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What is this week's blog about?
In this week’s blog, we take a look at the RICS Guidance Note Valuation of Individual New-Build Homes 3rd Edition.
This is essential reading for RICS APC and AssocRICS Valuation and Residential candidates, as well as candidates on other pathways involved with valuing residential property.
The full Guidance Note can be downloaded on the RICS website.
When did the Guidance Note take effect?
2 December 2019.
How does the Guidance Note relate to the Red Book?
The Guidance Note sits alongside both the RICS Valuation – Global Standards (Red Book) and the UK National Supplement (UK VPGA 11 in particular). It provides best practice guidance and should be referred to when valuing individual new-build homes.
What does new-build mean?
New-build relates to property that will be owned for the first time, e.g. newly built, converted or fully renovated. New-build property could be a one-off unit or part of a much wider development site. However, for all of these the approach to valuation should be broadly similar.
What does the Guidance Note not relate to?
RICS state specific scenarios where the Guidance Note does not apply, these include:
Purchase reports for corporate clients purchasing residential investment portfolios
Valuations of housing stock for local government or registered social landlords
Valuations of housing stock for inclusion in financial statements
Valuations of Houses in Multiple Occupation (HMOs)
Purchase reports for individual new-build properties
Valuation reports for custom-build, self-build or ‘stage release’ projects (reference should be made to the lender’s guidance for the correct approach to valuation)
Valuations for brokers or other third parties
Valuations on the basis of Market Rent
The reason for this is that other RICS guidance will be relevant in these circumstances, e.g. RICS Guidance Note Valuation of Buy-to-Let and HMO Properties.
How might the valuation of new-build properties differ?
New-build properties may attract a new-build premium price over and above second-hand market prices.
The new build premium is split into two categories; first owner benefits and resale benefits.
First owner benefits are those only available to the first owner of a new-build property and which fall away after first occupation.
These include:
Newness
Initial occupier prestige
Access to new-build finance
Access to Government schemes, e.g. Help to Buy
Developer incentives
Certainty of price and completion date
Removal of competitive bidding
No chain
Reduced price for off-plan purchases
Full warranty
Bespoke specification
Resale benefits are those that pass with ownership, such as:
Modern specification
Reduced running costs and increased energy efficiency
Modern facilities and services, e.g. concierge for new-build apartments
Modern design, e.g. open plan
New local infrastructure
Reduced short and medium term maintenance liabilities
How should valuers adopt appropriate assumptions and special assumptions for new-build property?
The Guidance Note requires valuers to make a number of assumptions and special assumptions when valuing new-build property:
‘In the case of a building that has not yet been constructed, RICS members will provide a valuation on a special assumption that the development of that building has been satisfactorily completed, as at the date of the inspection, in accordance with planning permission and other statutory requirements.
In the case of a newly constructed property, RICS members will provide a valuation on the assumption that it has been built under a recognised builders’ warranty or insurance scheme approved by the lender, or that it has been supervised by a professional consultant capable of fully completing the professional consultant’s certificate to meet lender requirements.
RICS members will assume that the contents of the UK Finance Disclosure Form provide full disclosure of the financial aspects of the sale (see section 4.6).
RICS members will assume that certain facilities that are to form part of the completed development scheme, such as leisure complexes, swimming pools and communal provisions, are completed.
RICS members will assume that certain planned transport links, infrastructure provisions and other constructions, such as retail units as part of a larger scheme, are completed.
In some cases, lenders will require RICS members to assume that the new-build property is already occupied. (If a lender requests that this or a similar special assumption be adopted, guidance should be obtained from the lender specifying how their instruction is to be interpreted; for example, a lender may require second-hand or resale value.)’.
What specific considerations do valuers need to be aware of relating to new-build properties?
Access limitations where a site is under construction need to be recorded in the terms of engagement and valuation report. Any information relied upon in making assumptions or special assumptions should be stated, e.g. construction site plans, show home or developer’s specification. Health & safety is also a primary concern when inspecting a site under construction.
Plot characteristics, e.g. proximity to roads, railway lines or pylons, views and neighbouring dwelling types.
Details of the UK Finance Disclosure Form relating to incentives, tenure type and method of construction (comprehensive list of information is contained within Section 4.4 of the Guidance Note). Incentives generally fall into two categories; bespoke enhancements and monetary contributions.
Issues over suitability for residential use where a former commercial, office or agricultural building has been converted under permitted development rights, e.g. poor quality, low ceiling height, lack of light or small size.
Warranties or assurance schemes, e.g. NHBC, LABC or Premier Guarantee.
Use of modern methods of construction.
How should new-build property be valued?
UK VPGA 11 of the UK National Supplement states that; ‘the valuation of a new-build property should be approached in the same way as any other valuation. There are, however, specific aspects of the new-build residential market that have led certain mortgage lenders to require an alternative approach to valuation. In all instances, the notified sale price must be treated with caution’.
Comparable evidence should be collated from three main source categories; on-site comparables, off-site comparables from other new build sites and resale or second-hand comparables. All comparables should be suitably similar to the subject property and a combination of all three categories is recommended. This also reflects best practice in the RICS Guidance Note Comparable Evidence in Real Estate Valuation 1st Edition.
Any incentives agreed for new-build comparables should be verified and their impact on selling price accounted for in the valuer’s analysis. Some comparables may need to be analysed on a rate psm/ft basis, where this is standard practice for the market in question.
The valuer’s comparable analysis should take into account:
Underlying value locally for similar resale properties
Added value for better specification or design of new-build property compared to resale or second-hand properties
Incentives offered to facilitate new-build sales
First-owner benefits, in terms of newness and new-build purchase packages
Affordability premium
Specific site and market conditions
A range of comparables should be considered to allow the valuer to reach a robust and justified assessment of Market Value. Valuers should also apply a ranking to the comparables, indicating which have been attributed the greatest weight.
Valuers should avoid establishing a new-build sales price and then adjusting this to reflect a new-build premium. This is because ‘the apportionment of exact value percentages to each element is not necessary and may be very misleading. The value of each element will differ between individual properties and some elements may have no value’.
In many cases, the assessment of Market Value may not necessarily equate to the agreed new-build purchase price. This supports the well-known contention that valuation is very much a combination of both art and science, requiring the valuer to apply a qualitative analysis and their own judgement to the comparables to reach their opinion of Market Value.
How should valuers report on value?
Valuers will generally report in the lender’s standard form report. If a report is likely to be seen by a prospective purchaser, the following statement should be included; ‘It should be appreciated that the valuation provided is for the property as new. It may not be possible to obtain the valuation figure if the property is resold as second-hand, especially if comparable new property is on offer at the same time.’
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N.b. Nothing in this article constitutes legal, professional or financial advice.