New Paradigms in Real Estate Asset Valuation

As the Covid-19 pandemic continues to impact livelihoods and economies around the world, real estate investment managers find themselves facing new challenges for valuing their assets. Sensus recently engaged two industry experts to share their views on technology’s role in the valuation process, the impact of the pandemic on asset values, and the challenges faced by external appraisers in the current environment.

Julien Sporgitas, Head of Advisory EMEA, Altus Analytics, Altus Group

Julien Sporgitas oversees the advisory practice for Altus Group in the EMEA region and provides valuation management services to the largest Pan-European fund managers covering more than EUR 35 billion in volume, with more than 1,500 assets across main real estate sectors and markets.

Stephane Campori, Director Real Estate, Alter Domus

Stephane Campori is Director Real Estate at Alter Domus in Luxembourg. Alter Domus provides a complete range of vertically integrated solutions to the alternative investment industry and serves ninety percent of the world’s largest real estate firms at the time of this magazine’s publication.

As a starting point for our discussion, what differentiates the role of external appraisers in the real estate sector from other industries?

As an investment, real estate is a more complex asset class that requires a specific set of competencies, as well as third-party valuations. According to Julien Sporgitas, Head of Advisory EMEA at Altus Analytics, the intrinsically illiquid nature of real estate also requires the assets to be valued independently on a frequent basis. “There is a definite best practice to externalise the valuation exercise. Frequency will vary depending on the nature of the funds of course, but this is a key differentiator from what you will see in other asset classes.”

Based on your experience, how can technology facilitate the valuation process and the delivery of data?

Believing that the effective use of technology begins with the quality of data, Sporgitas remarked, “Integrity, transparency and consistency are the big three items when it comes to data. From a technology perspective, valuation and performance benchmarking, as well as data analytics are some key parts of the valuation management process. Fund managers usually sit on a wide range of data points, and the challenge is to really use and leverage the data to provide fruitful insights.”

Sporgitas added, “For each appraisal at Altus Group, we track numerous data points and use our database comprised of a large number of properties. This allows us to streamline our valuation process for each appraisal while also bringing more consistency and objectivity.”

Stephane Campori, Director Real Estate at Alter Domus concurred, “As a third-party administrator, we see an increasing number of client requests for more granular data. These requests are coming not only from investors but also from asset managers who are continuously seeking benchmarks for the overall performance of their portfolios, and the ability to closely monitor KPIs relevant to their business.

“As fund administrators we have a strong focus on ensuring the accuracy, consistency and integrity of the data we deliver to our clients,” Campori explained. “To this end we are implementing a “data-as-a-service” model and have invested heavily in technology solutions to consume and manage data. We are extending our real estate platform from the US into Europe and Asia-Pacific – which, besides hosting Yardi, allows for greater operational efficiency through automated data collection and standardised reporting.”

How has the Covid-19 pandemic impacted the valuation process?

“This has been an evolving process for all of us,” reflected Sporgitas. “Being able to value assets in the context of uncertainty, where the pandemic prevents you from conducting site visits, together with a lack of comparable evidence, leads to a real challenge in determining an asset value that can be relied upon from a fund Net Asset Value perspective.”

Asked if he had faced any situations where asset owners disagreed with appraisers’ valuations, he commented, “It’s a bit of a vicious circle. If there’s uncertainty in the valuation process, it raises questions around the ability to determine a reliable Net Asset Value for your fund. Uncertainty adversely impacts confidence in valuations which in turn impacts transaction volumes. But if nobody is willing to transact, what market evidence can a third-party appraiser use to determine a market value?”

“The pandemic has certainly increased scrutiny on the valuation process from investors, regulators and external auditors,” added Campori. “At the same time, valuation bodies such as the Royal Institute of Chartered Surveyors – as well as professional associations like INREV and AREF – have been proactive in releasing guidance and best practices to ensure a consistent approach within the industry. As a silver lining, Covid is also providing an opportunity to clarify the roles and responsibilities of each party – from fund manager to external appraiser – around the valuation process. And now more than ever, fund managers need to be able to demonstrate the robustness and independence of the valuation function.”

What are the main challenges faced by external appraisers in terms of reporting to investors?

Acknowledging the challenges of adjusting the reporting framework to reflect market uncertainty, Sporgitas recalled, “The effort was very well coordinated at the beginning of the pandemic to disclose valuation uncertainty clauses consistently in third party appraisals.”

Uncertainty clauses have gradually been lifted since Q3 2020 for several real estate asset classes, including logistics, prime office buildings, hypermarket and food retailers as the industry adjusts to the new normal. Sporgitas continued, “Nowadays we are seeing more market conditions clauses, which reflect the state of the market – the fact that we’re in a pandemic. It’s much less strong than a valuation uncertainty clause, and that’s the evolution we’ve seen. With the recent pick-up in transaction levels in Q4 and the pipeline we see with some of our clients in early 2021, there is an expectation that valuation uncertainty will not be reinstated in the immediate future. However, the impact of Brexit could potentially be another game changer for certain asset classes so this will need to be monitored during the next couple of quarters.”

What are the main business impacts of valuation uncertainty?

Noting that uncertainty in valuations creates greater volatility, Campori explained that it can also lead to suspend trading, which was the case for some open-ended UK property funds, as well as increased repayment risk caused by early redemptions. He cautioned, “Uncertainty also disrupts the fundraising process, and may even indirectly lead to a breach of loan covenants if firms fail to demonstrate compliance with Loan to Value ratios.”

Sporgitas added, “Material uncertainty has led to a flight to quality. Market players are competing for the same assets, resulting in significant premiums in transacted prices for core assets in prime locations.”

Campori agreed and added, “We are noticing a general ‘wait-and-see’ attitude amongst clients, with a sense that fund managers are looking for opportunities in the next three to four months. I think that when the first movers take action, the followers will be right behind them.”

How do these exceptional circumstances impact the fair-value disclosure in the financial reporting?

“There is a clear need for disclosing more transparency, particularly in techniques that are used for valuing assets as well as key assumptions taken to determine asset value. There will be a lot of scrutiny, especially from external auditors on these aspects and how they relate to the year-end financial statements,” said Campori.

While acknowledging the importance of robust stress testing procedures being disclosed under certain financial reporting frameworks, he also emphasised the need to avoid being too general in disclosing the impact of the pandemic on the value of the assets, noting “It cannot be a simple ‘copy and paste’ disclosure that is used across several financial statements but needs to consider various features including the nature and location of the underlying assets.”

Any key takeaways for external valuers?

“I think there will be more scrutiny on the valuation process as a whole, and also more scrutiny on fund managers in terms of what independent controls are in place to assure the appointment of valuers is done following best practices – and that valuations of third-party appraisers are being properly challenged,” said Sporgitas. “In the current environment, the ability to leverage data and technology to drive efficiency and more transparency towards investors on performance analytics will be a key consideration for fund managers.”

Campori added another point around increasing frequency of valuation as an approach to mitigating risk. “We have seen some of our clients managing open-ended vehicles with a quarterly Net Asset Value calculation, switching from an annual to a quarterly valuation exercise. This may be a temporary decision taken under the current circumstances, but it’s definitely a trend we’re seeing in the market and one resulting in more work for external appraisers.”

This article was originally published in Sensus Magazine.

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