Peter Pereira Gray from the $35 Billion Wellcome Fund Trust was tasked by the RICS in December 2020 to conduct a review into the industry’s approach to property valuations. This has been mounting for years. But during the pandemic, it all came to a head: there were notorious seizures in the real estate fund management industry preventing pensioners from gaining access to their funds. The RICS Red Book framework could not cope with the pandemic. Valuers were prevented from doing their jobs in a normal fashion when ‘material valuation uncertainty’ arose, and were forced to issue disclaimers. This resulted in major UK pensions funds left with no option but to stop key operations. Why? It turns out that the very essence of the RICS Red Book for real estate investment valuations was no longer fit for purpose in the world of property. More specifically, it was even triggering fund crises in times when there was no major financial crisis compared to the structural issues and the sentiment throughout the global financial crisis in the 2000s. All this boils down to the fact that there was a lack of readily-available recent investment comparables (aka the ‘comps’).
Meanwhile, many property firms have benefited from a tremendous run during the 2020 and 2021 years of C-19 mayhem. The value of assets didn’t plummet to zero because comps didn’t exist. The dry powder of billions of capital waiting for distressed assets didn’t find a home. Clearly, alternatives are needed once it is deemed that the RICS Red Book cannot support the essential ingredient during times of change: i.e. trust in valuations and maintenance of associated financial operations for the most important assets in our society: land and property.
Skip forward to this month, January 2022: Pereira Gray delivers a once-in-a-generation comprehensive account of the situation in the RICS Investment Valuation review. Every surveyor should read it as part of their CPD. The changes are recommended as a minimum, not an option. Otherwise, the Valuation discipline may well risk being separated from multi-disciplinary property firms in future. Why? There is evidence of persistent conflicts of interest in an industry that, until now, has not been able to regulate itself and deter the few rotten apples that tarnish the reputation of all responsible and professional surveyors.
There is also another clear issue that had to be addressed: the $30 trillion growing asset class of global real estate is increasingly accepted as a mainstream capital allocation for the global fund management industry. This is a classic pitch for top global funds to recite in front of their LPs of Sovereign Wealth Funds, University endowment funds, and superannuation industry. The flip side is that it is no longer sustainable for investment valuers and advisors to shy away from proper Quality Assurance and industry regulation that has historically applied to other major asset classes. We should note that the bar is not to install regulation for regulation’s sake: Pereira Gray points to the basic need of providing “mathematical proof” for the decision-making of custodians of pension funds and lenders that act upon the signed-off valuation expectations.
Epitomising the wholesale changes in the report is the specific recommendation to involve a Valuation Compliance Officer as per The Times:
“CBRE, Savills and Knight Frank are among surveying firms that will have to employ a Valuation Compliance Officer to ensure that valuations are made objectively and they will be governed by a new regulatory panel under plans announced today.”
The Times, London – 13 January 2022
In addition to a wholesale change in mindset and quality assurance attitudes, the report’s main recommendations demand a change in methodology. All RICS surveyors globally, particularly in the UK (given the powers under the RICS and Royal Charter), must embrace Discounted Cash Flows (‘DCF’) as the primary methodology for investment valuations. The explicit nature of DCFs leaves no room for ambiguity or mystery. There can of course be ambiguity in human judgement. That is why valuations, pricing, appraisals and bidding will always remain an ‘art’ to some extent. But once a decision is taken to select someone’s or a team’s human judgement, it must be explicitly documented for the usual fiduciary reasons.
Peter Bill in the Estates Gazette injects his coverage of this review with his usual sense of humour this week. But he also predicts “inertia” from his luncheon friends. Other leading EMEA Heads of Valuation do not share this view. They sense urgency and the need to ‘get ahead of the curve’ of anticipated regulation at the likes of Savills, Cushman & Wakefield and JLL. As in the Estates Gazette’s coverage of Future Female Leaders under the leading light of Sam McClary, this is another major facet of change within the global property industry in which all surveyors must play their part. This financial report looks not only at mathematical proof but also other crucial causes like creating a regulatory framework to prevent bullying between Principals and objective Valuers.
It is vital to note that the RICS Investment Valuation report was immediately and unequivocally accepted by the independent RICS Standards Board. For all intents and purposes, relevant Property Directors and Board members are advised to take it seriously. Otherwise, the next review may well recommend that professionals from other industries stamp their layman opinion on how Property should be regulated. We are sure that our fellow real estate colleagues will prefer to regulate themselves via RICS, rather than see a sea of accountants or lawyers eat their lunch from a Quality Assurance regulatory perspective.
It is simply a fact of life that many professionals in the last 10 years of their careers will be under far less pressure. If they don’t act, it’s for the rising stars in their 30s/40s who may face the consequences. But any well-established professional property firm that values its brand in the long-term will do well to press ahead with unavoidable changes in 2022.
We will be sharing more about this in the coming weeks, with further analysis via this website’s blog. Our CEO Michael Molloy will be speaking at the Bayes Business School in the City of London in February 2022, and we invite any interested readers to let our team know if they wish to arrange similar briefings for their businesses, societies or clubs.