The Royal Institution of Chartered Surveyors (RICS) has launched its promised consultation into using Discounted Cash Flow for valuations - the key plank of a root and branch overhaul aimed at safeguarding market confidence and trust in investment property valuation in the UK.
In January of last year RICS accepted all 13 of the recommendations of an independent review that calls for more oversight over and stricter rules governing property valuations. The review commissioned by the Standards and Regulation Board of RICS in 2020 was overseen by Wellcome Trust chief executive Peter Pereira Gray.
Perhaps most noteworthy was the conclusion that discounted cash flow should now be used as the primary methodology for preparing valuations, rather than measures such as all-risk yield calculations.
RICS has now launched its consultation into the recommendation via the Valuation Review Implementation Committee.
Discounted Cash Flow (DCF) is a form of valuation that calculates an investment's value based on the ability to receive a predicted future cash flow. The valuation review made three key recommendations related to DCF. Two recommendations covered analytical approaches and their application within DCF valuations, while the third recommendation focused on standardised property risk advice.
RICS's Red Book is the definitive standard by which UK Chartered Surveyors undertake valuation advice.
Its DCF 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 is proposing 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 underutilised.
The DCF consultation closes on Wednesday 12 April.
Richard Waterhouse, Chair of the Valuation Review Implementation Committee RICS, said in a statement: "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.”