by Christopher Shores
As we enter the 1990s the UK property market is in a state of confusion and uncertainty not seen since the mid-1970s. Interest rates continue to bite; over-ambitious development fuels fears of oversupply; the effect of Value Added Tax and the new Uniform Business Rate creates doubts which as yet remain unquantified and unquantifiable.
The economic miracle of the 1980s appears to have turned sour, in my view, as a result of political and economic mismanagement with the Government-inspired selfishness and profligacy of the consumer — understandable and human though that may be. In this scenario, can growth continue? Will recession or inflation prevail or, even worse, are we back to stagflation?
Following the spendthrift years of the 1970s and subsequent institutional doubts about property investment, with its illiquidity and proven resistance to easy performance measurement, most funds reduced the percentage of their overall assets which they wished to see invested in the sector. Two years of strong property performance, however, coupled with falls in the value of equities, tended to push these percentages up to unacceptable levels, even without undue new investment. Not surprisingly, most institutions during recent months have been happy to sit back and see which way the markets will develop, limiting new property acquisitions only to the obvious bargain — usually tendered to them by an increasingly desperate developer with cashflow problems.
In such a situation the real imperfections of the property market became manifest. Increasingly, evidence of transactions is diverging: on the one hand, there are “historic” purchase figures achieved when institutions — the great market-makers — were buying keenly; on the other, there are a few recent prices bearing all the hallmarks of a forced sale.
Hard market evidence must always be the best basis for valuation, but, as every experienced practitioner knows, the market is cyclical and there are periods — as now — when evidence which is relevant to particular categories of property is simply not available. It is at this point that the valuer is thrown back on his training, his experience and his intuition — and it is here that the arguments begin.
There are those who call for all valuers to go strictly by the guidance notes issued by the RICS, in the belief that therein lies the solution. Yet how many of these “panacea merchants” have actually read the guidance notes? A close look at their content clearly demonstrates the valuer’s dilemma in today’s circumstances. GN 18 (Valuations of Assets for Investment Purposes and as Security for Loans) clearly states:
Investment Properties
(2) The only acceptable basis of valuation of completed properties held as investments is open market value …
In identifying “open market value”, GN 22 (Land and Building; Definitions of “Open Market Value” and “Forced Sale Value”) specifies:
(1) Open market value
1.1 “Open market value” means the best price at which an interest in property might reasonably be expected to be sold at the date of the valuation assuming:
(a) a willing seller;
(b) a reasonable period in which to negotiate the sale taking into account the nature of the property and the state of the market;
(c) that values will remain static during that period;
(d) that the property will be freely exposed to the open market;
and
(e)that no account will be taken of any additional bid by a purchaser with a special interest.
It is particularly relevant to note how the definition of “forced sale value” differs from the above:
2.1 “Forced sale value” is the open market value as defined above with the proviso that the vendor has imposed a time limit for completion which cannot be regarded as a “reasonable period” as referred to in Para 1.1
It will be noted that, contrary to the apparent belief of many, there is no mention of a “willing buyer”.
In considering these assumptions, the valuer, faced with inadequate or non-existent evidence, must ask himself the following questions:
(1) What is a “willing seller”? If a seller is not able to dispose of a property at the time of valuation for a sufficient price to allow reinvestment in other forms of investment offering an amalgam of income and growth no less advantageous than that disposed of, why should he sell? Reason suggests that he will decide to await a more appropriate moment, which experience has shown is likely to return in the normal investment cycle. If he must sell before that time, he has, in effect, become a “forced seller”.
(2) What is a “reasonable period” in this context, for a property which was, until recently, clearly “institutional” but which is currently out of fashion: a shopping mall is an obvious example? Is it the point at which it has returned to favour, or the point at which prices have reduced sufficiently to bring purchasers back in reasonable numbers? In the latter case, the absence of evidence makes it difficult to decide when such a moment has arrived. If the vendor wishes it sold quicker, are we not again into a “forced sale”?
(3) “That values will remain static.” In the absence of sensible evidence, does this indicate that efforts should be made to sell at a figure whereby the investment can reasonably be replaced, as proposed in (1) above, or that the owner should be recommended that the valuation should be on a forced sale basis?
In such circumstances, the guidance notes are in fact of little assistance, since they are surely capable of such wide and diverse interpretation.
Some surveyors seem to take the view that in circumstances such as these the valuer should play safe and value “very conservatively”, ie that he should effectively value on a forced sale basis. Is this a sensible and responsible attitude for the valuer to adopt? Do one or two forced sales in a stagnant market, which experience shows is likely to be only temporarily static, really indicate that all property has only a forced sale value at the moment? In taking this line, is the valuer not in danger of so reducing confidence that he helps to create a self-fulfilling prophecy? Or will such down-valuation help to create a situation where property will once more appear an irresistible bargain and the market will return, creating the evidence necessary to allow more objective valuations to take place? Perhaps in such circumstances clients should be advised to have both “willing seller” and “forced sale” figures provided.
In any event, should not valuers at least be entering into some public debate in an effort to achieve a consensus within the profession as a whole?
