What it means
A professional body is an organisation that sets rules of conduct and competence for a particular profession. RICS does this for surveyors, who advise on the value, use, management and construction of land and buildings.
Becoming a chartered member requires qualifications, work experience and an assessment of competence. For finance people, the most relevant output is the set of valuation standards, often called the Red Book.
A valuer who follows these standards is expected to use recognised methods, be transparent about assumptions and be independent from the parties to a deal. Lenders often insist on a RICS valuation before they advance a property loan.
Valuations matter because property is often the largest asset on a balance sheet or the main security for a loan. A company with an old building may be carrying it at a value far below the market, while a developer may rely on a valuation to fund a new project.
An independent opinion from a qualified valuer gives the company, its lenders and its auditors confidence in the figure. RICS also publishes guidance on matters such as measuring buildings, managing property, and construction cost management.
Many surveyors work on cost plans for construction projects, which finance teams use to approve budgets and monitor spending. Quantity surveyors in particular manage the costs of building projects.
The body regulates its members and firms, which means it can investigate complaints and apply sanctions. This regulation is one reason lenders and courts treat RICS-regulated advice with respect.
It does not mean that a valuation is a guarantee, because a valuation is an opinion at a point in time. The nuance for non-specialists is that RICS is one of several bodies.
Other countries have their own valuation institutes, and not every property valuation must be done by a RICS member. Finance teams should check what their lender, auditor or jurisdiction actually requires.
In practice
Real-world examples.
Example
A manufacturing company wants to borrow $6,000,000 secured on its factory. The bank asks for a valuation from a RICS-registered valuer. The valuer concludes that the factory is worth $9,000,000, and the bank sets the loan amount using that figure.
Example
A property fund is acquiring an office building and wants to know whether the asking price is fair. Its finance team commissions a chartered surveyor to prepare a valuation that follows the Red Book standards. The report is shared with the fund's investors and auditors.
Example
A hospital group is building a new wing and hires a chartered quantity surveyor to prepare a cost plan. The surveyor tracks the budget through the project and flags a $400,000 overrun risk early, which allows the finance director to arrange extra funding.
Case study
Seen in the real world.
Westbrook Retail is an illustrative, fictional company that owned 12 shops and wanted to refinance its borrowing. The lender required independent valuations of the properties by RICS-registered valuers.
The valuers found that two of the shops, in declining town centres, were worth much less than the figures in the company's accounts. The total value was $4,000,000 lower than management had assumed, which reduced the amount the lender was willing to advance.
The finance director used the findings to renegotiate the loan size and to plan the sale of the weaker shops. The illustrative lesson is that an independent valuation can be uncomfortable, but it protects the company from borrowing against inflated values. The board also asked for the valuations to be refreshed every year, so that the carrying values in the accounts stayed close to market levels. The auditors welcomed the change because it gave them independent evidence for one of the largest balances on the balance sheet.
Watch out
Common mistakes.
- Treating a valuation as a fixed fact rather than an opinion at a particular date based on stated assumptions.
- Assuming that anyone calling themselves a surveyor is chartered, when only qualified members can use the RICS designations.
- Using an old valuation for a new loan or an audit without checking whether it is still acceptable to the lender or auditor.
Questions
People also ask.
What does MRICS mean?
It means the person is a professional member of RICS who has met its standards of qualification and experience. A senior member may use FRICS, which denotes a fellow of the institution.
What is the Red Book?
It is the RICS valuation standards document, which sets out how members should carry out and report valuations.
Do I always need a RICS valuation?
Not always, as requirements depend on the lender, the purpose and the country, so check with your bank and auditor. For a small loan or an internal estimate, a lighter-touch appraisal may be enough.
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