But these “valuations” are crucial to REITs and property mutual funds.
By Nick Corbishley, for WOLF STREET:
In its third quarter report on the state of the UK’s commercial property market, the Royal Institution of Chartered Surveyors (RICS) said that expectations for a decline in rents for prime office space were “the most widespread” since records began in 2014. Yet valuers have barely marked down their valuations of office properties in London, prompting some to question whether they are conflicted by the lucrative contracts they have with the UK’s largest REITs and property mutual funds.
With the UK once again back in lockdown, all workers who can work from home — including the lion’s share of London’s office workers — have been urged to do so. Many of them never returned to the office to begin with. Research published by Morgan Stanley in October found that only 49% of UK workers had made it back to their workplace as of October. This is a particular issue in London, and London-based employers, lumbered with largely empty office space, have begun in recent months to dump at least part of that real estate as subleases on to an already saturated market.
Between June and September alone, more than 1 million square feet (92,900 square meters) become available as firms, including some of the City’s biggest banks, sought to sublet space they no longer needed. Since the start of the virus crisis, the availability of office real estate has mushroomed to almost 20 million square feet, from a 10-year average of 14 million square feet. It is growing at the fastest rate, in net terms, since 2009, according to RICS.
Yet despite plunging demand and rising vacancies, valuers have barely marked down the properties belonging to their clients. This has prompted some in the industry to question the validity of the valuations, reports The Times of London.
“The valuers are now in denial on offices just as they have been for years on retail,” said former Treasury minister Lord Oakeshott, who runs London-based commercial property firm Olim Property, which has no exposure to office or retail properties. “London office rents are clearly in freefall, with very little occupier demand, but the valuers are only marking them down by 0.2% or 0.3% a month.”
The Institution of Chartered Accountants in England and Wales was the first to raise the alarm about property valuations, warning that it sometimes finds “little evidence to support” their validity. RICS, the UK property industry regulator, has launched a review of how property valuations are conducted in response to rising concerns about potential conflicts of interest in the industry. Depending on its findings, it may consider imposing mandatory rotation of valuers
Relationships between REITs and valuers and property mutual funds and valuers tend to last for decades, giving rise to very cozy, deep-seated ties. In some cases, a surveyor may even act as valuer for a firm while also having a seat on the firm’s board. These cozy relationships may make it more difficult for a surveyor to reduce its estimated value of properties belonging to an important client, since it could have a material impact on that client’s performance.
For REITs, the reported valuation has a major bearing on the company’s performance metrics, which in turn affect the share price. In the case of open-ended property mutual funds, the price at which investors subscribe and redeem their shares is determined by net asset value (NAV), so the valuation directly impacts their returns too.
The concentration and governance of the valuation industry are also under scrutiny, having drawn comparisons with the UK’s scandal-tarnished audit profession, which has been dominated for decades by the “Big Four” global accountancy firms (KPMG, EY, PwC and Deloitte) but is now finally undergoing an overhaul.
The valuation of the UK’s property industry is essentially controlled by a tiny clutch of surveying firms, including CBRE, Knight Frank, and Cushman and Wakefield. By its own admission, CBRE values two-thirds of Britain’s biggest REITs, as well as the three largest office landlords: Great Portland Estates, Land Securities, and International Workspace Group (previously known as Regus). Together with Knight Frank, it is estimated to value at least 60% of UK property funds.
Just as the Big Four audit firms have often audited the accounts of their clients while also charging fees for a host of other services, valuers are often appointed to value a fund manager or property firm’s properties while charging them fees for other consulting services. In both cases, there is a clear potential for conflicts of interest.
Though industry representatives strongly deny such charges, The Times suggests that valuers are at least beginning to acknowledge a growing perception that the industry may be prone to malpractice, sometimes with hugely costly consequences. At the end of last year, acute uncertainty about valuations triggered a run on M&G’s £2.5 billion flagship property fund, which led the fund to suspend redemptions — and the fund’s investors still can’t touch their money. By Nick Corbishley, for WOLF STREET.
Regus’ U.S. subsidiary, RGN Holdings, has already filed for Chapter 11 bankruptcy. Read… WeWork Forerunner IWG/Regus Restructures its Business, Unleashing Mayhem on Landlords and Investors
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