RICS research: client expectations
18 October 2018
What will clients want from valuers and valuations in a tech-enabled future? Sander Scheurwater reviews RICS research findings
The valuation profession is likely to face a period of significant change in coming years in terms of:
- how the process is managed; and
- the role of the valuer and the benefits they can offer to clients.
An RICS insight paper, The future of valuations, explores 2 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 2 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.
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 guidance note Sustainability and commercial property valuation 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.
The use of market value on its own, under any circumstances and for any purpose, has had demonstrable limitations
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.
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 RICS guidance note Bank lending valuations and mortgage lending value).
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:
- 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); and
- A vision for real estate finance in the UK, which was published in March 2014, provided 7 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 Long-term value methodologies and real estate lending investigating 3 methodologies, namely adjusted market value, investment value and mortgage lending value.
These discussions are ongoing, and valuers should be a part of them. Clients are increasingly expecting valuations to be provided more quickly, with sustainability taken into account and, ideally, a future outlook. Valuers, clients and organisations are advised to work together and build on existing documentation and guidance to identify what valuers can do, and what clients can reasonably expect.
The paper describes the current valuation process, as well as what a future valuation process might look like. We have broken down each of these valuation processes into 4 stages below, with the client deliberately as the focus of both.
The current valuation process
The current process will look familiar to valuers:
- there is a discussion between valuer and client on the terms of engagement;
- the valuer investigates the primary data sources such as market research, inspection, property analysis, public information, and information from the client;
- from these investigations and information received directly from the client come data, which is processed, calculated, qualified, verified and analysed; and
- the above steps lead to a single value that is put in a valuation report for the client.
By and large, every valuation goes through this entire process, which may have become more sophisticated and professional but has not changed substantially over recent decades.
The future valuation process
Now, imagine what a future valuation process could look like.
- Pre-valuation negotiation process: rather than being reached through negotiation with a client, the valuation agreement could be done through so-called smart contracts, without human interaction. There would be no need for legal departments, and the smart contract could be put in a blockchain system for validation and transparency.
- Investigation: in many instances, a property will still need to be inspected, but this could be done by drones on the outside and advanced robotics on the inside. Data could also be gathered more through secondary sources such as Google or Twitter, and through digital developments such as smart buildings and the Internet of Things, rather than the aforementioned primary data sources.
- Secondary data can then go into an automated valuation model run by artificial intelligence, and the results of this process may be analysed and interpreted by a qualified valuer.
- The outcome could be variously a value, value range or advice for the future, which could go into a visually attractive and easy-to-understand interactive valuation report.
There are 2 key points to note about this putative process.
- Valuations can be done without any human intervention.
- Whatever the process looks like exactly, it will become more fragmented, and there will be no need for a professional valuer from the terms of engagement to the valuation report. Certain aspects may be carried out by a machine, some in house by the clients, and other aspects skipped altogether. The involvement of the valuer, and the part of the valuation process in which they are involved, will depend on the complexity and risk level of the valuation, but also on the value that the human professional can add for the client.
The valuer as adviser
So the paper offers one simple recommendation: be prepared. Don’t be afraid of changes in technology or the market, or ignore them. Study them, and see how you can best use technological developments and changing client expectations to your benefit. Or, conclude that nothing will change and that therefore you don’t need to. It’s up to you.
The paper also recommends that valuers embrace technology, enhance the client experience and update their skill sets. Most importantly, consider whether the valuer could, or should, come to act more as an adviser to the client. The report explores 2 roles for a valuer, which could be interlinked or distinct.
- The valuer as valuer: providing independent valuations that meet the demands of professionalism, independence, impartiality and objectivity, for instance for regulatory purposes and shareholder protection, based on market value or other existing criteria.
- The valuer as consultant: providing commercial advice to the client on a range of issues and looking into the future, with the client remaining responsible for the business decision.
Becoming consultants would mean that valuers would increasingly operate in a highly competitive environment. However, with their extensive knowledge of both markets and buildings, alongside the right training, a different outlook on technologies and methods and a discussion on long-term value, they could comfortably fulfil both their core role as well as that of consultant.
There may be an increased polarisation between valuers who need to be efficient and valuers who offer a non-standardised process, but it will be up to the individual valuer to see where their niche lies, and to the individual client to understand and decide what they are looking for in a valuation. But all things considered, there is no doubt that valuations and valuers will continue to benefit the client.
Sander Scheurwater is Director of Corporate Affairs, Europe, at RICS