PROPERTY JOURNAL

Red Book: UK updates reflect changing practice

With the UK supplement to the Red Book Global Standards recently revised in response to regulatory changes and consultation with the profession, Property Journal outlines the main changes

Author:

  • Ben Elder FRICS

20 October 2023

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A new edition of RICS Valuation – Global Standards: UK national supplement was published on 19 October 2023 and will be effective from 1 May 2024. 

It is important to note that the UK supplement is exactly that: it is supplementary to, but does not replace, the requirements set out in RICS Valuation – Global Standards (Red Book Global Standards). To provide services that comply with the UK supplement, valuers must understand and apply the requirements of the Red Book Global Standards.

Revisions reflect regulatory change and valuation review

The UK supplement has been updated to enact changes in valuation standards and in the legislative and regulatory valuation frameworks. 

The update also enables the implementation of several recommendations made in RICS' Independent Review of Real Estate Investment Valuations published in January 2022.

The revisions to the supplement follow extensive consultation with the real-estate professions and guidance from expert working groups who focused on the challenges facing different sectors. 

We were careful to make sure that RICS received representation from a wide variety of sources, including SMEs, larger organisations and the private and public sectors, as well as from clients. RICS is grateful to all those who provided their insight and knowledge.

The changes are concentrated in three main practice areas: financial reporting, the public sector and residential valuations.

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New financial and governance reporting standards introduced

One of the most significant changes to the UK supplement is a direct response to the valuation review's recommendations.

These amendments introduce specific new governance standards under UK VPS 3. It is important to note that these changes apply only to a limited subset of regulated-purpose valuations (RPVs), such as fund valuations. The focus of the new governance rules on rotation are in respect of the asset itself as opposed to, for example, the client's parent company.

The new governance rules introduce additional requirements in relation to the length of time a valuation engagement can be undertaken by a valuer or a valuation firm, often referred to as a rotation. The new rotation requirements are as follows:

  • a maximum period of ten years before the rotation of a valuation firm; this might include multiple engagements
  • a maximum single engagement period of five years
  • a maximum period of five years before the rotation of an individual responsible valuer
  • a minimum three-year break after rotating off an engagement
  • a transition policy to allow that a smooth transition to the new arrangements has been incorporated, allowing two years before the new rules will be enforced.

The rules recognise that there may be exceptional circumstances where there are a limited number of valuation experts capable of competently carrying out the valuation of a specialist asset, e.g. a nuclear power station. In such exceptional circumstances, the valuation firm must notify their responsible principal and also the RICS Regulation Team that they are not adhering to the normal rotation policy.

Alongside the rotation requirements, a new mandatory requirement for valuers to ask about the involvement of independent parties in the client's valuation instructions has been introduced under UK VPS 3.4. 

This is designed to identify the risk of instructing parties exerting any undue influence on the valuer, and thus prevent this happening. There is also a new obligation for valuers to record any preliminary advice, draft reporting or client discussions under UK VPS 3.5.​

In addition to these amendments to VPS 3, supplementary changes to the financial reporting section of the Red Book: UK have been introduced. These include minor house style amends to UK PS1, UK VPS 1 and UK VPS 2 to improve clarity.

Minor amends have also been made to UK VPGA 1 Valuation for financial reporting: general matters, in order to: 

UK VPGA 2 Valuations for other regulated purposes has also been significantly amended to incorporate external regulatory changes, including recent updates from the Financial Conduct Authority and Takeover Panel.

Minor amendments have been made to UK VPGA 3 Valuations for assessing adequacy of financial resources to incorporate general administrative updates and commentary on the implementation of the Basel III regulatory framework for banks by the Prudential Regulation Authority, and a short comment on Solvency II.

'New governance rules introduce additional requirements on the length of time a valuation engagement can be undertaken by a valuer or a valuation firm'

Valuation for public-sector accounting guidance amended

UK VPGA 4 Valuation of local authority assets for accounting purposes has been completely revised to make it more user-friendly and remove some of the duplication of the previous edition. This makes the section more accessible to clients as well as valuers.

In addition, minor house style amendments have been made to improve the clarity of UK VPGA 5 Valuation of central government, devolved administration and NHS assets for accounting purposes.

By contrast, some major amendments have been made to UK VPGA 6 Local authority and central government accounting: existing use value (EUV) basis of value, primarily to accommodate the Existing use value (EUV) for UK public sector financial statements, 1st edition and to link UK VPGA 6 and the professional standard more clearly.

Moreover, minor house style amendments have been made to UK VPGA 7 Valuation of registered social housing providers' assets for financial statements, in order to improve clarity as well as incorporating some administrative updates to make the section more accessible.

Meanwhile, the valuation of UK charity assets has undergone considerable legislative and regulatory change in recent years. Accordingly, the major amendments to UK VPGA 8 Valuation of charity assets reflect amendments introduced under the Charities Act 2022.

As the role of the auditor becomes more prevalent in valuation, UK VPGA 9 Relationship with auditors has been amended slightly to incorporate commentary on the minimum information requirements for this profession, particularly when it comes to portfolio valuations.

UK VPGA 10 Valuation for commercial secured lending purposes has also been slightly amended for house style. Importantly, new environmental, social and governance principles have been incorporated as well.

Residential valuation guidance refined

The focus of UK VPGA 11 Valuation of UK residential property has been broadened to include the provision of valuation advice for residential property generally rather than just mortgages. In response to market feedback, the content has been reshaped according to high-level principles, with detailed guidance to follow in a separate publication expected to be published in the second quarter of 2024. UK VPGAs 12 and 13 have also been merged into UK VPGA 11.

In addition, minor house style amendments to improve clarity have been made to UK VPGA 14 Valuation of registered social housing for loan security purposes, alongside some minor administrative updating.

Other changes

Moreover, minor amendments incorporating general administrative updates have been made to UK VPGA 15 Valuations for capital gains tax, inheritance tax, stamp duty land tax and the annual tax on enveloped dwellings and residential property developer tax. 

These signpost additional HMRC and Valuation Office Agency guidance on the subject, while commentary on residential property developer tax has also been included.

Minor house style amendments have been made to UK VPGA 16 Valuations for compulsory purchase and statutory compensation as well, to improve clarity. The professional statement on compulsory purchase remains in consultation at the time of publication. 

UK VPGA 17 Local authority disposal of land for less than best consideration has been amended to include new guidance on Northern Ireland and Scotland. This section has also been reworded for clarity and consistency.

Finally, UK VPGA 18 UK Affordable rent and market rent under the Housing Acts in a regulatory context has been removed on the advice of our affordable housing experts, as this section is no longer required.

RICS will be supporting the implementation of the above changes through a series of webinars, podcasts and training opportunities that can be viewed on the RICS Valuation Standards page.

 

Ben Elder FRICS is head of professional practice – valuation and investment advisory at RICS

Contact Ben: Email

Related competencies include: Valuation

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