By Robert Peto
Is it important for valuers to understand macroeconomic and financial dynamics when providing an opinion of market value?
Given that market value should only be assessed through the eyes of purchasers, it is, in my opinion, important for valuers to understand their state of mind. Investors are, more than ever, trying to read the economic tea leaves to inform decision making. So should valuers, because sentiment is a key driving force in the market.
It appears that financial Armageddon has been averted.
All the indicators are pointing to a recovery in sentiment albeit, in most cases, this is more about a slowing in the rate of decline rather than a return to positive territory.
The capital markets are in overdrive with new equity raisings and issuance of corporate bonds. In the real estate world, REITs and many unlisted indirect vehicles are recapitalising. There is a plethora of opportunity and investment fund capital raising, either completed or under way, waiting for the moment to strike — particularly for UK property, which has seen the fastest adjustment in pricing of all the western countries, combined with a relatively cheap currency.
Property yields are historically attractive on a comparative basis, and the asset class is attracting increasing interest, particularly at the “long-dated end” where prices have already risen by around 10% to 15% in the last three months. The IPD Monthly Index has experienced its first rise in capital values since June 2007 and the current shortage of reasonable investment grade stock on the market is leading to competitive interest in increasing lot sizes, particularly where stapled debt is available.
“It has never been more important to take into account property fundamentals when valuing”
So has the tide turned? The answer, of course, is yes and no. The positives are set out above. However, it is still wise to be cautious. While debt is less scarce than it was, the banks are still over-leveraged. There is also a significant and well-documented refinancing problem to be overcome during the next five years. If true market accounting were to be imposed, then real estate could still be the cause of a financial relapse. There is also the spectre of a return of inflation with consequent knock-on effects on interest rates. However, the real test still remains on the occupational and rental side, and this is driven by the health of the economy as a whole.
Unemployment is rising and, given the level of government debt, it is likely the public sector will be a contributor to the dole queue over the next five years.
The latest RICS Commercial Property Survey indicates less negativity about increasing floor space, falling rents and rising inducements, but it is still negative, and the correlation between these surveys and rental changes in the following three to six months is very high. We can therefore expect net effective rents to continue falling with a fairly sluggish recovery over the next two to three years.
Having said this, speculative development has virtually ceased. This rental cycle has been about a demand strike not a speculative oversupply. It is therefore conceivable that, in two to three years’ time, selective markets may experience significant rises in rents to justify development.
There is a greater feeling of stability, but it has never been more important to take into account property fundamentals in valuing. The best property will improve and the worst will get worse. Valuers have the tricky task of differentiating between the two. (Robert Peto, Property Week) http://www.propertyweek.com/story.asp?sectioncode=274&storycode=3150261
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