“There is something rotten at the core of the valuation system.” These are the words of a moderately senior industry figure, dismayed by the pretence that retail capital values are gently contracting, rather than rudely collapsing. One marker: the joint stock market value of Landsec, British Land, Hammerson and Intu was £18bn last week. The net asset value, according to valuers, was £28bn: a £10bn difference of opinion.
Who would be a valuer of retail property, faced with totting up assets for a client with a December year-end? Income is falling in all but prime centres. Nobody wants to be first to make the deepest cut, some for fear of failing to match industry benchmarks. Yet owners know this or that centre is worth no more than 60% of the asking price – but because it has not sold, they still want it entered at book value.
The parallels between valuers and auditors have become impossible to ignore. Both markets are dominated by a handful of firms. Both markets are ineffectually policed. Both markets have a conflict at their heart: no auditor or valuer dare get too uppity with a client who is also paying more handsomely for consultancy advice. The only difference, to date, is audit scandals are forcing change.
Last month, the Competitions and Markets Authority announced an inquiry into the audit profession under Legal & General chairman Sir John Kingman, who said: “If the many critics of the audit process are right, it is not just the companies that buy audits that lose out; it is the millions of people dependent on savings, pension funds and other investments in those companies whose audits may be defective.”
Ditto valuations. Let’s imagine the RICS has the stomach to launch a similar inquiry. What might be asked? How about: “If a shopping centre has been on the market for £156m for six months and the best offer you have refused is £90m, what is that centre worth? £156m, because the ‘willing buyer/willing seller’ link has not been established. Or should it be marked down to £90m because nobody will pay more?”
How about: “Long-term incentive plans for board members and, more particularly, bonuses for fund managers often include an element requiring movements in portfolio value to outperform benchmark data covering the wider sector. Is there evidence that tying incentives to benchmarks heightens the propensity to harmonise valuation movements with those in the chosen peer group?”
Recommendations and reactions
Imagine the reaction if the RICS ordered REITs and funds not to employ agents who value for any other service? Simply not going to happen, is it? The RICS could amend the ‘willing buyer/seller’ rule. Perhaps. But not before years of arguing. There could be official condemnation of benchmarked bonuses tail-wagging Red Book rules. Unlikely, at least not until after the next crash.
After the last crash, great efforts were made to put a system in place to ensure that valuers did not fall into disrepute. The Property Industry Alliance (PIA) eventually came up with the concept of adjusted market value (AMV) in the summer of last year. Little has been heard since. But, essentially, the system relies upon lopping off a percentage of the Red Book value if the long-term statistics show the market is overvalued.
But there is a flaw in the reasoning, admitted by the great and the good who made up the PIA panel. “AMV is blind to structural change… there is still concern that interest rates or other transformational factors (my italics) might cause values in the future to diverge structurally from their historic trend. In such an event, excessively early warning signals could lead to a potential loss of credibility for the methodology.”
What’s happening in retail is surely transformational. If the PIA wishes to retain credibility for the use of AMV, it might be wise for it to dwell on the issue. But that will inevitably take ages. Let’s come back to the question: what does a valuer do right now, faced with providing a year-end fix on a retail portfolio they, their client and the world at large know is worth a lot less than its Red Book value?
Agents used the Red Book ‘uncertainty’ clause after the 2016 Brexit vote, dealing the get-out-of-being-sued card with the phrase ‘the probability of our opinion of the valuation being exactly as the price achieved is now reduced’. Or maybe do what one brave and wise valuer has just done after being called in by a client to carry out due diligence on the original valuation: recommend a 20% cut, ‘just because’.
This comment was published in the 23rd November edition of Property Week.