Professional Documents
Culture Documents
References in this Report to the masculine pronoun apply equally to male and
female valuers.
RICS 2002
Contents
Appendix 1 Bibliography
Appendix 2 Membership of the Working Party
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The RICS should approach IPD to identify what further information about
the composition and performance of valuers contributing to its Indices could
be published.
The RICS should publish more extensive guidance in the Red Book on how
to identify and deal with threats to objectivity, drawing on the concepts
developed by the Institutes of Chartered Accountants.
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The RICS should require valuers to declare their firms fee earning
relationship with any party directly interested in the outcome of a valuation if
asked by any party to whom they have a fiduciary duty.
10
The RICS should set out, in the Red Book, standards of best practice and
minimum requirements for the conduct and recording of draft valuation
meetings designed to show what information was produced by the client which
might influence the value derived, and how that information was used to
influence, or otherwise, the final valuation figure. Rules for the disclosure of
the record during monitoring should also be established.
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12
The RICS should prepare and publish a guide to the Red Book which
sets out the valuation process and its regulation from the clients viewpoint.
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14
The exemption from the Red Book for valuations given in the course of
estate agency should be reviewed to ensure that the exemption is restricted to
the proper circumstances.
15
16
The RICS should review the current Practice Statements in the Red Book
and introduce such amendments as necessary to ensure that a valuer is
prohibited from producing a valuation for third party use of a property on
which his firm has received an introductory fee unless another firm has
produced a full, formal valuation for the client between the date the transaction
was agreed and the date of the third party valuation. Such a prohibition should
last for at least one year.
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The RICS should explain and clarify with the Financial Services Authority
and other appropriate regulatory authorities the role that it will fulfil in
monitoring the processes of valuation. This should occur at the same time as
the Valuation Monitoring Committee is created so that any reasonable
requirements of the regulatory authorities can be included in the Monitoring
System.
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2.0 Background
2.1. Academic Reports on the Behaviour of Valuers
In late 2000 the Universities of Reading and Nottingham Trent published their
findings in a research project funded by the Educational Trusts of the
Investment Property Forum, the RICS and Jones Lang LaSalle entitled, The
Influence of Valuers and Valuations on the Working of the Commercial
Property Investment Market (the Reading / Trent Report). The project
examined some of the processes involved in valuation and the impact that
valuers and valuations have on the commercial property investment market in
the UK. It asked the question, amongst others, Are valuers simply
'scorekeepers' or do they actively affect prices, liquidity and turnover?
The RICS welcomed the Reading/Trent Report as it highlighted a number of
issues which were already a cause for concern. The RICS wished to have
advice on whether it should take further action in relation to any of them. The
Working Party was established to carry out this role.
The Reading/Trent Report and this Report do not directly address the
valuation of owner-occupied residential property. Although a very large and
important area of activity, the Working Party decided that it raised issues
which were outside the area of its remit, and it did not have the necessary
expertise to consider them.
To inform the Working Party, a number of other papers and publications
addressing the operation of the valuation process in the UK were considered.
The Working Party also considered papers from other professional
organisations concerning their procedures (See Appendix 1).
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2.3
2.4
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Where the Working Party needed further information, this was obtained either
from specific Working Party members or by research carried out by the
secretariat and reported back to the Working Party at subsequent meetings.
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General
For most areas of activity covered by the profession, the RICS confines itself
to setting and monitoring educational standards, requiring members to update
their knowledge throughout their career, and issuing guidance and help to its
members on particular subjects from time to time. However, in the case of
valuation, the RICS has introduced over the years since 1977 an increasing
number of mandatory requirements on its members, culminating in the
publication of the current Red Book, which is now applicable to virtually all
valuation work. The Red Book is an extensive Appraisal and Valuation Manual
setting out a large number of mandatory and advisory material for valuers. The
rationale for this degree of control is that the valuation of property supports a
large amount of financial activity. There is therefore a wide public interest that
the task should be performed to the highest standards.
The Reading / Trent Report investigated only valuations carried out for
financial reporting purposes by investment fund managers (pension funds,
insurance companies and unit trusts) and property companies. However,
many of the issues highlighted are also applicable to valuations carried out for
secured lending purposes by banks and building societies, and for other
purposes. The Working Party took the view that the quality assurance
arrangements for valuations should be considered as a coherent whole. It
therefore gives its recommendations for the valuation process generally,
although several are really only applicable to valuations for financial reporting
by investment fund managers and property companies, the primary focus of its
remit.
At the outset, the Working Party drew a distinction between valuations which
are produced essentially for the use of the instructing client only, and
valuations where others not party to the valuation process may be expected to
use the valuation. The former group is extremely diverse, people wishing to
have a valuation of a property for many reasons, but particularly includes
valuations for secured lending. For convenience this group is termed, in this
report, valuations for known client use only, or one-to-one valuations. The
second group includes valuations to be incorporated in company accounts and
in the accounts of trusts, partnerships etc, in the assessment of the solvency
of pension funds or other trusts, in statements linked to financial transactions
such as take-overs, in the direct pricing of units or interests in collective
investment schemes etc. These have been termed valuations for third party
use, or third party valuations.
The differentiation between these two groups was fundamental to much of the
Working Partys work because they vary in one important respect. Valuations
for third party use are normally commissioned by the directors / managers /
trustees of a company or fund, but are provided for the benefit of third parties
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The Working Party concluded that the issues which it had been asked to
consider could be grouped into five broad areas, and this Report is assembled
in that way. First, it considers the essential output, the figure of valuation, its
accuracy and currency. Secondly, the Report considers the sources of
valuation, the structure of valuation production. Thirdly, it looks at the
pressures faced by valuers and the best means of securing independence
and objectivity. Fourthly, the Report addresses some issues about the way
that valuers communicate with their clients, valuation reporting, and finally it
looks at the need for some form of quality control system in the form of quality
assurance and monitoring.
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definition. If valuations fail to follow the market as closely as they could, given
the nature of the task, there must be occasion for the profession to be
criticised. Without identifying or discussing the extent of lagging and variation
in valuations, the Reading/Trent Report did highlight the mismatch in valuation
methods between those used to price assets by sellers and purchasers, and
those used to undertake periodic valuations.
In addition, the Reading/Trent Report argued that valuers are exposed to
influence, particularly from clients who may have an interest in the outcome of
the valuation other than its accuracy, an issue covered in several paragraphs
below.
Understanding the extent of valuation currency, accuracy and variation is
clearly of vital importance to all users of them. The Working Party agreed that
it was a proper role for the RICS to continue to produce and maintain
standards of procedure designed to enhance the quality of valuations and the
probability of accuracy. It also considered whether the RICS should go further
and have a role in monitoring the output of valuers in an attempt to give public
reassurance on currency, accuracy, and variation, particularly for third party
valuations. It was concluded that any form of detailed monitoring of valuation
figures was impractical as it would require the replication of the entire
valuation process, and most cases of difference would amount to defensible
differences of opinion. Such differences could only be resolved in a formal
judicial or semi-judicial environment. However the Working Party agreed that it
was untenable for the RICS to play no role whatsoever in valuations produced
for third parties as there is a genuine public interest. If problems arise, a
laissez faire attitude could lead to understandable criticism. The difficulty
arises in deciding what any role should comprise.
After considerable discussion, the Working Party agreed that the RICS should
procure ongoing studies of the accuracy and currency of valuations for third
party use. Data on valuation variation is more difficult to obtain. These
studies, although built from actual cases, should be generalised in their nature
and, with suitable commentary, would provide confidence to the market and
public on the accuracy of valuations. Much the greatest concentration of data
on third party valuations lies in the database held by Investment Property
Databank (IPD). IPD is an organisation which collates data from a significant
proportion of UK institutional funds and property companies on the periodic
valuations produced of the assets under their control. These data are used,
inter alia, to produce their published headline market indices. It was reported
that research into valuation accuracy, sponsored in some years by Drivers
Jonas and pursued annually by IPD themselves, was of considerable
importance in underpinning the credibility of the Index as a reliable market
measure and thus by implication also the valuations that contribute so
centrally to it. This seems the obvious place to start. IPD currently records the
outcomes of in excess of 2,000 UK property transactions each year. Of these
around 1,000 represent sales of properties with prior valuation track records
included within IPD's databases. This evidence enables a carefully conducted
comparison of the relationship between valuations and subsequently achieved
market prices. It was felt by the Working Party that this research could be
extended, perhaps informed by a high level academic and professional
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steering group, and could then be backed and published by the RICS on a
consistent annual basis as part of its contribution to the process of monitoring
valuation standards in the UK. Whilst such work would, of course, only reflect
the valuations produced to IPD, these would cover a significant proportion of
all third party valuations, and the Working Party considered that the results of
such work would be likely to reflect most commercial property valuations for
investment-type properties. It would not, however, capture the large number of
valuations carried out of smaller, often owner-occupied, properties commonly
used as collateral for loans. Nor would it reflect much specialised commercial
property. Almost by definition the last group, although occasionally an
important element of third party valuations, will not be susceptible to a
general overview. Despite these limitations, the Working Party concluded that
such a study would provide a useful indicator of valuation accuracy.
Recommendation 1
The RICS should enter discussions with Investment Property Databank with a
view to agreeing a means by which their data could be used to produce
ongoing annual reports on the correlations between valuations and achieved
prices as observed by IPD, and consider with the wider academic community
how the data can be additionally analysed to provide better information on the
currency of valuations. The RICS should also encourage research into the
valuation process and behavioural issues and ensure that the knowledge
gained is fully integrated into the educational system.
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Recommendation 2.
The RICS should approach IPD to identify what further information about the
composition and performance of valuers contributing to its Indices could be
published.
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6.2
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providing the proxy for price and not casting forward to a future date except in
some loan security instructions.
If valuers were detached from the market place in the interests of an
improvement in the state of independence, the Working Party concluded that
there would be great threats to the quality of valuations, in particular their
currency. This disadvantage would far outweigh, in the opinion of the
Working Party, any improvements in appearance.
The Working Party concludes that there is a need for the Red Book definition
of independence because there will be circumstances in which the state of
independence is in the interests of the client. However, the definition should
make clear that the term Independent is used in a special sense, and that the
quality of independence in its everyday sense is required to be shown by all
valuers in all circumstances. Probably the majority of valuers act as External
Valuers. Subject to the safeguards covered below, this seems, to the
Working Party, a perfectly proper relationship, and one which will not, of itself,
impede the quality of valuations. However the current RICS definitions of
Valuer Status need greater clarification and amplification.
Recommendation 3
The definitions of Internal, External, and Independent valuer should be
clarified to avoid ambiguities and misunderstanding by clients and users, and
amplified in each case to make it clear that all valuers are required to have
independence, integrity and objectivity in the performance of their task,
whichever role they fulfil.
Threats to objectivity can arise from many circumstances, a number of which
are touched on in what follows. Whilst, no doubt, valuers do strive to maintain
objectivity, it is not always easy to see that ones own objectivity is threatened,
or may be seen by others to be threatened. The Working Party therefore
concluded that, as objectivity must be one of the fundamental criteria by which
the profession and its output is judged, the RICS should give further guidance.
Recommendation 4
The RICS should publish more extensive guidance in the Red Book on how to
identify and deal with threats to objectivity, drawing on the concepts developed
by the Institutes of Chartered Accountants.
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There are some advantages in specifying, as the Red Book does, generic
definitions of the roles valuers may fill, and in having descriptions of, and
prohibitions on certain forms of conflict of interest. However, the Working Party
took the view that there are dangers in relying too heavily upon the wording of
such definitions. Participants in the property market tend to have a wide
variety of relationships with each other capable of all sorts of interpretations.
The dangers are best counteracted by requirements for openness and
transparency within the broad framework provided by the definitions. The
recommendations which follow reflect this view. In adopting this approach, the
RICS would be following similar principles to those adopted by the Institutes of
Chartered Accountants.
Other fee-earning relationships with parties interested in the valuation being
produced, normally the instructing client and, in the case of valuations for
secured lending, the borrower or a broker, should be declared so that users of
the valuation may draw whatever conclusions they wish. The Working Party
considered at length how far this principle should be carried. In particular,
there are issues of commercial confidence to be considered and balanced
against the benefits of openness. The Working Party reached three
conclusions. First, the key relationship lay in the proportion of the total fees the
valuers firm derived from the interested party. In principle, the higher this
proportion, the more leverage the party might be thought to have. Secondly, to
reduce the risks to commercial confidentiality, reporting should be in bands,
e.g. under 5%, 5 to 10% and so on. Thirdly, the obligation to report should be
mandatory for valuations for third party use. For valuations for known client
use only there should be no such obligation, but valuers should be required to
give the information if asked to do so by any party to whom they might be
considered to have a fiduciary duty.
Recommendation 5
The RICS should introduce a requirement for disclosure by valuers producing
valuations for third party use of their firms total fee earning relationship with
the instructing client, to be expressed in a formalised manner. This disclosure
must appear in their valuation report and any published reference thereto.
Recommendation 6
The RICS should require valuers to declare their firms fee earning relationship
with any party directly interested in the outcome of a valuation if asked by any
party to whom they have a fiduciary duty.
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6.4
Duration of instructions.
The Reading/Trent Report found that, in a few cases, the use of the same firm
or individual valuer over a long time scale had apparently distorted the level of
values. Close personal relationships can develop, and familiarity with the
circumstances could lead to insufficient questioning of the factors affecting the
valuation. The Working Party therefore considered whether, for valuations for
third party use, there should be a requirement for some form of rotation, that a
firm should be required to stand down after performing the task for a given
number of years.
Such an arrangement could certainly be seen to mitigate the perceived threat.
However, the Working Party agreed that there would be serious
disadvantages. Changing valuer is a costly exercise, not only in the financial
costs necessarily incurred in taking up a new brief, but it is also costly in the
sense of knowledge foregone. The Working Party was told that attempts are
being made to reduce the financial costs, but the costs of whichever sort
would be ultimately born by investors. Such costs should only be imposed for
tangible advantage. There are also advantages in continuity, producing wellinformed valuations in an unbroken series. Continuity also tends to increase
the cost-effectiveness of valuations. The Working Party therefore concluded
that this is not an area where rigid rules seem appropriate and that there
would be no net advantage in requiring the rotation of firms of valuers.
The Working Party nevertheless recognised that there are dangers of
individual valuers becoming over-familiar with both the properties being
valued, and with the client. This can lead to threats to objectivity as the valuer
gets too close to the issues he must address. The Working Party concluded,
therefore, that firms of valuers should be encouraged to rotate their personnel
dealing with any particular client. There may be merits in doing this for all
valuation work, but the Working Party decided to restrict its recommendation
to valuations for third party use only.
Recommendation 7
Valuers producing valuations for third party use should be required to state
within their valuation report and any published reference thereto, the length of
time that they have been carrying out valuation instructions for the client.
Recommendation 8
The RICS should publish guidance on good practice in rotating personnel
producing valuations for third party use.
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with any other interested party. It is not necessary to cover occasions when
factual information is exchanged, (albeit that, for other reasons, such a record
should be kept) but only those when the valuers overall opinion of value might
have been influenced. Nor is it necessary that the occasion should be
recorded in great detail. Rather, the record should provide an audit trail
which, when the valuers process is being reviewed either by himself before
reaching his final conclusion, or by others in the course of monitoring, will
show when the valuers independence and objectivity might have been
influenced, and demonstrate either that his opinion had not been changed, or,
that it had been and why. Given the great variation in the relationships
between clients and valuers, the form for recording such occasions should not
be prescriptive, but the principles should be made clear, particularly when any
third party has a legitimate interest in the outcome of the valuation.
Recommendation 9
The Red Book should contain specific guidance on the recording of occasions
when a valuer discusses the outcome of the valuation with the client or any
other interested party.
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from management. The Working Partys approach was that valuers should
have a similar protective structure.
It was put to the Working Party that the expectation of client pressure could
lead some valuers to treat draft valuation meetings with the client as a
negotiation over the final figures, even to the point where they entered the
meeting with a proposed valuation differing from the number they believed to
be appropriate with a view to some sort of negotiation taking place. The
Working Party had no evidence that such behaviour was other than, at worst,
rare, but to the extent that it occurs at all, it is unprofessional and measures
should be taken to limit its occurrence. The Working Party believes that the
key point is that it is appropriate for valuations to be adjusted at draft valuation
meetings where new and persuasive evidence is produced to justify a change,
but they should not be changed in the absence of such evidence. Some
safeguard would be provided if valuers kept careful records of draft valuation
meetings, as, the Working Party was told, many do at present. The record
should note the information provided in relation to the valuations, and
subsequently record how that information was used to justify a change in
value. This is a key issue in perceptions, and the Working Party was in no
doubt that, particularly for valuations for third party use, valuers should be
prepared to take some trouble to create a transparent audit trail.
Recommendation 10
The RICS should set out, in the Red Book, standards of best practice and
minimum requirements for the conduct and recording of draft valuation
meetings designed to show what information was produced by the client which
might influence the value derived, and how that information was used to
influence, or otherwise, the final valuation figure. Rules for the disclosure of
the record during monitoring should also be established.
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Recommendation 11
The RICS should undertake an examination of the influences and pressures
on valuers who are instructed to undertake valuations for secured lending, and
of those parts of the valuation process particular to this context, with a view to
establishing Practice Statements designed to ensure public confidence in the
valuation process in this area.
Recommendation 12
The RICS should prepare and publish a guide to the Red Book which sets out
the valuation process and its regulation from the clients viewpoint.
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Recommendation 13
RICS should publish an interim information paper, pending the outcome of the
ESRC funded Reading research, about valuations based on limited
information, giving examples of different situations in which such valuations
are requested and best practice on how they should be approached. The topic
should also be addressed in CPD seminars.
Recommendation 14
The exemption from the Red Book for valuations given in the course of estate
agency should be reviewed to ensure that the exemption is restricted to the
proper circumstances.
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identified but a bracket around that correct value can be determined is called
the Margin of Error and seems to have developed unchallenged by judges,
lawyers and valuers since the landmark valuation professional negligence
case of Singer & Friedlander in 1977. It is only recently that academic
comment concerning its validity has been published.
Uncertainty is a normal market feature deriving from the nature of property,
which should be openly acknowledged. It is variable from property to property
and from market condition to market condition. It is something to be managed
as it cannot be removed.
In the context of the Working Partys work, the open expression of uncertainty
might well ameliorate charges of client influence. In the light of valid new
information or interpretation from the client, it might be entirely correct for a
valuer to change his single figure valuation within his own area of uncertainty.
Such a change could be differentiated from one where a client persuaded the
valuer to change the basic tenor of his calculation.
Beyond this, there is a risk that third party users of valuations may be misled
by the apparent certainty of a single figure valuation. One can easily imagine
circumstances where a portfolio is valued on two occasions at exactly the
same figure. On the first occasion the market was vigorous and the valuer
might be confident to 5% or less of the figure because of a wealth of
transaction and other supporting evidence of prices. On the second occasion,
information on the market may be more sparse and the various signals of the
level of prices less numerous or conflicting. The valuation arrived at may be
identical but the level of uncertainty in the valuers opinion is greater. At
present, the valuer can readily express this to a single client, but there is no
robust and understood mechanism for him to do so to third parties. Therein
lies the scope for misunderstanding.
The issue is whether this sort of normal uncertainty should be communicated
and if so, can it be communicated in the valuation figure or in the valuation
report? This is a complex issue which was debated at length, and
inconclusively, in the Mallinson Committee in 1994. In the time available, the
Working Party feels unable to recommend a particular method for reporting
uncertainty around the single valuation estimate, but it considers that clients
deserve more information than they normally receive at present.
Recommendation 15
RICS should commission work to establish an acceptable method by which
uncertainty could be expressed in a manner which will be helpful and will not
confuse users of the valuation. RICS should also seek to agree with
appropriate representative bodies of those commissioning and using third
party valuations the circumstances and format in which the valuer would
convey uncertainty.
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Recommendation 16
The RICS should review the current Practice Statements in the Red Book and
introduce such amendments as necessary to ensure that a valuer is
prohibited from producing a valuation for third party use of a property on
which his firm has received an introductory fee unless another firm has
produced a full, formal valuation for the client between the date the transaction
was agreed and the date of the third party valuation. Such a prohibition should
last for at least one year.
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cost, and the cost must be commensurate with the benefits expected to flow
from the system. However, the Working Party believes that a worthwhile
system can be introduced at a reasonable cost. Furthermore, it believes that it
is highly desirable for the RICS to introduce such a system. Clients of
members of the professions, and the public at large, have, today, high
expectations of the standards of performance of those professionals, and
rightly so. The Working Party believes that, to meet those valid expectations,
the RICS must be able to show that it has taken reasonable steps to provide
assurance of the quality of service of its members
8.2.1
8.2.2
The Working Party notes that the present approach of the Red
Book is to focus on matters of process and professional behaviour and not
to prescribe particular methods of valuation. It accepts this approach,
recognising that the technical expertise to undertake valuations is
fundamental to the professional skills of the valuer. This means that a
monitoring system should focus on process. This Report contains a
number of examples of issues that should be covered by a monitoring
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system: procedures for recording and dealing with client meetings, content
of valuation reports, how independence issues have been
addressed. In order to provide a sound basis for the monitoring system,
the RICS should prepare a comprehensive Practice Statement on these
matters, bringing together existing material and expanding it to cover all
the topics concerned.
8.2.3
8.2.4
8.2.5
8.2.6
8.2.7
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8.2.8
Recommendation 17
The RICS should create a Valuation Monitoring Committee to create and
manage a Review and Monitoring System in accordance with the principles
set out, and make amendments to the Red Book to enforce the System.
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Recommendation 18
The RICS should explain and clarify with the Financial Services Authority and
other appropriate regulatory authorities the role that it will fulfil in monitoring
the processes of valuation. This should occur at the same time as the
Valuation Monitoring Committee is created so that any reasonable
requirements of the regulatory authorities can be included in the Monitoring
System.
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Appendix 1
Bibliography
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Appendix 2
RICS Secretariat:
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