At a time when the covid-19 crisis has created an unprecedented amount of uncertainty in private real estate, one thing is for sure. “Everything is very difficult to value right now,” says John Kjelstrom, head of the valuation practice at financial risk management firm Chatham Financial.
According to Kjelstrom, this includes all property sectors, not just those directly impacted by the crisis, namely hotels and retail. Student housing: “A big question mark right now.” Office: “It really depends on the strength of the tenants and the duration of their leases.” Apartments: “That’s going to depend on if and how close they are to stabilization.” Even industrial, the industry darling: “It really depends on the effectiveness of asset management and how it capitalizes on the increase in demand for that space.”
There is so much uncertainty in real estate, in fact, the Royal Institution of Chartered Surveyors – the standard bearer for property valuations in Europe – has encouraged appraisers to put in so-called material uncertainty clauses into their valuations since the start of the year.
Material uncertainty aside, however, second-quarter property valuations are meaningful, says Brian Velky, managing director at SitusAMC, a technology and real estate services firm. When the Q2 2020 NCREIF Fund Index – Open‐end Diversified Core Equity results were released, real estate values were down 2.5 percent. “That may not seem like a lot. But that index has covered the market since the 1970s. A 2.5 percent decline in one quarter has only occurred 15 out of 170 quarters and is the first material decline since the GFC,” he observes. “That’s a significant one-quarter move in the context of private real estate.”
Against this negative backdrop, the standardization of performance reporting has become a front-of-mind issue for the industry. “I always find that standards become much more popular when things get bad,” says Marybeth Kronenwetter, director of reporting standards at industry body The National Council of Real Estate Investment Fiduciaries. “When things are going well, it doesn’t reach the top of the pile. But when things are bad, people need to know why.”
PERE spoke with more than a dozen industry sources, including valuers, investors, managers and associations about how they are addressing both new covid-related issues and ongoing challenges with valuations and performance reporting.
PODCAST: How to value assets during covid-19
Listen to two valuation management firms share their strategies for assessing a property’s worth during a time of massive dislocation and uncertainty.