The UK government is to remove a rule from its Alternative Investment Fund Managers (AIFM) regulation that for more than a decade has impeded the use of third-party valuers for real estate funds.
The UK Treasury and Financial Conduct Authority (FCA) has proposed ending unlimited liability for external valuers of AIFMs as part of a consultation to reform the AIFM regime, a pre-Brexit legacy, put in place in 2013 as part of the EU’s AIFM Directive.
The rule had effectively forced managers of real estate funds to adopt internal valuations rather than employ third-party appraisers, raising questions of transparency for investors in the funds.
Industry experts and bodies have been lobbying the government to remove the rule, which imposes unlimited liability for any losses caused by the third-party valuer being negligent. This week, they welcomed the news for both institutional investors and the UK real estate sector as a whole, including the valuation industry.
“This specific rule has long impeded our world-class real estate valuer sector,” said Vanessa Hale, CEO of Real Estate:UK. “Independent valuations are essential conditions for the new investments we need in the UK’s built environment – and a pre-condition for economic growth.”
Real estate funds lawyer Melville Rodrigues, who has long advocated for the change, said: “When the reform takes effect, it will be a welcome win for external valuers, UK real estate in general and the growing alternative investment fund sector in particular. That’s not all, because valuers can grow their businesses with confidence and investors in the funds they support will benefit from external valuations.”
Rodrigues added: “I’ve spent years leading the industry initiative, advocating reform and proposing reasonable change. After all that engagement with Treasury and FCA officials, as well as within the funds industry, this is a very satisfying outcome.”
Writing in IPE Real Assets in 2024, Rodrigues explained that the “unlimited liability imposed by the regulation means that few, if any, professional valuers can or will accept appointment as external valuers by an AIFM. In addition to their commercial concerns, there is the fact that most reputable valuers in the UK are required by their professional bodies to have professional indemnity insurance, and this insurance will generally not be available unless a liability cap is in place.”
A policy note from the Treasury shows “unanimous” support from respondents to a previous consultation, suggesting a review if the requirement for unlimited liability for external valuers.
The move has been welcomed by the valuation sector. Caroline Bathgate, partner at Knight Frank, said: “We welcome the news of the proposed reform to external valuer liability. By enabling valuers to operate within a proportionate and insurable liability framework, the UK can expand access to independent expertise and encourage greater transparency and confidence in the valuation of real estate.”
A statement from the Royal Institution of Chartered Surveyors said it welcomed “a more proportionate approach to external valuer liability that supports independent valuation, broadens market participation and serves the interests of investors and the wider public”.
Richard Booth, UK head of investor clients within JLL’s valuation business, said: “We welcome moves to remove ambiguity and enable valuers and their clients to engage with greater certainty – enhancing the UK’s position as a destination for real estate investment.”
Chris Thorne, director of valuation risk management consultants Valuology, said: “The original EU directive on which the current UK regulations were based failed to properly recognise the need for a robust arm’s-length relationship between the fund manager an external valuer that protected the latter’s independence. The new regulations create the clear separation between the role of the independent fund valuer and managing the performance of the fund which is important for investors and is welcome on every level.”
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