Partner Article

New standards for valuers

The rise in property values in London is worrying – equally so is the languishing of values in the regions.

Investment property values in London have forged ahead in 2013 with a reported £40bn of trading, an increase of over 30% on 2012 (David Erwin, Cushman & Wakefield – Property Week, Jan 10, 2014).

My forecast is that Newcastle, as a key regional city, will fight back this year. With a shortage of quality city centre and large high-quality industrial sheds in the wider region, incentives will fall away and some rental growth is anticipated.

What does this do to valuations? In the recession we saw how property prices had been fuelled by readily available finance, not growth in occupier demand, and when the merry-go-round stopped, prices fell, negative equity occurred and finance stopped. It is only coming back very cautiously.

Valuation of property is based on comparable sales of similar property in the neighbourhood. Rising prices were at the heart of fuelling further lending either for purchases or for re-mortgaging of increased asset values. This ever-rising spiral of prices went unchecked, until the bubble burst.

To improve the performance of chartered surveyor valuers, the Royal Institution of Chartered Surveyors (RICS) has established the Valuer Registration scheme to ensure that high standards are maintained. It has revised the Red Book, the RICS Valuations – Professional Standards, which came into effect on January 6. These revisions are a continuous process of improvement to meet the increasingly exacting demands on valuation globally and in the UK.

The method of valuation is well documented and at the core of the quality of advice given by chartered surveyors. A dichotomy arises when evidence of transactions on which comparisons are based begin to conflict with sensible commercial investment decisions in property.

This was addressed at the end of last year by Andy Haldane, executive director of financial stability at the Bank of England, who is reported to have said: “Valuation lies at the heart of the pro-cyclical spirals we have seen historically in the commercial property market. Peaky valuations can give the appearance of safety margins for lenders, causing them to loosen their grip on credit conditions, driving valuations higher still.”

He compares the valuation process used in Germany, where instead of taking a valuation of property at one point in time if it were to be sold in the open market, valuations reflect “medium term or sustainable valuations” through a cycle. “Any ramping-up of property prices above their sustainable value would not then automatically give the appearance of safety and thereby encourage looser credit conditions.”

This is a fundamental shift in the way values are carried out and the definitions by which the valuers are obliged to work. Importantly, the generality of the market place will need to be educated in the change and its consequences. Not least of this will be the market adjustment to the change and its impact on values, mortgage debt and prices that will result.

This was posted in Bdaily's Members' News section by JK Property Consultants .