The Independent Review of Real Estate Investment Valuations: future-proofing confidence

In the Summer of 2020, the RICS Standards and Regulation Board appointed Peter J. Pereira Gray supported by an Expert Advisory Group to lead an independent review into real estate investment valuations and to provide evidence-backed recommendations.

The RICS’ aim in requisitioning the review was to ensure that these valuation services “remain relevant and trusted in this important and sensitive professional field” following concerns in some quarters over performance and the independence of valuers.

The Valuation Review has now been published [1] (December 2021), along with the response of the RICS Standards and Regulation Board (the SRB) dated 13 January 2022 [2].  In short, the SRB has “unequivocally accepted” all 13 recommendations in the Review – our summary and analysis are set out below.

• 13 core recommendations
• Three key recommendations
• RICS SRB’s response
• Valuer independence and conflicts
• Looking ahead

13 core recommendations

1. Commissioning and Receiving Valuation Reports
   There should be standardised governance arrangements for commissioning and receiving valuation reports for high-risk and ‘regulated’ valuations.
2. Valuation and Advisory Activities
   Valuers should ensure that the separation of valuation from advisory activities within firms is consistently applied.
3. Rotation
   RICS should develop a time-specific, mandatory procurement and rotation process for valuers.
4. Compliance Role
   New Valuation Compliance Officer role to specifically cover valuation process and conduct.
5. Raising Concerns
   The RICS needs clearly signposted processes to raise concerns about ethical conduct and any improper pressure placed on valuers.
6. Quality Assurance Panel
   There should be a new independently led valuation regulatory quality assurance panel, under the jurisdiction of the SRB.
7. Valuation Audit Trail
   The RICS Red Book[3] should include further standards around the conduct and recording of valuation instructions and meetings between client and valuer.
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
   ii. Advanced Analytics
   RICS should improve the knowledge and application of valuers in respect of advanced analytical techniques.​
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, to inform the extension of regulatory requirements and support to valuers.
10. Standardised Property Risk Advice
    RICS should develop a framework to standardise property risk advice.
11. Post-Qualification Requirements and Revalidation
    RICS should review its post-qualification requirements for valuers, and consider introducing mechanisms for regular revalidation of valuers.
12. Diversity
    RICS should continue to build on its important work to ensure a diverse and inclusive valuation profession.
13. Culture and Behaviour
    Further specific RICS guidance is required to clarify RICS’ expectations around the culture and behaviours expected of RICS professionals in the pursuance of valuation activities.

Three Key Recommendations

Mr Pereira Gray’s clearly stated view was that implementing only some of the 13 recommendations would not work - describing them as “a package” which, “if taken as a whole and adopted robustly…. will go a long way to improving and securing society’s trust in property investment valuations”.

Mr Pereira Gray highlighted the three that he considered “overarch all of the others”. These are recommendations 4, 6 and 13 above, relating to the quality assurance panel, the new Valuation Compliance Officer role and culture/behaviour in valuation activities.
 

RICS SRB’s response

The SRB’s response has been positive and clear in its support for the Review outcomes, stating that they are “of vital importance to the profession’s credibility and future standing” and committing “to act with energy and purpose” in their implementation. 

There is an understandable acknowledgement that the time and resources that are needed to effect these changes means that the recommendations cannot be implemented overnight but the SRB has pledged to “achieve lasting change as quickly as possible”, with input from the profession and stakeholders.

In its response to the Review, the SRB noted that the Review did not find any “systemic issues that lead to questions regarding the overall credibility or accuracy of valuations”. Further, recognising that the recommendations may have relevance beyond real estate investment valuations, the SRG will consider the possibility of broader application.

Valuer independence and conflicts

The Review identified these areas as the “two major ‘elephants in the room’” uncovered in the investigation underpinning the Review. Accordingly, one of the key issues faced was whether to require the separation of valuation and advisory services.

In this context, Mr Pereira Gray stated:

“No one coming into this Review…… failed to recognise that the decision of the UK accountancy profession’s regulator, the Financial Reporting Council (FRC), to request the separation of audit from advisory services by 2024 creates a crucial precedent for our own deliberations”.

The deliberation was also guided by the requirements of the UK Takeover Panel in association with the Takeover Code. Mr Pereira Gray‘s view is that the RICS should develop standards based upon and around the same principles.

There will be widespread relief amongst RICS professionals that the outcome of this consideration was that, on balance, no mandatory separation between valuation and advisory services was required on the basis that the current status quo “results in potentially better outputs for the client and hence society”. 

There is a multi-pronged “but” however in the recommendations, including the following key changes:

• the Review states that it is essential that relevant firms have in place a Valuation Compliance Officer (recommendation 4 above), to be a senior appointment reporting at main board/partnership level: “the role must have ‘teeth’”;
• further to recommendation 3, a time-specific, mandatory procurment and rotation process for valuers will be established - in Mr Pereira Gray's view: “if one is not to seek separation of valuers from multidisciplinary practices, it is essential to recommend rotation to ensure relationships do not become too cosy”;
• a new independently-led valuation regulatory quality assurance panel, with lay members, to report to the SRB and to have the capacity to “sanction potentially erring practitioners” (6 above); and
• the direction in recommendation 8(i) that the valuation profession should incorporate the use of discounted cash flow as the principal model to be applied in preparing property investment valuations.

Looking ahead

Most of the changes will take time to flow through to substantive practice – the RICS has a huge project ahead to plan and resource the delivery of the Review’s recommendations.

The requirement for mandatory rotation and the use of the discounted cash flow model are likely to be amongst the most contentious of the recommendations but the RICS has committed to deliver all 13. Change is uncomfortable and can lead to steep learning curves and bumps along the way.  However, if the RICS delivers on its commitment to implement the recommendations from the Review, that would lead to much stricter policing of valuation work, which, in terms of minimising risks, is likely to be to the ultimate advantage of firms and those that insure them.