RICS professional standards and guidance, global Valuation ... Valuation of development property 1st

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  • rics.org/guidance

    RICS guidance note

    RICS professional standards and guidance, global

    Valuation of development property 1st edition, October 2019

  • Valuation of development property

    RICS guidance note, global

    1st edition, October 2019

    Published by the Royal Institution of Chartered Surveyors (RICS)

    Parliament Square

    London

    SW1P 3AD

    www.rics.org

    No responsibility for loss or damage caused to any person acting or refraining from action as a result of the material included in this publication can be accepted by the authors or RICS.

    Produced by the RICS Land Professional Group

    ISBN 978 1 78321 371 9

    © Royal Institution of Chartered Surveyors (RICS) September 2019. Copyright in all or part of this publication rests with RICS. Save where and to the extent expressly permitted within this document, no part of this work may be reproduced or used in any form or by any means including graphic, electronic, or mechanical, including photocopying, recording, taping or web distribution, without the written permission of RICS or in line with the rules of an existing licence.

    Typeset using Typefi

    rics.org

  • ii Effective from 1 February 2020RICS guidance note, global

    Valuation of development property

  • Contents

    Acknowledgments ............................................................... iv

    RICS professional standards and guidance ...................... 1

    RICS guidance notes ......................................................... 1 Glossary ................................................................................ 3

    1 Introduction ................................................................... 11

    2 Development valuation process .................................. 13

    2.1 Introduction ............................................................. 13 2.2 Basis of valuation ..................................................... 14 2.3 The valuation approach ........................................... 15

    3 Establishing the facts ................................................... 17

    4 Assessing development potential ............................... 18

    5 Valuation: the market approach .................................. 21

    6 Valuation: the residual method .................................... 24

    6.1 Residual valuation method ....................................... 24 6.2 Discounted cash flow application ............................. 26 6.3 The basic residual method ....................................... 27

    7 Risk analysis and residual profit ................................. 29

    7.1 Risk analysis ............................................................ 29 7.2 Profit as a residual .................................................. 30

    8 Land in the course of development ............................ 32

    9 Reporting the valuation ................................................ 34

    Appendix A: Factual issues ............................................... 36

    A1 Inspection and site-specific information ................... 36 A2 Existing planning matters ......................................... 36

    Appendix B: Treatment of inputs into the residual method ......................................................................................... 38

    B1 Discounted cash flow technique .............................. 38 B2 Treatment of inputs: basic residual model ................ 45 B3 Assessing the land value ......................................... 48

    Appendix C: Development valuations – illustrative assumptions and special assumptions ...................... 49

    C1 Illustrative standard assumptions ............................. 49 C2 Illustrative special assumptions ................................ 52

    rics.org

    iiiRICS guidance note, globalEffective from 1 February 2020

  • Acknowledgments

    RICS would like to thank the following for their contributions to this guidance note:

    Lead authors

    Neil Crosby MRICS (University of Reading)

    Peter Wyatt MRICS (University of Reading)

    Working group

    Chair: Robert Fourt FRICS (Gerald Eve LLP)

    Jasper Masters FRICS (CBRE)

    Andy Leahy FRICS (BPG Limited)

    Nicholas St. Johnston FRICS (International Finance

    Corporation)

    Amit Oberoi MRICS (Colliers)

    Clement Lau FRICS (Hongkong Land)

    David Faulkner FRICS (Colliers)

    Simon Wainwright FRICS (J Peiser Wainwright)

    RICS Professional Group lead

    Tony Mulhall MRICS

    RICS Publishing

    Standards Development Manager: Antonella Adamus

    Standards Project Manager: Katherine Andrews

    Editor: Megan Reed and Mary McGowan

    iv RICS guidance note, global Effective from 1 February 2020

    Valuation of development property

  • RICS professional standards and guidance

    RICS guidance notes

    Definition and scope RICS guidance notes set out good practice for RICS members and for firms that are regulated by RICS. An RICS guidance note is a professional or personal standard for the purposes of RICS Rules of Conduct.

    Guidance notes constitute areas of professional, behavioural competence and/or good practice. RICS recognises that there may be exceptional circumstances in which it is appropriate for a member to depart from these provisions – in such situations RICS may require the member to justify their decisions and actions.

    Application of these provisions in legal or disciplinary proceedings In regulatory or disciplinary proceedings, RICS will take account of relevant guidance notes in deciding whether a member acted professionally, appropriately and with reasonable competence. It is also likely that during any legal proceedings a judge, adjudicator or equivalent will take RICS guidance notes into account.

    RICS recognises that there may be legislative requirements or regional, national or international standards that take precedence over an RICS guidance note.

    rics.org

    1Effective from 1 February 2020 RICS guidance note, global

  • Document status defined The following table shows the categories of RICS professional content and their definitions.

    Publications status

    Type of document Definition RICS Rules of Conduct for Members and RICS Rules of Conduct for Firms

    These Rules set out the standards of professional conduct and practice expected of members and firms registered for regulation by RICS.

    International standard High-level standard developed in collaboration with other relevant bodies.

    RICS professional statement (PS) Mandatory requirements for RICS members and RICS regulated firms.

    RICS guidance note (GN) A document that provides users with recommendations or an approach for accepted good practice as followed by competent and conscientious practitioners.

    RICS code of practice (CoP) A document developed in collaboration with other professional bodies and stakeholders that will have the status of a professional statement or guidance note.

    RICS jurisdiction guide (JG) This provides relevant local market information associated with an RICS international standard or RICS professional statement. This will include local legislation, associations and professional bodies as well as any other useful information that will help a user understand the local requirements connected with the standard or statement. This is not guidance or best practice material, but rather information to support adoption and implementation of the standard or statement locally.

    Valuation of development property

    2 Effective from 1 February 2020RICS guidance note, global

  • Glossary

    Acquisition/disposal cost The cost associated with the acquisition or disposal of property, usually including legal and agent fees, as well as any purchase or sales taxes.

    Alternative use value See Value in alternative use.

    Building costs index An index relating to the cost of building work. It is normally based on cost models of the ‘average building’, which measure the changes in costs of labour, materials and plant that collectively cover the basic cost to a contractor.

    Cash flow The movement of money by way of income, expenditure and capital receipts and payments during the development.

    Comparable property transaction A property used in the valuation process as evidence to support the valuation of another property.

    Discounted cash flow A method of valuation explicitly setting out the inflows and outflows of an investment/ development. See also Internal rate of return (IRR) and Net present value (NPV).

    Developer contributions Obligations often tied to the grant of development permissions providing a benefit to the community, either generally or in a particular locality. They are often mandatory requirements that have to be provided in order to undertake a development.

    Development appraisal A financial appraisal of a development. It is normally used to calculate either the residual site value or the residual development profit, but it can be used to calculate other outputs.

    rics.org

    3Effective from 1 February 2020 RICS guidance note, global

  • Development profit The amount by which, on completion or partial completion of a development, the estimated income of a development exceeds the total outlay. This can be expressed in various forms.