Guidelines

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

The IVS Committee and The European Group of Valuers’ Associations (TEGOVA) define market value as “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion”. The IASB definition of fair value under IFRS 13 is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”.

In order to comply with professional international valuation standards, the market value estimate should, in principle, be free of any uncertainty clauses and special assumptions. Any special assumption or uncertainty clause should be adequately disclosed.

In order to comply with IFRS 13 the manager should ensure that the external valuer provides sufficient market evidence (if available in the market) and comparables to support all key assumptions used in the estimation of the market value.
 

Valuers should comply with a recognised international professional valuation standard.

Appointed valuers should comply with recognised international professional valuation standards such as International Valuation Standards (IVS), RICS or TEGOVA.
 

Transfer taxes and purchasers’ costs are deducted when determining the value of properties.

When determining the market value of a property, the valuer should make the same allowance for transaction costs that a normal purchaser of the property would make in the market, regardless of the exit strategy.
 

External valuation report must include information regarding the valuation method used for investment property, property held for sale, property under construction and ground leases, as well as applicable valuation inputs and market assumptions.

The valuation methods can include, among others:

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

The valuation of property under construction can be based upon:

• fair value at completion less costs to complete (residual approach);
• cost approach should only be used in specific and rare circumstances when other valuation methods cannot be applied.

During the initial phases of the construction of a property, the level of uncertainty surrounding the fair value of the property is high. In this context, the fair value as determined using the residual approach may be equal to the consideration paid for the property plus subsequent construction costs.

The information regarding applicable market assumptions could, for example, include sensitivity analysis of rent movements and yield changes.

Note that for the purpose of the INREV NAV, valuations of property under construction must be stated at fair value. Refer to INREV NAV adjustments in module 4 - INREV NAV guidelines.

In the event of significant changes in market value resulting from a rotation of the external valuer, the manager must perform an assessment of the main underlying assumptions and provide full disclosure of the rationale for such changes.

Finally, the valuation methodology applied must lead to the market value regardless of the agreed valuation methodology as per management valuation regulations.
 

The valuation performed by the external valuer should be subject to the manager’s formalised internal valuation review and approval process.

The manager should ensure that the overall valuation is reviewed and approved internally for accuracy prior to its inclusion in the vehicle’s NAV and disclosure to stakeholders. The review and approval process should be impartial, objective, consistent and independent.

The review and approval should include the following controls, among others:

• the manager should ensure that the valuation timing and frequency is consistent with the valuation policies foreseen in the management regulations;
• the manager should ensure that the valuer’s valuation assumptions as well as valuation method used are appropriate with regard to the nature of the property to be valued.

The manager’s review can be adapted to the nature of the reporting, allowing for high level review for monthly or quarterly reporting as opposed to a full review for annual reporting.
 

The valuation must result in a single number.

Valuation ranges should not be used. However, if valuation ranges are provided by an external property valuer, it has to be clear which amount is being used in the reporting, for instance, the lowest, average or maximum value of this range.
 

In exceptional circumstances, deviations by managers from property valuations as determined by external property valuers must be clearly explained and disclosed.

If there is a disagreement between the manager and the property valuer on the market value parameters, these parameters must be clearly explained and disclosed. We expect these deviations and disagreements to occur only very rarely and if so, more in relation to opportunistic investments, where, for example, the manager and the external valuer have different views as to the likelihood of a particular event occurring (because, for example, the manager is in discussion with governmental bodies, potential buyers or tenants). Another example of deviation could be related to disagreement about value changes if there is a considerable time period between the actual date of external valuation and a later reporting date.

In such exceptional circumstances, the market value, as determined by the manager, must be reported in the balance sheet 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 measures) should be followed by the manager in the event of valuation adjustments.