Review of real-estate investment valuations

RICS has commissioned an independent review of real-estate investment valuations, with the findings to shape our future regulatory strategy

Author:

Fiona Mannix

22 October 2020

Commercial valuation

Valuation

Commercial properties on Walton Street, Jericho, Oxford

Walton Street, Jericho, Oxford. Photographer: Ben Molyneux, Shutterstock

The RICS Standards and Regulation Board has commissioned an independent review of real-estate investment valuation practices in response to structural shifts in investor and occupier demand for real estate.

The review will consult representatives from a wide range of sectors and key global markets and make recommendations to RICS on valuation standards and related support frameworks. The Standards and Regulation Board will consider the recommendations of the review next September.

Who is involved in the review?

The Standards and Regulation Board provides independent oversight and a public-interest perspective across RICS standard-setting, entry to the profession and regulatory processes. The board includes non-members of RICS.

Peter Pereira Gray FRICS will lead the independent review. Gray has 35 years’ experience of the property investment sector and is currently acting as the managing partner and CEO of the Wellcome Trust’s investment division. He also sits on the trust’s valuation committee and is the co-chair of the Institutional Investors Roundtable.

In his role as chair of the review, Gray will appoint a working group reflecting a broad range of expertise from different sectors. The review will examine the way valuations of property assets for investment purposes are carried out.

Context, issue and drivers

An estimated 70% of global wealth is held in land and property assets. Ultimately, much global bank lending is secured on these assets and their use in business. For this reason, valuation plays a critical role in supporting overall market confidence and economic stability.

In the UK, RICS is the only substantial professional body and regulator of valuation of real estate, although this position is not established in statute. As the leading professional body, operating under a public-interest charter, it must maintain trust in its standards and protocols.

RICS applies valuation standards through the Red Book, which provides the core mandatory and advisory guidance for regulated individuals and firms offering valuation services. The Red Book incorporates the high-level principles and definitions of the International Valuation Standards (IVS), and applies additional RICS requirements and guidance, acting as a one-stop regulatory framework for professional valuers.

Over the past year, RICS has received extensive market feedback – principally, but not solely, from the UK – that valuations of investment portfolios for the purposes of financial performance reporting are at risk of being considered unfit for purpose.

Criticism has centred on valuers’ ability to keep pace with market realities, for example:

rapidly evolving investor and occupier demand
changing occupational trends and their impact on investment in real estate, such as the increase in online retail and lease lengths
institutional real-estate investment becoming more widely understood as an actively managed business activity, where management’s abilities have a material impact on worth and value
the suspension of UK property funds at perceived market turning points, such as in times of economic uncertainty or when markets are particularly volatile.

This criticism has been combined in some quarters with concerns expressed by clients about the independence of valuers reporting on investment performance. These and other questions are being asked in the context of changing public expectations about professionals’ independence and objectivity – especially when it comes to statutory audits – so there is a need to ensure that RICS standards and protocols are robust enough to withstand public scrutiny.

As a result, the independent Standards and Regulatory Board agreed that an external review is necessary to provide evidence-backed recommendations on these issues. RICS considers this review to be of critical importance to the profession’s future, and its findings will shape our regulatory strategy.

Parameters of review are as follows.

The review will focus on valuations of property assets for investment purposes.
The scope will initially include recommendations in respect of the UK and then assess comparability with other key global markets.
The review does not extend to the RICS monitoring and enforcement model; however, recommendations may need to be transposed into the model in due course.

The 4 specific areas for consideration are as follows:

valuation methodology
property risk analysis, also known as the forward look
independence and objectivity
measuring confidence.

The overall aim of the review is to make recommendations to RICS for their consideration – regarding real-estate investment valuations to ensure that services remain relevant and trusted.

Valuation methodology

Is current valuation methodology of real estate fit for purpose in ensuring it keeps pace with the market?
Do the current applications of valuation methodologies meet market requirements – i.e. do valuations provide sufficient information to clients and others who rely on them about the factors that have influenced the valuation opinion?
Do the requirements of the Red Book/IVS create an adequate global/national framework for provision of high-quality valuation advice? Should RICS play a more active role in specifying the methodology to be adopted in certain circumstances?
Is there a need for additional guidance, training and data to RICS valuers to support the provision of high-quality valuation advice?
Can professional valuers make better use of technology to deliver high quality valuations?

Property risk analysis – the forward look

Are valuations appropriately instructed?
Are valuations provided in a manner which gives clients sufficient, forward-looking quantitative analysis on risks and their impact on investment worth, in addition to the objective opinion of current value?
Can more be done to ensure clients understand how to instruct additional supporting, bespoke risk analysis?
Do valuers have the tools to deliver this sort of analysis?

Independence and objectivity

Are current RICS requirements in respect of valuer independence sufficient? This will focus on valuations for financial reporting (including investment portfolio performance measurement). The scope will initially make recommendations in respect of the UK context and then assess comparability with other key global markets (e.g. Singapore, US, Europe, Hong Kong, Australia, India).
Are there any other material threats to objectivity in valuation that RICS should consider?

Measuring confidence

How can RICS measure market confidence in RICS valuer performance on an ongoing basis?

Feedback on the review’s terms of reference is welcome before evidence gathering commences. Email any feedback or to express an interest in the review’s upcoming work by 23 October.