Avoiding the valuation pitfalls

In the third instalment of EG’s APC competency series, Kate Taylor continues her journey along the commercial property pathway and discusses the challenge of demonstrating valuation competency at assessment

APC-SeriesHOT TOPICS

Red Book updates. Two significant updates to brush up on are:
• New Financial Reporting System: UKVS 1, 2 & 3 (Jan 15)
• Lease extension valuation assumption change: UK Appendix 10 (Apr 15)

RenoValue is a Europe-wide valuation initiative on sustainability and valuation. It is in its early stages, but keep an eye on it at: www.renovalue.eu


There is no getting away from the fact that valuation is probably the most challenging APC competency. This is borne out by referral report analysis, which highlights that valuation appears on more referral reports than any other competency.

Why should this be? Aren’t all competencies created equal? The short answer is “no”, not when an accreditation scheme is at stake. Candidates who pass valuation at level 3 can become a registered valuer with no further hoops to jump through (aside from paying the fee). This focuses the minds of the assessors: there isn’t one global brand at stake, but two.

A central tenet

Valuation is central to many of the other competencies, since most property advice contains valuation considerations. For example, landlord and tenant comprises functions such as rent review and agency comprises functions such as disposal.

Valuation also lies at the heart of the business world, with asset values often a driver of share prices and valuation a key part of property taxation. Ultimately, everything needs valuing for a myriad of potential purposes.

One of the most significant purposes, is loan security valuation. Anyone in any doubt as to the importance of this function to the economy should revisit the global financial crisis, described vividly by Peter Bill in Planet Property (2013).

To imagine the importance and scope of valuation, candidates should think of everything that could affect supply and demand, then try to put a number on it. That is the challenge for the valuer.

Level 1

As a result of its fiscal significance, valuation is heavily controlled by the RICS via the Valuer Registration Scheme and the mandatory practice statement: RICS Valuation – Professional Standards 2014, commonly known as The Red Book. The first top tip for candidates is to ensure that knowledge and understanding of this document is thorough and up to date.

The Red Book contains the things to think about (Professional Standards 1 and 2) and the processes to be followed (Valuation Practice Statements 1-4) as well as some useful guidance notes: Valuation Practice Global Applications, UK Guidance Notes, UK Valuation Standards and UK Appendices. The International Valuation Standards (“IVS”) are also included in full with handy black-edged pages to make navigation easier.

Do not underestimate the task of getting to grips with detail contained in The Red Book. It requires a substantial amount of revision and must not be skimped on.

There are a range of other guidance notes and information papers that will relate to candidates’ specific areas of practice, which can be accessed via isurv or the RICS website for revision. Quoting RICS documents provides reassurance to assessors that candidates understand best practice and the mandatory requirements in this vital field.

A good understanding of the commercial realities of the market that the candidate practises in will also be required. For this, an awareness of the typical levels of value and yields is important. As is not forgetting the bigger picture affecting valuation, ie politics, economics and demographics.

In addition, there is the technical side. Candidates will need to know which methods to use in order to value different types of properties for various purposes (see EG, 12 September at p94 and 26 September at p100). They should be able to describe the steps in all the main methods of valuation (comparative, investment, residual, profits and depreciated replacement cost) and any associated sub-techniques, like discounted cash flow. Don’t forget to demonstrate an understanding of appropriate due diligence and professional indemnity insurance.

Level 2

Level 2 requires this complex body of knowledge to be put into practice with reference to specific examples. Both capital and rental valuation experience is required, using the appropriate techniques and standards. Candidates are expected to have been involved in the preparation of valuation reports, although it is made clear that at level 2 candidates will not necessarily be carrying out valuations as part of their day-to-day activities (Commercial Property Pathway Guide, p40).

Candidates should be able to talk through a valuation step by step. It is important to demonstrate a good understanding of comparable analysis on capital values, rents and yields as this will be relevant to most methods at some point.

The selection and analysis of various types of yield is likely to be probed in any investment valuation and candidates must be ready for this.

With valuation, there is always more than one way to approach it, so consider the alternatives and be prepared to justify an approach. Many candidates fall into the trap of being too inward-focused and only consider “the company way” or the Argus print out.

Level 3

Level 3 is the bogey level of the bogey competency. This is where it gets serious and assessors will not accept an holistic overview of this competency. A high standard is demanded and candidates should note that level 3 is a significant progression from level 2.

This is because at level 3 candidates need to be able to provide complex reasoned advice to clients about valuation. In the field of commercial property (particularly in London) the numbers are huge and the pressure is on. All candidates must ask themselves whether they are ready to advise a client independently about something as significant as suitable security for a loan worth millions of pounds. It is a litigious area, with more lenders challenging valuations and making accusations of professional negligence and valuers need to be competent in their field.

Although the pathway guide does not demand experience in Red Book valuations, it refers to formal valuation reports (which could be statutory valuations). Most assessors will expect to see experience of a Red Book valuation demonstrated, with the candidate able to articulate all the required processes.

A high level of technical detail will be expected in describing the specific examples end-to-end, with a focus on the analysis and valuation calculation. Candidates should not simply say what they did but how they did it and why, always ending an example with “and my advice to the client was…”.

Most candidates underestimate the complexity of this competency and that is why it appears most often on referral reports. Avoid the traps and give valuation the focus it deserves.


EXAMPLE QUESTIONS*

Level 1

• When does a valuer NOT need to follow the processes outlined in
The Red Book?

Level 2

• Talk me through the analysis and valuation of… (specific example)

Level 3

• What was the advice you gave to the client regarding uncertainty in this valuation and how was it reported?

*Don’t assume that the questions given here will be asked at an APC assessment. Assessors will focus on and pose questions on the basis of the candidate’s declared competencies, pathway guide requirements, up to date developed knowledge base and the examples provided in their summary of experience, etc.


USEFUL RESOURCES

RICS APC Guides These should be read at least once every three to four months and fully understood. Candidates from outside the UK
also need to check their regional websites for any local APC requirements: www.rics.org

APC Explained Masterclass This helps candidates to understand what needs to be done to achieve the APC, including a walk-through of the DeLever APC process timeline and myAPC Diary with an explanation of what to do at each key milestone: www.delever.com

Timeline wallchart An A2 pictorial view of the whole APC process, based on the RICS guides and Jon Lever’s professional knowledge and experience of the APC. It can be used to track progress. Free copies available at: www.delever.com

Book Bill, P: Planet Property (Troubador, 2013)

RICS Red Book: www.rics.org

υisurv: www.isurv.com


SUPERVISORS AND COUNSELLORS
How to help

Candidates need to do the bulk of the work in a valuation and be able to explain and justify it. If they can convince the responsible valuer who knows the project, then they can probably convince the assessors. There is a risk that candidates may come across as the “bag carriers” rather than the valuers. Help them to avoid this scenario.

On a practical level, some candidates struggle to gain experience in valuation. Could you find a place for a candidate via secondment or internship?


Kate Taylor FRICS is an APC chair and a DeLever APC coach. Follow Kate Taylor and Jon Lever on Twitter: @katetay73593006 and @deleverapc

Click here for full access to EG‘s pathway to success series on APC competencies.