Residential Property Valuation Practice in a Thin Market

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					Real Estate
Initiative

Residential Property:
Valuation Practice in a Thin Market
       Residential Property:
Valuation Practice in a Thin Market


                   Prepared by the
   Real Estate Initiative at the University of Ulster




                   Research Team

              Professor Alastair Adair
                Professor Jim Berry
                Ms Veronica Farrell
                  Dr Martin Haran
               Professor Greg Lloyd
             Professor Stanley McGreal




                      June 2009
Acknowledgements
The Real Estate Initiative at the University of Ulster (REI) research team would like to thank all those who
participated in the various stages of this study for their valuable contributions. The level of interest, co-
operation and commitment across the three stakeholder groupings emphasises the importance of the topic
as well as the support to further develop the research, improve market transparency and the efficiency of
the valuation process.
Residential Property:
Valuation Practice in a Thin Market


CONTENTS

      ACKNOWLEDGEMENTS

1.0   Introduction                            1

2.0   Research Context                        2

3.0   Research Methodology                    3

4.0   The Valuation Challenge                 4

5.0   Discussion Fora                         7

6.0   Research Findings                       9

7.0   Conclusions                             13

8.0   Research Outcomes and Recommendations   15

9.0   References                              17
1.0 Introduction




This report has been compiled by the                  Section 2 provides contextual background
Real Estate Initiative (REI) to promote               to the research in terms of the correction in
understanding of the valuation process across         the housing market in Northern Ireland and
multi-stake holder disciplines within the             the transformation in the financial landscape
residential property sector. The low volume of        as a result of the ongoing crisis. Section
residential sales yielding hard market evidence       3 details the research framework and the
has meant that valuers have been operating            methodology employed across the various
in what is effectively an information vacuum.         stages of the study. The valuation challenge
This creates an environment with conflicting          and the problems presented by a thin market
signals regarding the value of both new and           are explored in Section 4. Section 5 outlines
resale residential property for mortgage              the key findings from the research. These are
lending. The low volume of transaction                presented in a thematic basis and reflect the
evidence is very often compounded by                  key issues to emerge over the various stages of
deep discounting, the widespread use of               the study. Conclusions to the research study
incentives within the new build sector, and           are presented in Section 6. A series of research
the unrealistically high expectations within          outcome proposals are set out in Section
the resale sector. All of these factors have          7. Whilst the research paper is an outcome
come together to add to the uncertainty of            in itself, the recommendations have been
valuations in the current market.                     developed to promote a pro-active response
                                                      to resolving a number of the themes identified
                                                      over the course of the study.


                                                  1
2.0 Research Context




The research is set within a framework of               constraints on credit supply means that the
falling house prices in Northern Ireland over a         levels of finance at their disposal have been
period of 21 months which in tandem with the            dramatically reduced. As a result, mortgage
constrained availability of mortgage finance            providers have adopted a more conservative
and the reduced loan-to-value ratios following          approach to their lending practices.
the financial crisis, has seen a dramatic decline
in the volume of transactions for both new              The objective of the research is to enhance
build and resale property.                              cross disciplinary understanding of the valu-
                                                        ation process, the valuation framework and
The impasse in market activity has prompted             the criteria applied in measuring risk and
developers to dramatically discount prop-               uncertainty across different stages of the
erties or to enhance the overall specification of       property cycle in these specific conditions.
their product in an attempt to attract potential        This is achieved through the development
purchasers. In many instances new build                 of a series of research questions which seek
property coming to the market is relatively             to reflect the views and opinions of the
superior to existing stock in terms of the              relevant stakeholder groupings. These include
finished specification. It would seem, however,         residential property developers, mortgage
that valuations do not always reflect this,             providers and valuers. Section 3 details the
while in cases where developers have offered            research methodology employed and outlines
a discount this has been taken as a caveat for          the research framework.
further discounting on the part of the valuer.
From the mortgage providers’ perspective,

                                                    2
3.0 Research Methodology




The research methodology was designed to                   Stage 1                 Stage 2                     Stage 3
incorporate flexibility and to ensure that key         Developer Interviews    Lender Interviews           Valuer Focus Group
themes to emerge over the various stages
of the research could be explored in depth
                                                                                   Stage 4
and across the key stakeholder groupings
(Figure 1). Stages 1 - 4 acted as the ‘building                                 Discussion Forum

blocks’ to the knowledge base, with the views
and experiences of stakeholders at each                                            Stage 5
stage fed through and expanded upon in                                        Results Dissemination
subsequent phases of the investigation. The
methodology enhanced the understanding of
                                                                                                      Vertical Integration of
the key issues and enabled the research team                                                          Knowledge
                                                                                                      Horizontal Integration of
to explore differences in the interpretation of                                                       Knowledge

the dominant themes across the stakeholder
groupings. Stage 5 which involves the pub-            Figure 1 Research Framework
lication of results is intended to improve
understanding of the mortgage valuation               included nine developers from the CEF Private
process across the development and financial          House Builders’ Committee, eleven valuers
sectors and provide a sense of appreciation of        representing both the RICS and the IAVI, and
the differences in valuation interpretation.          eight representatives of financial institutions
                                                      which are responsible for more than 60% of
Twenty-eight stakeholders contributed over            the residential mortgage lending in Northern
the various stages of the research. These             Ireland.
                                                  3
4.0 The Valuation Challenge




Confidence in the housing market in                  growing consensus that house prices in the
Northern Ireland has been significantly              province are closer to ‘bottoming out’ than in
eroded. Following a period of unsustainable          other parts of the UK. The University of Ulster
growth, house prices in Northern Ireland have        House Price Index shows that the rate of house
undergone the steepest correction of any UK          price decline in Northern Ireland narrowed
region. The University of Ulster House Price         in Q.1 2009 and is expected to flatten out by
Index (produced in partnership with the Bank         the end of the year. Indeed in the new build
of Ireland and the Housing Executive) shows          sector, when taking into account the levels of
that the average house price in Northern             deep discounting that have taken place, it is
Ireland has fallen 37% from the peak in Q.3          feasible that new build properties have already
2007 to the end of Q.1 2009. Figures compiled        found their base.
by the Nationwide Building Society confirm
a correction of similar magnitude. According         In the midst of this uncertainty, it is important
to the Nationwide figures, house prices in           to emphasise that the housing market in
Northern Ireland have fallen 39.2% from a            Northern Ireland is comparatively immature. In
peak in Q.3 2007 to the end of Q.1 2009. By          essence this is likely to be the first down phase
contrast over the same period house prices           of a property cycle that many homeowners will
across the whole of the UK have fallen 18.7%         have experienced. Fear of the unknown has
(Nationwide, 2009).                                  certainly heightened anxiety, and along with
                                                     the systemic shift in the financial landscape,
Given the depth of correction that has already       has added to the uncertainty of home owners
taken place in Northern Ireland there is             as well as prospective purchasers. Whilst

                                                 4
latent demand for property hasn’t gone away,          mortgage valuation process. Valuations for
prospective purchasers require reassurance            secured lending on residential property are
and it follows that their confidence in the           provided to lenders to assist in the assessment
market needs to be restored.                          of loans secured on the property (RICS, 2009).
                                                      The RICS mortgage valuation specification
The role of the valuer has been identified            provides clear instruction to valuers on their
within the property development community             role, the terms of engagement, the valuer
as being crucial in reflecting market                 inspection and the valuation report. The
confidence and enhancing transaction                  specification which has been jointly prepared
levels. Whilst it must be argued that valuer’s        with the Council of Mortgage Lenders (CML)
respond to, rather than, dictate market               applies to the valuation of residential property
trends, valuations are a key component of the         for mortgage purposes on behalf of building
mortgage lending process. Access to finance           societies, banks and other lenders. RICS
is a major determinant of market activity,            members should comply with the specification
consequently, valuers are considered to               unless varied by the lender’s standard terms
occupy an influential position in terms of the        of engagement and standard report form.
overall lending decision. In scenarios where          The standard report form is reference to the
mortgage valuations do not stack up relative          individual lenders valuation proforma but
to the agreed sale price, lending institutions        perhaps the more important caveat is the
are unlikely to approve the necessary funding         lender’s ‘terms of engagement’ which in effect
that would enable the prospective purchaser           enables the client (lender) to issue instructions
to complete the transaction and as result the         outside of the RICS specification. In the
sale is unlikely to proceed.                          course of this study it emerged that client
                                                      instruction would take precedence over the
There is an acceptance across the stakeholder         RICS specification.
groupings that the complexity of the valuation
process itself is further accentuated in a thin       Client instruction is the subject of ongoing
market. Developers and mortgage providers             debate across the stakeholder groupings,
accept that valuers do not have the same              most notably in terms of the undue pressure
volume of comparables as a basis for valuation;       that some instructions place on the valuation
indeed, in some instances developers, have            profession. In essence, however, what
employed pro-active measures to assist                client instruction brings about is variance
valuers and improve market transparency by            in valuation practice.      Many within the
providing comparable transactional evidence.          stakeholder groupings were unaware of
The frustrating aspects of the valuation              the client instruction caveat, assuming that
process (in the current market), from the             instructions would be consistent across lenders
developer perspective, are the inconsistencies        with valuations undertaken by RICS members
in valuations and the apparent failure to             automatically conforming to RICS specification.
take account of the enhanced specification            Instead, it has been suggested from within the
of new build properties relative to existing          lending profession that valuation instructions
stock. In the current market, developers              reflect the circumstances of a given lender at a
have significantly enhanced the specification         point in time based on their financial strength,
of their product in an attempt to attract             market projections, willingness to lend and
prospective purchasers but in a number                attitude to risk.
of cases valuers have failed to factor the
increased specification into the valuation.           In the course of this research study it
                                                      transpired that a small number of mortgage
In some respects developer frustration                providers operating in the Northern Ireland
over inconsistencies in valuation practice is         market have been instructing valuers to value
born out of a lack of understanding of the            new build property on the same basis as


                                                  5
resale stock. Traditionally a premium has been
applied to new build property. In Northern
Ireland the figures compiled by University of
Ulster/NHBC show that in the five year period
2001-2006 the premium for new build ranged
from 0.3% in 2005, to as much as 9% in 2001
and 2006. Since 2007, the premium for new
build property has eroded, fundamentally as
a result of the deep discounting in the new
build sector.




                                                 6
5.0 Discussion Fora




Discussion fora with members of the RICS                                  financial institutions. In a recessionary econ-
and IAVI indicated that predominantly                                     omic environment, certain financial institutions
valuers would take into account, or factor                                are particularly risk averse and seem to be
in, a new build premium to reflect the lower                              basing lending decisions on worst case
maintenance costs or the specification of                                 scenario outcomes - in terms of residential
finish. In scenarios, however, where valuation                            mortgage lending this reflects the possibility
instructions on the part of the client stipulated                         of lender default.       The argument being
new build was to be valued on the same basis                              put forward (by a minority) of the lending
as resale property it would be difficult for                              community is that in a default scenario the
the valuer to factor in the premium. Whilst                               lender would be required to take what may
accepting that this was likely to frustrate                               have been a new build property when it was
developers, valuers point out that they are                               originally purchased back to the market – at
acting under direct client instruction and have                           which point it would in essence be ‘resale
no desire to apply unnecessary downward                                   stock’.
pressure on valuations1.
                                                                          Given the rise in repossession figures the
The rationale for instructing new build stock                             cautionary approach adopted by some
to be valued on the same basis as resale stock                            lenders is understandable. Figures compiled
reflects the reduced appetite for risk among                              by the Council of Mortgage Lenders (CML)
                                                                          show that there were 12,800 repossessions
                                                                          by first charge mortgage lenders in the UK in
1
  Resale stock can in certain instances also command a valuation
premium due to factors such as the unique design of the property or       Q.1 2009, a rise of 50% on the same period last
the prestige of the location etc.

                                                                      7
year. The number of loans in arrears of more          defaults on the mortgage and the lender
than 2.5% of the mortgage balance also rose,          is forced to bring the property to market
from 182,600 in Q.4 2008 to 205,300 in Q.1            as a result, for all intended purposes this
2009 (CML, 2009). In spite of the rise, the CML       would be classified as a distressed/fire sale.
acknowledge that the levels of repossessions is       Distressed properties tend to be significantly
not likely to reach the 75,000 it had projected       discounted to encourage a quick sale; they
for 2009 and as a consequence they are likely         do not go through the same marketing
to revise their forecast downwards. According         process in terms of promotion or duration as
to the CML figures repossessions continue to          conventional resale property and therefore
account for less than 0.1% of the outstanding         cannot reasonably be taken as the basis for
mortgages in the UK.                                  establishing open market value. In a thin
                                                      market, and with transactional evidence at
Risk adversity cannot, however, justify the           a premium, anecdotal evidence presented
argument for valuing new build property               across the various stages of this investigation
on a resale basis. First, the argument being          would suggest that distressed sales have been
put forward relates to borrower default risk –        used as the basis for valuation. This along
which should be treated as a separate issue           with other key findings from the research is
to property valuation. Second, if a purchaser         presented in Section 5.




                                                  8
6.0 Research Findings




A number of themes emerged over the
course of the research which merit deeper             Distressed Sales as the
exploration. The phased approach to the
research ensured that as the themes transpired        Basis for Open Market
they could be iteratively incorporated into the
study and explored across the stakeholder             Value
groupings. The approach promoted a cross
stakeholder understanding of the complexities         In the residential property market transactional
of valuation practice in a thin market and            evidence is predominantly used as the basis
ensured that the findings from the research           of establishing valuations and in the main,
could be presented in an objective manner.            valuations are undertaken in compliance
                                                      with RICS specification. However, in a thin
Dominant themes to emerge over the course             market, transactional evidence is limited
of the study included the use of distressed           and, as a result, valuers have been working in
sales as a basis for valuation, valuation and         what fundamentally could be described as an
interpretation of developer incentives, as well       information vacuum. Over the course of this
as, the growing trend of appointing valuers           investigation scenarios have been identified
from outside their geographic area. These             were valuers in the relative absence of open
key themes as well as their implications for          market transactional evidence have utilised
the valuation process are considered in the           distressed/fire sales as their basis for valuation.
remainder of section 5.
                                                      Distressed sales, if taken as a base for
                                                      establishing open market value, will invariably
                                                  9
place downward pressure on valuations. A
small number of valuers made the case that               Valuation and
distressed sales are the de facto market at
present. It is their view that the drop off in           Interpretation of
transactional activity has meant that sales at
present could all be described as distressed –           Developer Incentives
if you take what constitutes a ‘distressed sale’
to its extreme. They argue that “developers              Developer incentives have become a feature of
have been offering significant discounts on              the market in Northern Ireland in response to
their properties to try and enhance cash flow            the downturn in the residential housing sector.
and meet their lending obligations – does this           The RICS provides valuers with guidance
not constitute a distressed sale?”. This minority        on the interpretation and determination of
viewpoint amongst the valuation profession               developer incentives and how these should
(and it must be stressed that it is a minority           be taken into consideration when establishing
of valuers) would argue that anyone selling              an open market value. Throughout the
property at present must be in a position                discussions it became apparent that there is a
of distress – otherwise why would anyone                 relative lack of understanding across the three
sell given the overriding market conditions.             stakeholder groups about the interpretation
What this viewpoint fails to take into account           and valuation of developer incentives and
is natural dissolution and the fact that                 how this can impact upon open market value.
irrespective of market conditions some home
owners are committed to sell.                            Previous research undertaken by the Real
                                                         Estate Initiative (REI) highlighted a number
The RICS Valuation Standards (Red Book)                  of incentive mechanisms that have been
defines market value as:                                 introduced by developers across the UK
                                                         and Ireland in an attempt to generate
‘The estimated amount for which a                        market activity. These incentives have been
                                                         introduced in response to the correction in the
property should exchange, on the date                    market, as well as the transformation in the
of valuation, between a willing buyer,                   financial landscape, and predominantly can be
and a willing seller, in an arm’s length                 categorised into; developer discounts, equity
transaction, after proper marketing                      sharing arrangements and loan provisions.
wherein the parties had each acted                       Valuer knowledge and interpretation of
knowledgably, prudently and without                      developer incentives is continuing to evolve.
compulsion’.                                             This investigation not only served to enhance
                                                         cross–stakeholder understanding of the
Distressed sales do not constitute a ‘willing            complexities associated with this subject,
buyer/willing seller scenario’. Prudent valuers          but also provided a sense of appreciation of
will of course refer to, or acknowledge, a               the differing perspectives. In terms of valuer
distressed sale in the valuation report, and for         interpretation, the developer discount model
the purposes of their Professional Indemnity             is the cleanest cut. If for example, a property
insurance would be encouraged to do so –                 listed at £150K is subsequently discounted
distressed sales should not however be used              by the developer to £125K to facilitate
as the basis for market value.                           completion, the developer might argue that
                                                         the property is still worth £150K, and as a
                                                         result of the discount given the prospective
                                                         purchaser is automatically acquiring equity
                                                         of £25K. Given that loan to value ratios have
                                                         been reduced from 100% to between 80-
                                                         85% by a number of mortgage providers, the

                                                    10
reduction should in essence mean that the                Developer equity sharing models result in the
prospective purchaser is in a better position            developer retaining a long-term ownership
to comply with the reduction in loan-to-value            interest in the property, usually in the form
ratios. In the example provided, based on a              of a second charge on the property, with the
loan-to-value ratio of 80%, the prospective              prospective purchaser acquiring a percentage
purchaser would in essence only be required              of the property (usually between 50% and
to provide £5K into the deal upfront in order            90%).
to complete.
                                                         For valuation purposes the complexity of
Whilst this is the developer rationale, the              equity sharing arrangements centres on the
interpretation of mortgage providers of such             repayment structure of the developer equity. If,
discounts is likely to be distinctly different.          for example, a developer retains a 25% equity
There is a strong likelihood that the property           share in a property listed at £150K, then the
for mortgage purposes would be valued at                 prospective purchaser will essentially acquire
£125K. The basis of the lower valuation is               a 75% (£112.5K) share in the property. If the
that if in truth the open market value of the            repayment of the developer’s equity share is
property was 150K, then that would be the                not a set figure, and is instead subject to 25%
value at which the transaction would be                  of the value of the property at a given point in
completed. Given that the agreed sales price             time, for example 10 years, or on the disposal
is £125K, then it is likely to be this, and not          of the property – then in essence there is no
the list price that forms the basis of valuation.        guarantee that the developer will actually
In terms of the loan-to-value ratio therefore,           realise that equity stake. If the equity model
if the mortgage provider was offering loan-              has been structured in this manner then the
to-value ratios of 80%, then in the scenario             recovery of the equity stake on the part of the
outlined, it would be 80% of £125K, meaning              developer is subject to a future rising market.
that the prospective purchaser would still be            In terms of the valuation equation, the role
required to put £25K into the deal in order to           of the valuer is to establish the open market
facilitate purchase.                                     value of the property at a given point in time
                                                         – their role is not to project future market
Therefore the valuer has an important role to            trends. In scenarios where the recovery of the
play in interpreting the appropriate discount            ‘equity stake’ held by the developer is subject
model and in establishing true market value.             to a rising market it is feasible that this could
Distinctions must be made between what                   be detracted from the valuation. This of
constitutes a genuine discount on the part               course could be overcome if the developer
of the developer in order to complete a one-             was entitled to the set amount either at a
off sale, and scenarios where the ‘discounted            point in time or on disposal.
price’ is in fact the norm being achieved for
that property type.                                      A further mechanism introduced by
                                                         developers to overcome the transformation
The equity sharing model is not as well                  in financial market conditions and offset
developed in Northern Ireland as in other                the shortfall between contract price and
regions in the UK but is becoming more                   current market value has been the provision
commonplace as developers explore new                    of loan facilities. These generally have been
avenues to overcome the restrictions                     secured against the property in the form of a
in lending criteria that has hampered                    second charge and, unlike many of the equity
transactional activity.  The co-ownership                sharing models, are repayable irrespective of
model is the most established shared equity              changes in property market conditions. There
scheme in Northern Ireland, but the change               is an argument amongst the development
in market conditions has seen a number of                community that loans of this nature are not an
developers introduce shared equity or shared             incentive as such and therefore should not be
ownership schemes to improve affordability.              subtracted from the value of the property. The
                                                    11
counter argument to this is that many of these
loans are being provided on favourable terms               Appointment of
in order to attract prospective purchasers –
some have even been provided on an interest-               Valuers from Outside
free basis which raises issues about the cost of
capital and as a result the valuation is likely to         their Geographic Area
reflect this.
                                                           Evidence has emerged through discussions
Other forms of developer incentives, including             with the key stakeholder groupings that
the payment of stamp duty, legal fees, the                 increasingly    financial   institutions    are
payment of mortgages for a set period, or                  employing valuers from outside their
contributions to the purchaser deposit will                geographic area. This is contrary to RICS
also be discounted from the valuation of                   valuation standards which advocate the
the property. Developers have put forward                  appointment of valuers who have ‘knowledge
an argument that contributions to the                      and experience in the valuation of the
purchaser deposit, particularly in the case                residential property in the particular locality’
of first time buyers is not distinctly different           (RICS, 2009).
from a purchaser obtaining their deposit
from a parent/relative. The distinction from               In the main, valuers operating on behalf on
the financier, and consequently the valuer                 mortgage lenders in Northern Ireland are
interpretation of developer contributions is               appointed from a pool of surveyors, with the
that the developer has a vested interest in the            mortgage provider having limited input into
transaction; therefore any contribution on the             the appointment. Recent experiences from
part of the developer in this manner is at odds            across the stakeholder groupings suggest,
with the “arms length transaction” concept laid            however, that a small number of mortgage
down in the RICS valuation Standards. Valuer               providers are insisting on appointing valuers
interpretation of developer incentives must                from outside their immediate geographic area
take into account the impact of the incentive              of expertise. From the lender’s perspective,
on the value of the property and the extent to             the rational for appointing valuers outside
which the price would be significantly lower if            their geographic area is to achieve an
the incentive were not available. If the value             objective valuation.
of the property was to fall as a result of the
developer incentives being removed then                    Whilst there is an acceptance that valuers are
it is likely that this will be reflected in the            professional and competent in the manner
valuation.                                                 in which they undertake valuations, the
                                                           practice of appointing valuers from outside
The CML ‘Disclosure of Incentives Form’ is a               their geographic area has raised a number
welcome addition to the valuation framework                of concerns. There is consensus that such
in that it assists valuers to quantify incentives.         appointments only add to the complexity
It is clear, however, that inconsistencies exist in        of the valuation process by removing the
both the application and interpretation of the             intricate local market knowledge required to
‘Disclosure of Incentives Form’. The objective             make an informed decision. This is particularly
of the form was to improve communication                   pertinent in a thin market were deficiencies in
and transparency across the valuation                      transactional evidence reinforce the need for
process but in certain instances valuers have              an established network of data sources upon
revealed that they did not always have access              which to draw, as well as a comprehensive
to the ‘Disclosure of Incentives’ form prior to            understanding of local market trends. There is
undertaking the valuation.                                 a feeling within the development community
                                                           that in the absence of local market knowledge
                                                           the valuer is more likely to err on the side of
                                                           caution as opposed to an objective valuation.

                                                      12
7.0 Conclusions




Client instructions for the purposes of                  The valuation profession is under pressure in
residential mortgage purposes are, in the                terms of its Professional Indemnity insurance
main, undertaken in accordance with RICS                 (PI) to exercise prudence, particularly given
valuation standards (Red Book). Over the                 the context of the market correction in
course of this investigation it has become               Northern Ireland and the fact that there has
evident that a number of mortgage                        been an increase in the number of negligence
providers are instructing valuers outside                cases being taken against valuers in respect
RICS specifications. Whilst client instructions          of valuations undertaken at the height of
take precedence and lenders are entitled                 the boom. Therefore, it is conceivable that
to instruct valuers in accordance with their             less experienced valuers in particular may
corporate viewpoint, it is the inconsistencies in        feel compelled to err on the side of caution.
instruction across the lending institutions that
further contribute to uncertainty and variance           The valuation profession is, however, a reg-
in valuation practice. Significantly, within the         ulated body. Membership of the RICS and
context of the Northern Ireland residential              IAVI ensures that valuers are competent
market, it transpires that the inconsistencies           within their chosen field as well as adhering
in client instruction exist at both inter- and           to a professional code of conduct. Valuers,
intra- regional scales. Whilst the variance in           therefore, should be allowed to do the job
instruction across financial institutions was            for which they are qualified in an objective
anticipated, it appears that client instructions         manner free from external influences.
vary within institutions, most notably between
Belfast based and regional branches.

                                                    13
Over the course of this research study evi-                             source the best comparable evidence available
dence has emerged to suggest that there is                              and to ensure that valuations accurately
a tendency for certain mortgage providers                               reflect market trends. The increase in market
to instruct valuers to exercise conservatism                            activity has also given rise to a view that the
in their approach, or to request justification                          complications of valuation practice in a thin
for what they deem to be overly optimistic                              market are behind us and that the increased
valuations. This serves to detract from the                             momentum will ultimately resolve the issue.
objectivity of the valuation process and,                               Whilst there is an element of credibility in
in many ways, can serve to undermine the                                this viewpoint, there is also a pertinent need
credibility of the valuation profession in                              to acknowledge deficiencies in the current
terms of its perceived competence and                                   valuation system, to resolve the underlying
professionalism.                                                        issues and to put in place procedures/
                                                                        mechanisms that ensure the implications of a
A consensus exists within the valuation                                 significant decline in transactional activity can
profession that valuers are not given due                               be more effectively and competently managed
recognition for their expertise. Downward                               in the future.
pressure on the fee that the valuer receives for
a mortgage valuation has meant that valuers                             To ignore the issues identified in this research
are being forced to deliver quantity rather than                        in the hope that similar market conditions to
quality in terms of the comprehensiveness                               those experienced over the last 18 months
and depth of detail provided in the valuation                           will not transpire in future market cycles
report.                                                                 would be imprudent and myopic. A resolve
                                                                        exists amongst the stakeholder groupings
Whilst a lending institution may charge a                               in Northern Ireland to work together to
prospective purchaser in the region of £5001                            improve transparency and communication
for a survey valuation in some cases the                                channels across the valuation process. This
valuer may receive in the region of £150 for                            resolve must be acted upon to address the key
carrying out a full survey and as little as £30                         issues identified, the benefits to be derived
for a drive-by valuation. If travel costs, for                          from greater collaboration and improved
example, have to be factored into these fees                            transparency would be realised across the
then there is little scope for a valuer to provide                      stakeholder groupings. Section 7 outlines a
anything over and above client requirements,                            series of proposals that might be developed
such as a written commentary on wider                                   or that require further exploration in response
market indicators or the context in which the                           to the most pertinent issues raised over the
valuation was realised. In certain cases the                            course of this research study.
valuation proforma provided by the lending
institution also offers little scope for a valuer
to expand or elaborate beyond the series of
boxes, which in essence diminishes the input
of the valuer in terms of their knowledge and
expertise.

A small degree of momentum would appear to
have returned to the market in recent months
and as a result valuers have an increasing
locus of transactional evidence upon which to
base their valuations. As a consequence, there
is an onus of responsibility on the valuer to
1
  The margins on the valuation charge relative to what valuers
are being paid suggests that survey fees are being utilised by
lending institutions as a means of generating increased revenue.


                                                                   14
8.0 Research Outcomes and
    Recommendations




Outcome 1 –                                           feedback of any substance on valuations
                                                      and are generally only informed if there is
Improve Communication                                 a problem with the valuation through the
                                                      prospective purchaser.
Channels
                                                      Recommendation
In terms of the valuation process there is            REI to engage with RICS and CML to explore
an underlying need for improved channels              the possibility of improving communication
of communication across the stakeholder               channels with developers post valuation.
groupings. Developers would welcome the
introduction of some form of commentary on
the mortgage valuation process. Developers            Outcome 2 –
acknowledge that if valuations are to remain
objective, they must be devoid of developer           Enhance Market
influence. They also accept that the developer
is fundamentally one step removed from                Transparency
the contractual bond between the valuer,
the lending institution and the prospective           A key objective of the research was to
purchaser. However, developers would                  enhance the transparency of the valuation
welcome some form of communication post-              process. Improved transparency will help
valuation to inform them of the valuation             remove uncertainties and enhance the effic-
outcome. Currently developers receive no              iency. In thin market conditions, the lack

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of transactional evidence has meant that                Recommendation
valuers have had to operate in an information           University of Ulster to develop a short course
vacuum, by developing a centralised database            (subject to demand) to enhance stakeholder
for housing transactions in Northern Ireland,           understanding of valuation standards, the
valuers would have access to an effective and           valuation process and the valuer codes of
wide ranging data tool which would not only             conduct.
assist them with valuations, but would also
counter many of the problems experienced
in a thin market. Valuation professionals
operating in countries with access to data              Outcome 4 –
sources similar to that proposed have
reported greater efficiency and confidence              Improve Consistency in
in the valuation process across stake holder
groupings and that the data source actually             Client Instruction
enhances rather than detracts from the
valuation process.                                      Inconsistency in client instruction is a major
                                                        contributory factor to the uncertainties
                                                        and variances in residential valuations. In
Recommendation                                          a number of cases client instructions mean
REI to investigate the case for a centralised           that valuations are undertaken outside RICS
data base across the valuation profession               valuation standards. Whilst such instruction
and explore in greater depth the practical              is at the discretion of the client, it does not
implications in terms of its credibility,               promote best practice as advocated by the
reliability, timing and financing.                      International Valuations Standards Council
                                                        (IVSC). Appointing valuer’s from outside their
                                                        geographic area and on terms outside RICS
Outcome 3 -                                             specifications is putting undue pressure on the
                                                        valuer in terms of their Professional Indemnity.
Develop Understanding
                                                        Recommendation
of the Valuation Process                                RICS to consult with CML on behalf of
                                                        members to explore options for standardising
Over the course of this study it transpires that        valuation instructions
inconsistencies existed across the cross-stake          across mortgage providers.
groupings in terms of their understanding and
interpretation of the valuation process. A key
objective of this research was to develop a
greater sense of appreciation across the stake
holder groupings of the differing motivations
and interpretations. The dissemination of
this report will contribute to that agenda.
Should demand exist for an enhanced
understanding of the valuation process and
valuation techniques within the development
and financial sectors then REI will explore the
feasibility of developing a short course to
address that need.




                                                   16
9.0 References




Council for Mortgage Lenders (CML) (2009) Mortgage arrears and possessions statistics – Q1, 2009.
London.

Nationwide (2009) Nationwide Quarterly House Price Index – Q.1, 2009. London.

Royal Institute of Chartered Surveyors (2009) Valuation Standards – UKPS 3 Valuation for loan
facilities. London.

University of Ulster (2009) Northern Ireland Quarterly House Price Index – Q.1, 2009. Jordanstown.




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