Real Value?

#Week45 saw Donald Trump in the witness stand of a New York courtroom, defending himself against claims that The Trump Organisation inflated the value of its assets to secure better financing terms from its lenders.

For fellow veterans of the New York real estate sector, who long ago tired of his exaggerated claims, schadenfreude has been the dominant emotion. And some of the details that have emerged are undoubtedly funny: the $1.5 billion valuation of his Mar a Lago club (independent valuation: $300 million); the stated size of his Trump Tower apartment at 30,000 sq ft (actual size: 11,000 sq ft); and the assertion that his 40 Wall Street tower was “the tallest building downtown” (70 Pine Street, a block away, is 30 foot taller).

It all points to wider concerns about the reliability of real estate asset valuations, and the implications for a sector that thrives on deals. Speak to any investment agents, and they’ll tell you about the current disparity between what sellers think an asset is worth and what buyers are prepared to pay.

This reflects a host of issues – the granular nature of the market, the 50 shades of asset quality from super-prime to obsolete, the willingness of existing lenders to ‘extend and pretend’ (for now), the availability of new finance for buyers – but is also placing question marks over the book values some assets are being given.

Take offices: research suggests office assets in The City have fallen 26% from their peak, and 14% in the West End. Sizeable, painful falls – but with a paucity of deals to provide comparable evidence, and some big discounts on those transactions that have got over the line, some people are asking if a true picture is being painted. Is the situation in fact even worse than it seems?

A thriving market is based on trust, and if two parties cannot even agree on a basic metric such as valuation, there is little chance of a successful deal being brokered. If valuations are widely disputed, it’s little wonder there is such disparity between buyers and sellers on what buildings are worth.

We have been here before, with retail assets. Retail was the first sector to experience the hugely disruptive force of the internet, but throughout the decade or more of declining values, there were often complaints that valuers were being too bullish in their assessments. If retail has now generally stabilised, with assets changing hands at realistic prices, the question has to be asked if whether a swifter recalibration of values would’ve helped the market reach this more positive position sooner.

It is tempting to view valuation as a science, but in truth it has always been more of an art. So many different factors feed into what an asset is worth, that a case can be made for both upward and downward revisions on almost any property. Trump may have been ridiculed for the huge uplift he would place on buildings simply because they had his name on them, but the fact remains that a successful brand does add value to an asset. And determining just how much that brand adds to a building’s bottom line is fiendishly tricky thing to do.

The only certainty over what a building is worth is how much someone paid for it, and even that is only correct for the instant the deal was signed – even a week later a change in circumstances could influence the value. In the meantime, valuers are to a greater or lesser extent putting their fingers in the air and trying to see which way the wind is blowing – in a rapidly shifting market, this makes disagreements over valuations almost inevitable. Buyers and sellers will eventually come closer in their opinions and transactions will return; only in hindsight will we see how close to the mark valuers were.