RICS P ROP E RT Y JO U RN A L
UPFRONT VAL UAT I O N
Long-term valuers
What will clients want from valuers and valuations in a tech-enabled future? Sander Scheurwater reviews RICS research findings
T
he valuation profession is likely to face a period of significant change in coming years, in terms of how the process is managed, the role of the valuer and the benefits they can offer to clients. An RICS insight paper, The Future of Valuations (www.rics.org/futureofvaluations), explores two main issues to determine how far they will have an impact on valuations and valuers: technological developments and changing client expectations. The latter is the focus of this article. The paper was developed by a Europe-wide expert group consisting of both valuers and clients. Such an approach is important, because it is only through discussion that we can find the right way forward. We are therefore extremely grateful for the support and cooperation of banks via the European Mortgage Federation–European Covered Bond Council, and for that of institutional investors through INREV, the European Association for Investors in Non-Listed Real Estate Vehicles.
Changing client expectations Valuations have come under increased regulatory scrutiny in recent years. While market value remains the dominant basis for many valuation purposes, the global financial crisis showed the limitations of relying on this in the event of a severe downturn. Megatrends such as changing demographics, increasing urbanisation, climate change and self-driving cars will have an impact on long-term value as well, which is important to the client. The paper describes two main elements in which clients are increasingly expressing interest, but which remain difficult for valuers to take into account in traditional valuations: sustainability and long-term value. 10 OC T OBER/NO V EMBER 2 018
Sustainability and value Sustainability, as defined by the RICS Red Book, is “the consideration of matters such as (but not restricted to) environment and climate change, health and well-being and corporate responsibility that can or do [have an] impact on the valuation of an asset. In broad terms it is a desire to carry out activities without depleting resources or having harmful impacts”. Sustainable and climate-resilient real-estate characteristics should be taken into account, as they have an effect when valuing a property. However, valuers reflect the market; they do not lead it. Solid evidence of factors affecting the value of properties is still required. So far, despite the growing number of studies in this area, most research aiming to provide empirical evidence that valuers need has been of limited use. Currently, the RICS Sustainability and commercial property valuation guidance note (www.rics.org/suscpvalgn) advises valuers to collect appropriate and sufficient sustainability data as and when it becomes available for future comparability, even if it does not currently have an impact on value. But there is a client demand to know about the impact of sustainability, and valuers should think about how to use their knowledge and skills appropriately and go beyond a traditional valuation. The discussion around a building’s sustainability is often directly linked with another conversation among valuers and between valuers and clients – namely, the subject of a building’s future, or long-term, value. Long-term value As has already been indicated, the use of market value on its own, under any circumstances and for any purpose, has had demonstrable limitations, especially during the global financial crisis. A market
value essentially looks at the past, and can thus lead to a lagging effect. There is no doubt that market value will remain the main valuation base for many purposes. But at the same time, clients are increasingly asking for “long-term value”. Different terms are used, such as long-term value, economic value or real economic value, sustainable value, and the already existing mortgage-lending value. However, except for the latter, these have never been fully developed (see the Bank lending valuations and mortgage lending value guidance note, www.rics.org/banklendvalgn). For valuers, part of the reluctance to engage in the discussion may revolve around definitions of value and liability. Looking into the future value of a building might better be described as a risk assessment or a prediction than a “value”. Also, with the future being inherently uncertain, providing a future value or risk assessment cannot have the same liability consequences as providing a market value. Long-term value discussions, and research, are already taking place. Two examples in the paper are: bb long-term value discussions in Germany, where the local valuation body HypZert leads a European initiative on Long-Term Sustainable Value, with a discussion paper published on this in 2016 (http://ltsv.info/ltsv/ltsv) bb A Vision for Real Estate Finance in the UK, which was published in March 2014 (https://bit.ly/2MphDcF), provided seven recommendations for reducing the risk of damage to the financial system from another commercial real-estate market crash; one of these was to use long-term value in risk management. This led to a follow-up report in June 2017 entitled Image © iStock