How to determine price in an uncertain market

COMMENT: In the property investment market, it’s very important to understand the distinction between the price that an asset can command in today’s market and what that asset’s most recent valuation is. Sometimes these will be aligned, but this becomes rarer at times of market uncertainty such as now, when buyer demand has become distorted by non-property factors and there is also less transactional evidence. In the realm of property financing this distinction is very well understood, and it is particularly pertinent where non-performing loan books are being traded. These are loans which, by definition, have parted company with the valuation that initially secured their financing and, as such, require an estimation of the price that the underlying asset would command if it were sold in the open market today. While there are nothing like as many “distressed sellers” today as there were after the global financial crisis, we are now seeing some areas of stress in the market, including high street retail, and there will be an increasing number of loans that need to be unwound or sold on during the coming months. These situations invariably require pricing assets on the assumption of a sale today or assuming certain outcomes of asset management. It gives a reality check against recent valuations but is also a fascinating insight into the true nature of the current market Underlying rationale Providing this pricing expertise is something in which we’ve specialised for many years, and most recently we advised Palm Capital on its purchase of a £150m sub-performing loan book which was secured against a portfolio of 80 UK commercial real estate assets. The portfolio is spread across UK locations and compromises 49% high street retail and long-let retail warehouses, 12% leisure, 15% logistics and 21% offices. The loan book has an average maturity of more than eight years and the underlying leases have a WAULT of 8.5 years. However, what is of particular interest at this stage of the property cycle is the buyer’s rationale for the purchase. Palm Capital said it had identified this opportunity to gain exposure to the regional UK market, which offers a “superior risk-return income yield and upside potential”. It was particularly attracted to the long duration of the loans that are performing and the opportunity to use its past experience in acquiring distressed situations and using asset management to enhance returns. Market insight For reasons of confidentiality, we have not been able to talk about the work we have done in this area of the market since 2011, but we have advised on a large number of the major sub-performing loan book sales during this period. These situations invariably require pricing assets on the assumption of a sale today or assuming certain outcomes of asset management. It gives a reality check against recent valuations but is also a fascinating insight into the true nature of the current market. The immediacy of pricing certainly concentrates the mind when you may personally then be given the job of achieving that price through a sale in the auction room only a few weeks later. Of course, the majority of assets will be the subject of asset management prior to a disposal, but accurate pricing is what clients want to know. Many of the non-performing loan acquirers and their financiers want to know the hard truth about what the market is really doing, what is being sold, the methodology behind the pricing, the prices achieved for a wide range of property types and geographical locations, who is buying and the depth of demand. In this context, the auction room is a powerful benchmark, especially if the same institutional grade and scale of assets are being traded continuously. Our advisory services have been most in demand when there is market uncertainty, when few know what the real market is doing. Investment-grade auctions act as a continuum which is liberated from the prescribed frequencies of valuations and, as such, enable investors to lock into assets at today’s prices. From a UK perspective, this is increasingly important as we continue to be impacted by prolonged political and economic uncertainty. There is an unprecedented level of global demand, which is coming from huge institutional investors right through to private individuals. The scale of their respective purchasing power varies enormously, but they are all united in one goal: the quest to invest to achieve long-term returns by buying at the right price. Having access to this pricing insight is going to be a powerful tool for investors beset by global uncertainty. Richard Auterac is chairman of Acuitus