Protecting Surveyors Bulletin 4: the Independent Review of Real Estate Investment Valuations

United Kingdom

In the latest in our series looking at developments in the Surveyors sphere, we look at the review instigated by RICS into real estate investment valuations and the potential recommendations which may emerge. The review, which aims to make recommendations to RICS by August 2021, intends to ensure valuation practices and global professional standards are fit for purpose. The review examines three key areas that surveyors should be aware of.

Valuation methodology – will it lead to a more prescriptive approach?

The review seeks to assess valuation standards found in the Red Book. At present, the Red Book guidance errs towards the starting point that the valuer has the requisite knowledge to conduct the valuation and needs only limited guidance (i.e. on what methodology to adopt).

However, the review may lead to a more prescriptive approach as to how valuations should be conducted, the argument being that this might help keep valuations consistent. It may also mean that too many specific requirements make it more difficult for a valuer to use their judgment when considering the context of each valuation.

The review may find that there is no need to change the wording of the Red Book. But, in lieu of any amendments, it may recommend the need for additional guidance and training to RICS valuers to help clarify the basic tenets of the methodology.

For more on methodology, particularly where the valuation falls outside the margin of error and the valuer’s methodology comes under scrutiny, see our previous Law-Now

Property Risk Analysis – will it lead to a more ‘forwards looking’ analysis?

When valuing a property, available comparative data is the primary starting point (the ‘backwards look’ analysis). However, lenders are increasingly asking for a long-term future value or property risk analysis within reports.

There is an understandable reluctance amongst surveyors to engage in this more ‘forward looking’ approach to valuations, as it can require more prediction which can be risky. The review may seek to address this trend.

It is worth noting that a surveyor engaging in any prediction of future market trends will have to be mindful of their potential liability. If the information is incorrect and the surveyor is found to have acted negligently, it may be held responsible for the reasonably foreseeable consequences of the information being incorrect.

For more on the risks of valuations in an uncertain world see our Law-Now.

Conflicts of Interest

Valuers are keenly aware of the need to be independent and objective when producing valuations. Although the Red Book and the Rules of Conduct set out requirements for avoiding conflicts of interest, the review seeks to examine whether greater clarity is needed.

There is often uncertainty around what constitutes a conflict of interest, with different parts of a business advising on different aspects of a portfolio. The review may require further ring fencing of areas within a business, to ensure there is sufficient independence. However, a valuer may argue that speaking with colleagues in different parts of the business (e.g. investment advisory) helps ensure that valuations are more accurate. It remains to be seen what recommendations the review will make in this regard.

We will continue to monitor the progress of the review. The surveying profession, and its Insurers, will follow with keen interest the outcome of the review and its consequences in protecting against any potential claims.