RICS draft guidance note - Valuation of development land, 1st edition

Valuation of development land, 1st edition

9 Reporting the valuation

9.1 The precise nature of the report depends upon the instructions given and its purpose, but the requirements of VPS 3, section 2 (a) to (p), must be considered. In particular:

  • the basis of valuation must be clearly stated. Where a basis other than market value is adopted this must be fully explained. See VPS 3, paragraph 2.2 (e)
  • all the assumptions/special assumptions made must be stated and, where appropriate, comment made on the effect of those assumptions/special assumptions where they are material. See VPS 3, paragraph 2.2 (i) and
  • the statement requiring comment on the valuation approach is particularly important in these valuations. See VPS 3, paragraph 2.2 (l).

9.2 The value of development property may include an element that reflects the difference between the value of the land with the benefit of a specific planning consent and the value with the assumption of an enhanced consent that would be included in any expected exchange price. The proportion that can be properly reflected in the reported value is almost entirely subjective, being based upon the valuer's experience and knowledge of the market.

9.3 In common with all other valuation exercises, valuers should be transparent about their approach and, particularly when reporting for loan security purposes, this element of the reported value is to be identified as a separate figure. It can be reported as a market value subject to an assumption under VPS 3, paragraph 2.2 (i). It may also be appropriate for some valuation purposes, for example loan security, dependent upon the instructions, to report the value in the existing use to enable the lender to identify the different risks to their collateral.

9.4 If the valuation of the development property results in a negative value, even if it is not to be developed, the negative value must be reported in accordance with VPS 3, paragraph 2.2 (m). This should be accompanied by an explanation as to why the negative value has resulted. This also may be a matter dealt with in special assumptions to the valuation.

9.5 The use of various risk analysis techniques may often be appropriate to identify the variation in valuations of development property and the source of that variation. This may be more appropriate in development property valuations than for other property types due to the volatility of values and valuations identified previously.

9.6 For most purposes the requirement is for a valuation to be reported as a single figure. Where risk analysis has been applied, the valuation should still be reported as a single figure but the potential for significant variation should be reported in an appropriate manner. VPGA 10 recommends that material valuation uncertainty should normally be reported qualitatively and that a stated range of value is not good practice.

9.7 This is also recommended for the reporting of normal uncertainty within the valuation of development property. However, where the purpose of the valuation is not one where a single figure valuation is required it is acceptable to agree with the client that a range of values be reported.

9.8 As all reports should include some form of risk analysis - an explanation of the reasons for the range adopted should be given. It should also be expressly stated in the report that the range of inputs is not to be assumed to encompass all possible inputs. It is solely to give the client an indication of the impact of change in individual inputs on the valuation.

9.9 Valuers should exhibit great care in reporting this variation quantitatively as it may be used in litigation cases as proof of the permissible margin of error in some jurisdictions. There is guidance on the reporting of 'material valuation uncertainty' within VPGA 10. However, valuation variation within the valuation of development property does not constitute material valuation uncertainty in accordance with VPS 3, paragraph 2.2 and is not an example set out in VPGA 10, section 2. Nevertheless, valuers may find paragraphs 3.2 and 3.3 of VPGA 10 helpful in drafting their report.

9.10 In reporting any tolerance around the valuation, valuers may find it useful to refer to the process by which the valuation was produced (see Figure 1, section 1) and highlight issues that contribute to any uncertainty surrounding the valuation, including the different options that may have been identified.

 

For most purposes the requirement is for a valuation to be reported as a single figure. Where risk analysis has been applied, the valuation should still be reported as a single figure but the potential for significant variation must be reported in an appropriate manner.

 

Valuers may find it useful to refer to the process by which the valuation was produced and highlight issues which contribute to any uncertainty surrounding the valuation, including the different options that may have been identified.