Material Valuation Uncertainty

Material Valuation Uncertainty

Updates from the Material Uncertainty Forum

Material Uncertainty Clause - Member Update

18th January 2021

Through the establishment of the SCSI Material Uncertainty Forum, we keep under regular review the impact that COVID is having on the property market and transactional levels.  At its most recent SCSI Material Uncertainty Forum meeting, a recommendation that the Clause may no longer be appropriate for the following asset classes was made and instead it may be more appropriate to use Market Conditions clause.

Date of guidance issued Asset Class
      10th November 2020 Development Land
20th October 2020 Offices
13th October 2020 Industrial / Logistics
13th October 2020 Institutional grade primary healthcare facilities
22nd September 2020 PRS/ Multi-Family (excluding student accommodation)
22nd September 2020 Residential
22nd September 2020 Social Housing on long term leases to government, housing bodies or local authorities
18th January 2021 Agricultural Land
18th January 2021 Retail

Individual markets may react differently to the COVID-19 outbreak, and Registered Valuers will consider the circumstances in which a material uncertainty declaration is appropriate. Registered Valuers should be fully aware of VPGA 10 and VPS 3 within the RICS Red Book Global Standards in the decision-making process. Where material uncertainty is declared, the valuer is reminded that this should be explicitly stated.

Whether material uncertainty exists remains the decision of the Valuer. They should include a sound rationale to explain the decision-making process and this should be recorded for future reference.

The Forum will continue to meet frequently on this topic and monitor the level of transactions occurring in our market. For more information on Material Uncertainty and Market Conditions Clause, please click here. The SCSI will provide further updates as necessary in future member ezines.

Forum Update Detail

Update further to the forum of 18th January 2021: the latest forum output continues to recommend that material valuation uncertainty declarations are not generally required, subject to the terms set out below and in accordance with the criteria on the right of this page. Note that this recommendation continues to reflect that some assets valued with reference to trading potential remain subject to use of such a declaration and that discretion in all cases remains with the valuer. These recommendations reflect no change from the output of 3 November 2020.

Please see the RICS practice alert for recommended phrasing for reporting. This phrasing includes reference to ‘the potential for market conditions to move rapidly in response to changes in the control or future spread of COVID-19’ and we therefore ‘highlight the importance of the valuation date.’ Given the timing of this update and the continuation of end of year valuation reporting, appropriate supporting commentary considering current circumstances and the valuation date may be appropriate. This is detailed further in the RICS practice alert supplement.

The outputs of the SCSI/RICS Material Valuation Uncertainty Forum are based on a high-level overview of market conditions, and necessarily cannot consider factors applying to specific assets, regions or markets. SCSI/RICS reminds regulated members that the decision whether to insert, maintain or remove a declaration that a valuation is materially uncertain is that of the valuer, taking into account the specific attributes and performance of the individual asset and its market. Regulated members should consider on a case-by-case basis whether it would be appropriate to include commentary that a valuation is materially uncertain. They should have a sound rationale for the decision they reach upon such consideration and should maintain a record of that rationale for future reference. The views of the SCSI/RICS Material Valuation Uncertainty Forum  are not a substitute for that process.

Neither SCSI/RICS or any member of the Material Valuation Uncertainty Forum accepts any responsibility, duty or liability to any party in respect of the contents of the Forum output. Any such responsibility, duty or liability is expressly disclaimed. SCSI/RICS and the MUC Forum shall therefore not be held accountable, either collectively or individually, for any losses relating to or arising out of a valuer’s decision to insert, maintain or remove any declaration of material valuation uncertainty.

Forum Output

The SCSI/RICS Material Valuation Uncertainty Forum  meets regularly to discuss material valuation uncertainty in Ireland real estate markets. The forum assesses this against the published criteria. The forum recommends that material valuation uncertainty declarations may not be required in the circumstances suggested below, subject to valuer discretion for individual cases. Supporting commentary on market conditions is suggested, even where material valuation uncertainty is not being declared.

The application of a material uncertainty declaration is intended to consider sharp, unpredicted shocks to a market leading to a temporary suspension of market activity.

Red Book VPGA 10, (Matters that may give rise to material valuation uncertainty) refers to ‘relatively unique’ market factors and, for example, ‘an unprecedented set of circumstances on which to base a judgment’. This may be of particular note when considering the impact of later phases or “waves” of COVID-19, compared to the initial outbreak, including circumstances such as the Level 5 ‘lockdowns’ of Society and certain businesses.

It is now some months since the onset of COVID-19 and the declaration by the World Health Organisation (WHO) of a global pandemic on 11 March 2020 and the recommendation by the SCSI/RICS of the use of the Material Uncertainty Clause on 17 March 2020. The Material Valuation Uncertainty  Forum are of the opinion that there is sufficient evidence of market activity to warrant recommending this general lifting, subject to the following:

Although it has been recommended that material valuation uncertainty should no longer apply to most sectors and assets, the decision on whether or not to apply the material valuation uncertainty declaration in any sector, should be based on individual valuer judgement and in each case will depend upon the circumstances of the valuation. For example, many of the assets valued with reference to trading potential referred to above have been the subject of enforced closure for a prolonged period and although the vast majority of businesses have now been allowed to re-open, not all have done so and in many cases it is too early to properly assess the trading potential of these assets with a sufficient degree of certainty. In these circumstances it is appropriate for the valuer to continue to apply a material uncertainty declaration until such time as the impact on the trading potential of the asset and sector can be seen more clearly.

Whilst transaction volumes in many sectors remain very low, there are other indicators which can inform the valuer as to market sentiment and pricing such as, for example: rent collection statistics, landlord and tenant negotiations on lease variations to turnover rents, rent reductions and rent holidays and CVA outcomes. This is not an exhaustive list – however these examples may be adequate to provide valuers with sufficient confidence in many cases, but with some assets it will still be appropriate to apply a material valuation uncertainty declaration.

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