Critical Review of Professional Ethics and Comparable Valuation Method

Name: Tze Leung LEE

Student Number: 1806743

Module Code: VAL7VAE

Submitted to: Module leader

Submission date: 8 November 2021

Word Count: 2,194 (Tables included)

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 Table of Contents

Section Pages
Executive summary 3
1. Introduction 4
1.1 Professional ethics 4
1.2 Comparative valuation method 4
2. The ethical standards of RICS 5
3. How the standards affect the approach to valuations 6
3.1 Conflicts of interest 6
3.2 Undue influence of others 6
3.3 Information confidentiality 7
4. Comparable method of valuation 8
4.1 Comparable evidence 8
4.2 Hierarchy of comparable evidence 8
4.3 Limitations of comparable method of valuation 9
5 Estimate of market rent 10
5.1 Comparable analysis matrix 10
5.2 Analysis of hierarchy 11
5.3 Calculation of estimated market rent 12
6. Scenario analysis of ethical implications 13
7. Conclusion and recommendations 15
7.1 Conclusion 15
7.2 Recommendations 15
References 17
Appendix 19

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 Executive Summary

This report addresses the issues of the RICS ethical standards, emphasizing “Act with integrity” and the
comparable method of valuation with scenario analysis.

The critical elements under “Act with integrity” include conflicts of interest, undue influence of others, and
information confidentiality, which may affect the approaches to valuations.

An RICS member should not accept an engagement that could create conflicts of interest unless all the
parties affected have provided informed consent, and the member is satisfied that the assignment in the best
interests of all the parties affected and that their independence and objectivity will not be jeopardized.

An RICS member should be alert to the undue influence on their professional judgment and should always
maintain independence and objectivity.

The valuation method compares the property to be valued with similar properties (i.e., comparable
evidence), and their prices or rental and adjust the differences to arrive at the market value. The method is
subject to the following limitations:

 The quality of comparables may be distorted by the state of the market

 It is a backward-looking method
 Adjustment to comparable evidence may be prone to arbitrary

Weighting the comparable evidence collected is the critical part of the method, which involves exercising
professional judgment.

The report concluded that “Act with integrity” is the most important among the five ethical standards.

The report recommended that RICS members should always adhere to the ethical standards and the
professional statement “Conflicts of interest.”

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1. Introduction

In response to a client’s concern about professional ethics and the comparable valuation method, this report
is to address, with scenario analysis, the following issues:

 How the ethical standards affect the approach to valuations;

 Critical evaluation of the comparable method of valuation.

Set out below are the key concepts:

1.1 Professional ethics

The definition of professional ethics, endorsed by RICS, is the “giving of one’s best to ensure that clients’
interests are properly cared for, but in doing so, the wider public interest is also recognized and respected.”
(RICS 2021a)

1.2 Comparative valuation method

The method compares the property to be valued with similar properties and their prices / rental, and adjusts
for the differences to arrive at the market value. (RICS 2019a)

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2. The ethical standards of RICS

RICS members (“Members”) are required to observe a set of five global professional and ethical standards
(RICS N.D. a)：

1. Act with integrity

Example behaviours include avoiding conflicts of interest and undue influence.

2. Always provide a high standard of service

Example behaviours include acting within the sphere of competence and being transparent about fees.

3. Act in a way that promotes trust in the profession

Example behaviours include honouring obligations and respecting the spirit of professional standards.

4. Treat others with respect

Example behaviours include treating clients with respect and never discriminating against anyone.

5. Take responsibility
Example behaviours include acting with care and diligence, and responding to complaints appropriately.

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3. How the standards affect the approach to valuations

Concerning “Act with integrity,” the following are the key aspects that affect Members’ approach to
valuations:

3.1 Conflicts of interest

The RICS statement (RICS 2017) explains three types of conflict:

3.1.1 Party conflicts: where firms owe conflicting duties to two or more different clients. For example,

 Producing valuation for both the seller and the purchaser of a property transaction.
 Producing valuation for two or more parties competing for a property.

3.1.2. Own interest conflicts: where a valuer’s own interest conflicts with those of the client. For example, a
valuer producing valuation for a seller is a potential buyer of the property.

3.1.3. Confidential information conflicts: where a valuer’s duty to provide relevant information to one client
conflicts with the valuer’s duty to keep their information confidential to another client. For example, a firm
has confidential information about a client’s property, which would be relevant to a property valuation for
another client. (RICS N.D.-b)

An RICS Member (“Member”) shall not accept an engagement that would create a conflict of interest or a
significant risk of conflict unless all parties concerned have provided prior informed consent, and the
Member is satisfied that the assignment is in the best interests of all the parties affected and that their
independence and objectivity will not be jeopardized.

3.2 Undue influence of others (RICS 2021b)

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Undue influence is “influence that prevents someone from exercising an independent judgment with respect
to any transaction.” (Oxford Reference, N.D.).

For example, an important client requests an ungrounded uplift in the valuation figure.

Members should maintain independence and objectivity. Pressure from an important client is not a
compelling reason to change the professional opinion.

A Member’s objectivity can be compromised when the valuation outcome is discussed before it is completed
with either the client or another party concerned. The Member must be alert to the possible influence on
their objectivity and independence.

3.3 Information confidentiality (RICS 2021b)

Information of clients must be kept confidential. Information obtained during valuation work could be
market sensitive, and thus this duty is highly important.

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4. Comparable method of valuation

The comparative method involves analyzing rental and/or capital value transactions that have taken place in
the property market. A comparison is made based on the key elements of comparison, such as size, location,
age, condition, layout and tenure, etc. There will be no properties that are identical. Differences between
comparables and the subject property must be reconciled to arrive at the market value. (Shapiro 2013 et al.)

4.1 Comparable evidence

Comparable evidence is items of information used as support for the valuation of similar properties.

Comparable evidence should ideally be:

 Comprehensive
 Similar to the subject item
 Current
 An arms-length transaction
 verifiable
 In line with local market practice
 An active market transaction
RICS (2019a)

4.2 Hierarchy of comparable evidence

A critical part of the valuation process is weighing (or ranking) the evidence collected about the subject
property.

In general, it is not easy to define a hierarchy of evidence with precision since different sources have
different importance based on market conditions, the purpose of the valuation, and the nature and type of the
asset being valued. Professional judgment is needed to determine their relative importance on a case-by-case
basis. ( RICS 2019a)

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However, certain kinds of evidence are usually prioritized as opposed to others. For instance, the weight of
the following evidence decreases from item# 1 to item#5 (Whitson 2021a)

1. “The open market sale or leasing evidence”

2. “Rent reviews-negotiated settlement”
3. “Lease renewals (in or outside the Landlord and Tenant Act 1954)”
4. “Independent expert determinations”
5. “Arbitration awards”

4.3 Limitations of comparable valuation method

The comparison is perhaps the most straightforward method and is preferred by courts for its use before
other complexed methods are used. (Isaac and O’Leary 2012) However, the technique is subject to the
following limitations (Whitson 2021a):

 The quality of comparables may be distorted by the state of the market

In an inactive market, the comparables may not represent market trends due to limited property
transactions available.
In a robust market, due to the lengthy acquisition process of property, the comparables may not be so
reliable because the property’s value may have increased between the comparable evidence date and the
valuation date.

 A backward-looking method.

Comparables must have become outdated before the valuation takes place.

 Adjustment to comparables may be prone to arbitrary

In the absence of recent or similar evidence, adjustment has to be made to the comparables. Subject to
the experience and skill of the valuer, the adjustment may be prone to arbitrary.

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5 Estimate of market rent

5.1 Comparable analysis matrix (RICS 2012)

Comp. 1 Comp. 2 Comp. 3 Comp. 4 The Note

subject

Belmont Business Park Unit 4 Unit 5 Unit 7 Unit 8

Market Rent ("MR") p.a. 240,000 295,000 252,500 150,000

Net internal area (NIA) (sm) 1,400 1,450 1,400 1,000 1,667 1

Quantitative adjustments：-

Conversion from IRI to FRI basis (44,250) 2

Adjustment for car parking spaces (7,500) (2,500) (7,500) (5,000) 3

Allowance for financial strength of tenant (3% of rent) 4,500 4

Shorter lease term adjustment (3% of rent) (8,850) 5

Net quantitative adjustment to MR (7,500) (55,600) (7,500) (500)

Adjusted MR per square metre 166 165 175 150

Date 12 months 14 months ago 21 months ago 24 months ago Now

ago

Transaction type Rent review Letting Letting Letting Letting

Qualitative adjustments：-

Condition Slightly worse Slightly worse Slightly worse Slightly worse

Location Similar Similar Similar Similar

Layout Slightly worse Slightly worse Slightly worse Slightly worse

Facilities Slightly worse Slightly worse Slightly worse Slightly worse

Building efficiency and sustainability credentials Worse Worse Worse Worse

Net qualitative adjustment (compared with the subject) Slightly worse Slightly worse Slightly worse Slightly worse 6

Notes

To be in line with the subject property and the comparables, the following adjustments are made:
1. The subject: IPMS 1 is converted to IMPS 3 based on a working assumption. (Whitson 2021b)

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2. Landlord’s outgoing is assumed to be 15% of annual rent (External repairs@10%, Insurance@2.5%,
Management fee @2.5% ) (Whitson 2021c)
3. Parking space value @ £500 each is deducted from the comparables to reflect rental without parking
spaces.
4. The 3% allowance reflects the lower payment default risk of a tenant with solid financial strength.
5. A shorter-term lease could attract a higher rental rate because it provides a less stable income to the
landlord. Assume 3% to be deducted from the annual rental.
6. The subject property is adjacent to Belmont Business Park, so the location is all similar. However, the
subject was completed recently while the other comparable properties were erected 20 years ago.
According to a recent surveyor’s report, their condition, layout, facilities, and sustainability credentials
are slightly worse or worse than the subject property.

5.2 Analysis of evidence hierarchy

Comp. 1 is the most recent transaction, but it is a rent review. Lesser weight should be given to rent review
because it may not reflect the current market condition but a compromise between the landlord and tenant.

The greatest weight should thus be given to Comp. 2 (Unit 5) because:

 it is an open market letting transaction
 its size is closest to the subject
 it is the most recent transaction compared to Comp.3 and Comp. 4.

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5.3 Calculation of estimated market rent

Local market evidence suggests rental growth for this type of office over the last 12 months is around 2%.

Adjustment for the overall qualitative factors is estimated at 5%.

The estimated market rent is calculated as follows:

£
Adjusted MR /sm p.a. for Comp 2 (Unit 5) 165
Add: 2% to reflect the rising market 3.30
Add: 5% for overall qualitative factors adjustment (Note 6) 8.25
Market rent per square metre 176.55
Market rent for the subject p.a. (£176.55*1667) before car parking spaces value 294,309
The value of car parking spaces (25 spaces@£500 each) 12,500
Market rent for the subject p.a. on 15-year lease FRI terms with 5 years 306,809
upwards only rent review.

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6. Scenario analysis of ethical implications

Richard should share the full facts with the client, Chandos, including his potential reward from the
purchaser. Withholding the information could result in the following ethical issues:

Act with integrity

 Richard is not honest.

 Richard is taking advantage of his client if he negotiates secretly with the potential purchaser in the
hope that this will lead to a larger reward.

Act in a way that promotes trust in the profession

 Failure to disclose the full facts to the client or even negotiating secretly with the potential purchaser
could bring the profession into disrepute.

Suppose Richard or his firm represents or advises the potential buyer. In that case, there will be conflicts of
interest because the firm is producing valuation for the seller while representing the buyer (i.e., party
conflicts). Simultaneously, the firm also has an interest in the transaction (i.e., own interest conflicts).
Richard or his firm should not accept the engagement unless:
 all parties affected have provided informed consent;
 Richard is satisfied that the assignment is in the best interests of all the parties concerned; and
 Richard is satisfied that he can still exercise his professional judgement independently and objectively.

The larger reward could also create a potential undue influence on Richard. Richard must be alert to the
possible influence on his objectivity and independence. More importantly, Richard or his firm should not be
deliberately partial to the purchaser, which is highly unethical and against the standard “Act with integrity.

In the likely event that Richard will produce a valuation for the property’s capital value for Chandos, who is
considering the offer, the following ethical issues could result:

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 Always provide a high standard of service

The offer is only open for two weeks. Richard must, before accepting the engagement, make sure his firm
can complete the valuation on time. Acting outside the scope of competence is not ethical.

 Act with integrity

Accepting an assignment that one is unsure of its timely completion is not acting with integrity.

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7. Conclusion and recommendations

7.1 Conclusion

“Behaving ethically is at the heart of what it means to be a professional; it distinguishes professionals from

others in the marketplace. “(RICS N.D.-c). Whichever valuation method is used, RICS (2021b): Members
must at all times act ethically to avoid any situations that contradict their professional obligations.

Arguably, the standard “Act with integrity” is paramount; the other ethical standards simply derive from it.
As noted in section 6, while the ethical issues could be covered by standard 2 or 3, “Act with integrity” is
always applicable. The interpretation of “Act with integrity” could be so broad as to cover all possible
unethical situations.

7.2 Recommendations

7.2.1 Adhere to the ethical standards

The RICS ethical standards should always be adhered to. To assist understanding, the following should be
considered:

 Refer to the RICS brief explanation, with examples, of the ethical standards.
 Refer to the (new) RICS rules of conduct, arguably guidance of the ethical standards.
 Enrol in the RICS online courses regarding professional ethics.
 Refer to the decision tree in the Appendix (RICS N.D-d.), which assists in making decisions regarding
ethical issues.

7.2.2 Adhere to the RICS professional statement “conflicts of interest.”

According to the professional statement (RICS 2017), Members’ firms should have effective systems and
controls to identify, manage and record conflicts of interest. Richard’s firm should review their systems and

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controls to ensure they are compliant. Meanwhile, (RICS 2019b): The use of centralized electronic databases
to identify, manage and record conflicts of interest is regarded as good practice.

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References.

Isaac D and O’Leary (2012) Property Valuation Principles (2nd Edition), [Print book], UK, Plagrave
Macmillan.

Oxford Reference (No date) Undue Influence [online] Available at Undue influence - Oxford Reference
[accessed 7 November 2021]

RICS (No date- a) The Global Professional and Ethical Standards, Global standards [online] London: RICS
Available at the-global-professional-and-ethical-standards.pdf (rics.org) [accessed 7 November 2021]

RICS (No date-b) Rule of conduct case study [online] London: RICS Available ROC Case Studies (rics.org)
[accessed 7 November 2021]

RICS (No date-c) Ethics, [online] London: RICS Available Ethics (rics.org) [accessed 7 November 2021]

RICS (No date-d) Decision tree, [online]London: RICS Available at ethics-decision-tree-rics.pdf [accessed 7
November 2021]

RICS (2012) Comparable evidence in property valuation, (1st edition,2012), Information paper [online]
London: RICS Available at Comparable evidence in property valuation 2012 (rics.org) [accessed 7
November 2021]

RICS (2017) Conflicts of interest (1st edition, March 2017), Professional statement [online] London: RICS
Available conflicts_of_interest_global_1st-edition_dec_2017_revisions_pgguidance_2017_rw.pdf (rics.org)
[accessed 7 November 2021]

RICS (2019a) Comparable Evidence in Real Estate Valuation (1st edition, October 2019) ,Guidance note
[online] London: RICS Available at comparable-evidence-in-real-estate-valuation.pdf (rics.org) [accessed 7
November 2021]

RICS (2019b) Conflicts of Interest : Implementation and Impact, (June, 2019) , Professional statement
review, [online] London: RICS Available at conflicts-of-interest-implementation-and-impact-rics.pdf [accessed 7
November 2021]

RICS (2021a) Professional ethics [online] London: RICS Available at Concept of ethics | Professional ethics
| isurv[accessed 7 November 2021] (Available via isurv-see section 5 of the e-Library)

RICS (2021b) Compliance with standards where a written valuation is provided, Professional standards
[online] London: RICS Available at PS 1 Compliance with standards where a written valuation is provided |
Part 3: Professional standards (PSs) | isurv [accessed 7 November 2021] (Available via isurv-see section 5 of
the e-Library)

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Shapiro E ,Mackmin D and Sams G (2013) Modern Methods of Valuation, (11th Edition) （Print book）, the
USA and Canada, Routledge

Whitson M. (2021a) Comparative method of valuation, [webinar]，VAL7VAE 21 Oct 2021, Reading,

UCEM, Available at Module: Valuation and Ethics (VAL7VAE) (Sep 2021) Lecture - Comparative Method
of Valuation Week 4 - Zoom (login) [accessed 7 November 2021]

Whitson M. (2021b) Ethics and Measurement, [webinar] VAL7VAE 14 Oct 2021, Reading, UCEM,
Available at Module: Valuation and Ethics (VAL7VAE) (Sep 2021) Measurement Week 3 - Zoom (login)
[accessed 7 November 2021]

Whitson M. (2021c) Assignment 1 , VAL7VAE [webinar] VAL7VAE 28 Oct 2021, Reading, UCEM,
Available at Module: Valuation and Ethics (VAL7VAE) (Sep 2021) Assignment Briefing Week 5 - Zoom
(login) [accessed 7 November 2021]

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Appendix:

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