Experts think that history may repeat itself, just as when valuers were caught out in recent years for valuing retail stores and shopping centres too optimistically.
The warning signs were there early on, but these were often ignored by valuers until an increasing number of empty shops resulted in dramatic reductions in property values. Covid merely accelerated that, with shop closures in lockdown and a rapid shift to online orders.
The same fate could befall offices especially as when large scale occupiers such as HSBC, Barclays, Deloitte, JP Morgan, Standard Life Aberdeen and Fidelity have have all indicated there could be a major shift in their modus operandi, a move to much more home-working.
As vacancies start to rise, when leases run their terms, rents will fall dramatically, as will property values. According to The Times newspaper, available London office space has recently increased to almost 20 million sq ft, from the 10-year average of 14 million sq ft, as many businesses are now seeking to sublet space they no longer require.
Investors in large office blocks, insurance companies and property funds in the main, rely on annual valuations given by the main property agents and consultants including: Colliers International, CBRE, Knight Frank and Cushman & Wakefield. Can investors in these funds still rely on valuations when these professional valuers have marked underlying property assets down a mere 0.2% to 0.3% per month?
The professional accounting body, The Institute of Chartered Accountants in England and Wales, has expressed concern about a lack of objective evidence for property valuations in investment company accounts.
The Institute has said:
“We sometimes find there is very little evidence to support valuations, and where there is a formal valuation by a specialist valuer, little or no evidence of evaluating their competence and objectivity, the relevance and reasonableness of assumptions, or completeness and accuracy of source data.”
According to its website CBRE values around two-thirds of Britain’s top UK real estate investment trusts and is a valuer to three major office landlords reporting results last week. Great Portland Estates, Land Securities and the Workspace Group showed only modest changes in their portfolio valuations with falls of 2.4%, 1.9% and 4.9% respectively.
Nick Knight, head of UK valuation at CBRE, has said:
“Has the effect of Covid brought an internet moment to the office sector that is comparable to retail? I think it’s quite early to make that call. We know that companies are moving to hot-desking, a lot of organisations are looking to reduce their footprint, availability has risen and that’s impacting on forecasts and rental values in the valuation world.”
“There is a view emerging that the longer people have been in lockdown, the more they’ve realised what the office gives that they are not having at home.” Mr Knight says that CBRE believes there will continue to be strong demand for offices with good amenities and “wellbeing characteristics that help companies to attract talent.”