UK will escape property valuations crisis

Published 06th Aug 2007

The UK property market is unlikely to suffer the kind of valuations crisis that brought some of Germany’s largest open-ended property funds close to collapse in 2005 and early 2006, according to industry research.
But the report by independent UK industry group Investment Property Forum (IPF) warned that Authorised Property Unit Trusts such as the M&G Property Portfolio and the Norwich Property Trust were most vulnerable to discrepancies between unit pricing and periodic valuations of its property holdings.
The report -which is yet to be published and was authored by Neil Crosby, professor of real estate at Reading University - said British property valuers were subject to stricter professional standards than their German peers.
As a result, they were in a better position to identify major discrepancies between periodic property valuations and real-time or transaction-based market pricing, it said.
British commercial property returns this year and in 2008 are expected to slowdown sharply towards low single-digit percentages after three straight years in the high teens, according to the UK’s property derivatives market.
Such concerns are reflected in the poor share price performance this year of Britain’s leading listed property companies, which are trading at large double-digit percentage discounts to their net asset value, and in recent moves by some of Britain’s top property funds to cut the price at which investors can take money out.
The IPF said periodic valuations - quarterly or annual valuations of a fund’s underlying property assets - often fell behind market prices in rising markets but tended to catch up and often exceeded market prices when markets were falling.
This second trend turned Germany’s property market into an “accident waiting to happen”, the IPF said, and set in place a turn of events that cast a pall over the country’s entire open-ended property funds industry.
Attempts to correct inaccurate valuations of fund assets spurred thousands of investors to try to cash in investments at over-inflated levels before fund units were repriced, forcing Deutsche Bank to take the unprecedented step of freezing redemptions in its flagship Grundbesitz-Invest fund.
Funds managed by Germany’s biggest open-ended property fund manager DekaBank and by KanAm were also affected.
The IPF said UK property valuers had made great strides since 1990 to improve the accuracy of periodic valuations - driving the margin for error down to 10 percent - but it said their German colleagues still had “major issues to address”.
“A similar event is much less likely to occur (in the UK) even in a long bear market, as long as the valuation regime for those property investment types at risk continues to be transparent and objective,” the IPF report said.
It said the Royal Institution of Chartered Surveyors (RICS) continued to have an important role to play in policing valuation standards throughout the industry.
By Sinead Cruise

Source: ' Reuters '

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