New valuation rotation rules for registered providers (RPs) came into force on 1 May 2024. There has been a lot of discussion and questions raised around the rules and we are delighted to collaborate with Richard Petty of JLL on a follow up to our original insight to help answer these questions and to clarify some points on the issues raised:

Q: Do the rules affect only RPs?

No. The rules apply to all valuations of property assets, provided they are carried out for what is known as a ‘regulated purpose’ (see below). The new rules have been put in place to address wider concerns about property valuations, particularly those of commercial properties for listed companies, rather than concerns relating to residential or social housing. These concerns were examined and addressed in an independent Valuation Review covering all asset types undertaken by Peter Pereira Gray (at the time, CEO of the investment division of the Wellcome Trust) commissioned by the RICS Standards and Regulation Board in September 2020, when the pandemic should have been having a marked impact on office and retail valuations, especially.

Although the review was wide ranging, its recommendations in terms of valuer rotation apply to all valuations carried out under a UK contract (whether the asset is located in UK or not), and the rules are therefore contained in the updated UK Supplement to the RICS Red Book (or, to give its proper title, RICS Valuation - Global Standards 2022).

There has been a UK Supplement to the Red Book for many years, most particularly relevant to the social housing sector because it contains the definition of EUV-SH, so there is nothing new in having such a supplement. It is not aimed specifically at the social housing sector.

Q. The rules apply only to “regulated purpose valuations”. Specifically which types of valuation will this catch?

The rules relate only to ‘regulated purpose’ valuations which are defined as:

• valuations for financial reporting, excluding such valuations in the public sector (so not Housing Revenue Account valuations, for example)
• valuations for inclusion in prospectuses and circulars to be issued by UK companies (including initial public bond issues and any tap of those bonds)
• valuations given in connection with takeovers and mergers (in the corporate world)
• valuations for authorised collective investment schemes
• valuations for unauthorised and unregulated collective investment schemes.
  

In JLL’s experience, it is really only the first two above which arise in the social housing sector. Full details may be found in the RICS UK Supplement. In the social housing sector, valuations given in relation to EMTN programmes and for both initial bond issuances and subsequent bond taps will fall under the rules.

However, the following types of valuation would not be caught by the rules:

• loan security valuations (although as noted in our original insight some funders are nevertheless applying their own valuer rotation rules)
• valuations for private placements (which are not regulated purpose valuations and are therefore not caught)
• revaluations of the security for existing public bond issues (where no new capital is being raised which is secured against the properties included in that valuation)
• projects which require valuations that span periods of less than five years in total.

Q. The rules see the introduction of a maximum duration of five years before the rotation of an individual “responsible” valuer in relation to a given asset (as well as a maximum of 10 years before the rotation of a valuation firm). What is meant by the term “responsible valuer”?

The responsible valuer is the valuer specifically named in the terms of engagement letter and in the valuation report. He or she is the valuer primarily responsible for the valuation, but may not be the only signatory to the report, depending on the signing requirements of the specific firm and/or client involved in giving the valuation report.

A valuer must not be identified as the responsible valuer for the same asset, for the same regulated purpose, for a period of more than five years. However, if the responsible valuer changes, then a valuation firm may continue to value the same asset or assets for a period of up to ten years, provided no single engagement within that period is for more than five years.

Q. If rotation is not required for loan security valuations, are funders introducing this as a separate requirement?

The rules do not extend to loan security valuations. However, we have seen a small number of funders introduce their own rules regarding valuer rotation into their funding documentation. This will not be an issue for short dated debt where the valuer rotation rules will never be tripped due to the short term nature of the financing arrangements. For the funders that have already introduced wording into their loans to cover this point this new loan requirement is intended to bring such loans in line with the rules already in place for their real estate customers increasingly in other sectors (where the valuer rotation rule is commonplace). 

However, this is a new concept for this sector and may be problematic for some RPs, especially those who have invested time in technological solutions with their valuation partners to provide the necessary data and who may not relish having to start afresh with a new valuation partner. As a result, we recommend that RPs seeking longer term debt or capital markets financing enquire at term sheet stage as to whether this is going to be an issue that they will need to consider.

Q. Is there a transition period?

The new rules came into force on 1 May 2024. However, RICS is allowing a transition period up to and including 30 April 2026, during which valuations may be undertaken that would otherwise be in breach of the requirements. This is to facilitate an orderly transfer to a new responsible valuer or valuation firm.

However, it does not give anyone carte blanche to enter into long term contracts which would otherwise breach the rules. There are disclosure and monitoring provisions, and a clear expectation on the part of RICS that regulated member firms will adhere to both the letter and spirit of the new rules.

How Capsticks can help

If you have any queries around the topics covered by this insight, please speak to Susie Rogers, Sarah Darvell, Naomi Roper or Richard Petty.

Capsticks aims to be the firm of choice for RPs. We advise over 200 RPs of varying sizes and locations across the country on all areas of housing. In particular, we lead many charging projects for RPs, recently securing over 10,000 properties in a year and almost always achieving MV-T. Our highly experienced banking team can advise on all manner of financing arrangements including loan agreements, equity financing, debt restructuring, debt capital markets issuance and real estate, corporate, social housing, green, social and sustainable and healthcare finance.