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International valuation standards and the impact of IAS and Basel II on property valuation standards and practice in Germany and in the UK

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Zusammenfassung

Inhaltsangabe:Abstract:
This paper deals with the valuation of property in a global context and discusses contemporary and evolving issues that might affect property valuation standards and practice in Germany and in the United Kingdom. It shows the need, the development and the growing acceptance of International Valuations Standards (IVS) published by the International Valuations Standards Committee and identifies valuations for financial reporting as the key driving force behind the ambition of harmonising valuation standards. Additionally, the major differences between valuation standards and practice in Germany and the UK are examined, the interrelationship between and the discussion about three concurring set of standards (namely Red Book, Blue Book and White Book) is presented and the importance of Market Value as the central underlying definition of value is highlighted.
Then the parallel development of International Accounting Standards (IAS) and their adoption within the European Union from 2005 onwards is explained and it is shown that this reinforces the position and the acceptance of IVS. Furthermore, the major differences between IAS, German and UK Generally Accepted Accounting Practice regarding the treatment of real estate are shown and the possible consequences for the valuation of fixed assets are derived.
Also the New Basel Capital Accord (Basel II) which determines the way how banks have to allocate capital is identified as another area of interest for the valuation profession. For this reason the methodology of Basel II is explained briefly and the problems and consequences regarding the treatment and valuation of real estate that evolve out of an application of Basel II are explored.
Finally, other areas of interest that might determine the future of property valuation are addressed, notably the issue of sustainability. It is shown that there are numerous benefits of sustainable buildings, that the client demand for them is rising and that valuers will have to consider this aspect because it will affect the Market Value of the property. In sum, this paper shows that there are fundamental differences in the way how the German and the UK valuation scene is acting to cope up with these developments on the international scene, i.e., the UK valuers and the RICS are acting proactive and are at the forefront of new developments (the fact that the RICS based their new Red Book mainly on IVS is the best example), while in contrast […]

Leseprobe

Inhaltsverzeichnis


ID 7001
Lorenz, David: International Valuation Standards - And the impact of IAS and Basel II on
property valuation standards and practice in Germany and in the UK
Hamburg: Diplomica GmbH, 2003
Zugl.: Fachhochschule Südwestfalen, Universität, Dissertation / Doktorarbeit, 2002
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- I -
Table of contents
ABSTRACT... III
ABSTRACT (German translation) ... IV
LIST OF ABBREVIATIONS ...V
LIST OF FIGURES... VI
1. INTRODUCTION ...1
2. OBJECTIVES AND RESEARCH METHODOLOGY ...1
3. VALUATION
STANDARDS ...3
3.1 W
HAT ARE VALUATION STANDARDS AND WHY ARE THEY BENEFICIAL
? ... 3
3.2 I
NTERNATIONAL
V
ALUATION
S
TANDARDS
... 4
3.2.1 The development of international valuation standards... 4
3.2.2 Objectives and content of IVS... 6
3.2.3 The Basis of valuation... 7
3.2.3.1
Concepts of price, cost and value ... 7
3.2.3.2 Market
Value ... 8
3.2.3.3
Valuation bases other than Market Value... 9
3.3 R
ED
, W
HITE OR
B
LUE
? ... 12
3.4 V
ALUATION STANDARDS AND PRACTICE IN
G
ERMANY AND IN THE
UK ... 14
3.5 C
ONCLUSION
... 17
4. INTERNATIONAL ACCOUNTING STANDARDS AND VALUATIONS FOR
FINANCIAL REPORTING ...17
4.1 T
HE DEVELOPMENT AND THE BENEFITS OF
IAS ... 17
4.2 A
CCOUNTING STANDARDS AND THE
E
UROPEAN
U
NION
... 19
4.3 T
HE TREATMENT OF REAL ESTATE UNDER
IAS
AND THE DIFFERENCES TO
G
ERMAN AND
UK GAAP... 21
4.3.1 Accounting for owner occupied property... 21
4.3.2 Accounting for investment property... 23
4.3.3 Accounting for leases ... 24
4.4 C
ONSEQUENCES FOR THE
UK
AND
G
ERMANY
... 25
4.5 C
ONCLUSION
... 27

- II -
5. BASEL II AND VALUATIONS FOR LENDING PURPOSES...27
5.1 W
HAT IS
B
ASEL
II? ... 27
5.2 M
ETHODOLOGY AND STRUCTURE OF
B
ASEL
II... 30
5.2.1 Minimum
capital
requirements... 30
5.2.2 Supervisory review process... 33
5.2.3 Market
discipline... 34
5.3 T
HE TREATMENT OF REAL ESTATE AND ITS CRITIQUE
... 34
5.3.1 Real estate under the Standardised approach ... 34
5.3.2 Real estate under the IRB approach ... 37
5.4 I
MPACT ON
G
ERMANY AND ON THE
UK ... 38
5.5 C
ONCLUSION
... 39
6. AREA OF FURTHER RESEARCH OR THE FUTURE OF PROPERTY
VALUATION...40
6.1 D
IFFERENT CODES OF MEASUREMENT PRACTICE
... 40
6.2 R
ISK ADJUSTED DISCOUNTED CASH FLOW
... 41
6.3 T
HE ISSUE OF SUSTAINABILITY
... 42
7. CONCLUSION ...44
APPENDIX...47
BIBLIOGRAPHY...93
DECLARATION ...107

- III -
Abstract
This paper deals with the valuation of property in a global context and discusses contemporary and
evolving issues that might affect property valuation standards and practice in Germany and in the United
Kingdom. It shows the need, the development and the growing acceptance of International Valuations
Standards (IVS) published by the International Valuations Standards Committee and identifies valuations
for financial reporting as the key driving force behind the ambition of harmonising valuation standards.
Additionally, the major differences between valuation standards and practice in Germany and the UK are
examined, the interrelationship between and the discussion about three concurring set of standards
(namely Red Book, Blue Book and White Book) is presented and the importance of Market Value as the
central underlying definition of value is highlighted.
Then the parallel development of International Accounting Standards (IAS) and their adoption within the
European Union from 2005 onwards is explained and it is shown that this reinforces the position and the
acceptance of IVS. Furthermore, the major differences between IAS, German and UK Generally
Accepted Accounting Practice regarding the treatment of real estate are shown and the possible
consequences for the valuation of fixed assets are derived.
Also the New Basel Capital Accord (Basel II) which determines the way how banks have to allocate
capital is identified as another area of interest for the valuation profession. For this reason the
methodology of Basel II is explained briefly and the problems and consequences regarding the treatment
and valuation of real estate that evolve out of an application of Basel II are explored.
Finally, other areas of interest that might determine the future of property valuation are addressed,
notably the issue of sustainability. It is shown that there are numerous benefits of sustainable buildings,
that the client demand for them is rising and that valuers will have to consider this aspect because it will
affect the Market Value of the property.
In sum, this paper shows that there are fundamental differences in the way how the German and the UK
valuation scene is acting to cope up with these developments on the international scene, i.e., the UK
valuers and the RICS are acting proactive and are at the forefront of new developments (the fact that the
RICS based their new Red Book mainly on IVS is the best example), while in contrast in Germany two
`valuation worlds' exist. One which is orientated internationally and which applies internationally
accepted standards and valuation methodologies and which is very up to date with global developments;
and then there exists the traditional world comprising the majority of German valuers and professional
bodies which are trying to hold on to national valuation approaches and which are very suspicious about
anything that is new. It is concluded that every single valuer, irregardless of the country he lives in,
misses a huge business potential if he does not recognise what is going on internationally and if he does
not make attempts to align with the changed client demand.

- IV -
Abstract (German translation)
Die vorliegende Arbeit behandelt das Thema Immobilienbewertung in einem globalen Kontext und
erörtert gegenwärtige Entwicklungen auf den internationalen Finanz- und Bankmärkten, welche die
Immobilienbewertungsstandards und ­praxis in Deutschland und in England beeinflussen werden. Sie
zeigt den Nutzen, die Entwicklung und die gesteigerte Akzeptanz der Internationalen Bewertungs-
standards (International Valuation Standards ­ IVS), die vom internationalen Bewertungsstandards-
komitee veröffentlicht werden. Dabei zeigt sich, dass die stärkste Triebkraft, die hinter den Bemühungen
um einen einheitlichen Wertermittlungsstandards steht, Bewertungen zu Bilanzierungsszwecken sind.
Des weiteren werden die Hauptunterschiede herausgearbeitet, die zwischen englischem und deutschem
Bewertungswesen bestehen und es wird erörtert, weshalb es gegenwärtig gleich drei verschiedene
,Standards' (Red Book, Blue Book und White Book) gibt, die auf europäischer bzw. internationaler
Ebene konkurrieren. Zudem wird versucht, die Bedeutung der Marktwertdefinition als zentrales und
international anerkanntes Wertkonzept darzulegen.
Im Anschluss wird die Entwicklung von internationalen Rechnungslegungsstandards (International
Accounting Standards ­ IAS) und deren Einführung in der Europäischen Union ab dem Jahre 2005
skizziert. Die Hauptunterschiede, die zwischen diesem Regelwerk und der nationalen
Rechnungslegungspraxis in Deutschland und England bestehen, werden dargelegt und es wird versucht,
daraus die Konsequenzen für die Bewertung von Immobilien abzuleiten. Weil Immobilienbewertungen
auch im Kreditgeschäft eine zentrale Rollen spielen und sich auch auf diesem Gebiet eine neue
Entwicklung abzeichnet, wird die Struktur und die Methodik der neuen Basler Eigenkapitalvereinbarung
(Basel II) kurz erläutert. Weiterhin wird versucht, die Probleme und Konsequenzen herauszuarbeiten, die
sich für die Behandlung und Bewertung von Immobilien aus einer Anwendung von Basel II ergeben.
Schließlich finden einige Aspekte Erwähnung, welche die Zukunft der Immobilienbewertung
beeinflussen bzw. bestimmen könnten; darunter vor allem das Thema einer nachhaltigen
Gebäudenutzung sowie der Messung der ökologischen Performance von Immobilien.
Diese Arbeit zeigt deutlich, dass das britische Bewerterwesen ganz anders auf internationale und neue
Entwicklungen reagiert als das deutsche Bewerterwesen. Während von englischen Bewertern und vor
allem von der RICS die Initiative ergriffen wird, um mit der internationalen Entwicklung Schritt zu
halten (die Neufassung des Red Book, die in weiten Teilen auf IVS basiert, ist hierfür das beste Beispiel)
wird in Deutschland versucht and traditionellen Bewertungsansätzen festzuhalten. Dies Arbeit kommt zu
dem Schluss, dass es für jeden Bewertungssachverständigen angebracht ist, sich mit den oben erwähnten
Entwicklungen auseinanderzusetzen, um das gewaltige Geschäftspotential nicht zu versäumen, das mit
diesen Entwicklungen einhergeht.

- V -
List of abbreviations
ASB
Accounting Standards Board
ASC
Accounting Standards Committee
BCBS
Basel Committe on Banking Supervision
BIS
Bank for International Settlements
BREEAM
Building Research Establishment Environmental Assessment Method
BRW
Benchmark Risk Weight
CRE
Corporate Real Estate
DCF
Discounted Cash Flow
DRC
Depreciated
Replacement
Cost
EAD
Exposure
at
Default
ECA
External Credit Assessment
EEC
European Economic Community
EU
European
Union
EUV
Existing Use Value
FRS
Financial Reporting Standard
GAAP
Generally Accepted Accounting Principles
IAS International
Accounting
Standards
IASB
International Accounting Standards Board
IOSCO
International Organisation of Securities Commissions
IRBA
Internal Rating Based Approach
IVA International
Valuation
Application
IVS International
Valuation
Standards
IVCS
International Valuation Standards Committee
LGD
Loss Given Default
M
Maturity
MLV
Mortgage Lending Value
MV
Market
Value
MVEU
Market Value for the Existing Use
NBCA
New Basel Capital Accord
NPV
Net Present Value
OECD
Organisation for Economic Cooperation and Development
OMV
Open Market Value
PD
Probability of Default
RW
Risk
Weight

- VI -
RWA
Risk Weighted Assets
RICS
Royal Institution of Chartered Surveyors
SSAP
Statements of Standard Accounting Practice
TIAVSC
The International Assets Valuation Standards Committee
TEGOVA
The European Group of Valuers' Associations
TEGOVOFA The European Group of Valures of Fixed Assests
WertR
Wertermittlungsrichtlinie
WertV
Wertermittlungsverordnung
List of figures
Figure Nr.: Description:
Page:
1
IASB approach of the value to the business
22
2
UK approach of the value to the business
22
3 The
structure
of
Basel
II 29
4 Rating
categories
and
risk
weights
30
5
Different components of risk and their application
31
6
Representative values for the benchmark risk weights
32
7
Risk weights under the Standardised and under the IRB Approach
33
8 Structures
of
corporate
financing
compared
38

- 1 -
1.
Introduction
These are interesting times to write about the valuation of property in a global context. Among European
valuers and professional bodies the issue of possible convergence of valuation standards and practice is
considered highly topical. Nevertheless, the efforts that have been made to harmonise standards and the
debates surrounding this topic were mainly focused on harmonisation within the European Union. Now,
the discussion is getting a much more global `touch' due to the following developments on the
international scene: First of all the globalisation of business activities in general, the increased amount of
cross-border transactions, a growing number of company mergers and acquisitions or the drive to
international diversification of property investments are only some of the reasons for the need of
common global standards for the valuation of property as one of the most important factors of production
and for the rising acceptance of International Valuation Standards (IVS) published by the International
Valuation Standards Committee (IVSC). Secondly, the accounting profession is also developing a
common set of International Accounting Standards (IAS) at the same time that is now becoming to be
accepted by states and financial markets all around the world. Since it became obvious in the 70s and 80s
that both the valuation and the accounting profession are heavily dependant on each other, the key
driving force behind the ambition of harmonising property valuation standards in Europe has been
valuation for financial reporting. Consequently, it is clear that what is required in these International
Accounting Standards has a severe impact on international standards for the valuation of property. And
thirdly, the international banking industry attempts to adopt a new and more sophisticated regulatory
framework, called Basel II, in order to measure credit risk and determine capital adequacy. Surprisingly,
this regulatory framework does not only contain rules for the treatment of property as collateral but also
guidelines and requirements for the valuation of such property.
At a first glance these developments on the international scene may seem to have little practical
consequence for the individual valuer acting within the tight borders of a national or local property
market. But over time international events will affect national markets and with them the individual
valuer, probably much sooner than he might think. So, when valuers take time to view what is affecting
markets and properties, evaluate where their profession is headed, and consider what will be required of
them in the days ahead, a fresh and sometimes startling view of national real estate markets, valuation
requirements, trends and the road ahead begins to emerge (Dorchester and Vella, 2000).
2.
Objectives and research methodology
This paper essentially is a critical review of contemporary and evolving issues affecting property
valuation standards and practice in Germany and in the United Kingdom. The two basic aims of this
paper are to explain how international events affect the work of the individual valuation professional and
to show that these affects are either to his detriment or to his advantage, depending on his attitude
towards change and willingness to align with international client demand.

- 2 -
The focus is on commercial property valuations in general and on valuations for financial reporting and
for lending purposes in particular. This paper deals with the valuation of property in a very fundamental
way and is therefore not considered with detailed valuation methodology. The objectives are as follows:
· To explain the need for and the development of International Valuation Standards and the
interlinkage between different standard setting bodies.
· To stress the main differences between valuation standards and current valuation practice in
Germany and in the UK.
· To give an overview of the development and the application of International Accounting
Standards and of the key differences between these standards and accounting standards in
Germany and in the UK regarding the treatment of real estate.
· To point out the main consequences for property valuations evolving out of an application of
International Accounting Standards in Germany and in the UK.
· To briefly explain the new banking capital adequacy framework Basel II and to show the main
problems and consequences for the treatment and valuation of real estate evolving out of its
application in Germany and in the UK.
· To identify other areas of interest, such as the issue of sustainability, that might determine the
future of property valuation.
In order to achieve these objectives three main sources of information have been used: Literature,
personal interviews and correspondence as well as real estate conferences. In order to gain an overview
and a first understanding of these contemporary and evolving issues and in the absence of any
meaningful textbooks the literature review covered a variety of standards (e.g. International Valuation
Standards, European Valuation Standards, the final draft of the new Red Book, International Accounting
Standards and the new Basel Capital Adequacy Accord), publications in related journals (e.g. in the
Journal of Property Investment & Finance, the Journal of Corporate Real Estate or the Appraisal Journal,
etc.) and papers from real estate conferences (e.g. from the Cutting Edge 2000 conference in London or
the 8
th
ERES conference in Alicante). Furthermore, especially two texts have been extraordinary helpful:
One by John Edge (2001) that gave great insights into the relationship between accounting and valuation
standards and the other one by John Rich (2001a) which I consider the most comprehensive text on Basel
II and valuations for lending purposes up to date.
Then the decision was made not to proceed by way of a questionnaire survey because it was the aim to
explore in depth a very specialized area in which only a limited number of people were likely to have
sufficient knowledge and expertise. Thus, personal interviews and/or correspondence was held with
several valuation professionals from the UK and Germany, with representatives of the International
Valuation Standards Committee and the Royal Institution of Chartered Surveyors, with academics and
with representatives of the banking and mortgage industry (a complete list with all interview partners can
be found in Appendix 1, page 48). Transcripts of all interviews held can be found in the Appendix, page

- 3 -
63. I decided not to write a summary of the interview findings but to cite from them where appropriate
and by doing so to include the findings in the text body of this paper. The views of some of these
interview partners have had a big influence on the development of this paper. Although I was aware of
the constraints of personal interviews (e.g. bias of interviewee, influence through the interviewer or lack
of anonymity) I considered this form of research to be the best way to gain from other peoples
knowledge and experience.
Additionally, I attended two real estate conferences in Germany organised by the Institute for
International Research; the first one `Basel II and the Real Estate Industry' (15
th
­ 17
th
April 2002) in
Wiesbaden and the second one `Property Valuation' (10
th
­ 11
th
June 2002) also in Wiesbaden. These
conferences were very helpful for an understanding of different viewpoints of various participants of the
German real estate industry.
(The personal learning outcomes of this dissertation project and the reason for choosing this topic are
summarized on page 49, Appendix 2)
3.
Valuation Standards
3.1
What are valuation standards and why are they beneficial?
A standard is an agreed or required level of quality or attainment and valuation is the skill (or the art) of
determining the value of property. Consequently, valuation standards set out the rules for the process of
valuation and give guidance on best practice. According to Edge (2001) valuation standards cover
conduct, ethics, and competency issues such as: The basis of valuation, the stated purpose of the
valuation, competency tests, the valuer's responsibilities, the extent of due diligence and inquiries,
disclosure when accepting instructions, disclosure in the body of the report, the reasonableness of
limitations and stated assumptions and explicit coverage of the valuation process and rationale, etc.
Furthermore Edge (2001) states that it is important to understand the difference between valuation
standards and valuation methodology, because standards should be constant while in contrast
methodology is dynamic and changes according to the requirements of the market place. However,
valuation standards, if they can be responsive to market needs, should also tackle methodology because
"it seems illogical not to determine how a valuation should be undertaken, if the standard for the process
is the same." (Gilbertson, 2002)
To me the two central elements of a valuation standard are the definition of the basis of valuation (i.e.,
the underlying definition of value) and the code of conduct. The first because "a change in the definition
of value can have material effect on the values that would be assigned to properties" (IVSC, 2001a) and
the second because "valuers should always promote and preserve public trust in the valuation
profession." (IVSC, 2001a) In general valuation standards are of benefit for several reasons:
· they lead to greater accuracy, consistency and transparency
· they improve the reputation of the valuation profession and the quality of appraisals

- 4 -
· they make sure that valuations can be understood and reconstructed by the users of valuations,
the clients
· and, like any other standard, they improve the property industry's performance.
Nevertheless, due to differences in national history, culture, economic background and in the nature of
the property market different national valuation standards, terminology and methodology emerged
around the world. Property is a significant element of global business and the valuation of property plays
a crucial role. Estimates of total Foreign Direct Investment (FDI) vary, but it is estimated that the annual
figure might be in excess of $1 trillion. The UK Economist Intelligence Unit estimates that the property
component might be as much as 20% of total FDI, whether direct or indirect investment into real estate
(McNamara, 2000). In this context of increased globalisation of business activities and cross border
transactions national valuation standards do not lead to the benefits mentioned above, but to confusion
among the users of valuations and to the misinterpretation of valuations prepared under different national
standards. Consequently, there exists a need for one global valuation standard.
3.2
International Valuation Standards
3.2.1
The development of international valuation standards
Property valuation for financial reporting has been and still is the original driving force behind the
ambition to create a single set of common valuation standards (Sayce and Connellan, 2000). This
becomes clear if the history of international standards is looked at. If one writes about the history or the
development of international valuation standards one must begin with the Royal Institution of Chartered
Surveyors (RICS). The RICS was founded 1868 in the UK and is today with 110000 members in 120
countries the world's biggest professional body addressing all aspects of land, property, construction and
the associated environmental issues. After the famous 1974 property crash in the UK the RICS created an
Assets Valuation Standards Committee which developed the `Guidance Notes on the Valuation of
Assets', because it became obvious that the absence of any written valuation standard meant that it was
difficult to identify best practice. The first edition was published in 1976 and became known as the `Red
Book', which dealt almost exclusively with the valuation of real estate for company accounts purposes,
stock exchange purposes and similar needs (Mackmin, 1999). The Red Book was endorsed by the Bank
of England, the London Stock exchange, banking associations and others and it was also taken up by the
Commonwealth countries and served as a template for national standards for many of these countries
(Edge, 2001). Over the years the Red Book was rewritten and supplemented several times until the 1995
edition, the `Appraisal and Valuation Manual', was published, which covered nearly all purposes of real
estate valuation. Currently the RICS is undertaking a Red Book re-write project in order to bring their
standards in line with present market needs.
There was, however, also a need for valuation standards outside the UK: In order to serve the specific
needs of the European Union, the RICS together with valuation professionals from Belgium, France,
Germany and Ireland formed the `The European Group of Valuers of Fixed Assets' (TEGOVOFA) in

- 5 -
1977; their basic aim was to give guidance on real estate valuations for company accounts (Gerardy,
Möckel and Troff, 1997). In 1981 TEGOVOFA published its own standards for property valuation called
`Guidance Notes on the Valuation of Fixed Assets' which became known as the `Guide Blue' or the
`Blue Book'. The Blue Book was based almost word-for-word on the RICS Red Book, but since
TEGOVOFA reorganised into `The European Group of Valuers Association (TEGOVA) to evidence its
recognition of a broader base of valuation clientele beyond that of financial reporting, and since
TEGOVA published a revised statement of standards called the `European Valuation Standards 2000',
the Blue Book is now "truly an amalgam of trans-European influences designed to comply with EC rules
and regulations." (Edge, 2001)
At about the same time European standards were developed in the late 70s, the quickening pace in the
globalisation of investment markets led to the need of internationally accepted standards for reporting the
value of property. "It became obvious that without international valuation standards there was
considerable potential for confusion." (IVSC, 2001a) For this reason some members of a technical
committee of the RICS and representatives of U.S. appraisal organisations began a dialogue in 1978-
1979 that led to the creation of `The International Assets Valuation Standards Committee' (TIAVSC) in
1981. This Committee published the first international valuations standards in 1985, and again these
standards were closely based on the RICS Red Book and "followed the traditional practice of stating
standards as broad generalizations, touching on examples, but leaving unexpressed the formal statement
of specific standards." (Dorchester and Vella, 2000) Then, in 1994, the Committee changed its name to
International Valuation Standards Committee (IVSC), expanded its focus beyond property valuations
exclusively for financial reporting and published a revised version of their standards. "One of the most
vital elements in the revised standards was the worldwide recognition of market value as a standalone
paradigm and the development of a standard solely devoted to the development and reporting of market
value." (Dorchester and Vella, 2000) Finally in 2001, after two other editions, the IVSC published the
`International Valuation Standards 2001' (IVS), which is now a set of comprehensive valuations
standards gaining more and more acceptance in the valuation world. "These Standards ... are becoming
increasingly influential and accepted by accounting, governmental and other regulatory bodies
worldwide." (Epstein, 2002) However, this 2001 publication, newly named the `White Book' is only one
step in the IVSC's `three-year-standards project', which will lead to a complete overhaul and upgrade of
the standards by 2002. Today the IVSC, as a Non-Government Organization member of the United
Nations, has grown considerably and represents professionals form 52 countries (the IVSC member
states are listed on page 50, Appendix 3). The IVSC is working together with international agencies such
as the Organisation for Economic Cooperation and Development, the World Bank, the International
Monetary Fund, the World trade Organisation, the Commission of the European Union, and the Bank for
International Settlements. Furthermore, the IVSC maintains a close relationship with other standard-
setting bodies, such as the International Accounting Standards Board, the International Federation of
Accountants and the International Organisation of Security Commissions (IVSC, 2001a). What makes
this standard unique is that the White Book and the IVSC fulfil the demand of the market as they are now

- 6 -
recognized and supported financially by the major valuation and accounting firms, most of them
operating on both sides of the Atlantic (e.g. Knight Frank, Jones Lang LaSalle, Richard Ellis, etc.). This
endorsement was a turning-point for the IVSC standards, "as it showed that international providers of
valuation services wanted a single international standard and had identified the IVSC as providing the
right vehicle to deliver it." (Estates Gazette, 2000) (A graphical description of a worldwide valuations
standards scheme can be found on page 52, Appendix 4)
3.2.2
Objectives and content of IVS
The objectives of IVS are as follows:
· To facilitate cross-border transactions and contribute to the viability of international property
markets by promoting transparency in financial reporting as well as the reliability of valuations
performed to secure loans and mortgages, for transactions involving transfers of ownership, and
for settlements in litigation or tax matters;
· To serve as a professional benchmark, or beacon, for valuers around the world, thereby enabling
them to respond to the demands of international property markets for reliable valuations and to
meet the financial reporting requirements of the global business community; and
· To provide standards of valuation and financial reporting that meet the needs of emerging and
newly industrialized countries (IVSC, 2001a).
Before something is said about the content and the organisation of IVS 2001, it must be pointed out that
some elements or sections of the text are contained as exposure drafts reflecting the fact that they are not
totally finished yet, and that a revised version of IVS will be published soon. Moreover, one important
element, which is currently in development, is missing in the 2001 edition and it will certainly be
included in the next edition. This is a comparative matrix in order to facilitate the correlation of areas of
coverage in IVS with other valuation standard documents around the world, e.g. the RICS Red Book,
TEGOVA's Blue Book or the Uniform Standards of Professional Appraisal Practice of the U.S Appraisal
Foundation and Appraisal Institute (Milgrim, 2001).
The White Book consist of the following sections:
The Introduction includes the history and the constitution of the IVSC as well as an explanation of the
format and organisation of the book. The General Valuation Concepts and Principles consists of a
discussion of the concepts (land and property concepts, price, cost, value, Market Value, highest and best
use, etc.) and of the economic principles upon which valuation practice is based. The section Code of
Conduct covers ethical and competency requirements and is designed to ensure that valuation results are
reliable, consistent and unbiased. The section Property Types explains the characteristics of and
distinctions between real property, personal property, business, and financial interests. The International
Valuations Standards section is considered the most fundamental part of the book and contains two
standards: IVS 1, Market Value Basis of Valuation explains and defines Market Value as well as the
general criteria relating to its application; IVS 2, Valuation Bases other than Market Value identifies and

- 7 -
explains non-market bases of value and distinguishes these form Market Value. The next section
International Valuation Applications (IVAs) covers two industry segments: IVA 1, Valuation for
Financial Reporting explains the background of accounting concepts, conventions and standards as well
as the criteria that valuers must consider when preparing valuations for financial reporting; IVA 2,
Valuation for Lending Purposes gives guidance on valuations for lending institutions. The section
Guidance Notes addresses particular valuation issues such as business valuations, valuation of lease
interests, or valuations carried out with discounted cash flow analyses, etc. The Guidance Notes are
considered more transitory than the Standards and may be amended from time to tome to provide
additional guidance. In addition to the sections mentioned above there are the Commentaries and the
Glossary. The Commentaries section is the least permanent element of the standards as it provides broad
interpretations, interim advice and issues that may require immediate response (e.g. an examination of
the possible impact of standards issued by the Basel Committee on Banking Supervision on valuations
for loan purposes). The Glossary includes valuation specific definitions and cross-references of
definitions of divergent usage in various English speaking countries (IVSC, 2001a and Estates Gazette,
2000 and Milgrim, 2001). (See Appendix 5, page 53 for a graphical overview of the structure of IVS)
In sum, it can be concluded that this standard is well on the way to become a set of comprehensive and
robust international standards. Nevertheless, besides the missing element mentioned above there is
another section or issue that should be included in the next edition of IVS and that is a section covering
valuation methodology. (A brief explanation of internationally accepted valuation methods can be found
on page 54, Appendix 6) Currently, IVS include guidance on discounted cash flow (DCF) analysis and
on Depreciated Replacement Cost (DRC) for the purpose of financial reporting while, in contrast, other
valuation methods, such as the classic income capitalisation approach or the sales comparison approach
are only mentioned very shortly. It is perfectly true that valuation methods must follow the needs and
habits of the market but it is also true that the basic principles of these valuation methods now have
stayed the same over years. As long as IVS are considered "a living document, subject to continuing
adjustment, updating and correction" (Edge, 2000), I see no reason why there should not be more
detailed guidance on valuation methods that are currently accepted internationally. This would help
clients to understand that a valuation produced in London, New York, Berlin, Melbourne or Moscow is
reliable in its standards and its methodologies. "That must increase the value of the product" (Gilbertson,
2002)
3.2.3
The Basis of valuation
3.2.3.1
Concepts of price, cost and value
At the core of the discussion about one common valuation standard lies the problem of defining the basis
of valuation or, in other words, the harmonisation of different concepts of value. "One of the key
successes of the IVSC has been developing a common definition of market value accepted in most of the
world." (Edge, 2001) But before the definition of Market Value is given in the next chapter the important

- 8 -
distinction between price, cost and value must be made: Price is the amount asked, offered or paid for a
good or service, and it is important to bear in mind that the price paid for goods or services by an
individual with particular motivations or special interests "may or may not have any relation to the value
which might be ascribed to the goods or services by others." (IVSC, 2001a) Therefore, the terms price
and value are not synonymous, although they are frequently used as if they were (McParland et al.,
2000). Cost is the price paid for goods or services or the amount required to create or produce the good
or service (IVSC, 2001a). Value is an economic concept referring to the monetary relationship between
goods and services available for purchase and those who buy and sell them. "The economic concept of
value reflects a market's view of the benefits that accrue to one who owns the goods or services as of the
effective date of valuation." (IVSC, 2001a)
3.2.3.2
Market Value
The concept of Market Value (MV) is defined 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." (IVSC, 2001a)
In addition, IVS includes detailed explanations of every single element of the definition, e.g. the term
"estimated amount" is qualified to mean "the most probable price reasonably obtainable". Furthermore,
the concept of Market Value is linked with the concept of highest and best use as a fundamental and
integral part of Market Value estimates. Highest and best use is defined as:
"The most probable use of a property which is physically possible, appropriately justified, legally
permissible, financially feasible, and which results in the highest value of the property being valued."
(IVSC, 2001a)
It is this definition of Market Value that is (or will become) the most common type of value associated
with property valuations around the world. It has been adapted by TEGOVA in the Blue Book and also
by the RICS in their Red Book. The interesting thing with the Red Book is that although Market Value
has been adopted, the major part of the valuations carried out under the Red Book are still based on Open
Market Value (OMV) as the central UK concept of value. This is now changing because the final draft of
the new Red Book, which will be put into practice in 2003, does not contain the concept of OMV any
more (the definition of OMV can be found on page 56, Appendix 7); the central element will now be
Market Value (RICS, 2002). The new Red Book will give a much wider recognition to IVS than has ever
been done before (Chapter 3.3 discusses this in more detail). However, it is astonishing that the new Red
Book adopts the IVS interpretation of MV word-by-word but does not link MV to the concept of highest
and best use as defined above. What is said is that MV "will include elements of value arising from any
expectation that circumstances affecting the property may change in the future." (RICS, 2002)

- 9 -
Furthermore, it is stated that "the amount of hope value must be limited to the extent that it would be
reflected in offers made by prospective purchasers in the general market." This leads to the question what
this is for. If the RICS adopts definitions and interpretations of the IVSC, then why not completely and
fully? I can see no difference in these two approaches; and if there should be a difference, then it is
certainly not measurable. Is this the attempt to give the definition of MV a `red' shade?
The IVSC concept of MV is overlapping with the accounting concept of Fair Value (FV) which is
defined in IAS as: "The amount for which an asset could be exchanged between knowledgeable, willing
parties in an arm's length transaction." Fair Value is a much broader generic description; it encompasses
Market Value (where there is one) and most of the times fair value will equate to Market Value. The
International Accounting Standard 16 states that "the fair value of land and buildings is usually its
market value." And IVA 1 states that "fair value and market value may be equivalent when fair value
meets all requirements of the market value definition in IVSC Standard 1 ..." (IVSC, 2001a) For
example, FV is not the same as MV if there is no market for the property being valued; then there must
be another means of looking at what fair value could be. For owner occupied properties this can be
Depreciated Replacement Cost. Consequently, Fair Value can include Depreciated Replacement Cost
whereas Market Value cannot (Edge, 2002). In sum, however, "Fair Value is an imprecise term designed
to give accountants and their corporate clients flexibility. This may conflict with the needs of valuers
who require specificity in order to give consistent advice." (Sayce and Conellan, 2001)
3.2.3.3
Valuation bases other than Market Value
As stated before, IVS 2001 includes a standard covering valuation bases other than Market Value; e.g.
Value in Use, Investment Value, Depreciated Replacement Cost, Insurable Value, Mortgage Lending
Value, or Forced Sale Value, etc. It would lead beyond the scope of this paper to explain and discuss
each of these concepts. However, three of these concepts must be dealt with in more detail as they are
important for the debate on international valuation standards.
Depreciated Replacement Cost (DRC)
DRC is defined in IVS 2001 as follows: "An acceptable method used in financial reporting to arrive at a
surrogate for the Market Value of specialised and limited properties, for which market evidence is
unavailable. DRC is based on an estimate of the Market Value for the Existing Use (MVEU) of the land
plus the current gross replacement (or reproduction) costs of improvements less allowances for physical
deterioration and all relevant forms of obsolescence and optimisation." (IVSC, 2001a) IVS 2001 goes on
to make the result of the DRC method "subject to the adequate potential profitability or service potential
of the enterprise from the use of the asset as a whole ..." Consequently, the directors of the company
could adopt a lower figure in their accounts if they believe that the potential profitability of the business
is insufficient to carry the DRC estimate. By doing so, the DCR method can no longer be considered an
acceptable surrogate for MV but a Value in Use estimate. (The Value in Use is defined in IVS as "the
value a specific property has for a specific use to a specific user and is, therefore, non-market related".)

- 10 -
This is not only problematic because it questions the suitability of DRC as a surrogate for MV but also
because the DRC method is used in international valuation practice for the assessment of other valuation
bases (where there is a shortage of market transactions) than solely financial reporting (White et al.,
1999). I assume that it was for this reason that the RICS modified the definition of DRC in the final draft
of the new Red Book by stating that DRC is "a method of valuation which provides a recognized proxy
for the Market Value of Specialized Properties."
Furthermore, there is an inconsistency in the IVS definition of DRC because it states that the land value
element must be based on the Market Value for the Existing Use although the IVSC abandoned the
concept of MVEU (or know as Existing Use Value ­ EUV) from their standards.
Existing Use Value (EUV)
As mentioned above the concept of EUV is currently not contained in IVS 2001; it has been abandoned
(with the explanation that "it is inconsistent with the definition of fair value, and should not override that
definition" (IVSC, 2001a)) simply because the International Accounting Standards Board removed this
concept from their standards in July 1998 and stipulated that owner occupied property should appear in
financial statements at Market Value. However, it is mentioned here because the concept of EUV is
currently being discussed extremely controversially among international accounting and valuation
professionals. EUV is a traditional UK based concept (also used in New Zealand, Australia and South
Africa) developed exclusively for valuations of owner occupied property for financial reporting. It is
based on the Red Book definition of OMV which is further qualified as follows:
· only for the existing use and
· assuming vacant possession.
This means for the valuer that any higher alternative use value must be disregarded and that the valuation
result must reflect the price that would have to paid in the marketplace for empty premises. The rationale
behind this concept is that the figure in the accounts should reflect the value of the property to the
business whilst it remains in use by the business (i.e., based on the accounting assumption that the going
concern will continue). The case against EUV is that the value of the property reflected in the accounts
should be based on the properties potential use if the business sold it (Edge, 2002). Why some
accountants and valuers do not like MV for owner occupied property can be explained by the following
example: If a factory site is worth a million dollars, but as a redeveloped site, for example as a retail
park, it could be worth two million dollars, then MV would be two million dollars and EUV would be
one million dollars. If it now comes down to the depreciation of the property as an asset of the company
this should be based on the existing use of the factory. Otherwise, if the depreciation were based on the
redeveloped site it would be a false basis of depreciation. Nevertheless, it is totally unclear what is going
to happen with EUV and if it will appear in IVS again. The UK Accounting Standards Board (ASB) does
insist on this concept; consequently the new Red Book also requires EUV (now with a new definition
based on MV) for owner occupied property. There is also much discussion going on in the UK whether

- 11 -
`vacant possession' for owner occupied property is the correct approach.
1
But "at the moment nothing
clear seems to have emerged by way of direction." (Rich, 2002) Furthermore, there is currently a
working party in the IASB called `revaluation group' and it is made of the four countries mentioned
above which apply the EUV concept. They surely advice the IASB to re-establish EUV, but as the matter
stands and unless IAS is changed, the concept of EUV will be dead by 2005.
2
The position of the IVSC
is clear: they will follow the decision made by the IASB.
Mortgage Lending Value (MLV)
The concept of MLV has been recognized and adopted by the IVSC as a non-market based assessment in
the 2001 edition of IVS for the first time and is defined as follows: "Mortgage Lending Value is the
value of the property as determined by the valuer making a prudent assessment of the future
marketability of the property by taking into account long-term sustainable aspects of the property, the
normal and local market conditions, the current use and alternative appropriate uses of the property.
Speculative elements may not be taken into account in the assessment of the mortgage lending value. The
mortgage lending value shall be documented in a transparent and clear manner."
This definition is taken from European legislation (EC Directive 98/32/EC) and applies in Europe to
valuations for lending purposes to those member states which have adopted the Solvency Ratio Directive
(89/647/EEC). This contrasts to the rules set out in IVS and also to what is required under the Red Book,
where valuations for lending purposes should be based on MV. However, the concept of MLV has been
adopted by the IVSC for two reasons: First because the European countries which traditionally apply this
concept are trying to establish MLV internationally; especially the German mortgage banks are pressing
for a wider recognition of MLV (Trotz, 2001 and Kälberer, 2002). And second because the new Basel
Capital Accord requires MLV for certain valuation purposes.
But there is a very strong reluctance against this concept of a so called `sustainable Market Value' which
can best be described by John Edge's (2002) statement on MLV: "Property and property performance
tends to be more volatile than bankers and accountants would like. MV has to reflect this volatility. MLV
is designed to try to eradicate the top-end volatility by indicating what the sustainable bottom-end value
of a property might be, based on historic performance indicators, thereby stripping out the frothy top-end
volatility. The intention seems to be to improve (the perception of) property as a reliable asset basis for
loan collateral purposes. MLV has some use in that it provides an indication of where in the property
cycle the property market might be at a particular point in time, so giving an indication of the degree of
risk that the current level of MV might represent. The reason that valuers do not particularly like it is that
MLV is difficult to evidence, there is no real agreed criteria between valuers as to a comparable approach
to the assessment of MLV. Its usefulness is questioned, as is its relevance. Many valuers prefer to
explain the context of the property market in the text body of the valuation report. These comments may
1
The RICS Property Valuation Forum has recently published guidance on the interpretation and application of
EUV; see: Epstein, 2002 and RICS Property Valuation Forum, 2002
2
For a pretty detailed examination of the problematic linked with EUV see: Sayce and Conellan, 2001

- 12 -
be fairly subjective in nature, but that is the value (and limitations) of a professional's opinion. The
bankers would prefer to see a specific figure to represent MLV rather than have to make a judgement
themselves as to loan risk based upon their reading of the valuer's valuation report." Also John Rich
(2002) answered the question, if he thinks that MLV is an appropriate basis for valuations for loan
purposes by stating: "In short, no, nor does most of the rest of the world. ... It may suffice in a non
litigious environment and in a culture which accepts the concept of an `acknowledged expert', but we
tend to be more cynical in UK."
3.3
Red, White or Blue?
It has been pointed out that the White Book now is the decisive standard for property valuations
worldwide. However, for a valuer acting in Europe it may well be that he sees himself confronted with
three concurring (or complemental) standards, namely the White Book, the Red Book and the Blue
Book. It may also be sometimes the case that a valuer must advise an international client on which
standard the valuation should be based (Brühl, 2002). Therefore, some additional thoughts on these
standards seem to be appropriate:
The existing Red Book as a national valuation standard recognizes International and European Standards
only to the extent as they are regarded acceptable alternatives that can be adopted in specific
circumstances (i.e., if a valuer is undertaking a valuation outside the UK). This is to be changed in the
new Red Book because it no longer regards these standards as alternatives. "...it was decided that the
best way of implementing the RICS' objective was by adopting the International Valuation Standards
(IVS) wherever possible and integrating these into the RICS Standards. This approach also avoids
creating a situation where the Standards could be interpreted as competing, rather than being
complementary." (RICS, 2002) Also TEGOVA standards are referred to but only for two special
valuation situations for which the Blue Book gives guidance whereas the White Book does not: First, for
valuations provided for the annual accounts of European insurance companies; this is because the
definition of MV under European legislation differs marginally from the international definition. Second,
for valuations for loan purposes within some member states of the European Union, because in such
cases the concept of MLV must be applied.
What has also changed in the new Red Book is that a number of different valuation concepts (e.g.
estimated realization price, estimated restricted realization price, open market value for alternative use)
have been abandoned in favour of MV and its surrogate DRC. The new Red Book can be divided into
two parts; the first and fundamental one is mainly based on the White Book and the second one contains
UK specific valuation issues (e.g. definition and application of EUV). The RICS have recognized that the
brand value of the Red Book will diminish over time as International Valuation Standards become much
more accepted (Edge, 2002). Cynics may say that it now looks like a red envelope around IVS and that
the changes to the existing Standard have been made in order not to lose international acceptance. But

- 13 -
irregardless of the reasons for the changes they are a great success for IVS as they are now becoming
mandatory for all chartered surveyors.
Looking at the Blue Book and the TEGOVA, the situation is different. At the moment TEGOVA
produces a complete set of standards which seems to be a mixture of IVS and current Red Book content
enriched with some EU specific valuation issues (Brühl, 2002). Only in the two cases mentioned above,
where European legislation differs from international standards, the Blue Book contains guidance which
is not included in IVS. (As a side issue it may be important to know that the current version of the Blue
Book is inconsistent with IAS because it requires the application of EUV for owner occupied
properties.
1
) Despite the efforts of TEGOVA to harmonize standards through the publication of the Blue
Book, recent research "indicates that there is limited progress on the harmonisation of standards in
Europe." (McParland, et al., 2002) It is not only for this reason that the majority of statements, which I
heard during the research for this paper, concluded that a complete set of European standards is
unnecessary and utterly confusing. The only reason for European standards is that, if there is local
legislation (EU or national) that requires a difference from IVS, somebody like TEGOVA needs to
examine that and to give guidance (Edge, 2002).
What TEGOVA is doing right now is to pronounce on two aspects of EU legislation, support this with a
complete set of own standards and point out differences between the valuation practice in EU members
states and their own standards, the Blue Book. It might be a much better idea to point out differences
between the valuation practice in EU member states and IVS. Critics argue that there is no client demand
for a European standard, that it is a waste of time for the European valuation profession to produce two
sets of standards, national and regional and that TEGOVA should fulfil another role than producing
standards, namely:
· Support and proactive contribution to the work of the IVSC.
· Proactive coordination of national standard setters and of the valuation profession in Europe and
to provide guidance for national standard setters on how they could bring their standards in line
with IVS.
· Initiating changes to EU Directives; i.e., to help the Commission in their assessment of possible
non-conformity of IVS with EU Directives and recommending appropriate changes to the
Directives.
· Implementation guidance: Identification of issues for which the IVSC general guidance is not
sufficient to ensure consistent application of a given standard in the EU.
To conclude, the role of the Blue Book will diminish over time because "in the end there should be no
need for a European standard, other than to identify differences caused by specific EU legislation."
(Edge, 2002)
1
See TEGOVA, 2000, Standard 5.12: "Fair Value defined, only in this context, as Existing Use Value ­ for
properties occupied for the purpose of the business."

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3.4
Valuation standards and practice in Germany and in the UK
A lot has been said about the RICS and their Red Book now; therefore this chapter is mainly concerned
with German standards and practice. However, in order to highlight the differences between the UK and
Germany some additional comments on the Red Book and British valuation professionals are necessary:
The RICS is not the only professional body in the UK which is concerned with property valuation; there
are also the Incorporated Society of Valuers and Auctioneers and the Institute of Revenues Rating and
Valuation. These three organizations are working together in producing the RICS Red Book to which all
Chartered Surveyors are obliged. (In the UK there exists an unwritten law that one can only have success
in the property and valuation scene as a chartered surveyor.) The RICS and Red Book have no statutory
or legal powers but the RICS has got appropriate disciplinary power over its members, including the
right of expulsion. In the UK there is a lack of state interference in the valuation profession and therefore
it has become normal for the profession to "regulate all areas of practice either alone or, where
appropriate, together with other leading professional bodies." (Morgan, 1998) For example, the RICS are
closely working together with the UK ASB, which leads to conformity between accounting and valuation
rules. In sum, this leads to a very flexible approach of setting standards, because it is always possible to
amend or extend the standards immediately, if practice shows that this is necessary. In sum, the UK
valuation system, including the high level of education of valuers, advanced and internationally accepted
valuation methodology, a long history of property related research and the proactive work of the RICS
can be regarded as model and template for other countries.
The overall picture in Germany looks slightly different. In Germany there exists no organization
comparable to the RICS; there are several competing professional bodies for valuers (e.g. Bundesverband
der öffentlich bestellten und vereidigten Sachverständigen or Bundesverband Deutscher
Grundstückssachverständiger, etc.) but none of these has high status and the membership in these
professional bodies does in itself not give status to a valuer. For historical reasons the valuation
profession was (or to be more precisely, still is) dominated by architects, building engineers and land
surveyors who have special knowledge of the valuation work and who have been given the status of
`sworn valuers' by the Chambers of Industry and Commerce. This registration as a `sworn valuer' was
the only fact that gave evidence of any professional competence (Morgan, 1998). However, during recent
years the first university courses for property economists have been introduced which are also accredited
by the RICS, thus opening up the possibility to become chartered surveyor (e.g. at the University of
Applied Sciences in Stuttgart). Also the German Society of Chartered Surveyors (Deutscher Verband
Chartered Surveyors) and the number of their members is growing significantly but does not yet have the
same status as the RICS in the UK .

- 15 -
Furthermore a system of certifying valuers has recently been introduced by some professional
associations
1
"but it remains to be seen if this will result in higher standards for valuers or the gradual
abolition of the `sworn valuer'". (Morgan, 1998) In sum, however, it can be said that a growing part of
the German valuation profession is recognizing the need for a reorganisation in order to meet the client
demand for qualified valuers with property economic background (Gondring, 2002). But this does not
automatically change the principal problem with German valuation standards. The problem is that
valuation professionals cannot influence German valuation standards to the same extent as this is
possible in the UK. To be precise, and by taking the definition of a valuation standard given in chapter
3.1 as basis, Germany has no real valuation standard. Of course, Federal law and individual Land law lay
down specifications for basic minimum standards expected of persons who provide expert advice and
also case law has evolved some principles but there does not exist any written code of conduct for the
purpose of property valuations (Adair et al., 1996).
The most common basis of valuation is the German Verkehrswert (market value) which is defined in the
Federal legislation (section 194 Baugesetzbuch) as follows: "The Verkehrswert is defined as the price
which, at the time to which the assessment refers, would be attainable in normal business dealings, in
accordance with the legal circumstances and actual characteristics, the particular state and situation of the
property or other object for valuation, without regard to unusual or personal circumstances."
2
German
valuers often argue that the Verkehrswert is exactly the same as the internationally accepted MV;
however, I do not share this opinion. The Verkehrswert is conceptualized as an average price which
could be offered by the average bidder in the market `in normal business dealings' (Downie, 1998 and
Adair et al., 1996). This contrasts to the concept of MV as the `most probable price reasonably
obtainable' and it is also in contrast to the concept of highest and best use. If there are any measurable
consequences evolving out of this difference (i.e., a higher valuation result with valuations based on MV)
is another question.
Another important definition of value is the Beleihungswert (mortgage lending value) which is used for
lending purposes and which is defined in the Mortgage Bank Law (Hypothekenbankgesetz); it is nearly
the same as the definition of MLV that can be found in European legislation.
Then there is the German Federal Order for Valuation (Wertermittlungsverordung ­ WertV) which
purely deals with valuation methodology and which provides a detailed code of valuation concepts that
are the foundation of traditional valuation practice. The Wertermittlungsrichtlinen (WertR) contain
1
For example HypZert Gmbh is certifying valuers in Germany under the Euronorm 45013. This certification body
has also received the so called `Approved by TEGOVA' certificate which is a quality certificate issued by
TEGOVA. The interesting thing is that if a valuer wants to become `certified' he must pay 4.250 and pass a test
created by HypZert Gmbh; after passing this test the valuer is certified but only for valuations based on Mortgage
Lending Value! Then the valuer has got the possibility to pay another 600 and pass another test in order to be
certified for valuations based on Market Value. A valuer has not the possibility to pass only the test for valuations
based on Market Value. It is a prerequisite to pass the test for valuations based on MLV first. To me this system of
certified valuers looks like a `promotion tour' for MLV.
2
This translation is taken from: Downie, 1998

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guidance and data for valuers in interpreting and using the WertV. Three valuation methods are
explained and recognized in the WertV for arriving at the Verkehrswert; these are:
· Vergleichswert (direct comparison method)
· Ertragswert (income approach)
· Sachwert (depreciated replacement cost method ­ DRC method)
Apart from minor differences
1
all three methods are conceptually equivalent to their counterparts used in
the UK, but they differ fundamentally in their application (Adair et al, 1996). For example the DRC is
used by UK valuers only for specialised properties for which no market data is available while in contrast
this method is used by German valuers much more often (especially for residential properties but also as
a `check' for nearly all kind of valuation purposes). This is not only because of the lack of detailed
market information available but also because of the background of most German `sworn' valuers as
architects or building engineers (Morgan, 1998). Moreover, the Discounted Cash Flow (DCF) method is
much more used by UK valuers for income producing property whereas the traditional income approach
is dominant for this valuation purpose in Germany. This is because the DCF method is not recognized by
the WertV as an appropriate valuation method. By the way, this is the major point of critique at the
WertV, because the income approach described in here is static; i.e., it is not possible to consider the
movement of the market or of any other determinants that might affect the value of the property over a
certain period of time (e.g. rent, maintenance costs, vacancy, etc.).
Certain valuation functions rely heavily on WertV concepts and procedures; for example all valuations
produced for the courts and valuations for the open property investment funds must be produced in
accordance with the WertV. Also valuations produces by the German Gutachterausschüsse (Boards of
Expert Valuers) which are commissioned to collect and publish data on land values and to carry out
valuations for the public have to be in accordance with the WertV. To say it short, the WertV is extremely
influential and the state is heavily involved in property valuation issues with considerable support at
Federal level through legislation and published guidelines on its application. This is problematic because
states are working slowly; thus the system is not flexible enough to follow the needs and habits of the
market. Of course, there are also some valuation professionals (e.g. those who are working in
international property consultancy firms) who are not influenced and bound by the WertV and who apply
internationally accepted valuation methodology (e.g. DCF) and definitions of value.
In 1996 Adair et al. concluded in their essay on the property valuation system in Germany that "it
remains to be seen how it will adapt to the volatility in property markets introduced by increased levels
of speculative development and cross-border investments, and whether clients will favour the traditional
methods and their exponents, or a more international system of valuation introduced by consultants
operating on a pan-European scale." Today, six years later, it can be stated that the valuation system and
the whole valuation profession seems to be living in two different worlds. There is the traditional world
1
The direct comparison and the depreciated replacement cost method are nearly the same but there are differences
between the German and the UK income approach: The main difference is the separation of the land value and the
capital value of the building in Germany.

Details

Seiten
Erscheinungsform
Originalausgabe
Jahr
2002
ISBN (eBook)
9783832470012
ISBN (Paperback)
9783838670010
DOI
10.3239/9783832470012
Dateigröße
1 MB
Sprache
Englisch
Institution / Hochschule
Nottingham Trent University – unbekannt
Erscheinungsdatum
2003 (Juli)
Note
1,0
Schlagworte
immobilienbewertung bewertung marktwert bewertungsstandard rechnungslegung
Zurück

Titel: International valuation standards and the impact of IAS and Basel II on property valuation standards and practice in Germany and in the UK
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111 Seiten
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