RICS launches consultation on DCF valuation model

The Royal Institution of Chartered Surveyors has launched a public consultation focusing on discounted cash flow valuations, as part of its ongoing review into changes to the Red Book. The consultation will ask surveyors to assess the Red Book, its content and proposals for change. This will include proposed new global practice information on DCF valuations. Additionally, the draft Red Book UK Supplement standard for valuing real estate investments recommends that valuers should strongly consider the use of DCF when undertaking valuations.  DCF, a type of valuation that calculates an investment’s value based on future cash flow predictions, was a core component of Peter Pereira Gray’s independent report into valuations, which was published last year. Pereira Gray’s 81-page review proposed the widespread use of DCF as the primary method for valuation, since existing measures fail to provide “sufficient information” to clients on the make-up of the values of their properties. “The days of a valuer relying upon an ‘all-risks yield’ should be numbered,” said Pereira Gray at the time. Pereira Gray’s review made three key proposals relating to DCF. Two recommendations covered analytical approaches and their application within DCF valuations, while the third related to standardised property risk advice. A focus on the method comes as economic uncertainty brought about by the COVID-19 pandemic and geopolitical developments, which have created price fluctuations in property markets and underscored the need for an increased accuracy around valuations and ensuring that assumptions made within valuations are explicit. Richard Waterhouse, chair of the valuation review implementation committee at the RICS, said the consultation comes at a time of significant upheaval in the real estate investment market and valuation profession. “This is a time of enormous changes for investment real estate and the valuation profession that provides the services that support it, and it is of fundamental importance that the standards we produce ensure regulated members consistently deliver to high standards to maintain public trust,” Waterhouse said. The organisation is also developing a “suite of updates” to its professional standards, practice information and training material in response to greater use of the DCF model, driven by “fundamental changes” in valuation. The RICS plans to create a digital “transition hub” on its website to support any new standards, in addition to upskilling chartered surveyors globally for greater use of DCF in their work, with particular focus on territories where the DCF model is underutilised. “We are reaching out to our global membership of over 130,000, along with our key partners in the industry, to gain their crucial insights into this critical update,” said Waterhouse.  The consultation will close on 12 April. It comes after the first consultation relating to Pereira Gray’s report, focusing on mandatory valuer rotation, began in November last year.  See also: RICS valuation review: act fast or risk more ‘draconian’ measures   To send feedback, e-mail pui-guan.man@eg.co.uk or tweet @PuiGuanM or @EGPropertyNews