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Hot Topic Highlight – RICS Review of Real Estate Investment Valuations



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What is today's blog about?


In this week’s blog, we take a look at the RICS Review of Real Estate Investment Valuations. Essential reading for all RICS APC and AssocRICS candidates with Valuation as a technical competency.

We recommend reading the full review here, as it provides helpful context and further detail into how the valuation industry is changing in 2022 and beyond.


Why was the Review commissioned?


The RICS Standards and Regulation Board commissioned the Review to futureproof the valuation of assets for investment purposes, as a result of market changes, impact of Covid-19 and structural shifts in occupier and investor demand.


Who conducted the Review?


The Review was led by Peter Pereira Gray, who is the Managing Partner and Chief Executive Officer of the Investment Division of the Wellcome Trust. He has over 35 years’ experience in the property investment sector. He was supported by an Expert Advisory Group, comprising experts from the valuation, real estate, regulation, financial services, investment analysis and academic sectors.


What types of valuation did the Review focus on?


The Review focussed on the valuation of property assets for investment purposes, particularly where these are relied upon by third parties. These are typically higher risk valuations where public confidence must be at its highest.


These purposes specifically include:

  • Financial reporting

  • Inclusion in prospectuses, circulars, takeovers and mergers

  • Collective investment schemes

  • Unregulated property unit trusts

  • Commercial investment property financing


What recommendations did the Review make?


The Review made thirteen core recommendations, three of which are considered to carry greatest weight.


These are:

  • The creation of a dedicated, independently-led valuation regulatory quality assurance panel, under the jurisdiction of the RICS Standards and Regulation Board.

  • The creation of a formal Valuation Compliance Officer role within regulated valuation providers to ensure services are delivered appropriately, objectively, and to the standards observed across today’s financial services industry. This role is envisioned to provide a robust foundation for full accountability and responsibility of valuation firms to their clients and to the valuation regulatory quality assurance panel, particularly where multidisciplinary services are provided to clients.

  • The need for further specific RICS guidance to clarify RICS’ expectations around the culture and behaviours expected of RICS professionals in the pursuance of valuation activities.


The full list of recommendations are as follows:


‘Recommendation 1 – Commissioning and Receiving Valuation Reports

RICS should work with appropriate stakeholders in standardising governance arrangements for commissioning and receiving valuation reports for high-risk and ‘regulated’ valuations.


Recommendation 2 – Valuation and Advisory Activities

Valuers, with the support of RICS, should ensure that the separation of valuation from advisory activities within firms is consistently applied in respect of the use of valuation data and instructions.


Recommendation 3 – Rotation

RICS should develop a time-specific, mandatory procurement and rotation process for valuers.


Recommendation 4 – Compliance Role

RICS should build on its existing ‘RICS responsible principal’ obligation by developing a Valuation Compliance Officer role to specifically cover valuation process and conduct.

Recommendation 5 – Raising Concerns

RICS should ensure it has clearly signposted processes for its regulated members and other stakeholders to raise concerns about ethical conduct and address, amongst other issues, improper pressure placed on valuers.


Recommendation 6 – Quality Assurance Panel

RICS should create a dedicated, independently-led valuation regulatory quality assurance panel, under the jurisdiction of the RICS Standards and Regulation Board.


Recommendation 7 – Valuation Audit Trail

The Red Book should include further standards around the conduct and recording of valuation instructions and meetings between client and valuer.


Recommendation 8 – Analytical Approaches (i) Discounted Cash Flow

The valuation profession should incorporate the use of discounted cash flow as the principal model applied in preparing property investment valuations.


Recommendation 8 – Analytical Approaches (ii) Advanced Analytics

RICS should improve the knowledge and application of valuers in respect of advanced analytical techniques.


Recommendation 9 – Global Standards

RICS should maintain a record of valuation standards adoption and application in countries outside the UK where significant numbers of its Registered Valuers operate, in order to inform the extension of regulatory requirements and support to valuers.


Recommendation 10 – Standardised Property Risk Advice

RICS should develop a framework to standardise property risk advice.


Recommendation 11 – Post-Qualification Requirements and Revalidation

RICS should review its post-qualification requirements for valuers, and consider introducing mechanisms for regular revalidation of valuers.


Recommendation 12 – Diversity

RICS should continue to build on its important work to ensure a diverse and inclusive valuation profession.


Recommendation 13 – Culture and Behaviour

There is a need for further specific RICS guidance to clarify RICS’ expectations around the culture and behaviours expected of RICS professionals in the pursuance of valuation activities’.


What recommendations were made in relation to valuation methodology?


The Review promoted the adoption of the discounted cashflow (DCF) methodology by valuers, over the traditional investment method, e.g., using a growth implicit yield to capitalise a rent into a capital value.


This is because clients are increasingly requiring explicit valuation advice, with specific (explicit) inputs and assumptions adopted (rather than all being reflected in an all risks yield, which is growth implicit). These inputs and assumptions include rental growth, risk premium, discount rate, timings and exit point.


What will happen next?


The RICS issued a response to the Review in January 2022, which you can read here. They have confirmed that they will use the Review to shape future RICS standards and regulatory strategy, subject to appropriate stakeholder consultation.


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