When will International Property Measurement Standards be accepted as the definitive measurement standard in the UK? asks Lynn Johnson
As the Royal Institution of Chartered Surveyors (RICS) prepares to launch the second edition of the International Property Measurement Standards for office buildings, it is a timely opportunity to consider how, and whether, the UK commercial property market has adopted the first edition.
Introduction of the new standard
The International Property Measurement Standard (IPMS) for office accommodation became mandatory in January 2016 (additional standards include residential with retail, industrial and mixed-use to follow). However, 18 months on and a survey of registered valuers across the UK, carried out by Northumbria University in July and August, revealed that 92% still use the Code of Measuring Practice (COMP) in loan security valuations for commercial office buildings. Alarmingly, for those interested in the standardisation of measurement practice, only 8% considered both methods. All participants indicated a client preference for the original COMP basis as a tool for measurement and valuation. This highlights a key challenge for IPMS. How can international measurement standards be standardised when practitioners and clients do not appear ready to accept change?
Although the standard is mandatory, the RICS acknowledged that there would be a “period of transition” as the market adopted the new basis. To manage this situation, the RICS allowed the continued use of COMP, however, the flip side of this leeway is that the valuation profession was not compelled to use the new standard. Findings suggest that this non-insistence on the application of the new standard has meant that it is not being applied at the transaction stage. Furthermore, new letting transactions, which form the basis for comparable market evidence, are also being analysed on the old method.
What are IPMS?
- International Property Measurement Standards became mandatory in January 2016 to replace the measurement of offices with the RICS Code of Measuring Practice (6th ed, 2007).
- IPMS support the valuation of property and the analysis of market transactions, as well as the functional requirements of professionals including owners, occupiers, property managers, asset managers and other property professionals.
- Their purpose is to provide a consistent and transparent global basis of measurement, enabling property to be compared like-for-like internationally.
Issues highlighted
The survey highlighted several issues which are shared by both the banking and surveying profession. The most prominent being the lack of use by agents.
Transactions provide comparable evidence, and it is widely acknowledged that all transactions agreed are still being analysed through the COMP basis, ie net internal area. There appears to be a lack of willingness to adopt IPMS, the view being that the standard is complex and can be interpreted in several ways depending on client instruction and the property in question. This complexity has led to doubts among clients and professionals alike about the new method.
Valuers rely on agents to provide market evidence – at the end of the day they are the “market makers”. Agents take instruction from their clients and, at present, they see no purpose in adopting the standard. Valuers and banks are of the same opinion and see no purpose in considering IPMS if market evidence is being transacted and analysed in terms of net internal area – there is no reason to consider IPMS measurement as it does not form a comparison. Banks and clients also see the new measuring standard, particularly its enhanced complexity, as being costly in terms of time spent on site.
This is at a time when fees are already in contention in the marketplace with increased competition between valuers as well as added pressure from banks and their clients to keep costs to a minimum. Banks acknowledge the issues surrounding IPMS but are unwilling to pass on any extra costs when the measurement is not utilised in the valuation process. The institutional norm continues to be based on market rent and market value, adopted from market data and analysed through the COMP.
Why the inertia?
It is worth considering the reasons behind the lack of IPMS take-up. One explanation for this negative perception of IPMS could be linked to education.
In the lead up to IPMS, and since its official launch, there have been many CPD events and online seminars. In addition, before the launch of IPMS, the RICS invested heavily in regional champions tasked with training practitioners throughout the country. At the time, this was not well received by the profession and many of the training events were attended by company graduates who needed to understand the method for their APC. Therefore, the question must be asked: “was the right audience captured?”
Moreover, there is also the issue of differences in floor areas between the two methods, specifically in terms of measurements included and not included.
A small survey was conducted by Northumbria University property department in January and February 2016. The sample included various office premises within Newcastle upon Tyne. The results demonstrated that floor areas can differ between 10% and 20% depending on the age, nature and layout of the property. An increase in floor area produces an increase in market rent and ultimately market value. Similarly, a decrease in floor area produces a decrease in market rent and market value.
Banks are still very cautious when lending on commercial property and perceive an increase as a degree of uncertainty and risk. Their main concern being the increase in any valuation if using the new standard.
Change required
In conclusion, the survey has demonstrated that IPMS has not been positively received in the UK by either agents, valuers, clients or owners of property. Clients and property owners see no benefit in adopting IPMS measurement standards. Why would they, when they know that transactions, and the market as a whole, is being modelled on the COMP basis?
It remains the case that agents take instructions from their clients, while valuers are analysing their COMP transactions to model the market. Until this traditional process changes, findings suggest that the planned “period of transition” may take longer than envisioned. It could also mirror the turbulent passage toward using, and valuing, in sq m, rather than sq ft, and trail the long heralded application of the true equivalent yield.
One way of enforcing IPMS could be through regulation and penalty. However, such a heavy handed approach is unlikely to be received lightly by traditional practice. If the RICS is determined to see IPMS in the marketplace, a more proactive and constructive approach should involve more investment in market education. A key objective should be to work with surveyors (agents and valuers), investors and banks alike. In particular, there should be interaction with all parties to put a realistic structure in place for a period of transition from the old standard to the new.
Lynn Johnson MRICS is the programme leader of MSc Real Estate and MSc Real Estate (International) courses at Northumbria University. Lynn welcomes comments from readers on personal experiences of using IPMS: lynn.johnson@northumbria.co.uk
