Social housing valuations expected to drop

Before Rishi Sunak was announced as the new prime minister, valuers forecasted a fall in the valuation of tenanted social housing homes that use the Existing Use Value for Social Housing (EUV-SH) methodology.  

Under EUV-SH, it is assumed that properties will remain in the sector. The value is calculated by adding up rental income over a 30-year period and taking away the costs. The net figure is discounted to allow for inflation.

Richard Petty, head of JLL’s UK Living valuation advisory, predicted there could be a drop in values over the coming months. 

He said that with registered providers of social housing facing a tighter rent cap following a government consultation, and with decarbonisation costs and operating costs rising by more than the rate of inflation, “it’s really hard to see how you can avoid reductions in value”.

Mr Petty said things could improve or get worse, but there is a “good chance” that valuations will go down in the near future, and the next three to six months are going to be a “bit bumpy”.

“In core social housing, I think we have the position that we still have a very secure – touch wood – index-linked income stream with very high user demand and, ultimately, government support for a large proportion of income,” he said.

“So, I can’t see any reason why, just because of the volatility, valuations should go down immediately.

“But there is a good chance that they will go down because of all the factors we’ve been talking about around pressure on values and also, in general, risk. Because when we put a discount rate on a portfolio, we’re trying to capture the risk that’s inherent in all our assumptions.

“By how much and when exactly, it’s too hard to say, but there is a good chance that valuations will go down in the weeks or months ahead.”

Andy Smith, a director in Savills’ housing valuations team, said that the “underlying assets remain sound”, with strong demand, but some valuations will come under pressure.

He cited the fact that the government is consulting on introducing tighter rent caps, the cost of debt has risen because gilt rates have increased and operating expenses have increased above inflation.

Mr Smith said that if the cost of finance rises, then valuations are going to be affected negatively across the board. He believes values could potentially drop on particular properties that are hard to let, such as certain sheltered housing units.

“Some valuations will come under pressure and it’s a case of looking much more closely at how things are done, almost on a case-by-case level,” he said.

“We’re in a very volatile situation at the moment. And we can’t say in truth whether this is going to be something which is going to have a long-term impact, or whether it’s just short-term volatility that the market will ride out.

“Certainly, valuations are likely to come under greater scrutiny by lenders and there will be some pressure points where it’s just obvious that the level of value that we might have reported six months ago may not be at that level if we would report in the next six months, just by the way that the economy has moved in that period.”