Determine Industrial Values & Report
Valuation activity reacts to the client’s instruction. A comprehensive instruction enables the valuer to carry out the task of valuation in an efficient and professional manner. The Regulations of the Valuers Act clearly specify that valuers have to provide their clients with a written estimate of fees and a confirmation of the instruction as well as other instructions contained in the Rules of Conduct that further dictate how a valuer must act. We will look briefly at these to recap them for you.
A valuer is prohibited from bringing a valuation in at a predetermined amount. This relates directly to the class of client who wants to influence the valuation – and these do exist! The rules of conduct also prohibit the valuer from undertaking work contingent on a specified amount of compensation being obtained (this item pertains to compulsory acquisition valuations).
The rules of conduct provide that the valuer must act professionally, which includes ‘such other laws’ and the list of these is extensive (as we found above). This is embodied in statute and the existing common law principle that valuers must act competently with all the legislation affecting their work. Although there are a number of complex pieces of legislation that govern the making of valuations and the use and administration of land, you are required to have a sound working knowledge of the legislation affecting your area of practice.
There are also provisions relating to high-pressure tactics and confidentiality.
The legislation also provides that the valuer must not enter into an agreement to undertake valuation work, or continue to undertake valuation work, if doing so would place the valuer’s interests in conflict with the client’s interests.
Perhaps most importantly you should not undertake the valuation of property that is outside of the ambit of our own valuer’s experience or that you feel you are incapable of performing correctly and professionally.
There are a number of professional issues affecting valuation practice in addition to legal requirements. These relate to things like the accounting requirements for asset valuation. Valuation professional standards have evolved in recognition of influences like accounting standards.The main valuation institution in Australia is the Australian Property Institute (API). This institution has built a set of professional practice notes over time and these influence the conduct of valuers, and also serve as a guideline for valuation practice.
The API’s professional practice notes can be broken down into the following areas:
– ethics and conduct
– business-client focus
– professional practice standards
– guidance notes
If you join the API as a student member you should be able to view these notes that should help you study. Alternatively the Australian Valuers Institute has a similar set of guides and rules of conduct You might find a valuer you get to know or work with also has a set. If you can get to see them do so as these are considered industry standard.
The professional practice standards are for crucial areas of valuation practice. Compliance with these practice standards is mandatory for members of the API. The professional practice standards currently in force are :
– valuation procedures
– valuation for mortgage and loan security purposes
– valuations for financial reporting purposes
– valuations for compulsory acquisition
The professional practice standards require that (ideally) valuation is based on a written instruction. The valuation opinion should be backed by an inspection and a rigorous examination of the property being valued and its market.
Guidance notes are provided in order to give assistance to professionals in the wide area of property valuation and related fields. While the matters contained in the guidance notes are not mandatory, they provide a good foundation for valuation practice. The guidance notes that are relevant to the valuation of commercial property include:
– Valuation procedures-real property
– Land contamination issues
– Valuation of owner-occupied property
– Disclaimer clauses and qualification statements
– Electronic transmission of documents
– Valuation for mortgage and loan security purposes
– Valuations for use in financial reports
– Valuations for compulsory acquisition
– Valuation for rating and taxing Methods of measurement
– Feasibility studies
– Prospectus valuations
In addition to the legislative and professional requirements, pure business sense dictates that valuers must ensure clarity in the instructions they receive.
If the instructions are not properly defined, problems may emerge over the nature and scope of the report that the valuer delivers. Accurately defining the terms of reference is the first step in ensuring that good-quality valuation advice is provided to clients. This will also reduce the risk of dispute arising after the valuation is completed.
The terms of reference that you need to consider in instructions for valuation assignments include the following :
– the purpose of the valuation
– business considerations (professional fee and cost recoveries)
– specific valuation-related information
– the property being valued and the report format
As we mentioned earlier it is a statutory requirement that you confirm your instructions in writing. and it is also the only thing that you have, if your valuation is challenged, that proves you’ve undertaken the valuation as requested. If there is any doubt as to what is required, or any ambiguity whatsoever you should reconfirm in writing until you are happy that you fully understand your brief and can satisfactorily undertake the task required.
Purposes of valuation
Valuations can be required for a range of purposes. Valuers need to clearly understand the purpose of a valuation, as this will determine the range of matters that will have to be considered, such as how the valuation is carried out and what market evidence will need to be collected.
Asset valuation and financial reporting –
A major reason for carrying out commercial property valuation is the need for commercial property owners to comply with asset reporting standards.
Public companies, property trusts and government departments are required by law to provide valuations of property assets held as part of their annual reporting to shareholders or the public. In completing these assignments valuers are required to value property assets in accordance with the guidelines for this class of valuation.
The guidelines can be found in :
– Australian Accounting Standards Board (AASB) guidelines (for example AASB 1041)
– International Valuation Standards Committee Standards Book
– Australian Property Institute Professional Practice Guidelines
Valuers undertaking this sort of work must have a good working knowledge of the way in which the relevant accounting standard or standards should be applied to a particular valuation. This means that they will have to be conversant with the asset valuation standards and they may also need to liaise with accountants or legal advisers in dealing with the interpretation of these standards to specific valuation assignments.
However, in some cases property will be of a class that is not normally traded. Where this is the case the valuer can apply a replacement cost depreciated approach in determining the value of the property for its current use. Some examples of specialist uses that might not have a general market are:
– specialized factories designed for a specific manufacturing use
– public buildings constructed specially for government administrative purposes (and not for general commercial office use)
– licensed clubs
The rules dealing with asset valuation are complex. Valuers who do this sort of work need to have an understanding of the International Valuation Standards provisions, the Australian accounting standards and the practice standards and guidelines produced by institutions like the API. Furthermore, the valuer has to be conversant with changes in the standards and any relevant case law. Asset valuation is reasonably specialised but it is a frequent reason for valuation of commercial real estate.
Purchase and sale price –
Occasionally valuers are requested to provide a valuation for a prospective purchaser before the sales contract is exchanged. Valuers may be asked to comment on various aspects of the commercial property (including those relating to investment performance) and might also be requested to provide a value range representing the upper and lower possible prices for the property which could be substantiated by the available market evidence.
Due diligence –
Organizations often seek to validate significant property decisions before the completion of a binding agreement. Indeed, the stock exchange, shareholders and the general public expect confirmation that decisions being made by public companies are well informed.
Property transactions by public institutions may be preceded by a due diligence process. The due diligence process seeks to obtain independent validation of the proposed transaction by relevant experts prior to binding agreements being completed or property or financial information being released.