Building a Better You
Property Elite’s sole aim is to build better property professionals - supporting your career every step of the way, whether you are an AssocRICS or RICS APC candidate or a MRICS or FRICS Chartered Surveyor simply seeking engaging CPD.
We provide a wide range of training and support, so why not find out more on our website about how we might be able to support you? We work with candidates across all RICS APC and AssocRICS pathways, routes to assessment and geographic regions.
Don’t forget to sign up online for your free 15 minute AssocRICS or RICS APC consultation, including a review of your referral report if you have been referred. You can also book your bespoke training or support services directly through our eShop.
Not sure about signing up? Make sure you read what our recent successful candidates have to say in our Testimonials.
What is today's blog about?
In this week’s blog, we take a look at the April 2022 RICS Insight Paper, AVMs: Implications for the Profession and their Clients. This is essential reading for all candidates involved in valuation work.
You can download a full copy of the Insight Paper here.
Why was the Insight Paper published?
You can read about the RICS AVM roadmap, published in July 2021, in our previous blog. This led to wide ranging consultation and the publication of the current Insight Paper in April 2022.
The Insight Paper does not provide formal or mandatory guidance. However, it does provide an overview of the current state of AVM use within the industry and the response of RICS to this.
What are the key takeaways from the Insight Paper?
AVMs are used extensively in the valuation profession, although RICS has not yet issued extensive guidance on their use or application. This includes the due diligence process, risk management (including liability) and regulatory function of RICS.
In particular, RICS emphasise that valuers need to become sufficiently skilled, competent and experienced in the use of AVMs and that the use of any AVM requires the human input of a Chartered Surveyor (and Registered Valuer).
Why are AVMs becoming used more widely?
The increased use of AVMs is typically client-driven and due to the following factors:
Speed
Cost
Scale – particularly for valuations of portfolios, taxation, funds, non-performing loans and securitisation
Consistency – for large-scale valuations, AVMs can help to remove an element of human error (if used appropriately). AVMs can also be used as a sense or cross check for manual valuations
What types of assets are AVMs being used to value in the current market?
AVMs are most effective when used to value assets which are homogeneous (i.e., similar) and have an active market. They are often used to value residential properties for secured lending purposes (and for social housing portfolios), although with lender caveats where the construction type is non-traditional, for example.
In the UK, AVMs are not yet used by lenders in Northern Ireland. There is a desire to extend their use into the Isle of Man and Channel Islands, for higher-value and for buy-to-let properties. The use of AVMs is also limited for blocks of flats given the risk of combustible cladding and requirement for EWS 1 forms.
The use of AVMs is more challenging for diverse commercial assets, particularly if they are income-producing, have unique characteristics or are infrequently traded. However, the use of AVMs is becoming more widespread to forecast Market Rents, assess Market Value on the basis of vacant possession and create new market indices.
Why is data quality so important for AVMs?
‘Garage in, garbage out’
High quality data needs to be inputted in AVMs to provide high quality, reliable outputs (i.e., valuations).
This requires data to be:
Recent
Available
Able to be used in line with data protection and privacy legislation and in an ethical manner
Auditable – with a clear source and provenance
Assured – legally and financially if material issues are identified with the data
Consistent
Collected appropriately
Of sufficient scale and range
Free of bias and of sufficient sample size
Ideally transacted values not asking prices, which are less reliable
ESG and sustainability are also two important considerations when inputting data within AVMs, e.g., EPC rating or BREEAM certification (if available). This sits comfortably with the relevant guidance of the updated 2022 Red Book Global.
What models do AVMs use?
To find out more about what types of models AVMs use, e.g., regression analysis, machine learning and neural networks, head to our Free Resources and download our relevant Research Papers.
What are the key risks of AVM use?
Bias, including inherent selection bias by the user or end client
Conflicts of interest where professionals both develop and use AVMs
AVM outputs can drive perceptions of value
Input data may not be of sufficient quality to produce consistent, reliable outputs
AVM outputs intended for risk assessment are being relied upon as valuations or misunderstood by the auditing or accounting sector as being equivalent to a manual valuation
DRCs are being automatically adjusted using building cost indices which introduces a very specific risk into the valuation process
Reliance on market indices may not reflect asset specific characteristics or issues
Insufficient supervision of AVM use by Chartered Surveyors (and Registered Valuers)
AVMs may struggle to deal with market uncertainty or volatility, e.g., Covid-19 or Brexit
AVMs could drive market volatility rather than reflecting market conditions
Without human input, AVMs could become self-reinforcing rather than being marked to the market
Lack of standardisation in AVM models
Lack of consumer awareness about the adoption and use of AVMs
Impact on the Professional Indemnity Insurance (PII) market
Lack of input of surveyors and valuers into AVM development
How is RICS responding to the increased use of AVMs?
RICS have confirmed that they will continue to reflect the use of AVMs within the Red Book Global, with a potential new Guidance Note being published to supplement this. RICS also plan to review the APC competencies and pathways in relation to the increased use of technology and data, as well as enhancing qualified members’ skills and competence in this area. This may include a new Property Data Scientist pathway for the APC.
RICS also emphasise the role in AVM adoption and use of the ‘human in the loop’, i.e., a Chartered Surveyor (and Registered Valuer). This will require collaboration between technology professionals and the surveying industry to create AVMs that are fit for purpose, consistent and reliable.
How can we help?
Don't leave it too late to book your submission feedback and review, APC question pack, e-mock interview or 1-2-1 mentoring. We also provide revision quizzes, revision guides and a CPD Webinar Package.
We offer a range of short and long-term support packages in our eShop, including our popular Monthly Mentoring and Kick Start packages. These can include an RICS APC or AssocRICS Counsellor in certain circumstances.
Head to our blog archive to access even more free CPD and AssocRICS and RICS APC training and support.
Download your free AssocRICS and RICS APC resources, including e-books and revision quizzes.
Find out more about our bespoke AssocRICS and RICS APC training and support, before booking your free 15 minute consultation.
Not sure about signing up? Make sure you read what our recent successful candidates have to say in our Testimonials.
Stay tuned for our next blog post to help build a better you.
N.b. Nothing in this article constitutes legal, professional or financial advice.