Valuing the data elephant
In real estate, where the ‘cash cow’ of the physical asset is still healthy, there is a reluctance to acknowledge the presence of the digital asset and what it could mean in the future.
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, the role of the valuer and the benefits they can offer to clients. An RICS insight paper, The Future of Valuations, explores two 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 extremely grateful for the support and cooperation from banks through the European Mortgage Federation–European Covered Bond Council, and institutional investors through INREV, the European Association for Investors in Non-Listed Real Estate Vehicles.
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.
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.
RICS, Director of Corporate Affairs, Europe
The paper describes two 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, 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”. Climate-resilient and sustainable 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 Sustainability and Commercial Property Valuation guidance note 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.
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 among valuers and between valuers and clients: 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 Bank Lending Valuations and Mortgage Lending Value guidance note).
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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:
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 the valuation process in four stages below, with the client deliberately as the focus.
The current process will look familiar to valuers: first, there is a discussion between valuer and client on the terms of engagement. Second, 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 at the third stage is processed, calculated, qualified, verified and analysed, all leading to a single value that is, fourth, 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.
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.
Now, imagine what a future valuation process could look like.
There are two key points to note about this putative process.
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 advisor to the client. The report explores two roles for a valuer, which could be interlinked or distinct.
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.
Director Corporate Affairs, Europe