Valuing Property in Times of Uncertainty
by
Brian Ronnie, Valuation Partner
08 May 2009
We are in a false valuation position at the current time and I am advising lenders and their customers not to sell unless there is a dire need to do so to protect the company’s accounts. In most cases, as long as the borrower can afford the interest payments, it is worthwhile holding on to some assets as the market will improve from the current, extremely low ebb in the cycle.
Market forces affect value, but the function of the valuer is the same as it is in a boom climate. The challenge we face is how to analyse trends and evidence to determine values in times of uncertainty and market instability. Limited liquidity results in very few comparables and more probability that our opinion may not be as close to the price achieved by an actual sale as it is in more certain times.
The concept of valuation uncertainty is not a new issue but due to the current credit crisis it has been well documented. We find lenders will sometimes wish for a quantitative percentage figure to indicate reduced property values but this would not be accurate. A better indication is the valuer’s confidence in the market and their commentary on the market as it was, as it is and the likely short term future. Another good guide is considering failed bids for property. These do not constitute evidence but they do provide a gauge as to where the market clearing price is.
Yields have moved out and land values have fallen as a result. By obtaining a valuer’s sensitivity analysis, an owner occupier or lender can estimate the current situation and where the market is likely to go. This provides banks with ideal ammunition to structure loans and protect their clients accordingly.
In certain cases we find that some residual valuations do not stack up in the current market. Sites, however, do have values and we will advise where we believe the clearing price is based on how the market perceives future performance.
The outlook is not all negative. Interest rates are at an all time low of half a percent, although whether or not this is a toothless animal remains to be seen. In addition, the Royal Bank of Scotland announced they were pumping between £1.6 and £1.7 billion into the residential mortgage sector and there are some green shoots of recovery in the investment market as yields are well in excess of the interest rates. A variety of cash rich developers and private individuals are steadying themselves for purchases this financial year.
In the recent Budget statement it was announced the stamp duty holiday on homes up to £175,000 is to be extended to the end of the year. There will also be an extra £80 million for shared equity mortgage schemes plus a ‘kickstart’ for stalled housing projects. This will hopefully provide a small amount of encouragement to the residential sector.
It is essential at this uncertain time for valuers to be bold and state an honest view taking into account falling trends if this is the case. An ongoing dialogue with the lender to understand the structure of the loan and how healthy the income stream appears throughout the period of the loan is invaluable. We provide clients with a single valuation figure, not a range of figures, supported by a market commentary, sensitivity analysis and statement of the best and worst case scenarios.
Contact Brian Ronnie for further information on 0141 204 3838 or email brian.ronnie@ryden.co.uk
