This case study is based on a real instruction. Names, addresses and identifying details have been changed, and figures rounded, to protect client confidentiality.
The instruction
A family-owned special purpose vehicle held two mixed-use investment properties in south west London — in each case a retail unit at ground floor with self-contained flats above. The company’s accountants required an independent valuation for inclusion in the statutory accounts at the year end.
The properties had last been valued four years earlier. The directors had continued to carry them at that figure, on the basis that “nothing had changed”. Between the two valuation dates, interest rates had moved substantially, one of the retail tenants had changed, and both leases had moved materially closer to expiry. A great deal had changed.
Why the accounts needed a valuation
Under Section 16 of FRS 102, investment property whose fair value can be measured reliably without undue cost or effort is measured at fair value at each reporting date, with changes recognised in profit or loss. Fair value is not an optional refresh — it is a measurement basis applied at every reporting date.
For property, fair value is generally equated with market value as defined in the RICS Valuation – Global Standards. Our reports for financial statement purposes are prepared under the Red Book (current edition effective 31 January 2025) and the UK national supplement, which set out specific requirements for valuations for inclusion in financial statements, including the terms of engagement, the valuer’s independence, and disclosure of any material uncertainty.
How we approached it
Both properties were valued on an investment basis: the income stream capitalised at a yield derived from comparable investment transactions, with the residential and commercial elements analysed separately before being brought together.
Property A — retail unit with three flats above
| Element | Analysis |
|---|---|
| Retail unit — passing rent | £46,500 per annum, FRI lease, 6 years unexpired, tenant on file with reviewable accounts |
| Retail unit — estimated rental value | £52,000 per annum |
| Capitalisation — term and reversion | Term at 7.25%, reversion at 8.00% |
| Retail element value | £672,000 |
| Three flats — long leases granted, ground rent income | £1,050 per annum aggregate, capitalised at 8% |
| Flats — reversionary value | Deferred, immaterial at 91 years |
| Property A — market value | £685,000 |
Property B — retail unit with two flats above, held on ASTs
The flats here were retained and let on assured shorthold tenancies rather than sold off on long leases, which changes the analysis entirely. Residential investment let on ASTs is valued by reference to the residential investment market, not the commercial one, and in this location the vacant possession value materially exceeded the investment value — a point the directors had not appreciated.
| Element | Value |
|---|---|
| Retail unit (term and reversion, 9.0% / 9.5%) | £312,000 |
| Two flats — vacant possession value | £690,000 |
| Less: allowance for obtaining vacant possession and void | (£24,000) |
| Property B — market value | £978,000 |
The result
Aggregate fair value of £1,663,000, against a carrying value in the accounts of £1,845,000. The reduction was driven principally by outward yield movement on secondary retail over the intervening period, partly offset by residential value growth.
That was not the answer the directors were hoping for. It was, however, the answer the accounts required, and there is a straightforward professional point here: a valuer instructed for financial reporting purposes owes a duty to report the figure the evidence supports. A valuation prepared to suit a preferred outcome is worth nothing to anyone who might rely on it — auditors, lenders, incoming shareholders or HMRC.
Other situations where companies need a Red Book valuation
- Year-end accounts where investment property is carried at fair value under FRS 102, or under the revaluation model for owner-occupied property.
- Transfers of property into or out of a company, where market value is substituted for actual consideration between connected parties.
- Share transfers and shareholder exits, where the underlying property value drives the share value.
- Secured lending, refinancing and facility reviews.
- Corporate restructuring, incorporations and de-envelopings.
- Partnership and matrimonial disputes involving corporately held property.
Frequently asked questions
Do company accounts need a professional property valuation?
Where investment property is carried at fair value under Section 16 of FRS 102, the fair value must be determined at each reporting date. Directors’ estimates may be challenged by auditors, and an independent Red Book valuation by an RICS Registered Valuer is the recognised way of supporting the figure.
What is the difference between fair value and market value?
They are defined differently but in practice, for property held as an investment, fair value under FRS 102 is generally taken to equate to market value as defined by the RICS Red Book and International Valuation Standards. A Red Book valuation will state the basis adopted explicitly.
How often should company property be revalued?
Investment property carried at fair value under FRS 102 requires a fair value at each reporting date. In practice many companies obtain a full valuation periodically with directors’ assessments between, but where market conditions have moved — as with the yield shift affecting secondary retail in recent years — a carried-forward figure quickly becomes unsupportable.
Need a valuation for your year end?
Blakes Chartered Surveyors prepare Red Book valuations for company accounts, secured lending, corporate transactions and shareholder matters. Our work is approximately 95% residential, and we also undertake local mixed-use commercial valuations — typically shops with flats above — accepted case by case, referring on where a matter falls outside our expertise.
Call 020 7373 7373 or email info@blakessurveyors.com. RICS regulated firm no. 752265.
