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What is today's blog about?
In this week’s blog, we look at the new RICS Guidance Note, Valuation of Development Property (1st Edition, October 2019). This replaces the former Valuation Information Paper (VIP) 12, Valuation of Development Land.
It should be read in conjunction with RICS Valuation – Global Standards 2017 (Red Book), which incorporates IVS 410 – Development Property.
Essential reading for RICS APC and AssocRICS candidates.
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What is the aim of the Guidance Note?
The aim is to provide guidance to valuers on how to value development properties, which are often complex, sensitive and incorporate optionality.
What is development property defined as?
IVS 410 defines development property 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’
This includes:
‘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 use or higher density in a statutory plan’.
How can development property be valued?
RICS set out a clear approach to valuing development property in the new Guidance Note:
The two main valuation methods are the comparable and residual methods. Ideally, both methods should be used to ensure that the end value is cross-checked appropriately.
The Guidance Note explores the due diligence required for development property valuations, ensuring that appropriate assumptions and special assumptions can be made.
It also discusses how to assess development potential, including seeking advice from external specialists, e.g. planning consultants.
Finally, it looks at the four main options for development property, which are likely to influence the valuation approach and outcome. These are to develop, develop in phases, sell or dispose, and defer or wait.
What basis of value should I use?
The new Guidance Note provides clarification on the appropriate bases of value, as per VPS 4 and IVS 104.
Market Value is refined as ‘the value of the development property assuming optimum development, taking into account current and prospective economic and market circumstances and planning conditions’.
This may require special assumptions to be made where the valuation does not assume optimum development.
The Guidance Note (and supporting glossary) also provide clarification around special value, marriage value and hope value.
How can risk be accounted for?
The Guidance Note explores key areas of risk in valuations of development property and how this can be analysed, e.g. sensitivity analysis, scenario modelling and simulation models (based on probability).
How can values be reported?
The Guidance Note looks at the requirements of VPS 3 in relation to valuation reporting. Generally, a single valuation figure should be reported, although where risk analysis has been carried out the potential for variation should be reported appropriately.
Where can I download the full Guidance Note from?
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N.b. Nothing in this article constitutes legal, professional or financial advice.