RICS valuation review: launch of consultation focusing on DCF valuation

RICS announces its valuation review with a launch of a consultation that will be focusing on DCF valuation.

As part of its review into UK Valuation practice aimed at safeguarding market confidence and trust in investment property valuation, the Royal Institution of Chartered Surveyors (RICS) is today (1 March 2023) launching a consultation focusing on updating core elements of its standards and practice information, specifically regarding the use of Discounted Cash Flow (DCF) within valuations.

Today’s proposals are a key part of a wider programme of proposed changes being taken forward by overseen by the Valuation Review Implementation Committee, working on behalf of the RICS Standards and Regulation Board (SRB).

DCF is a form of valuation that calculates an investment’s value based on the ability to receive a predicted future cash flow. The use of DCF by valuers was a component of an independent Valuation Review commissioned by SRB and published in 2022. The review made three key recommendations related to DCF.

Two recommendations covered analytical approaches and their application within DCF valuations, while the third recommendation relates to standardised property risk advice.

Economic uncertainty brought about by the COVID-19 pandemic and present geopolitical developments have created price fluctuations in property markets. These developments highlighted the importance of an increased focus on valuation and ensuring that assumptions made within valuations are explicit. Being more explicit regarding the assumptions contained within valuations will help those relying upon them have greater confidence in their accuracy.

The Red Book is the definitive standard by which Chartered Surveyors undertake valuation advice. The consultation will ask respondents to assess the current Red Book, its content, and proposals for change. Additionally, the draft Red Book UK Supplement standard for valuing investment property suggests that valuers should strongly consider the use of DCF when undertaking valuations.

The consultation also includes proposed new global practice information on DCF valuations. To support these standards, RICS proposes developing a DCF Transition Hub on its website, in addition to upskilling Chartered Surveyors globally for greater use of DCF in their work, with a particular focus on territories where DCF is currently under-utilised.

The DCF consultation closes on Wednesday, 12 April 2023.

Richard Waterhouse, Chair of the Valuation Review Implementation Committee RICS, said:

“As part of its commitment to lead the profession globally, RICS is developing a suite of updates to its professional standards, practice information and training material.

“Fundamental changes in valuation across the industry have led to greater usage of DCF, and so we feel that these updates should focus on this.

“We are reaching out to our global membership of over 130,000, along with our key partners in the industry, to gain their crucial insights into this critical update.

“This is a time of enormous changes for investment real estate and the valuation profession that provides the services that support it, and it is of fundamental importance that the standards we produce ensures regulated members consistently deliver to high standards to maintain public trust.

“The consultation is part of the implementation of the Pereira Gray Review of real estate investment valuations, commissioned by the RICS Standards and Regulation Board (SRB) considering the complex and swiftly changing marketplace in which valuers do their work.

“We invite the profession to take an active part in shaping the sector and future-proofing it for the many changes and challenges to come.”

Kindly shared by Royal Institution of Chartered Surveyors (RICS)

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