RICS: Val­u­a­tion un­cer­tainty in the run up to Brexit

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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