Property valuation in an uncertain market
IT won't surprise anyone that currently valuing any commercial property in the context of the Covid-19 pandemic is difficult.
In an industry that relies on sales evidence to support opinions on the value of physical assets, valuing without inspections and with only limited (if any) reliable comparable sale transactions is at best challenging, sometimes simply not possible.
Even so, instructions on valuations are being received and accepted where they can reasonably be carried out.
Property inspections are still restricted in Northern Ireland, so the limitations on the instruction have to be explicitly agreed in the terms of engagement and clearly set out in the report.
If the client agrees, valuations can be produced subject to a deferred inspection and measurement which is often a sensible and practical approach.
Clearly this is not a normal functioning market and the RICS acknowledged that fact in a “valuation notification” shortly after the pandemic was announced in March.
Market activity is being impacted in many sectors. As at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes, to inform opinions of value.
Indeed, the current response to Covid-19 means we are faced with an unprecedented set of circumstances on which to base a judgment.
Our valuation(s) is/are therefore reported on the basis of ‘material valuation uncertainty'. Consequently, less certainty – and a higher degree of caution – should be attached to a valuation than is normally the case.
Given the unknown future impact coronavirus might have on the real estate market, we recommend that you keep the valuation of under frequent review.
While the decision to declare a valuation “materially uncertain” is that of the valuer, in reality this clause is being included in all valuations at present. It does not mean the valuation cannot be relied upon, but it signals a clear note of caution to anyone relying on it, that less reliance can be placed on the figure than would normally be the case.
Declarations of material valuation uncertainty only continue for long as circumstances apply. To advise industry the RICS set up The Material Valuation Uncertainty Leaders Forum to consider the global Covid-19 pandemic impact on valuations, particularly with relevance to financial statements.
While the UK Government and Stormont Executive wrestle with their own recovery strategies, the forum (which is meeting weekly given the rapidly evolving government advice and regulations), has indicated the material uncertainty clause should only be lifted in a gradual and phased way.
In their meeting on May 14 there was a consensus that reporting material valuation uncertainty may no longer be appropriate for:
• Long dated annuity income with at least 20-years unexpired term certain with a secure covenant such as government or very strong investment grade.
• Standalone food stores let to major operators.
•Institutional grade primary healthcare facilities.
After meeting on May 21 and then again on May 28, the following were added to the list:
• Non-reversionary residential ground rents (in excess of 80 years).
• Specialist supported houses let to registered providers on FRI leases and all types of rented social housing owned by housing associations.
• Smaller format food stores let to major operators.
• Commercial forestry.
Although the above categories are admittedly “niche”, week by week the “asset classes” are broadening. The forum's advisory is only high level and it does not take into account property specific factors. The decision to declare or not declare “material uncertainty” is that of the valuer on a case-by-case basis.
In Northern Ireland we have few assets that could fall into the above secure investment categories and even in the context of a normal functioning market, a yield differential to prime GB values usually applies, reflecting our smaller and less liquid market.
The declaration of “material uncertainty” in valuation reports in Northern Ireland will continue for some time but the body of sales and rental evidence that we need to support our opinions will emerge as our markets gradually recover and normalise.
We shouldn't forget that the economic context today is quite different from the aftermath of the financial crash of 2007/08 and the muddy waters may clear more quickly than you may think.
:: Gareth Johnston is director at Lisney (www.lisney.com) in Belfast