Comparable evidence in property valuation: what do surveyors and their insurers need to know about the proposed new standard?

The Royal Institute of Chartered Surveyors (RICS) has published its proposed second edition of its 'Comparable evidence in real estate valuation' (CEV); currently a professional standard but due to change to best practice guidance once published. This is the first update to the standard since the first edition was published in 2019 and the changes reflect current issues such as ESG, AI and data protection.

Background: what is the CEV?

Real estate valuation is typically underpinned by 'comps' or 'comparables', which are, ideally, recently sold properties similar to the subject property. These enable the valuer to evidence their estimate, although the valuer will need to use their professional judgement to reach the final figure or range as properties are rarely identical and perfect evidence is not often available, especially for unusual properties or those intended to be used in a novel way.

Currently, the CEV is a professional standard, supplementing the 'Red Book' which contains detailed rules and guidance for valuers. However, RICS proposes that the second edition of the CEV will instead stand as best practice guidance, not mandatory rules.

As the professional regulatory body, RICS set professional standards setting out the mandatory and advisory ethical, conduct and competence standards applicable to all chartered surveyors. Standards and guidance issued by RICS will be relevant in any disciplinary proceedings and are likely to be relied on by claimants in professional negligence claims. However, "best practice" is just that: the ideal standard, not the civil liability standard, which is that of the reasonably competent chartered surveyor. Breach of the standards does not necessarily sound in damages, but may expose the professional to regulatory sanction.

The purpose of the CEV is to set out the principles applicable to the use of comparable evidence, encourage global consistency of practice, address issues of availability, especially in challenging market conditions and to give guidance on the potential sources of comps and their relative importance.

What's changing?

A redline reveals substantial proposed changes to much of the CEV. Valuers should consider it carefully in full. Some of the key changes are as follows.

New paragraph 2 makes clear that in practice valuers rely on a wider range of information than simply historical transactional data, especially in markets where comparative evidence is harder to find. Transactional evidence will be expressly defined in the new standard to include rent reviews and lease renewals and makes clear that valuers can also take into account asking prices, bids, indices and market sentiment. This clarity will help valuers defending claims arising from difficult valuations where they have relied on less obvious evidence to support their valuation. When preparing difficult valuations, surveyors are encouraged to seek peer review (or external peer review in extreme cases) by the new CEV.

With the expansion of appropriate source of information comes a reminder that each source must be properly weighted, reflecting that an asking price that may not necessarily be achieved should be given less weight than a confirmed sale price, for example. The current standard states that asking prices are not reliable evidence, but this is softened in the new edition which contains guidance on how to convert an asking price to an assumed sale price. This supports the reality that valuation is based on professional judgement, with the new CEV expressly recognising that comparables are guidance, rather than direct evidence of value. Types of evidence (which should ideally be from arms-length transactions) are helpfully categorised and listed in order of weight. The new CEV also reminds surveyors to "value as you devalue", or ensure that comparables must be adjusted so that they are on the same basis (eg price per m²) as the subject property.

The new CEV also addresses in more detail apparent inconsistencies between evidence, and makes clear that simple cost adjustment for comparable properties in different states of repair is "usually not sufficient". Similarly, the new CEV reflects that the "cost approach", ie the cost of constructing a replacement property, is a "method of last resort", usually only suitable for properties where there is no active market, such as museums, hospitals, places or worship or specialist industrial facilities. There is separate guidance on this: RICS' 'Depreciated replacement cost method of valuation for financial reporting'.

Of particular interest to those surveyors acting as expert valuation witnesses, the new CEV includes a whole new section governing retrospective valuations. This reflects changes in the law under Chifley Holdings Ltd v HMRC [2024] UKUT 00301 (LC) and Allen v Leicester City Council [2013] UKUT 16 (LC) to make clear that evidence coming to light after the events in question may be admissible, although contemporaneous evidence is of course preferred.

One potential change that may make life more difficult for valuers is the addition of new 3.4.2.2 which requires valuers to take into account transactional evidence that occurs after the valuation date but before the report is finalised. Logically, this creates an inconsistency, as the new evidence would not have been available on the valuation date and may cause delay and make it more difficult to finalise reports. As such, this may feature in coming professional negligence claims.

ESG must now be considered for the subject property, although valuers are not expected to have detailed knowledge in this area.

Automated Valuation System (AVS) and AI use must be disclosed in the report and valuers are reminded that AI outputs and AVS outputs do not, in themselves, constitute a valuation. This is in line with RICS' guidance on the use of AI in real estate valuation, which emphasises the valuer's obligation to exercise their professional scepticism when engaging with generative AI.

GDPR, data privacy and confidentiality are now addressed in detail, with the new CEV making clear that confidential data should not be referenced in the report without consent, but may still be used. Record-keeping is now stressed as especially important, especially for key inputs than cannot be disclosed in the report.

In addition, tenure is specifically flagged in the guidance, no doubt in light of the likely wholesale market change from leasehold to commonhold described in our article here.

Practical takeaways

All those carrying out and advising on valuations should familiarise themselves with the proposed new standard.

While the new CEV is likely to reflect existing best practice in many regards, valuers should nevertheless review their precedent valuation reports to ensure that they reflect what will be required by the new guidance – for example, stating the tenure, addressing weighing of evidence, generative AI and confidentiality.

Valuers should ensure that their AI and AVS policy aligns with the new CEV, for example to ensure that staff know that AI and AVS use must be disclosed if used for valuation.

Impact on insurers

One key trap for the unwary could be paragraph 3.4.2.2, which requires that the "valuer should be aware of, and respond appropriately to, any relevant transactional evidence available to market participants that appears after the valuation date but before the report is issued". Valuers may see more complaints from clients who become aware of eg a recent sale in the days between the valuation date and the report if this proposed provision of the CEV makes it into the final version. 

However, the change in status of the CEV will help when defending valuation claims and may conceivably give rise to fewer regulatory issues, since the CEV is now expressly best practice rather than a mandatory standard. Further, many of the changes are likely to support the exercise of valuers' judgement when dealing with difficult-to-value properties.

Generative AI and AVS use not being disclosed to the client could generate claims, but in most cases, it will be difficult to see what the loss would have been had the AI or AVS use been disclosed, especially since valuers have been using AVSs routinely since the early 2000s.

The new section dealing with retrospective valuation is likely to provide clarity to all parties when dealing with valuation evidence.