Two months after U.K.’s vote to leave the European Union, there is consensus that its commercial real estate is now worth less.
How much less? No one can quite agree.
Property broker CBRE estimated that property values across the U.K. fell 3.3% in July. Data-firm MSCI Inc. said values fell 2.8%. Norway’s sovereign-wealth fund said it took 5% off the value of its U.K. property portfolio because of Brexit. Aberdeen Asset Management, which operates a U.K. property fund, at first knocked its value down 17% to reflect rapid sales but more recently said it is off 5%.
One possible cushion for the property market is the British pound, which has fallen about 11% since the vote, causing extra pain for foreign holders of U.K. assets but also offering a hefty discount to potential new foreign buyers.
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The valuation problem reflects the difficulty of saying how much things are worth in a market that has just experienced an unusual shock. Many real-estate pros say commercial-property valuations are little more than educated guesswork when the market is stressed. Indeed, the firm that values Norway’s portfolio couldn’t come up with a post-Brexit number; to arrive at its discount, Norway’s fund managers simply took a pre-Brexit figure and knocked off 5%.
It doesn’t help that few transactions are taking place. Since June 24, the day after the referendum, there have been $2.9 billion of deals in the U.K., compared with nearly $9.5 billion in the same period last year, according to real-estate consultancy firm Real Capital Analytics.
Absent actual deals, valuers have had to rely more heavily on sentiment of investors and landlords, said people at property brokerages familiar with the appraisal process.
Another challenge: Discounts on deals post-Brexit have varied widely, with one brokerage seeing deals priced at 2% to 19% less than values before the referendum, said a person with knowledge of the deals.
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Fund managers under pressure to sell took bigger hits. Aberdeen sold a central London building to Norway’s oil fund for £124 million ($163 million), nearly 20% less than where the price was before Brexit, brokers close to the deal said.
On the flip side, U.K. property firm British Land PLC sold a building in downtown London with almost no discount for £400 million, different brokers said.
The Brexit referendum had a clear impact on the U.K. real-estate sector. Asset managers, Aberdeen among them, halted trading on their U.K. property funds as investors tried to pull their money out. Share prices of U.K. landlords dropped sharply. Deal making dried up.
Most analysts have expected property values to fall. The uncertain nature of Britain’s relationship with the rest of the EU, and especially the status of London’s giant finance sector, have pushed off business decisions, including whether to rent or buy new office space. Even before Brexit, investors were warning that U.K. commercial real-estate prices would deflate after a multiyear property boom.
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Political and economic uncertainty after Brexit has posed a challenge for commercial-property valuers who need to assess the broader market when valuing individual properties, said Fiona Haggett, U.K. valuation director at the Royal Institution of Chartered Surveyors.
"When you’re valuing in an uncertain market, you must use all the information you’ve got," Ms. Haggett said. "But bear in mind, much of that information predates the referendum result."
Given the wide gaps and low volume of sales, people responsible for valuing properties at major real-estate firms, such as CBRE, Jones Lang LaSalle and Cushman & Wakefield Inc., have had to rely on opinions of the property owners and investors, who are typically their clients, people familiar with the process said.
Some landlords have been telling valuers that values haven’t changed because, so far, Brexit hasn’t had a visible impact on the economy, while demand has remained robust as investors hunt for yield amid ultralow interest rates.
Other landlords and asset managers have suggested that values did fall but only marginally; property values slipping after Brexit would meet expectations but at the same time suggest the market wasn’t collapsing, one person familiar with the deals said. "This looks good. It shows property as a sector is resilient," the person said.
Meanwhile, investors on the lookout for bargains are typically after bigger discounts, so valuers have tried to incorporate the likelihood that sellers’ expectations won’t be met, the person said.
Immediately after the referendum, Norway’s sovereign-wealth fund hired Cushman & Wakefield to assess the value of its portfolio. It later made its own assessment, landing on the 5% reduction as "our best estimate of the real value," said Trond Grande, deputy chief executive of Norges Bank Investment Management, which manages the fund.
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Aberdeen, the only asset manager that reopened trading in its property fund, said in a recent briefing paper that "valuing the properties and the fund is much harder in a stressed market."
The challenge facing valuation has eased in recent weeks, said Ms. Haggett at RICS. As investors return from summer vacation, analysts expect transaction volumes to pick up, providing a clearer picture of the post-Brexit property market.
"Valuation is one of those funny things, a combination of art and science," Ms. Haggett said. "It’s all about understanding your market."
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