All forthcoming RICS independent valuations should, at the valuers discretion, include a statement highlighting Material Valuation Uncertainty in response to the coronavirus and the impact it is having on real estate markets.
The change was highlighted this morning in Schroder Real Estate's results as it said that RICS has informed it that the wording “would be applied to all independent valuations at least in the UK”.
As such the industry standard wording for the group’s independent valuation as at 31 March 2020 will include a statement highlighting "Material Valuation Uncertainty".
Ben Elder, RICS International Director for Valuation, confirmed to CoStar News: "As this is a fast moving global situation, while RICS has a role to support developing a consistent set of words, which it has, the decision whether to declare material uncertainty, and the timing of doing so including any dates, remains that of the valuer. Valuers in individual markets will assess their current situations, and it is important they do so. The current unprecedented circumstances are challenging for everyone. RICS expects its members and registered firms to act professionally and transparently at all times - this is particularly important when market conditions are changing rapidly.”
RICS rules that where material uncertainty is being identified, valuer best practice should be to explicitly report the term "material uncertainty" in all relevant cases of regulated purpose valuations under UK jurisdictions.
On its website it writes: “Members working in this area are reminded to refer to the relevant section of the Global Edition of the Red Book, including the definition of 'material uncertainty' as explicitly different from general market uncertainty. It is also incumbent on members undertaking valuations for this purpose to keep fully up to date of the implications under FCA rules.”
On its website at present RICS says in response to Covid-19 if the clause is added the following should be applied: "If the RICS Regulated Member has concluded there is material uncertainty, it is suggested that the following form of words can be used:
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."
In a statement on a raft of open-ended property suspensions yesterday, the FCA said the moves were in the best interests of fund investors and had been driven by the market uncertainty valuations clause: "The FCA understands that certain Standing Independent Valuers have determined that there is currently material uncertainty over the value of commercial real estate (CRE).
"In such situations, a fair and reasonable valuation of CRE funds cannot be established. As a result, some managers of open-ended CRE funds have temporarily suspended dealing in units of these funds and others are likely to follow for the same reason.
"Suspensions can be used by managers of open-ended funds, in line with their obligations under applicable regulations. In these circumstances, suspension is likely to be in the best interests of fund investors."
AREF, the Association of Real Estate Funds, also confirmed the unprecedented circumstances facing commercial real estate as a result of the COVID-19 outbreak mean valuation firms can "no longer make reliable judgements on value".
It added: "This is known as “material value uncertainty”. Valuers are still able to produce valuations and make professional judgements but with less certainty than under normal market conditions. This applies to all valuations for all types of commercial property, whether owned by property funds, companies or other types of owner.
"Under FCA rules applying to funds investing in inherently illiquid assets, such as commercial property, funds with more than 20% of their portfolio subject to material valuation uncertainty are required to suspend subscriptions and redemptions in the interests of all investors. Although these rules are not due to come into force until September 2020, existing rules would require fund managers to consider suspending funds in circumstances like the ones they are facing at the current time. Fund managers are acting promptly to protect investors and there have been a number of such suspensions with more likely to occur.
"AREF continues to work closely with the valuation community, and the Investment Association (IA) in liaising with the FCA and with other industry bodies. We will also be liaising with all our fund members to ensure information is shared appropriately to help at this difficult time."