PRACTICE PAPER: Investment valuation Developments from the Mallinson Report

Following the publication of the Mallinson Report in March 1994, the Royal Institution of Chartered Surveyors undertook a survey of Valuation Practice in the UK in accordance with Recommendation 25 of the report. In January 1995 questionnaires were sent out to a cross‐section of practitioners in the market. The responses represented a wide range of experience, geographical location and type of work. The majority of respondents spent more than 50 per cent of their time undertaking valuations. The questionnaire distinguished between valuations undertaken for pricing (asset valuations, sale/purchase advice, CPO, etc.) and calculations of worth, where the role of the valuer was to analyse the investment for a specific purpose for a specific client. Respondents were asked to indicate whether they tended to adopt a “traditional” model or a “DCF” model for the valuation of a number of different types of investment. These were rack‐rented freeholds, reversionary freeholds, over‐rented property, short leaseholds and long leaseholds. In the replies there was a consensus opinion that, when undertaking calculations of worth, the DCF method should be used as the principal method but tempered with the use of traditional techniques alongside. Conversely, when pricing property the traditional method was considered to be the appropriate tool, although many respondents said that they would also use DCF techniques on the more “unusual” interests such as over‐rented. With regard to the actual method adopted, most valuers using traditional methods favoured the use of an all‐risk/equivalent yield approach using layered income flows. Those using DCF preferred the short‐cut approach with a reversion to a sale price after the first change of income. Clearly suggests that there is a greater understanding of explicit techniques than anecdotal evidence had previously suggested.