RICS review rules out valuation separation

Fears that real estate could face the same fate as the accountancy world have been dampened, after a separation of valuation from advisory services was not recommended in a long-awaited independent valuations review for the RICS. Instead, the Independent Review of Real Estate Investment Valuations, led by Peter Pereira Gray of the Wellcome Trust, proposes 13 recommendations to create a valuation system “appropriate for a changing world”. They include the creation of a new regulatory quality assurance panel and compliance officer roles within firms. It also recommends a heavier focus on the discounted cash flow model; stricter controls on data and ethics; standardised commissioning and receiving for valuation reports; strengthening audit trails for meetings between clients and valuers; reviewing post-qualification revalidation; and a simplified Red Book. The standards and regulation board at the RICS, which commissioned the review, said it has accepted all of the report’s recommendations, but that they would be implemented at “different speeds”. Discounted cash flow Among the 81 pages of recommendations, Pereira Gray concluded that discounted cash flow should now to be used as the primary methodology for preparing valuations, rather than more traditional measures such as all-risk yield calculations. He said current measures fail to provide “sufficient information and clarity to the client on the make-up of the value of their property”, even if they can correctly identify the price at which an asset is likely to trade. “In a world that now offers cryptocurrencies, complex securities and derivatives, with professional compliance and regulation, the days of a valuer relying upon an ‘all-risks yield’ should be numbered,” said Pereira Gray. He advised that cash flows should account for matters including the prospective growth rate, the risk premium and the discount rate. Although Pereira Gray endorsed the idea of further separating advisory and valuation services, he stopped short of suggesting a more wide-ranging overhaul for multidisciplinary firms. Instead, he called for the RICS to work with valuers on tightening confidentiality on data and instructions. He acknowledged this was a decision that will “please some and frustrate others”. “I have concluded that multidisciplinary service providers may still undertake valuations, but they need to be supported by a robust compliance function built into the service delivery to protect everyone from the conflicts that can arise around a valuation process,” Pereira Gray said in the report, adding that he was “on the side of maintaining the status quo”. “The ‘easy’ answer might have been to recommend the independence of the valuation professional from their advisory colleagues; however, this runs the risk of poorer outputs overall, and I therefore recommend other mechanisms in the short term to counter the accusations that currently bedevil the industry,” he said. Pereira Gray additionally suggested a mandatory procurement and rotation process for valuers, to improve independence. “Enhancing confidence” Separately, a proposed compliance officer function at firms would “enhance society’s confidence” in valuations by boosting accountability. In the meantime, a quality assurance panel, reporting to the RICS standards and regulation board, would monitor and appraise valuations against set standards. Under the proposals, registered valuers will also be subject to continuing professional development requirements. Pereira Gray said the RICS should consider introducing mechanisms for regular revalidation as well as review post-qualification requirements. “I firmly believe it to be critical that RICS further enhances the skillsets of the chartered surveyor via specialist and dedicated training for those who choose to take the route of becoming a registered valuer,” said Pereira Gray. “I suggest [valuers] should be subject to dedicated CPD requirements to support continuous improvement over the years they are in practice.” He added: “My view is that a constructive form of revalidation should occur at suitably regular intervals, and should be appropriate to the type of work being undertaken.” Outside of the review, Pereira Gray urged the RICS to address concerns around a lack of adequate and affordable professional indemnity insurance for valuers as well as promote better understanding on value indices. Pereira Gray also noted that he will pass on “anecdotal” examples of industry practices linking to capital market transactions to RICS for “further consideration”, since he felt that they fell outside the report’s remit. The recommendations Standardise governance for commissioning and receiving valuation reports for high-risk and “regulated” valuations; Enhance separation of valuation from advisory activities in the context of data and instructions; Develop a mandatory procurement and rotation process; Establish a valuation compliance officer role to cover process and conduct; Ensure it signposts processes to raise concerns about ethical conduct and other issues; Create an independent regulatory quality assurance panel; Add standards to the Red Book for conduct and recording instructions and meetings between clients and valuers; Incorporate the use of discounted cash flow as the main model for deriving valuations and improve knowledge around advanced analytical techniques; Maintain a record of valuation standards adoption in countries outside the UK; Develop a framework to standardise property risk advice; Review post-qualification requirements and consider mechanisms for regular revalidation; Ensure the profession is diverse and inclusive; Strengthen guidance on culture and behaviours expected of valuation professionals. 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