Lenders: what does COVID19 mean for valuations?6th April 2020 - Published by
As you will be aware, the outbreak of the Novel Coronavirus (Covid-19) has impacted both local and global financial markets. We have found that many of our lender clients are starting to receive valuation reports with additional assumptions and limitations on the values given. Lenders may also be finding that their valuers are choosing not to carry out internal inspections of properties during the current climate due to concerns of potential health and safety risks for both the valuers and the public.
Valuations may take various forms including, but not limited to:
- full internal inspection of all but exposed parts and without testing of services
- internal inspection with some level of restriction on access
- a site perimeter or ‘drive-by’ inspection
- an inspection otherwise external to the site or property
- a ‘desktop’ opinion formed using, for example, digital mapping, records, plans and other data.
Registered RICS valuers are required to inform their clients about any restrictions of information and their ability to inspect a property and will need to set this out clearly in their terms of engagement once agreed with their clients. This will also need to be clearly stated in their report together with any assumptions that are being made as a consequence of restricted access and/or valuation information.
RICS has noted that the current circumstances related to the global Covid-19 pandemic are leading some valuers to include ‘material valuation uncertainty’ declarations in their reporting and advice. Red Book Global Standards defines material uncertainty as ‘where the degree of uncertainty in a valuation falls outside any parameters that might normally be expected and accepted’ (VPS 3 section 2). It also explains circumstances of material uncertainty to assist the valuation process (with additional guidance in VPGA 10), but the decision to declare it remains with the independent valuer.
As you will be aware, all valuations are professional opinions on a stated basis of value, coupled with any appropriate assumptions or special assumptions. Like all opinions, the degree of subjectivity involved will inevitably vary from case to case, as will the degree of ‘certainty’. RICS has noted that this does not mean that valuers are currently unable to value, as valuations under these circumstances provide a key function to support markets and stakeholders. However, valuers are required under RICS rules to draw their clients’ specific attention to any material uncertainty so as to not give the impression that greater weight could be attached to their opinion than is warranted. Valuers therefore need to make the decision on whether the current circumstances affect their valuation on a case-by-case basis. The more severe the Covid-19 impact on individual markets, and the more unpredictable the consequences, the more likely it is that valuers will be declaring their valuation is subject to material uncertainty.
RICS has provided template wording for valuers to use in their reports in the event that they consider the circumstances necessary. The wording reads as follows:
“The outbreak of the Novel Coronavirus (Covid-19), declared by the World Health Organisation as a ‘global pandemic’ on 11 March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries.
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 that we are faced with an unprecedented set of circumstances on which to base a judgement.
Our valuation(s) is/are therefore reported on the basis of ‘material valuation uncertainty’ as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty – and a higher degree of caution – should be attached to our valuation than would normally be the case. Given the unknown future impact that Covid-19 might have on the real estate market, we recommend that you keep the valuation of [this property] under frequent review.”
As you will be aware, real estate markets can be uncertain at the best of times, which is why lenders obtain and rely on a valuer’s detailed, in-depth experience and market knowledge. Valuers interpret the market even where evidence is limited, and it is that skill that lenders rely upon when making decisions as to whether to lend or not.
We are aware that lenders are, understandably, more cautious about lending in the current climate and it will be important for lenders to communicate with their valuers on a case-by-case basis so as to obtain clarity and comfort around the limitations and assumptions their valuers are stating will apply to a property.
As with any other factor or risk that a lender considers when deciding whether or not to lend, lenders should consider the extent that they will rely upon the valuation figure given and any additional monitoring (e.g. far more frequent valuations) or review of the property they will carry out in light of there potentially being material uncertainty relating to the valuation of that particular property. Lenders may also consider it appropriate to impose certain other conditions or obligations upon their borrowers, including increased guarantee support to underwrite the risk of there being a future valuation producing a lesser value than that contained in a previous valuation.
If you would like advice on anything mentioned above, please contact George MacMillan on 0161 838 7998 or email@example.com.