How the industry collaborated to lift material uncertainty clauses

COMMENT: The valuation profession has rightly been in the spotlight. The arrival of coronavirus in the UK was first reported on 31 January, and in the immediate aftermath property markets continued to function with good levels of liquidity and transparency. Sentiment remained strong. But the declaration of the global pandemic on 11 March changed everything. Markets were disrupted. In real estate, we could immediately see the impact on the hotel market, then retail and leisure. Within a week, the entire real estate market was in an uncertain world. Valuation, by its nature, always has a degree of uncertainty. In transparent and functioning markets, the profession should deliver valuations in tune with the sentiment and transactional evidence. The normal data points upon which we base our judgments and carry out our analysis became much harder to read in March. Sentiment was changing by the day, if not the hour, with a large amount of data hitting our desks which was inconsistent. Unforeseen events The Red Book sets out the criteria for introducing a material uncertainty clause. Its aim is to ensure that the client is not misled. The principle behind it is that when an unforeseen event hits a market, leading to a reduced level of certainty that can be attached to a valuation due to inconsistent evidence or a lack of evidence, we need to make sure the reader is aware that the uncertainty is material. We were in that world on 17 March. The MUC is not used lightly – it had been adopted in the aftermath of the global financial crisis and remained in place for around eight months. It was also introduced after the result of the Brexit referendum in 2016. Our thoughts soon turned to what we would need to lift an MUC – it had to be direct, observable market transactions and for market sentiment to be cleared, as well as other indicators and data points that we use. The RICS formed the Material Uncertainty Leaders’ Forum, where we agreed the circumstances under which we would rescind the clause. The forum’s aim is to discuss the evidence and the sentiment as we get more data points on our desks from a post-Covid-19 market. It followed that long-dated annuity grade income was the first to be lifted, along with institutional-grade primary healthcare. Further sectors – such as supermarkets – had MUC lifted at the end of May, build-to-rent and all industrial and logistics in mid-June, and last week central London offices and student housing. No hiding place An MUC is not there to hide behind in fast-moving markets or to allow us to take less responsibility for our role in the property market – which is to provide accurate and timely pricing information in an independent manner. When those data points are more limited, we continue to value with all available data; in the height of the pandemic we were looking for as many trends as possible from across the property market and wider financial markets. What has been good to see is the massive collaboration between valuers in sharing market-comparable evidence quickly, with a number of sector calls taking place to review the evidence and share the sentiment. I believe this has played a key role in making sure that the information is available to valuers to come to their own conclusion on the timing of lifting MUCs. The time to remove the MUC is a judgment call based on a number of inputs; but I hope that when we review how the valuation profession acted in the pandemic, the conclusion will be that we were logical in our thought, collaborative as a group and were aligned with markets – and that importantly, we delivered the right advice to our clients and the property market. Ollie Saunders is head of UK commercial advisory at JLL