Social housing valuers remove ‘material uncertainty clause’ and resume external inspections

News26 May 2020Sarah Williams

Major sector valuers Savills and JLL have removed the use of a ‘material uncertainty clause’ (MUC) for housing association properties valued via the EUV-SH approach following updated guidance from the Royal Institution of Chartered Surveyors (RICS) today.

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It comes as the two firms confirmed they will resume external inspections of social housing and development sites, in line with guidance from the government and RICS.

The lifting of MUC will apply from today (26 May) to all new valuations of rented social housing or leased shared ownership owned by housing associations valued using EUV-SH.

However, it will remain in place for properties valued via the Market Value subject to Tenancy (MV-T) method.

RICS published the update on MUC today (26 May) following the latest meeting of its Material Valuation Uncertainty Leaders Forum (UK), on 21 May. Alongside social housing, a handful of other asset classes are also affected, including standalone food stores let to major operators, and institutional grade primary healthcare facilities.

The clause had previously been applied to valuations across all sectors and property types since the middle of March by all major valuation firms, on the basis of the RICS guidance.

The clause noted that a “higher degree of caution” should be attached to the valuation than would normally be the case, because of the “unprecedented set of circumstances on which to base a judgement” arising from the COVID-19 pandemic.

Following an ongoing review of the position, the valuers now “no longer consider that there is material uncertainty when valuing on the basis of Existing Use Value for Social Housing”.

With the agreement of the RICS Material Valuation Uncertainty Leaders Forum, the clause will from today be lifted from: “All types of rented social housing or leased shared ownership, owned by housing associations and valued on the basis of Existing Use Value for Social Housing (EUV-SH) only, and therefore assuming that all homes remain within the regulated registered provider sector (but excluding social housing owned by local authorities where valued for Housing Revenue Account purposes under government guidance).”

Alongside Optivo, that includes five other housing associations that have raised money in the bond markets in new issuance, retained sales and taps, and the £125m raised by aggregator The Housing Finance Corporation’s Blend funding vehicle for two housing associations at an all-in cost of 2.25 per cent on 14 May.

Private issues, such as the £120m deal spread across two private placements last week by Your Housing Group, have also taken place.

The statement from Savills and JLL noted that while registered providers are reporting some impact on rent collection, “mitigation measures evident in the sector appear sufficient to address any loss of income and increase in risk”, and the firms “remain of the opinion that EUV-SH values for the vast majority of stock are unaffected”.

Physical inspections

Savills and JLL both ceased conducting internal property inspections on 16 March, and following the government’s announcement of lockdown, stopped external inspections from close of business on 23 March. Since then, any valuations have been conducted on a desktop basis.

Now, following the lifting of some movement restrictions and government and RICS guidance concerning working in other people’s homes, including surveyors undertaking property inspections, JLL and Savills have decided to resume external inspections of social housing and development sites.

However, for the time being they will not conduct internal inspections of tenanted properties for valuation purposes, stating: “Most valuations of social housing can be undertaken with a combination of external inspection and available technology, and we consider internal inspection to be non-essential at this stage.”

They added: “The exception to this could be single residential assets, if the property cannot be valued without an internal inspection, and both firms have put protocols in place for inspections in such circumstances. Indeed, protocols have been drawn up to enable inspections across other asset classes.

“However, it is likely to be some considerable time before we are able to conduct internal inspections of properties housing more vulnerable residents, such as sheltered schemes or care homes. We will only do so when government guidance allows.”

Building confidence among lenders

Commenting on the impact of today’s changes, Anne Johnson, head of housing valuation at Savills, said that while deals had continued to happen with the MUC applied, for example in the bond markets, today’s lifting is helpful.

She said: “I think it will give confidence to the market and enable mainstream lenders and private placement lenders to take steps to re-enter the market.”

On MV-T transactions, where the clause will still be applied, Ms Johnson said: “It may still have an impact in that mainstream lenders or the private placement market find it difficult to get comfortable, but certainly we’re seeing private placement investors and banks beginning to dip their toes back in the water, and that was before [today’s guidance change].

“So I would hope that the lifting on EUV-SH would help continue to build confidence in the sector.”

Andy Smith, director of housing valuation at Savills, added: “It’s important to note that even at market value on registered provider stock, investors and lenders are ultimately looking at the quality of the income stream the property is going to produce, rather than house price speculation.”