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The Pereira Gray Independent Review into Valuation

Changing valuation practice for a changed real estate market 

At the beginning of this year, the Independent Review of Real Estate Investment Valuations was published. 

The 13 recommendations – made by Peter Pereira Gray - were immediately accepted by the RICS.

This is nothing less than a once in a generation reform of the valuation profession with far reaching implications for valuers and their clients.

Parallels are being drawn with changes that have been introduced to other professions in recent years – such as audit. All these recommendations are ones that seek to ultimately protect and enhance the public interest.

Clients for regulated purpose valuations – which covers a significant part of the market – will soon have to rotate their valuation firm and valuer every five years. This includes the valuations for financial statements and regular fund valuations.

The evidence submitted to the review board showed relationships of more than 20 years being a fact of the real estate industry with the historic requirement being to just move the inhouse signatory every 7 years. This new recommendation has very significant practical and cost implication for clients – but ultimately is one that Peter felt was one to protect the public interest.

Another of the key changes that the valuation profession has to adopt is the use of discounted cash flow as the primary method of valuation. This means that valuers’ vocabulary will now include rental growth assumptions and target internal rates of return – rather than just the traditional approach to valuation vocabulary of ERV and equivalent yields. The all-risk initial yield was targeted in the report – will we see it phased out as a metric in the real estate market?

But the key trust of the report is to see a fundamental change to culture and behaviours. Clients needs to put in place ways for them to demonstrate that there is no undue pressure or influence on valuers. The RICS is putting in place an independent quality assurance panel to monitor and police valuers. Valuers are putting into place compliance officers – or giving their existing ones more internal ‘teeth’ and responsibility. Auditors are also having to advise clients and audit committees on good governance.

We expect a lively debate to start on the practicalities of these big changes – and that clients, valuers, the RICS and auditors have an important role in shaping the reforms. 

Download our report and contact us to find out more.

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