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John Perry: worse-case scenario is priced in |
The stock market began to anticipate problems in the commercial real estate sector before the worst news appeared. "The listed UK property sector fell by around 40% from January to November 2007, by which time [investors] appeared to be pricing in a worst-case scenario and then some," notes John Perry, head of pan-European real estate research at Deutsche Bank in London. To some extent these falls were merely mirroring the reality in the commercial real estate market. IPD’s UK index fell 3.6% in November and 3.7% in December – the largest falls ever recorded (the previous largest fall was 1.8% in May 1990). However, while the speed and severity of the falls were spectacular they must be considered in context.
"The scale of the falls reflects a fundamental change in the way in which valuations are conducted," says Perry. Whereas previously third-party valuations depended on transactional evidence – which in a weak market was scarce and therefore led to slow and lengthy falls in values that undermined confidence – now they are allowed to factor in market sentiment.