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Property Valuation – Material Uncertainty

The Professor


I think that it is fair to say the effect of the coronavirus worldwide is something that is unprecedented in our careers. I know that there are a few survivors of the “Spanish flu” of 1918/19 who are still alive but for most of us, this is beyond our own experiences of the financial and real estate markets. 

Ironically, at the beginning of January, I was asked, together with many other market players and commentators, to give a forecast for the 2020 Real Estate Market for the website Property Solvers[1].

My thesis was that after a period of three years of Brexit uncertainty, that the markets were already reacting positively to the relative certainty now that Brexit had extensively, if not completely, been exercised. Indeed, the predictions and forecasts of the other authors mirrored, to varying degrees, my own conjectures; 2020 was going to be a positive year for the property market. 

“What a difference a day makes” or rather a couple of months. Since the spread and impact of the coronavirus has subsumed the globe, our financial and real estate markets have changed beyond any recent recognition. Perhaps the only things that I said in my January article that stood the test of this short time was that “Businesses and Finance Markets do not like uncertainty” and “Move over Brexit, a new bigger uncertainty is on its way”. The second forecast could be seen to be apocryphal if I had been referring to the current pandemic but I wasn’t, I was referring to the impact of climate change which, as with all things non-Covid 19, is a challenge to wait for another day.

Valuation Uncertainty

But I digress; the point of this article is to discuss the new and unprecedented uncertainty that is impacting real estate markets worldwide and, specifically, the impact of that uncertainty on the “Market Value” of property (and other assets). 

Valuation is the process of estimating price in the market in the absence of an actual sale. The expertise of the property valuer is to take market evidence of previous similar sales, called comparables, and interpret these sale prices relative to the current market sentiment of possible or potential investors in that type of property.

You cannot value effectively with comparables alone and the adjustment of these historic sales by market sentiment is integral to the valuation process. So Market Value is an estimate of price; that is to say at what figure, in today’s market, will the seller “sell” and the buyer “buy”. 

Even in a market with lots of transactional evidence and lots of “chatter” about investment sentiment, the estimated figure will have a degree of uncertainty. The Royal Institution of Chartered Surveyors (RICS) states within its Professional Standards:

“… a valuation is not a fact. Like all opinions, the degree of subjectivity involved will inevitably vary from case to case, as will the degree of ‘certainty’ – for example, the probability that the valuer’s opinion of market value would exactly coincide with the price achieved were there an actual sale at the valuation date, even if all the circumstances envisaged by the market value definition and the valuation assumptions were identical to the circumstances of an actual sale”  – VPS 3 Valuation Reports, RICS Valuation – Global Standards ( The Red Book – when applied in tandem with the UK supplement) 

To paraphrase Benjamin Franklin, nothing is certain except death and taxation. 

Material Uncertainty

All valuations in normal markets have a degree of uncertainty. So the question is how do you deal with the massive uncertainty caused by the coronavirus? 

The RICS, like many other professional bodies around the world, recognises that there will be times when the uncertainty in the market is greater than normal. This is called MATERIAL UNCERTAINTY and, again to quote the RICS, it is where the addition of the word ‘material’ means that the degree of uncertainty in a valuation falls outside any parameters that might normally be expected and accepted.

Now, within the academic and professional literature there is a mire of different definitions for uncertainty and material uncertainty, different terminology, incompatible definitions and a plethora of myopic disciplinary perspectives. 

That discussion is outwith the ambit of this article as it is clear that, regardless of definition, that the world is experiencing unprecedented levels of uncertainty due to this ‘significant unforeseen event’. 

So, in mid-March of this year, the RICS issued advice to its members, and in particular to valuers, that it may be warranted to declare within their valuation reports that there is material uncertainty. The Red books clearly states:

“… in some cases there may be a greater degree of uncertainty concerning the valuation figure reported than usual, and where that uncertainty is material – which should be expressly signalled in the report – further proportionate commentary must be added in order to ensure that the report does not create a false impression. Valuers should not treat such a statement expressing less confidence in a valuation than usual as an admission of weakness – it is not a reflection on their professional skill or judgment, but a matter entirely proper for disclosure.” VPS 3 Valuation Reports, RICS Valuation – Global Standards

In my opinion, it would be odd for a valuer NOT to declare material uncertainty at this current time albeit, the decision to do so, or not, still lies with the valuer. Indeed, the RICS has recently issued a statement that says:

““RICS Regulated Members and firms may therefore be considering whether a material uncertainty declaration is now appropriate using the Red Book Process. If material uncertainty is declared, this should be explicitly stated, and RICS has suggested today, a form of wording that can be used.” RICS Press Release, 19thMarch 2020.

This advice was implemented via a RICS Valuation Notification on their website called “COVID-19 (Coronavirus)”. Such notifications are rarely used and its existence reiterates the importance that the RICS attach to the need to declare material uncertainty. All RICS valuers will have already read, and digested, its content in its entirety but I have repeated the salient wording that the RICS suggests should now be included in all valuation reports where there is material uncertainty

The Professor

About Nick French

Nick French

Nick is an experience teacher of valuation for both the profession and universities. Trading as "Real Estate Valuation Theurgy", Nick continues to write papers, presents conference papers and undertakes in-house training for the real estate profession at home and abroad.

Articles by Nick French

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