RICS: Valuation uncertainty in the run up to Brexit
Following the EU Referendum held on June 23, the UK electorate has voted to invoke Article 50 of the Lisbon Treaty and exit the European Union. I think we can all agree that we are now in a period of uncertainty in relation to many of the factors that impact the property markets, but how do we reflect this in our work?
Since the result of the referendum was announced it has not been possible to gauge the effect of this decision by reference to transactions in the market place. This will take time.
In the meanwhile, how do we reflect this uncertainty and unpredictability in our work? It’s accepted that valuations are an opinion based on the facts at the time, along with knowledge of the market, but, at this point there is a heightened possibility that our opinion of value will not precisely correspond with achieved rents or completed sales as they emerge and are reported.
The RICS Valuation – Professional Standards (Red Book) Global is clear about how to act in markets susceptible to change.
Paragraph 2.6 points out that, where there is market volatility, a reduced level of certainty may be a factor in your valuation. It accepts that it’s hard to make a firm judgement when the reaction or future movement of the market is unknown, but, in this event, you are still required to make that judgement.
What you must do is ensure that the context of your conclusion is clearly thought through, then fully expressed and documented.
The section goes on to say that, when reporting, valuers must comment on any issues that are affecting the certainty of the valuation. In the event that different outcomes are possible, it’s important to discuss this with your client and agree the basis on which the valuation is required.
This may necessitate the use of special assumptions about future scenarios (if that would help address some of the uncertainty), but be sure any special assumptions are realistic, valid and relevant to your instruction – see VPS 4 3, Special Assumptions. As an alternative approach, you may consider that a sensitivity analysis would be the best approach to demonstrate the effect that different outcomes may have.
Following on from this, any special assumptions or changes in approach that have been agreed must be clearly documented in your terms of reference, report and any supporting documentation.
As the process for exiting the EU is a long one, markets may remain uncertain for a protracted period of time, in which case valuers must continue to sound a cautionary note about the potential for longer term outcome uncertainty.
At this point it’s important to give thought to wording that might be appropriate for reports in this immediate postreferendum period. A number of the larger firms, particularly those with international clients, have already devoted time and thought to this issue.
These firms caution against any immediate assertion about the extent to which the market has been disrupted until that is evidenced in the facts. As a warning to clients pending relevant evidence emerging, the use of wording in reports along the lines of the following has been suggested:
Following the EU referendum concerning the UK’s membership, a decision was taken to exit. We are now in a period of uncertainty in relation to many factors that impact the property investment and letting markets. Since the Referendum date it has not been possible to gauge the effect of this decision by reference to transactions in the market place. The probability of our opinion of value exactly coinciding with the price achieved, were there to be a sale, has reduced. We would, therefore, recommend that the valuation is kept under regular review and that specific market advice is obtained should you wish to effect a disposal.
We all need to keep a close eye on market reaction in the coming weeks and take care to value and advise clients accordingly.