One market or two?]

Citation

French, N. (2010), "One market or two?]", Journal of Property Investment & Finance, Vol. 28 No. 1. https://doi.org/10.1108/jpif.2010.11228aaa.001

One market or two?]

Article Type: Editorial From: Journal of Property Investment & Finance, Volume 28, Issue 1

Property valuation – sentiment and fundamentals

During the last two years we all know that we have experienced one of the worst global downturns in living memory. Some argue that the situation is graver than the depression of the 1930s and, whilst certain market indicators would support this argument, there seems to me to be a stark difference between now and then. The depression of the 1930s appears to have affected everyone. The recession of the late 2000s seems to have divided to the “have” and “have nots”. If you are fortunate enough to be in employment now, the deflationary effects in the economy and the historically low interest rates means that, obtusely, we have a tranch of society who have a greater disposable income now than at the height of the boom.

This same dichotomy is also apparent in the property investment markets. There are a significant number of cash rich investors (funds, consortiums, individuals etc) who are actively looking to invest in the market both at home (wherever that may be) and abroad. Anecdotal evidence suggests that most investors are entrenching in their home markets as that offers a degree of comfort in expertise and familiarity but the end result is that there is a suppressed demand as they all wait to find the right product. Conversely, property owners of quality investments are waiting for prices to increase and thus there is a limited supply of good product. The end result is that where deals are currently happening, they are doing so in an environment of relatively high demand and relatively low supply; the end result, obtusely in a downturn, is a mini-bubble of increased prices. This is happening in both the commercial and residential markets.

Unsurprisingly, commentators are seizing upon this news as the herald of the recovery and, it is possible, that they are correct. If the market progresses with an increase in supply matching demand then prices rises may be maintained or even escalated. However, it is also possible that demand will remain constant and the increased supply or owners trying to capitalise on the short term prices rises will simply bring prices back down again. I subscribe to the latter view although I would welcome being proved wrong. But what is significant is what investors now consider as “good” investments. They need a good location, a high specification (which now includes an strong BREEAM sustainability rating on new builds), a long lease and a strong positive cash flow and, in as much as it can still be judged, a strong covenant. Any properties that do not match these features are simply being overlooked.

But, what of the role of valuation? At the start of the recession, UK valuers were quick to “grasp the nettle” and to reflect the downturn in their valuations. A number of commentators recognised this:

The days of waiting for evidence are over. In the absence of evidence, valuers should be required to value on sentiment (Mason, 2009)

Investment inactivity caused by property market uncertainty and wider financial market volatility means there is little transactional evidence on which to base values (Charleston, 2009).

Indeed UK valuers have been quite bold and, I think correct in marking to market robustly and expeditiously. The RICS in their 2008 Sale and Valuation Report commented upon the comparative willingness of UK valuers to adjust values downwards. Indeed, the RICS/IPD Valuation and Sale Price Report 2008 found 84.5 per cent of UK valuations were within 20 per centof the final subsequent sale. This is a very strong correlation in a downturn and significantly higher than in other countries. Yet, the picture is more complex than that. As noted above, the split in the UK investment property into “good” and “bad” properties means that the former are being sought strongly and prices are relatively strong because of this. The not so good properties are being left. In other words, it is not necessarily that a premium is being paid for the good property but it is true that a substantial discount is being experienced for lesser properties. Robert Peto of DTZ said in Property Week on 2 October 2009:

It has never been more important to take into account property fundamentals when valuing… the best property will improve and the worst will get worse. Valuers have the tricky task of differentiating between the two.

And it is my belief that this will not be a passing phase. We will see markets in most countries develop into two tier markets – good properties and bad properties. The former will be highly sought, the latter will struggle and the valuer will need to reflect that often, in the case of the latter, with no transactional evidence to support the valuation. Valuation will continue, in this market, to be made on sentiment.

Nick FrenchOxford Brookes University, Oxford, UK