The Royal Institution of Chartered Surveyors has launched updated guidance for using the discounted cash flow method, a key plank of the recommended overhaul of the UK valuation system.
The information comes in anticipation of a Global Red Book update in 2024, and following RICS's Review of Real Estate Investment Valuations. The Red Book is the definitive standard by which UK chartered surveyors undertake valuation advice.
RICS's independent review of real estate investment valuations was overseen by then-Wellcome Trust chief executive Peter Pereira Gray and published in January 2022.
His 13 recommendations called for more oversight over and stricter rules governing property valuations. They represent the biggest change to the property valuation industry in a generation.
Among the most radical changes, the 80-page independent valuation report called for the "primary mechanism" for valuing real estate to shift from estimating the "exchange price" to values based on future income calculated using discounted cash flow.
Discounted Cash Flow calculates an investment's value based on the ability to receive a predicted future cash flow. The valuation review made three key recommendations related to it. Two recommendations covered analytical approaches and their application within DCF valuations, while the third recommendation focused on standardised property risk advice.
The new practice information does not impose the methodology, but RICS encourages DCF use "where suitable". It says it is committed to the valuer's autonomy when selecting an appropriate valuation method, or methods and models.
Widely used in modern professional services, valuation professionals increasingly use the DCF method in their businesses. RICS says the guidance focuses on the latest methods that the industry chooses to use.
It is launching an online web hub to support the practice information – DCF Hub.
RICS international head of valuation, Ben Elder, said in a statement: “DCF is an important tool for valuers, but it also has applications across many areas where analytics are crucial to providing strategic investment advice. It is increasingly essential for surveyors, clients, regulators, and other stakeholders to understand DCF and explicit valuation techniques more widely.
"I would like to thank RICS' members, staff and the countless vital stakeholders both within and outside the valuation industry who have made this practice information and its accompanying learning hub a reality. Their work is crucial for keeping RICS' guidance at the cutting edge of industry demands, and we look forward to witnessing the improvements that this information and education will bring to the industry."
The new practice guidance has gone live at this link on the morning of 9 November.