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Market value should be defined by more than material uncertainty in times of crisis

Opinion: Factors that existed prior to Covid-19 – the lack of stock for first-time buyers or the shortage of quality industrial buildings – have not gone away

Only four months ago, we were looking at yet another strong performance in the commercial real estate sector. Office take-up had exceeded one million sq ft in the first quarter, underlying rents remained high at € 60 per sq ft in prime Dublin central locations while capital values, if anything, were probably overheated. Then along came Covid-19, and someone turned out the lights in the Irish property market. Or did they?

The commercial real estate market is in a state of flux with activity, bank lending, transactions and deal closings having ground to a near halt over the last two months. While we are starting to see some green shoots as we emerge from the lockdown, demand for all things property has been paused as key stakeholders await more certainty.

Any time confidence is challenged, market sentiment tends to shift very quickly. In the case of commercial real estate, material uncertainty is the new buzz term. It’s interesting to look at how this debate is unfolding with some property professionals happy to adhere to this clause, while others appear equally content to quote specific figures in an effort to quantify the likely impact on asset values.

One of the major lessons from the last recession, which was driven largely by excessive property lending, is that this time around, valuation reports are being read. But for these reports to have any value, they must be underpinned by sufficient and appropriate data, and underwritten with competency.

Unfortunately, the reality now is that we have significant and material unknowns in the market as a direct result of the lack of sales and lettings transactions. A competent valuer needs supporting evidence that will stand up to scrutiny and not be influenced by short-term market sentiment. The longer-term impact of the Covid-19 crisis is unknown, and this will continue to create material uncertainty until we have new evidence drawn from a sustained recovery in market activity and transaction volumes.

Material uncertainty should not be the sole or key driver of market value. Those who seem content to call such trends need to pay more attention to the fundamentals that drive value such as location, property type, life-cycle stage, quality of accommodation, rent, tenant, lease term and conditions, and covenant strength. These are the factors that one must understand and rely on for valuation purposes at any time, and particularly so as the market emerges from this latest crisis.

Valuations in the time of Covid-19

When it comes to producing a competent valuation report, the valuer should, at the outset, discuss the difference between market risk and market uncertainty with the instructing party.

Risk can be assessed and allowed for within a valuation (weighing up the pros and cons), and can also relate to future risk (rental growth, rentability etc). Uncertainty is harder to assess. It arises as part of the valuation (including the above risk) as at the valuation date, and not at any future date.

Risk and uncertainty work independently of each other. While uncertainty caused by market disruption is rarely quantifiable, it does not mean a competent registered valuer cannot carry out a reliable valuation report.

In the absence of comparable evidence from the last three months, valuers must stick to key valuation principles and have the experience and competency to understand the market fundamentals and their influence on valuations. Considerations such as occupancy, tenant rent, the capacity to generate income, void periods, tenant demand and investor sentiment will all be issues that will have been affected by the crisis.

To what extent we simply do not know. What we do know is that material uncertainty, while unwelcome and unpopular, particularly among lenders will, for the next couple of months at least, be a feature of the market dynamic.

It is important too, when considering any likely impact on valuations, that we bear in mind that those factors that existed prior to Covid-19 have not gone away. The lack of affordable stock for first-time buyers in the residential market, the demand for modern floor plate office accommodation, serviced offices, the shortage of quality industrial buildings to support the rapidly-growing logistics sector, the need to increase the numbers of available modern beds in nursing homes and the ongoing lack of affordable student accommodation will all need to be addressed in the post Covid-19 economy.

While all classes of property will be impacted to some extent by the crisis, only time and a body of comparable evidence will tell us what the real impact on values and yields will be. That should not, however, prevent a competent valuer from providing a compliant valuation report.

The advice to lenders, investors and vendors when instructing valuers in the current market is the best way to minimise the impact of material uncertainty, which all must adhere to in establishing a current valuation, is to focus on the competency of the valuer and not simply the perception of the brand they operate under.


Paul McElearney, The Irish Times - Wednesday 10th June 2020


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June 2020