Positive transactional news within the marketplace is again making headlines. Also topical are stories of those who have lost assets as a result of the recession. Real-life experiences of people whose property investment has not yielded the desired result are frequently publicised. How faithfully however are reports, based around huge variations in property values, being retold to a wider audience?
Nobody wanted to lose out in the wake of the sharp price correction that began to emerge from 2008 onwards, let alone those who had originally funded deals. The banks had to refinance hundreds of billions of pounds worth of loans to a particularly indebted commercial real estate sector. Whilst values were recalibrated as loans were restructured, the related work-out strategy often proved challenging. This required forecasting how or when recovery in pricing would happen if properties didn’t have readily identifiable asset management initiatives.
The result was that commercial property lending dramatically reduced and the cost of borrowing increased. Transactional activity fell away, leaving those with cash reserves to be selective purchasers, often at significantly lower prices due to the absence of competitive interest.
These deals provided fresh evidence of market dynamics and the levels of pricing at which parties were willing to transact. A combination of re-based values, a prolonged recession and little evidence of price improvement resulted in many borrowers being in breach of covenants. Loan restructuring arrangements often neared maturation with no clear means of significantly reducing their debt. It was when assets were returned to market that the robustness - or otherwise - of previous valuation advice was tested.
Questions were asked about whether valuations had been properly assessed from the outset and if there was a claim that could be taken against the surveyor. People asked how reliable the updated valuation could be, with so little directly comparable evidence, especially as a number of transactions were forced sales. Why were some valuations based upon special assumptions and what was their impact upon valuation?
A special assumption is where facts are assumed which differ from actuality. Examples include assuming that planning permission was in place when, in reality, it wasn’t; or that a letting had concluded which hadn’t as yet; or that a building was vacant when it was actually let; or that a higher number of houses could be progressed on a site than presently suggested.
In reality, recent press coverage involving property valuations may not have given the full picture. It’s unlikely that vast differences in the value of a single property can be compared like for like due to factors such as special assumptions or other market forces.
The spotlight has also been directed towards lending practices themselves. Was there a claim that could be taken against the lender? Accusations have been made by aggrieved borrowers that lenders were able to “take control” of assets and that the same institutions will be set to benefit as the market improves. As a result, present day and retrospective valuations are of huge importance and, regularly, contentious. With a dispute comes the need to appoint a valuer as an Expert Witness.
It is the secondary and tertiary sectors, together with strategic development land where the pain has been felt most acutely. Debt portfolio disposals and swift recovery in land values for certain development sites in areas attractive to housebuilders have been a means of reducing bank exposure. The assets which remain on the books, or which have been sold due to defaults on loan arrangements, often reflect the illiquidity associated with property as an asset class.
The reality, however, is that changes in the planning system, lapses of current planning consents and higher holding costs amongst other factors may result in some assets never performing or being developed in the way envisaged when they were originally acquired or when loans were initially provided.
Sadly, when the market was booming there was sometimes 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. To arrive at a figure, the valuer will account for a variety of factors. An appreciation of where present value really lies in a proper market context is fundamental and provides a starting point for devising a strategy for disposal, breaking up the portfolio into sellable lots or adopting various means of de-risking or improving the saleability and value of properties.
The importance of appointing a reputable valuer cannot be understated. They must have first-hand 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 establish the present value and comment meaningfully upon the appropriate value at previous dates and offer a context within which the figure can be properly understood.
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 because robust, independent, thoroughly researched advice will have the value attributed to it which it rightly deserves.