Proposed Changes to UK Supplement to the RICS Red Book
November 2022
At the beginning of November 2022 RICS published a Consultation Draft inviting comments on proposed changes to the version of the UK Supplement effective from 2018. The closing date for comments is Wednesday 14 December 2022.
The change which has attracted most attention is probably that relating to valuer rotation when undertaking recurring valuations for a “Regulated Purpose”. This is in response to the recommendations made by the Pereira-Gray Review published in early 2022. RICS claim the purpose of the review was to assess where changes may be necessary to re-establish public trust in the valuation of investment property. What the evidence was for public trust having been lost is unclear, although given that the last such review which led to the introduction of the concept of “Regulated Purpose” valuations was by Sir Bryan Carsberg two decades ago, there was no harm in revisiting the subject. The Red Book changes resulting from Pereira -Gray were considered by a dedicated working group but were not reviewed by the Global Valuation Standards Expert Working Group responsible for the Red Book generally prior to the Consultation Draft being published.
Changes have been proposed to many of the other sections. Apart from the proposed Regulated Purpose changes in UK VPS 3, perhaps the one which will have widest impact is the proposal to merge the three separate VPGAs dealing with residential mortgage valuations, other residential valuations and use of the HomeBuyers report and valuation into a single document UK VPGA 11.
You can jump to a summary of the changes we have noted in the different sections and what we think of them by clicking on the links below:
UK VPS3 Regulated Purpose Valuations – Supplementary Requirements
UK VPGA 1 Valuations for Financial Reporting
UK VPGA 2 Valuations for other Regulated Purposes
UK VPGA 4 Valuation of local authority assets for accounting purposes
UK VPGA 5 Valuation of central government assets for accounting purposes
UK VPGA 6 Existing Use Value basis of value
UK VPGA 7 Valuation of registered social housing providers’ assets for financial statements
UK VPGA 8 Valuation of charity assets
UK VPGA 9 Relationship with auditors
UK VPGA 10 Valuation for commercial secured lending purposes
UK VPGA 11 Valuation for residential purposes
UK VPGA 14 Valuation of registered social housing for loan security purposes
UK VPGA 16 Valuations for compulsory purchase and statutory compensation
UK VPGA 17 Local authority disposal of land for less than best consideration
UK VPGA 18 Affordable rent and market rent under the Housing Act
UK VPS3 Regulated Purpose Valuations – Supplementary Requirements
It is proposed to introduce new mandatory requirements for any valuer undertaking a Regulated Purpose Valuation. The first changes proposed are to the list of what constitutes a Regulated Purpose valuation.
What is a Regulated Purpose?
Two changes are proposed to the current list of Regulated Purposes:
-
As at present, valuations for financial reporting are included but with the added condition that the valuations will be relied on by third parties.
-
Valuations of investment property held by a local authority for financial reporting are explicility included..
What do we think?
The introduction of mandatory rotation, see below, makes the definition of what types of valuation are subject to this change far more important than at present. Valuations for financial reporting potentially covers a very wide range of valuations for different purposes, asset types and businesses. For all apart from the smallest closed companies there will always be shareholders who are third parties who may rely on valuations. The additional words proposed therefore effectively exclude no situation where a member is likely to be called upon to provide independent valuation advice. This will include valuations of owner occupied property, plant and equipment, which their client may not chose to use in their financial reports anyway. The valuer has no knowledge of whether a third party will rely on the value provided or not. This extra condition does not limit the scope of what is regarded as a Regulated Purpose in any way.
Valuation advice may be required not just in relation to determining the carrying amount in the balance sheet of a major asset owned by a business entity but to help the entity determine whether any asset is impaired and, if so, how it should be depreciated. Shareholders may be able to see what the entity has done as a result of the valuation inputs but they are not relying on valuation advice itself. Such valuation advice is rarely sought on a recurring basis year after year but on ad hoc basis. When sought it will usually be from a valuer familiar with the asset because they provide other advice such as rating, rent review or other services, thus meaning they can provide the required input to management quickly and economically. To oblige the valuer to either turn down providing advice on depreciation apportionments or impairment because they last did so three years previously puts the client to unnecessary cost for no benefit to anyone given that the client is under no obligation to take such advice or act on it if received.
The focus of the Pereira -Gray review was purely on Investment Property held in investment funds or companies. Under IFRS and other accounting standards these ARE required to be individually valued at each reporting date. To avoid overreaching the purpose and target of the Pereira-Gray review and causing unintended consequences for other types of valuation inputs into financial reporting generally, we believe the proposed additional words to valuations for financial reporting “where these are relied upon by third parties.” should be deleted and replaced with “of Investment Property under IAS 40 or UK FRS 102 Section 16.”
A similar condition is already proposed to restrict the Regulated Purpose requirement for public sector financial reporting to valuations of investment property. It follows that we support this.
Valuer Rotation
At present the Global Red Book requires a valuer undertaking a regulated purpose valuation to disclose their rotation policy in their terms and report wherever a series of valuations is provided over a period of time. The rotation policy can be of the valuer responsible within a firm and the guidance suggests that the maximum period before rotation should be seven years. This was introduced following the Carsberg report in 2002. At that time the mandatory rotation of the valuation firm was explored but there was significant resistance from the client side to this, which resulted in what might be seen as a watered down policy of rotating the valuer responsible within the firm.
It is now proposed this be superseded by a mandatory requirement for the valuer to confirm to the client in the written terms of engagement that the period for which the client has procured UK valuation services from the valuer and/or valuer’s firm for the same Regulated Purpose does not exceed five years, and will not have exceeded it by the end of the new instruction. Subject to certain conditions this may be extended by one period of three years, but otherwise there must be a gap of five years before the same valuer is able to accept the same instruction from the same client.
In other words, RICS is proposing to prohibit members and member firms from undertaking valuations for any regulated purpose for more than five consecutive years. This is regardless of the type or frequency of the advice required. As proposed, this means a valuer who provided a valuation of an owner occupied property six years and then three years ago of the same property for the same client may be unable to accept an instruction to repeat it now. This would be so even if their client merely had a policy to review the Fair Value every three years but had never reported this in their accounts. This is a gross overreach of the Pereira-Gray report.
Even if Regulated Purpose valuations were restricted to financial reporting valuations of investment property only (alongside the other present categories), what happens if clients persist in trying to instruct the same firm? The experience twenty years ago was that many of the large property investment vehicles resisted mandatory rotation The climate has moved on since then. Mandatory rotation of auditors is now in place for many entities and this may also be seen as good governance under ESG targets. However, RICS has pushed these proposals through in haste and the question arises whether adequate consultation has taken place with the client side. Other than regulated funds it has to be borne in mind that there is no obligation to use an RICS Valuer or Registered Firm, so unless there is client side support other options may emerge that do not involve using RICS members or firms.
Other Regulated Purpose Changes
Even more difficult to apply to the range of Regulated Purpose Valuations as now proposed is a requirement for the valuer to verify that the instruction has been made with the approval of one of the following authorities of the client (or a role of equivalent power and/or authority):
-
non-executive director;
-
an independent chair of their audit committee or equivalent;
-
a corporate compliance officer or equivalent.
Once again this is a recommendation made by a group with its focus only on the narrow field of listed or regulated property companies or funds. For many types of regulated purpose, especially the extremely broad category of financial reporting valuation regardless of the accounting purpose or asset type, this would be a totally unrealistic question to ask of a client and could rebound negatively on both the member and RICS. While this may be a useful public service safeguard in narrow band of valuation services, to be operational and effective it needs to be properly targeted.
UK VPGA 1 Valuations for Financial Reporting
A curious anomaly is that the financial reporting standards that RICS members are most likely to be required to provide valuation for are the International Financial Reporting Standards (IFRS). However, these are now hardly covered at all in the RICS Standards. They were largely removed from the Global Red Book when it started to include the IVS because the IVS contained the most up to date guidance on IFRS aimed at valuers. However, the IVSC withdrew this guidance from the IVS in 2017, in spite of having spent many years collaborating with the International Accounting Standards Board to produce this guidance and help promote consistent application of the accounting requirements. This has left a gap in the guidance at a global level. This update is only of the UK Supplement to the Red Book so is not the place for improving guidance on IFRS, and the focus of UK VPGA1 is therefore on the UK Generally Accepted Accounting Practices (UK GAAP) which are used by mainly smaller UK private entities.
A number of minor changes have been made to this VPGA but these are mainly clarifications and updating cross references. The accounting standards themselves have not materially changed. Perhaps the most significant change is an expanded explanation that the requirement in the accounting standards to report Fair Value disregarding attributable acquisition costs does NOT mean that a valuer should not use a yield adjusted to exclude acquisition costs when valuing investment property. Some auditors muddle the valuation reported, which is supposed to represent the price that would be agreed, with the methods used to estimate it. If the market calculates yields after deducting costs because that is the figure which represents the actual return to the investor, that is how prices are fixed and therefore how the valuer should estimate value.
Changes have also been made to the section on land/building apportionments for depreciation purposes because the current text invites confusion with the Depreciated Replacement Cost method, which has no relevance at all to depreciation for accounting purposes.
What do we think?
We welcome these changes, although look forward to a more comprehensive review of the whole Red Book content on Valuations for Financial reporting in due course.
UK VPGA 2 Valuations for other Regulated Purposes
This guidance cover valuations for company listings, takeover purposes and of regulated collective investment schemes. It currently recites a lot of material from the relevant regulations which are subject to change. Since these regulations are freely available on the relevant authority’s website most of this content has been removed leaving just the cross references to it.
What do we think?
We welcome this simplification since it is always better to rely on the source material where this is easily accessible.
UK VPGA 3 Valuations for assessing adequacy of financial resources.
It is proposed to delete this because the regulations referenced are of marginal relevance to valuers and RICS has not heard of any member being asked to get involved in providing valuations for either banking or insurance company solvency requirements which are mostly, if not always, done in house.
What do we think?
We agree this content is of little or no relevance to valuations provided by RICS members and is superfluous. Changes in regulation around solvency ratios for financial institutions may impact on markets e.g. by affecting funds available for investment in real property or in the availability of loan finance but have no direct effect on valuation processes.
UK VPGA 4 Valuation of local authority assets for accounting purposes.
It is proposed to significantly rearrange and rewrite sections of this guidance, both to reflect updates in the relevant regulations and improve clarity where feedback indicated valuers were not interpreting the requirements correctly.
What do we think?
We think the changes should improve this guidance for many users.
UK VPGA 5 Valuation of central government assets for accounting purposes
No material changes
UK VPGA 6 Existing Use Value basis of value
This has been substantially rewritten in the light of problems that had come to RICS’s attention with the way EUV was being applied. It is emphasised that the basis is only now applicable when valuing operational property, plant or equipment in the public sector for financial reporting.
What do we think?
We think the changes should help prevent some inappropriate interpretations of what the relevant accounting standards require.
UK VPGA 7 Valuation of registered social housing providers’ assets for financial statements
Changes have been made to better distinguish EUV-SH from EUV as applied to public sector assets under UK VPGA 6.
What do we think?
This is specialist area and RICS has not provided reasons for the changes proposed.
UK VPGA 8 Valuation of charity assets
Updates to reflect 2022 Charities Act coming into effect in 2023
What do we think?
The main changes are that, under the new Act, charities no longer have to be advised on property disposals by a “qualified surveyor” but a “designated advisor”, and the previous prescriptive list of the required report contents has been replaced with a much simpler list.
UK VPGA 9 Relationship with auditors
Minor changes have been made to clarify the valuer’s role and what valuers may anticipate being asked for when an auditor reviews significant valuations appearing in financial statements.
What do we think?
This is important guidance for any valuer providing valuations for financial reporting and the need to anticipate that they may well be asked to justify a valuation provided for inclusion in a financial statement. Authors are also under increasing pressure from their regulators to examine material valuation estimates appearing in accounts.
UK VPGA 10 Valuation for commercial secured lending purposes
No material changes
What do we think?
We have never understood the need for this VPGA as most of the content is already covered in VPGA 2 in the Global Red Book or elsewhere in the standards.
UK VPGA 11 Valuation for residential purposes
This is the second major change to the UK Supplement besides the changes to UK VPS 3. The three existing UK VPGAs covering residential mortgage valuations, other residential valuation and the Homebuyers report have been merged into one. RICS has not issued a reason for the changes so we have no insight into why this is proposed, although the result is a considerable simplification. The new VPGA extends to 8 pages compared with the 24 pages occupied by the three existing documents. Some obvious changes include the removal of the detail of what constitutes an Inspection for a mortgage lending valuation. Also, material that is covered in separate RICS Guidance is removed, for example, the valuation of leaseholds is now covered in a separate 2021 Guidance Note.
What do we think?
The rationalisation and avoiding duplication of material that is covered in standalone guidance is to be welcomed.
One material change we are concerned about is the proposed new material on dealing with requests for valuations assuming a restricted marketing period or forced sales. The existing guidance that says the valuer should use a “Projected Market Value” when asked to advise on value for possible possession proceedings is clearly flawed, both conceptually and in terms of its suitability. We therefore welcome the proposal that this be removed. The proposed new UK VPGA 10.11 on restricted marketing periods draws attention to VPS 4 and that providing such advice without a clear reason for the restriction is contrary to the standards. If a client insists on such advice it says that the valuer should a) point out in their terms of engagement that is not in accordance with the RICS standards and, b) refer to the limitations on this figure and the risks of relying on in the report.
The new material then includes a proposed definition for use when a client asks for a value in a “forced sale”. We have no problem with providing such a definition in principle but do with the way this is presented and with the definition provided. While paragraph 6 of 10.11 does refer to “the principles set out above” and the commentary in VPS 4 (presumably on restricted marketing periods), the fact that it is detached from the principles in question by a subheading means that may well miss the important conditions on providing such advice. As regards the wording of the definition, we believe it is a mistake to refer to the time limit being to legal completion. The time it will take to complete legal formalities, whether it be exchange of contracts or completion, depends on matters which are not only outside the valuer’s knowledge and professional expertise but which can also have little effect on the price that can be obtained. The RICS should not be encouraging members to provide such a hostage to fortune. The time limit should for reaching agreement, subject to contract.
UK VPGA 14 Valuation of registered social housing for loan security purposes
No material changes.
It is proposed to effectively withdraw this guidance.
What do we think?
We do not agree with this change. We understand the reason for this proposal is that RICS does not have the resources to check whether the relevant case law is up to date! Valuations for capital gains, inheritance tax, SDLT and ATED are probably the most common type of valuation required of members after secured lending. The differences between the relevant valuation definitions and Market Value need to be highlighted to members. The idea that it should be withdrawn because the law may not be up to date could be applied to much RICS guidance. It is only guidance and it remains the member’s responsibility to ensure that they are aware the current law affecting any type of work.
UK VPGA 16 Valuations for compulsory purchase and statutory compensation
There is currently a separate consultation on changes to the standalone Professional Standard for Compulsory Purchase. This may lead to this VPGA being withdrawn.
UK VPGA 17 Local authority disposal of land for less than best consideration
Updates are proposed to the content relating to Northern Ireland and Scotland.
UK VPGA 18 Affordable rent and market rent under the Housing Act
No material changes