The independent review of real estate investment valuation

Your chance to contribute to the future of valuation

March 10, 2021

Background - The RICS has commissioned an independent review of investment valuation to ensure that it remains relevant and trusted in the future.   It is headed by Peter Pereira-Gray of Wellcome Trust who has called for evidence by 31 March.  He will report his findings in September.

The review has been commissioned in the light of criticism that commercial property valuation has not kept pace with the market due to some fast-changing sector and market dynamics.  Whilst retail has been under the spotlight, the review will consider all asset types.   It will also consider whether valuers are maintaining enough independence and if they are being objective.

What is being asked?

There are four key areas of focus.

  • Valuation methodology: Does the valuation profession use methods that keep pace with how the market prices and are valuation reports transparent enough?  The review will also look at whether valuers are being instructed in the right way, if they need better training and also if they need to embrace technology more.
  • Property Risk Analysis – the “forward look”:  Are valuations correctly instructed?; do the reports contain sufficient forward looking analysis in relation to risk as well as the objective opinion of current value? Can valuers be instructed to provide risk analysis and does the profession have the tools to undertake this type of analysis?
  • Independence and Objectivity: Are the RICS requirements sufficient and are there other material threats?
  •  Measuring Confidence: How can the RICS measure confidence on an ongoing basis?

The detailed terms of reference can be accessed here

What does JLL think?

We really welcome this review and are proactively engaging with the Review board, our clients and our people.  The Board’s recommendations must show they have acted in an independent manner to ensure future confidence in the accuracy and impartiality of valuations.  It is a matter of public interest. 

Valuation is an integral part of the property market and our financial system – and objectivity, transparency and accuracy are essential.

The last review of the profession was in 2002 and was carried out by Sir Brian Carsberg.   This is a once in a 20-year opportunity to discuss and debate what is good and what is not in the best interest of both our clients and our profession.

The message we are sending to everyone is simple: get involved!  Valuers, clients and others who review and rely on our work can share their perspectives on the profession – and help shape its future.

Some of our key thoughts are:

  1. Protecting independence and objectivity is key to ensuring confidence, but it is equally important to ensure that valuers have the right skills and are market-facing with access to accurate real-time data.  This is particularly important in times of fast market movement or structural change, or when there are low levels of transactional evidence, such as we have experienced in retail recently and during the height of the 2020 pandemic.
  2. We call for a regular rotation of valuers where there is a regulated valuation relationship – such as valuing for financial statements or for a fund.  The firm, signatory and team should rotate at least as often as the entity’s auditor does.
  3. We think confidence is undermined and it looks wrong (even if the valuation is accurate) when a valuer has valued the same investments for more than 20 years and they have non-executive directors on their client’s board.
  4. The rules about conflicts of interest are clear – their interpretation should be consistent.
  5. Valuers should be clearer and more transparent about their corporate governance including how they handle data.
  6. Clients need to put in place internal processes to ensure there is not undue influence or pressure on their valuer.  Audit committees and boards should have systems in place to ensure that the valuer is able to freely opine and discuss their valuations.  A valuer’s role is to provide market information and we have an important role in aiding transparency.
  7. Auditors play an important role in reviewing valuations but they must call out bad practice such as smoothing in times of market movement. Their role is only effective if they are sufficiently in-tune with the market – particularly when it is fast moving due to market or structural correction.
  8. Indices, such as MSCI, need refreshing. No valuation house should have a material market share of valuations in an index.   Indices should be much more transparent.
  9. The RICS should not be prescriptive in how we value but the RICS and the wider profession should invest more in providing guidance and encouraging the development and adoption of continuously improved valuation techniques.    As a house, we are moving towards the consistent use of discounted cash flows and are investing in our data capabilities.
  10. The Valuer Registration Scheme should be updated with a focus on valuation specific training as part of annual CPD requirements, and RICS audits should have more focus on methodologies and making sure the valuer has the right skills.  It should have more teeth where the RICS are made aware of problems.
  11. Valuation professionals can provide the best advice if they have access to all market participants.   Being an integral part of a multi-disciplinary practice is important.  The valuer needs to give confidence to their clients and the public that they do operate impartially – especially at times of significant market correction.  The most accurate valuations will be provided where there is real-time access to market data from capital markets, debt, corporate finance and leasing colleagues is essential, as well as the interpretation of other direct and non-direct financial market indicators.
  12. The review is considering how valuers take account of ESG.  We think the RICS has an important role in ensuring the profession is on the front-foot.  Sustainability and how we reflect ESG in our valuations has been a large part of the conversation at JLL for a number of years.   The market is much more explicit now about this aspect and we are issuing a series of discussion papers on how to incorporate these important aspects in our advice.
  13. The skills required of a valuer are very different to when the Carsberg report was published– greater emphasis on valuation in real estate education is needed and the profession needs to be more pro-active on the skills needed for the future. We have reviewed how we recruit our trainees and are changing how we recruit straight away, enabling us to open valuation as a career to a wider part of society.
  14. Valuation is a “here and now” concept by its definitions.  A risk analysis can have value to some depending on the purpose and client, and we will see the emergence of a Long Term sustainable value methodology and other valuation based risk management advice.  But there isn’t one size that fits all – for instance a lender may be interested in future income performance and a fund is often just interested in hearing the value today. Ultimately, we believe valuers have a key role in being market observers and providing transparency and insight to our clients.  Some parts of the Red Book could be updated to enable more flexibility in reporting requirements.
  15. A regular publication showing valuation accuracy and market volatility would be welcome – including one that examines the facts behind large variances between valuation and price, and by sector.
  16. The RICS need to be well-resourced to implement whatever Peter Pereira-Gray recommends.

If you would like to comment or join the discussion about the future of valuation, do get in touch!

Ollie Saunders
Head of UK Commercial Valuation and EMEA Alternatives

Claire Macken
Head of UK Commercial Valuation – Investor Clients

Matthew Green
Head of Residential Development Valuation