'It's Live Data': Why UK Portfolio Write-Downs Are Tumbling 10 Times Faster Than During The GFC
UK property values are being written down faster than ever before in the sharpest correction in history.
The largest write-down of value in UK commercial real estate was between June 2022 and April 2023. It took 10 months to wipe out about £210B, according to Schroders, using Office for National Statistics data.
Compare this with the Global Financial Crisis, when the total fall in value was £71B over the three years between 2008 and the end of 2010.
Speed and time are relative, but even allowing for a larger and more valuable UK commercial property ledger, this is not a calculation that would give Einstein much trouble. The write-down in property values today is occurring about 10 times faster than during the GFC.
And there is more to come. We could be just a few months away from yet another record write-down as inflation and interest rates stay up and hopes of a soft economic landing go down.
So why are valuation write-downs almost instant — and spread fairly evenly across property sectors — when last time the economy took a serious dive they edged down slowly and jaggedly, with some sectors feeling the pain much later than others? And what does the change mean for the way commercial real estate in the UK is bought and sold?
One of several factors coming together is that the lessons of two historic events, the GFC and the pandemic, combined to convince valuers they had to act decisively.
Valuers had encountered criticism for slow write-downs during both events and decided this time they would prefer to jump rapidly.
“Last time round, there were no property transactions in the early days of the crisis, and the mindset among the valuation fraternity was that you couldn't write down value without evidence, and since there were no transactions, there was no evidence," Allsop commercial valuation partner Ed Dunningham said. "So lots of valuers held the line. At the same time, the banks were doing 'extend and pretend' with their loans, so they weren't being quick to mark values down. Everyone put off the inevitable.
“Now, today, you look at market sentiment as well as deals. You assess: If there was a market transaction, where it would fall? And since real estate values are so closely tied to money rates, we can see where values would fall.”
Thus, the post-November 2022 budget revaluation was a direct response to spiking money rates. Nobody waited for deal-related evidence of the kind required for traditional RICS Red Book valuations.
“Valuers have been concerned not to be slow on the uptake,” Dunningham said. “We don't want to lag. And I think valuers learned from the lessons of the past.”
They will be quick in the future, too, he said. Expect further interest rate rises to be reflected in write-downs more quickly.
Former banker and now Head of Capital Markets at IPSX Rupert Snuggs said he hopes valuers are as quick as possible. The faster they reprice, the better for everyone.
“In 2008-2010, maybe there was a cultural need to pretend things weren't as bad as they were," he said. "But bringing values down quickly moves the market through. Everyone knows where they stand. You take the medicine, and the market moves forwards. We saw that in the GFC with the U.S. banks who revalued super-fast, allowing them to build up from the bottom and to generate some paper profits quickly, which improves confidence."
Another factor at play is compliance. Fraser Greenshields is corporate finance partner at EY and a long-term observer of the valuation scene who said changes in working practice are part of the story.
“Maybe there was less segregation of duties between credit and loan management, so the originator was managing loans, but today there is more segregation of duties, and so it's more likely to mean more transparency about valuations,” he said.
Snuggs extended the idea to include asset managers and their valuers.
“Compliance rules are more robust than they were,” he said. “Back in the day, [asset managers] maybe had more friendly conversations with valuers. Today, valuers are more disinterested, very cold, and that plays into the reasons why valuations have dropped so fast.
“I'm an ex-banker. I'm used to compliance regimes and like it like that because it removes market inefficiencies. You get realistic views, not smoke and mirrors.”
Not everyone agreed.
“It's not one I'd get carried away with,” Dunningham said. “The problem back then was the approach and methodology. They just got it wrong.”
Then there is the fact that the commercial property market has undergone a fundamental structural change. Twenty years ago, long institutional leases were the norm. Today, they are rarities. Data from Re-Leased shows that almost half of all UK office leases are for less than a year, and just a few per cent of leases are for 10 years or more.
In a market poised on the cliff edge of lease events, it is more important than ever to have real-time information. No landlord or lender wants last month's valuation because next month's income stream could be very different from this month's. They need to know borrowers have income to cover interest costs. This contrasts with the distant past when landlords and lenders maybe had years in which to crystalise losses — or hope to swerve them.
“Lenders aren't going to want yesterday's information,” Allsop's Dunningham said, although he said today's lower loan-to-value ratios provide a buffer — mental or financial — to some lenders in the way that longer leases might have done in the past.”
If there is a consensus, it is this: Changed valuation practices, changes in leasing practices and changes in compliance practices have all played a part in making sure that when the economy changes, property values drop like a stone.
Property is often seen as a slow-moving, archaic industry. But for IPSX's Snuggs, these shorter leases bring with them an inherent increase in the speed at which the value of a property changes.
“If rental income drops, then valuation drops,” he said. “It's live data.”