The role and best practice of a professional institution in the public interest and that of its members

Our institutions operate in a changing world to maintain the appropriate ethical codes and standards yet now appear more susceptible to “Institutional Corruption” which is manifest when there is a systematic and strategic influence which is legal, or even currently ethical, that undermines the institutions e ectiveness by diverting it from its purpose or weakening its ability to achieve its purpose.

The issues a ecting the RICS which lead to the removal of its CEO and others followed by the Levett report into what had gone wrong and the Bichard Review as to what must be done to put things right, suggests that as an institution RICS had indeed become corrupted. It was clearly failing its member’s needs, acting without its members authority and in danger of not meeting its Royal Charter requirement to act to the public advantage but there are two significant changes which give cause for concern that such corruption may still be embedded in its new way forward.

Lord Bichard’s Review has put forward 36 recommendations for RICS to adopt and additionally to amend its charter to incorporate the following revised purpose.

“The Institution exists for the benefit of society to deliver positive change in the built and natural environment in the United Kingdom and around the world. It does this by advancing and facilitating access to surveying knowledge by maintaining and promoting the usefulness of the profession and by leading, supporting and regulating a body of skilled professional surveyors and firms who demonstrate the highest ethical and technical standards.”

The recommendations look sound enough but there may be a sting in the tail when it comes to the proposed change in the Royal Charter with the suggestion by Lord Bichard that the subject of “sustainability” be added. There are hopefully few who in today’s world would not put the environment and its sustainability as a core principle and that should be replicated by RICS and its members. However, there is a danger that enshrining any specific subject in the Royal Charter alongside the public interest criteria could result in an irreconcilable conflict.

We have already seen governments worldwide look to expand fossil fuel provision so as to overcome the potential energy shortfall as a consequence of the Ukraine war, which otherwise is likely to cause hardship and death through a lack of food production and heating during the winter months. But what happens when the same position faces an institution where its Royal Charter has two objectives which are in conflict with each other. The public interest mantra alone should be su cient and therefore I would advocate extreme caution in amending the RICS Royal Charter possible political interference.

The Bichard Review identifies a number of changes required to the existing Standards and Regulations Board (SRB). On the one hand ensuring it has appropriate delegated powers but on the other ensuring it is responsible to the Governing Council in performing its Regulatory duties e ectively.

This is an important change reflecting on an ine ectual and sometimes misguided SRB activity in the past with the best example being their acceptance of 13 recommendations from the recent “Valuation Review” by a Committee that only comprised representatives of Institutional and City of London based organisations, with few chartered surveyors and only one of the major surveying practices represented.

The majority of the reviews findings were appropriate but for the first time it recommended prescribing that for all investment property on a global basis the Discounted Cash Flow model is to the Primary valuation methodology for valuers to adopt as follows:

Recommendation 8 –Analytical Approaches (i) Discounted Cash Flow

The valuation profession should incorporate the use of discounted cash flow as the principal model applied in preparing property investment valuations.

My concern is that although RICS must ensure that there is transparency, independence, objectivity, and integrity in the process, it must not become involved in a prescriptive approach which interferes with the skill of the valuer. That is why members who undertake “formal valuations” must be RICS Registered Valuers with the appropriate skill base and the simple but critical objective, to ensure the valuer adopts the correct methodology for the task in hand and produces a valuation which is as accurate as possible.

For RICS to insist on the adoption of DCF in sectors of the market that do not use this methodology may well encourage an inaccurate or incorrect valuation. Consequently, following RICS standards under these circumstances (that is if Recommendation 8(i) is implemented) may result in valuers facing negligence claims because they have adopted an incorrect approach and is likely to dilute RICS’s profile and standing in the markets it serves to the benefit of other valuation organisations without such strictures.

That is not to say there is not significant work to be done in ensuring that chartered surveyor valuers are professionally trained and skilled in the art of the DCF methodology. Therefore the second strand of Recommendation 8 is entirely appropriate which is as follows:

Recommendation 8 – Analytical Approaches (ii) Advanced Analytics

RICS should improve the knowledge and application of valuers in respect of advanced analytical techniques.

It must be completely acknowledged that DCF has a significant role in investment analytics, and in some areas of determining Market Value, but it should not be prescribed as the primary route to the determination of value or be confused with one derived from an accountancy approach delving into market practice which has not been adopted by the market.

The suggestion that other methodologies, such as the single all-purpose yield, will need to be rigorously explained if DCF is not adopted, is inappropriate, as it should be the requirement that any methodology adopted must represent the valuer’s interpretation of the market and the appropriate valuation methodology used in that sector.

It is a serious shortcoming of the valuation review that there is no definition of “Investment Property” but it is confirmed that the “Review looked at all aspects of valuations of property assets for investment purposes.” That said, the report states in noticeably clear terms that “… attention has been primarily focused on valuations of real estate assets for performance measurement and decision making purposes, upon which third parties place reliance. These are principally valuations for: financial reporting; inclusion in prospectuses and circulars, and takeovers and mergers; collective investment schemes; unregulated property unit trusts and commercial investment property financing.”

It is clear that the valuation review was limited to primarily the Institutional and major property company part of the overall investment property but has been unashamedly used to dictate the DCF valuation methodology for all aspects of private commercial and residential investment property regardless of the market approach.

As an example, Recommendation 8(i) gives no consideration to a private investor purchasing a small investment such as a newsagents shop in Margate or a 2 bedroom flat in a town such as say Rochdale. As a result of Recommendation 8(i), the purchaser and lender will be subject to undertaking a DCF valuation in addition to a traditional market valuation. Neither the purchaser nor the lender will gain anything out of a DCF based valuation, it is likely to be inaccurate as the transactional market in this sector will not operate on a DCF valuation methodology and there will be a significant additional cost and time delay for the production of a report which will have no beneficial outcome to either the purchase or lender.

The valuation review did advise that “….prescriptive standards may not be suitable to cover the vast range of valuation circumstances and …… could lead to unwarranted valuation conclusions in some situations.” The report also correctly and fairly confirms “that traditional measures of value, such as an ‘all-risks yield’ calculation, can correctly identify the exchange price at which an asset will likely trade (the all-risks yield is merely the mathematical summary of the many assumptions that go into a valuation)”

Despite this warning, RICS, through the ill-advised and unseemly quick decision of the SRB, has taken it on themselves to change the entire face of valuation methodology for investment property on a global basis and in doing so has changed the fundamental principle that the valuer should determine how to value.

The first two tests since the problems experienced in the management of the RICS, as exposed by the Levett Report are firstly the Bichard Review which seeks to amend the fundamentals of the RICS Royal Charter for what some may regard as political purposes. Secondly SRB adopted the Valuation Review Recommendation 8 (i) where the DCF is to be the “Primary Valuation Model” for all investment property on a global basis because of the preferences of a pressure group from the financial services sector based in the City of London.

RICS must make sure it retains and promotes its independence based on the skills and experience of its Members and not be corrupted by the pressure from strong dominant groups or those with their own political agendas.