Rating agencies appear to have played a leading role in the current crisis that the real estate market in the UK finds itself in by overestimating the credit risk of property-backed debt instruments. The public should be able to expect – and to be protected by – the objective exercise of professional judgement by a responsible and regulated group, and the rating agencies failed in this regard. Did valuers also contribute to the crisis, by failing to discourage banks from lending high proportions of the ramped price of property, and by overestimating the value of property assets and property funds?
The RICS Valuation Faculty Board recently issued clarification on how valuations should be reported in times of valuation uncertainty. As the RICS states, “The valuation of … property in the current market is unusually challenging, due to a reduction in the number of comparable property transactions in what is a rapidly changing macroeconomic climate”. It approved the concept of a conditional valuation, effectively suggesting that valuation is impossible when there is no market.
In the absence of continuously traded, deep and securitised markets, commercial property valuations perform a vital function in the property market by acting as a surrogate for transaction prices. Property valuations are central to market efficiency, but within both the professional and academic communities, there is considerable scepticism about the ability of appraisals or valuations to fulfil this role in a reliable manner.
There has been a considerable amount of research into the operation of the valuation process in various parts of the world, especially in the US and the UK, dealing in particular with valuation accuracy and client influence. Given the untold damage done by credit rating agencies to the valuation profession, as defined in the broadest possible sense, valuer independence and freedom from conflicts of interest are vital to the continued operation of the real estate market. Right now, we face a hiatus and a withdrawal of liquidity. What role does valuation play in this?
