Amid Falling Vacancy And Rents, Spotlight Falls On Office Valuations

Property valuers are coming in for increasing criticism over not marking down the value of office assets in spite of rising availability and falling rents. 

Valuers have not marked down the value of retail assets in recent years to reflect changes in the way people use shops, and some industry observers and financial bodies have raised concerns that the same could be happening again in the world of offices.

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CBRE's monthly valuation index showed the value of UK offices falling just 0.5% in the third quarter, in spite of the turmoil in the sector. Some industry veterans feel that number is too low and that valuers are failing to keep up with the pace of change. 

“The valuers are now in denial on offices just as they have been for years on retail,” OLIM chief executive Matthew Oakeshott told The Times.

“London office rents are clearly in freefall, with very little occupier demand, but the valuers are only marking them down by 0.2% or 0.3% a month.”

Data from broker DeVono Cresa shows London rents had fallen on average by 3% in the second quarter of the year, and in some areas like Mayfair and Soho, rents had fallen by as much as 8%. 

In spite of limited new supply having come on stream in recent years, Savills predicted London vacancy rates rising from 6.5% at the start of the year to as much as 8.4% in 2022, as companies delay decisions to move and more staff work from home. London office take-up dropped 67% in the first seven months of the year, S&P said, taking an average of brokerage reports.  

In spite of recent share price rises on the back of positive news on coronavirus vaccine trials, stock market investors are still pricing in significant falls in the value of the assets of London office REITs. Derwent London is trading at a discount of 17% to its net asset value, and peer Great Portland Estates is trading at a 14% discount. 

So far, however, these negative metrics have not fed through to the price valuers are putting on hard assets. 

“Has the effect of Covid brought an internet moment to the office sector that is comparable to retail? I think it's quite early to make that call,” CBRE Head of UK Valuation Nick Knight told The Times. “We know that companies are moving to hot-desking, a lot of organisations are looking to reduce their footprint, availability has risen and that's impacting on forecasts and rental values in the valuation world. But there is a view emerging that the longer people have been in lockdown, the more they’ve realised what the office gives that they are not having at home.”