Guidelines

The value of the property should be its unbiased market value or fair value.

The valuation methods include, individually or a combination of, among others:

• market approach - based on market comparables;
• income approach - based on income capitalisation, discounted cash flow methodology or earnings multiple;
• cost approach - such as replacement cost less depreciation that should only be used in specific and rare circumstances when other valuation methods cannot be applied.

Valuations of property under construction should be stated at market value. Refer to INREV NAV adjustments in the INREV NAV module . The valuation of property under construction should generally be based on the fair value at completion less costs to complete (residual approach). Appropriate focus should be made on the sensitivity associated with input assumptions given the development status of the property.

However, in certain circumstances, the fair value may be determined by using the initial cost of acquisition plus subsequent construction costs. An example is during the initial phases of construction when the level of uncertainty is high. Particular care should be taken to ensure that construction and materials costs are up to date. Irrespective of local legal requirements or contractual obligations, such as vehicle regulations, the valuation methodology applied should lead to market value as defined by these guidelines.
 

The investment manager should ensure that external valuers comply with applicable laws and a recognised international professional valuation standards such as IVS, RICS and EVS.
 

All parties involved in the valuation process should strive to meet the highest professional standards of ethics and integrity.

See for more detail the inrev-guidelines">Governance module (G03) and other relevant valuation standards for ethical requirements related to the conduct of the valuer.
 

The vehicle documentation should include details of the valuation procedure along with the frequency and methodologies used to value all material assets and liabilities of the vehicle, including property.

As a key component of the vehicle’s legal framework, the investment manager should describe the underlying valuation methodologies, procedures performed, specific pricing methodologies (see inrev-guidelines"> INREV Governance module for more information) and special assumptions applied for the valuation of hard-to-value assets and liabilities, as appropriate.
 

The investment manager should design a valuation process that is aligned with the interests of investors and other stakeholders and takes account of the nature and style of the vehicle concerned.
 

The investment manager together with the governing body of the vehicle should ensure that the valuation process oversight performed by the investment manager is unbiased.

This oversight process should be independent of any potential conflicts of interest such as those arising from management or performance fee arrangements and from other services provided by related parties and associates of the external valuer and its organisation, such as brokerage.
 

The investment manager should ensure that the external valuer has a clear understanding of the context of their work and the purpose of the valuation.
 

The investment manager should ensure that the compensation of the external valuer fairly reflects the services provided and should not be directly linked to the outcome of the valuation.
 

The investment manager should ensure that the appointed external valuer is independent.

The external valuers involved in the valuation process should identify and disclose any threats to their independence or potential conflicts of interest and either manage or avoid them. See also PV11 for appropriate professional qualification requirements that set relevant rules of conduct and ethical standards.
 

In certain exceptional circumstances, the investment manager, after careful consideration by their valuation oversight function, may decide to adjust the values as determined by the external valuer to reflect their best estimates of market value in specific circumstances such as distressed situations, liquidations and wind-ups reflecting a non-going concern basis.

Such decisions should always be taken in the best interests of investors and other stakeholders and be subject to full scrutiny by the governing body of the vehicle.
 

The governing body of the vehicle, together with the investment manager and any relevant external parties, should ensure that they have the appropriate skills, market expertise, capacity and competence to estimate the market value of property in the best interests of investors.

This includes the requirement of any external valuer engaged to have the appropriate professional qualifications to perform their work, such as RICS Registered Valuer status, as well as sufficient market understanding to perform a robust valuation.
 

Given the subjective nature of property valuations and their importance to the financial framework, the governing body of the vehicle should perform effective scrutiny and actively engage with appropriate parties and make their own sound, objective and appropriate decisions when considering the determination of market value in the best interests of investors.
 

The investment manager should ensure that all parties involved in the property valuation process of the vehicle are adequately trained, familiar with the markets in scope, capable of challenging the work of the external valuer, and have access to appropriate educational programmes.
 

The investment manager, through its key members of the valuation function, and together with the governing body of the vehicle, should have the capacity and devote adequate time and resources to effectively oversee the valuation process.
 

The investment manager, together with the governing body of the vehicle, should design and operate an effective system of internal controls over a vehicle’s property valuation process.

Control objectives should include, but are not limited to:

• Ensuring that external valuers have been engaged in accordance with industry protocols;
• Ensuring that all relevant data has been provided to external valuers in a reasonable timeframe;
• Ensuring that valuation timing and frequency are consistent with the valuation policies foreseen in the management regulations;
• Ensuring that all data used in the valuation process is accurate, relevant, and up to date;
• Ensuring that the scope and methodology used to determine the market value of property reflect the legal requirements of the vehicle and applicable valuation standards;
• Understand the judgemental inputs used by the valuer in the valuation approach and the justification that they are unbiased and best reflect market circumstances. An audit trail of any subsequent discussions between the manager and the valuer and changes to the initial draft should be maintained;
• Ensuring that the scope of valuation models are adequate and that they have mathematical integrity. Valuation software can vary significantly depending on their level of automation, complexity, and exposure to manual input error risk;
• Considering appropriate back-testing when reviewing cash flow forecasts to validate reasonableness;
• Ensuring that appropriate consideration is given to the work and findings of other parties, such as internal or external auditors;
• Ensuring that significant asset-level events (eg lease termination for anchor tenants, material damage) and market events (eg exceptional circumstances impacting capital markets) are appropriately reflected in the market value when there is a timing difference between the actual date of external valuation and a later reporting date.

The governing body of the vehicle should undertake a review of the continuing appointment or re-appointment of the external valuer on a regular basis and at least once every three years.

The assessment of the external valuer firm is an ongoing process. A formal assessment should take place at least once every three years, with the objective that the external valuer firm is the best-suited valuer to perform the valuation. The results of the assessment should be reported to investors.

The assessment may result in a rotation of the external valuer firm. The assessment should also include an evaluation of whether the external valuer firm is properly insured against claims and its compliance with regulations, for example, the Alternative Investment Fund Managers Directive (AIFMD) in Europe. In the event of rotation, there should not be any affiliation between the external valuer firms.

See also G25 of the inrev-guidelines">INREV Governance module for guidelines on reviewing the performance of other service providers.

The investment manager should ensure that property valuations are performed at least once a year. The frequency of valuations should be described in the vehicle documentation and should reflect the expectations of investors and the ongoing business needs of the vehicle concerned, such as vehicle pricing considerations.

At a minimum, the scope of external property valuations should include consideration of all properties once a year. More frequent valuations may be required depending on economic circumstances or investor needs. Certain market conditions may present significant uncertainty and volatility requiring more frequent valuation updates. In addition, transactions such as the issuance or redemption of units/shares in certain vehicle types may require specific valuations.
 

The investment manager should ensure that the external valuer provides a comprehensive valuation report, in line with professional valuation standards, to enable them to adequately review and assess their work.

The external valuer should include in the valuation report key information regarding the valuation method used for each individual property type, such as investment property, property held for sale, property under construction, and ground leases. The scope of work and disclosures should be in line with the relevant valuation standards and their minimum requirements. In addition, all applicable material valuation inputs and market assumptions should be clearly communicated and explained.
 

Although external valuers may consider different valuation methodologies, the valuation should result in a single number.

There may be situations where different valuation outcomes need to be considered and resolved when determining a fair value. For instance:

• a valuer may use different methods with varying results to value a single asset;
• a single asset may be subject to multiple valuations by different valuers.

In these situations, the investment manager should determine an appropriate valuation methodology that results in a single number.
 

The fair value of properties used by the investment manager to determine the NAV of the vehicle should be aligned with the requirements of the INREV NAV module.

For instance, the allocation of transfer taxes and purchasers’ costs between a buyer and seller in different structures and market situations should be considered and appropriately reflected (see INREV NAV module).
 

The governing body of the vehicle should ensure that communication with investors is balanced and fairly represents the activities of the vehicle.

In addition to respecting contractual and reporting obligations, the investment manager should provide further clarity, and timely and accurate information to investors and/ or key stakeholders, as relevant. In pursuing this responsibility, the governing body of the vehicle should always consider the best interests of investors and confidentiality considerations. Information provided to investors should include but is not limited to:

• The valuation standards (such as RICS), methodologies, and frameworks used in arriving at an opinion of value;
• Information relevant to the approach taken across portfolios with different asset types and potentially different valuation methodologies;
• Disclosures of market assumptions and their related explanations. The information   regarding applicable market assumptions could, for example, include sensitivity analysis of rent movements and yield changes;
• Disclosure of any limitations or reservations made by the external valuer   in the valuation report;
• Disclosure and discussion of significant issues related to valuation outcomes, for example covenant breaches and related liquidity issues;
• Disclosure and explanation of deviations from the underlying appraised value, either related to vehicle-specific circumstances or disagreements with the external valuer (see PV22 and PV23);
• In the event of significant changes in market value resulting from a rotation of the external valuer, the investment manager should perform an assessment of the main underlying assumptions and provide full disclosure of the rationale for such changes.

During the lifecycle of a vehicle, the investment manager may decide to adjust the agreed-upon values as determined by the external valuer to reflect their best estimates of market value in certain exceptional circumstances related to the vehicle.

Examples of such exceptional circumstances where factual and objective information support a necessary adjustment include, among others, distressed situations, portfolio sales, liquidations, and vehicle wind-ups reflecting a   non-going concern basis of accounting. These adjustments should always be made in the best interests of investors and other stakeholders, and be subject to full scrutiny by the governing body of the vehicle. In such circumstances, timely and clear communication to investors outside of the regular reporting obligations of valuation outcomes may be required. The investment manager, together with the governing body of the vehicle, should enable such communications to take place through appropriate channels such as written reports and/or convening meetings.
 

The investment manager should ensure that appropriate internal procedures are clearly documented and can be applied in exceptional circumstances, where there may be disagreements between the investment manager and the external valuer on the underlying market value of certain individual assets. Such deviations should be fully communicated and disclosed to investors.

In such exceptional circumstances where the investment manager and the external valuer cannot reconcile their views the market value, as determined by the investment manager, should be reported to investors including full disclosure to justify the deviation from the market value arrived at by the external valuer.

Whatever the circumstances, appropriate internal procedures (including escalation and oversight measures) should be followed by the investment manager and the governing body of the vehicle in the event of valuation adjustments. These deviations and disagreements should occur very rarely and if so, more often in relation to more opportunistic investments, where, for example, the investment manager and the external valuer have different views as to the likelihood of a particular event occurring (because, for example, the investment manager is in discussion with governmental bodies, potential buyers or tenants).

Another example of deviation could relate to disagreements about value changes if there is a considerable time period between the actual date of external valuation and a later reporting date. An additional option in such circumstances is to instruct a further valuation.
 

The investment manager, together with the governing body of the vehicle, should regularly assess its level of performance in relation to its obligations towards investors and third parties, such as regulators, so far as it relates to the property valuation process, and make improvements as appropriate.
 

The investment manager and the governing body of the vehicle should be willing to accept a certain level of liability related to property valuations subject to reasonable indemnifications.

There should be a fair allocation of risk to the investment manager and the governing body of the vehicle. The extent of the liability should be in accordance with relevant laws and regulations and be described in the constitutional documents of the vehicle.

At the same time, the investment manager and the governing body of the vehicle should expect to be indemnified by the vehicle for losses, except in cases of fraud and culpable behaviours such as wilful misconduct or gross negligence.
 

The investment manager should ensure that the external valuer is willing to accept a certain level of liability related to property valuations subject to reasonable indemnifications.

The external valuer should be professionally liable and accountable for their work, in accordance with applicable regulations and the terms of their engagement.
 

The investment manager should provide or facilitate the provision of relevant and verifiable data and information to the external valuer in relation to sustainability factors that may impact valuation outcomes.

Such information and data could include, but is not limited to:

• A description of the current state and condition of the property with respect to material sustainability factors - see the inrev-guidelines">INREV Sustainability module for details regarding materiality assessment of ESG factors;
• A view of the current and future impact of sustainability regulations on the operation and ownership of the property;
• Information related to assumptions taken on current and future rentability related to sustainability factors associated with the property;
• A view on sustainability factors that have an impact on current and future operating costs assumptions (eg energy, waste disposal, water);
• A summary of sustainability considerations that are driving key capital expenditure (CapEx) assumptions in the valuation model. For instance, requirements and intentions to meet certain environmental targets to address physical and transitional climate risks, or decarbonisation pathways such as the Carbon Risk Real Estate Monitor (CRREM);
• Details of building and/or energy efficiency labels.

The investment manager should ensure that the external valuer assesses the sustainability information provided to them and its relevant elements in the input assumptions to the valuation model.

Sustainability factors should be taken into account in current valuation models based on the market evidence to support their inclusion.
 

The investment manager should ensure that the external valuer summarises and discloses how the sustainability data and information have been taken into account in their valuation process.

Information provided should take account of the investment manager’s obligations to report under various regulatory requirements (eg Sustainable Finance Disclosure Regulation (SFDR), EU Taxonomy). Further guidance on the nature of information exchange between external valuers and investment managers may be included as part of recognised valuation frameworks.
 

In following the transparency principle (PV-P05) and its related guidelines, the investment manager should, in its reporting to investors, disclose whether sustainability factors have been taken into account when arriving at valuation outcomes.

The investment manager should report to investors whether sustainability factors were deemed material during the valuation process and to what extent they were reflected in market value.

Appendix 2 illustrates a range of potential qualitative and quantitative disclosures in relation to valuation inputs that could be materially impacted by sustainability factors.