Five years ago, the mortgage market needed the EWS1. It provided much-needed clarity at a time when uncertainty around external wall safety was making large numbers of flats difficult to mortgage and leaving lenders, valuers and brokers with limited information on which to make decisions.
The market looks rather different today. We now have years of transactional evidence, greater understanding of how affected properties perform and, crucially, statutory protections that have changed the potential financial impact of remediation for many leaseholders.
Add in the latest RICS guidance and changes to PAS 9980, and the role of the EWS1 is starting to look rather different too. The issue is no longer simply whether the form is needed, but where it continues to add value and where the market now has other ways of assessing the risk.
The market could not have reached this point without EWS1
It’s easy to focus on the difficulties associated with EWS1, particularly the delays that have affected some transactions, but that risks overlooking the key role it has played in getting the market to where it is today.
When the form was introduced, valuers had limited market evidence on which to base their advice, while lenders faced significant uncertainty around security values and potential remediation liabilities. The EWS1 process, supported by RICS valuation guidance, provided a framework through which transactions could continue, helping to build the body of market evidence that lenders and valuers can draw upon today.
The risk has changed
The Building Safety Act also altered the way affected properties are viewed. Previously, discovering that remediation was required could leave a leaseholder facing significant costs, with obvious implications for affordability, value and saleability.
Where a property and leaseholder qualify for statutory protections, there can now be greater confidence that the borrower will not face the level of remediation costs that once created so much uncertainty. Attention can therefore shift from simply establishing whether a defect exists towards understanding what it actually means for the borrower, the property and its future marketability.
We are already seeing this reflected in lending policy. In some circumstances, lenders are prepared to proceed without definitive confirmation from either an EWS1 or Fire Risk Appraisals of External Walls (FRAEW) that remediation is required, provided the appropriate protections are in place.
Individual lender policy therefore becomes particularly important for brokers, as an affected property that falls outside one lender’s appetite may still be acceptable to another.
There is more to marketability than cladding
Building safety is also only one part of a much wider marketability question. High service charges, rising insurance premiums, major works liabilities and historic ground rent arrangements can all affect demand and, in some developments, may have a greater bearing on a buyer’s decision than outstanding remediation.
Interestingly, completing remediation does not automatically remove every challenge either. Where owners have delayed selling while work takes place, several similar flats can come onto the market once it is finished, potentially putting pressure on values even though the original building safety concerns have been addressed.
It’s another reason why remediation status cannot be considered in isolation when looking at the valuation of an individual property.
Could FRAEWs take on a greater role?
The updated PAS 9980 standard and revised RICS guidance create greater scope to rely on FRAEWs, although much will depend on the quality and consistency of the assessments produced.
If FRAEWs are to play a greater part in the mortgage process, they need to provide clear conclusions that can be understood and used by people outside the fire engineering profession, supported by confidence in the competence of those carrying them out. Achieving that consistently could reduce the need to rely on a separate EWS1 process.
A changing role rather than an immediate end
None of this means the EWS1 is about to disappear. Lender requirements still vary and the form continues to play an important role in many transactions, but the circumstances in which those decisions are being made have changed considerably.
Revised RICS guidance should mean fewer buildings require an EWS1, while PAS 9980 aims to make FRAEWs more useful and statutory protections have reduced some of the financial uncertainty surrounding remediation.
The direction of travel is towards a more proportionate approach, where the need for an EWS1 is determined by the circumstances of the individual building rather than purely due to the presence of a higher risk material and fewer lenders require them at all where statutory protections exist. If that continues, brokers should increasingly find that external wall issues do not automatically limit the mortgage options available to their clients.
