The rapid spread of the coronavirus disease 2019 (COVID-19) has thrown a curve ball on how the real estate appraisal profession is practiced.
Since the World Health Organization (WHO) declared it as a global pandemic on 11th March 2020, many countries have placed entire communities, cities and provinces in a stay-at-home, lock-down or community quarantine orders. These have prevented valuers from performing a proper, actual, physical inspection and investigation of properties for valuation due to the emergency travel and movement restrictions currently prevailing in various markets.
Property inspection is an integral part of any real estate valuation. In appraisal parlance, it is defined as a visit to a property to examine it and obtain information, in order to express a professional opinion of value. To highlight its significance to the profession, the International Valuation Standards states that inspections and investigations must always be carried out to produce a valuation. And in many "actual" appraisals, it can be considered as the first step of the valuation exercise.
Effects of COVID-19 in Philippine real estate
In the Philippines, the enhanced community quarantine currently being implemented has restricted movement, commerce and trade, with almost all real estate activity now at a veritable standstill. Buy-and-sell decisions are put on hold; leasing activities are almost next to impossible with full building lockdowns and restrictions on moving in and moving out of tenants; hotels and resorts are empty; malls are mostly closed except for supermarkets and pharmacies, and constructions have stopped. Even on-going transactions are now being delayed or worse, cancelled, as this climate of uncertainty persists.
How long this pandemic will last is the question in everybody's minds. Experts are divided on this, with some saying it could be over in a few months with others saying it could linger for more than a year.
What should valuers do?
So how do appraisers make a credible value opinion during these times when recent market transactions or listings used for comparison purposes may no longer be valid, and when the end of the lockdown is yet to be determined? Or even if it is, the timing of the market rebound is hard to foresee?
However valuers do it, whatever assumptions or special assumptions they may choose to make or analyses they may decide to run, they should disclose in the valuation report that the current COVID-19 pandemic have set unknown future impacts on the real estate market and that they should advise their clients to take their findings with a higher degree of caution that would normally be the case. They should also recommend that their client keep the valuation under frequent review.
Valuers should not treat this statement of expressing "less confidence in a valuation than usual" as an issue of reliability of the valuation. A failure to draw attention to the COVID-19 pandemic and its effect on the real estate market as a material uncertainty may give a client the impression that a greater weight could be attached to the opinion that is warranted, which would make the report misleading.
Can appraisers still render credible value opinions in this climate? If the issue of inspection (or the lack of it) is agreed upon in the onset and if the real estate valuation uncertainties are discussed in earnest with all assumptions and special assumptions put in place, then a valuer can provide a sound valuation considering these unprecedented circumstances.