In the last 12 months, the already challenged real estate world has morphed, yet again, into a new battlefield of conflicting pressures, which have resulted in some of the fastest valuation write-downs in my near-four decades operating in the UK market. Is there a simple explanation?
No doubt Peter Pereira Gray’s RICS review has had an immediate impact.
Many blame interest rates but they have rarely, if ever, been a major cause of sustained property devaluation. Availability of debt has had a much greater influence on value but nothing comes close to the impact of gross domestic product as the most influential reflection of value direction.
Since the global financial crisis, free money has created vast wealth, so returning some of that is hardly cataclysmic as surely this a small price to pay for 14 years of huge unearned wealth creation? Quantitative tightening was always going to produce a material value correction – maybe not quite so fast, but otherwise that was no surprise.
Those who over-geared heavily during the last few years and now face imminent refinancing have a massive challenge, which might also cause market skittishness.
Loan-to-values are less of a debt breach issue, as many deals acquired in the last few years will have plenty of equity fat on the bone, but interest cover challenges will see lenders, many from the ‘shadow’ banking sector, strip out economic value from borrowers if the assets can even be refinanced.
Unlike deposit-takers, which have maintained very robust balance sheets under the forensic scrutiny of the Bank of England, the unregulated lenders do possess decent real estate skills and are prepared to loan to own in the event of default and where the economic value is there to be carved out over time.
There is fear that where that isn’t feasible default could negatively affect values, but it is unlikely to have more than a very short-term impact.
Those who over-geared heavily during the last few years and now face imminent refinancing have a massive challenge, which might also cause market skittishness.
I remain puzzled by one particular contributor to value uncertainty and it’s the obsession with the ‘E’ in environmental, social and governance, and mainly Energy Performance Certificates (EPCs).
The ambitions are worthy but the rudimentary way they are being assessed will, in years to come, make today’s EPCs look like caveman drawings on the walls of energy conservation. We desperately need to modernise our thinking in this area.
Random targets and dates have started and will continue increasingly to distort markets, in offices in particular. Were this value destruction to be based upon good science and technological measurement, it might attract more attention from most property owners. We need to replace green washing with genuine action, not just to do the minimum to reach random targets but to achieve the maximum.
If government really wants a green revolution it needs to start offering carrots for actual proven energy savings and not the stick of potential stranded assets for non-compliance.
Total compliance is impossible in any event as the majority of our real estate world cannot physically pivot in anything like the permitted timeframe or afford the changes, and everyone knows it. Stranded empty buildings with no economic use will be a physical blight and destroy local surrounding economies, or what’s left of them, and create inflated rents for the greenest buildings, leaving a desert of empty, non-productive real estate. Pension funds, equity, insurers and society at large will suffer further value destruction because of this lack of creative thinking.
Surely the best solution is to incentivise property owners and occupiers to reduce their actual energy costs and to keep that process going, measured accurately using technology, which already exists. Use the carrot of tax concessions to encourage owners to spend money on their buildings, not the stick of stranding them. You create wealth for society by ensuring capital is deployed not destroyed and here is a wonderful and worthy opportunity for government to achieve this.
We are experiencing an illiquid market and value destruction following recent black-swan events, but occupational demand remains decent and is improving in many sectors, GDP is gently and increasingly positive and, who knows, a change to a more rewards-based approach to EPCs and we might well be looking at the start of a new and positive commercial real estate cycle.
Nick Leslau is chairman and chief executive of Prestbury Investments
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