A guide to “Red book” valuations

As seen on Development Finance Today

The most recent version of the red book – RICS Valuation, Global Standards 2017 – took effect on 1st July 2017.

Development Finance Today sought the views of industry insiders to find out how important red book valuations are in the development finance market.

What is a ‘red book valuation’?

Chris Whitney, Head of Specialist Lending at Enness:

The red book standard is the almost universally adopted standard for valuations.

Charlie Armstrong, Asset Finance Adviser at Arc & Co Structured Finance:

The red book valuation was understood by industry experts as the market standard for assessing the value of a given asset.

There are a list of rules and guidelines that are administered by RICS to make sure that practitioners follow the right protocol in an independent and fair fashion.

This is the first port of call when assessing an asset.

The red book valuation is the preferred standard for most lending institutions, banks and brokers.

Is it important to use red book valuations in property development?

Paul Riddell, Head of Marketing and Communications at Lendy:

“Red book valuations are used as a quality mark, and [are] essential for any party, organisation and institution involved in the property market, from lenders, tax advisers, HMRC for taxation, and lawyers and accountants,”

Chris added: The purpose of the red book standard is to make sure that there is no ambiguity in what is being valued, for what purpose and on what basis, either now or in the future.

Historically, valuation reports often missed out important factors, which could then lead to misinterpretation.

This is essential for a development lender when making a lending decision initially, monitoring during construction, during the exit process and for reporting purposes later on.

Yann Murciano, CEO at Blend Network:
At Blend, we feel it is important to use a red book valuation because this sets out the standards that should be followed when undertaking a building valuation and assess whether the project makes sense or not.

It’s like the ‘good medical practice’ for doctors or ‘solicitors’ professional standards’ for lawyers and solicitors.

By following the RICS rules and guidelines, we ensure that the valuation report is prepared to the highest possible professional standards and that there are no conflicts of interest and that it has been prepared by a suitably qualified practitioner.

Michael Dean, Principal at Avamore Capital:
The red book standard is crucial in development finance as it gives the lender full confidence in both the value of the property when a land loan is advanced and the GDV on practical completion.

Knowing both of these figures ensures that a lender isn’t lending too much money, either on day one (in case the developer never progresses a build) or when complete, ensuring a lender hasn’t advanced too much money against the completed scheme.