Copyright: David Lawson 1996
They thought it was all over. But the game goes on, and on - and on. Property professionals whooped up a storm when valuation rules were rewritten a year ago. The new Red Book appeared to draw a line under shadowy years which led to a string of court cases and embarrassing accusations of inaccuracy and incompetence during the boom.
Like TV reminders about the pitch invasion in England's 1966 World Cup victory, however, celebrations were premature. Disputes over valuation methods have flared again, reopening splits in the industry. Public language is constrained, often revolving around technical arguments that bemuse even experienced valuers. The arguments were well rehearsed in the run up two years ago to the Mallinson Report, which provided the basis for rewriting of the Red Book. They have been given a sharper edge by continuing fears over the future of property as an investment in a low-inflation economy.
Bank of England executive director Pen Kent has warned that purchasers will be more cautious, while 'accurate and understandable valuation will be a crucial ingredient.'
Powerful fund manager Alastair Ross Goobey, head of Hermes Pension Management, is throwing fuel on the fire with calls to dump traditional all-risk yield methods in favour of new financial techniques such as discounted cash flow. Leading developer Peter Freeman, of Argent, fans the flames with suggestions that valuation professionals could face extinction if they cannot adjust to a new order.
Capital & Counties has also brought dissent bubbling to the surface by objecting to the way a traditional open-market value figure had to be applied to its Lakeside shopping centre. The company felt a higher figure which incorporated the 'exceptional turnover rent potential' would suffice. That resurrects arguments of price versus worth.
Michael Mallinson, who pulled together more than 35 proposals for improving valuation methods in his report, refuses to back apocalyptic visions. But he cites personal experience of valuers working themselves out of jobs by clinging to old methods. Even he worries that efforts to bring credibility back to the profession lack motivation. 'Unless something is done soon, we are going to run into the sand,' he says. This, as much as varying views on 'correct' valuation methods, is the reason for the continuing furore. Critics believe the RICS is dragging its feet.
'There are a huge number of issues going nowhere,' says Philip Nelson of Nelson Bakewell and a prominent figure in the Investment Property Forum. 'Perhaps people think they have done the job and are now sitting back.'
In private, a more bitter face emerges. One prominent valuer said it was 'a disgrace' that the RICS had allowed such issues to continue festering. 'If they can't get their act together, surveyors will be out of work as clients turn to accountants to get what they want,' he said. Defenders of the faith are just as passionate. 'The problem is that we don't grab the headlines,' complains Richard Baldwin of Weatherall Green & Smith. He cites research by the University of Bristol showing that clients were overwhelmingly satisfied with valuations.
He also understands the wave of frustration tearing at the industry but rejects claims that little has happened since Mallinson. As chairman of the RICS Appraisal and Valuations Standards Board, he had the responsibility for publishing the Red Book and following through with guidelines about how to use newer techniques such as DCF. 'There is only so much you can do at once,' he says. 'We still have some way to go, but it was never going to be easy,' says Baldwin.
The first part of Mallinson - covering areas such as showing clients that valuations were regulated, agreeing how they were carried out and providing more information - were included in the Red Book. He insisted this was given priority, and for the last year a road show has travelled the country, attended by around 4,000 valuers.
'Most work is done by the chap in Chipping Sodbury, not the high-profile London firms,' says Nick French of Reading University. In most cases, the traditional all-risk yield method they use is entirely appropriate, he adds. But they need to learn about how to approach and report to clients.
The next stage comes in guidance notes being prepared by French and Robert Peto on complex issues which are firing up people like Ross Goobey, such as differences between worth and price and methods of carrying out DCF valuations. These have been in draft form for months but the RICS felt issuing them with the Red Book would have given valuers mental indigestion. They should be out by the autumn.
Perhaps just as importantly, clients will also receive new guidance from the British Bankers Association and the RICS . Jeremy Waters of JLW points out that while high-profile financiers might rail against traditional methods, local bank managers issuing 90% of valuation instructions demanded open market valuations. 'They will finally be instructed what to ask for,' he says.
If techniques like DCF are more appropriate, all well and good. 'Many valuers have been able to handle this for years,' he says. 'I remember doing one the first day I joined JLW in 1970.'
Nothing has changed since the fanfares blown by the Mallinson Report, according to Alastair Ross Goobey, head of Hermes Pensions Management. That is particularly galling, as he is probably the most vociferous supporter of techniques like discounted cash flow, which he would like to see become the industry standard.
He wants information on a property based not on open-market value and an all-risks yield in perpetuity but what may happen in future. That will show whether a building might be undervalued in terms of what it could produce in future - and when it should be sold. In other words, defined by its worth rather than its price - a key area Mallinson said should be explored.
'Traditional methods are not suitable for the modern world,' he says. 'This was brought home with over-rented property. Foreign investors used DCF methods to evaluate and buy them. They were not worried about what British valuers were saying with their techniques.' As over-renting, shorter leases and nil inflation become the norm, valuers will have to change or lose their business. Or funds will stop buying.
But surely he could order DCF valuations today? 'That is not the point,' he says. A valuer would come around at the end of the year and give an open market value under accounting regulations. 'That may imply we have made some rotten decisions. You can't build a portfolio based on your own views. The valuation profession dictates what we do.'
Michael Mallinson has personal experience of an industry failing to move with the times. After heading the Prudential's property services before retirement and then chairing the think-tank behind last year's changes to the Red Book he has seen all sides of valuation arguments. And despite suggesting further studies of new techniques, he chides those who believe DCF will give clients values they prefer. 'The correct figure is what the market will pay,' he says. That may or may not be determined by DCF - which itself can be difficult to apply without proper training.
But he believes the industry should work harder to develop such methods, and is disappointed at lack of progress since his report. He recently advised a client not to use surveyors on a property. 'They kept talking about rents and years' purchase figures. But this was a leisure scheme; a business. Little progress appeared to have been made in explaining techniques to clients. But they, too, would have to pull up their socks. Most bank managers were still living in the dark ages, he says.
Like the swan drifting up a millstream, the RICS is paddling like mad below the surface to move valuation methods forward, says Richard Baldwin, chairman of the Appraisal and Valuation Standards Board. He is irritated at suggestions that nothing has happened since he published the Red Book, pointing out that it has been updated several times. He held back guidance notes on valuation techniques while valuers learned about the new rules.
'There is only so much you can do at once,' he says, promising publication of guidance to bankers soon and the rest of the Mallinson-motivated material for valuers later this year. One area still to be clarified is the powers for calling in disputed valuation. He admits this will be difficult because they usually involve takeovers, where one party is usually reluctant to reveal information.
Traditional valuations could be heading for obsolescence as the industry changes, according to the joint head of developer Argent. In future there will be a greater concentration on income than capital values, which are merely indications of what happened in the past.
Obsolescence, replacement costs and future cash generation will all play a part. Securitisation will also put emphasis on performance of managers across a portfolio. 'Capital values will become much less of an issue,' he says. He blames banks for the current obsession because of their fixed ideas on loan-to-value ratios. 'There should be lots of alternative methods.'
But he understands valuers' reluctance to calculate future worth. 'Anyone who can accurately plan forward five years should be classified as a genius. We are the gamblers and take the profits when we are right, so we should also take the responsibility rather than shift the blame if it goes wrong.'
'The valuation process has to continuously evolve. I get the feeling that it has sat still,' says Philip Nelson, a senior member of Nelson Bakewell and the Investment Property Forum.
The Mallinson Report did a lot of good outside London, bringing up quality of valuations. But there was a need for a system which provided figures for different purposes.
A specialised occupier, for instance, will feel their building is worth more than the market value. A fund manager will want to know the future income potential. Subjective assessments mean there will never be a universally agreed figure. In the long term, however, he sees increasing freedom of information creating a market where market pricing does equate to worth - much as it does in equities and bonds.
JEREMY WATERS (JLW)
The top 10% of the profession can already provide alternative valuations like DCF, according to Jeremy Waters of JLW. 'Clients only have to ask.'
But there is a difference between this kind of investment advice and the objective current market values that must go into accounts - even if it offends landlords. 'It depends on the assets. DCF is already used for shopping centres; bids for the Metro Centre carried out this way were within 500,000 of each other.'