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12° Nicosia,
14 April, 2021
 
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Property valuations and uncertainty clauses

Uncertainty clauses not a long-term panacea for professionals in real estate industry

Andreas Andreou

Andreas Andreou

Property appraisers in this country have had to deal with unprecedented events in the last seven to eight years that forced them to make use of the so-called “uncertainty clauses” in their real estate estimates.

The first event took place after the haircut and the closure of Laiki Bank, as well as in the aftermath that turned banks into zombies, while the second case was last March when a total lockdown went into effect due to the pandemic. I imagine something similar would have taken place in 1974 following the Turkish invasion, but in all fairness property sciences in our country back then were still an “immature sperm” for any real data.

A material uncertainty clause, or “ρήτρα αβεβαιότητας” as it is known in Greek, becomes necessary when conditions call for it, given that such a market turmoil makes transactions range from non-existent to minimal and certainly not adequate or representative to form a correct basis for appraising the market value of real estate property.

So in such a case an appraiser goes ahead and gives an estimate on the market value while calling on the client to recognize that the property valuation may in fact (and justifiably) be erroneous. This is why professionals call on property owners to have their values reassessed frequently so that new information can be taken into account.

So far so good, but at what moment does the use of this clause stop and the professional appraisal go back to being normal again?

One known fact is that markets adapt very easily to new data while it is also a fact that professional appraisers bear responsibility for providing their clients with an objective and scientific view based on impartial judgment. After all, clients pay for a service and they have a real need to have professional opinion. So prolonging the use of these clauses would not be very professional as appraisers would simply avoid bearing responsibility indefinitely instead of providing an objective opinion.

So prolonging the use of these clauses would not be very professional as appraisers would simply avoid bearing responsibility indefinitely instead of providing an objective opinion

Let’s take an example here and look at what happened after the haircut in 2013, and all this has been recorded in history. We all know that people lost money from their accounts, equity portfolios quite simply evaporated, replacing debt tools were overused to settle bad loans, and banks turned into real estate company beasts. These companies are selling properties either on market terms or through auctions, they sell package loans with collaterals, etc.

All this is information that has been running at variable speeds from 2014 until today and will continue to run in the future. And financial stakeholders know this information full well.

Therefore, supply and demand in real estate at any given time reflects this kind of information almost 100% of the time. So prices are a reflection of the real world. As an appraiser I cannot invoke “high levels of uncertainty” due to the haircut just to tell my client “you know, I believe your apartment is worth €180,000 but the way they have done things with the haircuts and whatnot, it’s better that you ask me every month so we can follow up on the situation.”

I would be justified in saying this until the moment I would start realizing, me and everyone else, that the market was beginning to recover. As things went on, I ought to have accepted some adjustments in price as determined by the market and incorporated them in my valuations.

Same goes for the advent of the pandemic and the total lockdown that was imposed. This was a global shock that froze country economies all around the world, not just ours. So it was totally expected subsequently that such clauses would need to be introduced due to extreme uncertainty. While the pandemic, the lockdown, and their consequences rage on, it has been observed in many countries that demand for real estate is on the rise while adjusting to new needs and conditions.

While interest in office space and retail shops has gone down, demand for bigger homes outside city centres has been on the rise, in fact with record-high prices. Here we haven’t had huge price increases because other factors and data have worked against the trend, but we have seen recently that demand from Cypriots was up resulting in higher number of transactions compared to the previous corresponding period.

This is actually important for appraisers who can form objective opinions on the values of real estate property in many categories. Uncertainty clauses can be justified in cases where the value of real estate may be linked with the operating profit of a business that owns the property, such as in the hotel category for example.

So invoking uncertainty clauses is not panacea for a prolonged period and proper judgment is necessary to discern when and which real estate properties need the remedy. And the answer to that is almost always right in front of us.

The author is CEO at APS Andreou Property Strategy - Chartered Surveyors

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