The Ukrainian uncertainty principle

Wait-and-see is a well-known investor strategy when markets are disrupted. This is also a difficult time for property valuers, who are fully aware that the market isn’t quite what it used to be, but the transactions that would prove this have yet to take place. Valuers are faced with a quandary when it comes to factoring into their estimates such unquantifiables as the investor mood. “That was the situation in March 2020 at the beginning of the pandemic when the market virtually died. Such circumstances are particularly uncomfortable for valuers, who need to base the assessments behind their valuations on evidence from the market. But in this case, they no longer have access to such figures, since not much is happening on the market,” explains Marcin Malmon, the associate director of deal advisory, real estate advisory and the valuation team at KPMG in Poland.

And how did valuers react to the market stalling at the onset of the pandemic? They decided to raise expected yields by a smidgen – or, in other words, they lowered their valuations. In the end, they recognised that investment risks had grown at that time.

The pandemic experience

Marcin Malmon believes that lessons were learnt during the pandemic. “It became clear that there is such a thing as valuation uncertainty. Valuations are not just cold mathematical calculations; they also contain an element of judgement that comes from that person,” he explains. The European Group of Valuers’ Associations (TEGOVA) recommends that valuers state in their reports which of their assessments are based on solid market data and which are based on their own subjective judgement. Moreover, to give a signal as to how the market had changed, most valuation firms in Poland started adding clauses about the market uncertainty to their reports.

Such clauses are appearing once again as a direct result of the war in Ukraine. “A thorough valuation requires all the relevant market information to be factored in and for objectivity to be maintained. When there is so much economic uncertainty, as people in the property market follow geopolitical events closely and put off their business decisions, the shelf-life of such valuations is shortened. You need to read documents with that day’s date printed on the page of the valuation. The reason is, in the same way as what happened in the first months after the outbreak of the pandemic, that we are using information from before the conflict and so we have to state clearly that we are working in a market with a lot of uncertainty,” explains Marek Jamro, the director of the valuation department at JLL in Poland. Under such circumstances the role of the valuer has been undergoing changes. “More questions are being asked by banks and funds, who are looking not only to verify previous valuations but are also trying to get a grip on the current situation and its possible implications. Since we can use the full range of JLL’s market analysis, we can try to help them come to terms with the situation,” he says.

Cold judgement

So, should we expect a rise in yields – which. in other words, equals a fall in property prices? “Nobody knows this for sure, because, apart from the greater feeling that there is more uncertainty because of the war in Ukraine, there have not been many signs of an imminent rise in yields,” points out Marcin Malmon. It is important to understand that it’s still an open question how much the experience of the pandemic has coloured the perception of the situation. However, it seems that the events of 2020 could provide us with an argument for stay calm during the latest market disruption in 2022. “After the outbreak of the pandemic in March and April 2020, valuers expected that yields would rise only by a little, by around 25 base points. Four or five months later, it turned out that the rates for actual transactions did not always go up – and for certain types of properties they actually fell. I think that this time, since valuers don’t have the market figures, they’re not going to move in the direction of a significant rise in yields, if at all,” believes Arkadiusz Bielecki, the valuation director at Newmark Polska. Marcin Malmon is of a similar opinion. “I agree that investors need an additional premium for a higher risk, but I expect that such rises are only going to be symbolic. If more substantial information isn’t forthcoming from the market, then valuers are only going to raise the yields in their valuations slightly. However, this hasn’t happened yet and most valuers still haven’t taken this decision following the outbreak of the conflict in Ukraine,” he points out.

According to KPMG, the slight rise in yields during the first phase of the pandemic was above all intended to signal a trend that had been identified based on the company’s knowledge of the market and was to be used until the time when valuations could again be based on hard market data that was up-to-date. “Over the next few weeks, as was the case two years ago, valuers are going to struggle with this problem and will have to take decisions on how high the yields should be,” predicts Marcin Malmon.

Relatively better

However, there are significant differences between the ‘then’ and the ‘now’. The current crisis isn’t going to hurt rents or, in other words, property revenues, so we are in a completely different situation than at the start of the pandemic. “Then, we were faced with the burden of the lockdowns, which resulted in the demand for commercial space being curbed. As a result, we saw an initial reduction in the need for retail and office space. Tourism also suffered, which hurt hotels badly,” says Arkadiusz Bielecki.

Now that war has come to Ukraine, for the time being no other similar catastrophe can be foreseen on the leasing market and rents do not appear to be under threat. But other detrimental phenomena are emerging, such as rising inflation and increasing property running costs as well as more restrictive bank lending policies. “More expensive money is influencing the mood in the investment market for all property sectors. On the other hand, nothing has yet materialised that could threaten rent levels or the current demand for leasing space,” points out Arkadiusz Bielecki.

He believes that the migration due to the war in Ukraine could boost apartment sales as well as the hotel business and the entire living sector. “This stems from the necessity to house Ukrainian citizens regardless of where the financing to meet this need is going to come from,” he explains, and then goes on to explain that retail properties could also benefit, due to the requirement of meeting the daily needs of a rising number of people in Poland and also the to ensure deliveries of food, clothing and medicines from Poland to Ukraine.

Waiting for deals

This could be the reason why transactions that were initiated before the outbreak of the conflict in Ukraine are on the whole being continued – and there are no signs of any mooted trend of investors backing out of deals. “Some investors who are in negotiations are continuing to say that they want to invest and they are not going to change their position. This is particularly true of the warehouse sector and also for small retail centres,” insists Arkadiusz Bielecki of Newmark Polska. Marek Jamro of JLL has a similar opinion. “Right now, we have too few signals from the market to conclude that there has been some major change in investor outlook. Apart from there being more caution when it comes to investment decisions, we haven’t seen any reduction in interest on the demand side, which investors demonstrated during the recent MIPIM fair. There is also no pressure to sell off assets quickly. Today the market still looks stable,” he assures us.

Nonetheless, if we want to be sure what the reaction will be of investors and tenants to the events unfolding in Ukraine, we are just going to have to wait and see. “A full assessment of the results will be possible based on commercial data and on the terms of signed transactions, which includes both sales and leases,” argues Arkadiusz Bielecki. And Marek Jamro agrees: “I think that we will have more to say only after the second quarter of this year, when it will become clear what impact the situation has been having on leasing levels. But at the moment too little time has passed to give a final judgement on this situation,” concludes Marek Jamro.