Key Changes in RICS Valuation Standards
On 19 October the Royal Institution of Chartered Surveyors (RICS) published an updated RICS Valuation – Global Standards: UK National Supplement, which can be found here.
Several changes were made from the previous edition, following the RICS commissioned Valuation Review undertaken by Peter Pereira Gray. Some of the main changes have been summarised here by colleagues at Cushman & Wakefield.
One of the main changes that is likely affect commercial valuation, is the reporting standards required for sustainability and ESG which is documented in UK VPGA 10 - Valuation for commercial secured lending, under 10, Reporting. This change now sees the supplement mirror the current edition of the RICS Valuation – Global Standards Red Book.
Sustainability and ESG in Commercial Valuation
Accordingly, in VPGA 2 Valuation for secured commercial lending purposes, the Global Red Book notes that ‘sustainability and ESG factors can have a significant market influence, and valuations for secured lending should always have appropriate regard to their relevance to the particular assignment’. Further that ‘sustainability and ESG should form an integral part of the valuation approach and reasoning supporting the reported figure’. Additionally, the UK supplement adds clarity through relevant considerations including Minimum Energy Efficiency Standards (MEES), Energy Performance Certificate (EPC’s), sustainability related certification, ‘green leases’ and flood risk.
Whilst this supplement was only published just over three weeks ago, the Global Red Book it is now mirroring what was published in October 2021, some two years ago. In this time, we have seen several changes to reporting standards required by banks for secured lending purposes in line with the statement in VPGA 2. This has largely included EPC ratings and expiration dates, comments on the sustainability of the property, alongside comments regarding MEES, and the effect of the likely increases in both 2027 and 2030.
Evolution of Property Values: Green Premiums and Brown Discounts
This has resulted in a green premium vs brown discount start to further evolve, with values rapidly decreasing for those properties which don’t meet the requirements of investors ESG credentials and those requirements that are mandated. We are now seeing sustainable changes made by landlords, which has come in several forms whether that be ‘green leases’, or changes to building and its fabric, growing not just the value but also the attractiveness to occupiers who are now seeking EPC A, BREEAM excellent buildings in a post-covid.
Looking Ahead: The Role of RICS in COP28 and Policy Reform
Whilst changes have been made, this supplement is quite timely as those making sustainable changes seem to either be dropping or the effects of their changes reducing, or both. Recently, the RICS published a report for COP28, which is to be hosted in the UAE at the end of this year. The report titled ‘Decarbonising the built environment: policy reform reports for key market governments’ states that global emissions from property rose around 5% in 2021 in comparison to 2020. Whilst this uplift may be due to workers returning to the office, it is quite damning, as the built environment will play an integral part of reaching net-zero 2050, with the built environment currently producing 40% of global emissions annually.
This UK Supplement, along with the report noted above and the recent RICS UK Manifesto may help further spotlight and enable landlord’s, investors and occupiers to more informed decisions regarding their own sustainability goals, not only increasing the value of their assets but also aiding the environment in which, we as industry as responsible for a large proportion of its global emissions.