Following the recent publication of new Royal Institution of Chartered Surveyors (RICS) standards, designed to improve the governance of valuations for regulatory purposes, we caught up with Tom Norfolk, one of our partners who works in our valuations team and is based in our London office, to find out why these changes are so important.
Given the fact that almost 25% of corporate assets are held in real estate, understanding their true value is critical. Perhaps the most critical provision of the new standards is the introduction of a mandatory rotation cycle of valuation firms, as well as external valuers valuing assets for regulatory purposes. The rotation policy will come into effect from 1 May 2024.
It is worth noting that the compulsory rotation cycle is now a maximum engagement period per valuer of five years and a maximum period of 10 years for a valuation firm. We are already seeing this play out with a number of our existing instructions and the volume of tender invitations for Regulated Purpose valuations increasing.
Another provision is a minimum three-year break after rotating off an appointment.
In addition, there will be a two-year transition period to allow clients and valuation teams to start implementing the new guidelines.
Strengthening the standards will ensure that valuations conducted by RICS registered valuers will provide the validated evidence on asset values which investors rely on, and third parties refer to.
The business benefit is that these valuations “… remain relevant and trusted”.
The changes to the Red Book UK supplement, followed a consultation with RICS registered valuers, last year.
Anecdotal research suggests that some corporations have yet to realise the fact that the new guidelines have been enhanced to reinforce the ‘trust’ all parties have in the property valuations investors rely on.
Asset and property portfolio valuations, for investment purposes, have grown exponentially over the last few decades. That is why the RICS review focused on valuations of real estate assets for performance measurement and decision-making purposes including financial reporting, inclusion in prospectuses and circulars and takeovers and mergers.
The accuracy of independently assessed asset and portfolio valuations is also a valuable data source to help senior leadership teams make informed strategic decisions, when acquiring or disposing of a business, as part of a merger and acquisition strategy.
In addition, accurate valuations are necessary when assessing what an asset or property portfolio is worth during rounds of capital raising, or when considering their value before the transference of assets between business entities.
Other circumstances when the new RICS standards have major commercial benefits are related to collective investment schemes and unregulated property unit trusts.
Ultimately the goal of the RICS review is to future-proof valuation practices in response to changing market dynamics, as well as structural shifts such as that precipitated by the post-pandemic economy.
Accessing accurate, impartial valuations underpins the efficacy of all these commercial transactions and ensures that organisations meet the regulatory protocols that govern their businesses.
A final point from the guidelines is worth highlighting: “… where there are truly exceptional circumstances, a carefully controlled option to deviate from the requirements with notification to RICS Regulation…” is possible.
The issues around the efficacy of property valuations will always stalk the property world – if unscrupulous businessmen are willing to breach the boundaries of truth.
Perhaps less dramatic is the argument that rotating valuers is akin to changing auditors regularly: it encourages objectivity and minimises the risk of complacency and familiarisation with the client’s business and personnel – no matter how robust the internal process and protocols appear to clients.
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