The end of nil-valuations for high-rises?

28 January 2020

Last month, the Royal Institution of Chartered Surveyors (RICS), The Building Societies Association (BSA) and UK Finance agreed a new industry-wide valuation process for buildings more than six storeys high.

The latest trend of surveyors valuing properties in high-rise buildings at zero has been an issue for homeowners, occasionally preventing some from selling or re-mortgaging.

Why were valuers giving nil-valuations?

The fire safety of high-rise buildings was thrown into the spotlight following the tragedy of the Grenfell Tower fire. In May 2018 Dame Judith Hackitt published her final report ‘Building a Safer Future - Independent Review of Building Regulations and Fire Safety’ which, amongst highlighting confusion with existing regulations, stopped short of recommending new regulations to impose a blanket ban on combustible materials.

Despite this, on 11 June 2018 the Secretary of State for Housing, Communities and Local Government reaffirmed that the Government’s intention was “to ban the use of combustible materials on the external walls of high rise residential buildings, subject to consultation”.

The Building (Amendment) Regulations, SI 2018/1230 came into force on 21 December 2018 and implemented the promised ban on combustible cladding by prohibiting the use of combustible materials anywhere in the external walls of high-rise buildings over 18m above ground level, containing one or more dwellings.

In anticipation of the effect this would have on valuations of existing high-rises, the Government suggested that property owners seek a statement from a Chartered Professional that the cladding is fire safe. However, given the recent uncertainty, professionals had little incentive to expose themselves to liability by signing off the fire safety of cladding with no uniform process or guidance in place.

Surveyors were therefore left in a helpless position. Existing high-rises without any fire safety review on cladding having been undertaken had to be valued at zero, both for not meeting lending criteria and by representing an unquantifiable liability for the purchaser.

As such buildings represent a significant chunk of the housing market, an agreed industry-wide solution was urgently needed.

What is the solution?

The new External Wall Fire Review process requires a fire safety assessment to be conducted by a suitably qualified and competent professional. A clear and transparent pro-forma, EWS, has been created for the valuation process to be completed by the fire expert.

The EWS form has two options:

Option A

This will be completed where the building does not contain materials likely to support combustion (or does contain some, but only to an addition, such as a balcony).

The likely result will be that no further action is required, unless an addition contains significant quantities of these materials and requires remedial work. Even if this is the case, RICS has suggested that the cost of such remedial work would be low and lender guidance may suggest that retention of a set monetary amount would suffice.

 

Option B

This will be completed where there are known combustible materials in the external wall system. In this instance, the fire expert will have to determine whether remedial works are required. If the fire risk is sufficiently low, it may be suggested that no remedial works are required. Conversely, if the fire expert takes the view that such works are required, it is then down to the valuer to obtain the cost of those works, refer to lender guidance and reflect this in the valuation.

The EWS form will be valid for five years after it is created, though a new EWS form should be completed if external alterations have been made in that period.

Most importantly, the process allows valuers instructed by lenders for mortgage purposes to check whether a building has a EWS certificate and, if so, rely on its content to produce a valuation. In turn, it is intended that the EWS form will contain a disclaimer excluding liability for the fire expert, thereby providing an incentive for a fire safety review to be undertaken in the first place. This should help to prevent nil-valuations arising from the lack of certainty over the fire safety of cladding on high-rises.

 

Problem solved?

Not quite. The procedure is still likely to be a time-consuming and arduous one, particularly for those buildings requiring remedial works. The industry continues to encourage the owners of these buildings to proactively pursue independent testing of external wall materials to safely speed up the process for buyers and sellers.

There is also the question as to who is bearing the cost. The government has indicated that it does not expect individual homeowners to face bills for the remediation of buildings found to be a fire risk, but the position is still not quite clear. There will inevitably be a need for pressure on building owners or their representatives to have the building assessed, followed by an argument between leaseholders of individual homes and the freeholder of the building as to who foots the bill.

Finally, the situation is still developing. The government published a press release and new guidance containing advice on building safety for multi-storey, multi-occupied buildings in late January 2020, which:

  • Explained the government’s intention to appoint a construction expert to review remediation timescales and reiterated that options are being considered to provide financial support to individuals for remediation works;
  • Reinforced the Independent Expert Advisory Panel’s view that cladding material comprised of Aluminium Composite Material (and other metal composites) with an unmodified polyethylene core should not be on residential buildings of any height and should be removed; and
  • Announced the launch of a consultation on combustible cladding, including proposals to lower the 18 metre height threshold to at least 11 metres.

The immediate focus has been on buildings more than six storeys high, but it is clear that the lessons to be learnt from the Grenfell Tower disaster should not be limited to high-rises. Accordingly, the industry will likely need to consider updates to the new valuation process to include buildings of lower heights in order to avoid the same issue of nil-valuations arising once more.

For the meantime, the new EWS form has provided a much-needed pragmatism and consistency to the valuation process for sellers, buyers and surveyors alike.

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