International Valuation Committee assembled in the Hague, the Netherlands, October 2-5, 2004

International Valuation Standards Committee (IVSC) now has 42 regular members, 10 observing members and two corresponding members. In October 2004 three new full members were approved, including e.g. Sweden. The membership is designated for the country, i.e. The Association for Real Estate Valuation thus represents Finland.

The IVSC assembles twice a year for an extensive meeting, in connection of which there is also an annual general meeting in the autumn. This time it was held in the Hague, the Netherlands, in the beginning of October 2004. I participated in the IVSC meeting for the first time as the representative of The Association for Authorized Real Estate Valuation from Finland and as a representative of FIG Commission 9.

The Section in charge of preparing the International Valuation Standards assembled on the first two days. The assemblies were open for everyone registered. The Board of the IVSC assembled on the third day and the annual general meeting, and a connected extensive seminar was held on the fourth day. Some 30 persons participated in the Standards work, 50 in the annual general meeting, and approximately 150 in the seminar. The member organisation of the Netherlands is ROZ (Raad voor Onroerende Zaken) sponsored by ING Real Estate of the ING Group, which is one of the biggest financing organs in the world.

The Standards Section concentrated on the amendments of the 7th Edition of the International Valuation Standards published early in 2005, and especially the amendment concerning Depreciated Replacement Cost (DRC). In the present Standard the DRC is defined as non-market value based valuation method, which leads to market value replacement when the market is low and there is little market information, or there is no market at all. The method is clearly an application of the Cost Approach leading to the technical or economic present (current cost of reproduction or replacement of an asset less deductions for physical deterioration and all relevant forms of obsolescence and optimisation). After this a market-simulating depreciation is made, which was formerly considered to lead to fair value in accordance to International Accounting Standards. Now the interpretation was amended so that DRC leads to market value, i.e. the probable value, which a willing seller and buyer would reach in a transaction accordant to the definition of market value.

Market Value is 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. [IVS 1; the definition is also adopted by the European Union in the draft for a directive for banking supervision (Basel II) (IVSC, Global Valuation Issues, September 2004)]

The only difference to the actual market value approaches is that in DRC the actions of the parties are simulated via available market information, perhaps even weak, while with the actual approaches documented proof of the actions of the parties are obtained. The DRC method is therefore more inaccurate than the actual market value bases valuation methods. I believe one of the reasons for the amendment was that as the financial statements shall, in any case, be able to determine the fair value of a property, it is not justified to doubt the valuers? conceptions of property values be less reliable than of those who do not even actively work in the valuation business. My interpretation may not, however, be correct, as I have not participated in the antecedent meetings treating this matter. The new valuation guide for DRC is available on the IVSC web pages (www.ivsc.org), as well as the closely related amendments of the Valuation Application IVA 1, Valuation for Financial Reporting, which are largely due to the amendments of the International Accounting Standards Board (IASB) on the accounting standards.

The IVS2005 will have three new Guidance Notes (GN), Valuation of Specialised Trading Property, Mass Appraisal for Property Taxation, and Valuation of Properties in the Extractive Industries. Further, there are amendments on the Guidance Notes on leasehold valuation and on the valuation of machines and equipment, but apparently only the amendments on leasehold valuation will not be on time for the IVS2005.

The Guidance Note on Mass Appraisal for Property Taxation determines the grounds for the taxation system (juridical system, real property inventory system, amount of market information, adequate resources, system maintenance, and testing of the methods and processes), the structure of the valuation process (identification of the valuated real estates, determination of the market areas, identification of the factors for supply and demand, determination of the model structure, model calibration, application of the model to valuated real estates, ensuring the legality of the process, and evaluation and application of the outcome), the determination of the valuation grounds (normally the market value), and the information released in the valuation reports.

Several matters are still being prepared. The situation with the report on economic rights was clarified. The aim of the report is to especially treat the valuation of properties related to securitized mortgages and real property funds etc. and the impact of securitization on valuation, but also valuation of other economic interests, such as derivatives. Securitization, for example, has many traps, which need guidance for observing. One such trap was brought out and that is the overvaluation of securitized real property portfolio due to contract rents exceeding the market rents, which may mislead the public. It is quite probable that IVSC will prepare at least one Guidance Note on the subject.

Last year the Finnish Association for Real Estate Valuation took initiative with the IVSC on forest property valuation, and now it was agreed that the preparation of the valuation guidance be activated. The goal was to have a draft available at the Australia meeting in April 2005. Mr. Julio Torres Coto from Mexico is acting as the Chair of the Working Committee, and the Finnish participants were expected to give an advanced proposition in December 2004. The Guidance Note for Valuation of Properties in the Extractive Industries was hoped to be used as the model for the structure of the GN.

Other topical matters were e.g. the valuation of public sector property for economic reporting, valuation of historical (conserved) buildings, relationship between the valuer and the accountant, determination of the concept of immovable property (asset item or a bundle of rights), accuracy of the valuations made for real property indexes, insurance valuation, water rights valuation, and contacts with other international associations and/or projects, e.g. the International Accounting Standards Board (IASB), the International Federation of Accountants (IFAC), the Global Investment Performance Standards (GIPS), Basel Bank Control Committee, and the International Organization of Securities Commissions (IOSCO).

The most focal subjects at the annual general meeting itself was the acceptance of the budget. According to the IVSC annual budget the operational costs in 2005 will be USD 236.000. 20 % of these will be covered by subscription fees, less than 10 % by the IVS revenues, and some 2/3 by sponsor support. The significance of the sponsor support is thus very essential.

All in all the meetings had plenty of programs. Participation, however, gives so much better conception of the discussion policy and the related standpoints than just reading the finished reports. In my opinion also FIG should participate in the IVSC meetings. Plenty of resources for that shall also be reserved in practice, as the journeys are long and expensive, and the participation, preparation and reporting take a lot of time. One practical solution for forwarding information would be the distribution of the reports to more persons according to certain specialisation fields. Another alternative might be the launching of research projects on various subject matters. Suggestions are gladly received, as well as other potential ideas.

As regards the offerings of the meetings, besides writing to the papers I am prepared to give further information by giving discourses and lectures etc. upon inquiring.

Kauko Viitanen
Vice Chair of the Commission 9