Introduction
Acting ethically is a requirement for professionals working in various sectors of the economy, and the surveying profession is no different. Literature shows that surveyors in the UK associate ethical behaviour with doing the right thing, acting with justice, and fairness (Plimmer, Edwards & Pottinger, 2009). The surveying profession demands a high level of ethical behavior because the property industry is a high-value business that is hugely dependent on the reputation of professionals in the industry and the firms involved. For nearly two decades, the RICS (Royal Institution of Chartered Surveyors) has enforced a code of conduct that its members are required to abide by, in order to attain high ethical standards in the profession. Towards this end, the IRCS has developed explicit ethical and professional standards that act as guidance to their members, in addition to ensuring that the partners and clients dealing with the professional body have confidence in them. According to IRCS (2017) behaving ethically differentiates professionals from quacks in the marketplace. The RICS has created five standards that all its members are obliged to abide by. First, members must act with integrity. Secondly, members are expected to offer a high standard of service. Thirdly, members must conduct themselves in manner that instills trust in the profession. Fourthly, members are expected to treat those with whom they associate with respect. Finally, members are expected to take responsibility of their actions. This essay is based on a scenario of a trainee valuer who is advising a new client in retail investment on several issues. The first task exercising the aforementioned principles of avoiding conflict of interest, offering high quality standard, and being transparent about professional fees. The second task entails an analyzing of transactions relating to shop No. 27 that the client is interested in, in terms of capital and market rental values. Finally, the essay explores the issue of zoning as applied in shop valuation.
Task 1
Avoid conflicts of interest
The RICS (Royal Institution of Chartered Surveyors) has defined a conflict of interest as “anything that impedes or might be perceived to impede an individual’s or firm’s ability to act impartially and in the best interest of a client” (2017, n.p.). A conflict of interest could damage your reputation as a professional and that of your firm. You must be open, honest and transparent in all your dealings with potential and existing clients. Ensure that you only share necessary and appropriate information with clients while executing your professional duties. More importantly, ensure that you treat with confidence any information about current and potential clients that comes your way while conducting business (RICS, 2016). You owe clients a duty of care and as such, it is important not to divulge information about them to anyone, except in instances where it is mandatory or suitable to do so. The RICS is committed to curbing conflict of interest among its members out of a realization that if permitted to flourish, it could ruin public confidence in the professional body and its members. Additionally, a conflict of interest poses a danger to the integrity of the profession, not to mention that it damages confidence in the profession (Boyes Thrner LLP, 2017).
A conflict of interest could assume one of various forms. According to the new guidance issued by the RICS, in case an agent represents clients with competing interests, this amounts to a conflict of interest. For example, in case the agent is acting for two or more buyers who are competing for the same property. At the same time, a conflict of interest could also arise in case there is a clash between a client’s interests and the personal interest of the agent representing them. This could happen for example, in a case where the agent represents a client in an investment opportunity and the client in question happens to be a close family member. For these reasons, members of the RICS are called upon to abide by the compulsory requirements of the professional conduct. Failure to abide by such compulsory requirements or in the event of a professional negligence claim, this could bring your professional career into disrepute, in addition, it could also ruin the reputation of your employer (Lemen-Hogarth, 2017).
Always provide a high standard of service.
As a trainee valuer, it is important to ensure that your clients and potential clients receive high quality service at all times. The RICS has categorized provision of high standard of service as one of its five ethical and professional standards. For this reason, we have a professional responsibility to provide the best support and advice to clients and potential clients (Greenhalgh, 2016). It means that we have to be clear about the kind of services that we offer our clients. We should also fully understand the kind of services that our clients seek, so that we know how best to meet their expectations. More importantly, we are bound by this professional and ethical standard to ensure that our services are within the scope of our level of competence. In the event that the services sought by a client fall outside our scope, we owe our clients a duty to explain to them this development we determine that there is need for consultation or expert input, it is important to inform clients of such developments beforehand.
In case you cannot fulfill the client’s service requirements, the honourable thing to do is to inform them that what they are seeking is beyond your scope, instead of doing a shoddy job. The main objective of service provision is to act as a guarantee that services are beneficial and relevant to the needs of the client, your employer and the RICS (RICS, 2011). There is need therefore to take into account the complexity and type of each property, seeing as the standard and level of services provided often vary based on these factors. The overriding factors while offering these services should be value-for-money, effective service, as opposed to the lowest price.
Ensure transparency regarding your professional fees
A professional should always exercise transparency and openness in business dealings involving clients. This also entails the professional fee charged to clients. Transparency in professional fees in commercial and residential property is an emotive issues following suggestions of possible malpractices (Carsberg, 2008). According to the RICS (2009), the professional should clear any uncertainty that the client might have regarding the type of service they except to receive, and the cost involved. All fees involved should be clearly indicated, and there should be no hidden payments and/or commissions. The RICS has identified transparency on costs as one of its core principles and as such, members are duty-bound to comply with this directive (Fryzer, 2011). RICS professionals should be open and transparent with clients on the issues of payments or costs they are likely to incur while executing a business transaction, such as commissions and referral fees (RICS, 2014). Such transparency ensures that all parties are privy to how costs are arrived at.
Given the gloomy nature of the current economic climate, both clients and businesses will be interested in the type of service provided and the cost involved (RICS, 2009). The RICS has made it very clear on the issue of transparency regarding professional fees that firms and individual members owe clients a busty to abide by the ethical and professional standards of being transparent and open in all their business dealings (RICS, 2010). There are certain things that you can do as a professional to avoid conflict of interest. First, always ensure that you are committing to providing high quality services to your clients. Secondly, be very transparent from the word go about your professional fees. Professionals should be transparent with clients about the amount of commission they pay or receive. Moreover, they need to offer valid explanations on why they pay or receive such commission. There is nothing illegal about receiving commission. Nonetheless, the commission received should share a clear connection with the added value to warrant such payment (Pillig, 2010). Furthermore, professionals should ensure that clients are fully briefed on the services being sought including all charges incurred, so that they can make informed choices.
Task 2
Introduction
Appraisal assignment description
I have been chosen as a trainee valuer to estimate the fair market value of the chartered surveyor shops on a wholesale basis for the years 2016 and 2017. This draft report is aimed at providing an independent valuation suggestion for the shops to the interested client. As such, this draft is meant for the benefit of the client and the business owner. This valuation was conducted in accordance with the uniform standards of professional appraisal practice (USPAP), and the international valuation standards (Damodaran, 2016). Thus, the estimate of the shop value resulting from this valuation engagement is included as a conclusion of business value that is available in this detailed report (Yermack, 2016).
Premise and standard value
This valuation report relies on the use of fair market value as the basic standard. A fair market value refers to the expected price through which the business (or shops, in this case), would change the client and the owner (Feltham & Ohlson, 2015). In this case, neither should have a concluded price but both should have full knowledge on the important business facts specific to this case. This is similar to the market value basis as mentioned and defined in the international valuation standards (Huston et al., 2015). This valuation was performed under the premise of value undergoing its normal transactions. The Premise Value is a representation of the highest and best use of the shops’ assets (Salzman & Zwinkels, 2017).
The report’s scope
This report has been adequately prepared to meet the report scope. Specifically, it is an appraisal report meant for the client and does not seek to meet all the necessities of the revenue decision (Vaughan & Smith, 2014). During its preparation, certain assumptions were made:
(i)That the financial statements provided by the business management are accurate.
(ii)That a site review of the subject’s business premises has not been conducted, and there was no auditing of transactions.
Sources of information
The following information sources were used:
(i)The business financial statements and transaction records were analysed for the purpose of estimating the current shop value and business performance.
(ii)The financial statements including balance sheets were looked into to determine the business’s earning power and provide inputs for the shop’s valuation process.
Business description
The subject business undervaluation is involved in residential investments. Primarily, it is engaged in providing suburban shops for clients involved in small or mid-sized companies. The business ownership aims at obtaining the value for the shops and offers it for sale to the interested client.
Market overview
After a thorough analysis of the transaction details of the shops provided, it was concluded that the market rental of the shop designated 27 is standard and is in line with its proper market value. The conclusion was arrived at after proper evaluation of the transaction details for shops number 16 and 24 where the dimension details for 16 were 6m*18m, the rental sale was £49,100, yet the lease was at 15 years with a five-yearly rent review. Conversely, the dimensions for shop number 24 were 6.5m*20m and sales at £52,900, with a ten-year lease and 5-yearly rent review in 2015. Hence the conclusion reached is that in 2014, shop number 27 at the cost of £52,200 was a standard capital value for the client (Mckmin, 2013). Additionally, the residential industry has experienced continued growth in recent decades, and this provides more solid opportunities for the growth of small business shops (Morck et al., 2015). A business like this is solely dependent on the skill and initiative of the persons involved while providing services to their clients. Residential investment is high at the moment with an average of 11.2% increase per annum in the last five years (Lintner, 2014).
Financial statements reconstruction
An accurate estimation of the market rental and capital value of an asset depends upon the business’s financial performance (Jadhay, 2016). While the historical financial details remain important, the value of the shops depends on the business’s ability to remain competitive and benefiting to the market. In this case, the regions market statistics based on this business has clear economic potential and earning power.
Conclusion
After a proper analysis of the transaction details of the shops, the market rental and capital values of shop number 27 are standard values, and have also revealed a great market potential in the region they are situated. The expert advice was given above in the document is in accordance with the standards of professional appraisal practice and hence provide valuable insight to the client.
Task 3
The RICS has defined zoning as "a standard technique of measuring retail premises to calculate and compare their value" (2017, n.p.). This allows for comparison of shops of varying layouts and sizes. The technique has found use in the UK for more than six decades especially in the evaluation of properties and rental shops for rating purposes. Measuring techniques often differ. Regardless of the methodology uses, the most important thing is to ensure that all evidence has been reviewed using similar criteria (Lever, 2012). Once the correct dimensions of a rental shops have been taken, the configuration or layout of such a premises are then divided into zones (RICS, 2016). According to the RICS (2017), rental premises or shops are usually divided into several zones of about 20 feet each (6.1 metres). While a depth of 20 feet is fairly common, depths of 30 feet have also been reported. According to Isaac and O'Leary (2012) the value of a shop premises identified using zoning technique is an indicator of the various areas of activity in a shop. Consequently, those areas of a shop that translates into more sales are often the most valuable.
The zoning technique hinges on the premise that the shop frontage houses the most valuable are per square meter. This is where the main customer entrance is likely to be situated, in case of say, a cafeteria or supermarket. Moreover, this part of the shop is nearest to the window and as such the shop owner can easily display their products through the window (Valuation Office Agency, n.d.). The area nearest to the window is designated zone A, and is also the most valuable one. This underscores the significance of the front area of a shop as a valuation feature (Lever, 2012). This is because the front of the shop tends to attract more customers in comparison with the back of the shop. In this case the rear of the shop is largely used as a storage space, and fewer customers are likely to venture. As a rule, the value of a zone declines as the distance from the front of the shop increases. Accordingly, Zone A occupies the first 6.1 meters closest to the window. Zone B occupies the next 6.1 meters, while Zone C occupies the other 6.1 meters after Zone C. Any extra space is designated as the remainder (Zone D). According to the RICS, the recognized valuation rule entails assessing Zone B and the other preceding zones (that is, Zones C and D) in terms of Zone A. In this case, Zone B is halved from Zone A (B=A/2); Zone C constitutes a quarter of zone A (A/4); while Zone D entails an eight of Zone A (A/8).
The use of zoning as a standard technique for assessing rental shops enable potential clients to compare different retail premises in terms of accessibility, location, and traffic. These are important parameters to consider when leasing a rental shop because they are an indicator of the likely sales that one would make from their business operations in such a premises. The zoning technique is also seen as a suitable method of valuation because it means that the shop frontage, by virtue of the fact that it is nearest the window and hence would attract more customers, should be valued at a higher rate that other preceding zones. This is important because it means that you get value for your money. In other words, the unit of your shop that is charged the highest also brings in the most income.
On the other hand, the zoning technique has come under criticism for a number of reasons. First, zoning is seen by critics as an artificial process. In this case, it is regarded as a tool that the value use to analyze the shop premises. In light of this, the zoning technique fails to fulfil the role of function as a tool for use by the occupier of a rental premises to aid in their decision making. Moreover, the zoning technique has been deemed inappropriate for retailers as it does not assist them to decide on rental bids. In this case, retailers rely on prospects in order to realize a profit, the valuer also arbitrarily sets zone depths and while this has proven to be a trusted approach over the years, it has failed to stop tenants from developing alternate analysis.
Conclusion
Like other professionals, the RICS expects its members to conduct themselves in an ethical manner in all their dealings. This is part of the five standards that the RICS has developed to ensure that members maintain integrity in their dealings and take responsibility for their actions. Members should also avoid conflicts of interest as this could jeopardize their reputation and tarnish the integrity of the profession. Chartered surveyors are expected to always provide a high standard of service and ensure it is within their scope of competence. Moreover, they should also ensure transparency when it comes to professional fees. Task 2 of the assignment demanded a determination of the market rental and capital values of shop no. 27 that the client is interested in. Findings show that the cost for the shop represents a standard capital value relative to similar shops in the locality. Finally, task 3 showed how zoning results in different valuations for different sections of a shop premises, with zones nearer the shop front being costly as they also attract more customers, hence more sales. However, zoning does not assist retailers in making decisions about rental premises, such as rental bids.
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