New Red Book aims to ensure global quality of valuation

A new edition of RICS Valuation – Global Standards (Red Book Global Standards) was published on 2 December and will be effective from 31 January.

Following consultation with more than 200 individuals, firms and organisations, RICS has updated Red Book Global Standards to ensure they remain relevant and fit for purpose.

The revised standards also align with the most recent edition of the International Valuation Standards (IVS), published in January 2024, and support RICS' commitment to maintaining the high quality of valuation practice worldwide, and building trust in the profession.

The standards are essential to meeting client and regulatory demands and producing accurate, compliant, objective and transparent valuation reports for the public benefit and economic stability.

The purpose of updating the standards has been to:

• align with developments in other relevant global standards and regulations, such as the new IVS, which also come into effect on 31 January
• incorporate new material on modelling and methods
• include practice and process changes in response to developments in technology and the environmental, social and governance (ESG) agenda.

The existing structure remains largely intact, but professional standards (PS) 1, PS2 and valuation technical and performance standards (VPS) and guidance have been revised and, in some cases, reordered.

The new edition focuses on practical implementation by adopting and applying the latest international standards, such as the new IVS, along with additional best practice guidance.

It includes new material on modelling and methods, updated guidance on valuations for financial reporting purposes – in the form of an entirely rewritten valuation practice guidance application (VPGA) 1 – and the introduction of a new VPGA section on the relationship between valuers and auditors, VPGA 11.

The updates position RICS members and regulated firms as the leading global providers of IVS-compliant valuations.

Moreover, Red Book Global Standards now mandate consideration of ESG factors at every stage of the valuation process, including inspection, investigation, recording and reporting.

This will help valuers identify, report and document significant ESG issues, fostering sustainable and responsible practices in the built and natural environment.

Most notably, the number of mandatory VPSs has now increased from five to six.

• While the allocated numbering of VPS 1 relating to terms of engagement, or scope of work, remains unchanged, a major update mirroring IVS is that such terms must include any requirements relating to the consideration of significant ESG factors.
• VPS 2 on inspections, investigations and records has been renumbered to VPS 4, with additions that primarily reflect the updated concept of documentation in the IVS, akin to RICS' definition of records or valuation records.
• VPS 3 on valuation reports is now VPS 6. This section has been updated to reflect revised requirements for such reports in the IVS, including key sources of data and inputs, reference to any models used, and – notably – documenting in the report any requirements for consideration of significant ESG factors.
• VPS 4 on bases of value, assumptions and special assumptions becomes VPS 2. Commentary has been added to this section to provide guidance on the treatment of transaction costs.
• Finally, VPS 5 from the previous edition has now been separated into two parts, comprising VPS 3 on valuation approaches and methods, and a new VPS 5 in respect of valuation models, in response to IVS 105. Where a complex or proprietary valuation model is used – often involving advanced numerical and statistical practices and the use of advanced technology and automation – valuers must ensure that these are appropriate for the valuation purpose, using appropriate professional judgement.

The new edition acknowledges the increasingly important role that technology plays in valuations while continuing to highlight the importance of good written records, transparency and ethical conduct in the valuation process.

The updated Red Book Global Standards note that artificial intelligence (AI), automated valuation models (AVMs), and valuation calculation software can be helpful tools.

However, the standards also underline that these should be used responsibly and that their output will only be regarded as the provision of a written valuation if the valuer has also applied their professional judgement to it.     

Moreover, for the first time, Red Book Global Standards include mandatory requirements for the consideration of ESG at every stage of the valuation process, from inspection and investigation to recording and reporting.

This will help valuers identify, report, and document significant ESG factors, fostering sustainable and responsible practices in the built and natural environment.

Specific changes relating to ESG factors include:

• revised definition of ESG to align with IVS, maintaining a separate definition for sustainability
• incorporation of the new IVS 104 data and inputs (ESG) appendix into Red Book Global Standards
• updated material on inspection and investigation in VPS 4
• mandatory consideration of any significant ESG factors in VPS 1 on terms of engagement, mirrored in reporting VPS 6 standards
• relevant ESG coverage in respective VPGAs for each asset type
• substantially updated ESG guidance in VPGA 8 on real property interests, including coverage of each of the three pillars for the first time.

It covers the basics of financial reports, what the valuer needs to consider when taking on such work, and what additional information needs to be included in the report.

The section then summarises the key International Financial Reporting Standards (IFRS), which may entail particular valuation inputs for different types of asset or liability according to specific accounting requirements.

The key standards in question include IFRS 13 on fair value measurement, IFRS 16 on leases, and the recent IFRS S1 and S2 on providing accounting standards relating to sustainability and climate disclosures.

VPGA 2 on valuations for secured lending has also been updated and simplified to improve clarity and focus, including a slight change to the previous title. 

Additional guidance is meanwhile provided on independence, objectivity and conflicts of interest when undertaking valuations for secure lending, as well as taking instructions and disclosures – including the use of master service agreements – basis of value and special assumptions, and reporting requirements. 

VPGA 10 on material valuation uncertainty (MVU) has been updated to help valuers identify such uncertainty, assessing its impact on valuation, and communicating MVU to clients and other stakeholders.

Because all valuations are estimates, there is always some degree of uncertainty involved. However, the guidance sets out that such ordinary uncertainty should not be confused with MVU, and includes examples of common circumstances in which this may arise.

The new VPGA 11, on the relationship with auditors, reflects the growing importance of such professionals in the valuation process and aims to improve communication between valuers and auditors.

It is important for both to understand their roles and responsibilities to ensure that valuations are accurate and reliable.

All other VPGAs have been reviewed and updated by specialist working groups to reflect current practices, including in the areas of valuation of businesses and business interests in VPGA 3, trade-related properties in VPGA 4, plant and equipment – now including infrastructure – in VPGA 5, intangible assets in VPGA 6, and arts and antiques in VPGA 7.

VPGA 8 on valuation of real-property assets has also been comprehensively updated to include additional guidance in respect of ESG matters and assessing the implications for value, including extra guidance on reflecting the transition to net-zero in valuations, and on the risks of stranded assets; that is, those that are not compliant with energy performance requirements and circularity.

The publication of new Red Book Global Standards marks a significant milestone in valuation practice.

As a comprehensive guide, it gives practitioners the latest tools and techniques to provide high-quality, sustainable, and resilient valuations.

As the valuation profession continues to evolve, Red Book Global Standards will remain an essential resource for valuers and users of valuations, ensuring that these meet the needs of present and future generations.