Covid-19 has 'ripped up the rule book' as surveyors go on lockdown and multiple bridging lenders freeze new business

Valuers have joined the UK on lockdown amid the Covid-19 crisis, resulting in business in the property lending market becoming much more conservative, slowing down or, in some cases, completely grinding to a halt.

While the situation and approach seem to be changing daily, Bridging & Commercial currently understands that there are fewer valuers and quantity surveyors willing, or able, to visit sites.

Just this week, we saw Galliard Homes, Taylor Wimpey and Barratt Developments, among others, close construction sites to play their part in helping safeguard their employees and prevent the spread of Covid-19 — and it’s only natural for this to happen with valuers, too.

A glimpse into the current life of a valuer

Popular tourist destination Covent Garden empty during the Cornoavirus outbreak of 2020

Up until Boris Johnson’s national address on Monday evening ordering strict ‘stay at home’ measures for the country to help fight the war against the coronavirus pandemic, Sean Mansfield, director at Capital Value Surveyors, told B&C that it took precautions such as wearing masks, gloves, shoe protectors, and asking properties to be vacated during its inspections — in addition to all internal and external doors left open so surfaces didn’t need to be touched.

Now, however, its opinion is that even these measures do not align with the “spirit of the crucial national effort” to minimise the spread of the virus between households.

“Internal inspections of occupied properties are no longer responsible in our view,” he confirmed, “nor consistent with the overall message of [the] government.”

While the volume of enquiries has decreased over the past 10 days, Sean said there had also been a handful of instructions it had declined as it felt it would be “irresponsible” to operate outside of these terms.

“This is a moral/health issue more than anything and the financial considerations must be an afterthought,” he urged.

Stephen Todd, co-founder of VAS Group, emphasised that, clearly, we are in unprecedented times.

“…There will be very limited transactions in the market for valuers to fully understand the effect of Covid-19 for some time,” he added.

“As such, the level of subjectivity is increased and ensuring you are getting the best possible advice by experienced local professionals becomes even more important, as valuers are required to rely more on their experience and expertise to be able to opine on value.

“From the lender’s perspective, it is important that they understand and appreciate the market context within which the valuation has been prepared and adjust their risk appetite accordingly.”

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Joe Arnold, managing director at Arnold & Baldwin Chartered Surveyors, agreed that surveyors were, at this stage, mostly on lockdown — but only from a property inspection perspective.

“We are still working, as are most brokers, but just from home,” he clarified.

“The market can continue as we use desktop valuations and have already been advised that physical inspections will not be mandatory for many of our lender clients.”  

He urged that, when placing cases, brokers must consider the valuation techniques accepted by lenders and to work with surveyors that are able to deliver desktop valuations.

Short-term trends

Empty streets in Haringay Green Lanes during the Covid-19 pandemic

“Lenders will largely stop lending,” Sean predicted, as a result of less people borrowing. 

We have already seen this with a number of lenders, including Together, Roma Finance, HFBS and Vector Capital temporarily halting new loan applications. 

Agam Jain, MD at Vector Capital, confirmed to B&C that the lender was not looking at any new applications until the lockdown was over. 

Vida Homeloans has also been advised by its valuers that, with immediate effect, they are unable to conduct physical valuations. 

“This means that any valuation due to be carried out on a current mortgage application will now not take place until further notice,” a spokesperson from Vida said.

“This also means that we are unable to accept any new mortgage applications for the time being.

“Any pre-valuation cases will now be withdrawn.”

Ian Broadbent, director at HFBS, commented that, without the ability to inspect the security due to travel restrictions, lenders’ strategies for mitigating risk were “limited”. 

“This is why we have taken the socially responsible step of temporarily suspending all new loan applications and safeguarding our staff, bank staff, clients, introducers, surveyors and solicitors.  

“It is hoped that this will be for a very [short] time.”

And, if travel restrictions intensify, the lenders who do have deals to get over the line will have to work with or without valuers to overcome the valuation process — which Sean believes will likely have long-term impacts on the whole lending process “for better or for worse.”

Market Financial Solutions’ panel of valuers is still visiting properties and producing reports, although it is unsure for how much longer they will be able to do so, due to the circumstances.

B&C has also heard of a ‘Covid-19 clause’ in valuation reports, which James Perris at De Villiers confirmed that it has implemented. 

It refers to VPS 3 and VPGA 10 of the RICS Red Book Global, meaning that valuations are being reported on the basis of “material valuation uncertainty”.  

“We cannot advise without sales evidence how much loss, if any, will be seen when the market and economy are allowed to function again,” said James.

“We can only advise that there will be no sales market in the short term and lenders must anticipate holding on to any asset for the longer term and ensure that they only lend at low LTV ratios.”

Jonathan Newman, senior partner at Brightstone Law, said he hadn’t seen a Covid-19 clause in a valuation report yet, but noted that it sounded similar to the Brexit clause that valuers introduced back in 2016.

“However, this does not work in law,” he claimed.

“A valuation claim is based on retrospective information to inform how much a property is worth on the day of the valuation and in the circumstances in which the valuation is carried out. 

“It does not anticipate the value of the property in the future and so, legally, this clause doesn’t make a bit of difference.”

How are bridging lenders reacting to recent developments?

The normally grid-locked Piccadilly Cirus in London's West End is empty on a weekday lunchtime

Mark Posniak, managing director at Octane Capital, declared that there was no doubt that Covid-19 had “ripped up the rule book”.

“Whether you want to call it a curveball or a Black Swan, it’s the biggest the industry has seen,” he said.

"The ‘material uncertainty’ clause, announced quite understandably by the RICS, makes things very difficult for lenders,” he added.

“In theory, it’s a caveat to a valuation — in practice, it’s an admission that the valuation could be wrong, that there are 'known unknowns’ attached to it, to quote Donald Rumsfeld.

"Where this clause is used, lenders will find it difficult to rely on [the valuation], which is why many are scaling back their LTVs.”

Blend Network revealed to B&C that it had reduced its maximum LTV for short-term lending due to  current conditions, but anticipated the stress would be short term and did not believe it would result in a prolonged and particularly depressive impact on the market. 

Tomer Aboody, director at MT Finance, claimed that valuers had been restricted from accessing properties and, as of Tuesday (24th March), most have confirmed that they would not visit any assets until such time as the government confirms they are allowed to do so.

“We appreciate the frustration this causes borrowers, but we continue to assess and review all deals, issuing terms and sometimes commencing legals, subject to and pending access.” 

Mark added that it was important to say that nobody was to blame for anything here, but it’s “no surprise” that lenders were reviewing their risk. 

“We will pull through this but for any business to err on the side of caution during this terrible pandemic is fully understandable.”

This is especially so in the property development world — if we see a drop in house prices, lenders must be comfortable in their values and underwriting procedures.

“I don’t believe lenders should hide behind their valuers, and I think this is going to be a much needed shakeup for our market,” stated Ashley Ilsen, CEO at Magnet Capital.

“…Over the last few years, I’ve seen some development lenders get ahead of themselves. 

“…Schemes that were written at 70% LTV in December could be 100% LTV by June.

“We’re still going to desperately need our surveyors for monitoring purposes and for their expertise, but now there will be more onus on the lenders to make sure they are doing the right thing from the outset.”

Empty station in Nottingham city centre after new government measures demand UK public to stay at home 

What are the solutions? Are there any?

One solution is using AVMs—however, the coronavirus pandemic is proving to be a situation where this method could be unreliable. 

Stephen explained that there would be be “little factual evidence”, such as data, to rely on, and therefore there would be much more emphasis on a valuer’s market experience to determine value. 

“AVMs rely on historic data sets and an automated output and, right now, there is no/limited new evidence to reflect the market, which has changed so quickly—this could in result in unusual outputs.”

Ian told B&C that “Relying solely upon AVMs with no direct knowledge of the security’s condition is significantly higher risk and dependent on the lender’s risk appetite.” 

“This is particularly true for bridging advances which are often made for conversion/refurbishment purposes,” he said, posing the question only a site visit could answer, “What condition is the security in?”

Some lenders are relying on drive-by or desktop valuations, based upon assumptions which can be verified at a later date.

“Some lenders are doing drive-bys themselves,” alleged Amadeus Wilson, director at SPF Short Term Finance.

“Others claim to have a couple of surveyors in the wings who are happy to visit properties,” he pointed out — but, as we can see, this is a grey area. 

“If you are employed to do a job by a lender, do you become a ‘key worker’ as bank employees are?”

Stephen felt that desktop valuations were the best solution, as you could get quality advice quickly and directly from experienced valuers.

As a result, he believed the industry was likely to see more lenders following this approach, with the option of inspection once the government restrictions were lifted. 

“However, there is an option to agree with valuers in advance that they will inspect the property as soon as they possibly can after the restrictions are lifted,” said Stephen, which he believed would limit any potential delays. 

“The key would be to be able to provide the valuer with as much information about the property as possible,” he added, “for example, property description, floor areas, number of bedrooms, tenancy/tenure details etc.”

But, while desktop valuations are increasing, combined with the ever-hardening PI insurance market for surveyors, this may not be a viable long-term solution, so, naturally, lenders’ LTVs would be lower against them.

Are they being used?

Paresh Raja, CEO at Market Financial Solutions, informed B&C that it did not support desktop valuations as the risks were “simply too high” for both the borrower and lender.

“There is not much we can do should valuations come to a complete halt,” he admitted. 

“….The lenders who will be able to overcome this obstacle are the ones who have strong relationships with their panel of valuers.” 

Paul Watson, head of origination at Blend Network, explained that AVMs and desktop valuations were “more appropriate in more liquid markets”, and therefore believed lenders should proceed with caution, in light of the increased uncertainty in the market.

“In our case, at Blend Network, in a normal market environment we would want a site visit, but in the current environment, to protect valuers we could look at desktop valuations,” he said. 

“But we might be more conservative on the LTV to mitigate the risk.” 

Amadeus claimed that with many lenders capped at 50-55% LTV as a result of AVMs and desktop valuations, this naturally prohibited any lending at higher LTVs, which therefore does not cater to all borrowers.

Paul believed that there would be a greater focus on gearing, pricing and security packages in the market, and these would be “fit for purpose on each and every deal”. 

While AVMs can work well for undifferentiated properties in certain towns and cities, this is not the case in London, and it is expected that reduced lending volumes are likely at higher LTVs, and the experience of a lender’s risk team has never been more important.

“…Two different sides of the street can vary in value,” highlighted Mark, adding that two nearby streets could be in a different ballpark altogether, from a price perspective. 

“What remains to be seen is how high lenders are prepared to gear against them during the pandemic.”

Do you have a story you would like to share about how the Covid-19 pandemic is affecting your business? Get in touch at [email protected]


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    Aroon Rana

    Excellent article

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