RICS Draft Update to the Global Red Book

Red Book Global Update 2022 - Proposed Changes

VPGA 8 Valuation of real property interests

This guidance provides additional commentary on certain specific topics and issues that arise in relation to the valuation of real estate, and is supplemental to IVS 400 Real Property Interests, IVS 410 Development Property and VPS 2. It expressly covers inspections and investigations, and includes important material on sustainability and ESG issues, which can be a market influence in relation to real estate.

1.3 (c) where relevant, information on any substantial outgoings and running costs, and the level of recovery from the occupier - energy efficiency and carbon emissions may be among a number of relevant factors when considering sustainability and ESG issues (see below)

2.6 Sustainability and environmental, social and governance (ESG) - Potential or actual constraints on the enjoyment and use of property caused by ESG issues may result from natural causes (such as flooding, severe storms and wildfires), from non-natural causes (such as contamination) or sometimes from a combination of the two (such as subsidence resulting from the historic extraction of minerals). Despite the considerable diversity of circumstances, the key question is always the extent to which the factors identified affect value. Particular care should be taken when assessing or commenting on ESG factors, as valuers may not have the specialist knowledge and experience required. In appropriate cases, the valuer may recommend making further enquiries and/or obtaining further specialist or expert advice in respect of these matters.

The following paragraphs consider the matter in more detail.

a) Natural environmental constraints

i. Some property will be affected by environmental factors that are an inherent feature either of the property itself or of the surrounding area, and which have an impact on the value of the property interest. Examples include ground instability issues (such as swelling and shrinking clay, subsidence consequent on historic or current mineral extraction, etc.) and the risk of flooding from any mechanism. Resilience protection measures may alleviate the impact of the factor.

ii. Although detailed commentary on both the risks and the effects may be outside the realm of the valuer's direct knowledge and expertise, the presence, or potential presence, of these factors is something that can often be established in the course of a valuation inspection through normal enquiries or by local knowledge. Use of the relevant Property Observation Checklist from appendices A to C of the RICS guidance note Environmental risks and global real estate, 1st edition (2018), may be of assistance when undertaking inspections. It is not just the risk of a particular event occurring that needs to be considered, but also the various consequences. For example, if the property has suffered a recent event such as flooding this may affect the availability of insurance cover, which, if material, should be reflected in the valuation.

iii. The valuer should be careful to state the limits that will apply to the extent of the investigations and the assumptions that will be made in relation to environmental matters, and should state any sources of information relied upon.

b) Non-natural constraints (contamination and hazardous substances)

i. A valuer may not be competent to advise on the nature or risks of contamination or hazardous substances, or on any costs involved with their removal. However, a valuer who has prior knowledge of the locality and experience of the type of property being valued can reasonably be expected to comment on the potential that may exist for contamination and the impact that this could have on value and marketability.

ii. The nature and risks may of course be directly attributable to the use of the property itself. For example, a number of businesses depend on activities that involve the use of hazardous substances or operate waste management activities that may be regarded as a nuisance by third parties. Although detailed commentary on such effects may be outside the realm of the valuer's expertise, their presence, or potential presence, is something that can often be established in the course of a valuation inspection through normal enquiries or by local knowledge.

iii. The valuer should state the limits on the investigations that will be undertaken and state any sources of information or assumptions that will be relied on. Any historic or existing use matters observed can again be recorded on the relevant Property Observation Checklist from appendices A to C of the RICS guidance note Environmental risks and global real estate, 1st edition (2018).

c) Sustainability and ESG - assessing the implications for value

i. While not a term that has a universally recognised definition yet (see the RICS glossary in Part 2), in a valuation context sustainability encompasses a wide range of physical, social, environmental and economic factors that can affect value and of which valuers should be aware.

ii. The range of issues includes, but is not limited to, key physical risks such as flooding, heat, wildfires and severe storms, and transitional risks such as energy efficiency, carbon emissions and climate impact. The impact of these risks can be influenced by current and historic land use as well as matters of design, configuration, accessibility, legislation, management and fiscal considerations. Sustainability matters can impact occupier preferences and purchaser behaviour, and may also be a consideration for investors, secured lenders, insurers and public bodies.

iii. The pace at which sustainability and ESG is feeding directly or indirectly into value has jurisdictional variations. In order to respond appropriately as markets change, valuers should continuously seek to enhance their knowledge. The role of valuers is to assess value in the light of evidence normally obtained through analysis of comparable transactions. While valuers should reflect markets, not lead them, they should be aware of sustainability features and the implications these could have on property values in the short, medium and longer term. The issues may extend to:

  • ESG matters (see above) including, where applicable, climate change and resilience to climate change
  • configuration and design including use of materials and concepts increasingly associated with 'wellness'
  • accessibility and adaptability, including access and use by those with disabilities
  • carbon emissions, energy efficiency, building 'intelligence' and other 'costs in use'
  • fiscal considerations.

iv. Valuers are actively encouraged to identify and collect sustainability and ESG-related data.

v. Only where existing market evidence would support this, or where in the valuer's judgement market participants would expressly reflect such matters in their bids, should sustainability characteristics directly influence value(s) reported.

vi. Valuers are often asked to provide additional comment and strategic advice. In these cases, the valuer should consult with the client on the use and applicability of sustainability and ESG metrics and benchmarks that are applicable in each case. For example, when preparing valuations on the basis of investment value or worth, sustainability and ESG factors that could influence investment decision-making may properly be incorporated, even though they are not directly evidenced through transactions.

vii. Where appropriate, in order to comply with best practice in reporting, valuers should:

  • assess the extent to which the subject property currently meets the sustainability and ESG criteria typically expected within the context of its market standing and arrive at an informed view on the likelihood of these impacting on value, i.e. how a well-informed purchaser would take account of them in making a decision as to offer price
  • provide a description of the sustainability-related property characteristics and attributes that have been collected
  • provide a statement of their opinion on the relationship between sustainability factors and the resultant valuation, including a comment on the current benefits/risks that are associated with these sustainability characteristics, or the lack of risks, and
  • provide an opinion on the potential impact of these benefits and/or risks to relative property values over time.

viii The RICS guidance note Sustainability and ESG in commercial property valuation and strategic advice, 3rd edition (2022) (due for publication January 2022) provides guidance on the identification, assessment and impact of sustainability and ESG issues for commercial real estate valuations.