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Property Valuation

The Carsberg Report

References in this Report to the masculine pronoun apply equally to male and
female valuers.

RICS 2002

Contents

1.0 List of Recommendations


2.0 Background
3.0 Main Issues
4.0 The Accuracy and Currency of Valuations
5.0 The Structure of Valuation Production
6.0 Independence and Objectivity
7.0 Valuation Reporting
8.0 Quality Assurance and Monitoring

Appendix 1 Bibliography
Appendix 2 Membership of the Working Party

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1.0 List of Recommendations


1

The RICS should enter discussions with Investment Property Databank


with a view to agreeing a means by which their data could be used to produce
ongoing annual reports on the correlations between valuations and achieved
prices as observed by IPD, and consider with the wider academic community
how the data can be additionally analysed to provide better information on the
currency of valuations. The RICS should also encourage research into the
valuation process and behavioural issues and ensure that the knowledge
gained is fully integrated into the educational system.

The RICS should approach IPD to identify what further information about
the composition and performance of valuers contributing to its Indices could
be published.

The definitions of Internal, External, and Independent valuer should be


clarified to avoid ambiguities and misunderstanding by clients and users, and
amplified in each case to make it clear that all valuers are required to have
independence, integrity and objectivity in the performance of their task,
whichever role they fulfil.

The RICS should publish more extensive guidance in the Red Book on how
to identify and deal with threats to objectivity, drawing on the concepts
developed by the Institutes of Chartered Accountants.

The RICS should introduce a requirement for disclosure by valuers


producing
valuations for third party use of their firms total fee earning relationship with
the instructing client, to be expressed in a formalised manner. This disclosure
must appear in their valuation report and any published reference thereto.

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The RICS should require valuers to declare their firms fee earning
relationship with any party directly interested in the outcome of a valuation if
asked by any party to whom they have a fiduciary duty.

Valuers producing valuations for third party use should be required to


state within their valuation report and any published reference thereto, the
length of time that they have been carrying out valuation instructions for the
client.

The RICS should publish guidance on good practice in rotating personnel


producing valuations for third party use.

The Red Book should contain specific guidance on the recording of


occasions when a valuer discusses the outcome of the valuation with the
client or any other interested party.

10

The RICS should set out, in the Red Book, standards of best practice and
minimum requirements for the conduct and recording of draft valuation
meetings designed to show what information was produced by the client which
might influence the value derived, and how that information was used to
influence, or otherwise, the final valuation figure. Rules for the disclosure of
the record during monitoring should also be established.

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The RICS should undertake an examination of the influences and


pressures on valuers who are instructed to undertake valuations for secured
lending, and of those parts of the valuation process particular to this context,
with a view to establishing Practice Statements designed to ensure public
confidence in the valuation process in this area.

12

The RICS should prepare and publish a guide to the Red Book which
sets out the valuation process and its regulation from the clients viewpoint.

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13

RICS should publish an interim information paper, pending the outcome


of the ESRC funded Reading research, covering valuations based on limited
information, giving examples of different situations in which such valuations
are requested and best practice on how they should be approached. The topic
should also be addressed in CPD seminars.

14

The exemption from the Red Book for valuations given in the course of
estate agency should be reviewed to ensure that the exemption is restricted to
the proper circumstances.

15

RICS should commission work to establish an acceptable method by


which uncertainty could be expressed in a manner which will be helpful and
will not confuse users of the valuation. RICS should also seek to agree with
appropriate representative bodies of those commissioning and using third
party valuations the circumstances and format in which the valuer would
convey uncertainty.

16

The RICS should review the current Practice Statements in the Red Book
and introduce such amendments as necessary to ensure that a valuer is
prohibited from producing a valuation for third party use of a property on
which his firm has received an introductory fee unless another firm has
produced a full, formal valuation for the client between the date the transaction
was agreed and the date of the third party valuation. Such a prohibition should
last for at least one year.

17

The RICS should create a Valuation Monitoring Committee to create and


manage a Review and Mo nitoring System in accordance with the principles
set out, and make amendments to the Red Book to enforce the System.

18

The RICS should explain and clarify with the Financial Services Authority
and other appropriate regulatory authorities the role that it will fulfil in
monitoring the processes of valuation. This should occur at the same time as
the Valuation Monitoring Committee is created so that any reasonable
requirements of the regulatory authorities can be included in the Monitoring
System.

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2.0 Background
2.1. Academic Reports on the Behaviour of Valuers
In late 2000 the Universities of Reading and Nottingham Trent published their
findings in a research project funded by the Educational Trusts of the
Investment Property Forum, the RICS and Jones Lang LaSalle entitled, The
Influence of Valuers and Valuations on the Working of the Commercial
Property Investment Market (the Reading / Trent Report). The project
examined some of the processes involved in valuation and the impact that
valuers and valuations have on the commercial property investment market in
the UK. It asked the question, amongst others, Are valuers simply
'scorekeepers' or do they actively affect prices, liquidity and turnover?
The RICS welcomed the Reading/Trent Report as it highlighted a number of
issues which were already a cause for concern. The RICS wished to have
advice on whether it should take further action in relation to any of them. The
Working Party was established to carry out this role.
The Reading/Trent Report and this Report do not directly address the
valuation of owner-occupied residential property. Although a very large and
important area of activity, the Working Party decided that it raised issues
which were outside the area of its remit, and it did not have the necessary
expertise to consider them.
To inform the Working Party, a number of other papers and publications
addressing the operation of the valuation process in the UK were considered.
The Working Party also considered papers from other professional
organisations concerning their procedures (See Appendix 1).

2.2.1 Investment Property Forum / RICS Property Valuation


Forum Panel Discussion, London, 25th April 2001
At a panel discussion on client/valuer communication and the integrity of the
portfolio valuation process, held on the 25th April 2001, the main concerns
and issues arising from the Reading / Trent Report were aired amongst
practitioners, clients and other interested parties. This meeting also provided a
focus on the issues that should be considered further.

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2.3

The Working Party

In response to these events the Chairman of the RICS Valuation Faculty


commissioned a Working Party to consider the issues and to make
recommendations to the RICS. It was considered that in order that the
findings of the Working Party are seen as objective, it should be chaired by an
independent person from outside the RICS.
Sir Bryan Carsberg was appointed to chair the Working Party. He was
Director General of the Office of Telecommunications from 1984 to 1992, and
of the Office of Fair Trading from 1992 to 1995. Subsequently, from 1995 to
2001, he was Secretary General of the International Accounting Standards
Committee. He is a Chartered Accountant by profession.
The membership of the Working Party is given in Appendix 2.

2.4

Remit of Working Party

The Working Party was requested to consider whether, in each of the


following areas identified in the Reading/Trent Report, the quality of service
provided to users of valuations within the UK gives cause for concern, and to
make recommendations to the RICS or any other relevant body as to how
any concerns should be allayed:

The role and timing of valuations


Valuation providers market structure
The acquisition and disposal process
The effect on trading
The Valuation process
Client influence on valuations
The impact of new fund managers and valuers
Status of valuations
Valuation lagging and accuracy

2.5 Modus Operandi


The Working Party met five times. Having been drawn from a cross-section of
valuation service providers and users of those services, the Working Party
was able to discuss all the issues under review from a position of both
experience and understanding of the general context in which regular
valuations of portfolios are required and of the details of the valuation process
itself. The Working Party operated under the overall direction of the
Chairman.

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Where the Working Party needed further information, this was obtained either
from specific Working Party members or by research carried out by the
secretariat and reported back to the Working Party at subsequent meetings.

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3.0 The Issues


3.1

General

For most areas of activity covered by the profession, the RICS confines itself
to setting and monitoring educational standards, requiring members to update
their knowledge throughout their career, and issuing guidance and help to its
members on particular subjects from time to time. However, in the case of
valuation, the RICS has introduced over the years since 1977 an increasing
number of mandatory requirements on its members, culminating in the
publication of the current Red Book, which is now applicable to virtually all
valuation work. The Red Book is an extensive Appraisal and Valuation Manual
setting out a large number of mandatory and advisory material for valuers. The
rationale for this degree of control is that the valuation of property supports a
large amount of financial activity. There is therefore a wide public interest that
the task should be performed to the highest standards.
The Reading / Trent Report investigated only valuations carried out for
financial reporting purposes by investment fund managers (pension funds,
insurance companies and unit trusts) and property companies. However,
many of the issues highlighted are also applicable to valuations carried out for
secured lending purposes by banks and building societies, and for other
purposes. The Working Party took the view that the quality assurance
arrangements for valuations should be considered as a coherent whole. It
therefore gives its recommendations for the valuation process generally,
although several are really only applicable to valuations for financial reporting
by investment fund managers and property companies, the primary focus of its
remit.
At the outset, the Working Party drew a distinction between valuations which
are produced essentially for the use of the instructing client only, and
valuations where others not party to the valuation process may be expected to
use the valuation. The former group is extremely diverse, people wishing to
have a valuation of a property for many reasons, but particularly includes
valuations for secured lending. For convenience this group is termed, in this
report, valuations for known client use only, or one-to-one valuations. The
second group includes valuations to be incorporated in company accounts and
in the accounts of trusts, partnerships etc, in the assessment of the solvency
of pension funds or other trusts, in statements linked to financial transactions
such as take-overs, in the direct pricing of units or interests in collective
investment schemes etc. These have been termed valuations for third party
use, or third party valuations.
The differentiation between these two groups was fundamental to much of the
Working Partys work because they vary in one important respect. Valuations
for third party use are normally commissioned by the directors / managers /
trustees of a company or fund, but are provided for the benefit of third parties

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- investors, policyholders or shareholders etc. In principle, the directors may


have a different interest in the outcome of the valuation from that of the third
parties, for example in the assessment of their performance. This brings
special pressures to bear on the valuer. Although instructed by the directors,
who are the formal client, the valuer has a fiduciary duty to the third parties,
as well as to the directors, to provide an objective opinion of value, but also
has very limited means for communicating with the very people who may
make decisions based on the valuation. This relationship is frequently
compared to that of an auditor and comparison with practices in the auditing
profession in part informed the Working Partys thinking on these matters,
albeit that it is important to bear in mind that there are fundamental differences
between the role of valuation and that of auditing.
Valuations for known client use only, by contrast, are normally produced on
the instructions of a single client (or perhaps a small group of clients with
differing interests, but seeking a common opinion of value) who intends to use
the product for some purpose singular to the client. Because of the one-to-one
relationship, the valuer should have fewer difficulties in both identifying the
needs of the client and conveying to the client all the information needed to
understand and benefit from the valuation. Further, the client has a direct
contractual relationship with the valuer and can use this to impose conditions
on the valuation process. However the client may have an interest in the
outcome beyond wanting an unbiased assessment of value. In addition, other
parties with access to the valuer may have an interest in influencing the
valuation. For example, it is not uncommon in valuations for secured lending,
that a broker or borrower may procure the valuation, and thus be the formal
client. They may clearly have an interest in influencing the valuer. Beyond this,
valuations for secured lending have a wider impact than just that between
borrower and lender. It has been a common feature of the property cycle for
very many years that it is often driven by lenders anxious to secure their loans
on property. In these circumstances it is of wide interest that valuers should
be providing robust, objective figures and valuation advice in order to reduce
the chances that the market becomes over-borrowed. The Working Party
understands that research into this area of valuation has recently been
commissioned and welcomes that development. A number of the
recommendations in this Report are relevant to both groups of valuations and
they should be so read unless a specific exclusion is given.
The Working Party also noted that the trend for more frequent valuation of
fund, trust and property company portfolios has tended to blur the distinction
between ultimate clients. The managers of such funds are often
commissioning valuations or valuation reviews for their own management
purposes, often at their own cost. In those cases they are, therefore, in all
senses, the client for whom the valuer is producing the figures. However, the
valuations are usually commissioned, for reasons of economy, from the same
valuers who are providing formal valuations for reporting purposes.

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The Working Party concluded that the issues which it had been asked to
consider could be grouped into five broad areas, and this Report is assembled
in that way. First, it considers the essential output, the figure of valuation, its
accuracy and currency. Secondly, the Report considers the sources of
valuation, the structure of valuation production. Thirdly, it looks at the
pressures faced by valuers and the best means of securing independence
and objectivity. Fourthly, the Report addresses some issues about the way
that valuers communicate with their clients, valuation reporting, and finally it
looks at the need for some form of quality control system in the form of quality
assurance and monitoring.

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4.0. The Accuracy and Currency of


Valuations
The key objective of the Reading/Trent Report was to identify the degree of
influence which valuers have upon the investment market, and, to the extent
that they have influence, whether it is compromised by any weaknesses in the
valuations produced.

4.1 The influence of valuers upon the market.


The Reading /Trent Report identified that valuers have a considerable
influence upon the market, with their intervention being commonly important in
deciding whether a property should be put to the market and, if it is, whether
or not agreement is reached on price. The Report found that this degree of
influence was quite acceptable to participants in the market. The Working
Party concurs with this view, and considers that such influence is inevitable,
and perhaps healthy. An informed and good quality valuer observes the
market and its participants, monitors transactions and interprets this
information to arrive at an opinion of value. Such an informed and good
quality valuer is bound to influence the market as his opinion will be a valued
input for those making a trade. This very fundamental issue is covered in more
detail in paragraph 6.2 below.

4.2 Valuation accuracy and currency.


The Reading/Trent Report reviewed a number of valuation process issues
which have been previously researched by academics and practitioners in the
UK and elsewhere, particularly the US. This review raised questions about the
accuracy and currency of valuations (and thus the benefit of the influence of
valuers), and outlined the evidence that valuations tended to lag actual
movements in the market, particularly at turning points, and that there was
also a tendency for valuers to anchor on either a previous valuation or a price
at which the property had transacted recently. This lagging in property
valuations has not been interpreted as a criticism. In fact, one of the most
respected land economists in the US cites it as rational behaviour by valuers
in markets where price changes cannot be identified instantaneously or even
quickly. Some element of smoothing and lagging is inevitable. However, the
valuation literature also holds evidence that valuers are commonly unaware of
the extent of this smoothing and lagging, and are unaware of the normal
variation between different valuations (valuation variation) and between
valuations and sale prices (valuation accuracy) caused by this inevitable
inability to identify the absolute correct value at any one point in time. In the
case of valuations for third party use the task of the valuer is generally to
provide an estimate of current market value in accordance with the approved

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definition. If valuations fail to follow the market as closely as they could, given
the nature of the task, there must be occasion for the profession to be
criticised. Without identifying or discussing the extent of lagging and variation
in valuations, the Reading/Trent Report did highlight the mismatch in valuation
methods between those used to price assets by sellers and purchasers, and
those used to undertake periodic valuations.
In addition, the Reading/Trent Report argued that valuers are exposed to
influence, particularly from clients who may have an interest in the outcome of
the valuation other than its accuracy, an issue covered in several paragraphs
below.
Understanding the extent of valuation currency, accuracy and variation is
clearly of vital importance to all users of them. The Working Party agreed that
it was a proper role for the RICS to continue to produce and maintain
standards of procedure designed to enhance the quality of valuations and the
probability of accuracy. It also considered whether the RICS should go further
and have a role in monitoring the output of valuers in an attempt to give public
reassurance on currency, accuracy, and variation, particularly for third party
valuations. It was concluded that any form of detailed monitoring of valuation
figures was impractical as it would require the replication of the entire
valuation process, and most cases of difference would amount to defensible
differences of opinion. Such differences could only be resolved in a formal
judicial or semi-judicial environment. However the Working Party agreed that it
was untenable for the RICS to play no role whatsoever in valuations produced
for third parties as there is a genuine public interest. If problems arise, a
laissez faire attitude could lead to understandable criticism. The difficulty
arises in deciding what any role should comprise.
After considerable discussion, the Working Party agreed that the RICS should
procure ongoing studies of the accuracy and currency of valuations for third
party use. Data on valuation variation is more difficult to obtain. These
studies, although built from actual cases, should be generalised in their nature
and, with suitable commentary, would provide confidence to the market and
public on the accuracy of valuations. Much the greatest concentration of data
on third party valuations lies in the database held by Investment Property
Databank (IPD). IPD is an organisation which collates data from a significant
proportion of UK institutional funds and property companies on the periodic
valuations produced of the assets under their control. These data are used,
inter alia, to produce their published headline market indices. It was reported
that research into valuation accuracy, sponsored in some years by Drivers
Jonas and pursued annually by IPD themselves, was of considerable
importance in underpinning the credibility of the Index as a reliable market
measure and thus by implication also the valuations that contribute so
centrally to it. This seems the obvious place to start. IPD currently records the
outcomes of in excess of 2,000 UK property transactions each year. Of these
around 1,000 represent sales of properties with prior valuation track records
included within IPD's databases. This evidence enables a carefully conducted
comparison of the relationship between valuations and subsequently achieved
market prices. It was felt by the Working Party that this research could be
extended, perhaps informed by a high level academic and professional

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steering group, and could then be backed and published by the RICS on a
consistent annual basis as part of its contribution to the process of monitoring
valuation standards in the UK. Whilst such work would, of course, only reflect
the valuations produced to IPD, these would cover a significant proportion of
all third party valuations, and the Working Party considered that the results of
such work would be likely to reflect most commercial property valuations for
investment-type properties. It would not, however, capture the large number of
valuations carried out of smaller, often owner-occupied, properties commonly
used as collateral for loans. Nor would it reflect much specialised commercial
property. Almost by definition the last group, although occasionally an
important element of third party valuations, will not be susceptible to a
general overview. Despite these limitations, the Working Party concluded that
such a study would provide a useful indicator of valuation accuracy.

Recommendation 1
The RICS should enter discussions with Investment Property Databank with a
view to agreeing a means by which their data could be used to produce
ongoing annual reports on the correlations between valuations and achieved
prices as observed by IPD, and consider with the wider academic community
how the data can be additionally analysed to provide better information on the
currency of valuations. The RICS should also encourage research into the
valuation process and behavioural issues and ensure that the knowledge
gained is fully integrated into the educational system.

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5.0 The Structure of Valuation Production


5.1 The number of providers
Valuation is one of the most widely used skills in the profession, this fact being
demonstrated by the Valuation Faculty being the largest within the new
structure of the RICS. Many chartered surveyors use valuations as only one of
their skills in providing advice to their clients. Although the Working Party is
not aware of any research into this, it is probable that a majority of valuations
are produced in this mixed service environment, an environment which implies
that the valuations are overwhelmingly for known client use only. It is
probable that this service is provided, anyway to some degree, by virtually
every general practice surveyor or firm of surveyors, implying a total pool of
providers of many hundreds of firms.
The Reading / Trent Report highlighted the fact that the majority of the work in
providing periodic valuation services for the major institutional investment
funds and property companies is, by contrast, now in the hands of relatively
few large firms. It also revealed that there were significant differences in the
ability of all but the largest firms to provide periodic valuation services at
competitive fees. This is because of the economies of scale associated with
the collection and analysis of market information. A few of those interviewed
for the Reading / Trent Report saw this as a cause for concern in that it could
place the large firms in a position of considerable influence over the majority of
fund valuations and the indices which spring from them. It could also limit the
effects of competition in promoting high quality service and value for money.
The Working Party discussed this issue in some detail. In its discussions, the
Working Party noted parallels with the concentration of auditing services for
large public companies in the hands of five large firms of accountants. The
Working Party took the view that the concentration of instructions in the hands
of a small number of firms was attributable to economic forces that had
affected a number of business areas in a similar manner in recent years. The
RICS could not reasonably be expected to take some action to increase the
number of firms in this section of the market. Furthermore, the Working Party
did not think that the present position would be seen as a reason for action by
other authorities. Indeed it appeared to the Working Party (without carrying out
any detailed investigation) that the competitive structure of the market had put
downward pressure on levels of fees. This would generally be seen as
consistent with the public interest, although there is no public interest in fees
being forced so low as to threaten to compromise the quality of the valuation
service. Furthermore, it might be argued that such a concentration was likely
to increase the amount of market evidence available to each individual valuer,
with a consequent tendency to improve in accuracy. It may also enhance the
opportunity for good quality control in the process sense because monitoring
can be focused.

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5.2 Influence on the IPD Index


One other particular issue arising from the reducing number of firms of valuers
producing periodic valuations was raised in the Reading/Trent Report. This is
the effect on the Investment Property Databank (IPD) Annual and Monthly
Indices. These indices are widely recognised as the leading set of property
investment performance indices and provides the benchmark by which
investment performance in the property sector is mostly measured.
Data prepared for the Working Party by IPD reveals that, as at December
2000, 64.7% by capital value of the property covered by the industry standard
Annual Index was valued by 5 valuation firms, and 37.7% by 3 firms. For the
smaller Monthly Index, which is restricted to unitised portfolios with fully
independent valuations, the corresponding figures (as at November 2001)
were 79.6% by the top 5 valuation firms and 62.4% by the top 3 firms.
The concern discussed in the Reading/Trent Report was that the decisions of
individual valuers could have significant effects, particularly on the month-bymonth performance measured by the Monthly Index, and that discrepant
valuations by one of the major suppliers could potentially skew that Index.
With increasing reliance being placed by many different parties on the
assessment of performance in relation to indices, it is particularly important
that they should be reliable.
The majority of performance measurement valuations are presently performed
annually, with greatest emphasis being correspondingly placed upon the IPD
Annual Index. However the Working Party was informed that the trend in fund
valuations is towards more frequent - usually quarterly - valuations, and
already well over 40% of the IPD measured Universe is valued on a quarterly
or higher frequency regime. The introduction of Global Investment
Performance Standards (GIPS) for real estate performance measurement in
the future should reinforce the trend. Furthermore, the recent development of
property-related derivatives based upon IPD Indices means that there is an
additional public interest in ensuring that users can have full confidence in the
reliability of such indices, and that the valuations underpinning the indices are
objective and transparent, and not open to manipulation.
In this context confidence must derive not only from a belief in the accuracy
of the valuations used to build the Index, but also confidence that there are no
systemic weaknesses in the manner in which the valuations are produced.
The Working Party considered that the limited number of firms producing the
material does not, in itself, give rise to a weakness. The views, strengths and
weaknesses of the large firms of valuers are very much open knowledge in a
communicative market place, and there are few restraints which would prevent
a firm which was seen to be falling down on the task being replaced.

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The Working Party concluded that it should make no substantive


recommendations under this particular heading as the sustaining of
confidence underlies all its recommendations. However, given the emphasis it
is placing upon transparency, there would be advantages if, at the least, IPD
published further facts about the distribution of valuers contributing to it. The
IPD Indices are, of course, independent commercial publications over which
the RICS has no control.

Recommendation 2.
The RICS should approach IPD to identify what further information about the
composition and performance of valuers contributing to its Indices could be
published.

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6.0 Independence and Objectivity


6.1 General Comments
Objectivity is a fundamental ethical requirement for professional valuers and
without it confidence in the valuation system is called into question. This is
reflected in existing RICS requirements in the Rules of Conduct and the Red
Book.
The Working Party noted that Regulation 1 in the RICS Code of Conduct
requires objectivity from RICS members in carrying out their work. More
specifically, Practice Statement 7.1.5 of the Red Book requires objectivity in
the carrying out of valuations. Any lack of objectivity in a valuation (e.g. where
it favoured a position being advocated by any party interested in the valuation)
would already breach RICS rules, and evidence of such a breach could result
in disciplinary action being taken against the member concerned.

6.2

Independent / External Valuations and Objectivity

In principle, the objectivity of a valuer may be seen to bear some relationship


to the degree of independence of the valuer from any party interested in the
valuation. With this in mind, the Red Book defines three capacities in which a
valuer may act for a client. These are:
Internal
External
Independent
These definitions enable the RICS to prescribe a degree of independence for
any given task, give clients some benchmarks, and provide valuers with some
criteria by which they may measure their position.
An Internal Valuer is defined in the Red Book as a valuer who is a director
(or equivalent status thereto) of the company, or an employee who has no
significant financial interest therein. The Working Party considered that this
wording is not very clear, but it is intended to allow an employee or director to
carry out a valuation provided that he has no personal financial interest in the
outcome.
The definition of an External Valuer is given in the Red Book as a valuer
who is not an Internal Valuer, where neither he nor any of his partners or codirectors are directors or employees of the Client company or have a
significant financial interest therein, and where the client company does not
have a significant interest in the Valuers company.

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An Independent Valuer is defined as an External Valuer who has no other


current or presently foreseeable potential fee earning relationship concerning
the subject property(ies) apart from the valuation fee, who has disclosed in
writing to the Client any present relationship, or relationship within the past
two years of receipt of the valuation instruction, with any of the interested
parties and any previous involvement with the subject property(ies).
The Working Party also considered research into the compliance of valuation
reports with the Red Book, carried out for the RICS in 1998 (the Waters
Report), which indicated that valuers in over one third of valuations observed
did not specify in their reports the capacity in which they were acting.
The concept of independence in giving a professional opinion is a very
profound one. As is made clear below, the state of mind of independence
should be an obligation on a valuer whatever role is being fulfilled. But it can
be argued, and such a line of thought probably underpins the Red Book
definitions, that independence can be better achieved by the valuer having no
other connection with the property being valued, the circumstances in which it
is being valued, and any of the parties interested in the outcome of the
valuation a state of independence. Such a condition, whilst not
guaranteeing independence of mind, would make it seem much more likely.
The Working Party wrestled with the concepts implicit in these two forms of
independence. It concluded that if valuers were required to show a state of
independence, even if that requirement were restricted to valuations for third
party use, the effects upon the structure and relationships of firms of valuers
and other chartered surveyors would be profound. It seemed to the Working
Party that it would inevitably lead to a necessity for the practice of valuation to
be separated, not only spatially but also commercially, from other aspects of
the profession, in particular from activities such as arranging transactions,
advising on transactions and investment management . The Working Party is
unambiguous and unanimous in its view that such a re-arrangement would not
be in the public interest.
As one might expect, the primary source of information for valuers comes from
the observed market place for properties. This information can be hard, in the
sense of known agreed transactions, or it can be soft, in the sense of
attitudes, trends in negotiations and so on. This information, particularly the
soft information, can only come from a close proximity to those actually
operating in the market. It is no coincidence that a number of firms deliberately
place their valuation staff in the same space as their agency staff. They do this
to improve the opportunity for valuers to sense subtle changes in market
trends. The second source of information for valuers comes from changes in
other markets. This is an area of particular difficulty for valuers. It has been
suggested, for example, that property values should move if bond prices move
because many properties have strong bond characteristics. However the real
property market does not have such a one-to-one link. In responding to
changes in other markets, valuers have to be very careful that they are not
getting ahead of the property market, which is probably a worse position than
lagging it. Valuers meet this difficulty by being very close to the market place
in order to pick up the soft signals. The valuer in preparing his opinion is

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providing the proxy for price and not casting forward to a future date except in
some loan security instructions.
If valuers were detached from the market place in the interests of an
improvement in the state of independence, the Working Party concluded that
there would be great threats to the quality of valuations, in particular their
currency. This disadvantage would far outweigh, in the opinion of the
Working Party, any improvements in appearance.
The Working Party concludes that there is a need for the Red Book definition
of independence because there will be circumstances in which the state of
independence is in the interests of the client. However, the definition should
make clear that the term Independent is used in a special sense, and that the
quality of independence in its everyday sense is required to be shown by all
valuers in all circumstances. Probably the majority of valuers act as External
Valuers. Subject to the safeguards covered below, this seems, to the
Working Party, a perfectly proper relationship, and one which will not, of itself,
impede the quality of valuations. However the current RICS definitions of
Valuer Status need greater clarification and amplification.

Recommendation 3
The definitions of Internal, External, and Independent valuer should be
clarified to avoid ambiguities and misunderstanding by clients and users, and
amplified in each case to make it clear that all valuers are required to have
independence, integrity and objectivity in the performance of their task,
whichever role they fulfil.
Threats to objectivity can arise from many circumstances, a number of which
are touched on in what follows. Whilst, no doubt, valuers do strive to maintain
objectivity, it is not always easy to see that ones own objectivity is threatened,
or may be seen by others to be threatened. The Working Party therefore
concluded that, as objectivity must be one of the fundamental criteria by which
the profession and its output is judged, the RICS should give further guidance.

Recommendation 4
The RICS should publish more extensive guidance in the Red Book on how to
identify and deal with threats to objectivity, drawing on the concepts developed
by the Institutes of Chartered Accountants.

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6.3 Financial relationships between valuer, client and others


interested in the outcome of the valuation.
The Red Book definitions focus upon the financial relationship between the
valuer, his task, and others with an interest in the outcome. It is self-evident
that if a valuer has a personal interest in the outcome of the valuation, his
position will be compromised. But beyond this, if the valuer, or the firm of
which he is a member, is drawing fees for work other than the valuation from
the client, or from other parties interested in the outcome of the valuation, then
there is potential for pressure to be brought to bear on the valuer which might
compromise his objectivity.
This issue is by no means unique to valuation. There has been a large debate
in the auditing world in recent years over the extent to which firms of
accountants should be permitted to act for their audit clients in a consultancy
capacity. Some people believe that the dual capacity is undesirable. They
believe that earning fees for non-audit work makes an auditor less likely to
take a firm line on audit issues for fear of jeopardising other fees. And they
believe that independence may be lost because the auditor finishes up
auditing the consequences of the firms consulting advice. However, there are
arguments in favour of clients being able to use their auditors to provide
consulting advice the fact that the auditor would have a high level of
knowledge of the business, and would be able to achieve cost effectiveness
being the most important. Furthermore, some argue that the wish to continue
doing the audit in future years is the biggest threat to independence of attitude
and receiving fees for consultancy or other matters makes little difference.
The Working Party requested additional information on how these issues are
addressed by accountants. The secretariat visited the Professional Standards
Office of the Institute of Chartered Accountants in England and Wales
(ICAEW) in August 2001 and met with senior staff.
ICAEW adopts a Principles Approach to ethical issues (as opposed to a
rules based approach). ICAEW has five fundamental principles (integrity,
objectivity, competence, performance and courtesy) which are used to
develop a framework which its members can use to test and resolve ethical
dilemmas. The Working Party considered the guidance provided to ICAEW
members on Integrity, Objectivity and Independence.
In addition to ethical guidance from ICAEW, accountants are required by Audit
Regulations to disclose details of the amount of non-audit fee income which is
generated from an audit client.
The Working Party considered these issues in the context of valuation. It
recognised that there could be threats to a valuers objectivity arising from a
firm having other fee-earning relationships with the client. However the
Working Party believes that the client can benefit from having a multi-faceted
relationship with a valuer and his practice, and that such relationships should
not be prohibited.

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There are some advantages in specifying, as the Red Book does, generic
definitions of the roles valuers may fill, and in having descriptions of, and
prohibitions on certain forms of conflict of interest. However, the Working Party
took the view that there are dangers in relying too heavily upon the wording of
such definitions. Participants in the property market tend to have a wide
variety of relationships with each other capable of all sorts of interpretations.
The dangers are best counteracted by requirements for openness and
transparency within the broad framework provided by the definitions. The
recommendations which follow reflect this view. In adopting this approach, the
RICS would be following similar principles to those adopted by the Institutes of
Chartered Accountants.
Other fee-earning relationships with parties interested in the valuation being
produced, normally the instructing client and, in the case of valuations for
secured lending, the borrower or a broker, should be declared so that users of
the valuation may draw whatever conclusions they wish. The Working Party
considered at length how far this principle should be carried. In particular,
there are issues of commercial confidence to be considered and balanced
against the benefits of openness. The Working Party reached three
conclusions. First, the key relationship lay in the proportion of the total fees the
valuers firm derived from the interested party. In principle, the higher this
proportion, the more leverage the party might be thought to have. Secondly, to
reduce the risks to commercial confidentiality, reporting should be in bands,
e.g. under 5%, 5 to 10% and so on. Thirdly, the obligation to report should be
mandatory for valuations for third party use. For valuations for known client
use only there should be no such obligation, but valuers should be required to
give the information if asked to do so by any party to whom they might be
considered to have a fiduciary duty.

Recommendation 5
The RICS should introduce a requirement for disclosure by valuers producing
valuations for third party use of their firms total fee earning relationship with
the instructing client, to be expressed in a formalised manner. This disclosure
must appear in their valuation report and any published reference thereto.

Recommendation 6
The RICS should require valuers to declare their firms fee earning relationship
with any party directly interested in the outcome of a valuation if asked by any
party to whom they have a fiduciary duty.

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6.4

Duration of instructions.

The Reading/Trent Report found that, in a few cases, the use of the same firm
or individual valuer over a long time scale had apparently distorted the level of
values. Close personal relationships can develop, and familiarity with the
circumstances could lead to insufficient questioning of the factors affecting the
valuation. The Working Party therefore considered whether, for valuations for
third party use, there should be a requirement for some form of rotation, that a
firm should be required to stand down after performing the task for a given
number of years.
Such an arrangement could certainly be seen to mitigate the perceived threat.
However, the Working Party agreed that there would be serious
disadvantages. Changing valuer is a costly exercise, not only in the financial
costs necessarily incurred in taking up a new brief, but it is also costly in the
sense of knowledge foregone. The Working Party was told that attempts are
being made to reduce the financial costs, but the costs of whichever sort
would be ultimately born by investors. Such costs should only be imposed for
tangible advantage. There are also advantages in continuity, producing wellinformed valuations in an unbroken series. Continuity also tends to increase
the cost-effectiveness of valuations. The Working Party therefore concluded
that this is not an area where rigid rules seem appropriate and that there
would be no net advantage in requiring the rotation of firms of valuers.
The Working Party nevertheless recognised that there are dangers of
individual valuers becoming over-familiar with both the properties being
valued, and with the client. This can lead to threats to objectivity as the valuer
gets too close to the issues he must address. The Working Party concluded,
therefore, that firms of valuers should be encouraged to rotate their personnel
dealing with any particular client. There may be merits in doing this for all
valuation work, but the Working Party decided to restrict its recommendation
to valuations for third party use only.

Recommendation 7
Valuers producing valuations for third party use should be required to state
within their valuation report and any published reference thereto, the length of
time that they have been carrying out valuation instructions for the client.

Recommendation 8
The RICS should publish guidance on good practice in rotating personnel
producing valuations for third party use.

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6.5. Client Influence


The Reading /Trent Report found evidence that client influence .does occur
and valuations can be influenced by clients (Reading / Trent Report p40).
However, the Reports Executive Summary also highlights the
owner/managers views that Despite these short term pressures, there was
an acceptance amongst those interviewed that most valuers could not be
easily moved and that there was no long term advantage in influencing
valuations upwards, as valuations would be forced to recover the position over
future periods.
The Reading/Trent Report findings illustrate that there is some short term
client influence, and the valuers approached were convinced that, on some
occasions, pressure was applied where the reasons were not based on
genuine differences of opinion over levels of market value. The authors of the
Reading/Trent Report were given rational reasons why it was counterproductive, in the long term, to seek to manipulate performance measurement
valuations, but they concluded that, although this good sense may be a
dampening factor, it is clear that the practice does occur. Changes of valuer
and changes of fund manager are occasions which the Reading/Trent Report
identified as particular points where valuations can change significantly and
client influence might well have been an issue. Although valuations for bank
lending were not investigated in the research for the Reading/Trent Report,
allowing any opportunity for borrowers, brokers, or even lenders to enter into
the valuation process gives an opportunity for unwarranted client influence.
The Working Party recognised that in any relationship involving payment of a
fee, particularly where repeat business is a possibility, the objectivity and
independence of the service provider may be at risk. This is a threat of which
valuers must be (and no doubt generally are) aware. If the risk is unavoidable,
then the issue is how re-assurance can be given that it is controlled and
minimised, and the Working Party considered whether the processes followed
in carrying out a valuation, and which involve interaction between interested
parties and the valuer, might be improved to this end.
It was argued strongly by both valuers and clients contributing to the
Reading/Trent Report that some interaction was essential to the production of
high quality valuations. Clients often have information which is critical to the
valuation and which they alone can provide economically to the valuer. The
Working Party accepted this view. However, safeguards are needed to limit
the possibility that the client will be able to influence the valuers opinions, and
to ensure that, to the extent that there is an interaction, its nature is
transparent. The Reading / Trent Report raised concerns in particular about
what are known as draft valuation meetings and the Working Party looked at
this area of alleged client influence in detail. Its conclusions appear in
paragraph 6.6. below.
The Working Party agreed that, given the inevitable risks, it should be a matter
of normal practice that a valuer keeps some note with his papers of all
occasions when the outcome of the valuation was discussed with the client, or

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with any other interested party. It is not necessary to cover occasions when
factual information is exchanged, (albeit that, for other reasons, such a record
should be kept) but only those when the valuers overall opinion of value might
have been influenced. Nor is it necessary that the occasion should be
recorded in great detail. Rather, the record should provide an audit trail
which, when the valuers process is being reviewed either by himself before
reaching his final conclusion, or by others in the course of monitoring, will
show when the valuers independence and objectivity might have been
influenced, and demonstrate either that his opinion had not been changed, or,
that it had been and why. Given the great variation in the relationships
between clients and valuers, the form for recording such occasions should not
be prescriptive, but the principles should be made clear, particularly when any
third party has a legitimate interest in the outcome of the valuation.

Recommendation 9
The Red Book should contain specific guidance on the recording of occasions
when a valuer discusses the outcome of the valuation with the client or any
other interested party.

6.6. Draft valuation meetings


The Reading/Trent Report raised particular concerns about what are known as
draft valuation meetings and the Working Party looked at this area of
potential client influence in detail. Holding meetings at which the valuer
produces his preliminary figures of valuation and discusses them with the
client prior to producing the final report is a well-established practice in the
valuation process, particularly in portfolio valuations for financial reporting
purposes. These meetings provide clients with an opportunity to influence the
outcome of valuations, potentially to the advantage of their organisation, or to
their own personal advantage (through, for example, annual bonuses linked to
the performance of their property portfolios which is in turn linked to the
outcome of the valuations).
The Working Party agrees with the Report that the influence of the client at
draft valuation meetings is a real possibility . It was not, however, persuaded
that it would be beneficial, or indeed practical, to prohibit such meetings, or
equivalent contacts between clients and valuers. From the clients viewpoint
they provide an important opportunity to understand the valuers viewpoint and
evidence and to use that information beneficially. The Working Party also
accepted that such contacts often involved the passing of information that is
critical to high quality valuations. It noted again the parallel between valuation
and auditing where it is accepted that company managers must have access
to the auditors of their company. Auditors must know how to deal with any
attempt to exert undue influence on their fundamental duty to provide an
objective opinion of the companys financial position and Statement of Auditing
Standards 440 is designed to assist auditors in how to handle representations

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from management. The Working Partys approach was that valuers should
have a similar protective structure.
It was put to the Working Party that the expectation of client pressure could
lead some valuers to treat draft valuation meetings with the client as a
negotiation over the final figures, even to the point where they entered the
meeting with a proposed valuation differing from the number they believed to
be appropriate with a view to some sort of negotiation taking place. The
Working Party had no evidence that such behaviour was other than, at worst,
rare, but to the extent that it occurs at all, it is unprofessional and measures
should be taken to limit its occurrence. The Working Party believes that the
key point is that it is appropriate for valuations to be adjusted at draft valuation
meetings where new and persuasive evidence is produced to justify a change,
but they should not be changed in the absence of such evidence. Some
safeguard would be provided if valuers kept careful records of draft valuation
meetings, as, the Working Party was told, many do at present. The record
should note the information provided in relation to the valuations, and
subsequently record how that information was used to justify a change in
value. This is a key issue in perceptions, and the Working Party was in no
doubt that, particularly for valuations for third party use, valuers should be
prepared to take some trouble to create a transparent audit trail.

Recommendation 10
The RICS should set out, in the Red Book, standards of best practice and
minimum requirements for the conduct and recording of draft valuation
meetings designed to show what information was produced by the client which
might influence the value derived, and how that information was used to
influence, or otherwise, the final valuation figure. Rules for the disclosure of
the record during monitoring should also be established.

6.7 Interested party influence on secured lending valuations


As already noted, the Working Party was reminded that there is ample motive
for client influence in the production of valuations for secured lending. This
might arise from lenders anxious to have a loan supported by a valuation, or
by borrowers or brokers anxious to secure the maximum loan. Apparently it is
not uncommon for a valuer to be selected after first being asked what his
valuation is likely to be. Such practices, although they maybe driven by
understandable commercial needs, are an obvious danger to professional
independence and objectivity. However, although the dangers may be
obvious, it may not always be easy for a valuer to avoid being placed in a
difficult position. The Working Party concluded that this is a very particular
context with a number of strands to it, not the least of which might be the
practices and policies of the major lending organisations. It is also, however,
fundamental to any external view of the professional standards of valuers.

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Recommendation 11
The RICS should undertake an examination of the influences and pressures
on valuers who are instructed to undertake valuations for secured lending, and
of those parts of the valuation process particular to this context, with a view to
establishing Practice Statements designed to ensure public confidence in the
valuation process in this area.

6.8 Fee Structures


Valuation fees are arrived at in a number of ways. One of the most usual is
that the valuer is paid a small percentage of the valuation figure he produces.
It has been argued, though not in the Reading/Trent Report, that this gives the
valuer an obvious conflict. The higher the figure produced, the more he is
paid. Whilst clearly true, the Working Party members have never come across
any evidence that valuers do take any advantage of this situation. That is not
surprising as the percentage of the valuation figure is usually very low, and the
value of a reputation for probity very high. There are also good and practical
reasons for using a percentage basis, certainly for portfolio valuations; it
enables the fee paid to rise and fall in response to purchases and sales to and
from the portfolio without the need to negotiate a fresh fee each time. The
Working Party were quite clear that this method of calculating fees in no way
corrupts the valuation process and decided that the issue did not carry enough
weight to merit a recommendation. That said, it is clear that those unfamiliar
with the property market may continue to see a conflict and it might well be
wise for valuers to consider other methods of reward wherever that is feasible.

6.9 About the Red Book


In fulfilling its role in furthering the quality of valuations, the primary means at
the disposal of the RICS is the Red Book. This is, and even with improvement
will remain, a major tome aimed at valuers. Few clients will read it, or know
what it contains. For the most part that will not matter. However the Red Book
does contain some fundamental obligations and concepts, particularly with
regard to independence and objectivity. The Working Party concluded that
understanding of valuers, and thus of valuations, might be enhanced if the
RICS published a short guide to the Red Book from the clients viewpoint.
Valuers might be expected to give this, or at least offer it, to clients.

Recommendation 12
The RICS should prepare and publish a guide to the Red Book which sets out
the valuation process and its regulation from the clients viewpoint.

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7.0 Valuation Reporting


7.1 The status of valuations
The Reading / Trent Report raised concerns about the provision of so-called
informal valuations. These are contrasted with formal valuations which are
generally understood to be ones which comply fully with the Red Book. The
term informal tends to be applied to various situations, including oral opinions
of value, valuations that are reported in an abbreviated form, and valuations
based upon limited information. These kinds of valuation create a number of
potential difficulties. In particular, the client may fail to understand the basis on
which the valuation has been prepared and the extent to which it can be relied
upon. This difficulty is heightened if the valuation reaches a third party who
may have no inkling of the limitations. However, although there are difficulties,
clients will often call for such a valuation, accepting its limitations perhaps
because of time pressure, or because they see no commercial need, from
their point of view, for incurring the expense of a formal valuation which meets
all the detailed obligations on the valuer contained in the Red Book. Informal
valuations may therefore meet a clients need.
The Working Party was informed that Reading University has been awarded a
grant from the Economic and Social Research Council to undertake a two year
investigation into all aspects surrounding the status of property valuations in
the commercial and residential markets. It welcomed this development, but
decided that there were several issues upon which it should comment in the
interim.
The Working Party noted that the Red Book already provides a number of
safeguards against valuation short cuts. Valuations based on limited
inspection or limited information are already covered under PS2.3.1, PS7.4.9
and PS7.4.11 which require the valuer to assess a number of factors before
accepting such an instruction and to make full reference in the report to the
limitations of the terms of the instruction. The Working Party was also told
that valuations were sometimes given, particularly in the course of a
transaction, which are expressed to be given in the course of estate agency.
Such valuations are a stated exception from the Red Book, and such an
exception is reasonable within limits, e.g. a valuation which is merely
suggesting an asking price or the level at which an offer should be made.
There are, however, clear dangers if the exception is being used
inappropriately. At present the Red Book gives no definition.
The Working Party believes that the key point is to recognise that valuations
cannot be informal, either in the sense that they involve a lessening of the
normal duty of care which a valuer owes to a client, or that they release the
valuer from the professional standards set out in the Red Book. Every
valuation is an expressed professional opinion and involves a duty of care to
the client. If the client has agreed, or requested, that the valuation should be

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undertaken despite limited information and/or delivered in a shortened or oral


form, it should still be undertaken within the framework provided by the Red
Book. The limitations just place greater obligations upon the valuer to ensure
that the client understands the limitations, and to make greater efforts to warn
against the valuation falling into the hands of a third party. In undertaking such
valuations, valuers should take care to describe the scope of their work
clearly, so as to limit the danger of misunderstanding regarding the reliance
which can be placed upon it, and they should formally request the client not to
pass the valuation on to others without also passing the full context of the
report.
Whilst the Working Party is satisfied that the Red Book makes adequate
provision for safeguards in situations where valuations are based on limited
information are provided by valuers, it did consider that awareness needs to
be raised amongst valuers as to how to deal with such situations.

Recommendation 13
RICS should publish an interim information paper, pending the outcome of the
ESRC funded Reading research, about valuations based on limited
information, giving examples of different situations in which such valuations
are requested and best practice on how they should be approached. The topic
should also be addressed in CPD seminars.

Recommendation 14
The exemption from the Red Book for valuations given in the course of estate
agency should be reviewed to ensure that the exemption is restricted to the
proper circumstances.

7.2 Reporting Uncertainty in Valuations


All valuations are an estimate of the figure most appropriate to the definition
being used. As a result, the valuer will always be uncertain, to some degree,
of the correct figure and a level of uncertainty around the estimate has been
accepted as perfectly reasonable by courts and tribunals around the world.
Despite this, the RICS Red Book requires, rightly in the Working Partys view,
that the valuer should always report a single figure, not a range, albeit that he
is encouraged to report on the uncertainty if this is material to the client.
The legal implications of not reporting a single figure are obvious. In the
absence of any lead from the profession in general, but totally relying on the
information supplied by numerous expert valuation witnesses, the courts have
developed the concept of a bracket within which a valuation may vary without
being thought negligent. The concept that a correct valuation cannot be

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identified but a bracket around that correct value can be determined is called
the Margin of Error and seems to have developed unchallenged by judges,
lawyers and valuers since the landmark valuation professional negligence
case of Singer & Friedlander in 1977. It is only recently that academic
comment concerning its validity has been published.
Uncertainty is a normal market feature deriving from the nature of property,
which should be openly acknowledged. It is variable from property to property
and from market condition to market condition. It is something to be managed
as it cannot be removed.
In the context of the Working Partys work, the open expression of uncertainty
might well ameliorate charges of client influence. In the light of valid new
information or interpretation from the client, it might be entirely correct for a
valuer to change his single figure valuation within his own area of uncertainty.
Such a change could be differentiated from one where a client persuaded the
valuer to change the basic tenor of his calculation.
Beyond this, there is a risk that third party users of valuations may be misled
by the apparent certainty of a single figure valuation. One can easily imagine
circumstances where a portfolio is valued on two occasions at exactly the
same figure. On the first occasion the market was vigorous and the valuer
might be confident to 5% or less of the figure because of a wealth of
transaction and other supporting evidence of prices. On the second occasion,
information on the market may be more sparse and the various signals of the
level of prices less numerous or conflicting. The valuation arrived at may be
identical but the level of uncertainty in the valuers opinion is greater. At
present, the valuer can readily express this to a single client, but there is no
robust and understood mechanism for him to do so to third parties. Therein
lies the scope for misunderstanding.
The issue is whether this sort of normal uncertainty should be communicated
and if so, can it be communicated in the valuation figure or in the valuation
report? This is a complex issue which was debated at length, and
inconclusively, in the Mallinson Committee in 1994. In the time available, the
Working Party feels unable to recommend a particular method for reporting
uncertainty around the single valuation estimate, but it considers that clients
deserve more information than they normally receive at present.

Recommendation 15
RICS should commission work to establish an acceptable method by which
uncertainty could be expressed in a manner which will be helpful and will not
confuse users of the valuation. RICS should also seek to agree with
appropriate representative bodies of those commissioning and using third
party valuations the circumstances and format in which the valuer would
convey uncertainty.

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7.3 Investment Purchase Reports


It was argued in the Reading / Trent Report that, where a valuer is asked to
provide a valuation confirming to a purchaser the price negotiated, and either
the valuer or his firm is introducing the property to the purchaser for an
introductory fee contingent upon the completion of the transaction, there is a
considerable incentive for the valuer to settle at or near the negotiated price.
In the Working Partys view this is only an issue where, ultimately, a valuation
for third party use is to be provided, the context of the Reading/Trent Report.
In the Working Partys analysis, firms of surveyors may fulfil three differing
roles in the procurement of property and its absorption into a portfolio. A firm
may act as introducing agent, role 1. For this service it would expect an
introductory fee from the purchaser. Such a role will not normally require the
firm to offer a formal opinion of value, but perhaps it is fair to assume that the
purchaser would expect a firm to whom a fee was being paid to at least offer
some warning if the price was other than a fair market price.
A firm may also be asked to produce a report on a property about to be
purchased, role 2. Such reports will usually, but not always, be required to
include a valuation, thus confirming to the purchaser whether or not they
paying a fair market price in the opinion of the valuer concerned.
Finally, once the property has been acquired, if the portfolio is externally or
independently valued, a valuer will be required to produce a valuation as part
of the routine valuation processes for the purchaser, role 3.
The Working Party debated at some length the relationships between these
roles and how many of them a firm could properly fulfil without jeopardising the
appearance of independence. It was concluded that to take all three would
carry clear conflicts and this should be prohibited. It was agreed that there
would be a conflict in fulfilling roles 1 and 3 and this should be prohibited
unless another firm had produced a full valuation as part of role 2. This
valuation from a valuer not party to the transaction would be a sufficient
firebreak between the transaction and the concluding third party valuation. It
was agreed that there was a conflict in fulfilling roles 1 and 2, but this should
not be prohibited. The conflict would be obvious to the client and it would not
be right to restrict the clients choice. Finally it was agreed that there was no
conflict in acting in roles 2 and 3. In both cases the valuer would be free of the
transaction and the task was effectively identical in each role.
When a conflict has arisen in these circumstances, the Working Party
concluded that a valuer should be precluded from carrying out a third party
valuation of the property concerned for 13 months, i.e. a clear year, after the
property entered the portfolio.

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Recommendation 16
The RICS should review the current Practice Statements in the Red Book and
introduce such amendments as necessary to ensure that a valuer is
prohibited from producing a valuation for third party use of a property on
which his firm has received an introductory fee unless another firm has
produced a full, formal valuation for the client between the date the transaction
was agreed and the date of the third party valuation. Such a prohibition should
last for at least one year.

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8.0 Quality Assurance and Monitoring


8.1 Quality assurance and Monitoring - General
A fundamental task facing the Working Party was to prepare
recommendations designed to ensure that clients and others using or affected
by valuations should have the highest possible confidence in the reliability of
valuations. In this part of its deliberations, the Working Party focused
particularly on whether some system of quality assurance would be conducive
to this objective. Such a system could not warrant the accuracy of any
particular valuation, but would be designed to ensure that valuers did indeed
follow best practice in their work, thus greatly increasing the probability of
accuracy and, equally importantly, the understanding of the valuation.
Many firms already have in place their own quality control procedures. But the
Working Party noted that a number of professional bodies use peer review
and external monitoring methods in order to show that they have used all
reasonable means to secure that their members are complying with standards,
rules and regulations. The information gleaned from this exercise is then used
to provide an overview of the extent to which compliance is generally being
maintained, to educate firms and members of specific areas in which they are
failing to comply and to refer serious cases of non-compliance to a
professional conduct panel.
The Working Party asked the secretariat to produce details of the existing
monitoring procedures for practice statements (i.e. covering the Red Book) of
the RICS, and its powers and procedures in relation to members conduct. A
comparison was also undertaken by the secretariat, at the request of the
Working Party, of the nature of practice standards, ethical / conduct standards
and peer review / monitoring within a small sample of other professional
bodies. This work looked at the RICS position in comparison with the
Appraisal Institute, the largest professional body for appraisers in the USA,
and that for auditors who are members of the ICAEW. The comparison was
undertaken by a combination of desk-top research and a visit to ICAEW where
a meeting was held with senior staff.
The RICS already has regulatory powers to require its members to comply
with its Code of Conduct and with the Red Book. Although some monitoring of
compliance with the Red Book is undertaken, use of regulatory powers is
largely reactive and is not linked to any systematic monitoring of valuation
firms in a routine way.
In considering the question of monitoring, the Working Party took into account
the great span of work which comprises valuation, and the range of
circumstances for which valuations are produced. Every valuation will be
important to the client for whom it is produced and merits such protection as
the RICS can provide. But any system of monitoring compliance will involve a

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cost, and the cost must be commensurate with the benefits expected to flow
from the system. However, the Working Party believes that a worthwhile
system can be introduced at a reasonable cost. Furthermore, it believes that it
is highly desirable for the RICS to introduce such a system. Clients of
members of the professions, and the public at large, have, today, high
expectations of the standards of performance of those professionals, and
rightly so. The Working Party believes that, to meet those valid expectations,
the RICS must be able to show that it has taken reasonable steps to provide
assurance of the quality of service of its members

8.2. Quality Assurance and monitoring the outline of a system


Given the very disparate circumstances for which valuations are produced,
and the wide range of valuers who produce them, the Working Party
concluded that it would be appropriate, and consistent with their general view
of the RICSs responsibilities, to differentiate to some extent between those
valuers who produced valuations for third party use, and those who did not.
Because the work of the former is in the public domain, they should be
required to submit to formalised and continuing external review. It would be
sufficient if the latter were subject only to some form of self-certification, with
external review in very occasional spot checks, or if difficulties arose.
The Working Party discussed at some length the form that a monitoring
system should take. It believes that the RICS should establish a Committee to
set up the system and then supervise its operation and that this Committee
should make many of the detailed decisions required. However, the Working
Party wishes to express its views on certain key areas.

8.2.1

The Working Party notes that monitoring could be carried out by


valuation firms which would check on their peers a literal system of peer
review. Alternatively the monitoring could be carried out by outside
consultants under contract to the RICS or by staff of the RICS specially
assigned to the activity. The Working Party believes that the most
appropriate decision would be to use consultants (who would not be RICS
members) or RICS staff. Use of valuation firms would create unnecessary
and irresolvable issues of commercial conflict. The supervisory Committee
would have a number of RICS members (and, desirably, some
independent members also) but should not receive the findings of the
system in a way that would include confidential details.

8.2.2

The Working Party notes that the present approach of the Red
Book is to focus on matters of process and professional behaviour and not
to prescribe particular methods of valuation. It accepts this approach,
recognising that the technical expertise to undertake valuations is
fundamental to the professional skills of the valuer. This means that a
monitoring system should focus on process. This Report contains a
number of examples of issues that should be covered by a monitoring

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system: procedures for recording and dealing with client meetings, content
of valuation reports, how independence issues have been
addressed. In order to provide a sound basis for the monitoring system,
the RICS should prepare a comprehensive Practice Statement on these
matters, bringing together existing material and expanding it to cover all
the topics concerned.

8.2.3

The system should cover all kinds of valuation, because the


requirement to show a high level of quality assurance, in a consistent
manner, applies to all valuations. The system should have two levels.
Level 1, the most stringent, should apply, at the least, to all firms who
produce valuations for third party use. Level 2 should apply to all other
valuers.

8.2.4

Level 1 should be a system which other valuers can buy into if


they wish. A valuer might wish to do this in order to differentiate his
service from that of rivals, or to replace or reinforce his existing internal
quality control system. Further, and more important, it would give clients
an opportunity to insist that their valuer subscribes to this level. This might
have cost implications for the client, but it would give him an important
option.

8.2.5

The design of the system should give attention to cost


effectiveness. The primary method for Level 1 should be a periodic visit to
carry out a sample inspection of working papers with the objective of
ensuring compliance with the requirements of the Red Book regarding
process. For Level 2, self-reporting (for example, an annual statement,
giving information to show compliance with the Red Book) is likely to be
sufficient with the possibility of a visit a low probability. Indeed, the
Working Party believes that self-reporting should probably be the basic
ingredient for all valuers, with a graded frequency of visit from virtually zero
to annual, depending on the size of the firm, volume and nature of
valuation business and evidence from the self reporting and previous
visits.

8.2.6

The supervisory Committee should develop procedures for dealing


with shortcomings revealed by the monitoring. In most cases, it will be
sufficient to report to the valuer concerned explaining the shortcomings
and to follow up to check that remedial action has been taken. However,
provision will be needed for disciplinary action in serious cases.

8.2.7

Firms which carry out valuations would be required to register for


the monitoring system, and they would be required to bear the cost of
running the system by paying fees in proportion to the quantity of
valuations which they undertake and the Level of the system to which they
will be subject.

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8.2.8

An annual report should be produced by the Monitoring Committee


which would set out details of the years monitoring activities in general
terms, highlighting areas of non-compliance and the numbers of firms
involved. This report should be in the public domain.

Recommendation 17
The RICS should create a Valuation Monitoring Committee to create and
manage a Review and Monitoring System in accordance with the principles
set out, and make amendments to the Red Book to enforce the System.

8.3 RICS action when things go wrong


The Working Party agreed that the RICS also needs to have a clearly
prepared approach when things go wrong. When the Monitoring system finds
fault, this should lie in the established disciplinary processes, as referred to in
paragraph 7.2.6. above. However, public concern may arise in cases where
monitoring has not yet occurred, or where it has, and no fault in the process
has been found. Normally, public concern will arise from the figures produced
by valuations, and not from the process. As has already been explained, the
fact of public concern should not alter the fundamental principle, accepted by
the Working Party, that it is not a proper role for RICS to become involved in
valuation figures. However, the Working Party agreed that, when such
concerns arise, the RICS should be seen to react promptly in its proper area
of concern, process.
There are two difficulties in this. First, as in all cases of concern about a
valuation, whether on the part of a client or the public, the valuer may be
subject to the threat of legal action for negligence. If the recommendation for
monitoring by the RICS is accepted and implemented, it is inevitable that the
outcome of monitoring will be a component in any action against a valuer. The
Working Party accepted that this is more than outweighed by the benefits to
the profession of a robust monitoring system. It also accepted that only the
guilty have anything to fear. A finding by the RICS that a firm has sound
processes which meet professional standards is likely to be well received by a
Court; besides valuers operating outside their area of expertise, probably most
findings of negligence arise from failure of process rather than error in figures.
Secondly, in cases of public concern, other authorities are likely to be
involved. In most cases this will be the Financial Services Authority, the Stock
Exchange, or perhaps a Government Department. The Working Party
therefore considered that it is important that the role of the RICS should be
established with such Bodies before a difficulty occurs. This would enable
these authorities to understand what support they can expect from the RICS,
and the limits to it. They would also have the opportunity to suggest
modifications away from the circumstances of a particular case. Above all, the
RICS would be able to respond swiftly and efficiently.

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Recommendation 18
The RICS should explain and clarify with the Financial Services Authority and
other appropriate regulatory authorities the role that it will fulfil in monitoring
the processes of valuation. This should occur at the same time as the
Valuation Monitoring Committee is created so that any reasonable
requirements of the regulatory authorities can be included in the Monitoring
System.

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Appendix 1

Bibliography

The influence of valuers and valuations on the working of the


commercial property investment market. (Reading and Nottingham
Trent Universities, 2000).

RICS Royal Charter

RICS Bye-laws and Code of Conduct Regulations

RICS Appraisal and Valuation Manual (The Red Book)

The UK Commercial Property Lending Market 2000: Research


Findings ( De Montfort University April 2001)
Valuation Reliability and Valuer Behaviour (UMIST October 2001)
(The Committee were provided with a copy prior to publication)
Valuers Compliance with the reporting standards of the RICS Red
Book (RICS 2000) (The Waters Report)
Audit Regulation Report to the DTI for the year to 31 Decmber
1999. (ICAEW, ICAS, ICAI).
Integrity, objectivity and independence. (ICAEW, 1997).

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Appendix 2

Membership of the Working Party


Sir Bryan Carsberg (Chairman)
Peter Balfour - Henderson Global Investors
Prof. Neil Crosby - University of Reading
Ian Cullen - Investment Property Databank
Michael Gunston - The British Land Company plc
Richard Jones - Morley Fund Management
Walter MacGregor The Royal Bank of Scotland Plc
Michael Mallinson
David Martin - CB Hillier Parker
Martin Moore - Prudential Property Managers
William Newsom - FPD Savills
Duncan Preston - Jones Lang LaSalle and Chairman RICS Valuation Faculty

RICS Secretariat:

Andrew Gooding - RICS Valuation Faculty Director


Adrian Nelson - RICS Valuation Faculty Executive

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