Nick French – Property Valuation – Material Uncertainty

Nick French

Property Valuation – Material Uncertainty

April 2, 2020



I think that it is fair to say the effect of the coronavirus worldwide is something that is unprecedented in our careers. I know that there are a few survivors of the “Spanish flu” of 1918/19 who are still alive but for most of us, this is beyond our own experiences of the financial and real estate markets.

Ironically, at the beginning of January, I was asked, together with many other market players and commentators, to give a forecast for the 2020 Real Estate Market for the website Property Solvers[1].

My thesis was that after a period of three years of Brexit uncertainty, that the markets were already reacting positively to the relative certainty now that Brexit had extensively, if not completely, been exercised. Indeed, the predictions and forecasts of the other authors mirrored, to varying degrees, my own conjectures; 2020 was going to be a positive year for the property market.

“What a difference a day makes” or rather a couple of months. Since the spread and impact of the coronavirus has subsumed the globe, our financial and real estate markets have changed beyond any recent recognition. Perhaps the only things that I said in my January article that stood the test of this short time was that “Businesses and Finance Markets do not like uncertainty” and “Move over Brexit, a new bigger uncertainty is on its way”. The second forecast could be seen to be apocryphal if I had been referring to the current pandemic but I wasn’t, I was referring to the impact of climate change which, as with all things non-Covid 19, is a challenge to wait for another day.

Valuation Uncertainty

But I digress; the point of this article is to discuss the new and unprecedented uncertainty that is impacting real estate markets worldwide and, specifically, the impact of that uncertainty on the “Market Value” of property (and other assets).

Valuation is the process of estimating price in the market in the absence of an actual sale. The expertise of the property valuer is to take market evidence of previous similar sales, called comparables, and interpret these sale prices relative to the current market sentiment of possible or potential investors in that type of property.

You cannot value effectively with comparables alone and the adjustment of these historic sales by market sentiment is integral to the valuation process. So Market Value is an estimate of price; that is to say at what figure, in today’s market, will the seller “sell” and the buyer “buy”.

Even in a market with lots of transactional evidence and lots of “chatter” about investment sentiment, the estimated figure will have a degree of uncertainty. The Royal Institution of Chartered Surveyors (RICS) states within its Professional Standards:

“… a valuation is not a fact. Like all opinions, the degree of subjectivity involved will inevitably vary from case to case, as will the degree of ‘certainty’ – for example, the probability that the valuer’s opinion of market value would exactly coincide with the price achieved were there an actual sale at the valuation date, even if all the circumstances envisaged by the market value definition and the valuation assumptions were identical to the circumstances of an actual sale”  – VPS 3 Valuation Reports, RICS Valuation – Global Standards ( The Red Book – when applied in tandem with the UK supplement) 

To paraphrase Benjamin Franklin, nothing is certain except death and taxation.

Material Uncertainty

All valuations in normal markets have a degree of uncertainty. So the question is how do you deal with the massive uncertainty caused by the coronavirus?

The RICS, like many other professional bodies around the world, recognises that there will be times when the uncertainty in the market is greater than normal. This is called MATERIAL UNCERTAINTY and, again to quote the RICS, it is where the addition of the word ‘material’ means that the degree of uncertainty in a valuation falls outside any parameters that might normally be expected and accepted.

Now, within the academic and professional literature there is a mire of different definitions for uncertainty and material uncertainty, different terminology, incompatible definitions and a plethora of myopic disciplinary perspectives.

That discussion is outwith the ambit of this article as it is clear that, regardless of definition, that the world is experiencing unprecedented levels of uncertainty due to this ‘significant unforeseen event’.

So, in mid-March of this year, the RICS issued advice to its members, and in particular to valuers, that it may be warranted to declare within their valuation reports that there is material uncertainty. The Red books clearly states:

“… in some cases there may be a greater degree of uncertainty concerning the valuation figure reported than usual, and where that uncertainty is material – which should be expressly signalled in the report – further proportionate commentary must be added in order to ensure that the report does not create a false impression. Valuers should not treat such a statement expressing less confidence in a valuation than usual as an admission of weakness – it is not a reflection on their professional skill or judgment, but a matter entirely proper for disclosure.” VPS 3 Valuation Reports, RICS Valuation – Global Standards

In my opinion, it would be odd for a valuer NOT to declare material uncertainty at this current time albeit, the decision to do so, or not, still lies with the valuer. Indeed, the RICS has recently issued a statement that says:

““RICS Regulated Members and firms may therefore be considering whether a material uncertainty declaration is now appropriate using the Red Book Process. If material uncertainty is declared, this should be explicitly stated, and RICS has suggested today, a form of wording that can be used.” RICS Press Release, 19thMarch 2020.

This advice was implemented via a RICS Valuation Notification on their website called “COVID-19 (Coronavirus)”. Such notifications are rarely used and its existence reiterates the importance that the RICS attach to the need to declare material uncertainty. All RICS valuers will have already read, and digested, its content in its entirety but I have repeated the salient wording that the RICS suggests should now be included in all valuation reports where there is material uncertainty

“… As at the valuation date, we** consider that we can 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. Our valuation(s) is / are therefore reported 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”. Valuation Practice Alert – Coronavirus RICS response to Covid-19, 19thMarch 2020

So to revert to the central tenet of this article, all valuations are uncertain due to the nature of the valuation process; they are expert opinions. But, at the moment the range of that uncertainty is greater than that experienced in normal markets.

What does “Material Uncertainty” mean to the user of property valuations?

So, what does this all mean to the users of valuations? I have heard anecdotal evidence that most of the big funds and lenders are fully aware, and cognisant, of the need to declare material uncertainty and the consequential additional caution needed when looking at the valuation figure.

But for other users of valuations, who are less conversant with the valuation process, it can be confusing. What is this “less certainty” in this valuation”? Can I ask another valuer for a more certain valuation?

The answers are all linked to the true nature of a valuation. In academic terms, a valuation is a range of possible values which usually conforms to a normal distribution. That is a distribution of numerous possible values ranging from a low value to a high value with a larger grouping of more likely values in-between. Indeed, American valuers often refer to the “most probable price”. So valuation is NOT a single figure, it is a range of possible figures. But, that doesn’t work in practice and a valuer has to indicate to the client ONE number. This is the estimate of Market Value. All valuation reports provide the client with single figure for market value.

But if you ask the valuer how certain they are that they have chosen the “correct” spot figure, they will answer according to the range of possible values in the market at that point in time. If the market is strong with lots of comparable evidence and market activity, that range will be relatively compact. If, however, the market has no transactions and no market evidence of bids or other activity, then that range will be significantly wider. That is why it is less certain. Their choice of a spot figure within a wide range has greater uncertainty that the figure chosen will correspond to the actual sale price were the property sold on the date of the valuation.

Likewise, all valuers work within the same environment and thus the lack of certainty will pertain to all valuations by all valuers, it is a market uncertainty and all valuations will have the same uncertainty at any point in time. There is no point of changing valuer as the uncertainty in the valuation figure will be the same.

So, as with everything else in this strange new coronavirus world, valuations are inherently less certain and it is incumbent upon the valuer to let the client know that at the commencement of the instruction and to explain the uncertainties relating to the subject property and the market within it is being valued.

Users of valuations should trust in their valuers. I have great faith in the property valuation profession and, whilst we are all uncertain about the current market, I am always certain of the professionalism of Chartered Surveyors.



About Nick French

Nick is an experience teacher of valuation for both the profession and universities. Trading as “Real Estate Valuation Theurgy”, Nick continues to write papers, presents conference papers and undertakes in-house training for the real estate profession at home and abroad.