The Impact of COVID-19 on Real Estate Valuation

Introduction

The decline in the level of business activities, stock market prices, bond prices and overall asset prices implies that the impact of COVID-19 definitely has some impact on valuations conducted by valuation practitioners all over the world. In this article, we would explore some of the various areas where the pandemic would impact value and our best estimate of what the impact may be like. However, we do not possess a crystal ball of what the future holds and this should not be seen as a definitive pronouncement but rather a contribution to the industry’s conversation around this topic.

Investment property valued by a valuer comprise the use of transaction volumes that are seldom available due to its indivisible nature and high price. Typically, valuers use historical valuations and comparable properties with values derived in previous periods that had different economic backdrops. As a result, property prices do not always react to the changes in expectations about the economic environment as fast as they should.

In the property market, the impact of COVID-19 are yet to be seen as transactions are less liquid and follows a due diligence & advisory process. For valuations after COVID-19, RICS advised valuers to utilise disclaimers that call attention to valuation uncertainty*.

COVID-19 would influence the following Real Estate Valuation assumptions. 

These include:

• Conservative assumptions for cash flow used to determine the value of the property;
• A higher risk premium would be applied to all risk assets to accommodate the effect of the virus;
• Rent growth would be lower for the foreseeable future (due to quarantine and social distancing);
• Prices of high quality and well leased properties might be renegotiated for moderate leverage on continued usage as most companies would require less space (Work from home policies would be explored more);
• Higher vacancy rate and prolonged impacts;
• Negative impact on rental income;
• Softening of capitalization rate to accommodate default for retail and tenanted properties on a case-by-case basis;
• High speculation and volatility value of the investment properties due to high unemployment levels and lack of customer confidence; and
• A potential increase in the number of forced sales.

In conclusion, the completion of construction projects would be untimely due to sourcing for sanitary ware, doors, HVAC and many other fixtures and fittings from China and other foreign property developers and vendors. Considering the likely impacts on the major assumptions of value, a softening of capitalisation rates is likely to occur in investment property valuation. Valuers should include new disclaimers, utilise evidence available to them at the time of valuation and should articulate fully all assumptions and opinions.

*FOR REPORTING PURPOSES RICS GAVE A CAVEAT FOR VALUATION REPORTS

The Royal Institute of Chartered Surveyors (RICS), which provides global guidance to valuers, suggests on their website (as at 29 March 2020) that its members consider advising their clients that they:

“… attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement.”

In addition, report our valuations “on the basis of ‘material valuation uncertainty’ as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty – and a higher degree of caution – should be attached to [our] valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of [this property] under frequent review.”

Conclusion

Once the current crisis is over, the post-crisis world would definitely not be the same as we used to know it. More businesses will become more virtual and geographically fragmented. People will have adapted to online shopping. Businesses will become more comfortable with virtual meetings.  Global businesses might reevaluate their supply chains. Therefore, the great uncertainty that lies with any prediction may become clearer and the impact on valuation would become more relatable.

References - CNBC, Perenews, PWC, Guardian, Medium, NASDAQ, UCL, Mercer and CushmanWakefield

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