Independent review of real estate investment valuations by RICS

The growing need for a valuation compliance check

The Review reveals that while compliance functions are now an inherent part of financial sectors, the property valuation industry could be perceived to lag, to some extent, behind this curve.

The recommendations state that valuers should be commissioned by, and report to, an independent Chair of Audit Committee or alike, thereby removing any perceived relationship with parties who have direct interest in the performance of asset values.

This is particularly important in high-risk situations (where third-party reliance and share or unit prices are derived from valuations). This recommendation highlights an ethical proposition which would enhance both client and third-party confidence about the authenticity of the valuation process.

In relation to this, the report notes requirements for a more robust Conflict of Interest Framework than currently exists. Furthermore, it recommends that in multi-disciplinary consultancies there should be clear separation of valuation functions to other areas of the business to ensure client confidentiality, although there is acknowledgement that the availability of market-facing knowledge remains of high importance to the valuer.

Independence by way of rotations

The Review observes that while rotation of valuers can be seen as a ‘burden’ to both clients and valuers, it nevertheless does help to show and ensure that valuations have a higher degree of independence. It recommends that RICS should develop time-specific, mandatory procurement and rotation processes for valuers. A maximum tenure of 9 years and, in cases of ‘high-risk’ valuations, a reduction to 5 years. The report also refers to guidance in Europe recommending rotation in 3-year cycles.

Altus Group has noted an increasing number of real estate fund managers opting to use either multiple valuers or a panel of valuers, which eases the rotation process whilst also aiding independence through not having a single relationship to one valuer firm.

Tracing a valuation audit trail

The Review highlights that transparency through the valuation process is essential with clear recording of client-valuer meetings and discussions. This is particularly noted in the regulated valuation environment and within draft to final value reporting stages, where discussions could develop beyond fact-checking. The review recommends RICS provide guidelines around the conduct and recording of valuation processes. This would help in limiting the possibility of unwarranted pressure on the valuer.

Altus Group has seen valuation processes being increasingly scrutinised during the past two years with regulators and auditors particularly focused on transparency, independence and governance.

Prominence of Discounted Cash Flow (DCF) in valuation methodologies

With regard to valuation methodologies, the Review finds that where different methods and approaches are used by valuers, there can be inconsistencies across valuation reports, even when prepared for the same purpose.

In addition, it notes that traditional commercial property valuation methods are more implicit, relying upon direct property comparables which tend to be backward-looking. While the report does applaud valuers who utilise the Discounted Cash Flow (DCF) methodology in addition to more traditional approaches, there is a strong recommendation to adopt the DCF approach as a primary method of valuation with more consistency.

Alongside this, there is a requirement for greater transparency on reporting of data points. The report, in short, calls on RICS to provide clearer guidance on methodologies, and for valuers and RICS to work together to ensure that there is the skill set to meet rapidly changing modern market requirements.

Over the past two years, Altus Group has witnessed an increasing adoption of the DCF methodology by fund managers, especially in the Pan-European space.

The guidance also highlights the growing demand for forward-looking advisories on valuations and thus recommends RICS to define guidelines in property risk advice.

The report briefly touches on technology in valuations, with reference to data collection, artificial intelnce, and automated valuation models. It highlights that such tools can aid the valuer and suligepport increasing accuracy, however, the ‘overarching role’ of the valuer’s professional judgement cannot be replicated.

Other recommendations

The report lays out other recommendations to solidify the foundations of increased independence and quality assurance in the valuation industry. It recommends RICS creates an independently-led, valuation-focused regulatory panel, under the existing RICS Standards and Regulation Board.

The proposed panel would provide a function of performance review as well as specific industry research and guidance. The Review goes further to suggest the introduction of post-qualification requirements for valuers.

An additional key recommendation under the same overarching theme is the creation of a senior role of Valuation Compliance Officer (VCO) within valuation providers. The VCO role would further help to ensure fulfilment of these core principles; similar positions already exist within the broader financial sector. Where there is concern over conduct, clearer RICS processes to support valuers and stakeholders is also recommended.

The report recognises the global reach of the RICS institute and recommends ways to support members within and outside the UK. Lastly, and notably not least, the Review identifies the need for further promotion of a diverse, inclusive culture of valuation professionals supporting the progression of culture and behaviours.

How can we help at Altus Group?

We have looked in detail at the review and its associated recommendations. We are pleased that much of the work Altus Group performs, notably within our Valuation Management team, aligns to many of these principles. Below we set out some examples of how we assist clients in ensuring robust valuation practices:

• As a third-party between clients and valuers, Altus Group acts as a firewall to the valuation process. As well as support through valuation management, we ensure that independence is duly maintained, and regulatory compliance requirements are met.

• Altus Group continues to have regular interaction with industry bodies and local regulators and follows best practices, ensuring independence in all its operations.

• We regularly support clients in detailed and transparent Request for Proposal (RFP) exercises both for appointment and rotation purposes. We aid clients on the appointment of single or multiple valuers based on best practices, market coverage and a Fund’s specificities.

• Clear audit trails are a key element of our valuation management practices. We have a dedicated platform, ARGUS ValueInsight, that centralises information and the review process for stakeholders. Additional risk management is added to this data through our specialist in-house team fact-checking and scrutinising against the valuation reported.

• We recognise the importance of the DCF valuation approach and changing market dynamics. We regularly construct and review cashflow data to verify application of DCF methodology. We also bring a strong modelling skill set to the table leveraging our proprietary valuation software - ARGUS Enterprise - which helps to provide consistency in modelling across our clients’ portfolios. Where requested, we are happy to support valuers on conversion of valuation files to DCF using AE functionality.

• As industry leaders in valuation software, data management and AI in real estate, we, like the Review, see a place for technology to work alongside the valuation profession and to support increasingly accurate reporting and risk management services.