RICS draft guidance note - Assessing financial viability in planning under the National Planning Policy Framework for England, 1st edition.

RICS draft guidance note - Assessing financial viability in planning under the National Planning Policy Framework for England, 1st edition

Appendix 2: Estimating EUV

This appendix provides guidance in arriving at an EUV in accordance with paragraph 015 of the PPG. The EUV is the first component in calculating the BLV.

The EUV is defined by the PPG in paragraph 015 as 'the value of the land in its existing use. EUV is not the price paid and should disregard hope value'.

'Existing use' is a term recognised in the IVS and 'value in existing use' is included in the glossary of Valuation of development property, RICS guidance note.

'Existing use' is described in IVS as a premise of value, distinguishing it from a basis of value, as it is intended to describe the circumstances of how an asset is used. Thus IVS 104 section 150 states 'Current use/existing use is the current way an asset, liability, or group of assets and/or liabilities is used. The current use may be, but is not necessarily, also the highest and best use'. Valuation of development property, RICS guidance note, identifies it as 'The market value, or any other appropriate basis, assuming the property continues in its existing use with no expectation of that use changing in the foreseeable future'.

This 'element of market value in excess of the existing use value, reflecting the prospect of some more valuable future use' is defined as hope value in the glossary of Valuation of development property, RICS guidance note. It goes on to note that 'this term is not specifically recognised by International Valuation Standards (IVS) or RICS Valuation - Global Standards (Red Book Global Standards) but is a well-used phrase in practice in some jurisdictions and the concept is defined in Paragraph 4.4 of VPS 4'. The PPG exclusion of any 'hope value' is in accordance with this identification.

It is clear and unambiguous that Valuation Standards and the PPG are compatible, and that the EUV for the purposes of FVAs is the value in the existing use, ignoring any prospect of future change to that use. Market value may, however, include that prospect where it exists.

The assessment of the EUV for FVA purposes does not involve a departure from Red Book Global and does not need to be formally declared as such.

The issues that arise in the determination of the EUV within the context of FVAs are:

  1. analysis of transaction evidence
  2. repair and improvement
  3. buildings run down in anticipation of development
  4. a partially completed development and
  5. specialised property.

There is an expectation that normal valuation methods will be employed, with the appropriate method being applied to the appropriate property type. Where possible and appropriate, the market comparison approach will be used and the analysis of transactions is a major part of that approach, often disaggregated into rent and yield components.

Normal methods of transaction analysis of rents, yields and/or capital values will apply. In the case of FVAs, the evidence must be adjusted to disregard any hope value that may be present in the transaction price. This will apply to yields and to direct capital value comparisons.

The PPG identifies the evidence base that can be used to support the determination of the EUV and the type of evidence and sources are set out in appendix 1. The normal market comparison approach to valuation practice is set out in Comparable evidence in property valuation, RICS guidance note, which also discusses sources and the hierarchy of comparable evidence. Assessors should make the plan-maker/decision-maker aware of the limitations of some of the data sources, especially where full knowledge surrounding the terms of the transactions is not available and assumptions have been made. These assumptions need to be reported.

PPG paragraph 017 states that 'where it is assumed that an existing use will be refurbished or redeveloped this will be considered as an AUV when establishing BLV'. The PPG assumes no substantial extension or improvement to the property, no enhancement of the existing use and no works requiring substantive planning permission. This does not exclude from the EUV an element of repair.

Repair can be reflected in the EUV in circumstances where, for example:

  1. there is a need to comply with statute (DDA, EPC, building regs compliance, etc.)
  2. a lift servicing the building is replaced (but not the sinking of new lift shafts, which would be classified as an AUV, as would reconfiguration of the space within the building) and
  3. normal asset management is performed.

What constitutes a repair verses a refurbishment will be determined by professional judgement as to whether the works bring the building up to standard within the existing use, or whether they go beyond that and fall into the bracket of refurbishment. In many circumstances, the expenditure in proportion to the building value can be a material consideration in informing this professional judgement. However, a building or site in need of substantial repair would have a lower EUV than a building or site in good repair. Furthermore, a landowner cannot profit from their failure to maintain the building or site.

Works undertaken to comply with building regulations or statutory requirements, such as the Disability Discrimination Act 1995 or the need to provide Energy Performance Certificates (EPCs), would generally constitute repairs, as these are required for the continued use of the building. Such works, of course, could represent a significant cost. If the property cannot be legally used for its current use at the date of valuation, that should be reported even if the EUV is based on the assumption that remedial works will be carried out.

All relevant repair and maintenance costs should be reflected in the valuation, and all assumptions made underpinning the assessment of the EUV should be reported.

Where buildings have been run down and possibly let on shorter-term leases with no right to renew, in expectation of future development - or even demolished - the EUV will be depressed below that of similar buildings that have not been so affected. The land value assuming development will not be affected, or could even be higher for the poorer site (for example if costs of demolition are not required or costs of obtaining possession are lower).

In such circumstances, it would be inappropriate to determine a lower BLV and penalise the landowner for making the site ready for development. That would occur if a lower EUV is coupled with a premium evidenced from similar sites that had not been made ready for development in this way. A balance is required, reflecting the circumstances at the valuation date, but also the costs actually incurred in delivering the site and bringing it forward for development purposes. Such costs would generally sit in the scheme assessment, as necessary to incur in order to bring the scheme forward. Any double-counting (value and cost) should be avoided in the EUV, premium and scheme assessment.

The EUV of a partially implemented development could be nil. The BLV may therefore be more appropriately assessed by reference to the AUV.

The Red Book Global Glossary defines a specialised property as 'a property that is rarely, if ever, sold in the market except by way of a sale of the business or entity of which it is part, due to the uniqueness arising from its specialised nature and design, its configuration, size, location or otherwise'. Such properties generally have a value to a trade buyer only. They will have an asset value to the entity using the asset for the purposes of its business, but there may be little or no market interest beyond that. The value may therefore lie either in a potential conversion or change of use, which would fall under the AUV (paragraph 017 of the PPG).

The asset value of specialised properties may be derived by reference to the depreciated replacement cost method of valuation. However, this does not necessarily reflect the price a property can achieve in the open market, but rather the value to the operating user if they had to go out and replace that asset. Assessors should take care that they achieve a balance between the EUV, premium and BLV that fairly reflects the criterion in the PPG of a minimum return at which it is considered a reasonable landowner would be willing to sell their land.