It’s time to drop the material uncertainty clause for most property valuations – the market has largely adapted to covid now.
In late October 2020, I was presenting a paper at an international Zoom conference and suggesting that, even in the depths of a second wave of coronavirus across Europe, property markets – and thus valuers – had adapted to the point that reliance by valuers on the ‘material uncertainty’ disclosure is no longer appropriate. For suggesting this, a viewpoint shared by the Royal Institution of Chartered Surveyors, I was adamantly told by the moderator that I was “living in cloud cuckoo land”. His argument was that people are really struggling with government-imposed lockdowns impacting so negatively on their lives and thus a valuer cannot objectively value any underlying property assets. While this misunderstanding could be the result of my own poor exposition, I think it was more about the fear of valuers operating in markets that differ from the pre-covid environment.
Let me explain. When covid was declared a pandemic in March 2020, many professional valuation bodies around the world recognised that the complete stagnation of all property markets meant that uncertainty in valuations would be greater than normal. This is called ‘material’ or ‘abnormal’ uncertainty and relates to the degree of uncertainty that the valuation figure provided would match the hypothetical sale figure in the market at that point in time. And, in the stagnation of that period, I fully concurred that it was appropriate to make such a declaration.
But, as with any shock to the system, markets quickly adapt. While the personal loss and business failures caused by covid were and still are traumatic, the valuer has an obligation to the client to provide a professional valuation. When I started as a valuer, I remember speaking with some of my colleagues who had worked through the Second World War, when valuations were still needed and had to be provided with no market data at all. While they were very supportive of a young surveyor, they were also quite dismissive when I suggested that I didn’t have enough evidence on which to base my valuation, commenting that I “didn’t know I was alive”. A valuer cannot abdicate their professional responsibility.
The question becomes: at what point do we stop using material uncertainty? And this question has two answers: (1) at the point where there is sufficient market activity in the form of transactions and offers that the valuer has sufficient data to determine market value without material uncertainty; and (2) at the point where the valuer has adapted to a paucity of transaction data and uses all other forms of market sentiment to determine market value.
In fairness, most valuers in transparent markets such as the UK (markets where there is relatively easy access to market data) have had the luxury of reliable transaction evidence to analyse for decades, and it has only been in the deep property crashes of the eighties and noughties that they have needed to rely more heavily on other forms of market sentiment to determine value. At the same time, colleagues in more opaque countries (markets where, due to cultural restrictions or indigenous business practices, there is a lack of transactional evidence) have always used other forms of market data more readily to provide market value. This might be data that valuers from transparent markets would historically have considered less useful. But the impact of covid is that all markets stopped and all transactional comparable evidence and all market sentiment disappeared in all countries overnight; the playing field became even. Material uncertainty was a sensible requirement at that point in time.
But that was in March. By June many markets were adjusting and, in some cases, experiencing booms. Residential sales in the UK and many other countries around Europe were seeing unprecedented demand as property owners in the big cities realised that the need to be close to work was less (now that home-working had been proved a viable option) and a more provincial or rural home with more space inside and out was a possibility. That change in consumer behaviour, together with some governments giving property transfer tax holidays to kick-start the market, led to substantial market activity. So much so, that valuers should no longer rely upon any material uncertainty caveat.
Likewise in the industrial and logistic markets, both of which have experienced upturns with more retailing being completed online. Even offices and high-street retail, which have suffered so badly with fewer occupants and less footfall, have started to experience transactions again albeit at much lower prices. In other words, in those markets there is sufficient evidence in all forms to allow the valuer to value without any material uncertainty clause. The world is adapting.
In other markets, which aren’t faring so well in terms of sales activity, there has been an increase in market sentiment and other pricing signposts such that valuers now have sufficient information to interpret the market appropriately and provide valuations on a normal basis. It is only properties for which value is tightly interlinked to trading profit (those in the restaurants, leisure and tourism sectors) that professional bodies are still suggesting, quite rightly, that a material uncertainty clause should be used.
So, my residence in the clouds is much overstated. Valuers need to understand that the material uncertainty clause is not a get-out-of-jail-free card. The valuer has a duty to provide the client with their professional opinion of market value. An active market is still an active market even if it is functioning against the backdrop of a horrible pandemic. The valuer, at a professional level, must disengage from the emotive struggle caused by lockdowns and provide an objective expert opinion of value. And even in markets with a paucity of information, the valuer has to adapt their valuation heuristics to match the state of the market at that juncture. The confusion of the start of the pandemic has passed and we are no longer experiencing the same uncertainty that triggered the use of material uncertainty clauses. Not all markets are the same, and the skill of the valuer isn’t just to determine which properties need the use of a material uncertainty clause – it is more important that they understand when such a clause is not needed.