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JPIF PRACTICE BRIEFING

22,2
Property appraisal in
Government
192
Anthony Andrew and Michael Pitt
Heriot-Watt University, Edinburgh, UK
Keywords Property, Capital budgeting, Options markets, Facilities, Asset valuation,
Government
Abstract In 2003 HM Treasury published a revised “Green Book”, otherwise known as The
Green Book Appraisal and Evaluation in Central Government – a technical guide, which is
designed to help decision makers appraise and evaluate capital expenditure decisions more
effectively. Coincidentally, the RICS brought out its revised edition of the “Red Book”, now called
The Appraisal and Valuation Standards, in March 2003. This paper looks at the development and
recent changes to these documents particularly from the viewpoint of a public sector property
practitioner involved in day-to-day appraisal.

Journal of Property Investment &
Finance
Vol. 22 No. 2, 2004
pp. 192-199
q Emerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780410536188
Introduction
Government capital expenditure decisions since the early 1970s have been governed by
the “Green Book”. This handbook ensures that decisions are made in the knowledge of
the economically optimum solution available after an appraisal of a range of
alternative options. This allows decision makers to choose the most economic option,
or failing that to be aware of the real economic cost of choosing another alternative on
other policy grounds.
From an entirely different perspective the RICS also began to develop its guidelines
for asset valuation or appraisal in 1976. These were the “Statements of Asset Valuation
Practice”, the “Red Book”, which set out property valuation and appraisal standards
for practitioners. This was to meet the concerns of the stock market, lenders and
corporate clients that there should be clearly understood uniform standards that
valuers should work to, to facilitate the transparency of the property markets. These
valuations were to be the grist to the mill of corporate decision-makers.
The two books have developed side by side with no cross-referencing and very little
linkage. Given that much Government decision making on capital expenditure
involves property interests this is suprising. The Government is a major client of
valuation surveyors. They value Government assets to “Red Book” standards for the
capital charge which signals the opportunity cost of the assets to property managers
and from time to time they undertake “Green Book” option appraisals for Government
clients so these parallel but related standards are worth examining together.
Government aspires to achieve the efficiencies of the private sector with its market
disciplines in managing its property interests. That is why it has a capital charging
system to encourage efficient resource allocation and why it insists on a full option
appraisal when capital decisions are made. The RICS regularly voices its aspiration for
surveyors to be involved in more strategic management thinking upstream of the
decision to commission valuations so there is some community of interest between the
two different disciplines developed in the Green and Red Books.
Brief history of the Green Book Property
The earliest origins of the “Green Book” are unclear. It appears to have originated in appraisal in
unpublished internal Government documents.. These are referred to in later documents
but do not seem to have been preserved by the British Library or the National Library Government
of Scotland. Option appraisal was being undertaken in government in 1971 by a team
of interdepartmental economists and Forestry in Great Britain: An Interdepartmental
Cost/Benefit Study (HM Treasury, 1971) was the result. The earliest methodological 193
document seems to have been the “Green Booklet” (HM Treasury, 1973) which was
produced to guide Government capital expenditure decision making by distilling the
thinking of mainstream economists into a concise and usable manual for
decision-makers, many of whom are not specialist economists. It is referred to in the
Foreword of Investment Appraisal in the Public Sector (HM Treasury, 1982), a
commercially unpublished document with a drab green cover which could be obtained
by writing to the Treasury. This Foreword also mentions that a revised edition was
issued in 1980, with further guidance in a “Dear Accounting Officer” letter DAO/81
explaining the importance of appraisal in the public sector. The 1982 edition had two
paragraphs on property and two worked examples dealing with opening a new shop
and a replacement research buildings but no specialist section on property. The term
“market value” was used but not defined. Also in 1982 there emerged a guide to
appraising health service developments, (DHSS, 1982). Then followed a supplementary
Management Guide (HM Treasury, 1983), and thereafter Supplementary Notes No. 1 on
The Appraisal of Financing Costs and No. 2 giving further advice on the appraisal of
public purchasing decisions (HM Treasury, 1984a, 1984b). Specialist procedures for the
health service were developed, (SHHD, 1987). Then, after a pause to absorb all this, a
fresh edition of the Green Book arrived in 1991 with a specialist Annex D on “Land and
Buildings”.
In the intervening years, there was more specialised advice on particular aspects of
appraisal for the public sector (Spackman, 1991, 1998). Property briefly merited its own
specialist appraisal handbook in the supplementary document The Economic
Appraisal of Property Options: A Manual of Procedures and Techniques (HM
Treasury, 1993). Nevertheless, the “Green Book” has retained its central role as a vital
working tool that is both rigorous enough to be effective for appraisal practitioners, but
simple enough to be used by non-specialists.
The Green Book was refreshed again in 1997 with what was called the second
edition. It emphasised the need to review past appraisals in the light of subsequent
outcomes to learn from the process. The core text grew from 18 to 28 pages and the
Annex F on property grew from just over three to six pages, with more detail on
property valuation. Northern Ireland has developed its own preface to the “Green
Book” to meets its particular local needs (DFPNI, 2003). Meanwhile, further work on
government assets was going on in parallel (Spackman, 1998).
The 2003 edition emerged after a prolonged debate about its length and complexity of
detail. With a core text of 49 pages and a total of 114 pages it is longer than its
predecessor which had 28 and 110 pages respectively. It remains a compact
workmanlike document with Annex 3 on “Land and Buildings” expanding to nine pages
with helpful worked examples. The 2003 edition marks a change to the Treasury
discount rate of 3.5 per cent on inflation-free and risk-free basis. Risk and uncertainty is
JPIF now unbundled and is to be dealt with explicitly in the body of the appraisal with none
22,2 reflected in the discount rate. Optimism bias is to be dealt with explicitly. Distributional
impacts on different sections of society are to be assessed more carefully and explicitly.

Brief history of the “Red Book”

In 1976 the RICS together with the Incorporated Society of Valuers and Auctioneers
194 and the Institute of Revenues Rating and Valuation produced the Assets Valuation
Standards Committee Statements of Asset Valuation Practice and Guidance Notes soon
called the “Red Book”. Further editions appeared in 1981 and 1990. A major rewriting
exercise was undertaken in 1995 and the “Red Book” was merged with the RICS
Manual of Valuation Guidance Notes (the White Book) to produce a much larger and
more comprehensive volume (RICS, 1995a, 1995b). This has been much revised and
updated in the intervening years. However, by 2001 there was a feeling that it was
becoming unwieldy. International Standards were being developed by the
International Valuation Standards Committee (IVSC, 2001, 2003) and TEGoVA, the
European Group of Valuer”s Associations (TEGoVA, 2000, 2003) which were more
streamlined. The decision was taken to undertake a major rewrite to slim down the
“Red Book” to set out standards, guidance notes and commentary. Methodological
guidance is now provided separately in a series free standing of Valuation Information
Papers (VIP). The new version of the Red Book came into force on 1 May 2003 followed
shortly after by the first Valuation Information Paper Valuation of Owner-occupied
Property for Financial Statements VIP1, (RICS, 2003a), with seven others currently
scheduled to follow
The “Red Book” does not cover option appraisal or the use of discounted cash flow
(DCF) to produce Net Present Values (or Costs) as decision-making tools. The
International Standards 2003 in Guidance Note 9 does explain the use of DCF as a tool
of analysis in market and non market based valuations, but not as a dynamic business
tool to compare a number of capital investment options. Similarly, TEGoVA briefly
mention it in Guidance Note 7.19 (TEGoVA, 2003) as a tool for use in an income
valuation rather than as a management decision making method.

The roles of the two manuals

As Norman Glass said in his preface to the 1997 edition the Green Book aims “to help
government departments and agencies appraise and evaluate their activities
effectively. It is intended to ensure consistency across government in appraisal and
evaluation practice” (HM Treasury, 1997). Broadly, it is an economists’ and
policy-makers’ tool for exploring, evaluating and making choices involving different
potential capital expenditure patterns. This is encapsulated in the definition of
appraisal in the glossary:
Appraisal. The process of defining objectives, examining options, and weighing up the costs
and benefits, risks and uncertainties of those options before a decision is made (HM Treasury,
2003).

The Red Book aims to set standards and ensure consistency in property valuation
practice in the UK and link with international standard. (IVSC, 2003; TEGoVA, 2003).
While its title proclaims its aspiration to cover the subject of appraisal, it does so in the
narrower, more American sense of appraising the value of an individual property. In Property
the “Red Book” glossary “Appraisal” is defined thus: appraisal in
Appraisal – see Valuation. Government
The RICS definition of valuation is:
Valuation. A member’s opinion of the value of a specified interest or interests in a property, at
the date of valuation, given in writing. Unless limitations are agreed in the Terms of 195
Engagement this will be provided after an inspection, and any further investigations and
enquiries that are appropriate, having regard to the nature of the property and the purpose of
the valuation.
The RICS see appraisal and valuation as synonymous. This is the American vision of
appraisal as a narrower more focussed task. In the Uniform Standards of Professional
Appraisal Practice 2003 it says:
Appraisal: (noun) the act or process of developing an opinion of value: an opinion of value
(The Appraisal Standards Board, 2000).
The Green Book takes a broader view of appraisal and sees it as more of a capital
planning, resource allocation and business decision-making tool requiring the
disciplined consideration and quantification of alternative strategies. To do this the
Green Book appraiser often needs to commission “Red Book” valuations where
different options require different property configurations.

Market value
The Red Book adopts the IVSC definition of market value in Practice Statement 3.2.
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 (RICS, 2003b; IVSC, 2003).
The Green Book uses a briefer definition:
The price at which a commodity can be bought and sold, determined through the interaction
of buyers and sellers in a market.
Where the commodity being valued is property a difference immediately emerges. In
paragraph 5.11 the Green Book says:
Costs and benefits considered should normally be based on market prices as they usually
reflect the best alternative uses that the goods and services could be put to (the opportunity
cost) (HM Treasury, 2003).
The Treasury is looking for the “Opportunity cost (or economic cost). The value of the
most valuable of alternative uses” (HM Treasury, 2003). This is made explicit in
“Annex 3 Land and Buildings” where it refers to the basis of valuation:
The valuation of a site should be based on the most valuable possible use, rather than the
highest value that could be obtained for its current use. The valuation should include an
assessment of the social costs and benefits of alternative uses of a site, not just the market
value (HM Treasury, 2003).
JPIF In contrast the RICS approach:
22,2 “. . .excludes an estimated price inflated or deflated by special terms or circumstances such as
atypical financing, sale and leaseback arrangements, special considerations or concessions
granted by anyone associated with the sale, or any element of Special Value”.
The Green Book appraiser would want any valuations of property in his appraisal to
196 consider any “Special Value” and might want to consider some of the other RICS
exclusions insofar as they reflected real opportunity cost and benefits from an
exchequer viewpoint. This is made explicit in Annex 3 paragraph 9, which says:
Valuations should be based on the definitions on “market value” (MV) or “open market value”
(OMV) used in the RICS Appraisal and Valuation Manual. Valuations should take into
consideration the prospects for development and the presence of any purchaser with a special
interest, insofar as the market would do so. To take into account such potential purchasers, it
may be necessary in instructing a valuer to adapt the RICS definition of MV/OMV (HM
Treasury, 2003).

Specialised buildings where there is no market

The two sets of guidelines share this in common. They both struggle in dealing with
the problem of specialised buildings for which there is no market to provide objective
evidence of comparative sales, yields and rentals. To deal with this the Green Book
refers to the Red Book and advises that professional valuation advice should be sought.
In Annex 3 paragraph 21 it says:
Depreciated replacement cost (DRC) comprises the open market value of the land in the
present use, plus the current gross replacement cost of the buildings and their site works. The
buildings costs are depreciated by an allowance to reflect their condition and age, and their
functional, economic and environmental obsolescence. These factors render the existing
property less valuable than a new replacement (HM Treasury, 2003).
This compares with the “Red Book” which says:
DRC is based on an estimate of the market value for the existing use of the land, plus the
current gross replacement (reproduction) costs of the improvements, less allowances for
physical deterioration and all relevant forms of obsolescence and optimization.
The Green Book is very cautious about the use of DRC, recognising it is not a true
opportunity cost. It says in paragraph 23, “DRC should only be used where there is a
continuing operational need for the property (or the stream of services derived from it)
over the period of the appraisal”.
Even then one wonders whether to remain consistent with the principle of reflecting
opportunity cost the Green Book appraiser should always check the potential
distortion implicit in a DRC valuation by including in the appraisal an examination of
the effective of using market value of each property in its highest and best use even if
that means demolition and sale for another use. The potential of the DRC approach to
distort opportunity cost is well documented (Andrew and Pitt, 2000; Heald and Scott,
1995; Andrew and Pitt, 2001).

Future developments?
The Green Book has made great strides in its development of the property aspects of
option appraisal over the years and embodies clear references to the Red Book and
helpfully directs appraisers to where advice on property interests and their valuation Property
can be found. appraisal in
There is no such cross-referencing in the Red Book to the Green Book. This is
probably no coincidence. The Red Book is the tool the RICS Valuation Faculty uses to Government
serve the accountancy profession and provides “snapshot” valuations for the purposes
of company balance sheets or asset registers. It follows the static approach of the
USPAP standards used in the USA that uses the terms “valuation” and “appraisal” 197
interchangeably”.
Other faculties of the RICS such as Facilities Management and Management
Consultancy have a different interest in valuation and appraisal. For them valuations
are a means to an end. They are tools of decision making, ingredients in the appraisal
of options and part of an ongoing asset management process in which the question is
constantly being asked, “Is this the most efficient use of this asset or set of assets. Are
there more efficient and productive alternatives?” Always, the facilities manager or the
management consultants are asking whether there are other options. To decide which
is the best option requires an option appraisal, which frequently embodies a number of
valuations.
To seek guidance on how to do this one has to look outside the RICS to economics
textbooks or the Green Book. Indeed, the vocabulary of the RICS Red Book, which
defines appraisal as a synonym of valuation, works against the concept of option
appraisal as another discipline. Should RICS facilities managers and management
consultants be seeking to distinguish the two disciplines of “valuation” and
“appraisal”, and developing the option appraisal discipline as a distinct tool of asset
management rather than leaving the field to generalist economists or accountants?
It would also help the discipline of appraisal review to develop. In PS2.5 the Red
Book forbids valuers undertaking critical reviews of valuations (and presumably
appraisals) unless they are in possession of all the facts that the first valuer possesses.
This is a bit inhibiting for surveyors in management consultancy and facilities
management who have to look critically at proposals put to them supported by option
appraisals. A more relaxed approach, like that of US appraisers who accept appraisal
review as a legitimate discipline, plus a distinction between valuation and appraisal
might allow surveyors to develop expertise in appraisal review (Andrew and Pitt,
2002).
Central government appraisers have been using the two disciplines reflected in the
Green and Red Books for years to help ensure the efficient use of taxpayers property
assets. Since the 1970s they have seen both become more sophisticated and the Green
Book shows significant understanding of property valuation issues. The Red Book has
developed as a tool to help the finance community. It has some way to go to distinguish
valuation from appraisal as a tool of asset management to enable chartered surveyors
to compete as facility managers and management consultants.

References
Andrew, A. and Pitt, M. (2000), “Asset valuation of specialised public sector buildings by
depreciated replacement cost”, Journal of Property Investment & Finance, Vol. 18 No. 6,
pp. 607-36.
JPIF Andrew, A. and Pitt, M. (2001), “The valuation of the site in depreciated replacement cost and
contractor’s basis valuations”, Property Management, Vol. 19 No. 4, pp. 298-307.
22,2
Andrew, A. and Pitt, M. (2002), “The review of property appraisals”, Journal of Property
Investment & Finance, Vol. 20 No. 1, pp. 59-67.
(The) Appraisal Standards Board (2000), Uniform Standards of Professional Appraisal Practice
(USPAP) 2000, Appraisal Foundation, Washington, DC.
198 Department of Finance and Personnel for Northern Ireland (DFPNI) (2003), The NI Preface to the
Green Book, available at: www.dfpni.gov.uk
Department of Health and Social Security (DHSS) (1982), Appraisal of Development Options in the
National Health Service, April, London.
Heald, D. and Scott, D. (1995), “The valuation of NHS hospitals under capital charging”, RICS
Cutting Edge.
HM Treasury (1971), Forestry in Great Britain: An Interdepartmental Cost/Benefit Study, HM
Treasury, London.
HM Treasury (1982), Investment Appraisal in the Public Sector, HM Treasury, London.
HM Treasury (1983), Investment Appraisal in the Public Sector: A Management Guide for
Government Departments, HM Treasury, London.
HM Treasury (1984a), Investment Appraisal in the Public Sector: Supplementary Note 1: The
Appraisal of Financing Costs, HM Treasury, London.
HM Treasury (1984b), Investment Appraisal in the Public Sector: Supplementary Note 2: Further
Guidance on the Appraisal of Public Purchasing Decisions, HM Treasury, London.
HM Treasury (1993), The Economic Appraisal of Property Options: A Manual of Procedures and
Techniques, HM Treasury, London.
HM Treasury (1997), Appraisal and Evaluation in Central Government, HM Treasury, London.
HM Treasury (2003), The Green Book Appraisal and Evaluation in Central Government, HM
Treasury, London.
IVSC (2001), IVSC International Valuation Standards 2001, International Valuation Standards
Committee, Anacortes, WA.
IVSC (2003), IVSC International Valuation Standards 2003, International Valuation Standards
Committee, Anacortes, WA.
RICS (1995a), RICS Appraisal and Valuation Manual, Royal Institution of Chartered Surveyors,
London.
RICS (1995b), Statement of Asset Valuation Practice, 1st (1976) and 2nd (1981) editions published
as Guidance Notes on the Valuation of Assets, Royal Institution of Chartered Surveyors,
London.
RICS (2003a), Valuation of Owner-occupied Property for Financial Statements, VIP1, Royal
Institution of Chartered Surveyors, London.
RICS (2003b), RICS Valuation and Appraisal Standards, Royal Institution of Chartered
Surveyors, London.
Scottish Home and Health Department (1987), Option Appraisal of National Health Service
Developments, Scottish Home and Health Department, Edinburgh.
Spackman, M. (1991), “Discount rates of return in the public sector – economic issues”,
Government Economic Service Paper, p. 113.
Spackman, M. (1998), “Capital maintenance in UK central government accounts”, Government
Economic Service Paper.
TEGoVA (2000), European Valuation Standards 2000, The European Group of Valuers’ Property
Associations and Estates Gazette, London.
TEGoVA (2003), European Valuation Standards 2003, 5th ed., The European Group of Valuers’
appraisal in
Associations and Estates Gazette, London. Government

Further reading
HM Treasury (1991), Economic Appraisal in Central Government: A Technical Guide for 199
Government Departments, HM Treasury, London.