by Andrew Woodburn
One of the consequences of every property market recession over the past 20 years has been the critical examination of the role and methods of the professional valuer: the current downturn is no exception. It is arguable that much of the criticism which has been levelled at property valuers during the past 18 months has been encouraged by the seeming reluctance of many surveyors to explain and justify the rationale behind their advice. In today’s market the valuer must provide an all round, consultative and analytical service. If he does not, he is failing himself and his client.
During the past two decades the property market has seen fundamental changes. No aspect of it has remained untouched, and this is true of the institutions which invest in it, the dealers who trade in it, the professionals who serve it and the occupiers who are the ultimate consumers.
The valuer plays an important part in the functioning of the market-place, in both an interpretive and analytical role, and the scope and extent of the advice which is offered to the client must reflect this.
The standard valuation report of 15 years ago typically comprised a valuation figure preceded by perhaps three or four pages of bland description liberally dosed with caveats. Photographs were often omitted and Ordnance Survey and street maps were frequently considered an afterthought. Analyses of tenant demand, availability of supply and past and projected take-up levels were a rarity, and the basis of calculation behind the valuation usually remained a mystery. If the client required clarification as to the valuer’s perception of current rental value, potential rental growth or yield logic, this was indignantly construed to be an unreasonable questioning of the valuer’s ability. In recent years there has been a growing recognition among professional valuers that the rather cosy status quo has had to change, and dramatically so, for a number of very good reasons. To place the valuer’s role in context, the importance of the commercial property market to the UK economy as a whole must be appreciated. The London Business School has reported that the total value of commercial property in the UK was £250bn in 1989, representing one-tenth of the UK’s gross domestic product, which is comparable to the total contribution made by the entire UK energy sector, including North Sea oil. One-third of total physical assets in the UK is accounted for by real property. Bank lending to property companies now stands at £40bn, which is a four-fold increase since autumn 1987. This is big business, and quality advice is paramount.
The wider availability of up-to-date data, the increasing sophistication of professional property researchers and the exponential growth of on-line data-base systems provide the property professional with more market data than has ever been available before. Clients’ expectations regarding quality and content of professional advice has heightened, and this trend has been positively encouraged by the entry over the past five years of the overseas investors, notably the Americans, Scandinavians and the Japanese, who have for a long time expected, and received, a more rounded service from their own professional property advisers.
The trend towards increased professionalism, although ultimately client driven, has been mirrored by the courts and the professional bodies, at the forefront of which is the RICS. Much has happened since the days of Singer & Friedlander v John Wood & Co (1977) 243 EG 212, and in the past 15 years there has been a wealth of case law which has generally placed an increasing burden of responsibility on the shoulders of the surveyor. The concept of quality assurance has emerged, and it is here to stay.
Ultimately, the needs and interests of the client are paramount. In today’s competitive, sophisticated and imperfect market the duty of the valuer is to provide an all-round, well-researched, consultative and analytical service.
Client’s needs
A professional valuer can operate effectively only in an environment which ensures that he is in close touch with the market-place. If he does not, it is impossible to place the results of his researches into context with the property which he is valuing. Cross-fertilisation of ideas, views and perceptions between the valuation and market departments within a surveying practice is fundamental. This point merits emphasis. Keeping up to date with the market does not simply mean reading the professional press; it means sitting down with your agency and investment colleagues and discussing what is happening in the market-place. It is precisely for this reason that no formal valuation advice should be given by any professional practice unless it has been considered by a senior representative of the professional, investment and agency divisions.
Full use of the many sources of market information now available must be made to ensure that the valuer, and therefore the client, has the full picture. These include on-line systems such as FOCUS; the regularly published market surveys produced by the research departments of London and provincial, professional practices; market transactions with which the valuer’s firm is, or has recently been, involved; and regional reports and surveys published by the professional press and the quality daily newspapers. Just as it is necessary for the valuer to collate and analyse all available information, it is incumbent upon the valuer to impart such knowledge to the client.
Speed of response may be of crucial importance. Initial “desktop” involvement is increasingly required by property lenders, and valuers should be prepared to give an early indication of likely value, subject, of course, to what may be found when the property is subsequently inspected and the usual full market and planning researches are undertaken. Prior to giving desktop advice it is essential that the client is fully aware of the limitations under which the valuer may be acting, but informal advice at an early stage can often highlight potential problems and minimise abortive costs.
After-sales service is also important. In many transactions, particularly the larger deals and those which involve multi-tenanted properties, queries may be raised regarding rent review settlements, planning issues, the effect on value of specific lease terms etc, and these demand immediate attention.
Valuer’s report
The form and content of a valuation report will, to a certain extent, be dictated by the client. As a generalisation, however, it must incorporate certain fundamental elements for the client to make a reasoned decision. These include:
- rehearsal of the client’s instructions, and the date, purpose and basis of the valuation;
- location, description and factual and physical aspects of the property, the site and the wider geographical area; communications, roads and infrastructure; demographics and the local economy;
- the legal aspects, including tenure, leases, licences and deeds of variation; town planning, highways and rating matters;
- factors determining value including the research, collation and analysis of rental and yield comparables; rental trends and prospects for growth; supply, availability and take-up; commentary on the occupational and investment markets, yield levels and trends;
- concise explanation of how the valuation figure is arrived at, including estimated rental value and yield logic adopted; calculation of initial, running, reversionary and equivalent yields; in the case of over-rented properties (a common animal these days!), distinguishing the growth element of the income stream from the ex-growth top-slice;
- the valuation, to include the valuation date, a reminder of the basis and purpose of the valuation and a clear statement of assumptions and caveats; whether the valuation has been undertaken in accordance with the “Statements of Asset Valuation Practice” and “Guidance Notes” issued by the RICS: non-disclosure and confidentiality clauses.
The final valuation figure should represent a logical distillation of all relevant factors which have a bearing on value. The report must reflect this, and be structured so as to enable the client to understand the valuation rationale and therefore make a reasoned assessment of risk.
Importance of presentation
Good presentation is essential. The information contained in the report should be structured so as to lead the recipient in a logical fashion to the conclusions which the valuer has drawn. The reader of the report may, or may not, agree with its conclusions, and that is entirely a matter for him.
If, however, he is unable to understand the valuer’s rationale, then the report has failed to achieve its primary purpose.
The narrative of the report should be supported by photographs (internal as well as external), maps, plans and schedules. If the property is multi-tenanted, summary details of floor areas, lease terms, passing rents, estimated rental values and reversion/review dates should be scheduled in an appendix. Where a number of rental and/or yield comparables are referred to, these can helpfully be scheduled in an appendix.
A number of our clients require valuation reports to be prepared in duplicate, one bound and the other loose leaf, in order to facilitate ease of copying, faxing and distribution. Make sure that you know what your client wants.
Conclusion
It is the duty of the valuer to provide objective, professional and reasoned advice to his client. The transitional period from a buoyant market to a depressed market, however, can pose considerable problems for the valuer. Market evidence is likely to be thin on the ground (or even non-existent) and he will be fully aware that the advice which he is giving may have significant, and possibly critical, implications for his client, be it a bank, a company or an individual.
In such circumstances it is essential that the view which the valuer puts forward is not only objectively and professionally conceived but is also seen to be so. The client is entitled to know.
