Valuers - do your values measure up?
 | To provide a valuation of many types of asset measurements are needed, for example to establish its physical size or to estimate the financial return that may be expected. In this blog I examine the need for real estate valuers to be clear about how physical measurements are calculated and used in the relevant market and ensuring that these are applied appropriately and consistently. |
RICS has recently invited comments on the proposed 7th Edition of its Code of Measuring Practice (the closing date was 13 October). When the final version is approved it will be the first material update in nearly 20 years, the 6th Edition having been produced in 2007. Although there was a misguided amendment to make the Code applicable globally in 2015 by integrating it with the International Property Measurement System (IPMS), this was reversed 2018 following widespread push back from the profession and valuation users.
While IPMS is useful for clients with property facilities around the world who may require a common basis for cross border management information, it is not widely used by valuers or investors. The new edition of the RICS Code says it “sits alongside” IPMS, so RICS members are free to use the latter if their client requests it. However, unless the IPMS is widely used in the relevant market, and most available comparable evidence is based on it, I would advise valuers to be very cautious about its use. Indeed, in the decade or so since the system was launched, I have reviewed many valuations of commercial real estate (CRE) across five continents and have yet to see it used.
The consultation draft indicates that the RICS Code is intended to be the principal guidance for measurement of buildings in the UK, which it undoubtedly has become over the 45 years since the first edition. The new edition includes some minor technical changes and clarification as to how the measurement of different property types should be undertaken. It introduces two new area definitions for residential property, Net Selling Area and Effective Floor Area, albeit these are formally codifying terms that have been used in parts of the UK residential sector for some time. However, these changes are not the focus of this article – it you want to find out more the consultation draft can be found on the RICS Code of Measuring Practice Website
As far as its relevance outside the UK is concerned, the introduction to the consultation draft says it may also serve as a “valuable reference”. I would put strong emphasis on the “may”. In my experience there are many different systems used around the World for calculating the area of real estate, either set by statutory regulations or simply generally accepted local market practice. Valuers need to use measurement systems that are used in the relevant market for the type of property in question and be very cautious about using the Code instead.
That is not to say that systems used outside the UK do not also need to be treated with caution by valuers. While both the RICS Code and IPMS include measurement bases designed to identify the area that can be used by an occupier for the purpose for which a building was designed, other measurement systems, particularly those decreed by law or regulation were often created for entirely different objectives. This can result in the resulting floor area failing to provide a useful comparator of how much usable space there is in the building which is usually one of the more important factors influencing its value.
One example I came across is where local regulation in a Middle East country requires floor areas to be measured to the centre of the outside walls. While in many cases measuring the wall thickness and working out the centre point may be possible, in this case it was a historic building with walls varying between 0.8 and 1.2 metres thick. Not only did this give a misleading impression of the useable space compared with more modern buildings but even this figure was unreliable because of the variations in thickness so deciding where the mid-point involved significant guess work.
Except for the second-hand residential market and smaller commercial property, it is becoming less common for valuers to measure the property themselves, instead relying on measurements provided by the client or a third party. There are now firms that specialise in building measurement that many larger CRE investors will use, leaving the valuer to focus on the price per m2 not to establish how many there are. This contrasts with when I started as a trainee valuer in the 1970s when my main job was holding one end of a tape measure while inspecting everything from a three-bed semi-detached house to an industrial estate with nearly fifty units of different sizes. My measurement tasks even included a smelting works, although I am glad to say no tape measures were involved in that particular job. And to qualify through the then RICS General Practice route I also had to demonstrate that I could use a theodolite and level!
Even if you are a valuer that rarely undertakes building measurements yourself it is still very important to understand how floor areas are calculated in the market sector in which you operate. You need to have sufficient knowledge of the Code or whatever other system is used to critically review any floor areas provided by another party, including your client, both for the subject property but also when analysing comparable transactions. Prices per sq ft or m2 are constantly bandied around between market players and their advisors but often with no codicil indicating whether this is based on GIA, NIA, or whatever. While reviewing valuations for financial regulators, I have seen examples of where gross and net areas are neither clearly nor consistently recorded in the valuation file or report, resulting in material valuation errors.
I strongly advise all real estate valuers in the UK to look out for the new Code, and refresh their memory of what measurement basis is the most appropriate for the type of property they specialise in. Outside the UK, the RICS Code may be less relevant but the need to understand all the nuances of how floor areas are quoted in your market still applies. Oh, and while they are at it, they might also reflect on the fact that international accounting standards consider valuation itself to be a form of measurement!
