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UNCERTAIN TIMES

THE COVID-19 PANDEMIC HAS LED TO THE USE OF MATERIAL UNCERTAINTY CLAUSES IN RED BOOK VALUATION REPORTS.

The RICS Valuation Global Standards, more commonly known as the Red Book, which complies with the International Valuation Standards, is globally recognised and respected as the basis for all RICS Registered Valuers providing a written valuation, who are required to comply with the Standards. One of the core aims of the Standards is to improve consistency across the profession and, crucially, provide transparency for clients on the valuation methods used in assessing the value of a property, and that the instruction is undertaken in a methodical manner.

FEATURE

Shane O’Beirne Professional Services Dept., Lisney Chair, SCSI Material Uncertainty Forum

”ONE OF THE CORE AIMS OF THE

STANDARDS IS TO PROVIDE TRANSPARENCY FOR CLIENTS ON THE VALUATION METHODS.

Transparency means that the report contains full disclosure of any and all considerations made by the valuer in forming their opinion. One of the key factors in recent months, following the emergence of Covid-19, is the use of a material uncertainty clause (MUC) in reports. Its use has led to some misunderstanding of its meaning, its intention, and when and why it is used, particularly among some clients. The topic of material valuation uncertainty is contained in the Valuation Standards and it is important to understand that its use is not a disclaimer but rather a disclosure to the client. To date, the RICS has only recommended specific consideration of its use three times: in the aftermath of the global financial crisis; after the Brexit vote; and, now, following Covid-19. The use of the clause in the current circumstances reflects that it can often take time for comparable transactions, which valuers utilise as part of their valuations, to transact due to the conveyancing process, etc. As a result, a property that sold pre Covid-19 may not reflect the current market, and the market as of the valuation date may not yet be demonstrable by more current transactions alone.

Criteria when considering whether to declare material uncertainty 1. There is evidence of disruption to markets because of one or more unforeseen events, accompanied either by: a. “inconsistent, or an absence of, data”; or, b. “an unprecedented set of circumstances on which to form a judgement” (Valuation Practice Guidance Applications (VPGA) 10,

Section 2, paragraph 2.4).

2. There is a “degree of uncertainty in [the] valuation [that] falls outside any parameters that might normally be expected and accepted” (Valuation Technical and Performance Standards (VPS) 3, Section 2.2 (o), paragraph 1).

3. The valuer’s concerns about the greater degree of subjectivity involved in the valuation need to “be expressly signalled in the report” (VPS 3,

Section 2.2, (o) paragraph 4).

The “overriding requirement is that a valuation report must not be misleading or create a false impression” (VPGA 10, paragraph 3.1). The RICS suggests that valuers consider using the following wording in valuation reports: “The current unprecedented circumstances are challenging for everyone. RICS expects its members and firms to act professionally and transparently at all times and this is particularly important when market conditions are changing rapidly. “Where a material uncertainty clause is being used, its purpose is to ensure that any client relying upon that specific valuation report understands that it has been prepared under extraordinary circumstances. The term is not meant to suggest that the valuation cannot be relied upon; rather, it is used in order to be clear and transparent with all parties, in a professional manner that – in the current extraordinary circumstances –less certainty can be attached to the valuation than would otherwise be the case. Indeed, with regard to the process itself, professional valuers will almost certainly have undertaken far more due diligence than normal, in order to arrive at their estimate of value”. To assist in determining a valuation, the RICS advises valuers to review the Guidance Note on Comparable Evidence and also collate supporting information from agency colleagues to include quoting prices, offers received, sale agreed prices and, where available, those properties that have transacted since the start of Covid-19 and their specific circumstances. In larger markets, such as the UK, the RICS has run a leaders’ forum assessing where, through demonstrable market activity since Covid-19, there are grounds for members to consider removing or adapting the MUC in their reports. Where this has been considered in England, or perhaps more specifically in higher transaction volume markets like London, it has been transactional evidence led. Markets such as England are much larger than that of Ireland, and an improvement in market activity there reflects such an approach.

The SCSI approach In the SCSI, members of the Valuation Committee recognised that while the MUC commentary was global, further recommendations provided by the RICS could only reflect the market in England and were perhaps even more focused in London and major cities. The key point of the advice from the RICS is that it is down to the individual valuer to assess the specific sub-market circumstances to determine whether to “insert, maintain or remove” the commentary in their report. The decision not to include the commentary must not be sentiment led and must consider a body of sales evidence, bids, and transactional activity reflecting the market as of the valuation date. In the SCSI, a group of valuers meet each week with representatives from Cushman & Wakefield, Colliers, Savills, CBRE, GVA, Knight Frank, QRE, BNP and Lisney. The group facilitates the discussion on market subsectors by reviewing new comparable sales, sale agreed deals, and price chipping with a view to making similar recommendations to the UK Forum but focused on the Irish market. As of the current date, the advice is that the removal of the commentary in Ireland is under continuous review with updates provided to members through the SCSI. The SCSI Forum (ROI) met on September 18 to discuss material valuation uncertainty in the Republic of Ireland real estate market. The Forum assessed the current situation against the agreed criteria and formed a consensus that reporting material valuation uncertainty may no longer be appropriate for five property types; instead, it may be more appropriate to use a market conditions clause. Those five property types are:

1. Residential. 2. PRS/multi-family (excluding student accommodation). 3. Social housing on long-term leases to Government, housing bodies or local authorities. 4. Industrial/logistics. 5. Institutional grade primary healthcare facilities.