assumptions made and the outcome. This may require the use of site-specific assumptions or special assumptions concerning the proposed or anticipated development; these assumptions must be reported in accordance with VPS 3 and VPS 4.

1.4 A development property is defined within IVS 410 as:

'interests where redevelopment is required to achieve the highest and best use, or where improvements are either being contemplated or are in progress at the valuation date and include:

  • the construction of buildings,
  • previously undeveloped land which is being provided with infrastructure,
  • the redevelopment of previously developed land,
  • the improvement or alteration of existing buildings or structures,
  • land allocated for development in a statutory plan, and
  • land allocated for a higher value uses or higher density in a statutory plan.'

1.5 References to development property or development land in this guidance note should be taken to refer to the above, in accordance with IVS 410.

1.6 Development schemes can vary from single or multiple residential schemes to industrial estates, shopping centres, other retail, offices and mixed-use developments. IVS 410 paragraph 20.2 sets out a non-exhaustive list of different purposes for which a valuation of development property might be required. These may include advice on financial reporting, loan security, acquisition, sale, the valuation of options (including the sale/acquisition of a call option to purchase the property at a later date at a specified price) and the assessment of taxes and valuations required within litigation.

1.7 Although there may be differences between, say, a valuation prepared for a proposed acquisition or sale and an appraisal by a developer in connection with its own business model, there are several over-riding principles that are relevant to all of these different purposes.

1.8 One of the more complex issues attached to the valuation of property development is valuation variation caused by the particular nature and timing of the valuation. This creates additional variation around the outputs relative to any variation in the inputs to the valuation, but it also increases the volatility of development property values over time. This in turn introduces more possible options for landowners and developers within the development process and some existing methodology has difficulty in accounting for these features. This guidance note addresses some of these difficulties and what it means for the valuation.

1.9 The aim of this guidance note is to guide the valuer in the approach to development property valuations, which are often complex, have a potentially high variation and incorporate optionality. These types of valuation can relate to specialised markets and therefore require a high level of expertise. Indeed, Red Book PS 2 sets out the mandatory requirements concerning appropriate experience, knowledge and skill.

1.10 This guidance note will be made effective three months from publication.

A development property is defined as an interest where redevelopment is required to achieve the highest and best use, or where improvements are either being contemplated or are in progress at the valuation date.