Bearing Witness to Expert Value
Why is it that disputes over property values appear to be increasing as the market improves? Nobody will have wanted to crystallise a loss or find themselves in a position of negative equity and will, therefore, have resisted selling assets unless forced to do so. The toll of the wider economy upon business and personal relationships has resulted in a number of casualties where each party needs to determine their share of the value of any associated property. With the banks tasked with refinancing of £160 billion worth of loans outstanding to the “particularly indebted” commercial real estate sector within the next three years, present day and retrospective valuations are of huge importance and, therefore, contentious. With increasing volumes of disputes comes the need to appoint a valuer as an Expert Witness.
Back in the early 1990s many funders sought to establish whether or not valuations provided in connection with loan facilities had been properly executed or whether there was a claim that could be taken against the surveyor. The picture this time around has been somewhat different. The past three years have witnessed a sharp decline in the extent of property lending to the commercial and residential sectors. The focus of funders has predominantly been upon loan restructuring. Fears of a huge volume of problematic property stock flooding the market and leading to a further downward spiral in pricing due to an oversupply of stock were unfounded. Conversely, lenders focused very much on working out situations and establishing suitable strategies for a medium term view.
As areas of the property market witnessed significant improvement in the latter half of 2009 onwards, those with loan exposure, receivers or administrators were able to negotiate suitable exit strategies in a number of instances. The reality, however, is that prime properties are not the type of assets causing particular difficulty to the banks nor their owners. These are sellable commodities where a weight of money remains for the right stock. It is the secondary sector, together with partially constructed developments or strategic land, which are causing much more concern. Such situations reflect the illiquidity associated with property as an asset class. Whilst many have been given an extended stay of execution through loan restructuring within the past two-and-a-half years, some such facilities are now nearing their end with no clear means in sight of significantly reducing the debt burden. Changes in the planning system, lapses of current planning consents, increased supply and reduced demand may result in some assets never being developed in the way originally envisaged when acquired or when loans were provided. Banks are increasingly at least asking the question: “Was the original valuation negligent?”
Sadly, when the market was booming there was a misconception that a valuation was merely an additional expense which was required as an audit check in order to tick a box and enable a loan to progress. Where the quality of advice was compromised in exchange for a low fee, problems have potentially come home to roost.
A valuation is a snapshot at a point in time. It is critical to understand how a particular property or portfolio of properties will compete within their own specific sector or the wider marketplace. An appreciation of where present value really lies in a proper market context is fundamental. This provides a starting point from modelling scenarios and devising an appropriate medium term strategy whether through disposal, breaking up the portfolio into sellable lots or adopting various means of derisking or improving the saleability and value of properties. The importance of appointing a reputable valuer involved at the coalface of the market cannot be understated. Such an individual must provide independence and objectivity and undertake sufficient research to corroborate evidence. They require firsthand knowledge of opportunities currently being appraised, discussions which may be bubbling under the surface and of deals which have occurred off market or which have failed to conclude. They must interrogate the quality of information presented in order to establish the present value or to comment meaningfully upon the appropriate value at previous dates, whether this is in terms of separation, dissolving of partnership or a potential negligence claim against another valuer.
The reality is that more and more parties with exposure to property will only discover the value of such advice once tested through the litigation process or out of court settlements. Lessons should be learned and there should be a flight to quality. Robust, independent, thoroughly researched advice will have the value attributed to it which it rightly deserves.
For more valuation advice contact Brian Allen on 0131 473 3310 or at brian.allen@ryden.co.uk
