Taking cladding into account in valuations

Since the tragic Grenfell Tower fire in June 2017, the issues of cladding and fire safety in tall buildings have hardly been out of the news. Despite having building regulation certification, buildings may have safety concerns. This had the effect of halting the property market in some areas, largely over concerns about the extent of future costs of remedial works which may run into millions of pounds. In response, the RICS has produced a guidance note, Valuation of properties in multi-storey, multi-occupancy residential buildings with cladding (1st edition, March 2021) and supplementary information paper Cladding for surveyors (1st edition, March 2021). The guidance note is intended to support valuers undertaking valuations for secured lending purposes on blocks of flats in the UK and is effective from 5 April 2021. The supplementary information paper is designed to increase a surveyor’s knowledge of typical external wall cladding systems. What is an external wall system? The EWS is made up of the outside wall of a residential building, including cladding, insulation, and fire break systems. What is an EWS1 form? The EWS1 form is designed to be used for residential properties such as blocks of flats (including those owned by housing associations and social housing providers as well as privately owned), student accommodation, care homes and houses in multiple occupation. The EWS1 process provides comfort to lenders, valuers, residents, buyers and sellers. The process itself involves a “qualified professional” conducting a fire risk assessment on the EWS, before signing an EWS1 form, which is then valid for five years. The form was originally designed following government advice regarding external wall systems on buildings above 18m, and was created to ensure such buildings could be assessed for safety to allow lenders to offer mortgages. Changes in government advice in January 2020 brought all residential buildings potentially within its scope. Its purpose is to ensure that a prudent valuation can be provided for a mortgage or remortgage on a property which features an external wall cladding system of uncertain make-up. The EWS1 form assessment is for valuation purposes only. It is not designed to assess other fire safety features or risks. Where an EWS1 form is required For buildings over six storeys: Where there is cladding or curtain wall glazing on the building. Where there are balconies which stack vertically above each other and either both the balustrades and decking are constructed with combustible materials or the decking is constructed with combustible materials. For buildings of five or six storeys: Where there is a significant amount of cladding on the building. Where there are aluminium composite material (ACM), metal composite material (MCM), or high-pressure laminate (HPL) panels on the building. Where there are balconies which stack vertically above each other and either both the balustrades and decking are constructed with combustible materials, or the decking is constructed with combustible materials. For buildings of four storeys or less: Where there are ACM, MCM, or HPL panels on the building. Not every building will require an EWS1 form and the following wall types have been excluded: Masonry construction; Traditional cavity wall construction; Timber framed buildings (with a brickwork, blockwork, or stonework external leaf); Concrete panels. The EWS1 form assessment is for valuation purposes only. It is not designed to assess other fire safety features or risks. Why this matters The valuer’s role and remit is specifically defined as “…to advise the lender on: the nature of the property and factors revealed during the inspection that are likely to materially affect its value the market value (and/or market rent if required), with specified assumptions or special assumptions and where there are serious cases of disrepair or obvious potential hazards revealed during the inspection that may have a material impact on its value.” The latest trend of surveyors valuing properties in high-rise buildings at £0 has been an issue for homeowners, occasionally preventing some from selling or remortgaging. In some circumstances, £0 valuations have been used in the process of valuing a property for mortgage lending purposes. This occurs when a property may not meet the mortgage lender’s lending criteria, or when further information is needed, such as an EWS1 form. That said, a valuer should always have a rationale to justify the request for the EWS1 form. Once a signed EWS1 form is obtained, there should be two options: external wall materials are unlikely to support combustion; or combustible materials are present in an external wall. In the latter eventuality, either the fire risk is sufficiently low that no remedial works are required, or high enough that remedial works are required. If an external wall system requires remedial work then a valuer should take this into consideration in their valuation. A valuation will only be possible if there is clarity on the cost of the work and a timeline for works to be completed. Lenders are unlikely to lend until remedial work has been completed, but some may choose to do so with retentions and based on their own risk appetite. Patrick Hill FRICS, head of valuation best practice at Savills, says: “While the RICS guidance note and the EWS1 form will greatly assist in the valuation of residential buildings with cladding, the real challenge for the valuer will be getting the valuation figure right. Valuers will need to proceed with caution.” Sebastian Deckker FRICS is a director in the valuation department at Savills Picture © Geoffrey Swaine/Shutterstock