The effects and aftermath of the COVID-19 health crisis will impact the work carried out by RICS regulated members in a variety of ways. Inspecting property may be difficult either through their firm’s own internal procedures, government-imposed restrictions or the occupant’s unwillingness to grant access. Access to evidential data such as comparables, may also be less freely available.
RICS reminds regulated members that, in addition to following the directions of government authorities, they should act in a transparent and professional manner. Where there are changes to the way RICS regulated members normally proceed with instructions, this must be agreed with the client and any agreed changes must be recorded. RICS regulated members should make detailed file notes to support the rationale that underpinned the changes.
Any restriction of information and/or the ability to inspect and investigate must be made clear, agreed with the client and clearly stated in the report. All affected terms of engagement must be amended to confirm this. These requirements also apply to any valuation assumptions that are made as a consequence of restricted access and/or valuation information. If the regulated member considers that it is not possible to provide a valuation on a restricted basis, the instruction should be declined.
Where a valuation refers to rental or other income, a considered assessment of that income in light of COVID-19 and, where relevant, its aftermath may be required. Valuers are advised to make sure they are acting upon the latest and most accurate information in respect of rental and other income, where this is relevant. The valuer may need to reflect upon structural and behavioural effects on markets either caused or heightened by COVID-19.
Where a valuation is provided on restricted information, information may be presented to RICS regulated members which has been prepared by third parties, such as other RICS regulated members, owners, tenants or occupiers of similar real estate, or their agents and clients’ own records. Questions of commercial confidentiality or statutory data protection may arise, which might mean that sources and figures cannot be confirmed, but this should not invalidate the use of the data in arriving at an opinion of value, provided confidentiality issues can be respected. Valuers need to be aware of any local data protection or confidentiality legislation that may apply in their jurisdiction and act accordingly. For example, it may be necessary to obtain permission to use data on comparable transactions, especially if this is going to be published in a report or used in judicial proceedings.
RICS regulated members must reasonably believe the information prepared by third parties is adequate and reliable.
RICS members must be aware and act within the requirements of the RICS Valuation – Global Standards (Red Book Global Standards). The following sections are relevant.
- VPS 1.3.1 (i) Nature and extent of the valuer’s work including investigations and limitations thereon.
- VPS 2.1 Inspections and Investigations.
- VPS 3.2 (g) Extent of Investigations.
- VPS 4.8 Assumptions.
RICS regulated members should also ensure they understand and comply with any guidance or requirements issued by national jurisdictions. These might be, for example emergency measures, continuity guidance or measures for operational return, each of which may take precedence over RICS standards.
Market conditions and material valuation uncertainty
Individual markets may react differently to the COVID-19 outbreak, and RICS regulated members will consider the circumstances in which a material uncertainty declaration is appropriate. RICS regulated members should be fully aware of VPGA 10 and VPS 3 within the RICS Red Book Global Standards in the decision-making process. Where material uncertainty is declared, the valuer is reminded that this should be explicitly stated. Where appropriate, the valuer may also want to reference the terms and output of the RICS Material Valuation Uncertainty Leaders Forum (UK), or another forum relevant to their jurisdiction (e.g. the SCSI forum for Ireland).
Whether material uncertainty exists remains the decision of the RICS regulated member. They should include a sound rationale to explain the decision-making process and this should be recorded for future reference.
The following wording can be used as an explanatory note to consider market conditions more generally, and, where appropriate, declare material valuation uncertainty. The wording in square brackets can be deleted as appropriate to whether material uncertainty is being declared and whether for a portfolio, group of properties or single asset. The material valuation uncertainty declaration refers to ‘x sector(s)’ and ‘x property(ies)’. These can be amended to allow for the property or properties to which the declaration applies to be clearly identifiable. Please refer to the practice alert supplement for further guidance and examples.
‘Market conditions explanatory note: Novel Coronavirus (COVID-19)
The outbreak of COVID-19, declared by the World Health Organisation as a “Global Pandemic” on the 11th March 2020, has and continues to impact many aspects of daily life and the global economy – with some real estate markets having experienced lower levels of transactional activity and liquidity. Travel restrictions have been implemented by many countries and “lockdowns” applied to varying degrees. Whilst restrictions have now been lifted in some cases, local lockdowns may continue to be deployed as necessary and the emergence of significant further outbreaks or a “second wave” is possible.
The pandemic and the measures taken to tackle COVID-19 continue to affect economies and real estate markets globally. [Nevertheless, as at the valuation date some property markets have started to function again, with transaction volumes and other relevant evidence returning to levels where an adequate quantum of market evidence exists upon which to base opinions of value.] [Accordingly, and for the avoidance of doubt, our valuation is not reported as being subject to ‘material valuation uncertainty’ as defined by VPS 3 and VPGA 10 of the RICS Valuation – Global Standards], [except as identified below.]
[Material valuation uncertainty
In respect of (x sector(s)), as at the valuation date we continue to be faced with an unprecedented set of circumstances caused by COVID-19 and an absence of relevant/sufficient market evidence on which to base our judgements. Our valuation of (x property(ies)) is therefore reported as being subject to ‘material valuation uncertainty’ as set out in VPS 3 and VPGA 10 of the RICS Valuation – Global Standards. Consequently, in respect of these valuations less certainty – and a higher degree of caution – should be attached to our valuation than would normally be the case.]
For the avoidance of doubt [this explanatory note, including the ‘material valuation uncertainty’ declaration, does not mean that the valuation(s) cannot be relied upon. Rather,] this explanatory note has been included to ensure transparency and to provide further insight as to the market context under which the valuation opinion was prepared. In recognition of the potential for market conditions to move rapidly in response to changes in the control or future spread of COVID-19 we highlight the importance of the valuation date.
Where RICS regulated members receive press queries on material valuation uncertainty, Ben Elder FRICS Global Director of valuation has issued the following statement and RICS regulated members can quote this in their response.
‘Where a material uncertainty declaration 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.’
Ben Elder FRICS, RICS Global Director of valuation
Value and worth
Engagement with stakeholders during the crisis has led to some anecdotal reports of a misunderstanding of the difference between the market value of a property (VPS 4.4) and the investment value or worth of it to a particular owner or occupier (VPS 4.6). A dialogue with the client may be particularly important when settling the terms of engagement in order to ensure that the purpose and basis of value (VPS 1.3.2 (f) and (g)) fully accord with the client's needs, and that only reasonable and relevant assumptions or special assumptions are made (VPS 1.3.2 (k)). Market value may coincide with its worth but a client’s unwillingness to transact at a certain level based on their own needs should not influence the assessment of market value. The assessment of worth does not require a hypothetical transaction but an assessment of the worth of an asset to an individual.
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