When is a figure a valuation? Understanding scope, purpose and basis under Red Book

Earlier in my career while working in Prague's post-EU accession property boom, I was called by a local investor client and asked if a proposed acquisition price looked reasonable.

In response, I sent an email stating that based on recent transaction data, the proposed acquisition price appeared to be within a normal range for comparable properties.

Months later, I was informed that my email had been referenced in an investment committee paper and included as 'supporting independent valuation information'. 

There were no terms of engagement entered into prior to sending the email, nor was a specific valuation date defined, nor was a basis of value identified.

What was initially meant to be an informal opinion on price had effectively been treated by the client as an independent valuation of the subject property.

This personal experience illustrates a common misconception among many in the profession today: while not all figures that chartered surveyors provide are valuations, some figures become valuations in substance whether intended or not.

Therefore, it is crucial to understand how to define the line separating those figures that are valuations and those that are not according to the RICS Valuation – Global Standards (Red Book Global Standards) in order to manage professional risk appropriately.

The key objective of this article is to set out what constitutes a valuation under Red Book Global Standards and why clarity in scoping at the outset regarding the purpose and basis of value is important in order to effectively carry out professional duties.

Confusion relating to what is (or is not) a valuation puts RICS members at professional risk and also confuses clients as to what type of service or advice they are receiving.

RICS defines valuation in the glossary of Red Book Global Standards as follows.

'An opinion of the value of an asset or liability on a stated basis, at a specified date. If supplied in written form, all valuation advice given by members is subject to at least some of the requirements of Red Book Global Standards – there are no exemptions (PS 1 paragraph 1.1).

Unless limitations are agreed in the terms of engagement, a valuation will be provided after an inspection and any further investigations and enquiries that are appropriate to undertake, having regard to the nature of the asset and the purpose of the valuation [emphasis in original].'

The International Valuation Standards (IVS) defines valuation as a process: 'The act or process of forming a conclusion on a value as of a valuation date that is prepared in accordance with IVS.' 

While Red Book Global Standards glossary defines a valuation as an opinion of value on a stated basis at a specified date, in practice, such an opinion will be supported by appropriate enquiry, analysis and professional judgement, having regard to the purpose of the instruction to be a valuation under Red Book Global Standards.

Returning to the Prague example, the difficulty was not that a figure had been mentioned, but that my email lacked the defining elements of a Red Book Global Standards valuation.

There were no agreed terms of engagement, no stated basis of value and no valuation date. The situation illustrates why Red Book Global Standards requires a structured framework for valuation assignments.

A Red Book Global Standards-compliant valuation therefore requires:

• a clearly defined scope of work and written terms of engagement (as per VPS 1 of Red Book Global Standards)
• a clear statement of the basis of value and any associated assumptions (VPS 2)
• the use of recognised valuation approaches and methods (VPS 3)
• thorough investigations, inspections and analysis of comparative evidence (VPS 4)
• the use of valuation models as necessary (VPS 5)
• clarity of reporting in the final valuation report (VPS 6). 

Compliance failures typically arise from either an inadequate definition of the scope of the assignment, ambiguous assumptions or lack of sufficient investigation. The VPS 1–6 framework is effectively a mechanism for managing risk.

It is also important to distinguish between the conceptual definition of a valuation as an opinion of value and the compliance of the valuation with professional standards, such as Red Book Global Standards or IVS.

Although non-compliance with these standards could be seen as a breach of professional duties, this does not have to mean that the figure provided is no longer a valuation.

Importantly, a figure can constitute a valuation in the eyes of a client or a court even if it lacks Red Book Global Standards compliance; in such cases, the valuer is not exempt from liability, they are simply in breach of professional standards.

This demonstrates that all valuations carried out by RICS members or RICS-regulated firms carry professional liability regardless of their intended use.

Exempted valuation purposes were removed from Red Book Global Standards because at no time can an individual be exempt from professional responsibility for stating their opinion of value, regardless of their intended use.

Exceptions are specific categories in which the mandatory application of VPS 1–6 is either inadvisable or inappropriate. Typically, these categories include:

• Brokerage/agency advice: if a surveyor offers valuation advice regarding a sales pricing strategy to be used in the course of negotiations, this will comprise an excepted valuation, and will be bound by PS 1 and 2 and will be excepted from the requirements of VPS 1–6.  
• Advisory services in negotiations/litigation: valuations provided for this purpose will be excepted from the requirements of VPS 1–6.  
• Expert witness and litigation: generally speaking, the figures produced for the purpose of expert witness testimony or litigation will be excepted from the requirements of VPS 1–6.
• Internal client use: in situations where the valuation is being prepared for the sole benefit of an internal client with no reliance on external parties (such as lenders), the valuation may also be treated as an excepted valuation and the valuer will still have an obligation to perform their duties with competence and objectivity.
• Statutory duties: any assessment made by a surveyor acting in the capacity of a statutory undertaker, pursuant to their statutory obligations, generally comprise excepted Red Book Global Standard valuations.

Regardless of whether an assignment is excepted or not, PS 1 (Compliance) and PS 2 (Ethics, competency, objectivity and disclosures) are mandatory, and compliance with VPS 1–6 should always be sought where possible.

Branding valuation advice for negotiation purposes only, indicative, etc., does not prevent such advice from being treated as a valuation when it is essentially a professional opinion of value intended for reliance.

As highlighted above, valuations prepared for brokerage and negotiation purposes in written form are still within the scope of Red Book Global Standards, albeit provided on an excepted basis.

While Red Book Global Standards valuations are often required by clients for use in respect of providing agency and brokerage services, so called brokerage opinions of pricing, if correctly worded, will not be considered valuations. 

However, problems will arise if such opinions are incorrectly worded and treated as a valuation in substance if they express a clear opinion of value that is relied on by the client or third parties.

Automated valuation models (AVMs) produce figures that in isolation will not be treated as an opinion of value for the purposes of Red Book Global Standards.

However, once a member adopts, reviews and reports on an AVM output as their professional opinion, it is a valuation and must comply with Red Book Global Standards, specifically the mandatory requirement of PS 1, PS 2, and VPS 1–6.

Indicative values referred to in development appraisals and strategic consulting reports are not valuations until a methodology is applied to a defined basis of value at a valuation date and documented accordingly.

The risk occurs when indicative values are expressed using valuation terminology, i.e. market value, but without the structure process required by Red Book Global Standards.

Insurance reinstatement assessments are evaluated outside the scope of Red Book Global Standards valuations.

Even when an assessment falls outside the technical scope of Red Book Global Standards, RICS members remain bound by the RICS Rules of Conduct.

These rules mandate that members act with integrity and maintain professional competence, ensuring that the core principles of the standards are upheld regardless of the specific assignment type.

This fact has been made clear by the courts in Singer & Friedlander Ltd v John D Wood & Co. In this landmark case, the court established that a valuer owes a duty of care to a lender even if the advice is provided informally, provided the valuer knows the recipient intends to rely on that figure for a specific purpose.

Moreover, the House of Lords' decision in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (SAAMCO) held that professionals owe a duty to prepare valuation figures with reasonable skill and care.

In addition, the principle emerging from the Supreme Court case of Manchester Building Society v Grant Thornton UK LLP is that liability is determined by the purpose for which the advice was given and the risk it was intended to address. 

This aligns closely with the Red Book Global Standards requirement that purpose and basis of value must be clearly defined at instruction stage.

Some common purposes of a valuation include:

• secured lending
• financial reporting
• taxation and statutory purposes
• acquisition or disposal
• litigation and expert witness work.

The purpose determines the basis of value, and the basis of value determines the methodology. Errors and disputes commonly arise when the three elements do not match.

Red Book Global Standards state that the basis of value, which could be market value, market rent or investment value must be specifically defined in the terms of engagement and appropriate to the stated purpose.

Determining the correct basis of value is a key aspect of professional judgement.

When a chartered surveyor expresses an opinion of value, even informally, that opinion may be relied on by others.

The defining features of a valuation are therefore not length, format or even labelling, but whether a professional opinion of value has been expressed for a particular purpose and at a defined date.

Clarity at the instruction stage, accurately defining purpose and basis of value, and adhering to Red Book Global Standards are the valuer's most effective safeguards.