Recent developments in property risk assessment

There has been a push for a review of current valuation auditing, with recent news reports indicating an apparent increase in ‘down valuations’ from 5% to 20% in two years, where mortgage valuations are presented with a lower figure than the listings or the offer amount accepted by the seller.

In order to assess a property in terms of its suitability as loan collateral for the mortgage lender, valuations require independent verification from qualified surveyors, as well as access to comparable data and intelligence relating to current market conditions. Consequently, the lending community has turned to technology to assist them in managing property risk assessment, using intelligent algorithms that automatically identify changes in market conditions, comparable data and are prompt to alert lenders and valuers of any potential changes. For example, over the last decade, Landmark Valuation Services have used the automated Q-Guard tool to check valuation reports for possible areas of concern, given each lender’s individual risk parameters and criteria, in order to carry out a further investigation if the system identifies an anomaly.

By estimating potential loan-to-value capacity, assessing property characteristics and ensuring consistency of reporting, valuation algorithms calculate the corresponding risk, in turn, enabling firms to Immediately determine the best approach for every valuation instruction. This provides a greater level of security and property risk assessment to all parties involved in the process. Traditionally mortgage lenders and surveyors have used fraud or risk alerts either pre or post valuation.

Pre-valuation alerts may impact the valuation method of choice, or push valuers to look out for specific areas of risk ahead of the visit to the property, for example, the property is located in an area where flooding has previously occurred, or any financial incentives identified by the algorithms, as part of the overall purchase of a new-build development. Post-valuation alerts can be targeted audit alerts or may pick-up on risks identified by the valuer, or even highlight potential valuer error before the valuation is completed and signed-off. Commercial director at Landmark Valuation Services, Michael Holden, suggests that customers should use a combination of the two depending on their need or risk appetite.

New technologies, such as artificial intelligence (AI) and machine learning (ML) techniques, are further improving this field, by incorporating sophisticated algorithms to automatically flag risky instructions based on historic data, such as environmental risks, property prices including pricing volatility data, socio-economic information, in addition to incongruous properties. A recent example is the use of drone inspections to reduce commercial real estate investment risks, with equipment or ageing roofs, being one of the top-10 sources of risk in commercial real estate.

Whilst traditional surveying methods of commercial roofs involve manual inspections or manned aircraft flyovers, they often result in inaccurate results and do not ensure worker safety. On the other hand, drone-based assessments present unbiased images of the entire surface, are able to provide thermal inspections that identify damages in areas that can’t be accessed via manual inspections, and can also be paired with AI and ML techniques to produce deeper insights.

With varied physical, financial and legal ground risks now being recognised as an environmental issue, Terrafirma has issued a risk and liabilities report designed to enable property professionals to better identify, manage and resolve ground and environmental hazards. The Ground Report is the world’s first commercial modelling of satellite-derived Surface Deformation data information on the risk of radon exposure; it also includes new guidance on all mining and natural ground perils, such as slope stability, running sands, sinkholes and erosion, including data on over 120,000 investigated subsidence claims and almost 10,000 sinkholes.

Overall, accurate and timely assessments of property and ground conditions can help reduce investment risk and help property managers, owners and insurers make strategic decisions about their properties. Investors should make use of recent technological development to ensure accurate mortgage valuations and secure the most effective loan-to-value figures.